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		UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549   FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS

PURSUANT TO SECTION 13 OR 15(d) of the

SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2004

or

For the Transition Period from                  to                 .

Commission File Number 1-13683

REMY INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE: (765) 778-6499

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE

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 ¨                          

INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT’S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. x

INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS DEFINED IN EXCHANGE ACT RULE 12B-2).

YES ¨                          NO x                          

STATE THE AGGREGATE MARKET VALUE OF THE VOTING AND NON-VOTING COMMON EQUITY HELD BY NON-AFFILIATES COMPUTED BY REFERENCE TO THE PRICE AT WHICH THE COMMON EQUITY WAS LAST SOLD, OR THE AVERAGE BID AND ASKED PRICE OF SUCH COMMON EQUITY, AS OF THE LAST BUSINESS DAY OF THE REGISTRANT’S MOST RECENTLY COMPLETED SECOND FISCAL QUARTER. Not Applicable

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

DOCUMENTS INCORPORATED BY REFERENCE: None.

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REMY INTERNATIONAL, INC.

FORM 10-K

DECEMBER 31, 2004

TABLE OF CONTENTS

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PART I

CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION

From time to time, Remy International, Inc. (formerly known as (“fka”) Delco Remy International, Inc.), which we refer to as the Company, makes oral and written statements that may constitute “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995, which we refer to as the Act, or by the Securities and Exchange Commission, which we refer to as the SEC, in its rules, regulations and releases. We desire to take advantage of the “safe harbor” provisions in the Act for forward-looking statements made from time to time, including, but not limited to, the forward-looking statements relating to our future performance contained in this Form 10-K and in other filings with the SEC.

Any statements set forth below or otherwise made in writing or orally by us with regard to our expectations as to financial results and other aspects of our business may constitute forward-looking statements. These statements relate to our future plans, objectives, expectations and intentions and may be identified by words like “believe,” “expect,” “may,” “will,” “should,” “seek,” or “anticipate,” and similar expressions.

We caution readers that any such forward-looking statements are based on assumptions that we believe are reasonable, but are subject to a wide range of risks including, but not limited to, risks associated with the uncertainty of future financial results, acquisitions, additional financing requirements, development of new products and services, the effect of competitive products or pricing, costs and difficulties related to integration of acquired businesses, pending and future legal proceedings, including environmental regulatory matters, reliance upon or loss of a major customer, international operating and supply risks, weather conditions, including their impact on demand for our aftermarket products, raw material and energy costs, including the cost of steel and availability, foreign exchange rate changes, transportation and related fuel costs, effectiveness of restructuring and cost saving initiatives, labor relations, the ability to obtain and maintain adequate prices for our products, our substantial indebtedness and limitations under debt agreements, costs for pension and post retirement benefit plans, the effect of economic conditions and other uncertainties. Due to these uncertainties, we cannot assure readers that any forward-looking statements will prove to have been correct and we do not intend to review or update any particular forward-looking statement in light of future events.

On August 1, 2004, we changed our name from Delco Remy International, Inc. to Remy International, Inc. We continue to market certain starters and heavy-duty alternators for original equipment and aftermarket customers under the Delco Remy brand name, which is licensed to us by General Motors Corporation, which we refer to as GM.

We are a leading global manufacturer and remanufacturer of aftermarket and original equipment electrical components and aftermarket powertrain components for automobiles, light trucks, heavy-duty trucks, industrial, construction and agricultural applications and other heavy-duty applications. We sell our products worldwide primarily under the “Remy” brand name, first used in 1896, the “Delco Remy” brand name, first used in 1918, the “World Wide Automotive” brand name, first used in 1986, and our customers’ widely recognized private label brand names. Our products include starters, alternators, engines, turbo chargers, and fuel systems. We also provide exchange services for used components, commonly known as cores, for remanufacturers. In 2004, approximately 54% of our sales were to the aftermarket and approximately 46% were to the original equipment market. We supply numerous highly engineered products to over 3,500 customers, principally in North America, Europe, Latin America and Asia.

We believe we are North America’s largest producer of remanufactured starters and alternators for the aftermarket. Remanufacturing is a process through which cores are disassembled into their sub-components, cleaned, inspected, combined with new subcomponents, reassembled into finished products and tested to original equipment specifications. We believe remanufactured products can be produced at a lower cost than a traditionally manufactured product, and with higher quality than an individually repaired product. Our expanding aftermarket business benefits from the non-deferrable nature of the repairs for which many of our products are used. We believe we are also North America’s largest supplier of original equipment starters for automobiles and light trucks and starters and alternators for heavy-duty vehicles.

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At the time of our separation from GM in August 1994, we were predominantly a North American original equipment manufacturer, with over 56% of our fiscal year 1995 sales derived from GM. Through strategic capital investments, acquisitions, joint ventures and facility and workforce rationalization, we have become a low cost, global manufacturer and remanufacturer with a more balanced business and product mix between the aftermarket and original equipment market. Since fiscal year 1995, we have increased our sales, broadened our product line, expanded our manufacturing and remanufacturing capabilities, diversified our customer base and end markets, lowered our cost base and extended our participation in international markets.

We changed our fiscal year end to December 31, effective August 1, 2000. Prior to August 1, 2000, our fiscal year ended on July 31. References to “fiscal year” other than fiscal year 2004, 2003, 2002 and 2001 pertain to years ending July 31 of such year.

Industry Overview

In general, our business is influenced by the underlying trends in the automobile, light truck, and heavy-duty truck, construction and industrial markets. However, we believe that we are reducing our dependence on the cyclical original equipment manufacturer, which we refer to as OEM, business by focusing on expanding our remanufacturing capabilities and placing greater importance on balancing our aftermarket business with our global OEM business.

Aftermarket

The aftermarket consists of the production and sale of both new and remanufactured parts used in the maintenance and repair of automobiles, trucks and other vehicles.

Remanufacturing is a process through which cores are disassembled into their sub-components, cleaned, inspected, combined with new subcomponents, reassembled into finished products and tested to original equipment specifications. We believe a remanufactured product can be produced at a lower cost than an originally manufactured product and with higher quality than an individually repaired product due to effective salvage technology methods, high volume precision manufacturing techniques and rigorous inspection and testing procedures. The ability to procure cores is critical to the remanufacturing process.

Aftermarket parts are supplied principally through three distribution channels:

We believe that the aftermarket and our opportunity in the aftermarket have been, and will continue to be, impacted by the following trends:

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Recently, large retail automotive parts chains offering a broad range of new and remanufactured products have experienced rapid growth at the expense of small, independent retail and wholesale stores. We believe that further increasing our sales to retail chains offers a significant opportunity for growth. We believe retail chains generally prefer to deal with large, national suppliers capable of meeting their cost, quality, volume and service requirements.

OEM Markets

The OEM market consists of the production and sale of new component parts for use in the manufacture of new vehicles. The OEM market includes two major classes of customers:

The OEM market has been impacted by fundamental changes in the OEMs’ sourcing strategies. OEMs are consolidating their supplier base, demanding that their suppliers provide technologically advanced product lines, greater systems engineering support and management capabilities, just-in-time sequenced delivery and lower system costs. OEMs are increasingly requiring that their preferred suppliers establish global production capabilities to meet their needs as they expand internationally and increase platform standardization across multiple markets. As OEM global alliances increase, global pricing for automotive components is becoming the norm.

OEMs continue to outsource component manufacturing in response to competitive pressures on OEMs to improve quality and reduce capital outlays, production costs, overhead and inventory levels. In addition, OEMs are increasingly purchasing integrated systems from suppliers who provide the design, engineering, manufacturing and project management support for a complete package of integrated products. By purchasing complete systems, OEMs are able to shift design, engineering and product management to fewer and more capable suppliers. Integrated systems suppliers are generally able to design, manufacture and deliver components at a lower cost than the OEMs due to:

Business Strategy

Focus on Operating Efficiency and Reinvest for Growth

We continue to pursue cost savings opportunities and reinvesting for sustained future growth. In 2003, we closed six manufacturing facilities and transferred production to lower cost facilities primarily in Mexico, South Korea, China, Poland, Brazil and Hungary. We have also continued to implement lean manufacturing principles and global purchasing initiatives to provide additional opportunities to improve our operating cash flow. We have invested in regional technical centers in the United States, Mexico, Europe and Asia. These centers include a broad range of on-site engineering, purchasing, supplier development and product testing operations designed to provide quick-to-market, leading-edge products and stronger customer relationships for Remy and the Delco Remy branded products. We believe our cost savings efforts, combined with organic sales growth and the payment in 2004 of substantially all of our related remaining contingent acquisition costs, will position us to improve cash flow and invest in engineering and technology.

Enhance our Share in the Growing Remanufacturing Market

We intend to leverage our leading position as a supplier of remanufactured components to the automotive aftermarket. Remanufactured products have significant advantages over traditionally manufactured and individually repaired products. The use of remanufactured components for warranty and extended service repairs is common practice as OEMs have sought to reduce warranty and extended service costs by using remanufactured components, which generally offer the same degree of quality and reliability as OEM products at a lower cost. This trend has also resulted in independent aftermarket customers requiring higher quality standards for remanufactured products. We plan to exploit our leading position and strengthen our customer relationships in the remanufacturing market.

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In March 2005, we acquired substantially all of the assets and assumed certain liabilities of Unit Parts Company, which we refer to as UPC, based in Oklahoma City. UPC is a major supplier to the automotive aftermarket for new and remanufactured starters and alternators, offering custom branding, packaging and logistics solutions as well as complete engineering and support services.

Increase our Share in the Global Original Equipment Market

Following the 2003 acquisition of Delphi Corporation’s light vehicle alternator business, we have significantly increased our share in the original equipment market, particularly in the European and Asian light vehicle markets, where customers increasingly look for suppliers with both starter and alternator technology. We are in the process of developing and expanding our sales infrastructure in Europe and Asia to support additional business. We also expect to benefit from anticipated growth in Latin America, Eastern Europe and Asia Pacific, where demand for light vehicles is expected to increase.

We have formed a wholly foreign-owned enterprise, Remy Electricals (China) Company Limited, in Shajing in the Guangdong Province of China to expand our manufacturing capabilities in China. Our new facility is expected to begin operation in the second quarter of 2005 and is designed to meet new business demand in China’s emerging markets. We will invest in China to transfer our new global technologies and best-in-class quality to the OEM vehicle platforms, which our existing customers have designated for domestic and export markets.

Existing facilities in China include an alternator operation, Remy Electricals Hubei Company, Ltd., in Jingzhou, Hubei Province, which we acquired from Delphi Corporation in March 2003. We established a Shanghai Representative Office in March 2003 that is the base for our domestic sales and purchasing activity.

Capitalize on Growth in the Heavy Duty Truck Market

We intend to capitalize on the expected growth in the original equipment market and aftermarket for heavy-duty truck components. Heavy Duty OEM sales increased in 2004 due to strong industry demand from North American Class 5-8 customers. We believe that the demand for original equipment heavy-duty truck replacement components is expected to grow over the next few years.

We are also investing in the heavy-duty supply system in China in response to the expanding demand for components used by trucks, construction, agriculture and off-road vehicles resulting from a growing economy. As the largest supplier of original equipment and aftermarket starters and alternators to the North American heavy-duty truck market, we believe we are well positioned to benefit from these positive trends.

Increase Focus on Technologically Advanced Products

We continue to produce technologically advanced products by regularly updating and enhancing our product line, which helps us to compete successfully in our markets. In 2003, we launched a new family of next-generation starters and alternators. We are also in various stages of development on a number of new products including:

Products

Our product line includes a diverse range of manufactured and remanufactured products for the aftermarket and OEM markets, which we sell under the “Delco Remy” brand name, the “World Wide Automotive” brand name or under our customers’ private-label brand names. We also provide core acquisition services for third party aftermarket remanufacturers as well as our own subsidiaries. Our product line is classified into five product categories: automotive OEM, heavy-duty OEM, electrical aftermarket, powertrain, and core services.

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The following table sets forth the approximate composition by product category of our revenues for the fiscal years ended December 31, 2004, 2003 and 2002:

Products within the automotive OEM and heavy-duty OEM categories include manufactured starters and alternators. Our starters and alternators are used in automobiles, light trucks, heavy-duty trucks, industrial, construction and agricultural applications and other heavy-duty applications by OEMs globally and are also used in marine and industrial applications.

Products within the electrical aftermarket include remanufactured starters, alternators, and locomotive power assemblies and turbo chargers. Products within the powertrain category include diesel engines, fuel injectors, injection pumps, fuel pumps, fuel valves and turbo chargers. Products within the core services category include third party core acquisition services.

Research and Development

Our engineering staff works both independently and with OEMs to design new products, improve performance and technical features of existing products and develop methods to lower manufacturing costs. In support of our engineering efforts, we have formed technical alliances with engineering and technology firms to identify long-term engineering opportunities. We are a participant in Electricore Incorporated, a consortium for advanced transportation technologies through which we are implementing technical alliances to develop next generation starters and alternators. We are developing a family of belt driven alternator starters, which we refer to as BAS, for mild hybrid gas applications.

We have obtained business with Allison Electric Drive, a unit of GM Powertrain, for the electric machine integral to the development of the transmission used in hybrid vehicles and have begun low volume production. We have plans to expand this product line to include similar products for higher volume automotive applications.

We plan to launch an ultra-capacitor module for the delivery vehicle market. The ultra-capacitor module is an energy storage device, which eliminates jump-starts, improves battery life and improves cold start capability.

Consistent with our strategy to introduce technologically advanced and improved products, we spent approximately $19.3 million in 2004, $15.9 million in 2003, and $13.5 million in 2002 on research and development activities including program engineering. We funded all research and development expenditures.

Customers

Our principal customers include automotive and heavy duty OEMs, OEM dealer networks, leading automotive parts retail chains and warehouse distributors. Our major customers include GM, International Truck and Engine Corporation, Advance Auto Parts, DaimlerChrysler, Caterpillar, Ford, Delphi, PACCAR, Cummins, Volvo/Mack Trucks, Pep Boys, Hyundai and Kia.

We have long-term agreements, with terms typically ranging from three to five years, to supply heavy-duty starters and alternators to GM, DaimlerChrysler Commercial Trucks, and Volvo/Mack Trucks. In 2004, total sales to GM and related affiliates accounted for approximately 28% of our sales and International Truck and Engine accounted for approximately 10% or our sales. No other customer accounted for more than 10% of consolidated net sales.

In connection with our separation from GM in July 1994, GM entered into long-term contracts with us to purchase 100% of its North American requirements for automotive starters (other than for Saturn and Geo) and 100% of its U.S.

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and Canadian requirements for heavy duty starters and alternators, at fixed prices which are scheduled to decline over the life of the contracts. GM’s obligations to purchase our automotive starters and heavy-duty starters and alternators under these agreements are subject to those products remaining competitive as to price, technology and design. In 1999, we extended the terms of these agreements with GM for us to supply automotive starters to July 31, 2008. In April 2002 we reduced our prices in accordance with the competitive clause of the original agreement. The supply agreement relating to heavy-duty products terminated on July 31, 2000, although we continue to supply GM with heavy-duty products.

In 1994, GM also entered into a long-term contract with us to distribute exclusively our automotive aftermarket products. The market drives prices we may charge to GM under this agreement. In April 2002 we reduced our prices in accordance with the competitive clause of the original agreement. This agreement terminates on July 31, 2008.

Distribution

Our products are distributed to our customers primarily by common carrier. However, we have an extensive distribution and logistics network to supply our global manufacturing footprint.

We employ our own direct sales force, which develops and maintains sales relationships with major North American truck fleet operators as well as our OEM, retail, warehouse, distributor and aftermarket customers. A network of field service engineers and product service engineers supplements these sales efforts.

Competition

The automotive parts market is highly competitive. Competition is based primarily on quality of products, service, delivery, technical support and price. Most OEMs and aftermarket distributors source parts from one or two suppliers and we compete with a number of companies who supply automobile manufacturers throughout the world. In the automotive market, our principal competitors include Bosch, Denso, Hitachi, Mitsubishi, Motorcar Parts & Accessories, Rayloc, Valeo and Visteon. In the heavy-duty truck market, our competitors include Bosch, Denso, Mitsubishi and Prestolite. In the powertrain category, our principal competitors include Cummins, Caterpillar and Jasper Engine.

Patents, Trademarks and Licenses

Pursuant to a Trademark License Agreement between us and GM, GM has granted us an exclusive license to use the “Delco Remy” trademark on and in connection with automotive starters and heavy duty starters and alternators until July 31, 2004, extendable indefinitely at our option upon payment of a fixed $0.1 million annual licensing fee to GM. We have also been granted a perpetual, royalty-free license to use the “Remy” trademark. The “Delco Remy” and “Remy” trademarks are registered in the United States, Canada and Mexico and in most major markets worldwide. GM has agreed with us that, upon our request, GM will register the trademarks in any jurisdiction where they are not currently registered.

GM has granted us a perpetual license to use the “Remy” name as a tradename and corporate name worldwide.

As part of our acquisition of Delphi Corporation’s light duty alternator business, we and Delphi Technologies, Inc., which we refer to as Delphi Technologies, entered into a license agreement dated November 30, 2002, by which we licensed from Delphi Technologies certain patents and technical information used in the manufacture and remanufacture of belt-driven automotive generators and alternators.

We own and/or have obtained licenses to various domestic and foreign patents and patent applications related to our products and processes. The patents expire at various times over the next 17 years. While these patents and patent applications in the aggregate are important to our competitive position, no single patent or patent application is material to us.

Purchased Materials

We have redefined our global sourcing strategy by applying a “best in class” approach that aims to identify and develop a global supply base that delivers best in class quality, cost and technology for our products and services. Part of this strategy is to find and develop suppliers that are either local to the region, share our global footprint or have local

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production on high labor content components or assemblies. The strategy drives the focus to “point-of use” sourcing, utilizing value stream principles and developing standardized processes to result in decisions that result in the lowest total cost in materials, freight and logistics for our global locations.

Principal purchased materials for our business include: aluminum castings, gray and ductile iron castings, armatures, solenoids, copper wire, injectors, electronics, steel shafts, forgings, bearings, commutators, pumps and carbon brushes. All materials are readily available from a number of suppliers, and we do not foresee any difficulty in obtaining adequate inventory supplies. We generally follow the North American industry practice of passing on to our customers the costs or benefits of fluctuation in copper and aluminum prices on an annual or semi-annual basis. In some cases, steel price fluctuations are not passed on to our customers.

Employees

As of December 31, 2004, we employed approximately 6,800 people, 1,400 of whom were salaried and administrative employees and 5,400 of whom were hourly employees. Approximately 2,000 of our employees are based in the United States, none of whom are unionized.

As of December 31, 2004, approximately 262 of our hourly employees at Remy Automotive Hungary kft. (fka Delco Remy Hungary kft.) are affiliated with the Hungarian Steel Industry Workers Union. The agreement was signed July 17, 1996 and is perpetual, subject to termination upon three months notice from either party.

As of December 31, 2004, approximately 400 of our hourly workers at our Polish facilities are affiliated with the Intercompany Trade Union or the Intercompany Union Organization NSZZ. Agreements with these unions were signed on August 23, 2000 and are perpetual.

As of December 31, 2004, approximately 1,900 of our hourly employees at our Mexican facilities were affiliated with the Confederacion Regional Obrera Mexicana SLP. Agreements with this union expire at various times in 2006 and 2007.

Our other facilities are primarily non-union. We are not aware of any current efforts to organize the employees in our other facilities. There can be no assurance that there will not be any labor union efforts to organize employees at facilities that are not currently unionized. At the present time, we believe that our relations with our employees are satisfactory.

Foreign Operations

Information about our foreign operations is set forth in tables relating to geographic information in Note 17 to our consolidated financial statements, “Business Segments and Geographic Area Information” in Item 8.

Environmental Regulation

Our subsidiaries’ facilities and operations are subject to a wide variety of federal, state, local and foreign environmental laws, regulations, ordinances and directives, including those related to air emissions, wastewater discharges and chemical and hazardous waste management and disposal, which we refer to as environmental laws. Our subsidiaries’ operations also are governed by laws relating to workplace safety and worker health, primarily the Occupational Safety and Health Act, and foreign counterparts to such laws, which we refer to as employee safety laws. We believe that we and our subsidiaries’ operations are in compliance with current requirements under environmental laws and employee safety laws, except for non-compliance where the cost that might be incurred to resolve the non-compliance would not have a material adverse effect on our results of operations, business or financial condition. The nature of our and our subsidiaries’ operations, however, exposes us to the risk of liabilities or claims with respect to environmental and worker health and safety matters. There can be no assurance that such costs will not be incurred in connection with such liabilities or claims.

Based on our experience to date, we believe that the future cost of compliance with existing environmental laws (or liability for known environmental claims) will not have a material adverse effect on our business, financial condition or results of operations. However, future events, such as changes in existing environmental laws or their interpretation or the discovery of presently unknown conditions, may give rise to additional compliance costs or liabilities for the subsidiaries that could have a material adverse effect on our business, financial condition or results of operations.

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Certain environmental laws hold current owners or operators of land or businesses liable for their own and for previous owners’ or operators’ releases of hazardous substances. Because of their operations, the long history of industrial uses at some of our facilities, the operations of predecessor owners or operators of certain of the businesses, and the use, production and release of hazardous substances at these sites, our subsidiaries are affected by such liability provisions of environmental laws. Various of our subsidiaries’ facilities have experienced in the past or are currently undergoing some level of regulatory scrutiny and are, or may become, subject to further regulatory inspections, future requests for investigation or liability for past disposal practices.

For example, Franklin Power Products, Inc. (our subsidiary) in Franklin, Indiana has been undergoing a Resource Conservation and Recovery Act (RCRA) site investigation and clean-up of volatile organic compounds in the soil and groundwater pursuant to an Environmental Protection Agency Administrative Order on Consent, which we refer to as the EPA order, issued to both Franklin Power Products and Amphenol Corporation, a prior owner of the property. Pursuant to the EPA order, Franklin Power Products and Amphenol Corporation are jointly addressing this matter. Amphenol indemnified Franklin Power Products for certain liabilities associated with the EPA order and Amphenol has satisfied and continues to satisfy the requirements of the EPA order. Based on our experience to date and the indemnities from Amphenol and the sellers of Franklin Power Products to us, we believe that future costs associated with this site will not have a material adverse effect on our results of operations, business or financial condition.

The Mississippi Department of Environmental Quality, which we refer to as MDEQ, issued Notices of Violation regarding alleged violations of state air laws by two of the Remy Reman facilities in Mississippi. Remy Reman resolved this liability through payment in January 2005 of approximately $0.2 million.

In September 2000, one of Franklin Power Products, Inc.’s Indiana facilities received a Finding of Violation and Order for Compliance from the EPA requiring the facility to correct violations of its wastewater discharge permits. Franklin Power Products, Inc. has installed wastewater treatment equipment and is in compliance with the terms of the order and has eliminated the discharge. In July 2004, we and Franklin Power Products, Inc. entered into an agreement with the U.S. Department of Justice on behalf of the EPA, which tolled the statute of limitations on the EPA’s potential claim for penalties. Since that time, we have been cooperating with the EPA by providing additional information and entered into settlement negotiations with EPA and the Department of Justice.

Backlog

The majority of our products are not on a backlog status.

Seasonality

Our business is seasonal, as our major OEM customers historically have one to two week shutdowns of operations during July and December. Our sales results in the third and fourth quarters reflect the effects of these shutdowns. Our working capital requirements also are affected by seasonality, as we build inventory for the summer sales month in the aftermarket. Typically our working capital requirements are highest from April through August and the change from the highest month to the lowest month (typically December) for accounts receivable, inventory and accounts payable has averaged $40.0 million over the past three years. Refer to Note 20 to our consolidated financial statements in Item 8, which presents certain quarterly (unaudited) financial information.

Acquisitions

We made cash earn-out payments totaling $13.5 million in 2004 relative to the 2000 acquisition of M&M Knopf Auto Parts, L.L.C., which we refer to as Knopf. These payments were based on the achievement of certain earnings goals by Knopf during the period August 2000 to December 2003. In December 2003, $13.5 million was accrued and recorded as an adjustment to the purchase price of Knopf, resulting in a corresponding increase in goodwill.

In connection with settlement of the arbitration between certain of our affiliates and our former partner at our operations in Mexico (see Note 2 to our consolidated financial statements), we recorded the purchase of the remaining shares of the Mexico joint venture from the minority shareholders. The net purchase portion of the arbitration award of approximately $5.5 million in cash was paid in the third quarter of 2004 and resulted in an approximately $5.1 million increase in goodwill.

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We made the final cash payment of approximately $4.8 million in 2004 on notes issued in 2002 in connection with our acquisition of the remaining shares from the minority shareholders of Remy Korea Limited (formerly Delco Remy Korea Limited), which was acquired in 1999.

We also made cash payments totaling approximately $1.8 million in 2004 relative to the acquisition of Delphi Corporation’s light vehicle alternator business.

Discontinued Operations

On September 1, 2004, we completed a stock sale of two of our wholly owned subsidiaries, Williams Technologies, Inc., which we refer to as Williams, and JAX Reman, L.L.C., which we refer to as JAX, to Caterpillar, Inc., which we refer to as CAT, for net cash proceeds of approximately $104.3 million and recorded an estimated gain of approximately $45.1 million, net of income taxes and deal-related costs and subject to future adjustment. In the third quarter of 2004, we also completed plans for the disposition of a related business.

The historical results for these companies are treated as discontinued operations beginning in the third quarter of 2004 and all prior periods have been reclassified.

Properties

Our world headquarters are located at 2902 Enterprise Drive, Anderson, Indiana 46013. We lease our headquarters. The following table sets forth certain information regarding manufacturing and certain other facilities operated by us as of December 31, 2004.

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We believe all facilities are suitable for their intended purpose, are being efficiently utilized and provide adequate capacity to meet demand for the next several years.

Legal Proceedings

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

Remy Mexico, S. de R.L. de C.V. Arbitration

Remy Mexico Holdings, S. de R.L. de C.V., which we refer to as RMH, our indirect subsidiary, and GCID Autopartes, S.A. de C.V., which we refer to as GCID, were parties to a series of agreements, including a partnership agreement. The partnership agreement created Remy Mexico, S. de R.L. de C.V. (formerly Delco Remy Mexico, S. de R.L. de C.V.), which we refer to as RM, which operates certain manufacturing facilities in Mexico. GCID was the minority partner with a 24% ownership interest. An affiliate of ours and RMH, Remy Componentes, S. de R.L. de C.V., which we refer to as RC and RM, were parties to a services agreement with an affiliate of GCID relating to the partnership, which, among other things, required the payment of fees in connection with the provision of employees to the partnership. That agreement terminated as of April 3, 2004. Another affiliate of GCID was the partnership’s landlord until April 30, 2004.

RMH and GCID signed a letter of intent on or about May 3, 2000, whereby GCID agreed to terminate certain of the agreements with RMH and to sell its partnership interest to RMH in exchange for a $13 million termination payment by RMH to GCID, but the transaction was never finalized. In June 2001, GCID declared RMH in default under the

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partnership agreement, alleging that RMH had failed to conduct the business of the partnership in accordance with that agreement. In August 2001, GCID instituted an arbitration proceeding before the American Arbitration Association against RMH and later added RC and our wholly owned subsidiary, Remy, Inc. (formerly Delco Remy America, Inc.), who together with RMH and RC are referred to as the named parties. GCID and its affiliates sought damages for the alleged (i) breaches of the partnership agreement, including a requirement under the partnership that RMH buy out GCID’s partnership interest; (ii) breaches of fiduciary duty; (iii) breaches of various other contracts between and among the various parties and (iv) tortious interference with contractual relations. RM terminated the lease agreement as of September 27, 2003. RM and RC relocated all operations to another facility in San Luis Potosi, Mexico as of April 30, 2004. In accordance with an interim award from the arbitration panel on March 10, 2004, RM and RC hired the employees previously provided by GCID’s affiliate under the services agreement as of April 3, 2004.

The arbitration panel issued its final award on June 25, 2004. In accordance with the final award, on July 6, 2004 GCID transferred its interest in RM to RMH and RMH, RM and RC paid GCID and its affiliates approximately $17.3 million for GCID’s minority interest, the award for past services fees for the period of 1997 through 2004, and other claims, including interest. RMH, RM and RC also paid approximately $1.8 million in VAT as a result of these payments.

UAW Litigation

On April 16, 2003, the International Union, United Automobile, Aerospace and Agriculture Implement Workers of America, which we refer to as UAW, and its Local Union 662 filed suit against the Company and RI, in Federal District Court in the Southern District of Indiana, Indianapolis Division. The lawsuit was filed under Section 301 of the Labor Management Relations Act, 29 U.S.C. Sec. 185, seeking enforcement of an expired Supplemental Unemployment Benefits plan, which we refer to as the SUB Plan. The plaintiffs allege that the SUB plan provides supplemental unemployment benefits for 52 weeks and separation pay in an amount exceeding $20.0 million for employees who were terminated as a result of the closure of RI’s Anderson, Indiana production facilities at the end of March 2003. The plaintiffs also seek to enforce terminated provisions of a health care program which the plaintiffs allege provides the terminated employees with 25 months of continued hospital, surgical, medical, hearing aid, prescription drug, mental health, substance abuse and vision insurance coverage. The terminated employees were represented by the UAW and its Local Union 662 under various agreements, which expired on March 31, 2003. The lawsuit was filed shortly after the UAW membership failed to ratify RI’s last, best and final offer for a Shutdown Agreement. The UAW filed an amended complaint on July 8, 2003 to which the Company filed an answer on July 24, 2003. The trial was previously expected to begin in January 2005, however, that date was continued and has not been reset as of this time. We deny the material allegations of the complaint, deny any wrongdoing and intend to defend ourselves vigorously, but are unable to predict whether the proceedings will have a material adverse effect.

Prison Labor Matter

In January 2004, a class action on behalf of all prisoners who worked in a South Carolina Department of Corrections, which we refer to as SCDC, Services Training Program at Lieber Correctional Institute was brought against our former subsidiary Williams, which was sold to CAT in September 2004, and the SCDC. The plaintiffs claim they should have been paid industry prevailing wage under a South Carolina prison industries authorization statute, that the SCDC and Williams violated the Payment of Wages Act and that the SCDC and Williams committed at tort under the South Carolina Tort Claims Act. Under the terms of the sale of Williams to CAT, we retained liability and responsibility for this claim. We deny the material allegations of the complaint, deny any wrongdoing and intend to defend ourselves vigorously, but are unable to predict whether the proceedings will have a material adverse effect.

Remy Reman Facilities

The Remy Reman facilities in Mississippi identified certain possible violations of state air laws and notified the state environmental agency under the state voluntary audit disclosure rules. The MDEQ issued Notices of Violation regarding alleged violations of state air laws by two of the Remy Reman facilities in Mississippi. Remy Reman resolved this liability through payment in January 2005 of approximately $0.2 million.

Franklin Power Products Facility

In September 2000, one of Franklin Power Products, Inc.’s Indiana facilities received a Finding of Violation and Order for Compliance from the EPA requiring the facility to correct violations of its wastewater discharge permits.

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Franklin Power Products, Inc. has installed wastewater treatment equipment and is in compliance with the terms of the Order and has eliminated the discharge. In July 2004, the Company and Franklin Power Products, Inc. entered into an agreement with the U.S. Department of Justice on behalf of the EPA, which tolled the statute of limitations on the EPA’s potential claim for penalties. Since that time, we have been cooperating with the EPA by providing additional information and have entered into settlement negotiations with the EPA and the Department of Justice.

There were no matters submitted to a vote of security holders during the quarter ended December 31, 2004.

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PART II

Market Information

There is currently no established public market for our outstanding common equity.

Holders

The approximate number of record holders of each of our classes of common stock as of March 15, 2005 was as follows:

Dividends

Our ability to pay dividends is restricted by certain covenants contained in our senior credit facilities, as well as certain restrictions contained in our indentures relating to our senior notes and our subordinated notes.

The following table presents our selected consolidated financial data for the fiscal year ending July 31, 2000, the five month transition period ended December 31, 2000, and the years ended December 31, 2004, 2003, 2002 and 2001 (dollars in thousands).

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The following discussion and analysis should be read in conjunction with and is qualified in its entirety by reference to our consolidated financial statements and accompanying notes. Except for historical information, the discussions in this section contain forward-looking statements that involve risks and uncertainties. Future results could differ materially from those discussed below.

General

We are a leading global manufacturer and remanufacturer of aftermarket and original equipment electrical components and aftermarket powertrain components for automobiles, light trucks, heavy-duty trucks, industrial, construction and agricultural applications and other heavy-duty applications. Our products include starters, alternators, engines, turbo chargers, and fuel systems. We also provide exchange services for used components, commonly known as cores, for remanufacturers. We supply numerous highly engineered products to over 3,500 customers, principally in North America, Europe, Latin America and Asia.

The aftermarket is highly fragmented and competitive. We believe that aftermarket suppliers are consolidating. We believe that this consolidation is occurring, in part, because of higher quality standards for remanufactured products, which may be more expensive or technically difficult for smaller remanufacturers to meet. We plan to exploit our leading position in the aftermarket for electrical components and to grow our share through internal growth and acquisitions.

The demand for components in the original equipment manufacturer, which we refer to as OEM, market is cyclical. We believe that opportunities for growth in the OEM market will continue to come primarily through the introduction of new products and expansion of our global operations. We believe that our aftermarket and OEM products are complementary and provide us with a competitive advantage in meeting customer needs and maintaining the high levels of expertise necessary to compete successfully in both markets. We believe that the high capability and expertise required to meet the stringent technology and quality requirements of OEM customers provides us with a competitive advantage in the development and production of products for the aftermarket.

The primary elements of cost of goods sold in our products include component parts, material, labor costs and overhead. The availability of cores may impact our cost of goods sold. While the availability and cost of cores fluctuate based on supply and demand, our relationships with dealers and our customers have historically provided us with sufficient access to cores at favorable prices.

With our 2003 acquisition of Delphi Corporation’s light vehicle alternator business, we believe we have now established the principal capabilities, geographic positions, cost base and customer base that we sought to achieve following our separation from GM over ten years ago. We believe we are now well-positioned to capitalize on our achievements by increasing our sales through organic growth, strategic transactions, pursuing cost savings opportunities and focusing on cash flow generation.

On March 18, 2005 we acquired substantially all of the assets and assumed certain liabilities of Unit Parts Company, which we refer to as UPC, based in Oklahoma City (See Note 22 to our financial statements in Item 8). UPC is a major supplier to the automotive aftermarket for new and remanufactured starters and alternators, offering custom branding, packaging and logistics solutions as well as complete engineering and support services. UPC had estimated net sales of approximately $150 million for the year 2004.

General Motors Corporation, which we refer to as GM, accounted for about 54% of our total OEM sales in 2004. In connection with our separation from GM, GM entered into long-term contracts to purchase from us 100% of GM’s North American requirements for automotive starters (other than for Saturn and Geo) and 100% of GM’s U.S. and Canadian requirements for heavy-duty starters and alternators. GM’s obligations to purchase our products in the future are subject to such products remaining competitive as to price, technology and design. GM’s obligation to purchase automotive starters

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from us terminates on July 31, 2008. Our exclusivity agreement with GM for heavy-duty vehicles expired in 2000, although we continued to supply GM’s heavy-duty starters and alternators in 2004. We cannot be sure that GM will not develop alternative sources for components currently produced by us and purchase some or all of its requirements from alternative sources.

In addition, GM Service Parts Organization, which we refer to as GM SPO, has been designated as an exclusive distributor of a significant amount of our automotive aftermarket products and as a distributor of our heavy-duty aftermarket products. In April 2002 we reduced our prices in accordance with the competitive clause of the agreement. Our exclusive distribution arrangement with GM SPO for our automotive aftermarket products terminates on July 31, 2008. Our distribution arrangement with GM SPO is renewable on an annual basis for our heavy-duty aftermarket products.

During the past four years, we have taken actions to improve our cost structure, delivery, quality and price, some of which have resulted in significant charges to income. The restructuring and other special or unusual charges discussed below were significant factors contributing to the net losses reported in 2001 through 2003. Events affecting the past four fiscal years include:

We believe that the actions and associated charges discussed above, combined with organic growth and new business, have provided the foundation for improved operating performance in future years. The initial impact of the restructuring and other cost reduction actions are reflected in our 2004 and 2003 operating performance. Gross margins, excluding the special charges for the change in estimate for core valuation and the Mexican Arbitration discussed above, improved to 19.1% in 2004 compared with 18.7% in 2003 and 16.5% in 2002.

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Results of Operations

The following table sets forth selected statements of operations data expressed as a percentage of sales:

Year Ended December 31, 2004 Compared To Year Ended December 31, 2003

Net Sales

Automotive OEM sales increased due primarily to higher automotive volume, including new business awards, which were partially offset by customer price reductions. Heavy-duty OEM sales increased due to strong demand from Class 5 – 8 truck customers. OEM sales were also favorably impacted by currency exchange rates in Europe and Korea. Electrical aftermarket sales were down due to soft market conditions during 2004 and the loss of a U.S. retail customer, partially offset by favorable currency exchange rates in Europe and strong sales of locomotive power assemblies. Powertrain sales increased due to increased diesel engine and parts volume. Third party sales in the core services business decreased due to general market conditions.

Gross Profit

Gross profit of $200.5 million in 2004 compares with gross profit of $63.2 million in 2003. Gross profit in 2003 reflected the special charges totaling $118.2 million, consisting of the $103.9 million charge for the change in estimate of the valuation of our core inventory and the $14.3 million charge relative to the Mexico arbitration settlement. The special charges are discussed in more detail below. Excluding the special charges in 2003, gross profit and gross profit as a percentage of net sales improved in 2004 compared with 2003. Total OEM gross profit increased $22.5 million in 2004 compared with 2003. OEM gross profit in 2003 was negatively impacted by the $14.3 million arbitration settlement, which is excluded in the following discussion. Automotive OEM gross profit decreased $22.4 million in 2004 due to costs associated with new alternator product lines, higher material costs and price reductions, partially offset by higher sales volume and the benefits of restructuring and cost reduction actions. Heavy-duty OEM gross profit increased $30.6 million in 2004 due to sales volume growth and the benefits of restructuring and cost reduction actions, partially offset by higher material costs. Higher material costs reflect increased prices for metals. Electrical aftermarket gross profit, excluding the impact of the $88.7 million special core valuation charge in 2003, increased $11.8 million in 2004. This improvement

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reflected cost benefits associated with restructuring actions and improved material and warranty costs, partially offset by lower sales. Powertrain gross profit, excluding the impact of the $15.3 million special core valuation charge in 2003, increased $5.0 million in 2004. This improvement reflected higher sales and cost benefits associated with restructuring actions and improved factory efficiencies. Gross profit on core services decreased $6.0 million due to sales volume and product mix. Gross profit on aftermarket products was negatively impacted in 2004 by an $8.2 million charge for the decline in the value of its core inventory. Freight surcharges reflecting escalating fuel oil prices, primarily during the third and fourth quarters of 2004, negatively affected profitability in all product categories.

Selling, General and Administrative Expenses

Selling, general and administrative, which we refer to as SG&A, expenses increased $16.5 million, to $113.3 million in 2004, compared to $96.8 million in 2003. As a percentage of net sales, SG&A expenses were 10.8% in 2004 compared with 9.9% in 2003. The year over year increase in SG&A expenses primarily reflects higher expenditures on product engineering, systems and marketing programs, in part related to our new alternator product lines and new sales awards, principally in the OEM sector. We expect to continue our investment in resources necessary to support our global expansion and new product development, resulting in increases in SG&A expenses during 2005.

Restructuring Charges

We recorded a net restructuring charge of $0.9 million in 2004 primarily related to the actions taken in prior years discussed below. The 2004 charge consisted of employee termination benefits of $1.3 million and $1.4 million of other costs, partially offset by a $1.8 million reduction in the reserve established in 2003 for the impairment of operating leases, as we reached an agreement to transfer our lease obligation for an Anderson-based facility to a third party.

In 2003, we recorded restructuring charges totaling $49.0 million related to: (i) the closure of our starter and alternator manufacturing operations in Anderson, Indiana; (ii) the closure of our electrical aftermarket remanufacturing and distribution facilities in Reed City, Michigan; (iii) the consolidation of two of our remanufacturing operations in Mississippi; and (iv) the consolidation of certain of our operations in Europe. The charges consisted of employee separation programs of $14.4 million, an asset impairment charge of $29.2 million, operating lease impairment charges of $9.1 million, a pension plan curtailment charge of $1.8 million and other costs of $1.7 million. These charges were offset by a post-employment benefit plan curtailment gain of $7.2 million.

Operating Income (Loss)

Operating income of $86.3 million in 2004 compares with an operating loss of $82.5 million in 2003. The loss in 2003 was impacted by the special ($118.2 million) and restructuring ($49.0 million) charges discussed below. The remaining $2.5 million year over year increase was due to the increase in gross profit offset by the increase in SG&A expense discussed above.

Interest Expense, Net

Interest expense, net, increased $2.7 million to $58.2 million in 2004 compared to $55.5 million in 2003. This increase reflects approximately $3.4 million of interest expense charged to continuing operations in 2004 that was charged to discontinued operations in 2003, additional interest expense for the period between the call and redemption dates of $1.3 million relative to redemption of the 10 5/8% Senior Subordinated Notes recorded in 2004 and interest expense associated with the Second Priority Senior Secured Floating Rate Notes issued in 2004, partially offset by lower interest expense on our senior credit facility and other borrowings. Our senior credit facility was paid down on September 1, 2004 with proceeds received from the sale of Williams and JAX.

Loss on Early Extinguishment of Debt

In connection with our refinancing actions during 2004 (discussed below), we recorded a loss on the early extinguishment of debt totaling $7.9 million. This loss consisted of: (i) a call premium of $2.5 million and write off of deferred financing costs of $1.4 million on redemption of the 10 5/8% Senior Subordinated Notes; (ii) a prepayment penalty of $1.8 million and write off of deferred financing costs of $0.7 million on prepayment of the term loan; and (iii) a write off of deferred financing costs of $1.2 million and other fees of $0.3 million.

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Income Taxes

The income tax provision of $5.4 million in 2004 consisted of taxes in various foreign jurisdictions totaling $5.0 million and provisions for domestic state and local taxes of $0.4 million. In accordance with SFAS No. 109, we established a valuation allowance for domestic U.S. deferred tax assets in 2003, which resulted in no domestic U.S. tax provision on 2004 domestic income. The income tax provision of $36.7 million in 2003 consisted of the $24.7 million increase to the valuation allowance as discussed below, a $2.9 million provision related to withholding taxes on intercompany dividends declared in 2003 and provisions in various foreign jurisdictions totaling $9.1 million. Our consolidated effective income tax rate of 26.7% in 2004 and (26.6%) in 2003 reflects the above issues.

Minority Interest in Income or Loss of Subsidiaries

Minority interest in income of subsidiaries of $2.8 million in 2004 compares with a $0.1 million credit in 2003. Minority interest in 2004 included minority shareholders’ interests in the earnings of Hubei Delphi Automotive Generators Company, Ltd., which we refer to as Hubei, Remy Mexico, S. de R.L. de C.V. (formerly Delco Remy Mexico, S. De R.L. de C.V.), which we refer to as RM, and our joint venture with International Truck and Engine Corporation. The $0.1 million credit in 2003 includes minority shareholders’ interests in the earnings of Hubei, RM, World Wide Automotive, L.L.C., which we refer to as World Wide, Power Investments, Inc., which we refer to as Power, and our joint venture with International Truck and Engine Corporation. A $2.5 million credit was recorded in 2003 related to minority shareholders’ share of the $103.9 million charge for the change in estimate in the valuation of core inventory. We purchased the remaining minority shareholders’ interests in World Wide and Power under contractual put agreements in 2003 and the remaining interest in RM in 2004 in connection with finalization of the Mexico Arbitration.

Loss From Unconsolidated Joint Ventures

The loss from unconsolidated joint ventures of $0.6 million in 2004 compares with a loss of $6.4 million in 2003. The loss in 2004 consisted of losses recognized related to additional capital contributions we made into iPower Technologies, L.L.C., which we refer to as iPower, and losses recorded by Hitachi Remy Automotive GmbH, partially offset by earnings recorded by Sahney Paris Rhone Ltd. Our share of losses related to Hitachi Remy Automotive GmbH in 2004 reduced the carrying value to zero. Accordingly, we have discontinued recognition of losses related to this joint venture. The loss in 2003 consisted of the write off of our investment in iPower and losses recorded by Hitachi Remy Automotive GmbH, partially offset by earnings recorded by Sahney Paris Rhone Ltd.

Discontinued Operations

Income from discontinued operations of $1.2 million in 2004, related primarily to the remanufactured transmission business, reflects operating income of $5.7 million, net of restructuring charges of $0.4 million, and interest expense of $4.5 million. The loss from discontinued operations of $8.0 million in 2003 reflects restructuring charges of $0.9 million and interest expense of $7.8 million. The loss from discontinued operations in 2003 includes the results of the remanufactured transmission business, Tractech, Kraftube and the contract remanufacturing and retail aftermarket gas engine businesses.

We recorded a $45.1 million gain, net of income taxes and deal-related costs, on the sale of Williams Technologies, Inc., which we refer to as Williams, and JAX Reman, L.L.C., which we refer to as JAX, to Caterpillar, Inc., which we refer to as CAT, in 2004. An estimated loss of $2.2 million was recorded in 2004 in connection with the commitment to dispose of a related business. An additional net gain of $1.0 million was recorded in 2004 on the sale of Tractech, Kraftube and the gas engine businesses. An initial gain of $2.3 million was recorded in 2003 on the sale of Tractech and Kraftube.

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Year Ended December 31, 2003 Compared To Year Ended December 31, 2002

Net Sales

Automotive OEM sales increased due primarily to shipments of alternators from Hubei and increased demand from non-GM customers. Heavy-duty OEM sales increased due to strong demand from Class 5 – 8 truck customers, primarily in the fourth quarter. OEM sales were also favorably impacted by currency exchange rates in Europe and Korea. Electrical aftermarket sales were up due to new business wins, partially offset by reduced sales to GM SPO and, in the first quarter, customer inventory reductions. Electrical aftermarket sales were also favorably impacted by currency exchange rates in Europe. Powertrain sales increased due to increased diesel engine and parts volume. Third party sales in the core services business increased due to higher volumes.

Gross Profit

Gross profit of $63.2 million in 2003 includes the special charges totaling $118.2 million discussed below and compares with gross profit of $153.7 million in 2002. Excluding the special charges, gross profit and gross profit as a percentage of net sales improved in 2003 compared with 2002. Total OEM gross profit decreased $5.0 million in 2003 compared with 2002. OEM gross profit in 2003 was negatively impacted by the $14.3 million arbitration settlement, which is excluded in the following discussion. Automotive OEM gross profit declined $0.8 million in 2003 as a result of start-up costs in new facilities, strengthening foreign currencies on costs in foreign production facilities and costs arising from the shut down and transfer of operations, largely offset by higher sales and the benefits of cost reduction and restructuring actions. Heavy-duty OEM gross profit increased $10.1 million due to higher sales and the benefits of cost reduction and restructuring actions. Electrical aftermarket gross profit, excluding the impact of the $88.7 million special core valuation charge in 2003, increased $6.1 million in 2003. This improvement was due primarily to increased sales volume, partially offset by unfavorable product mix. Powertrain gross profit, excluding the impact of the $15.3 million special core valuation charge in 2003, increased $5.3 million in 2003. This improvement reflected an overall increase in remanufactured diesel engine and parts volume and lower warranty cost. Gross profit on core services increased $7.1 million due to sales volume growth and improved product mix.

Selling, General and Administrative Expenses

SG&A expenses increased $1.7 million, to $96.8 million in 2003, compared to $95.1 million in 2002. As a percentage of net sales, SG&A expenses improved to 9.9% in 2003 from 10.2% in 2002. The year over year increase in spending primarily reflects investments in product engineering, distribution and marketing programs, largely offset by overall cost reduction and control efforts.

Special Charges

We recorded a special charge to cost of goods sold of $103.9 million in 2003 for a change in estimate of the valuation of our core inventory. This change in estimate establishes a new inventory value for core inventory, from primarily customer core deposit value to core broker price. It also aligns us with the majority of companies that use core broker prices for inventory valuation and with market trends indicating that the long-term recovery of core prices is unlikely. This non-cash charge did not materially impact our liquidity or borrowing base. We believe that this change will drive better purchasing and manufacturing decisions and provide additional flexibility to adjust inventory levels.

We recorded a $14.3 million charge in 2003 in connection with an interim decision entered by the arbitration panel in a proceeding brought against certain of our affiliates by the minority partner of our Mexico joint venture. The arbitration panel issued its final award on June 25, 2004. In accordance with this award, we paid approximately $17.3 million for the

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remaining minority interest, the award for past services fees and other claims, including interest. In addition, we paid approximately $1.8 million in value added tax as a result of these payments. The final award did not affect the special charge recorded in 2003.

Restructuring Charges and Credits

In 2003, we recorded restructuring charges totaling $49.0 million related to: (i) the closure of our starter and alternator manufacturing operations in Anderson, Indiana; (ii) the closure of our electrical aftermarket remanufacturing and distribution facilities in Reed City, Michigan; (iii) the consolidation of two of our remanufacturing operations in Mississippi; and (iv) the consolidation of certain of our operations in Europe. The charges consisted of employee termination benefits of $14.4 million, an asset impairment charge of $29.2 million, operating lease impairment charges of $9.1 million, a pension plan curtailment charge of $1.8 million and other costs of $1.7 million. These charges were offset by a post-employment benefit plan curtailment gain of $7.2 million.

In 2002, we recorded a non-cash net restructuring credit of $4.4 million consisting of a $4.9 million post-employment benefit curtailment gain and a $0.5 million pension curtailment charge related to employee separation programs associated with our 2001 restructuring actions.

Operating Income (Loss)

The $82.5 million operating loss in 2003 includes the special charges totaling $118.2 million and $49.0 million in restructuring charges discussed above and operating profit of $63.0 million in 2002 includes the $4.4 million net curtailment gain. Year over year performance was also impacted by the other sales, gross profit and SG&A expense factors discussed above.

Interest Expense, Net

Interest expense, net, increased $5.0 million to $55.5 million in 2003 compared to $50.5 million in 2002. This increase reflects approximately $8.8 million of interest expense charged to continuing operations in 2003 that was charged to discontinued operations in 2002, and a $0.5 million increase in deferred financing costs related to the senior credit facilities. These increases were partially offset by $2.7 million of reductions including lower borrowings under the senior credit facilities and other items. Interest expense in 2002 includes a $1.8 million loss on the write off of deferred financing costs in connection with the early retirement of our then existing $200.0 million revolving credit facility.

Income Taxes

The income tax provision of $36.7 million in 2003 includes a $24.7 million increase to the deferred tax valuation allowance recorded in the fourth quarter for certain unreserved domestic income tax assets established prior to 2003. This valuation allowance was provided in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (“SFAS No. 109”), primarily as a result of recording three consecutive years of domestic losses. The 2003 provision also includes a $2.9 million provision related to withholding tax on intercompany dividends declared in 2003 and provisions in various foreign jurisdictions totaling $9.1 million. A valuation allowance was also established on the deferred tax assets arising from 2003 domestic losses. Our consolidated effective income tax rate of 66.0% in 2002 reflects taxable intercompany dividends paid in 2002, which are not deductible for financial reporting purposes.

Minority Interest in Income or Loss of Subsidiaries

Minority interest in income or loss of subsidiaries of a $0.1 million credit in 2003, compares with a $4.2 million charge in 2002. The year over year change reflects (i) a $2.5 million credit in 2003 related to minority shareholders’ share of the $103.9 million charge for the change in estimate in the valuation of core inventory and (ii) our purchase of additional shares from the minority shareholders of World Wide, Power, and Delco Remy Korea, partially offset by the minority interest of Hubei, which was acquired in March 2003.

Loss From Unconsolidated Joint Ventures

The loss from unconsolidated joint ventures of $6.4 million in 2003 compares with a loss of $3.8 million in 2002. This increased loss primarily reflects the write-off of our investment in iPower and increased losses recorded by Hitachi

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Remy Automotive GmbH, partially offset by higher earnings at Sahney Paris Rhone Ltd. and the termination in 2002 of our joint venture, Continental ISAD Electrical Systems GmbH & Co., formed with Continental AG in 2002.

Discontinued Operations

The loss from discontinued operations of $8.0 million in 2003 reflects restructuring charges of $0.9 million and interest expense of $7.8 million. The loss from discontinued operations of $26.3 million in 2002 consisted of operating losses of $11.3 million, including restructuring charges of $2.8 million, interest expense of $16.7 million and an income tax benefit of $1.7 million. The loss from discontinued operations in 2003 and 2002 includes the results of the remanufactured transmission business, Tractech, Kraftube and the contract remanufacturing and retail aftermarket gas engine businesses.

Cumulative Effect of Change in Accounting Principle

In accordance with the provisions of SFAS No. 142, we recorded a $74.2 million charge to write down goodwill in certain of our operations in the first quarter of 2002. There was no income tax effect on this charge.

Liquidity and Capital Resources

Our short-term liquidity needs include required debt service (including capital lease payments), day-to-day operating expenses, working capital requirements and the funding of capital expenditures, contingent acquisition payments for recently completed acquisitions and restructuring actions. Cash interest payments are expected to approximate $62.0 million in 2005. In 2005, we will be required to make payments in connection with the previous acquisitions of portions of Delphi Corporation’s light vehicle alternator business. Long-term liquidity requirements include principal payments of long-term debt and payments in connection with the acquisition of our light vehicle alternator business of about $2.0 million in 2006. Our contractual obligations are provided in the table under the section “Contractual Obligations and Contingent Liabilities and Commitments.” Our principal payments on long-term lease obligations are presented in Note 9 to our consolidated financial statements.

In March 2005 we entered into Amendment No. 2 to the Second Amended and Restated Loan and Security Agreement to reflect, among other matters, the acquisition of substantially all of the assets and the assumption of certain liabilities of UPC. Additionally, the Amendment increases the maximum draw under our asset based Senior Credit Facility from $120.0 million to $145.0 million, eliminates the Earnings Before Interest, Taxes, Depreciation and Amortization, which we refer to as EBITDA, and Fixed Charge covenants from the facility and extends the maturity of the facility to June 30, 2008 with provisions for annual extensions thereafter. The amendment is discussed below.

On April 23, 2004, we issued $125.0 million principal amount of Second Priority Senior Secured Floating Rate Notes due 2009, which we refer to as the Floating Rate Notes, bearing an interest rate of LIBOR plus 4.00%, and $150.0 million principal amount of 9 ³/8% Senior Subordinated Notes due 2012, which we refer to as the 9 ³/8% Senior Subordinated Notes. The net proceeds from the issuance of these notes were used to pay down existing indebtedness under our senior credit facilities, including repayment of the $60.0 million term loan discussed below and relevant prepayment premium, and to finance the redemption of our outstanding 10 5/8% senior subordinated notes due 2006 issued on August 1, 1996, including the call premium and accrued interest. The 10 5/8% notes were called for redemption in their entirety on April 23, 2004 at a redemption price of 101.771% of their face amount plus accrued but unpaid interest up to, but not including, the redemption date of May 24, 2004.

On June 28, 2002, we entered into a $250.0 million secured, asset based, revolving credit facility, which we refer to as the Senior Credit Facility, with a syndicate of banks led by Wachovia Bank, National Association and its subsidiary Congress Financial Corporation. The Senior Credit Facility replaced our then-existing $200.0 million secured revolving credit facility, which was due to expire on March 31, 2003. The interest is payable at the end of each month.

The Senior Credit Facility is collateralized by liens on substantially all of our assets and substantially all of the assets of our domestic and certain of our foreign subsidiaries and by the capital stock of such subsidiaries.

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On October 3, 2003, we amended and restated our Senior Credit Facility. The $250.0 million amended and restated facility consisted of a $190.0 million secured, asset-based, revolving facility, and a $60.0 million term loan facility. Proceeds from the new term loan were used to reduce outstanding debt under our asset-based revolving credit facility, thereby increasing our total borrowing capacity under the Senior Credit Facility by approximately $60.0 million. The interest rate on the term loan facility is Wachovia Bank’s prime rate plus 4.5% subject to a minimum interest rate of 8.5%. The applicable interest rate on the amount borrowed under the revolving credit facility remains unchanged and floats at rates above Wachovia Bank’s prime rate and/or Eurodollar rates.

On September 1, 2004, we amended our senior credit facility to change certain definitions and to adjust certain financial covenants to reflect the sale of Williams and JAX. The revised covenant calculation for EBITDA was lowered from $108.0 million to $99.0 million for the rolling twelve-month period ending December 31, 2004, reflecting the sale of our transmission business.

In connection with the various amendments in 2004 and 2005, we amended our senior credit facilities to reflect the extinguishment of the $60.0 million term loan, provide for borrowings of up to $145.0 million under our asset based revolving credit facility, and extend the maturity date to June 30, 2008 with provisions for annual extensions thereafter.

At December 31, 2004, there were no borrowings under our Senior Credit Facility and utilization of letters of credit totaled $6.55 million. Based on the collateral supporting the senior credit facility at December 31, 2004, $113.45 million was available under the Facility. Had we had borrowings outstanding under our revolving credit facility at December 31, 2004, the interest rate would have been between 5.15% and 5.5%.

The Senior Credit Facility contains various restrictive covenants, which include, among other things: (i) limitations on additional borrowings and encumbrances; (ii) the maintenance of certain financial ratios and compliance with certain financial tests and limitations; (iii) limitations on cash dividends paid; (iv) limitations on investments and capital expenditures; and (v) limitations on leases and sales of assets.

During 2003, certain of our Mexican subsidiaries entered into a machinery and equipment sale-leaseback financing transaction with GE Mexico. Cash proceeds were $10.3 million, net of security deposits of $5.4 million. 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. We have accounted for these transactions as a financing transaction in accordance with SFAS No. 66 and SFAS No. 98. Accordingly, we have recorded an obligation of $15.7 million. The obligation at December 31, 2004 and 2003 was $12.2 million and $15.1 million, respectively. We also continue to explore additional financing options, both in the U.S. and abroad, in an effort to further enhance liquidity and assure continued compliance with the covenants of all existing financing arrangements.

We participate in two programs that accelerate the collection of accounts receivable. Under one program we sell the accounts of one of our aftermarket customers to a bank, on a non-recourse basis, at a discount. At December 31, 2004, the amount of receivables under this program was $21.1 million. The second program is an early pay plan under which a third party acts as paying agent for one of our customers. The accounts are paid, at a discounted rate, in 5 to 7 days after shipment instead of the regular terms. This program is also without recourse. The amount covered by this plan at December 31, 2004 was $6.6 million.

We believe that cash generated from operations, together with the amounts available under the senior credit facilities and other borrowings, will be adequate to meet our debt service, capital expenditure, contingent acquisition payment, restructuring and working capital requirements for at least the next twelve months, although no assurance can be given in this regard.

Year Ended December 31, 2004

Cash used in operating activities of continuing operations in 2004 of $9.4 million includes cash restructuring payments of $9.0 million and a litigation payment of $13.6 million. Accounts receivable increased $10.8 million in 2004 due primarily to stronger Automotive and Heavy-Duty OEM and Powertrain sales, in addition to a decrease in accelerated collections under the receivables programs discussed above. Days of sales outstanding were essentially unchanged year over year. Inventories increased $19.5 million in 2004 due primarily to builds in support of higher future Heavy-Duty OEM

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sales, builds for the launch of an additional remanufactured diesel engine and the impact of foreign currency exchange rates. Accounts payable increased $15.3 million in 2004 primarily as a result of the inventory builds discussed above. Other current assets and liabilities, net, increased $22.2 million year over year due primarily to a reduction in accrued expenses, including product warranty, employee salaries and benefits, interest and the payment of certain transaction fees. Cash restructuring payments consisted of employee termination benefits, leases and other costs. The litigation payment of $13.6 million (including value added tax of $1.8 million) was made in connection with the settlement of the services agreement component of the arbitration with the former minority shareholders of RM.

Cash provided by investing activities of continuing operations in 2004 of $53.8 million included acquisition payments totaling $25.5 million, consisting of earn-out payments relative to the 2000 acquisition of M&M Knopf Auto Parts, L.L.C. ($13.4 million), the final cash payment on notes issued in 2002 in connection with the acquisition of the remaining shares from the minority shareholders of Remy Korea Limited ($4.8 million), purchase of the remaining shares from the minority shareholders of the Mexico joint venture ($5.5 million) and payments made in connection with the acquisition of Delphi Corporation’s light vehicle alternator business ($1.8 million). In 2004 we recorded proceeds on the sale of Williams and JAX of $104.3 million, net of income taxes and deal-related costs, and proceeds on the sale of Tractech and Kraftube of $0.4 million. Capital expenditures of $25.3 million in 2004 consisted primarily of production, engineering and distribution equipment and systems. We have planned capital expenditures of approximately $35.0 million to $40.0 million in 2005. Capital expenditures are expected to increase in 2005 as a result of expenditures for the launch of new products and the establishment of new technology centers in Europe and Asia.

Cash used in financing activities of continuing operations in 2004 of $3.7 million included proceeds from the issuance of long-term debt ($275.0 million), payments for the retirement of long-term debt ($200.0 million) and payment of related financing costs ($12.5 million). We also made a $2.5 million payment to CVC Management LLC in 2004 relative to services provided in connection with the refinancing of our senior credit facility in 2002. Net repayments of other debt included the pay down of our senior credit facility with proceeds from the sale of Williams and JAX. In addition, cash dividends of $1.0 million were paid to the minority shareholders of Hubei.

Cash outflows of discontinued operations of $0.9 million in 2004, primarily related to the remanufactured transmission business, reflects operating income excluding restructuring charges of $6.0 million, an increase in net working capital and other assets and liabilities of $5.4 million, cash restructuring payments of $1.0 million and capital expenditures of $0.5 million.

Year Ended December 31, 2003

Cash provided by operating activities of continuing operations in 2003 of $25.1 million reflected net income from continuing operations, excluding non-cash and other reconciling items, of $31.9 million, a reduction in net working capital, excluding the effect of acquisitions and the change in estimate for core inventory valuation, of $8.5 million and cash restructuring payments of $15.3 million. Accounts receivable increased by $8.6 million, primarily due to increased sales volume in the OEM markets in the fourth quarter of 2003 and extended terms with certain customers in the core services business. Days of sales outstanding improved year over year. Inventories increased $28.3 million, excluding the change in estimate for core inventory valuation, reflecting launch of the new light-duty alternator product line, higher core returns from our customers and the exchange impact of the weaker dollar. Inventory turns improved year over year. Accounts payable increased by $24.5 million in 2003 due primarily to strong fourth quarter sales and the resulting increased inventory purchases, and changes in terms with certain foreign vendors. A $20.9 million decrease in other net current assets and liabilities primarily reflects increases in accrued wages, interest, warranty and other accrued liabilities. Cash restructuring payments consisted of employee termination benefits and lease termination costs.

Cash used in investing activities of continuing operations of $5.3 million included acquisition payments totaling $18.9 million, consisting of payments under contractual put agreements for World Wide ($5.9 million), Remy Korea Limited ($5.3 million) and Power ($5.2 million), and the acquisition of Delphi Corporation’s light vehicle alternator business ($6.1 million, including $3.6 million of cash acquired). In the fourth quarter of 2003, we recorded an estimated contingent earn-out liability of $13.5 million related to the acquisition of Knopf (as discussed above). The liability was based on the achievement of certain earnings goals by Knopf during the period August 2000 to December 2003 and was paid in 2004. This adjustment to the purchase price of Knopf resulted in a $13.5 million increase in goodwill. In the fourth quarter of 2003, we reversed an estimated contingent earn-out liability and recorded a corresponding reduction in goodwill in the amount of $4.3 million, which had been established relating to the acquisition of Mazda NA. We determined that it was unlikely that Mazda NA would achieve certain sales goals during the period June 2001 to

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December 2005. Net proceeds of $30.1 million were recorded on the sale of Tractech and Kraftube. Capital expenditures of $16.3 million consisted primarily of production, engineering and distribution equipment.

Cash used in financing activities of continuing operations was $4.2 million in 2003. Net proceeds of $10.3 million were recorded in connection with the sale-leaseback financing transaction with GE Mexico. These proceeds were used to reduce borrowings under the revolving line of credit. Net borrowings under the revolving line of credit and other debt instruments of $12.5 million were used to fund investing activities and discontinued operations. Cash payments of $2.0 million were made in connection with the amendments to the senior credit facilities as discussed above.

Cash outflows of discontinued operations of $7.7 million in 2003 primarily reflected capital expenditures in the remanufactured transmission business of $3.7 million and cash restructuring payments of $2.6 million.

Year Ended December 31, 2002

Cash provided by operating activities of continuing operations of $38.0 million in 2002 reflected net income from continuing operations, excluding non-cash and other reconciling items, of $33.3 million, a reduction in working capital of $20.5 million and cash restructuring payments of $15.8 million. Accounts receivable declined $5.5 million in 2002 due to accelerated collections through arrangements with certain financial institutions ($16.7 million), partially offset by increased fourth quarter sales. Inventories increased $4.9 million in 2002 due primarily to higher product returns in the aftermarket during the fourth quarter, largely offset by increased core usage and other inventory management efforts. Accounts payable increased $15.2 million year over year due to timing of vendor payments. Cash restructuring payments consisted primarily of employee termination benefits.

Cash used in investing activities of continuing operations included payments under contractual put agreements for Power ($5.6 million), World Wide ($5.4 million) and Remy Korea Limited ($5.5 million) and $0.3 million related to the acquisition of Delphi Corporation’s light vehicle alternator business. Capital expenditures of $18.5 million consisted primarily of production equipment and tooling. In 2002, we contributed $3.0 million to our iPower joint venture.

Cash provided by financing activities of continuing operations in 2002 of $5.6 million consisted of net borrowings under our revolving line of credit and increased borrowings in certain foreign operations. Deferred financing cost payments totaling $7.8 million were made in 2002 in conjunction with the replacement of our prior senior credit facility. Cash payments of $1.8 million were made to the minority shareholders of Remy Korea Limited in 2002.

Cash outflows of discontinued operations of $17.8 million in 2002 reflected operating losses of $8.5 million, excluding impairment and restructuring charges, cash restructuring payments of $5.1 million and a $1.5 million increase in working capital.

Contractual Obligations, Contingent Liabilities and Commitments

Our contractual obligations as of December 31, 2004 are provided in the following table (dollars in millions):

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In addition to the contractual obligations disclosed above, we also have a variety of other contractual agreements related to the procurement of materials and other commitments. With respect to these agreements, we are not subject to any contracts that commit us to significant non-cancelable commitments. With respect to agreements related to the procurement of inventory used in our manufacturing and remanufacturing processes, we had approximately $70 million to $80 million of open purchase orders at December 31, 2004.

Contingencies

We are a party to various legal actions and administrative proceedings and subject to various claims arising in the ordinary course of business, including those relating to commercial transactions, product liability, safety, health, taxes, environmental and other matters. For more information, see “Business – Legal Proceedings,” and Note 16 to our financial statements in Item 8.

Seasonality

Our business is seasonal, as our major OEM customers historically have one to two week shutdowns of operations during July and December. Our sales results in the third and fourth quarters reflect the effects of these shutdowns. Our working capital requirements also are affected by seasonality, as we build inventory for the summer sales months in the aftermarket. Typically our working capital requirements are highest from April through August and the change from the highest month to the lowest month (typically December), for accounts receivable, inventory and accounts payable has averaged $40.0 million over the past three years. Refer to Note 20 to our consolidated financial statements, which pertains to quarterly (unaudited) financial information.

Effects of Inflation

We believe that the relatively moderate inflation over the last few years has not had a significant impact on our revenues or profitability and that we have been able to offset the effects of inflation by realizing improvements in operating efficiency. We have commodity price risk with respect to purchases of certain raw materials. However, we have provisions in many of our contracts, which provide for the pass through of fluctuations in the price of certain raw materials, such as copper and aluminum.

Foreign Sales

Approximately 27%, 26% and 22% of our net sales from continuing operations in 2004, 2003 and 2002, respectively, were derived from sales made to customers in foreign countries. Because of these foreign sales, our business is subject to the risks of doing business abroad, including currency exchange rate fluctuations, limits on repatriation of funds, compliance with foreign laws and other economic and political uncertainties.

Accounting Pronouncements

For a discussion of pending accounting pronouncements that may affect us, see Note 1 to our financial statements in Item 8.

Critical Accounting Policies

Our accounting policies, including those described below, require management to make significant estimates and assumptions using information available at the time the estimates are made. Actual amounts could differ significantly from these estimates. See Note 1 to our consolidated financial statements in Item 8 for a summary of the significant accounting policies and methods used in the preparation of our consolidated financial statements. We believe the following are some of the more critical judgment areas in the application of accounting policies that currently affect the consolidated financial position and results of operations.

Inventory

Inventories are valued at the lower of cost or market determined by the first-in, first-out (FIFO) method. Estimates of lower of cost or market value of inventory are determined at the operating unit level and are based upon the inventory at that location taken as a whole. In the fourth quarter of 2003, we changed our estimate for the valuation of core inventory

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from primarily customer acquisition cost to primarily core broker prices and recorded a special charge of $103.9 million. Of this charge $94.8 million related to the write down of the core component of inventory and $9.1 million related to the establishment of an estimated liability for core returns. Effective in 2004, the value of cores are estimated over the expected remaining life of the core and are evaluated on an ongoing basis by comparing the estimate to broker prices.

We evaluate inventories on a regular basis to identify inventory on hand that may be obsolete or in excess of current and future projected market demand. For inventory deemed to be obsolete, we provide a reserve on the full value of the inventory. Inventory that is in excess of current and projected use is reduced by an allowance to a level that approximates the estimate of future demand.

Goodwill And Other Intangible Assets

We adopted SFAS No. 142, effective January 1, 2002. Under SFAS No. 142, goodwill is no longer amortized; however, it must be tested for impairment at least annually. Amortization continues to be recorded for other intangible assets with definite lives. We are subject to financial statement risk to the extent that goodwill and indefinite-lived intangible assets become impaired.

Warranty

The Company provides an allowance for the estimated future cost of product warranties and other defective product returns based on management’s estimate of product failure rates and customer eligibility. If these factors differ from management’s estimates, revisions to the estimated warranty liability may be required.

Core Liability

The Company records a liability for core returns based on cores expected to be returned. The liability represents the difference between the core deposit value to be credited to the customer and the core inventory value for the core being returned. Core inventory values decline over the expected remaining life of the core family. Core inventory values decline on the basis of several economic factors, including market availability, seasonality and demand. If estimated returns and/or core market value differ from management’s estimates, revisions to the estimated core liability may be required.

Employee Benefit Plans

We provide a range of benefits to our employees and retired employees, including pensions and post-retirement healthcare. We record annual amounts relating to these plans based on calculations specified by U.S. Generally Accepted Accounting Principles, which we refer to as U.S. GAAP, which include various actuarial assumptions such as discount rates, assumed rates of return, compensation increases, turnover rates and healthcare cost trend rates. The expected return on plan assets is based on our expectation of the long-term average rate of return on assets in the pension funds, which is reflective of the current and projected asset mix of the funds and considers the historical returns earned on the funds. We review our actuarial assumptions on an annual basis and make modifications to the assumptions based on current rates and trends when appropriate. As required by U.S. GAAP, the effects of the modifications are recorded currently or amortized over future periods. Based on information provided by our independent actuaries and other relevant sources, we believe that the assumptions used are reasonable.

Income Taxes

We account for income taxes in accordance with SFAS No. 109. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We record a valuation allowance that represents operating loss carryforwards for which utilization is uncertain. Management judgment is required in determining our provision for income taxes, deferred tax assets and liabilities and the valuation allowance recorded against our net deferred tax assets. The valuation allowance would need to be adjusted in the event future taxable income is materially different than amounts estimated.

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In the fourth quarter of 2003, we recorded a charge of $28.3 million for a deferred tax valuation allowance for substantially all unreserved domestic income tax assets established prior to 2003. Of this total, $24.7 million was charged to income tax provision and $3.6 million was charged to other comprehensive loss.

In the normal course of business, our operations are exposed to continuing fluctuations in foreign currency values, interest rates and commodity prices that can affect the cost of operating, investing and financing. Accordingly, we address a portion of these risks through a controlled program of risk management that includes the use of derivative financial instruments. Our objective is to reduce earnings and cash flow volatility associated with these fluctuations. Our derivative activities, all of which are for purposes other than trading, are initiated within the guidelines of established policies and procedures designed to manage market risk. We do not enter into any derivative transactions for speculative purposes. For further information on these matters see Note 1 to our financial statements in Item 8.

Our primary interest rate risk exposure results from changes in short-term U.S. dollar interest rates. In an effort to manage interest rate exposures, we strive to achieve an acceptable balance between fixed and variable rate debt positions. In order to limit the effect of interest rate changes on earnings and cash flows, we maintain a significant percentage of fixed rate debt (77% at December 31, 2004). As such, we are exposed to U.S. changes in interest rates on the senior credit facilities and the Floating Rate Notes. A 100 basis point increase in U.S. market interest rates on the amounts outstanding at December 31, 2004 under the senior credit facilities would result in an increase in our annual interest expense of approximately $1.3 million.

Our foreign currency risk exposure results from fluctuating currency exchange rates, primarily changes in the U.S. dollar against the South Korean Won and certain European currencies. We face transactional currency exposures that arise when our foreign subsidiaries (or ourselves) enter into transactions, generally on an intercompany basis, denominated in currencies other than their local currency. We also face currency exposure that arises from translating the results of our global operations to the U.S. dollar at exchange rates that have fluctuated from the beginning of the period. Exposure to variability in foreign currency exchange rates is managed primarily through the use of natural hedges, whereby funding obligations and assets are both denominated in the local currency. From time to time, we enter into exchange agreements to manage our exposure arising from fluctuating exchange rates related to specific transactions. A hypothetical 10 percent weakening in the exchange rates of foreign currencies over a one-year period would increase earnings by approximately $0.9 million. A hypothetical 10 percent weakening in exchange rates of foreign currencies would reduce the carrying value of our net investment in our foreign subsidiaries at December 31, 2004 by approximately $9.3 million.

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and

Board of Directors of

Remy International, Inc.

We have audited the accompanying consolidated balance sheets of Remy International, Inc. and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for each of the three years in the period ended December 31, 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Remy International, Inc. and subsidiaries at December 31, 2004 and 2003, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 4 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 142 “Goodwill and Other Intangible Assets” in 2002.

/S/ ERNST & YOUNG LLP

Indianapolis, Indiana

March 18, 2005

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REMY INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

See notes to consolidated financial statements.

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REMY INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

See notes to consolidated financial statements.

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REMY INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT