As
filed with the Securities and Exchange Commission on
June 21, 2007
Registration
No.
333-
UNITED
STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
FORM
S-3
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF
1933
AMERICAN
REAL ESTATE PARTNERS, L.P.
(Exact
Name of Registrant as Specified in Its Charter)
|
Delaware
|
|
13-3398766
|
|
(State
or Other Jurisdiction of
Incorporation or Organization) |
(I.R.S.
Employer
Identification Numbers) |
767
Fifth Avenue, Suite 4700
New York, New York 10153
(212) 702-4300
New York, New York 10153
(212) 702-4300
(Address,
Including Zip Code, and Telephone Number, Including
Area
Code, of Registrant’s Principal Executive Offices)
Keith
A. Meister
Principal Executive Officer and Vice Chairman of the Board
767 Fifth Avenue, Suite 4700
New York, New York 10153
(212) 702-4300
Principal Executive Officer and Vice Chairman of the Board
767 Fifth Avenue, Suite 4700
New York, New York 10153
(212) 702-4300
(Name,
Address, Including Zip Code, and Telephone Number,
Including
Area Code, of Agent for Service)
With copies
to:
Julie M.
Allen,
Esq.
Ian B. Blumenstein, Esq.
Proskauer Rose LLP
1585 Broadway
New York, New York 10036
(212) 969-3000
Ian B. Blumenstein, Esq.
Proskauer Rose LLP
1585 Broadway
New York, New York 10036
(212) 969-3000
Approximate
date of commencement of proposed sale of the securities to the public:
From time to time after the effective date of this Registration
Statement.
If
the only securities being registered on this Form are being offered pursuant
to
dividend or interest reinvestment plans, please check the following box. ¨
If
any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, other than securities offered only in connection with dividend
or interest reinvestment plans, check the following box. ý
If
this Form is filed to register additional securities for an offering pursuant
to
Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. ¨ _______________
If
this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. ¨ ____________
If
this Form is a registration statement pursuant to General Instruction 1.D.
or a
post-effective amendment thereto that shall become effective upon filing with
the Commission pursuant to Rule 462(e) under the Securities Act, check the
following box. ¨
If
this Form is a post-effective amendment to a registration statement filed
pursuant to General Instruction 1.D. filed to register additional securities
or
additional classes of securities pursuant to Rule 413(b) under the Securities
Act, check the following box. ¨
CALCULATION
OF REGISTRATION FEE
|
Title
of Each Class of Securities
to be Registered |
|
Amount
to be Registered
|
|
Proposed
Maximum Offering Price per Depositary
Unit
|
|
Proposed
Maximum
Aggregate Offering Price |
|
Amount
of Registration Fee
|
|||
|
|
|||||||||||
|
Depositary
units
|
4,525,058(1)(2)
|
$94.96(3)
|
$429,699,508(3)
|
$13,191.77
|
|||||||
——————
(1)
This
number reflects the aggregate number of depositary units representing limited
partnership interests issuable upon conversion of American Real Estate Partners,
L.P.’s Variable Rate Senior Convertible Notes due 2013 at the conversion rate of
$132.595 of our depositary units for each $1,000 principal amount of the
notes.
(2)
In the event
of
a stock split, stock dividend or similar transaction involving the amount of
depositary units of the Registrant, in order to prevent dilution, the number
of
depositary units registered hereby shall be automatically adjusted to cover
the
additional depositary units in accordance with Rule 416 under the Securities
Act.
(3)
Based on the
average of the high and low selling prices per unit as reported on the New
York
Stock Exchange on June 15, 2007. Estimated pursuant to Rule 457(c) under
the Securities Act, solely for the purpose of calculating the registration
fee.
The
information in this prospectus is not complete and may be changed. We may not
sell these depositary units until the Registration Statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer
to sell these depositary units and it is not soliciting an offer to buy these
depositary units in any jurisdiction where the offer or sale is not
permitted.
|
SUBJECT
TO COMPLETION, DATED
JUNE 21, 2007
|
|
PROSPECTUS
|
4,525,058
Depositary
Units
AMERICAN
REAL ESTATE PARTNERS, L.P.
This
prospectus relates to the resale of up to 4,525,058 depositary units of American
Real Estate Partners, L.P. that may be offered and sold from time to time by
the
selling securityholders named in this prospectus and the persons to whom such
selling securityholders may transfer their depositary units.
These
depositary units include the 4,525,058 depositary units initially issuable
upon
conversion of American Real Estate Partner, L.P.’s Variable Rate Senior
Convertible Notes due 2013, or the convertible notes. This prospectus also
relates to any additional depositary units issuable upon conversion of the
convertible notes in the event of a stock split, stock dividend or similar
transaction involving the amount of depositary units of the Registrant.
We will
not
receive any proceeds from the sale of the depositary units covered by this
prospectus.
Our
depositary units are listed on the New York Stock Exchange under the symbol
“ACP.”
Investing
in our depositary units involves some risk. See “Risk Factors” beginning on page
4.
——————
Neither
the Securities and Exchange Commission nor any state securities commission
has
approved or disapproved of these depositary units or passed upon the adequacy
or
accuracy of this prospectus. Any representation to the contrary is a criminal
offense.
——————
The
date
of this prospectus is
,
2007
| |
Page |
|
You
should rely only on the information contained in this document or to which
we
have referred you. We have not authorized anyone to provide you with information
that is different. This document may only be used where it is legal to sell
securities. The information in this document may only be accurate on the date
of
this document.
i
This
prospectus and the information incorporated herein by reference contain
“forward-looking statements” within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended, or the Exchange Act; Section 27A of the
Securities Act of 1933, as amended, or the Securities Act; and pursuant to
the
Private Securities Litigation Reform Act. These forward-looking statements
are
not historical facts, but rather our beliefs and expectations based on our
current expectations, estimates, projections, beliefs and assumptions about
our
company and industry. Words such as “anticipates,” “expects,” “intends,”
“plans,” “believes,” “seeks,” “estimates” and similar expressions are intended
to identify forward-looking statements. There statements are not guarantees
of
future performance and are subject to risks, uncertainties and other factors,
some of which are beyond our control, are difficult to predict and could cause
actual results to differ materially from those expressed or forecasted in the
forward-looking statements. These risks include those set forth in the section
of this prospectus called “Risk Factors.”
Those
risks are representative of factors that could affect the outcome of the
forward-looking statements. These and the other factors discussed elsewhere
in
this prospectus and the documents incorporated by reference herein are not
necessarily all of the important factors that cause our results to differ
materially from those expressed in our forward-looking statements. We caution
you not to place undue reliance on these forward-looking statements, which
reflect our view only as of the respective dates of this prospectus and the
documents incorporated herein by reference or other dates that are specified
in
those documents.
1
OUR COMPANY
American
Real Estate Partners, L.P., or AREP, is a master limited partnership formed
in
Delaware on February 17, 1987. We are a diversified holding company owning
subsidiaries engaged in the following operating businesses: gaming, real estate
and home fashion. On April 22, 2007, American Entertainment Properties Corp.,
or
AEP, a wholly owned indirect subsidiary of AREP, entered into a purchase
agreement with W2007/ACEP Holdings, LLC, an affiliate of Whitehall Street Real
Estate Funds, a series of real estate investment funds affiliated with Goldman,
Sachs & Co., or Whitehall Street Real Estate Funds, to sell all of the
issued and outstanding membership interests of American Casino &
Entertainment Properties, LLC, or ACEP, which comprises our gaming operations.
The parties expect to close the transaction in approximately December 2007.
On
February 9, 2007, we entered into an agreement and plan of merger, pursuant
to
which we would acquire Lear Corporation, or Lear, a publicly traded company
that
provides automotive interior systems worldwide, for an aggregate consideration
of approximately $5.2 billion, including the assumption by the surviving entity
of certain outstanding indebtedness of Lear and refinancing of Lear’s existing
term loan and credit facility. The consummation of the transaction is subject
to
regulatory approvals and shareholder vote.
Our
primary business strategy is to continually evaluate our existing operating
businesses with a view to maximizing value to our depositary unitholders. We
may
also seek to acquire additional businesses that are distressed or in
out-of-favor industries and will consider the divestiture of businesses. In
addition, we invest our available liquidity in debt and equity securities with
a
view to enhancing returns as we continue to assess further acquisitions of
operating businesses.
Our
general partner is American Property Investors, Inc., the general partner,
or
API, a Delaware corporation, which is indirectly wholly owned by Carl C. Icahn.
We own our businesses and conduct our investment activities through a subsidiary
limited partnership, American Real Estate Holdings Limited Partnership, or
AREH,
in which we own a 99% limited partnership interest, and its subsidiaries. API
also acts as the general partner for AREH. API has a 1% general partnership
interest in each of us and AREH. As of March 31, 2007, affiliates of
Mr. Icahn beneficially owned 55,655,382 units representing AREP limited
partner interests, or the depositary units, representing approximately 90%
of
the outstanding depositary units, and 10,304,013 cumulative pay-in-kind
redeemable preferred units, representing AREP limited partner interests, or
the
preferred units, representing approximately 86.5% of the outstanding preferred
units.
Our
depositary units, representing limited partnership interests, trade on the
New
York Stock Exchange under the symbol “ACP.”
As used
in this prospectus, “we,” “us,” “our,” “company” and “AREP” mean American Real
Estate Partners, L.P., and, unless the context indicates otherwise, include
our
subsidiaries.
Our
principal executive offices are located at 767 Fifth Avenue, Suite 4700, New
York, New York 10153. Our phone number is (212) 702-4300. Our website address
is
http:// www.AREP.com.
2
We are
registering for resale by the selling securityholders up to 4,525,058 depositary
units issuable upon conversion of the convertible notes, and any additional
depositary units issuable upon conversion of the convertible notes in the event
of a stock split, stock dividend or similar transaction involving the amount
of
depositary units of the Registrant. This prospectus is part of a Registration
Statement that the selling securityholders filed with the Securities and
Exchange Commission, or the SEC, using a “shelf” registration process. Under
this shelf process, we may offer, from time to time depositary units. This
prospectus does not contain all of the information included in the Registration
Statement. The registration statement filed with the SEC includes exhibits
that
provide more details about the matters discussed in this prospectus.
We will
not receive any of the proceeds from the sale by the selling securityholders
of
the depositary units. We will bear all fees and expenses incident to our
obligation to register the depositary units. We may suspend the use of this
prospectus for a period not to exceed sixty days in the aggregate during any
twelve-month period, in each case for valid business reasons, to be determined
in good faith by AREP in its reasonable judgment (which shall not include the
avoidance of AREP’s obligations hereunder), including, without limitation, the
acquisition or divestiture of assets, pending corporate developments, public
filings with the SEC and similar events.
You
should carefully read this prospectus, the related exhibits filed with the
SEC
and any prospectus supplement, together with the additional information
described below under the headings “Where You Can Find More Information” and
“Incorporation by Reference.” This prospectus incorporates important business
and financial information about us that is not included in or delivered with
this prospectus. We will provide without charge to each person to whom a copy
of
this prospectus is delivered, upon written or oral request of that person,
a
copy of any and all of this information. Requests for copies should be directed
to Investor Relations Department, American Real Estate Partners, L.P., 769
Fifth
Avenue, Suite 4700, New York, New York 10153; (212) 702-4300. Our web site
address is http://www.AREP.com. You should request this information at least
five business days in advance of the date on which you expect to make your
decision with respect to the exchange offer.
You
should rely only on the information contained or incorporated by reference
in
this prospectus and in any accompanying prospectus supplement. We have not
authorized any other person to provide you with different information. If anyone
provides you with different or inconsistent information, you should not rely
on
it. You should assume that the information appearing in this prospectus, any
prospectus supplement and any other document incorporated by reference is
accurate only as of the date on the front cover of those documents. We do not
imply that there has been no change in the information contained in this
prospectus or in our affairs since that date by delivering this
prospectus.
3
Investing
in our depositary units involves risks that could affect us and our business
as
well as the industries in which we operate and invest. Before purchasing our
depositary units, you should carefully consider the following risks and the
other information in this prospectus and any applicable prospectus supplement,
as well as the documents incorporated by reference herein. Each of the risks
described could result in a decrease in the value of our depositary units and
your investment in them.
Risks Relating to
Our
Structure
Our general partner
and its control person could exercise their influence over us to your
detriment.
Mr. Icahn,
through affiliates, currently owns 100% of API, our general partner, and
approximately 86.5% of our outstanding preferred units and approximately 90%
of
our depositary units, and, as a result, has the ability to influence many
aspects of our operations and affairs, including the timing and amount of any
distribution to unitholders. API also is the general partner of AREH.
The
interests of Mr. Icahn, including his interests in entities in which he and
we have invested or may invest in the future, may differ from your interests
as
a unitholder and, as such, he may take actions that may not be in your interest.
For example, if we encounter financial difficulties or are unable to pay our
debts as they mature, Mr. Icahn’s interests might conflict with your
interests.
In
addition, if Mr. Icahn were to sell, or otherwise transfer, some or all of
his interests in us to an unrelated party or group, a change of control could
be
deemed to have occurred under the terms of the indentures governing certain
of
our notes which would require us to offer to repurchase all such outstanding
notes at 101% of their principal amount plus accrued and unpaid interest and
liquidated damages, if any, to the date of repurchase. In the case of the
convertible notes, we also would be obligated to make a “make whole” payment in
the form of additional depositary units to any holder of convertible notes
who
converts such notes following a change of control. However, it is possible
that
we will not have sufficient funds at the time of the change of control to make
the required repurchase of such notes.
We have engaged,
and in the future may engage, in transactions with our
affiliates.
We have
invested and may in the future invest in entities in which Mr. Icahn also
invests. We also have purchased and may in the future purchase entities or
investments from him or his affiliates. Although API has never received fees
in
connection with our investments, our partnership agreement allows for the
payment of these fees. Mr. Icahn may pursue other business opportunities in
industries in which we compete and there is no requirement that any additional
business opportunities be presented to us.
We have
entered into an agreement and plan of merger pursuant to which we would acquire
all of the issued and outstanding common stock of Lear for an aggregate
consideration of approximately $5.2 billion, including the assumption by the
surviving entity of certain outstanding indebtedness of Lear and the refinancing
of Lear’s existing term loan and credit facility. The consummation of the
transaction is subject to regulatory approvals and shareholder vote.
Mr. Icahn beneficially owns approximately 16.0% of Lear’s outstanding
common stock.
Mr. Icahn
previously proposed that we acquire his interest in American Railcar, Inc., or American Railcar, and Philip
Services Corporation, or Philip Services. American Railcar is a publicly traded company that is primarily engaged in the
business of manufacturing covered hoppers and tank railcars. Philip Services is an industrial services company that
provides industrial outsourcing, environmental services and metal services to major industry sectors throughout North
America. A committee of independent directors of the board was formed to consider those proposals. Currently, at Mr.
Icahn’s request, only the proposal regarding the potential acquisition of the metal services business of Philip Services
is being considered by the committee. Any acquisition would be subject to, among other things, the negotiation, execution
and closing of a definitive agreement and the receipt of a fairness opinion. We continuously identify, evaluate and
engage in discussions concerning potential investments and acquisitions, including potential investments in and
acquisitions of affiliates of Mr. Icahn. There cannot be any assurance that any potential transactions that we consider
will be completed.
4
Certain of our management are committed to the management of other businesses.
Certain
of the individuals who conduct the affairs of API, including the chairman of
our
board of directors, Mr. Icahn, our principal executive officer and vice
chairman of the board of directors, Keith A. Meister, and our president, Peter
K. Shea, are, and will be, committed to the management of other businesses
owned
or controlled by Mr. Icahn and his affiliates. Accordingly, these
individuals may focus significant amounts of time and attention on managing
these other businesses. Conflicts may arise in the future between our interests
and the other entities or business activities in which such individuals are
involved. Conflicts of interest may arise in the future as we may compete with
such affiliates for the same assets, purchasers and sellers of assets or
financings.
To service our
indebtedness and pay distributions with respect to our depositary units, we
will
require a significant amount of cash. Our ability to maintain our current cash
position or generate cash depends on many factors beyond our
control.
Our
ability to make payments on and to refinance our indebtedness, to pay
distributions with respect to our depositary units and to fund operations will
depend on existing cash balances and our ability to generate cash in the future.
This, to a certain extent, is subject to general economic, financial,
competitive, regulatory and other factors that are beyond our control.
Our
current businesses and businesses that we acquire may not generate sufficient
cash to service our debt. In addition, we may not generate sufficient cash
flow
from operations or investments and future borrowings may not be available to
us
in an amount sufficient to enable us to service our indebtedness or to fund
our
other liquidity needs. We may need to refinance all or a portion of our
indebtedness on or before maturity. We cannot assure you that we will be able
to
refinance any of our indebtedness on commercially reasonable terms or at
all.
We are a holding
company and will depend on the businesses of our subsidiaries to satisfy our
obligations.
We are
a
holding company. In addition to cash and cash equivalents, U.S. government
and
agency obligations, marketable equity and debt securities and other short-term
investments, our assets consist primarily of investments in our subsidiaries.
Moreover, if we make significant investments in operating businesses, it is
likely that we will reduce the liquid assets at AREP and AREH in order to fund
those investments and the ongoing operations of our subsidiaries. Consequently,
our cash flow and our ability to meet our debt service obligations and make
distributions with respect to depositary units and preferred units likely will
depend on the cash flow of our subsidiaries and the payment of funds to us
by
our subsidiaries in the form of dividends, distributions, loans or
otherwise.
The
operating results of our subsidiaries may not be sufficient to make
distributions to us. In addition, our subsidiaries are not obligated to make
funds available to us, and distributions and intercompany transfers from our
subsidiaries to us may be restricted by applicable law or covenants contained
in
debt agreements and other agreements to which these subsidiaries may be subject
or enter into in the future. The terms of any borrowings of our subsidiaries
or
other entities in which we own equity may restrict dividends, distributions
or
loans to us. For example, the notes issued by our indirect wholly owned
subsidiary, ACEP, contain restrictions on dividends and distributions and loans
to us, as well as on other transactions with us. ACEP also has a credit
agreement which contains financial covenants that have the effect of restricting
dividends or distributions. This agreement precludes our receiving payments
from
the operations of our gaming properties which account for a significant portion
of our revenues and cash flows. We have credit facilities for WestPoint
International, Inc., or WPI, our majority owned subsidiary, and our real estate
development properties that also restrict dividends, distributions and other
transactions with us. To the degree any distributions and transfers are impaired
or prohibited, our ability to make payments on our debt will be limited.
We or our
subsidiaries may be able to incur substantially more debt.
We or
our
subsidiaries may be able to incur substantial additional indebtedness in the
future. The terms of our 8.125% senior notes due 2012, our 7.125% senior notes
due 2013 and our Variable Rate Senior Convertible Notes due 2013 do not prohibit
us or our subsidiaries from doing so. We and AREH may incur additional
indebtedness if we comply with certain financial tests contained in the
indentures that govern these notes. As of March 31, 2007, based on these tests,
we and AREH could have incurred up to approximately $1.4 billion of additional
indebtedness. Since that date, we issued $600.0 million principal amount of
our
Variable Rate Senior Convertible Notes due 2013, reducing the amount that we
and
AREH could incur based upon this test. If we complete the acquisition of Lear
and
5
fund the acquisition with borrowings, as we currently contemplate, under the financial tests contained in the indentures, AREP and AREH will not be able to incur additional indebtedness. However, our subsidiaries, other than AREH, are not subject to any of the covenants contained in the indentures with respect to our senior notes, including the covenant restricting debt incurrence. If new debt is added to our and our subsidiaries’ current debt levels, the related risks that we, and they, now face could intensify.
Our failure to
comply with the covenants contained under any of our debt instruments, including
the indentures governing our outstanding notes, including our failure as a
result of events beyond our control, could result in an event of default which
would materially and adversely affect our financial
condition.
If there
were an event of default under one of our debt instruments, the holders of
the
defaulted debt could cause all amounts outstanding with respect to that debt
to
be due and payable immediately. In addition, any event of default or declaration
of acceleration under one debt instrument could result in an event of default
under one or more of our other debt instruments. It is possible that, if the
defaulted debt is accelerated, our assets and cash flow may not be sufficient
to
fully repay borrowings under our outstanding debt instruments and we cannot
assure you that we would be able to refinance or restructure the payments on
those debt securities.
The market for
our
securities may be volatile.
The
market for our equity securities may be subject to disruptions that could cause
substantial volatility in their prices. Any such disruptions may adversely
affect the value of your securities.
We have only
recently made cash distributions to our unitholders, and future distributions,
if any, can be affected by numerous factors.
While
we
made cash distributions with respect to each of the four quarters of 2006 in
the
amount of $0.10 per depositary unit and the first quarter of 2007 in the amount
of $0.15 per depositary unit, the payment of future distributions will be
determined by the board of directors of our general partner quarterly, based
on
a review of a number of factors, including those described below and other
factors that it deems relevant at the time that declaration of a distribution
is
considered. Our ability to pay distributions will depend on numerous factors,
including the availability of adequate cash flow from operations; the proceeds,
if any, from divestitures; our capital requirements and other obligations;
restrictions contained in our financing arrangements; and our issuances of
additional equity and debt securities. The availability of cash flow in the
future depends as well upon events and circumstances outside our control,
including prevailing economic and industry conditions and financial, business
and similar factors. No assurance can be given that we will be able to make
distributions or as to the timing of any distribution. If distributions are
made, there can be no assurance that holders of depositary units may not be
required to recognize taxable income in excess of cash distributions made in
respect of the period in which a distribution is made.
Holders of our
depositary units have limited voting rights, rights to participate in our
management and control of us.
Our
general partner manages and operates AREP. Unlike the holders of common stock
in
a corporation, holders of our outstanding depositary units have only limited
voting rights on matters affecting our business. Holders of depositary units
have no right to elect the general partner on an annual or other continuing
basis, and our general partner generally may not be removed except pursuant
to
the vote of the holders of not less than 75% of the outstanding depositary
units. In addition, removal of the general partner may result in a default
under
our debt securities. As a result, holders of depositary units have limited
say
in matters affecting our operations and others may find it difficult to attempt
to gain control or influence our activities.
Holders of
depositary units may not have limited liability in certain circumstances and
may
be liable for the return of distributions that cause our liabilities to exceed
our assets.
We
conduct our businesses through AREH in several states. Maintenance of limited
liability will require compliance with legal requirements of those states.
We
are the sole limited partner of AREH. Limitations on the liability of a limited
partner for the obligations of a limited partnership have not clearly been
established in several states. If it were determined that AREH has been
conducting business in any state without compliance with the applicable limited
partnership statute or the possession or exercise of the right by the
partnership, as limited partner
6
of AREH, to remove its general partner, to approve certain amendments to the AREH partnership agreement or to take other action pursuant to the AREH partnership agreement constituted “control” of AREH’s business for the purposes of the statutes of any relevant state, AREP and/or unitholders, under certain circumstances, might be held personally liable for AREH’s obligations to the same extent as our general partner. Further, under the laws of certain states, AREP might be liable for the amount of distributions made to AREP by AREH.
Holders
of our depositary units may also have to repay AREP amounts wrongfully
distributed to them. Under Delaware law, we may not make a distribution to
holders of common units if the distribution causes our liabilities to exceed
the
fair value of our assets. Liabilities to partners on account of their
partnership interests and nonrecourse liabilities are not counted for purposes
of determining whether a distribution is permitted. Delaware law provides that
a
limited partner who receives such a distribution and knew at the time of the
distribution that the distribution violated Delaware law will be liable to
the
limited partnership for the distribution amount for three years from the
distribution date.
Additionally,
under Delaware law an assignee who becomes a substituted limited partner of
a
limited partnership is liable for the obligations, if any, of the assignor
to
make contributions to the partnership. However, such an assignee is not
obligated for liabilities unknown to him or her at the time he or she became
a
limited partner if the liabilities could not be determined from the partnership
agreement.
We may be subject
to the pension liabilities of our affiliates.
Mr. Icahn,
through certain affiliates, currently owns 100% of API and approximately 90%
of
our outstanding depositary units and 86.5% of our outstanding preferred units.
Applicable pension and tax laws make each member of a “controlled group” of
entities, generally defined as entities in which there are at least an 80%
common ownership interest, jointly and severally liable for certain pension
plan
obligations of any member of the controlled group. These pension obligations
include ongoing contributions to fund the plan, as well as liability for any
unfunded liabilities that may exist at the time the plan is terminated. In
addition, the failure to pay these pension obligations when due may result
in
the creation of liens in favor of the pension plan or the Pension Benefit
Guaranty Corporation, or the PBGC, against the assets of each member of the
controlled group.
As
a result of the more than 80% ownership interest in us by Mr. Icahn’s
affiliates, we and our subsidiaries are subject to the pension liabilities
of
all entities in which Mr. Icahn has a direct or indirect ownership interest
of at least 80%. One such entity, ACF Industries LLC, or ACF, is the sponsor
of
several pension plans which, as of December 31, 2006, were not underfunded
on an
ongoing actuarial basis but would be underfunded by approximately $87.2 million
if those plans were terminated, as most recently reported by the plans’
actuaries. These liabilities could increase or decrease, depending on a number
of factors, including future changes in promised benefits, investment returns
and the assumptions used to calculate the liability. As members of the
controlled group, we would be liable for any failure of ACF to make ongoing
pension contributions or to pay the unfunded liabilities upon a termination
of
the ACF pension plans. In addition, other entities now or in the future within
the controlled group that includes us may have pension plan obligations that
are, or may become, underfunded and we would be liable for any failure of such
entities to make ongoing pension contributions or to pay the unfunded
liabilities upon a termination of such plans.
The
current underfunded status of the ACF pension plans requires ACF to notify
the
PBGC of certain “reportable events,” such as if we cease to be a member of the
ACF controlled group, or if we make certain extraordinary dividends or stock
redemptions. The obligation to report could cause us to seek to delay or
reconsider the occurrence of such reportable events.
Starfire
Holding Corporation, or Starfire, which is 100% owned by Mr. Icahn, has
undertaken to indemnify us and our subsidiaries from losses resulting from
any
imposition of certain pension funding or termination liabilities that may be
imposed on us and our subsidiaries or our assets as a result of being a member
of the Icahn controlled group. The Starfire indemnity (which does not extend
to
pension liabilities of our subsidiaries that would be imposed on us as a result
of our interest in these subsidiaries and not as a result of Mr. Icahn’s
and his affiliates’ more than 80% ownership interest in us) provides, among
other things, that so long as such contingent liabilities exist and could be
imposed on us, Starfire will not make any distributions to its stockholders
that
would reduce its net worth to below $250.0 million. Nonetheless, Starfire may
not be able to fund its indemnification obligations to us.
7
We are subject to the risk of possibly becoming an investment company.
Because
we are a holding company and a significant portion of our assets may, from
time
to time, consist of investments in companies in which we own less than a 50%
interest, we run the risk of inadvertently becoming an investment company that
is required to register under the Investment Company Act of 1940, as amended,
or
the Investment Company Act. Registered investment companies are subject to
extensive, restrictive and potentially adverse regulation relating to, among
other things, operating methods, management, capital structure, dividends and
transactions with affiliates. Registered investment companies are not permitted
to operate their business in the manner in which we operate our business, nor
are registered investment companies permitted to have many of the relationships
that we have with our affiliated companies.
In order
not to become an investment company required to register under the Investment
Company Act, we monitor the value of our investments and structure transactions
with an eye toward the Investment Company Act. As a result, we may structure
transactions in a less advantageous manner than if we did not have Investment
Company Act concerns, or we may avoid otherwise economically desirable
transactions due to those concerns. In addition, events beyond our control,
including significant appreciation or depreciation in the market value of
certain of our publicly traded holdings or adverse developments with respect
to
our ownership of certain of our subsidiaries, such as our loss of control of
WPI, could result in our inadvertently becoming an investment company.
If it
were established that we were an investment company, there would be a risk,
among other material adverse consequences, that we could become subject to
monetary penalties or injunctive relief, or both, in an action brought by the
SEC, that we would be unable to enforce contracts with third parties or that
third parties could seek to obtain rescission of transactions with us undertaken
during the period it was established that we were an unregistered investment
company.
We may become
taxable as a corporation.
We
believe that we have been and are properly treated as a partnership for federal
income tax purposes. This allows us to pass through our income and deductions
to
our partners. However, the Internal Revenue Service, or IRS, could challenge
our
partnership status and we could fail to qualify as a partnership for past years
as well as future years. Qualification as a partnership involves the application
of highly technical and complex provisions of the Internal Revenue Code of
1986,
as amended. For example, a publicly traded partnership is generally taxable
as a
corporation unless 90% or more of its gross income is “qualifying” income, which
includes interest, dividends, oil and gas revenues, real property rents, gains
from the sale or other disposition of real property, gain from the sale or
other
disposition of capital assets held for the production of interest or dividends,
and certain other items. We believe that in all prior years of our existence
at
least 90% of our gross income was qualifying income and we intend to structure
our business in a manner such that at least 90% of our gross income will
constitute qualifying income this year and in the future. However, there can
be
no assurance that such structuring will be effective in all events to avoid
the
receipt of more than 10% of non-qualifying income. If less than 90% of our
gross
income constitutes qualifying income, we may be subject to corporate tax on
our
net income, at a federal rate of up to 35% plus possible state taxes. Further,
if less than 90% of our gross income constituted qualifying income for past
years, we may be subject to corporate level tax plus interest and possibly
penalties. In addition, if we register under the Investment Company Act, it
is
likely that we would be treated as a corporation for U.S. federal income tax
purposes. The cost of paying federal and possibly state income tax, either
for
past years or going forward, could be a significant liability and would reduce
our funds available to make distributions to holders of units, and to make
interest and principal payments on our debt securities. To meet the qualifying
income test, we may structure transactions in a manner that is less advantageous
than if this were not a consideration, or we may avoid otherwise economically
desirable transactions. Recently proposed legislation may affect the status
of
publicly traded partnerships such as AREP. Although as proposed the legislation
would not impact AREP’s status as a partnership for tax purposes, it is unclear
whether such legislation would be enacted or, if enacted, what its final form
and effect would be.
Holders of
depositary units may be required to pay tax on their share of our income even
if
they did not receive cash distributions from us.
Because
we are treated as a partnership for income tax purposes, holders of depositary
units are generally required to pay federal income tax, and, in some cases,
state or local income tax, on the portion of our taxable income allocated to
them, whether or not such income is distributed. Accordingly, it is possible
that holders of
8
depositary units may not receive cash distributions from us equal to their share of our taxable income, or even equal to their tax liability on the portion of our income allocated to them.
If we discover
significant deficiencies in our internal controls over financial reporting
or at
any recently acquired entity, it may adversely affect our ability to provide
timely and reliable financial information and satisfy our reporting obligations
under federal securities laws, which also could affect the market price of
our
depositary units or our ability to remain listed with the New York Stock
Exchange.
Effective
internal and disclosure controls are necessary for us to provide reliable
financial reports and effectively prevent fraud and to operate successfully
as a
public company. If we cannot provide reliable financial reports or prevent
fraud, our reputation and operating results would be harmed. As of December
31,
2006, we completed remediation of previously reported significant deficiencies
in internal controls, as defined under interim standards adopted by the Public
Company Accounting Oversight Board, or PCAOB – two at the holding company and
one at a subsidiary. A “significant deficiency” is a control deficiency, or
combination of control deficiencies, that adversely affects a company’s ability
to initiate, authorize, record, process or report external financial data
reliably in accordance with generally accepted accounting principles such that
there is a more than remote likelihood that a misstatement of a company’s annual
or interim financial statements that is more than inconsequential will not
be
prevented or detected.
To the
extent that any material weakness or significant deficiency exists in our or
our
consolidated subsidiaries’ internal control over financial reporting, such
material weakness or significant deficiency may adversely affect our ability
to
provide timely and reliable financial information necessary for the conduct
of
our business and satisfaction of our reporting obligations under federal
securities laws, which could affect our ability to remain listed with the New
York Stock Exchange. Ineffective internal and disclosure controls could cause
investors to lose confidence in our reported financial information, which could
have a negative effect on the trading price of our depositary units or the
rating of our debt.
Since we are
a
limited partnership, you may not be able to pursue legal claims against us
in
U.S. federal courts.
We are
a
limited partnership organized under the laws of the state of Delaware. Under
the
rules of federal civil procedure, you may not be able to sue us in federal
court
on claims other than those based solely on federal law, because of lack of
complete diversity. Case law applying diversity jurisdiction deems us to have
the citizenship of each of our limited partners. Because we are a publicly
traded limited partnership, it may not be possible for you to attempt to sue
us
in a federal court because we have citizenship in all 50 U.S. states and
operations in many states. Accordingly, you will be limited to bring any claims
in state court. Furthermore, American Real Estate Finance Corp., our corporate
co-issuer for our notes, has only nominal assets and no operations. While you
may be able to sue the corporate co-issuer in a federal court, you are not
likely to be able to realize on any judgment rendered against it.
Risks Related to
our
Businesses
General
In
addition to the following risk factors specific to each of our businesses,
all
of our businesses are subject to the effects of the following:
·
the
continued threat of
terrorism;
·
economic
downturn;
·
loss
of any of our or our subsidiaries’ key
personnel;
·
the
unavailability, as needed, of
additional financing; and
·
the
unavailability of insurance at
acceptable rates.
Our acquisition
of
Lear will require a significant investment or may not be successfully
completed.
On
February 9, 2007, we entered into an agreement and plan of merger, pursuant
to
which we would acquire Lear, a publicly traded company that provides automotive
interior systems worldwide for aggregate consideration of
9
approximately $5.2 billion, including the assumption by the surviving entity
of certain outstanding indebtedness of Lear and the refinancing of Lear’s
existing term loan and credit facility. The consummation of the transaction
is subject to regulatory approvals and shareholder vote. If we complete the
acquisition of Lear, it would require a significant investment by us, including
approximately $1.3 billion in cash. Under the financial tests contained in the
indentures that govern our notes due 2012 and 2013, AREP and AREH will not be
able to incur additional indebtedness as a result of borrowings to finance the
Lear acquisition, which may limit our flexibility in entering into future financing
arrangements, including those to support our existing businesses or to acquire
new businesses. Lear also has significant pension and related liabilities for
which we could become liable as a member of a controlled group of entities.
Our
agreement with Lear permitted Lear to solicit proposals from other potential
purchasers for 45 days after the signing of the agreement and to respond to
offers after that date and until Lear’s stockholders approve the transaction
with us. No competing proposals were received as of the date of this prospectus.
We cannot assure you that we will be able to complete the transaction or that
the completion of the transaction will be for the consideration described
above.
Furthermore,
the proposed transaction is subject to additional risks and uncertainties,
including, but not limited to, the satisfaction of conditions to closing, which
requires Lear stockholder approval and U.S. and foreign antitrust approval.
If
we were to complete the acquisition, Lear’s business and operations would be
subject to various risks, including the uncertainty of its financial performance
following completion of the proposed transaction; general conditions affecting
the automotive industry, particularly in the United States; and general domestic
and international market conditions.
In addition,
we have been named as defendants in various lawsuits challenging the transaction. Specifically, a
consolidated action is pending in the Court of Chancery of the State of Delaware which alleges, among other things, that
the purchase price is unfair to Lear stockholders. A preliminary injunction was issued requiring supplemental disclosure.
The supplemental disclosure requirement has been satisfied and, consequently, the injunction has been dissolved. A
consolidated action filed in Michigan state court making virtually identical allegations was dismissed by the court
because of the prior-filed Delaware action. Plaintiffs in the Michigan state action have filed a motion for
reconsideration which is pending. Finally, a complaint is pending in the United States District Court for the Eastern
District of Michigan, which alleges that the transaction would violate certain provisions of the Employment Retirement
Income Security Act (referred to as the Federal Action). Motions to dismiss the Federal Action have been fully briefed
and await disposition, as does plaintiff’s application for preliminary injunction. Based upon the above there is a risk
that the transaction may be enjoined, or, if the transaction is completed, liability may nevertheless be imposed
thereafter.
Gaming
Our sale of ACEP
may not be successfully completed.
On April
22, 2007, AEP entered into a Membership Interest Purchase Agreement with
Whitehall Street Real Estate Funds to sell all of the issued and outstanding
membership interests of ACEP, which comprises our gaming operations. The
transaction is subject to the approval of the Nevada Gaming Commission and
the
Nevada State Gaming Control Board, as well as customary conditions. The parties
expect to close the transaction in approximately December 2007; however, we
cannot assure you that we will be able to consummate the transaction.
The gaming industry
is highly regulated. The gaming authorities and state and municipal licensing
authorities have significant control over our operations.
Our
properties currently conduct licensed gaming operations in Nevada. Various
regulatory authorities, including the Nevada State Gaming Control Board and
the
Nevada Gaining Commission, require our properties to hold various licenses
and
registrations, findings of suitability, permits and approvals to engage in
gaming operations and to meet requirements of suitability. These gaming
authorities also control approval of ownership interests in gaming operations.
These gaming authorities may deny, limit, condition, suspend or revoke our
gaming licenses, registrations, findings of suitability or the approval of
any
of our ownership interests in any of our licensed gaming operations, any of
which could have a significant adverse effect on our business, financial
condition and results of operations, for any cause they may deem reasonable.
If
we violate gaming laws or regulations that are applicable to us, we may have
to
pay substantial fines or forfeit assets. If, in the future, we operate or have
an ownership interest
10
in casino gaming facilities located outside of Nevada, we would also be subject
to the gaming laws and regulations of those other jurisdictions.
The sale
of alcoholic beverages at our gaming properties is subject to licensing and
regulation by local authorities. Any limitation, condition, suspension or
revocation of, or disciplinary action with respect to, any such license would
reduce the number of visitors to our casinos to the extent the availability
of
alcoholic beverages is important to them. Any reduction in our number of
visitors will reduce our revenue and cash flow.
Rising operating
costs for our gaming properties could have a negative impact on our
profitability.
The
operating expenses associated with our gaming properties could increase due
to
some of the following factors:
·
our
properties use significant amounts of
electricity, natural gas and other forms of energy, and energy price increases
may reduce our profitability;
·
our
properties use significant amounts of
water and a water shortage may adversely affect our operations;
·
some
of our employees are covered by
collective bargaining agreements and we may incur higher costs or work
slow-downs or stoppages due to union activities; and
·
our
reliance on slot machine revenues and
the concentration of manufacturing of slot machines in certain companies could
impose additional costs on us.
We face substantial
competition in the gaming industry.
The
gaming industry in general, and the markets in which we compete in particular,
are highly competitive:
·
we
compete with many world-class
destination resorts with greater name recognition and different attractions,
amenities and entertainment options;
·
we
compete with the continued growth of
gaming on Native American tribal lands;
·
the
existence of legalized gambling in
other jurisdictions may reduce the number of visitors to our
properties;
·
certain
states have legalized, and others
may legalize, casino gaming in specific venues, including race tracks and/or
in
specific areas, including metropolitan areas from which we traditionally attract
customers; and
·
our
properties also compete, and will in
the future compete, with all forms of legalized gambling.
Many
of
our competitors have greater financial, selling and marketing, technical and
other resources than we do. We may not be able to compete effectively with
our
competitors and we may lose market share, which could reduce our revenue and
cash flow.
We cannot guarantee
that we will be able to recover our investment made in connection with the
acquisition of the Aquarius.
On May
19, 2006, our wholly owned subsidiary, AREP Laughlin Corporation, acquired
the
Aquarius Casino Resort, or the Aquarius, from affiliates of Harrah’s Operating
Company, Inc., or Harrah’s, for approximately $113.6 million, including working
capital. Acquisitions generally involve significant risks, including
difficulties in the assimilation of the operations, services and corporate
culture of the acquired company.
Pursuant
to the Membership Interest Purchase Agreement that AEP has entered into with
Whitehall Street Real Estate Funds to sell the issued and outstanding membership
interests of ACEP, we have agreed to make capital expenditures, including $10.5
million through 2007 to refurbish rooms, upgrade amenities and acquire new
gaming equipment for the Aquarius.
There
can
be no assurance that this acquisition will be profitable or that we will be
able
to recover our investments either upon the sale of ACEP or, if the sale is
not
consummated, in our future gaming operations.
11
Real Estate Operations
Our investment
in
property development may be more costly than anticipated.
We have
invested and expect to continue to invest in unentitled land, undeveloped land
and distressed development properties. These properties involve more risk than
properties on which development has been completed. Unentitled land may not
be
approved for development. These investments do not generate any operating
revenue, while costs are incurred to obtain government approvals and develop
the
properties. Construction may not be completed within budget or as scheduled
and
projected rental levels or sales prices may not be achieved and other
unpredictable contingencies beyond our control could occur. We will not be
able
to recoup any of such costs until such time as these properties, or parcels
thereof, are either disposed of or developed into income producing assets.
We may be subject
to environmental liability as an owner or operator of development and rental
real estate.
Under
various federal, state and local laws, ordinances and regulations, an owner
or
operator of real property may become liable for the costs of removal or
remediation of certain hazardous substances, pollutants and contaminants
released on, under, in or from its property. These laws often impose liability
without regard to whether the owner or operator knew of, or was responsible
for,
the release of such substances. To the extent any such substances are found
in
or on any property invested in by us, we could be exposed to liability and
be
required to incur substantial remediation costs. The presence of such substances
or the failure to undertake proper remediation may adversely affect the ability
to finance, refinance or dispose of such property. We generally conduct a Phase
I environmental site assessment on properties in which we are considering
investing. A Phase I environmental site assessment involves record review,
visual site assessment and personnel interviews, but does not typically include
invasive testing procedures such as air, soil or groundwater sampling or other
tests performed as part of a Phase II environmental site assessment.
Accordingly, there can be no assurance that these assessments will disclose
all
potential liabilities or that future property uses or conditions or changes
in
applicable environmental laws and regulations or activities at nearby properties
will not result in the creation of environmental liabilities with respect to
a
property.
Home Fashion
Operations
Pending legal
proceedings may result in our ownership of WPI’s common stock being reduced to
less than 50%. A legal action in Delaware challenges the issuance to of the
preferred stock of WPI. Uncertainties arising from these proceedings may
adversely affect WPI’s operations and prospects and the value of our investment
in it.
We
currently own approximately 67.7% of the outstanding shares of common stock
and
100% of the preferred stock of WPI. As a result of the decision of the U.S.
District Court for the Southern District of New York reversing certain
provisions of the Bankruptcy Court order pursuant to which we acquired our
ownership of a majority of the common stock of WPI, the proceedings in the
Bankruptcy Court on remand and the proceedings in the Delaware action, our
percentage of the outstanding shares of common stock of WPI could be reduced
to
less than 50% and perhaps substantially less and our ownership of the preferred
stock of WPI could also be affected. The Bankruptcy Court entered a stay of
its
order on remand. On May 9, 2007, the District Court issued an order conditioning
the continuation of the Bankruptcy Court’s stay on the posting of a bond. No
bond was posted. On May 22, 2007, WPI, its subsidiary WestPoint Home, Inc.,
and
we filed a Petition for a Writ of Mandamus in the U.S. Court of Appeals for
the
Second Circuit requesting, among other relief, the reinstatement of the Sale
Order. The Second Circuit scheduled oral argument on the Petition for Mandamus
for June 26, 2007 and reinstated the stay pending its decision.
If we
were to lose control of WPI, it could adversely affect the business and
prospects of WPI and the value of our investment in it. In addition, we
consolidated the balance sheet of WPI as of March 31, 2007 and WPI’s results of
operations for the period from the date of acquisition through March 31, 2007.
If we were to own less than 50% of the outstanding common stock or the challenge
to our preferred stock ownership is successful, we would have to evaluate
whether we should consolidate WPI and if so our financial statements could
be
materially different than as presented as of March 31, 2007, December 31, 2006
and December 31, 2005 and for the periods then ended.
12
WPI acquired its business from the former owners through bankruptcy
proceedings. We cannot assure you that it will be able to operate profitably.
WPI
acquired the assets of WestPoint Stevens Inc., or WestPoint Stevens, as part
of
its bankruptcy proceedings. Certain of the issues that contributed to WestPoint
Stevens’ filing for bankruptcy, such as intense industry competition, the
inability to produce goods at a cost competitive with overseas suppliers, the
increasing prevalence of direct sourcing by principal customers and continued
incurrence of overhead costs associated with an enterprise larger than the
current business can profitably support, continue to exist and may continue
to
affect WPI’s business operations and financial condition adversely. In addition,
during the protracted bankruptcy proceedings of WestPoint Stevens, several
of
its customers reduced the volume of business done with WestPoint Stevens. We
have installed new management to address these issues, but we cannot assure
you
that new management will be effective.
WPI
operated at a loss during fiscal year 2006 as well as for the three months
ended
March 31, 2007, and we expect that WPI will continue to operate at a loss during
fiscal year 2007. We cannot assure you that it will be able to operate
profitably in the future.
The loss of any
of
WPI’s large customers could have an adverse effect on WPI’s
business.
During
fiscal year 2006 and the three-month period ended March 31, 2007, WPI’s six
largest customers accounted for approximately 50% and 52%, respectively, of
its
net sales. Other retailers have indicated that they intend to significantly
increase their direct sourcing of home fashion products from foreign sources.
The loss of any of WPI’s largest accounts, or a material portion of sales to
those accounts, would have an adverse effect upon its business, which could
be
material.
A portion of
WPI’s
sales are derived from licensed designer brands. The loss of a significant
license could have an adverse effect on WPI’s business.
A portion
of WPI’s sales is derived from licensed designer brands. The license agreements
for WPI’s designer brands generally are for a term of two or three years. Some
of the licenses are automatically renewable for additional periods, provided
that sales thresholds set forth in the license agreements are met. The loss
of a
significant license could have an adverse effect upon WPI’s business, which
effect could be material. Under certain circumstances, these licenses can be
terminated without WPI’s consent due to circumstances beyond WPI’s
control.
A shortage of
the
principal raw materials WPI uses to manufacture its products could force WPI
to
pay more for those materials and, possibly, cause WPI to increase its prices,
which could have an adverse effect on WPI’s operations.
Any
shortage in the raw materials WPI uses to manufacture its products could
adversely affect its operations. The principal raw materials that WPI uses
in
the manufacture of its products are cotton of various grades and staple lengths
and polyester and nylon in staple and filament form. Since cotton is an
agricultural product, its supply and quality are subject to weather patterns,
disease and other factors. The price of cotton is also influenced by supply
and
demand considerations, both domestically and worldwide, and by the cost of
polyester. Although WPI has been able to acquire sufficient quantities of cotton
for its operations in the past, any shortage in the cotton supply by reason
of
weather patterns, disease or other factors, or a significant increase in the
price of cotton, could adversely affect its operations. The price of man-made
fibers, such as polyester and nylon, is influenced by demand, manufacturing
capacity and costs, petroleum prices, cotton prices and the cost of polymers
used in producing these fibers. In particular, the effect of increased energy
prices may have a direct impact upon the cost of dye and chemicals, polyester
and other synthetic fibers. Any significant prolonged petrochemical shortages
could significantly affect the availability of man-made fibers and could cause
a
substantial increase in demand for cotton. This could result in decreased
availability of cotton and possibly increased prices and could adversely affect
WPI’s operations.
The home fashion
industry is highly competitive and WPI’s success depends on WPI’s ability to
compete effectively in the market.
The home
fashion industry is highly competitive. WPI’s future success will, to a large
extent, depend on its ability to remain a low-cost producer and to remain
competitive. WPI competes with both foreign and domestic companies on, among
other factors, the basis of price, quality and customer service. In the home
fashion market, WPI competes with many companies. WPI’s future success depends
on its ability to remain competitive in the areas
13
of marketing, product development, price, quality, brand names, manufacturing
capabilities, distribution and order processing. We cannot assure you of WPI’s
ability to compete effectively in any of these areas. Any failure to compete
effectively could adversely affect WPI’s sales and, accordingly, its operations.
Additionally, the easing of trade restrictions over time has led to growing
competition from low priced products imported from Asia and Latin America. The
lifting of import quotas in 2005 has accelerated the loss of WPI’s market
share. There can be no assurance that the foreign competition will not grow
to a level that could have an adverse effect upon WPI’s ability to compete
effectively.
WPI intends to
increase the percentage of its products that are made overseas. There is no
assurance that WPI will be successful in obtaining goods of sufficient quality
on a timely basis and on advantageous terms. WPI will be subject to additional
risks relating to doing business overseas.
WPI
intends to increase the percentage of its products that are made overseas and
may face additional risks associated with these efforts. Adverse factors that
WPI may encounter include:
·
logistical
challenges caused by
distance;
·
language
and cultural
differences;
·
legal
and regulatory
restrictions;
·
the
difficulty of enforcing agreements with
overseas suppliers;
·
currency
exchange rate
fluctuations;
·
political
and economic instability;
and
·
potential
adverse tax
consequences.
There has been
consolidation of retailers of WPI’s products that may reduce its
profitability.
Retailers
of consumer goods have become fewer and more powerful over time. As buying
power
has become more concentrated, pricing pressure on vendors has grown. With the
ability to buy imported products directly from foreign sources, retailers’
pricing leverage has increased and also allowed for growth in private label
brands that displace and compete with WPI proprietary brands. Retailers’ pricing
leverage has resulted in a decline in WPI’s unit pricing and margins and
resulted in a shift in product mix to more private label programs. If WPI is
unable to diminish the decline in its pricing and margins, it may not be able
to
achieve or maintain profitability.
WPI is subject
to
various federal, state and local environmental and health and safety laws and
regulations. If it does not comply with these regulations, it may incur
significant costs in the future to become compliant.
WPI is
subject to various federal, state and local laws and regulations governing,
among other things, the discharge, storage, handling, usage and disposal of
a
variety of hazardous and non-hazardous substances and wastes used in, or
resulting from, its operations, including potential remediation obligations
under those laws and regulations. WPI’s operations are also governed by federal,
state and local laws and regulations relating to employee safety and health
which, among other things, establish exposure limitations for cotton dust,
formaldehyde, asbestos and noise, and which regulate chemical, physical and
ergonomic hazards in the workplace. Consumer product safety laws, regulations
and standards at the federal and state level govern the manufacture and sale
of
products by WPI. Although WPI does not expect that compliance with any of these
laws and regulations will adversely affect its operations, we cannot assure
you
that regulatory requirements will not become more stringent in the future or
that WPI will not incur significant costs to comply with those
requirements.
Investments
We may not be
able
to identify suitable investments, and our investments may not result in
favorable returns or may result in losses.
Our
partnership agreement allows us to take advantage of investment opportunities
we
believe exist outside of our operating businesses. The equity securities in
which we may invest may include common stock, preferred stock and securities
convertible into common stock, as well as warrants to purchase these securities.
The debt securities in which we may invest may include bonds, debentures, notes
or non-rated mortgage-related securities, municipal obligations, bank debt
and
mezzanine loans. Certain of these securities may include lower-rated or
non-rated
14
securities which may provide the potential for higher yields and therefore may
entail higher risk and may include the securities of bankrupt or distressed
companies. In addition, we may engage in various investment techniques, including
derivatives, options and futures transactions, foreign currency transactions,
“short” sales and leveraging for either hedging or other purposes.
We may concentrate our activities by owning significant or controlling interest
in certain investments. We may not be successful in finding suitable opportunities
to invest our cash and our strategy of investing in undervalued assets may expose
us to numerous risks.
Our investments
may
be subject to significant uncertainties.
Our
investments may not be successful for many reasons, including, but not limited
to:
·
fluctuation
of interest rates;
·
lack
of control in minority
investments;
·
worsening
of general economic and market
conditions;
·
lack
of diversification;
·
fluctuation
of U.S. dollar exchange rates;
and
·
adverse
legal and regulatory developments
that may affect particular businesses.
15
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The
following unaudited pro forma condensed combined financial statements that
follow are presented to give effect to:
·
the
pending acquisition of Lear for an
aggregate cash purchase price of approximately $2.9 billion, funded in part
by
approximately $1.3 billion from our cash and cash equivalents and
investments;
·
the
issuance of $2.6 billion of notes
to be issued to finance a portion of the Lear acquisition and finance and
replace a portion of Lear’s existing credit facilities; and
·
the
pending sale of American Casino &
Entertainment Properties LLC, or ACEP, our indirect wholly owned
subsidiary.
The
unaudited pro forma condensed combined financial statements are based on the
historical financial statements of AREP, ACEP and Lear, as well as the
assumptions and adjustments described below and in the accompanying notes to
the
unaudited pro forma condensed combined financial statements.
The
unaudited pro forma condensed combined balance sheet as of March 31, 2007
is presented as if the pending acquisition of Lear and the notes to be issued
to
finance the Lear acquisition occurred on March 31, 2007. The unaudited pro
forma condensed combined statements of operations for the three months ended
March 31, 2007 and the fiscal year ended December 31, 2006 has been
prepared to give effect to the unaudited pro forma adjustments necessary as
if
the pending acquisition of Lear and the notes to be issued to finance the Lear
acquisition had taken place on January 1, 2006.
As
described in Note 3 to the pro forma condensed combined financial statements,
on
October 16, 2006 and March 31, 2007, Lear completed the divestiture of
substantially all of its European and North American interior businesses,
respectively. Accordingly, the unaudited pro forma condensed combined statement
of operations for the three months ended March 31, 2007 gives effect to the
IAC North America Transaction (as defined below) as if it had occurred as of
January 1, 2007. The unaudited pro forma condensed combined statement of
operations for the year ended December 31, 2006 gives effect to the IAC Europe
Transaction (as defined below) and North America Transaction as if they had
occurred as of January 1, 2006.
The
unaudited pro forma condensed combined balance sheet as of March 31, 2007
is presented as if the pending sale of ACEP occurred on March 31, 2007. The
unaudited pro forma condensed combined statements of operations for the three
months ended March 31, 2007 and the years ended December 31, 2006,
2005 and 2004 has been prepared to give effect to the unaudited pro forma
adjustments necessary as if the pending sale of ACEP had taken place on
January 1, 2004. In accordance with SEC guidelines, such historical pro
forma statements of operations are presented for discontinued operations that
are not yet required to be reflected in historical statements.
The
preliminary allocation of the purchase price of Lear used in the unaudited
pro
forma condensed combined financial statements is based upon preliminary
estimates. The estimates and assumptions, some of which cannot be made prior
to
completion of the Lear acquisition, are subject to change upon the acquisition
date and finalization of the valuation of Lear’s assets and liabilities. Upon
completion of the acquisition, AREP expects to make additional adjustments,
and
these valuations could change significantly from those used in the pro forma
condensed combined financial data presented below. The final determination
of
the allocation of the purchase price will be based on the actual tangible and
intangible assets of Lear that exist as of the acquisition date.
The
unaudited pro forma condensed combined results do not purport to be indicative
of the financial position and results of operations that we will obtain in
the
future, or that we would have obtained if the pending sale of ACEP and
acquisition of Lear were effective as of the dates indicated above. The pro
forma adjustments are based upon currently available information and upon
certain assumptions that we believe are reasonable. The unaudited pro forma
condensed combined financial statements should be read in conjunction with
the
historical consolidated financial statements of AREP and Lear included in their
respective annual reports on Form 10-K and quarterly reports on Form 10-Q,
and
related amendments.
16
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES
UNAUDITED
PRO FORMA CONDENSED COMBINED BALANCE
SHEETS
(amounts in 000s)
(amounts in 000s)
|
March
31, 2007
|
||||||||||||||||||||
|
Historical
|
Pro
Forma Adjustments
|
|||||||||||||||||||
|
AREP
|
LEAR
|
Acquisition
of Lear |
Sale
of
ACEP |
Pro
Forma
Results |
||||||||||||||||
|
ASSETS
|
||||||||||||||||||||
|
Current
assets:
|
||||||||||||||||||||
|
Cash
and cash equivalents
|
|
$
|
2,331,521
|
|
$
|
330,400
|
|
$
|
(1,456,491
|
)
|
(4a)
|
|
$
|
1,004,450
|
|
(5a)
|
|
$
|
2,209,880
|
|
|
Investments
|
563,552
|
—
|
—
|
(3,159
|
)
|
(5b)
|
560,393
|
|||||||||||||
|
Inventories,
net
|
235,358
|
599,000
|
—
|
—
|
834,358
|
|||||||||||||||
|
Trade,
notes and other receivables,
net |
169,841
|
2,412,700
|
—
|
(6,348
|
)
|
(5b)
|
2,576,193
|
|||||||||||||
|
Other
current assets
|
124,594
|
355,900
|
—
|
(18,535
|
)
|
(5b)
|
461,959
|
|||||||||||||
|
Total
current assets
|
3,424,866
|
3,698,000
|
(1,456,491
|
)
|
976,408
|
6,642,783
|
||||||||||||||
|
Property,
plant and equipment, net
|
898,594
|
1,425,900
|
—
|
(417,978
|
)
|
(5b)
|
1,906,516
|
|||||||||||||
|
Investments
|
201,943
|
183,200
|
—
|
—
|
385,143
|
|||||||||||||||
|
Goodwill
|
—
|
2,006,600
|
2,182,900
|
(4b)
|
—
|
4,189,500
|
||||||||||||||
|
Intangible
assets
|
25,772
|
40,900
|
—
|
(2,370
|
)
|
(5b)
|
64,302
|
|||||||||||||
|
Other
non current assets
|
71,492
|
306,400
|
—
|
(41,631
|
)
|
(5b)
|
336,261
|
|||||||||||||
|
Total
assets
|
$
|
4,622,667
|
$
|
7,661,000
|
$
|
726,409
|
$
|
514,429
|
$
|
13,524,505
|
||||||||||
|
LIABILITIES
AND
PARTNERS’ EQUITY |
||||||||||||||||||||
|
Current
liabilities:
|
||||||||||||||||||||
|
Accounts
payable
|
$
|
66,497
|
$
|
2,480,300
|
$
|
—
|
$
|
(6,749
|
)
|
(5b)
|
$
|
2,540,048
|
||||||||
|
Accrued
expenses and other current liabilities
|
168,744
|
1,181,000
|
—
|
210,981
|
(5b)
|
1,560,725
|
||||||||||||||
|
Current
portion of long-term debt
|
23,620
|
26,400
|
—
|
(502
|
)
|
(5b)
|
49,518
|
|||||||||||||
|
Total
current liabilities
|
258,861
|
3,687,700
|
—
|
203,730
|
4,150,291
|
|||||||||||||||
|
Long-term
debt
|
1,675,498
|
2,431,800
|
1,481,600
|
(4c)
|
(257,202
|
)
|
(5b)
|
(5c)
|
5,331,696
|
|||||||||||
|
Other
non-current liabilities
|
23,738
|
820,100
|
—
|
(6,144
|
)
|
(5b)
|
837,694
|
|||||||||||||
|
Preferred
limited partnership units
|
119,073
|
—
|
—
|
—
|
119,073
|
|||||||||||||||
|
Total
long-term liabilities
|
1,818,309
|
3,251,900
|
1,481,600
|
(263,346
|
)
|
6,288,463
|
||||||||||||||
|
Total
Liabilities
|
2,077,170
|
6,939,600
|
1,481,600
|
(59,616
|
)
|
10,438,754
|
||||||||||||||
|
Minority
interests
|
198,019
|
28,900
|
—
|
—
|
226,919
|
|||||||||||||||
|
Partners’
equity
|
2,347,478
|
692,500
|
(755,191
|
)
|
(4d)
|
574,045
|
(5d)
|
2,858,832
|
||||||||||||
|
Total
liabilities and partners’
equity |
$
|
4,622,667
|
$
|
7,661,000
|
$
|
726,409
|
$
|
514,429
|
$
|
13,524,505
|
||||||||||
17
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES
UNAUDITED
PRO FORMA CONDENSED COMBINED STATEMENTS OF
OPERATIONS
(amounts in 000s except per unit amounts)
(amounts in 000s except per unit amounts)
|
Three
Months Ended March 31, 2007
|
|||||||||||||||||||||
|
Historical
|
Pro
Forma Adjustments
|
||||||||||||||||||||
|
AREP
|
LEAR
|
Acquisition
of Lear |
Lear
IAC
Transaction (4f) |
Sale
of
ACEP (5e) |
Pro
Forma
Results |
||||||||||||||||
|
Revenues:
|
|||||||||||||||||||||
|
Lear
Automotive
|
|
$
|
—
|
|
$
|
4,406,100
|
|
$
|
—
|
|
$
|
(580,500
|
)
|
$
|
—
|
|
$
|
3,825,600
|
|||
|
Gaming
|
112,888
|
—
|
—
|
—
|
(112,888
|
)
|
—
|
||||||||||||||
|
Real
Estate
|
27,887
|
—
|
—
|
—
|
—
|
27,887
|
|||||||||||||||
|
Home
Furnishings
|
210,604
|
—
|
—
|
—
|
—
|
210,604
|
|||||||||||||||
|
351,379
|
4,406,100
|
—
|
(580,500
|
)
|
(112,888
|
)
|
4,064,091
|
||||||||||||||
|
Expenses:
|
|||||||||||||||||||||
|
Lear
Automotive
|
—
|
4,220,700
|
—
|
(579,600
|
)
|
—
|
3,641,100
|
||||||||||||||
|
Loss
on divestiture of Lear’s Interior business
|
—
|
25,600
|
—
|
(25,600
|
)
|
—
|
—
|
||||||||||||||
|
Gaming
|
89,661
|
—
|
—
|
—
|
(89,661
|
)
|
—
|
||||||||||||||
|
Real
Estate
|
23,606
|
—
|
—
|
—
|
—
|
23,606
|
|||||||||||||||
|
Home
Furnishings
|
249,619
|
—
|
—
|
—
|
—
|
249,619
|
|||||||||||||||
|
Holding
Company Expenses
|
7,679
|
—
|
—
|
—
|
—
|
7,679
|
|||||||||||||||
|
370,565
|
4,246,300
|
—
|
(605,200
|
)
|
(89,661
|
)
|
3,922,004
|
||||||||||||||
|
Operating
income (loss)
|
(19,186
|
)
|
159,800
|
—
|
24,700
|
(23,227
|
)
|
142,087
|
|||||||||||||
|
Other
income (expense), net:
|
|||||||||||||||||||||
|
Interest
expense
|
(32,977
|
)
|
(51,500
|
)
|
(27,743
|
)
|
(4e)
|
200
|
5,436
|
(106,584
|
)
|
||||||||||
|
Interest
and other income
|
31,458
|
—
|
—
|
—
|
(419
|
)
|
31,039
|
||||||||||||||
|
Other
income (expense), net
|
84,781
|
(17,200
|
)
|
—
|
3,100
|
—
|
70,681
|
||||||||||||||
|
Equity
on earnings of affiliate
|
—
|
1,300
|
—
|
(400
|
)
|
(4g)
|
—
|
900
|
|||||||||||||
|
Income
(loss) from continuing operations before income taxes and minority
interests
|
64,076
|
92,400
|
(27,743
|
)
|
27,600
|
(18,210
|
)
|
138,123
|
|||||||||||||
|
Income
tax expense
|
(6,949
|
)
|
(32,400
|
)
|
—
|
1,600
|
(4h)
|
6,192
|
(31,557
|
)
|
|||||||||||
|
Minority
interests
|
11,590
|
(10,100
|
)
|
—
|
(300
|
)
|
—
|
1,190
|
|||||||||||||
|
Income
(loss) from continuing operations
|
68,717
|
49,900
|
(27,743
|
)
|
28,900
|
(12,018
|
)
|
107,756
|
|||||||||||||
|
Income
(loss) from discontinued operations
|
27,861
|
—
|
—
|
—
|
12,018
|
39,879
|
|||||||||||||||
|
Net
earnings
|
$
|
96,578
|
$
|
49,900
|
$
|
(27,743
|
)
|
$
|
28,900
|
$
|
—
|
$
|
147,635
|
||||||||
|
Net
earnings (loss) attributable to:
|
|||||||||||||||||||||
|
Limited
partner
|
$
|
94,656
|
$
|
48,907
|
$
|
(27,191
|
)
|
$
|
28,325
|
$
|
—
|
$
|
144,697
|
||||||||
|
General
partner
|
1,922
|
993
|
(552
|
)
|
575
|
—
|
2,938
|
||||||||||||||
|
$
|
96,578
|
$
|
49,900
|
$
|
(27,743
|
)
|
$
|
28,900
|
$
|
—
|
$
|
147,635
|
|||||||||
|
Net earnings
per limited partnership unit:
|
|||||||||||||||||||||
|
Basic earnings:
|
|||||||||||||||||||||
|
Income
from continuing operations
|
$
|
1.09
|
$
|
1.71
|
|||||||||||||||||
|
Income
from discontinued operations
|
0.44
|
0.63
|
|||||||||||||||||||
|
Basic
earnings (loss) per LP unit
|
$
|
1.53
|
$
|
2.34
|
|||||||||||||||||
|
Weighted average limited
partnership units outstanding:
|
61,857
|
61,857
|
|||||||||||||||||||
|
Diluted earnings:
|
|||||||||||||||||||||
|
Income
from continuing operations
|
$
|
1.09
|
$
|
1.70
|
|||||||||||||||||
|
Income
from discontinued operations
|
0.44
|
0.62
|
|||||||||||||||||||
|
Diluted earnings
per LP unit
|
$
|
1.53
|
$
|
2.32
|
|||||||||||||||||
|
Weighted average LP units
and equivalent partnership units outstanding
|
61,857
|
62,920
|
|||||||||||||||||||
See
accompanying notes
18
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES
UNAUDITED
PRO FORMA CONDENSED COMBINED STATEMENTS OF
OPERATIONS
(amounts in 000s except per unit amounts)
(amounts in 000s except per unit amounts)
|
Year
Ended December 31, 2006
|
|||||||||||||||||||||
|
Historical
|
Pro
Forma Adjustments
|
||||||||||||||||||||
|
AREP
|
LEAR
|
Acquisition
of Lear |
Lear
IAC
Transactions (4f) |
Sale
of
ACEP (5e) |
Pro
Forma
Results |
||||||||||||||||
|
Revenues:
|
|||||||||||||||||||||
|
Lear
Automotive
|
|
$
|
—
|
|
$
|
17,838,900
|
|
$
|
—
|
|
$
|
(3,067,200
|
)
|
$
|
—
|
|
$
|
14,771,700
|
|||
|
Gaming
|
385,699
|
—
|
—
|
—
|
(385,699
|
)
|
—
|
||||||||||||||
|
Real
Estate
|
134,575
|
—
|
—
|
—
|
—
|
134,575
|
|||||||||||||||
|
Home
Furnishings
|
957,656
|
—
|
—
|
—
|
—
|
957,656
|
|||||||||||||||
|
1,477,930
|
17,838,900
|
—
|
(3,067,200
|
)
|
(385,699
|
)
|
15,863,931
|
||||||||||||||
|
Expenses:
|
|||||||||||||||||||||
|
Lear
Automotive
|
—
|
17,545,500
|
—
|
(3,247,300
|
)
|
—
|
14,298,200
|
||||||||||||||
|
Loss
on divestiture of Lear’s Interior business
|
—
|
636,000
|
—
|
(636,000
|
)
|
—
|
—
|
||||||||||||||
|
Gaming
|
326,984
|
—
|
—
|
—
|
(326,984
|
)
|
—
|
||||||||||||||
|
Real
Estate
|
106,621
|
—
|
—
|
—
|
—
|
106,621
|
|||||||||||||||
|
Home
Furnishings
|
1,108,293
|
—
|
—
|
—
|
—
|
1,108,293
|
|||||||||||||||
|
Holding
Company Expenses
|
25,822
|
—
|
—
|
—
|
—
|
25,822
|
|||||||||||||||
|
1,567,720
|
18,181,500
|
—
|
(3,883,300
|
)
|
(326,984
|
)
|
15,538,936
|
||||||||||||||
|
Operating
income (loss)
|
(89,790
|
)
|
(342,600
|
)
|
—
|
816,100
|
(58,715
|
)
|
324,995
|
||||||||||||
|
Other
income (expense), net:
|
|||||||||||||||||||||
|
Interest
expense
|
(106,612
|
)
|
(209,800
|
)
|
(110,972
|
)
|
(4e)
|
400
|
21,314
|
(405,670
|
)
|
||||||||||
|
Interest
and other income
|
52,672
|
—
|
—
|
—
|
(2,239
|
)
|
50,433
|
||||||||||||||
|
Other
income (expense), net
|
99,277
|
(101,000
|
)
|
—
|
6,000
|
239
|
4,516
|
||||||||||||||
|
Equity
on earnings of affiliate
|
12,620
|
16,200
|
—
|
(43,400
|
)
|
(4g)
|
—
|
(14,580
|
)
|
||||||||||||
|
Loss
from continuing operations before
income taxes and minority interests |
(31,833
|
)
|
(637,200
|
)
|
(110,972
|
)
|
779,100
|
(39,401
|
)
|
(40,306
|
)
|
||||||||||
|
Income
tax expense
|
(13,271
|
)
|
(54,900
|
)
|
—
|
(13,700
|
)
|
(4h)
|
12,758
|
(69,113
|
)
|
||||||||||
|
Minority
interests
|
68,173
|
(18,300
|
)
|
—
|
(1,100
|
)
|
—
|
48,773
|
|||||||||||||
|
Income
(loss) from continuing operations
|
23,069
|
(710,400
|
)
|
(110,972
|
)
|
764,300
|
(26,643
|
)
|
(60,646
|
)
|
|||||||||||
|
Income
(loss) from discontinued operations
|
775,764
|
—
|
—
|
—
|
26,643
|
802,407
|
|||||||||||||||
|
Income
(loss) before cumulative effect of
a change in accounting principle |
798,833
|
(710,400
|
)
|
(110,972
|
)
|
764,300
|
—
|
741,761
|
|||||||||||||
|
Cumulative
effect of a change in accounting
principle |
—
|
2,900
|
—
|
—
|
—
|
2,900
|
|||||||||||||||
|
Net
earnings (loss)
|
$
|
798,833
|
$
|
(707,500
|
)
|
$
|
(110,972
|
)
|
$
|
764,300
|
$
|
—
|
$
|
744,661
|
|||||||
|
Net
earnings (loss) attributable to:
|
|||||||||||||||||||||
|
Limited
partner
|
$
|
782,936
|
$
|
(693,420
|
)
|
$
|
(108,764
|
)
|
$
|
749,090
|
$
|
—
|
$
|
729,842
|
|||||||
|
General
partner
|
15,897
|
(14,080
|
)
|
(2,208
|
)
|
15,210
|
—
|
14,819
|
|||||||||||||
|
$
|
798,833
|
$
|
(707,500
|
)
|
$
|
(110,972
|
)
|
$
|
764,300
|
$
|
—
|
$
|
744,661
|
||||||||
|
Net earnings
per limited partnership unit:
|
|||||||||||||||||||||
|
Basic earnings:
|
|||||||||||||||||||||
|
Income
(loss) from continuing operations
|
$
|
0.40
|
$
|
(0.93
|
)
|
||||||||||||||||
|
Income from discontinued operations
|
12.29
|
12.71
|
|||||||||||||||||||
|
Cumulative
effect of a change in
accounting principle |
—
|
0.05
|
|||||||||||||||||||
|
Basic
earnings (loss) per LP unit
|
$
|
12.69
|
$
|
11.83
|
|||||||||||||||||
|
Weighted average limited
partnership units outstanding:
|
61,857
|
61,857
|
|||||||||||||||||||
|
Diluted earnings:
|
|||||||||||||||||||||
|
Income
(loss) from continuing operations
|
$
|
0.40
|
$
|
(0.93
|
)
|
||||||||||||||||
|
Income from discontinued operations
|
12.29
|
12.71
|
|||||||||||||||||||
|
Cumulative
effect of a change in
accounting principle |
—
|
0.05
|
|||||||||||||||||||
|
Diluted earnings per LP unit
|
$
|
12.69
|
$
|
11.83
|
|||||||||||||||||
|
Weighted average LP units and
equivalent
partnership units outstanding: |
61,857
|
61,857
|
|||||||||||||||||||
See
accompanying notes
19
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES
UNAUDITED
PRO FORMA CONDENSED COMBINED STATEMENTS OF
OPERATIONS
(amounts in 000s except per share amounts)
(amounts in 000s except per share amounts)
|
Year
Ended December 31, 2005
|
||||||||||
|
Historical
|
Pro
Forma
Adjustments |
|||||||||
|
AREP
|
Sale
of
ACEP (5e) |
Pro
Forma
Results |
||||||||
|
Revenues:
|
||||||||||
|
Gaming
|
|
$
|
327,982
|
|
$
|
(327,982
|
)
|
$
|
—
|
|
|
Real
Estate
|
100,299
|
—
|
100,299
|
|||||||
|
Home
Furnishings
|
472,681
|
—
|
472,681
|
|||||||
|
900,962
|
(327,982
|
)
|
572,980
|
|||||||
|
Expenses:
|
||||||||||
|
Gaming
|
260,955
|
(260,955
|
)
|
—
|
||||||
|
Real
Estate
|
82,512
|
—
|
82,512
|
|||||||
|
Home
Furnishings
|
495,110
|
—
|
495,110
|
|||||||
|
Holding
Company Expenses
|
12,478
|
—
|
12,478
|
|||||||
|
Acquisition
costs
|
4,664
|
—
|
4,664
|
|||||||
|
855,719
|
(260,955
|
)
|
594,764
|
|||||||
|
Operating
income (loss)
|
45,243
|
(67,027
|
)
|
(21,784
|
)
|
|||||
|
Other
income (expense), net:
|
||||||||||
|
Interest
expense
|
(91,174
|
)
|
18,846
|
(72,328
|
)
|
|||||
|
Interest
and other income
|
42,791
|
(1,617
|
)
|
41,174
|
||||||
|
Other
income (expense), net
|
(12,861
|
)
|
(25
|
)
|
(12,886
|
)
|
||||
|
Equity
on earnings of affiliate
|
1,375
|
—
|
1,375
|
|||||||
|
Loss
from continuing operations before income taxes and minority
interests
|
(14,626
|
)
|
(49,823
|
)
|
(64,449
|
)
|
||||
|
Income
tax expense
|
(18,170
|
)
|
16,789
|
(1,381
|
)
|
|||||
|
Minority
interests
|
10,140
|
—
|
10,140
|
|||||||
|
Loss
from continuing operations
|
(22,656
|
)
|
(33,034
|
)
|
(55,690
|
)
|
||||
|
Income
(loss) from discontinued operations
|
(3,013
|
)
|
33,034
|
30,021
|
||||||
|
Net
loss
|
$
|
(25,669
|
)
|
$
|
—
|
$
|
(25,669)
|
|||
|
Net
loss attributable to:
|
||||||||||
|
Limited
partner
|
$
|
(20,292
|
)
|
$
|
—
|
$
|
(20,292
|
)
|
||
|
General
partner
|
(5,377
|
)
|
—
|
(5,377
|
)
|
|||||
|
$
|
(25,669
|
)
|
$
|
—
|
$
|
(25,669
|
)
|
|||
|
Net loss
per limited partnership unit:
|
||||||||||
|
Basic earnings:
|
||||||||||
|
Loss
from continuing operations
|
$
|
(0.31
|
)
|
$
|
(0.90
|
)
|
||||
|
Income from discontinued operations
|
(0.05
|
)
|
0.54
|
|||||||
|
Basic
loss per LP unit
|
$
|
(0.36
|
)
|
$
|
(0.36
|
)
|
||||
|
Weighted average limited
partnership units outstanding:
|
54,085
|
54,085
|
||||||||
|
Diluted earnings:
|
||||||||||
|
Loss
from continuing operations
|
$
|
(0.31
|
)
|
$
|
(0.90
|
)
|
||||
|
Income (loss) from discontinued operations
|
(0.05
|
)
|
0.54
|
|||||||
|
Diluted loss per LP unit
|
$
|
(0.36
|
)
|
$
|
(0.36
|
)
|
||||
|
Weighted average LP units
and equivalent partnership units outstanding
|
54,085
|
54,085
|
||||||||
See
accompanying notes
20
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES
UNAUDITED
PRO FORMA CONDENSED COMBINED STATEMENTS OF
OPERATIONS
(amounts in 000s except per share amounts)
(amounts in 000s except per share amounts)
|
Year
Ended December 31, 2004
|
||||||||||
|
Historical
|
Pro
Forma
Adjustments |
|||||||||
|
AREP
|
Sale
of
ACEP (5e) |
Pro
Forma
Results |
||||||||
|
Revenues:
|
||||||||||
|
Gaming
|
|
$
|
299,981
|
|
$
|
(299,981
|
)
|
$
|
—
|
|
|
Real
Estate
|
61,557
|
—
|
61,557
|
|||||||
|
361,538
|
(299,981
|
)
|
61,557
|
|||||||
|
Expenses:
|
||||||||||
|
Gaming
|
251,119
|
(251,119
|
)
|
—
|
||||||
|
Real
Estate
|
49,681
|
—
|
49,681
|
|||||||
|
Holding
Company Expenses
|
4,327
|
—
|
4,327
|
|||||||
|
Acquisition
costs
|
414
|
—
|
414
|
|||||||
|
305,541
|
(251,119
|
)
|
54,422
|
|||||||
|
Operating
income (loss)
|
55,997
|
(48,862
|
)
|
7,135
|
||||||
|
Other
income (expense), net:
|
||||||||||
|
Interest
expense
|
(47,320
|
)
|
18,939
|
(28,381
|
)
|
|||||
|
Interest
and other income
|
42,145
|
(1,049
|
)
|
41,096
|
||||||
|
Other
income (expense), net
|
24,453
|
—
|
24,453
|
|||||||
|
Income
(Loss) from continuing operations before income taxes
|
75,275
|
(30,972
|
)
|
44,303
|
||||||
|
Income tax expense
|
(10,099
|
)
|
10,099
|
—
|
||||||
|
Income
(loss) from continuing operations
|
65,176
|
(20,873
|
)
|
44,303
|
||||||
|
Income
from discontinued operations
|
88,578
|
20,873
|
109,451
|
|||||||
|
Net
earnings
|
$
|
153,754
|
$
|
—
|
$
|
153,754
|
||||
|
Net
earnings attributable to:
|
||||||||||
|
Limited
partner
|
$
|
130,850
|
$
|
—
|
$
|
130,850
|
||||
|
General
partner
|
22,904
|
—
|
22,904
|
|||||||
|
$
|
153,754
|
$
|
—
|
$
|
153,754
|
|||||
|
Net earnings
per limited partnership unit:
|
||||||||||
|
Basic earnings:
|
||||||||||
|
Income
(loss) from continuing operations
|
$
|
0.96
|
$
|
0.51
|
||||||
|
Income (loss) from discontinued operations
|
1.88
|
2.33
|
||||||||
|
Basic
earnings (loss) per LP unit
|
$
|
2.84
|
$
|
2.84
|
||||||
|
Weighted average limited
partnership units outstanding:
|
46,098
|
46,098
|
||||||||
|
Diluted earnings:
|
||||||||||
|
Income
(loss) from continuing operations
|
$
|
0.95
|
$
|
0.51
|
||||||
|
Income (loss) from discontinued operations
|
1.69
|
2.33
|
||||||||
|
Diluted earnings (loss) per LP unit
|
$
|
2.64
|
$
|
2.84
|
||||||
|
Weighted average LP units
and equivalent partnership units outstanding
|
51,542
|
46,098
|
||||||||
See
accompanying notes
21
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
1. DESCRIPTION OF
TRANSACTIONS
Potential
Acquisition
On
February 9, 2007, we entered into an agreement and plan of merger pursuant
to
which we would acquire Lear for an aggregate consideration of approximately
$5.2
billion, including the assumption by the surviving entity of certain outstanding
indebtedness of Lear and the refinancing of Lear’s existing term loan and credit
facility. In connection with the planned merger, our subsidiary, AREP Car
Holdings Corp., entered into a commitment letter with Bank of America, N.A.,
and
Banc of America Securities LLC on February 8, 2007, pursuant to which Bank
of
America would act as the initial lender under two senior secured credit
facilities in an aggregate principal amount of $3.6 billion, consisting of
a
$1.0 billion senior secured revolving facility and a $2.6 billion senior secured
term loan B facility. The credit facilities, along with cash on hand, are
intended to refinance and replace Lear’s existing credit facilities and to fund
the transactions contemplated by the merger. We intend to fund approximately
$1.3 billion of the purchase price from our cash and cash equivalents and
investments. The transaction is conditioned upon (i) clearance under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, and the applicable foreign
antitrust laws of certain other jurisdictions, (ii) approval of the merger
and
adoption of the merger agreement by Lear stockholders and (iii) other customary
closing conditions. AREP expects that the transaction will close on or about
July 1, 2007, provided the foregoing conditions which have not yet been
satisfied or waived are satisfied or waived. There can be no assurance that
we
will be able to consummate the transaction.
Pending Sale
of
American Casino & Entertainment Properties LLC
On April
22, 2007, American Entertainment Properties Corp, or AEP, a wholly owned
indirect subsidiary of AREP, entered into a Membership Interest Purchase
Agreement with W2007/ACEP Holdings, LLC, an affiliate of Whitehall Street Real
Estate Funds, a series of real estate investment funds affiliated with Goldman,
Sachs & Co., to sell all of the issued and outstanding membership interests
of ACEP, which comprises our gaming operations, for $1.3 billion, plus or minus
certain adjustments such as working capital, more fully described in the
agreement. Pursuant to the terms of the agreement, AEP is required to cause
ACEP
to repay, from funds provided by AEP, the principal, interest, prepayment
penalty or premium due on ACEP’s 7.85% senior secured notes due 2012 and ACEP’s
senior secured credit facility. With this transaction, we anticipate realizing
a
gain of approximately $0.57 billion on our investments in ACEP, after income
taxes. ACEP’s casino assets are comprised of the Stratosphere Casino Hotel &
Tower, the Arizona Charlie’s Decatur, the Arizona Charlie’s Boulder and the
Aquarius Casino Resort. The transaction is subject to the approval of the Nevada
Gaming Commission and the Nevada State Gaming Control Board, as well as
customary conditions. The parties expect to close the transaction in
approximately December 2007; however, there can be no assurance that we
will be able to consummate the transaction.
2. BASIS OF
PRESENTATION
AREP
accounts for acquisitions under Financial Accounting Standards Board Statement
No. 141, Business Combinations. In accordance with business combination
accounting, AREP will allocate the purchase price of Lear to the tangible and
intangible assets acquired and liabilities assumed based on their estimated
fair
values. AREP’s management has not yet determined the fair value of the assets
and liabilities to be acquired as the acquisition has not yet been consummated.
The final determination of such assumptions and estimates cannot be made until
AREP completes the acquisition of Lear. Therefore, for purposes of the pro
forma
financial statements, the excess of the purchase price over the book value
of
Lear’s assets and liabilities has been allocated to goodwill.
3. LEAR
ACQUISITION
The
purchase price and purchase price allocation below are preliminary estimates
as
the acquisition has not been completed and the date for which the assets to
be
acquired and liabilities to be assumed has not been determined.
See
accompanying notes
22
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
3. LEAR ACQUISITION
–
(continued)
Preliminary
Purchase Price
The
total preliminary purchase price to be allocated is comprised of:
|
(in
000s)
|
||||
|
Purchase
of outstanding common stock of Lear at $36.00 per
share
|
|
$
|
2,857,991
|
|
|
Less
amount to be allocated to the general partner(1)
|
(62,691
|
)
|
||
|
Total
preliminary purchase price to be allocated
|
$
|
2,795,300
|
||
——————
(1)
As of
March 31, 2007, Icahn Partners LP, Icahn Partners Master Fund LP, Koala
Holding Limited Partnership and High River Limited Partnership, which are
affiliates of Mr. Icahn, beneficially owned approximately 16% of Lear’s
outstanding common stock. In accordance with generally accepted accounting
principles, in connection with the acquisition of Lear stock, the excess of
cash
disbursed over the historical cost of the shares beneficially owned by Mr.
Icahn, which amounts to approximately $62.7 million, will be charged to AREP’s
general partner’s equity.
Preliminary
Purchase Price Allocation
For
purposes of the pro forma financial statements, AREP has used Lear’s assets and
liabilities as of March 31, 2007 as the basis for developing AREP’s fair value
estimates.
The
total preliminary purchase price will be allocated to Lear’s tangible and
intangible assets acquired, and liabilities assumed based on their estimated
fair values as of the acquisition date. The excess of the purchase price over
the net tangible and identifiable intangible assets will be recorded as
goodwill. For purposes of the accompanying pro forma financial statements,
the
total preliminary purchase price was allocated as follows:
|
(in
000s)
|
||||
|
Current
assets
|
|
$
|
3,579,600
|
|
|
Property,
plant & equipment, net
|
1,425,900
|
|||
|
Investments
|
183,200
|
|||
|
Other
non current assets
|
347,300
|
|||
|
Goodwill,
net
|
4,189,500
|
|||
|
Current
liabilities
|
(3,671,000
|
)
|
||
|
Long-term
debt
|
(2,431,800
|
)
|
||
|
Other
non current liabilities and minority interests
|
(827,400
|
)
|
||
|
Total
preliminary purchase price
allocation
|
$
|
2,795,300
|
||
Lear IAC
Transactions
On
October 16, 2006, Lear completed the contribution of substantially all of its
European interior business to International Automotive Components Group, LLC
(“IAC Europe”), its joint venture with WL Ross & Co. LLC and Franklin Mutual
Advisers, LLC, in exchange for a one-third equity interest in IAC Europe (the
“IAC Europe Transaction”). On March 31, 2007, Lear completed the transfer of
substantially all of the assets of its North American interior business (as
well
as its interests in two China joint ventures) to International Automotive
Components Group North America, Inc. (the “IAC North America Transaction”). In
addition, a wholly owned subsidiary of Lear contributed approximately $27
million in cash to International Automotive Components Group North America,
LLC
(“IACNA”) in exchange for a 25% equity interest in IACNA and warrants for an
additional 7% of the current outstanding common equity of IACNA. In connection
with the IAC North America Transaction, International Automotive Components
Group North America, Inc. assumed the ordinary course liabilities of Lear’s
North American interior business, and Lear retained certain pre-closing
liabilities, including pension and postretirement liabilities incurred through
the closing date of the transaction.
For
accounting purposes, Lear’s interests in IACNA and IAC Europe will be accounted
for under the equity method of accounting. The pro forma adjustments related
to
Lear’s accounting for these equity investments do not reflect purchase
accounting adjustments to be recorded by IACNA and IAC Europe and do not reflect
the operations
23
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
3. LEAR ACQUISITION
–
(continued)
of other businesses acquired
by IAC Europe. Consequently, the amounts reflected in Lear’s unaudited pro forma
condensed consolidated financial statements are subject to change.
4. PRO FORMA
ADJUSTMENTS – LEAR ACQUISITION
The
following pro forma adjustments are included in the unaudited pro forma
condensed combined balance sheet:
4a
To
record the following adjustments to cash:
|
(in
000s)
|
||||
|
Estimated
proceeds from borrowings
|
|
$
|
2,600,000
|
|
|
Estimated
cash paid for Lear common
stock
|
(2,857,991
|
)
|
||
|
Estimated
transaction costs – Lear
|
(80,100
|
)
|
||
|
Estimated
repayment of Lear debt
|
(1,118,400
|
)
|
||
|
Total
adjustments to cash
|
$
|
(1,456,491
|
)
|
|
4b
To
record the following adjustments to goodwill:
|
(in
000s)
|
|||
|
Preliminary
fair
value
|
|
$
|
4,189,500
|
|
Historical
amount
|
2,006,600
|
||
|
Increase
|
$
|
2,182,900
|
|
4c
To
record the following adjustments to long-term debt:
|
(in
000s)
|
||||
|
Estimated
proceeds from
borrowings
|
|
$
|
2,600,000
|
|
|
Estimated
repayment of Lear debt
|
(1,118,400
|
)
|
||
|
Increase
|
$
|
1,481,600
|
||
4d
To eliminate Lear’s historical
stockholders’ equity and to record $62.7 million of the purchase price of Lear
stock allocated to the General Partner.
4e
To record additional interest
expense associated with the net increase in debt as per Note 4c above.
4f
To eliminate the results of
operations arising from the IAC North America Transaction and the IAC Europe
Transaction.
4g
To reflect Lear’s estimated equity
loss of $0.4 million and $42.1 million for the three months ended March 31,
2007 and the year ended December 31, 2006, respectively, related to its 25%
ownership interest in IACNA and Lear’s estimated equity loss of $1.3 million for
the year ended December 31, 2006 related to its one-third equity interest
in IAC Europe. These adjustments do not reflect purchase accounting adjustments
to be made by IACNA and IAC Europe and do not reflect the operations of other
businesses acquired by IAC Europe.
4h
Primarily reflects the elimination
of tax expense relating to the IAC North America Transaction for the three
months ended March 31, 2007, and the elimination of tax benefits relating
to the IAC North America Transaction and the IAC Europe Transaction for the
year
ended December 31, 2006.
24
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
5. PRO FORMA
ADJUSTMENTS – DISPOSITION OF ACEP
5a
To record
the following adjustments to cash:
|
(in
000s)
|
||||
|
Estimated
gross proceeds from sale of ACEP
|
|
$
|
1,300,000
|
|
|
Add:
net working capital
|
50,335
|
|||
|
Total
proceeds
|
1,350,335
|
|||
|
Repayment
of long-term debt (including redemption
fees)
|
(263,600
|
)
|
||
|
Net
proceeds
|
1,086,735
|
|||
|
Estimated
transaction costs
|
(6,757
|
)
|
||
|
ACEP’s
cash balance included in net working capital
|
(70,528
|
)
|
||
|
Stay
bonuses
|
(5,000
|
)
|
||
|
Total
adjustments to cash
|
$
|
1,004,450
|
||
5b
Reflects the elimination of the
March 31, 2007 carrying value of the assets and liabilities of ACEP.
5c
Reflects the payment of ACEP’s
long-term debt by AREP of $255 million.
5d
Reflects the amount of the
estimated net gain on the transaction, net of income taxes.
5e
Reflects the reversal of revenues
and expenses included in income from continuing operations attributable to
the
sale of ACEP, net of income taxes.
25
The
selling securityholders will receive all of the proceeds from the sale of the
depositary units under this prospectus. We will not receive any proceeds from
these sales.
None
of
the depositary units offered and sold pursuant to this prospectus are being
sold
by us. Therefore, there will be no dilution in the net tangible book value
per
depositary units as a result of the sale of the depositary units offered and
sold pursuant to this prospectus.
26
The
following description of our depositary units does not purport to be complete
and is qualified in its entirety by reference to applicable Delaware law, and
to
provisions of our partnership agreement, dated as of May 12, 1987, as amended,
or our partnership agreement, and the depositary agreement, as amended, or
the
depositary agreement, entered into among us, the Registrar and Transfer Company,
as depositary, or the depositary, and the unitholders.
General
The
depositary units represent limited partner interests in AREP. The percentage
interest in AREP represented by a depositary unit is equal to the ratio it
bears
at the time of such determination to the total number of depositary units in
AREP (including any undeposited depositary units) outstanding, multiplied by
99%, which is the aggregate percentage interest in AREP of all holders of
depositary units. Subject to the rights and preferences of preferred units,
each
depositary unit evidences entitlement to a portion of AREP’s distributions and
an allocation of AREP’s net income and net loss, as determined in accordance
with our partnership agreement. We are authorized to issue additional depositary
units or other securities from time to time to unitholders or additional
investors without the consent or approval of holders of depositary units, or
unitholders. There is no limit to the number of depositary units or additional
classes of units, including preferred units, which may be issued. The board
of
directors of our general partner has the power, without any further action
by
the unitholders, to issue units with such designations, preferences and
relative, participating or other special rights, powers and duties, including
rights, powers and duties senior to existing classes of depositary units or
preferred units. The depositary units have no preemptive rights.
Transfer of Depositary
Units
Until
a
depositary unit has been transferred on the books of the depositary, we and
the
depositary will treat the record holder of the unit as the absolute owner for
all purposes. A transfer of depositary units will not be recognized by the
depositary or us unless and until the transferee of the depositary units, or
a
subsequent transferee, executes and delivers a transfer application to the
depositary. Transfer applications appear on the back of each depositary receipt
and also will be furnished at no charge by the depositary upon receipt of a
request for it. By executing and delivering a transfer application to the
depositary, a subsequent transferee automatically requests admission as a
substituted unitholder in the partnership, agrees to be bound by the terms
and
conditions of our partnership agreement and grants a power of attorney to our
general partner.
On a
monthly basis, the depositary will, on behalf of subsequent transferees who
have
submitted transfer applications, request the general partner to admit such
subsequent transferees as substituted limited partners of AREP. If our general
partner consents to such substitution, a subsequent transferee will be admitted
to the partnership as a substituted limited partner upon the recordation of
such
subsequent transferee’s name in our books and records. Upon admission, which is
in the sole discretion of our general partner, he will be entitled to all of
the
rights of a limited partner under the Delaware Revised Uniform Limited
Partnership Act, or the Delaware Act, and pursuant to our partnership
agreement.
A
subsequent transferee will, after submitting a transfer application to the
depositary but before being admitted to AREP as a substituted unitholder of
record, have the rights of an assignee under the Delaware Act and our
partnership agreement, including the right to receive its pro rata share of
distributions. A subsequent transferee who does not execute and deliver a
transfer application to the depositary will not be recognized as the record
holder of depositary units and will only have the right to transfer or assign
its depositary units to a purchaser or other transferee. Therefore, such
subsequent transferee will neither receive distributions from the partnership
nor be entitled to vote on partnership matters or any other rights to which
record holders of depositary units are entitled under the Delaware Act or
pursuant to our partnership agreement. Distributions made in respect of the
depositary units held by such subsequent transferees will continue to be paid
to
the transferor of such depositary units.
A
subsequent transferee will be deemed to be a party to the depositary agreement
and to be bound by its terms and conditions whether or not such subsequent
transferee executes and delivers a transfer application to the depositary.
A
transferor will have no duty to ensure the execution of a transfer application
by a subsequent transferee and will have no liability or responsibility if
such
subsequent transferee neglects or chooses not to execute and deliver the
transfer application to the depositary. Whenever depositary units are
transferred, the transfer application requires that a subsequent transferee
answer a series of questions. The required information is designed to provide
us
with the information necessary to prepare our tax information return.
27
Withdrawal of Depositary Units from Deposit
A
unitholder may withdraw from the depositary the depositary units represented
by
its depositary receipts upon written request and surrender of the depositary
receipts evidencing the depositary units in exchange for a certificate issued
by
us evidencing the same number of depositary units. A subsequent transferee
is
required to become a unitholder of record before being entitled to withdraw
depositary units from the depositary. Depositary units which have been withdrawn
from the depositary, and therefore are not evidenced by depositary receipts,
are
not transferable except upon death, by operation of law, by transfer to us
or
redeposit with the depositary. A holder of depositary units withdrawn from
deposit will continue to receive its respective share of distributions and
allocations of net income and losses pursuant to our partnership agreement.
In
order to transfer depositary units withdrawn from the depositary other than
upon
death, by operation of law or to the partnership, a unitholder must redeposit
the certificate evidencing such withdrawn depositary units with the depositary
and request issuance of depositary receipts representing such depositary units,
which depositary receipts then may be transferred. Any redeposit of such
withdrawn depositary units with the depositary requires 60 days’ advance written
notice and payment to the depositary of a redeposit fee initially $5.00 per
100
depositary units or portion thereof, and will be subject to the satisfaction
of
certain other procedural requirements under the depositary agreement.
Replacement of Lost
Depositary Receipts and Certificates
A
unitholder or subsequent transferee who loses or has its certificate for
depositary units or depositary receipts stolen or destroyed may obtain a
replacement certificate or depositary receipt by furnishing an indemnity bond
and by satisfying certain other procedural requirements under the depositary
agreement.
Amendment of
Depositary Agreement
Subject
to the restrictions described below, any provision of the depositary agreement,
including the form of depositary receipt, may, at any time and from time to
time, be amended by the mutual agreement of us and the depositary in any respect
deemed necessary or appropriate by them, without the approval of the holders
of
depositary units. No amendment to the depositary agreement, however, may impair
the right of a holder of depositary units to surrender a depositary receipt
and
to withdraw any or all of the deposited depositary units evidenced by a
depositary receipt or to redeposit depositary units pursuant to the depositary
agreement and receive a depositary receipt evidencing redeposited depositary
units.
The
depositary will furnish notice to each record holder of a depositary unit,
and
to each securities exchange on which depositary units are listed for trading,
of
any material amendment made to the depositary agreement. Each record holder
of a
depositary unit at the time any amendment of the depositary agreement becomes
effective will be deemed, by continuing to hold the depositary unit, to consent
and agree to the amendment and to be bound by the depositary agreement, as
so
amended.
The
depositary will give notice of the imposition of any fee or charge, other than
fees and charges provided for in the depositary agreement, or change to the
fees
and charges, upon record holders of depositary units to any securities exchange
on which the depositary units are listed for trading and to all record holders
of depositary units. The imposition of any fee or charge, or change to them,
will not be effective until the expiration of 30 days after the date of such
notice, unless it becomes effective in the form of an amendment to the
depositary agreement effected by us and the depositary.
Termination of
Depositary Agreement
We may
not terminate the depositary agreement unless the termination (1) is in
connection with us entering into a similar agreement with a new depositary
selected by the general partner, (2) is as a result of our receipt of an opinion
of counsel to the effect that the termination is necessary for us to avoid
being
treated as an “association” taxable as a corporation for federal income tax
purposes or to avoid being in violation of any applicable federal or state
securities laws or (3) is in connection with our dissolution.
The
depositary will terminate the depositary agreement, when directed to do so
by
us, by mailing notice of termination to the record holders of depositary units
then outstanding at least 60 days before the date fixed for the termination
in
such notice. Termination will be effective on the date fixed in such notice,
which date must be at least 60 days after it is mailed. Upon termination of
the
depositary agreement, the depositary will discontinue the transfer of depositary
units, suspend the distribution of reports, notices and disbursements and cease
to perform any other
28
acts under the depositary agreement, except in the event the depositary agreement
is not being terminated in connection with us entering into a similar agreement
with a new depositary, the depositary will assist in the facilitation of the
withdrawal of depositary units by holders who desire to surrender their depositary
receipts.
Resignation or Removal
of Depositary
The
depositary may resign as depositary and may be removed by us at any time upon
60
days’ written notice. The resignation or removal of the depositary becomes
effective upon the appointment of a successor depositary by us and written
acceptance by the successor depositary of its appointment. In the event a
successor depositary is not appointed within 75 days of notification of such
resignation or removal, the general partner will act as depositary until a
successor depositary is appointed. Any corporation into or with which the
depositary may be merged or consolidated will be the successor depositary
without the execution or filing of any document or any further act.
29
The
rights of a limited partner of the partnership are set forth in our partnership
agreement and the Delaware Act. The following is a summary of certain provisions
of our partnership agreement and the agreement of limited partnership of AREH,
or the AREH partnership agreement, which is similar to our partnership agreement
in all material respects (except for the preferred units). The following summary
discusses certain provisions which relate to both, and is qualified in its
entirety by reference to both our partnership agreement and the AREH partnership
agreement. A reference to the “partnership agreement” in this prospectus refers
to both of our partnership agreement and the AREH partnership agreement, unless
otherwise indicated.
Removal of the General
Partner
Subject
to certain limitations on the exercise by unitholders of voting rights, the
general partner may be removed by the written consent or affirmative vote of
holders of depositary units owning more than 75% of the total number of all
outstanding depositary units, voting as a class, then held by unitholders,
including the general partner and its affiliates to the extent that they are
holders of depositary units. Upon the removal of the general partner by holders
of depositary units, the holders of depositary units will be obligated to elect
a successor general partner and to continue the business of the partnership.
At
the election of the general partner, a successor general partner will be
required, at the effective date of its admission as a general partner, to
purchase API’s 1% general partner interest directly from API for a price equal
to its “fair market value,” as described below.
If API
does not elect to sell its interest, the successor general partner will be
required to contribute to the capital of AREP cash in an amount equal to 1/99th
of the product of the number of depositary units outstanding immediately prior
to the effective date of such successor general partner’s admission (but after
giving effect to the conversion of API’s general partner interest into
depositary units described below) and the average price at which the depositary
units had been trading over the 20-day period immediately preceding the
successor general partner’s admission. Thereafter, the successor general partner
will be entitled to one percent (1%) of all partnership allocations and
distributions.
If API
chooses not to sell its 1% general partner interest directly to a successor
general partner, API’s general partner interest in AREP will be converted into
depositary units, with the number of depositary units to be received to be
based
upon the “fair market value” of its general partner interest at the time of its
removal and the average price at which the depositary units had been trading
over the 20-day period preceding the effective date of API’s departure. In this
regard, the “fair market value” of the departing general partner’s interest is
the amount that would be distributable to API on account of the interest if
AREP
were to dispose of all of its assets in an orderly liquidation, commencing
on
the effective date of its removal at a price equal to the fair market value
of
those assets (discounted at the rate then payable on one-year U.S. Treasury
obligations to the effective date of such removal to reflect the time reasonably
anticipated to be necessary to consummate the sales), as agreed upon between
API
as the departing general partner and its successor, or, in the absence of an
agreement, as determined by an independent appraiser.
Upon
removal of API from the partnership, API also will be removed as general partner
of AREH and its general partner interest in AREH will either be purchased by
the
successor general partner or converted into depositary units (in which case
the
successor shall also contribute to the capital of AREH) in the same manner
as
provided above with respect to the partnership.
The
partnership agreement provides that, upon the departure of API and the
conversion of its general partner interest in AREP to depositary units, AREP
will, at the request of the departing general partner, file with the SEC up
to
three registration statements under the Securities Act registering the offering
and sale of all or a portion of the depositary units owned by API, including
those depositary units received upon conversion of its general partner interest
in AREP and AREH. The cost of the first registrations will be borne by AREP
and
the cost of any other such registration will be borne by API.
Withdrawal of the
General Partner
The
general partner may withdraw, but only if:
(1)
the withdrawal is with the consent
of a majority interest;
30
(2)
API, with the consent of a majority
interest, transfers all of its interest as general partner in the
partnership;
(3)
the transferee consents to be bound
by the partnership agreement and the transferee has the necessary legal
authority to act as successor general partner of the partnership; and
(4)
AREP receives an opinion of counsel
to the effect that a vote by the unitholders and the admission of a new general
partner is in conformity with local law, will not cause the loss of limited
liability to the unitholders and will not cause AREP to be treated as an
“association” taxable as a corporation for federal income tax purposes.
Notwithstanding
the foregoing, API may, without the consent of the unitholders (to the extent
permitted by law), transfer its interest as general partner in AREP to any
person or entity that has, by merger, consolidation or otherwise, acquired
all
or substantially all of the assets or stock of API and continued its business,
provided that such person or entity has a net worth no less than that of API
and
has accepted and agreed to be bound by the terms and conditions of the
partnership agreement. The general partner also may mortgage, pledge,
hypothecate or grant a security interest in its interest as general partner
in
AREP without the consent of unitholders.
Distributions
The
general partner has the power and authority to retain or use partnership assets
or revenues as, in the sole and absolute discretion of the general partner,
may
be required to satisfy the anticipated present and future cash needs of the
partnership, whether for operations, expansion, improvements, acquisitions
or
otherwise.
Subject
to Section 17-607 of the Delaware Act and to the provision with respect to
distributions upon liquidation or dissolution of the partnership, the general
partner, in its sole and absolute discretion, may make such distribution from
partnership assets or otherwise as it deems appropriate in its sole discretion,
quarterly, annually or at any other time. Any distributions will be distributed
to the general partner and the record holders in accordance with their
respective percentage interests.
Distribution
of proceeds on liquidation or dissolution of the partnership will be made:
first, to the payment of any debts and liabilities of the partnership which
are
then due and payable; next, to the establishment of such reserves as the general
partner deems reasonably necessary to provide for any future, contingent or
unforeseen liabilities or obligations of the partnership; and next, pro rata
in
accordance with and to the extent of the positive balances in the general
partner’s and record holders’ respective capital accounts.
Allocations of Income
and Loss
Our
partnership agreement provides, in general, that, after allocation to the
holders of preferred units of an amount of income or gain equal to the 5%
accrued distribution rate for the year, all items of income, gain, loss and
deduction are allocated to API and to the holders of depositary units in
accordance with their respective percentage ownership in the partnership. Items
allocated to the holders of depositary units are further allocated among them
pro rata in accordance with the respective number of depositary units owned
by
each of them. The partnership’s income gain, and loss and deduction, for federal
income tax purposes, will be computed on an annual basis and apportioned equally
among the calendar months among the general partner and record holders of
depositary units in accordance with their percentage interests as of the close
of business on the last day of the month in which taxable income or losses
are
apportioned. The partnership’s gains and losses from capital transactions
generally will be allocated among the general partner and record holders of
depositary units in proportion to their percentage interests as of the close
of
business on the last day of the month in which such gains and losses occurred.
However, if gain from a capital transaction is recognized by the partnership
over more than one calendar year, gain recognized by the partnership in years
subsequent to the year in which the capital transaction occurred shall be
allocated in the same manner as income of the partnership allocated.
Nevada Gaming Law
Dispositions
If any
Nevada gaming authority requires that a limited partner be licensed, qualified
or found suitable under any applicable Nevada gaming law and the limited
partner
31
·
fails
to apply for a license, qualification
or a finding of suitability within 30 days, or such shorter period as may be
required by the applicable Nevada gaming authority after being requested to
do
so by the Nevada gaming authority, or
·
is
denied such license or qualification or
not found suitable,
then the general partner
will have the right, exercisable in its sole and absolute discretion,
·
to
require each the limited partner to
dispose of its partnership interest within 30 days, or such earlier date as
may
be required by the applicable Nevada gaming authority, of the occurrence of
the
event described above, or
·
to
redeem the partnership interest of the
limited partner, on behalf of and for the account of the partnership, at a
redemption price equal to lowest of
·
the
market price for the partnership
interest on the filing date, as defined, which, in the case of a depositary
unit, will be the unit price;
·
the
price at which such limited partner
acquired the partnership interest; and
·
such
other lesser amount as may be required
by any Nevada gaming authority.
Immediately
upon a determination by a Nevada gaming authority that a limited partner will
not be licensed, qualified or found suitable and must dispose of its partnership
interest, the limited partner will, to the extent required by applicable Nevada
gaming laws, have no further right to exercise, directly or indirectly, any
rights to which limited partners or record holders are entitled under the
Delaware Act or partnership agreement or to receive any distributions made
by
the partnership, except the redemption price.
New Jersey Gaming
Law
Dispositions
Securities
of
the partnership are held subject to the condition that if a holder of any
security is found to be disqualified by the New Jersey Casino Control Commission
pursuant to the provisions of the New Jersey Casino Control Act, or the Casino
Control Act, the holder will dispose of his interest in the partnership in
accordance with the Casino Control Act. The partnership agreement is deemed
to
include all provisions required by the Casino Control Act and the regulations
under it.
Amendment of the
Partnership Agreement
Amendments
to
the partnership agreement may be proposed by the general partner or by holders
of depositary units owning at least 10% of the total number of depositary units
outstanding then owned by all unitholders. Any proposed amendment (other than
those described below) must be approved by the general partner in writing and,
subject to limitations on the exercise by unitholders of voting rights, by
at
least a majority interest in order to be adopted. Unless approved by API in
writing and, subject to limitations on the exercise by unitholders of voting
rights, by all of the holders of depositary units, no amendment may be made
to
the partnership agreement if the amendment, in the opinion of counsel would
result in the loss of the limited liability of unitholders or AREP as the sole
limited partner of AREH or would cause AREP or AREH to be treated as an
association taxable as a corporation for federal income tax purposes. In
addition, no amendment to the partnership agreement may be made which
would:
·
enlarge
the obligations of the general
partner or any unitholder or convert the interest of any unitholder into the
interest of a general partner;
·
modify
the expense reimbursement payable to
the general partner and its affiliates pursuant to the partnership agreement
or
the fees and compensation payable to the general partner and its affiliates
pursuant to the AREH partnership agreement;
·
modify
the order and method for allocations
of net income and net loss or distributions of net cash flow from operations
without the consent of the general partner or the unitholders adversely
affected; or
·
amend
sections of the partnership agreement
concerning amendments of the agreement without the consent of unitholders owning
more than 95% of the total number of depositary units outstanding then held
by
all unitholders.
32
Notwithstanding the foregoing, the general partner may make amendments to the
partnership agreement without the consent of the unitholders, if such amendments
are necessary or appropriate:
·
to
reflect a change in the name or location
of the principal office of the partnership;
·
to
reflect the admission, substitution,
termination, or withdrawal of unitholders in accordance with the partnership
agreement;
·
to
qualify AREP as a limited partnership or
to ensure that AREP will not be treated as an association taxable as a
corporation for federal income tax purposes;
·
in
connection with or as a result of the
general partner’s determination that AREP does not or no longer will qualify as
a partnership for federal income tax purposes, including, without limitation,
an
amendment reflecting the reorganization of AREP into a qualified “real estate
investment trust”;
·
to
reflect a change that is of an
inconsequential nature and does not adversely affect the unitholders in any
material respect, or to cure any ambiguity, correct or supplement any provision
in the partnership agreement not inconsistent with law or with other provisions,
or make other changes with respect to matters arising under the partnership
agreement that will not be inconsistent with law or with the provisions of
the
partnership agreement;
·
to
satisfy any requirements, conditions, or
guidelines contained in any order, directive, opinion, ruling or regulation
of a
federal or state agency or contained in federal or state law;
·
to
facilitate the trading of the depositary
units or comply with any requirement or guideline of any securities exchange
on
which the depositary units are or will be listed for trading;
·
to
make any change required or contemplated
by the partnership agreement;
·
to
amend any provisions requiring any
action by the general partner if applicable provisions of the Delaware Act
related to AREP or AREH are amended or changed so that such action is no longer
necessary; or
·
to
authorize AREP to issue units (or other
securities) in one or more additional classes, or one or more series of classes,
with any designations, preferences and relative, participating, optional or
other special rights, powers and duties, including rights, powers and duties
senior to existing classes of depositary units or preferred units, as shall
be
fixed by the general partner.
Issuance of Additional
Securities
The
partnership is authorized to issue additional depositary units or other
securities from time to time to unitholders or additional investors without
the
consent or approval of unitholders. There is no limit to the number of
depositary units or additional classes that may be issued. The board of
directors of the general partner has the power, without any further action
by
the unitholders, to issue securities with such designations, preferences and
relative, participating or other special rights, powers and duties, including
rights, powers and duties senior to existing classes of depositary units or
preferred units.
Meetings; Voting
Rights of Unitholders
Any
action that is required or permitted to be taken by unitholders may be taken
either at a meeting of the holders of depositary units or without a meeting
if
consents in writing setting forth the action so taken are signed by holders
of
depositary units owning not less than the minimum number of depositary units
or
preferred units that would be necessary to authorize or take such action at
a
meeting. Meetings of the holders of depositary units may be called by the
general partner or by unitholders owning at least 10% of the total depositary
units outstanding then owned by all such unitholders. Holders of depositary
units may vote either in person or by proxy at meetings.
Matters
submitted to the unitholders for their consent will be determined by the
affirmative vote, in person or by proxy, of a majority interest, except that
a
higher vote will be required for certain amendments described above, the removal
of the general partner and the continuation of AREP after certain events that
would otherwise cause dissolution.
Each
unitholder will have one vote for each depositary unit as to which the
unitholder has been admitted as a unitholder. A subsequent transferee of
depositary units who has not been admitted as a unitholder of record with
33
respect to the depositary units will have no voting rights with respect to the
depositary units, even if such subsequent transferee holds other depositary
units as to which it has been admitted as a unitholder. The voting rights of
a unitholder who transfers a depositary unit will terminate with respect to
that depositary unit upon its transfer, whether or not the subsequent transferee
is admitted as a unitholder of record with respect thereto. The partnership
agreement does not provide for annual meetings of the unitholders.
Restriction on
Short-Form Mergers
Neither
the general partner nor its affiliates will cause the partnership (in the event
that the Delaware Act is amended to permit partnerships to engage in short-form
merger transactions), or any successor entity of the partnership, whether in
its
current form as a limited partnership or as converted to or succeeded by a
corporation or other form of business association, to effect a merger or other
business combination (in the event that such short-form merger statute applies
to other business combinations) of the partnership or such successor, in each
case pursuant to Section 253 of the General Corporation Law of Delaware, or
any
successor statute, or any similar short-form merger statute under the laws
of
Delaware or any other jurisdiction. This provision does not apply to any other
merger or business combination transaction. In addition, no amendment to this
provision is permitted without a unanimous vote of the record holders, unless
the amendment has been approved by the audit committee, in which event only
a
majority interest, as defined, is required for approval of the amendment.
Liability of General
Partner and Unitholders
The
general partner will be liable for all general obligations of the partnership
to
the extent not paid by the partnership. The general partner will not, however,
be liable for the nonrecourse obligations of the partnership. Assuming that
a
unitholder does not take part in the control of the business of AREP and
otherwise acts in conformity with the provisions of the partnership agreement,
the liability of the unitholder will, under the Delaware Act, be limited,
subject to certain possible exceptions, generally to the amount contributed
by
the unitholder or the unitholder’s predecessor in interest to the capital of the
partnership, plus the unitholder’s share of any undistributed partnership
income, profits or property. However, under the Delaware Act, a unitholder
who
receives a distribution from AREP that is made in violation of the Delaware
Act
and who knew at the time of the distribution that the distribution was improper,
is liable to AREP for the amount of the distribution. Such liability or
liability under other applicable Delaware law (such as the law of fraudulent
conveyances) ceases after expiration of three years from the date of the
applicable distribution.
Under
the
Delaware Act, a partnership is prohibited from making a distribution to a
partner to the extent that at the time of the distribution, after giving effect
to the distribution, all liabilities of the partnership, other than liabilities
to partners on account of their partnership interests and liabilities for which
the recourse of creditors is limited to specified property of the partnership,
exceed the fair value of the assets of the partnership (except that fair value
of property that is subject to a liability for which the recourse of creditors
is limited is included in the assets of the partnership only to the extent
that
the fair value of the property exceeds that liability). An assignee of a limited
partner who becomes a substituted limited partner does not, under the Delaware
Act, become liable for any obligation of the assignor to restore prior
distributions.
Books and
Reports
The
general partner is required to keep complete and accurate books with respect
to
the partnership’s business at the principal office of the partnership. The books
are maintained for financial accounting purposes on the accrual basis, in
accordance with generally accepted accounting principles. The fiscal year of
AREP is the calendar year.
Unitholders
will be entitled to have access to AREP books and certain other records at
reasonable times upon reasonable notice to the general partner, subject to
certain limitations including those intended to protect confidential business
information.
The
general partner will furnish to each unitholder, within 120 days after the
close
of each fiscal year, reports containing certain financial statements of AREP
for
the fiscal year, including a balance sheet and statements of income,
unitholders’ equity and changes in financial position, which will be audited by
a nationally recognized firm of independent certified public accountants. Within
90 days after the close of each taxable year, AREP will use its best efforts
to
furnish to each unitholder as of the last day of any month during such taxable
year such information as may be required by the unitholders for the preparation
of their individual federal, state and local tax returns. This
34
information will be furnished in summary form so that certain complex calculations
normally required can be avoided. The partnership’s ability to furnish
such summary information may depend on the cooperation of unitholders in supplying
certain information to the partnership.
Power of
Attorney
Pursuant
to the AREP partnership agreement, each unitholder of record appoints API and
each of API’s authorized officers as the unitholder’s or substituted
unitholder’s attorney-in-fact:
·
to
enter into the depositary agreement and
deposit the depositary units of the unitholder or substituted unitholder in
the
deposit account established by the depositary and admit the holders of
depositary units and preferred units as limited partners in AREP,
and
·
to
make, execute, file and/or
record
·
instruments
with respect to any amendment
of the partnership agreement;
·
conveyances
and other instruments and
documents with respect to the dissolution, termination and liquidation of AREP
pursuant to the terms of the partnership agreement;
·
financing
statements or other documents
necessary to grant or perfect a security interest, mortgage, pledge or lien
on
all or any of the assets of the partnership;
·
instruments
or papers required to continue
the business of AREP pursuant to the partnership agreement
·
instruments
relating to the admission of
substituted limited partners in the partnership; and
·
all
other instruments deemed necessary or
appropriate to carry out the provisions of the partnership
agreement.
The power
of attorney is irrevocable, will survive the subsequent death, incompetency,
dissolution, disability, incapacity, bankruptcy or termination of the granting
unitholder, and will extend to such unitholder’s heirs, successors and
assigns.
Death, Bankruptcy
or
Incompetency of a Unitholder
The
death, bankruptcy or adjudication of incompetency of a unitholder will not
dissolve the partnership. In such event, the legal representatives of the
unitholder will have all the rights of a unitholder for the purpose of settling
or managing the estate and such power as the deceased, bankruptcy or incompetent
unitholder possessed to assess, sell or transfer any part of his interest.
The
transfer of depositary units and preferred units by the legal representative
to
any person or entity is subject to all of the restrictions to which such
transfer would have been subject if it had been made by the deceased, bankrupt
or incompetent unitholder.
Termination,
Dissolution and Liquidation
The
partnership will continue until December 31, 2085, unless sooner dissolved
or
terminated and its assets liquidated upon the occurrence of the earliest
of:
·
the
withdrawal, removal or bankruptcy of
the general partner (subject to the right of the unitholders to reconstitute
and
continue the business of AREP by written agreement of a majority interest and
designation by them of a successor general partner within 90 days);
·
the
written consent or affirmative vote of
a majority interest, with the approval of the general partner, to dissolve
and
terminate the partnership;
·
the
sale or other disposition of all or
substantially all of the assets of the partnership;
·
the
partnership’s insolvency or bankruptcy;
or
·
any
other event causing or requiring
dissolution under the Delaware Act.
The
unitholders’ right to continue AREP described above is subject to the receipt of
an opinion of counsel to the effect that the continuation and the selection
of a
successor general partner will not result in the loss of limited liability
of
the unitholders and will not cause AREP to be treated as an association taxable
as a corporation for federal income tax purposes. Upon dissolution, the general
partner or other entity or person authorized to wind up the affairs of AREP
will
proceed to liquidate the assets of AREP and apply the proceeds of liquidation
in
the order of priority set forth in the partnership agreement.
35
The
depositary units being offered by the selling securityholders are issuable
upon
conversion of the convertible notes. We are registering the depositary units
in
order to permit the selling securityholders to offer the depositary units for
resale from time to time. Except for the ownership of the convertible notes
issued pursuant to the Indenture, dated as of April 5, 2007, by and among AREP,
AREP Finance, AREH, as guarantor, and Wilmington Trust Company, as Trustee,
the
selling securityholders have not had any material relationship with us within
the past three years.
The table
below lists the selling securityholders and other information regarding the
beneficial ownership of the depositary units by each of the selling
securityholders. The second column lists the number of depositary units
beneficially owned by each selling securityholder, based on its ownership of
the
convertible notes, as of June 1, 2007, assuming conversion of all convertible
notes held by the selling securityholders on that date, without regard to any
limitations on conversions.
The third
column lists the depositary units being offered by this prospectus by each
selling securityholder.
In
accordance with the terms of a registration rights agreement by and among the
AREP, Portside Growth and Opportunity Fund, or Portside, and Highbridge
International LLC, or Highbridge, this prospectus generally covers the resale
of
the depositary units issued or issuable upon conversion of the convertible
notes
as of the trading day immediately preceding the date the Registration Statement
is initially filed with the SEC. Because the conversion price of the convertible
notes may be adjusted, the number of depositary units that will actually be
issued may be more or less than the number of depositary units being offered
by
this prospectus. The fourth column assumes the sale of all of the depositary
units offered by the selling securityholders pursuant to this prospectus.
The
selling securityholders may sell all, some or none of their depositary units
in
this offering. See “Plan of Distribution.”
|
Name
of Selling Securityholder
|
Number
of
Depositary Units Owned Prior to Offering |
Maximum
Number
of Depositary Units to be Sold Pursuant to this Prospectus |
Number
of
Depositary Units Owned After Offering |
|||
|
Portside
Growth & Opportunity Fund(1)
|
|
4,977
|
|
4,977
|
|
0
|
|
Ramius
Capital Group, LLC
|
284
|
284
|
0
|
|||
|
Highbridge
International LLC(2)
|
937,064
|
937,064
|
0
|
|||
|
Highbridge
Convertible Arbitrage Master
Fund, L.P.(3) |
62,220
|
62,220
|
0
|
|||
|
Linden
Capital LP
|
226,253
|
226,253
|
0
|
|||
|
Lyxor/Context
Fund Ltd.
|
6,938
|
6,938
|
0
|
|||
|
AHFP
Context
|
2,187
|
2,187
|
0
|
|||
|
Finch
Tactical Plus Class B
|
1,282
|
1,282
|
0
|
|||
|
Worldwide
Transactions Limited
|
1,735
|
1,735
|
0
|
|||
|
Altma
Fund SICAV Plc in Repsect of the
Grafton Sub Fund |
8,296
|
8,296
|
0
|
|||
|
Casam
Context Offshore Advantage Fund Limited
|
3,922
|
3,922
|
0
|
|||
|
Institutional
Benchmarks Series (Master Feeder)
Limited in Respect of Alcor Series |
1,282
|
1,282
|
0
|
|||
|
Context
Advantage Master Fund, L.P.
|
30,921
|
30,921
|
0
|
|||
|
SGAM
A.I. Boreal
|
22,626
|
22,626
|
0
|
|||
|
Altma
Fund SICAV in respect of Trinity
Sub-Fund |
27,995
|
27,995
|
0
|
|||
|
AM
Master Fund I, L.P.
|
89,091
|
89,091
|
0
|
|||
|
Lyxor/AM
Investment Fund Ltd.
|
15,272
|
15,272
|
0
|
|||
|
AM
International E Mac 63 Ltd.
|
71,270
|
71,270
|
0
|
|||
|
Lehman
Brothers Inc.
|
150,835
|
150,835
|
0
|
|||
|
Xavex
Convertible Arbitrage 10 Fund
|
23,530
|
23,530
|
0
|
|||
|
Xavex
Convertible Arbitrage 2 Fund
|
3,545
|
3,545
|
0
|
|||
|
CNH
CA Master Account, L.P.
|
75,418
|
75,418
|
0
|
|||
|
Argent
LowLev Convertible Arbitrage
Fund II, LLC |
453
|
453
|
0
|
36
|
Name
of Selling Securityholder
|
Number
of
Depositary Units Owned Prior to Offering |
Maximum
Number
of Depositary Units to be Sold Pursuant to this Prospectus |
Number
of
Depositary Units Owned After Offering |
|||
|
Argent
Classic Convertible Arbitrage
Fund, L.P. |
36,200
|
36,200
|
0
|
|||
|
Argent
Classic Convertible Arbitrage
Fund II, L.P |
8,598
|
8,598
|
0
|
|||
|
Lyxor
Master Fund
|
6,184
|
6,184
|
0
|
|||
|
Partners
Group Alternative Strategies
PCC Ltd. |
12,067
|
12,067
|
0
|
|||
|
HFR
CA Global Select Master Trust
Account |
3,545
|
3,545
|
0
|
|||
|
Class
C Trading Company, Ltd.
|
18,779
|
18,779
|
0
|
|||
|
DBAG
London
|
88,616
|
88,616
|
0
|
|||
|
RCG
PB, Ltd.
|
683
|
683
|
0
|
|||
|
Bank
Austria Special Situation
|
398
|
398
|
0
|
|||
|
RCG
Baldwin, L.P.
|
171
|
171
|
0
|
|||
|
RCG
Latitude Master Fund, Ltd.
|
1,024
|
1,024
|
0
|
|||
|
Credit
Suisse Securities Europe Ltd.
|
94,272
|
94,272
|
0
|
|||
|
PBGC
Maintenance
|
1,855
|
1,855
|
0
|
|||
|
Redbourn
Partners Ltd.
|
37,709
|
37,709
|
0
|
——————
(1)
Ramius
Capital Group, LLC, or Ramius Capital, is the investment adviser of Portside,
and consequently has voting control and investment discretion over securities
held by Portside. Ramius Capital disclaims beneficial ownership of the units
held by Portside. Peter A. Cohen, Morgan B. Stark, Thomas W. Strauss and Jeffrey
M. Solomon are the sole managing members of C4S& Co., LLC, the sole managing
member of Ramius Capital. As a result, Messrs. Cohen, Stark, Strauss and Solomon
may be considered beneficial owners of any units deemed to be beneficially
owned
by Ramius Capital. Messrs. Cohen, Stark, Strauss and Solomon disclaim beneficial
ownership of these units.
(2)
Highbridge
Capital Management, LLC, or Highbridge Capital, is the trading manager of
Highbridge and has voting control and investment discretion over the securities
held by Highbridge. Glenn Dubin and Henry Swieca control Highbridge Capital
and
have voting control and investment discretion over the securities held by
Highbridge. Each of Highbridge Capital, Glenn Dubin and Henry Swieca disclaims
beneficial ownership of the securities held by Highbridge.
(3)
Highbridge
Capital is the trading manager of Highbridge Convertible Arbitrage Master Fund,
L.P., or Highbridge Master Fund, and has voting control and investment
discretion over the securities held by Highbridge Master Fund. Glenn Dubin
and
Henry Swieca control Highbridge Capital and have voting control and investment
discretion over the securities held by Highbridge Master Fund. Each of
Highbridge Capital, Glenn Dubin and Henry Swieca disclaims beneficial ownership
of the securities held by Highbridge Master Fund.
37
We are
registering the depositary units issuable upon conversion of the convertible
notes to permit the resale of these depositary units by the holders of the
convertible notes from time to time after the date of this prospectus. We will
not receive any of the proceeds from the sale by the selling securityholders
of
the depositary units. We will bear all fees and expenses incident to our
obligation to register the depositary units.
The
selling securityholders may sell all or a portion of the depositary units
beneficially owned by them and offered hereby from time to time directly or
through one or more underwriters, broker-dealers or agents. If the depositary
units are sold through underwriters or broker-dealers, the selling
securityholders will be responsible for underwriting discounts or commissions
or
agent’s commissions. The depositary units may be sold in one or more
transactions at fixed prices, at prevailing market prices at the time of the
sale, at varying prices determined at the time of sale or at negotiated prices.
These sales may be affected in transactions, which may involve crosses or block
transactions:
·
on
any national securities exchange or
quotation service on which the securities may be listed or quoted at the time
of
sale;
·
in
the over-the-counter
market;
·
in
transactions otherwise than on these
exchanges or systems or in the over-the-counter market;
·
through
the writing of options, whether
such options are listed on an options exchange or otherwise;
·
ordinary
brokerage transactions and
transactions in which the broker-dealer solicits purchasers;
·
block
trades in which the broker-dealer
will attempt to sell the units as agent but may position and resell a portion
of
the block as principal to facilitate the transaction;
·
purchases
by a broker-dealer as principal
and resale by the broker-dealer for its account;
·
an
exchange distribution in accordance with
the rules of the applicable exchange;
·
privately
negotiated
transactions;
·
short
sales;
·
sales
pursuant to Rule 144;
·
broker-dealers
may agree with the selling
securityholders to sell a specified number of such units at a stipulated price
per unit;
·
a
combination of any such methods of sale;
and
·
any
other method permitted pursuant to
applicable law.
If
the selling securityholders effect such transactions by selling depositary
units
to or through underwriters, broker-dealers or agents, such underwriters,
broker-dealers or agents may receive commissions in the form of discounts,
concessions or commissions from the selling securityholders or commissions
from
purchasers of the depositary units for whom they may act as agent or to whom
they may sell as principal (which discounts, concessions or commissions as
to
particular underwriters, broker-dealers or agents may be in excess of those
customary in the types of transactions involved). In connection with sales
of
the depositary units or otherwise, the selling securityholders may enter into
hedging transactions with broker-dealers, which may in turn engage in short
sales of the depositary units in the course of hedging in positions they assume.
The selling securityholders may also sell depositary units short and deliver
depositary units covered by this prospectus to close out short positions and
to
return borrowed units in connection with such short sales. The selling
securityholders may also loan or pledge depositary units to broker-dealers
that
in turn may sell such units.
The
selling securityholders may pledge or grant a security interest in some or
all
of the depositary units owned by them and, if they default in the performance
of
their secured obligations, the pledgees or secured parties may offer and sell
the depositary units from time to time pursuant to this prospectus or any
amendment to this prospectus under Rule 424(b)(3) or other applicable provision
of the Securities Act, amending, if necessary, the list of selling
securityholders to include the pledgee, transferee or other successors in
interest as selling securityholders under this prospectus. The selling
securityholders also may transfer and donate the depositary units in other
circumstances in which case the transferees, donees, pledgees or other
successors in interest will be the selling beneficial owners for purposes of
this prospectus.
38
The
selling securityholders and any broker-dealer participating in the distribution
of the depositary units may be deemed to be “underwriters” within the meaning of
the Securities Act, and any commission paid, or any discounts or concessions
allowed to, any such broker-dealer may be deemed to be underwriting commissions
or discounts under the Securities Act. At the time a particular offering of
the
depositary units is made, a prospectus supplement, if required, will be
distributed which will set forth the aggregate amount of depositary units being
offered and the terms of the offering, including the name or names of any
broker-dealers or agents, any discounts, commissions and other terms
constituting compensation from the selling securityholders and any discounts,
commissions or concessions allowed or reallowed or paid to broker-dealers.
Under
the
securities laws of some states, the depositary units may be sold in such states
only through registered or licensed brokers or dealers. In addition, in some
states the depositary units may not be sold unless such units have been
registered or qualified for sale in such state or an exemption from registration
or qualification is available and is complied with.
There
can
be no assurance that any selling securityholder will sell any or all of the
depositary units registered pursuant to the registration statement, of which
this prospectus forms a part.
The
selling securityholders and any other person participating in such distribution
will be subject to applicable provisions of the Exchange Act, and the rules
and
regulations thereunder, including, without limitation, Regulation M of the
Exchange Act, which may limit the timing of purchases and sales of any of the
depositary units by the selling securityholders and any other participating
person. Regulation M may also restrict the ability of any person engaged in
the
distribution of the depositary units to engage in market-making activities
with
respect to the depositary units. All of the foregoing may affect the
marketability of the depositary units and the ability of any person or entity
to
engage in market-making activities with respect to the depositary units.
We will
pay all expenses of the registration of the depositary units pursuant to the
registration rights agreement, estimated to be $[_] in total, including, without
limitation, SEC filing fees and expenses of compliance with state securities
or
“blue sky” laws; provided, however, that a selling securityholder will pay all
underwriting discounts and selling commissions, if any. We will indemnify the
selling securityholders against liabilities, including some liabilities under
the Securities Act, in accordance with the registration rights agreements,
or
the selling securityholders will be entitled to contribution. We may be
indemnified by the selling securityholders against civil liabilities, including
liabilities under the Securities Act, which may arise from any written
information furnished to us by the selling securityholder specifically for
use
in this prospectus, in accordance with the related registration rights
agreement, or we may be entitled to contribution.
Once
sold
under the Registration Statement, of which this prospectus forms a part, the
depositary units will be freely tradable in the hands of persons other than
our
affiliates.
Proskauer
Rose LLP will provide us with an opinion as to certain legal matters in
connection with the depositary units we are offering, including the validity
of
the depositary units being offered hereby.
The consolidated
financial statements of American Real Estate Partners, L.P. and Subsidaries
as of December 31, 2006 and 2005 and for each of the three years in the
period ended December 31, 2006 and management’s assessment of effectiveness of internal
control over financial reporting as of December 31, 2006
incorporated by reference in this prospectus
have been audited by Grant Thornton LLP, independent registered public
accountants, as indicated in their reports with respect thereto (which report on the
consolidated financial statements refers to the change in accounting for the Partnership’s investment in
ImClone Systems Incorporated and Subsidiary from an available for sale security to the equity method)
and are included herein in reliance upon the authority of said firm as experts in accounting and auditing in giving
said reports.
The
balance sheet of American Property Investors, Inc., as of December 31, 2006,
included in this prospectus has been audited by Grant Thornton LLP, independent
accountants, as stated in its report with respect thereto, and is included herein
in reliance upon the authority of said firm as experts in accounting
and auditing in giving said report.
39
The
consolidated financial statements of ImClone Systems Incorporated and subsidiary
as of December 31, 2006 and 2005, and for each of the years in the three-year
period ended December 31, 2006, have been incorporated by reference herein
in
reliance upon the report of KPMG LLP, independent registered public accounting
firm, incorporated by reference herein, and upon the authority of said firm
as
experts in accounting and auditing. The audit report covering the December
31,
2006 consolidated financial statements refers to the Company’s adoption of the
provisions of Statement of Financial Accounting Standards No. 123R, “Share-Based
Payment.”
The consolidated
financial statements of GB Holdings, Inc. and subsidiaries for the year ended
December 31, 2004 have been incorporated by reference herein in reliance upon
the report of KPMG LLP, independent registered public accounting firm, incorporated
by reference herein, and upon the authority of said firm as experts in accounting
and auditing.
The
consolidated financial statements and financial statement schedule of Lear
Corporation as of December 31, 2006 and 2005 and for each of the three
years in the period ended December 31, 2006 included elsewhere in this
prospectus have been audited by Ernst & Young LLP, independent registered
public accounting firm, as set forth in their report thereon appearing elsewhere
herein and are included in reliance upon such report given on the authority
of
such firm as experts in accounting and auditing.
We have
filed with the SEC a Registration Statement on Form S-3 under the Securities
Act
to register the depositary units offered by this prospectus. This prospectus
is
part of the Registration Statement. This prospectus does not contain all the
information contained in the Registration Statement because we have omitted
certain parts of the Registration Statement in accordance with the rules and
regulations of the SEC. For further information, we refer you to the
Registration Statement, which you may read and copy at the public reference
facilities maintained by the SEC at 100 F Street, N. E. Room 1580, Washington,
D.C. 20549. You may obtain copies at the prescribed rates from the Public
Reference Section of the SEC at its principal office in Washington, D.C. You
may
call the SEC at 1-800-SEC-0330 for further information about the public
reference rooms. The SEC maintains a web site that contains reports, proxy
and
information statements and other information regarding us. You may access the
SEC’s web site at http://www.sec.gov.
We are
subject to the informational requirements of the Exchange Act. As a result,
we
are required to file reports, proxy statements and other information with the
SEC. These materials can be copied and inspected at the locations described
above. Copies of these materials can be obtained from the Public Reference
Section of the SEC at 100 F Street, N. E. Room 1580, Washington, D.C. 20549,
at
prescribed rates. Our depositary units are listed on the New York Stock Exchange
under the symbol “ACP.”
The SEC
allows us to “incorporate by reference” the information we file with them, which
means that we can disclose important information to you by referring you to
those documents. The information incorporated by reference is considered to
be
part of this prospectus, and information that we file later with the SEC will
automatically update and supersede this information. We incorporate by reference
the documents listed below, all filings made pursuant to the Exchange Act after
the date of the initial registration statement and prior to effectiveness of
the
Registration Statement and any other future filings we will make with the SEC
under Section 13(a), 13(c), 14 or 15(d) of the Exchange Act (other than Current
Reports on Form 8-K containing disclosure furnished under Items 2.02, 7.01
or
8.01 of Form 8-K, unless otherwise indicated therein):
·
Our
Annual Report on Form 10-K and Form
10-K/A, Amendment No. 1, for the fiscal year ended December 31, 2006, filed
with
the SEC on March 6, 2007 and March 16, 2007, respectively (SEC File No.
001-09516);
·
Our
Quarterly Report on Form 10-Q for the
fiscal quarter ended March 31, 2007, filed with the SEC on May 10, 2007 (SEC
File No. 001-09516);
40
·
Our
Current Reports on Form 8-K, filed with
the SEC on April 3, 2007, April 5, 2007, April 17, 2007, April 24, 2007, April
27, 2007 and May 10, 2007 (SEC File No. 001-09516); and
·
The
description of the depositary units
contained in the Registration Statement on Form 8-A, initially filed on May
12,
1987, and any subsequent amendment thereto filed for the purpose of updating
such description.
You may
request a copy of these filings (not including the exhibits to such documents
unless the exhibits are specifically incorporated by reference in the
information contained in this prospectus), at no cost, by writing or telephoning
us at the following address:
American
Real
Estate Partners, L.P.
767 Fifth Avenue, Suite 4700
New York, New York 10153
Attn: Chief Financial Officer
Telephone requests may be directed to (212) 702-4300
767 Fifth Avenue, Suite 4700
New York, New York 10153
Attn: Chief Financial Officer
Telephone requests may be directed to (212) 702-4300
This
prospectus is part of a Registration Statement we filed with the SEC. You should
rely only on the information or representations provided in this prospectus.
We
have authorized no one to provide you with different information. We are not
making an offer of these securities in any state where the offer is not
permitted.
You
should not assume that the information in this prospectus is accurate as of
any
date other than the date on the front of the document.
Statements
contained in this prospectus as to the contents of any contract or document
are
not necessarily complete and in each instance reference is made to the copy
of
that contract or document filed as an exhibit to the Registration Statement
or
as an exhibit to another filing, each such statement being qualified in all
respects by such reference and the exhibits and schedules thereto.
41
| American
Property Investors, Inc. |
|
|
| Lear
Corporation |
||
F-1
The Board of
Directors
American Property Investors, Inc.
American Property Investors, Inc.
We have
audited the accompanying balance sheet of American Property Investors, Inc.
as
of December 31, 2006. This financial statement is the responsibility of the
Company’s management. Our responsibility is to express an opinion on this
financial statement based on our audit.
We
conducted our audit 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 balance
sheet is free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in that balance sheet.
An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall balance sheet
presentation. We believe that our audit of the balance sheet provides a
reasonable basis for our opinion.
In
our
opinion, the balance sheet referred to above presents fairly, in all material
respects, the financial position of American Property Investors, Inc. as of
December 31, 2006, in conformity with accounting principles generally
accepted in the United States of America.
/s/ Grant Thornton LLP
New York, New
York
June 15, 2007
June 15, 2007
F-2
BALANCE
SHEET
|
December 31,
2006 |
|||
|
|
|||
|
ASSETS
|
|
||
|
Cash
and cash equivalents
|
$
|
1,204,034
|
|
|
Investment
in partnerships (Note B)
|
52,342,623
|
||
|
$
|
53,546,657
|
||
|
LIABILITIES
AND STOCKHOLDER’S
EQUITY
|
|||
|
Accounts
payable and accrued expenses
|
6,059
|
||
|
Stockholder’s
equity:
|
|||
|
Common
stock – $1 par value, 1,216 shares authorized,
216 shares outstanding |
216
|
||
|
Additional
paid-in capital
|
35,507,904
|
||
|
Note
receivable from affiliate (Note C)
|
(9,500,000)
|
||
|
Retained
earnings
|
26,938,478
|
||
|
Accumulated
other comprehensive
income
|
594,000
|
||
|
Total
stockholder’s equity
|
53,540,598
|
||
|
Total
liabilities and stockholder's equity
|
$
|
53,546,657
|
|
See notes
to
balance sheet.
F-3
Notes
to Balance Sheet
December 31, 2006
December 31, 2006
Note A — Business and
Summary of Significant Accounting Policies
1.
Organization
American
Property Investors, Inc. (“API” or “the Company”) is the general partner of both
American Real Estate Partners, L.P. (“AREP”) and American Real Estate Holdings
Limited Partnership (“AREH”). API has 1% general partnership interest in both
AREP and AREH. API is a wholly-owned subsidiary of Becton Corporation (“Becton”)
which in turn is owned by Carl C. Icahn. Mr. Icahn also owns, indirectly,
approximately 90% of the limited partnership interests of AREP, a New York
Stock
Exchange master limited partnership.
2. Cash and Cash
Equivalents
The
Company considers all temporary cash investments with maturity at the date
of
purchase of three months or less to be cash equivalents.
3. Use of
Estimates
Management
of
the Company has made certain estimates and assumptions relating to the reporting
of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statement to prepare this balance
sheet
in conformity with accounting principles generally accepted in the United States
of America. Actual results could differ from those estimates.
4. Income
Taxes
The
Company and its parent have elected and the stockholders have consented, under
the applicable provisions of the Internal Revenue Code, to report their income
for Federal income tax purposes as a Subchapter S Corporation. The stockholders
report their respective shares of the net taxable income or loss on their
personal tax returns. Accordingly, no liability has been accrued for current
or
deferred Federal income taxes related to the operations of the Company in the
accompanying balance sheet. State and local taxes are de minimus
5. Investments
in
Partnerships
The
Company evaluates its investments in partially-owned entities in accordance
with
FASB Interpretation No. 46 (revised December 2003), Consolidation of
Variable Interest Entities, or FIN 46R. If the partially-owned entity is a
“variable interest entity,” or a “VIE,” and that the Company is the “primary
beneficiary” as defined in FIN 46R, the Company would account for such
investment as if it were a consolidated subsidiary.
For a
partnership investment which is not a VIE or in which the Company is not the
primary beneficiary, the Company follows the accounting set forth in AICPA
Statement of Position No. 78-9 – Accounting for Investments in Real Estate
Ventures (SOP 78-9). In accordance with this pronouncement, investments in
joint
ventures are accounted for under the equity method when its ownership interest
is less than 50% and it does not exercise direct or indirect control. Factors
that are considered in determining whether or not the Company exercises control
include important rights of partners in significant business decisions,
including dispositions and acquisitions of assets, financing and operating
and
capital budgets, board and management representation and authority and other
contractual rights of the partners. To the extent that the Company is deemed
to
control these entities, these entities would be consolidated.
The
Company has determined that the AREP and AREH partnerships are not VIEs and
therefore it accounts for these investments under the equity method of
accounting as the limited partners have important rights as defined in SOP
78-9.
This investment was recorded initially at cost and was subsequently adjusted
for
equity in earnings or losses and cash contributions and distributions as well
as
other comprehensive income/loss.
F-4
AMERICAN
PROPERTY INVESTORS, INC.
Notes
to Balance Sheet
December 31, 2006
December 31, 2006
Note A — Business and
Summary of Significant Accounting Policies – (continued)
On a
periodic basis the Company evaluates whether there are any indicators that
the
value of its investments in partnerships are impaired. An investment is
considered to be impaired if the Company’s estimate of the value of the
investment is less than the carrying amount. The ultimate realization of the
Company’s investments in partnerships is dependent on a number of factors
including the performance of that entity and market conditions. If the Company
determines that a decline in the value of a partnership is other than temporary,
then the Company would record an impairment charge.
Note B — Investment in
Partnerships
The
Company has a 1% general partnership interest in both AREP and AREH. AREP is
the
99% limited partner and holding company of AREH which is involved in the
following operating businesses: (i) Oil & Gas; (ii) Gaming; (iii) Real
Estate; and (iv) Home Fashion.
The
carrying amount of the investment in partnerships on the Company’s balance sheet
exceeds the underlying equity in the net assets of the partnerships by
$254,382,000. This difference is as a result of adjustments reflected in AREP’s
equity to account for certain acquisitions from affiliates of the general
partner. The differences between the historical cost of companies acquired
and
the purchase price paid to the affiliates of the general partner were accounted
for as contributions from or distributions to the general partner.
F-5
AMERICAN
PROPERTY INVESTORS, INC.
Notes
to Balance Sheet
December 31, 2006
December 31, 2006
Summarized
financial information for American Real Estate Partners, L.P. and subsidiaries
as of December 31, 2006 is as follows (in thousands of dollars):
|
December 31,
2006 |
|||
|
|
|||
|
ASSETS
|
|||
|
Cash
and cash equivalents
|
$
|
1,912,235
|
|
|
Investments
|
539,115
|
||
|
Inventories,
net
|
245,502
|
||
|
Trade,
notes and other receivables, net
|
176,496
|
||
|
Other
current assets
|
134,987
|
||
|
Assets
held for sale
|
47,503
|
||
|
Total
current assets
|
3,055,838
|
||
|
Property,
plant and equipment, net
|
|||
|
Gaming
|
422,715
|
||
|
Real
Estate
|
283,974
|
||
|
Home
Fashion
|
200,382
|
||
|
Total
property, plant and
equipment
|
907,071
|
||
|
Equity
investment and other
|
179,932
|
||
|
Intangible
assets
|
25,916
|
||
|
Other
assets
|
75,990
|
||
|
Total
assets
|
$
|
4,244,747
|
|
|
LIABILITIES
AND PARTNERS’ EQUITY
|
|||
|
Accounts
payable
|
$
|
69,853
|
|
|
Accrued
expenses and other current liabilities
|
197,792
|
||
|
Current
portion of long-term debt
|
23,970
|
||
|
Securities
sold not yet purchased
|
25,398
|
||
|
Margin
liability on marketable securities
|
—
|
||
|
Liabilities
of discontinued operations held for sale
|
—
|
||
|
Total
current liabilities
|
317,013
|
||
|
Long-term
debt
|
1,184,990
|
||
|
Other
non-current liabilities
|
22,212
|
||
|
Preferred
limited partnership units
|
117,656
|
||
|
Minority
interests
|
292,221
|
||
|
Partners’
equity
|
2,310,655
|
||
|
Total
liabilities and partners’ equity
|
$
|
4,244,747
|
|
Note C — Note
Receivable
The
Company has an unsecured demand note receivable due from Carl C. Icahn, in
the
amount of $9,500,000. Interest on the note accrues at the rate of 3.75% per
annum and is payable on the last day of April and October. Interest has been
paid through December 31, 2006.
F-6
To the Board of Directors
and Shareholders of
Lear Corporation
Lear Corporation
We have
audited the accompanying consolidated balance sheets of Lear Corporation and
Subsidiaries (the Company) as of December 31, 2006 and 2005, and the
related consolidated statements of operations, stockholders’ equity and cash
flows for each of the three years in the period ended December 31, 2006.
Our audits also included the financial statement schedule for the three years
in
the period ended December 31, 2006, included in Item 8. These financial
statements and schedule are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements and
schedule 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. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the Company
as
of December 31, 2006 and 2005, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2006, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule
for
the three years in the period ended December 31, 2006, when considered in
relation to the basic financial statements taken as a whole, presents fairly,
in
all material respects, the information set forth therein.
As
discussed in Note 2 to the consolidated financial statements, in 2006 the
Company changed its method of accounting for stock-based compensation.
As
discussed in Note 10 to the consolidated financial statements, in 2006 the
Company changed its method of accounting for pension and other postretirement
benefit plans.
/s/ Ernst & Young LLP
Detroit,
Michigan
February 20, 2007
February 20, 2007
F-7
CONSOLIDATED
BALANCE SHEETS
|
December
31,
|
|||||||
|
2006
|
2005
|
||||||
|
(in
millions,
except share data) |
|||||||
|
ASSETS
|
|||||||
|
Current
Assets:
|
|
$
|
502.7
|
|
$
|
197.3
|
|
|
Cash
and cash equivalents
|
|||||||
|
Accounts
receivable
|
2,006.9
|
2,000.1
|
|||||
|
Inventories
|
581.5
|
595.6
|
|||||
|
Current
assets of business held for sale
|
427.8
|
607.7
|
|||||
|
Other
|
371.4
|
445.7
|
|||||
|
Total
current assets
|
3,890.3
|
3,846.4
|
|||||
|
Long-Term
Assets:
|
|||||||
|
Property,
plant and equipment, net
|
1,471.7
|
1,614.7
|
|||||
|
Goodwill,
net
|
1,996.7
|
1,939.8
|
|||||
|
Long-term
assets of business held for sale
|
—
|
485.2
|
|||||
|
Other
|
491.8
|
402.3
|
|||||
|
Total
long-term assets
|
3,960.2
|
4,442.0
|
|||||
|
$
|
7,850.5
|
$8,288.4
|
|||||
|
LIABILITIES
AND STOCKHOLDERS’
EQUITY
|
|||||||
|
Current
Liabilities:
|
|||||||
|
Short-term
borrowings
|
$
|
39.3
|
$
|
23.4
|
|||
|
Accounts
payable and drafts
|
2,317.4
|
2,516.0
|
|||||
|
Accrued
liabilities
|
1,099.3
|
1,008.6
|
|||||
|
Current
liabilities of business held for sale
|
405.7
|
549.3
|
|||||
|
Current
portion of long-term debt
|
25.6
|
9.4
|
|||||
|
Total
current liabilities
|
3,887.3
|
4,106.7
|
|||||
|
Long-Term
Liabilities:
|
|||||||
|
Long-term
debt
|
2,434.5
|
2,243.1
|
|||||
|
Long-term
liabilities of business held for sale
|
48.5
|
27.6
|
|||||
|
Other
|
878.2
|
800.0
|
|||||
|
Total
long-term liabilities
|
3,361.2
|
3,070.7
|
|||||
|
Stockholders’
Equity:
|
|||||||
|
Common
stock, par value $0.01 per share, 150,000,000 shares
authorized,
81,984,306 shares and 73,281,653 shares issued as of December 31, 2006 and 2005, respectively |
0.7
|
0.7
|
|||||
|
Additional
paid-in capital
|
1,338.1
|
1,108.6
|
|||||
|
Common
stock held in treasury, 5,732,316 shares and 6,094,847 shares as
of
December 31, 2006 and 2005, respectively, at cost |
(210.2
|
)
|
(225.5
|
)
|
|||
|
Retained
earnings (deficit)
|
(362.5
|
)
|
361.8
|
||||
|
Accumulated
other comprehensive loss
|
(164.1
|
)
|
(134.6
|
)
|
|||
|
Total
stockholders’ equity
|
602.0
|
1,111.0
|
|||||
|
$
|
7,850.5
|
$
|
8,288.4
|
||||
The
accompanying notes
are an integral part of these consolidated financial
statements.
F-8
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
For
the Year Ended
December 31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
(in
million, except per share data)
|
||||||||||
|
Net
sales
|
|
$
|
17,838.9
|
|
$
|
17,089.2
|
|
$
|
16,960.0
|
|
|
Cost
of sales
|
16,911.2
|
16,353.2
|
15,557.9
|
|||||||
|
Selling,
general and administrative expenses
|
646.7
|
630.6
|
633.7
|
|||||||
|
Goodwill
impairment charge
|
2.9
|
1,012.8
|
—
|
|||||||
|
Loss
on divestiture of Interior business
|
636.0
|
—
|
—
|
|||||||
|
Interest
expense
|
209.8
|
183.2
|
165.5
|
|||||||
|
Other
expense, net
|
85.7
|
38.0
|
38.6
|
|||||||
|
Income
(loss) before provision for income taxes, minority interests
in consolidated subsidiaries, equity in net (income) loss of affiliates and cumulative effect of a change in accounting principle |
(653.4
|
)
|
(1,128.6
|
)
|
564.3
|
|||||
|
Provision
for income taxes
|
54.9
|
194.3
|
128.0
|
|||||||
|
Minority
interests in consolidated subsidiaries
|
18.3
|
7.2
|
16.7
|
|||||||
|
Equity
in net (income) loss of affiliates
|
(16.2
|
)
|
51.4
|
(2.6
|
)
|
|||||
|
Income
(loss) before cumulative effect of a change in
accounting
principle |
(710.4
|
)
|
(1,381.5
|
)
|
422.2
|
|||||
|
Cumulative
effect of a change in accounting principle
|
2.9
|
—
|
—
|
|||||||
|
Net
income (loss)
|
$
|
(707.5
|
)
|
$
|
(1,381.5
|
)
|
$
|
422.2
|
||
|
Basic
net income (loss) per share:
|
||||||||||
|
Income
(loss) before cumulative effect of a change in accounting
principle
|
$
|
(10.35
|
)
|
$
|
(20.57
|
)
|
$
|
6.18
|
||
|
Cumulative
effect of change in accounting principle
|
0.04
|
—
|
—
|
|||||||
|
Basic
net income (loss) per share
|
$
|
(10.31
|
)
|
$
|
(20.57
|
)
|
$
|
6.18
|
||
|
Diluted
net income (loss) per share:
|
||||||||||
|
Income
(loss) before cumulative effect of a change in
accounting
principle |
$
|
(10.35
|
)
|
$
|
(20.57
|
)
|
$
|
5.77
|
||
|
Cumulative
effect of change in accounting principle
|
0.04
|
—
|
—
|
|||||||
|
Diluted
net income (loss) per share
|
$
|
(10.31
|
)
|
$
|
(20.57
|
)
|
$
|
5.77
|
||
The
accompanying notes
are an integral part of these consolidated financial
statements.
F-9
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’
EQUITY
|
December 31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
(In
millions, except share data)
|
||||||||||
|
Common
Stock
|
|
|||||||||
|
Balance
at beginning and end of period
|
|
$
|
0.7
|
|
$
|
0.7
|
|
$
|
0.7
|
|
|
Additional
Paid-in Capital
|
|
|||||||||
|
Balance
at beginning of period
|
$
|
1,108.6
|
$
|
1,064.4
|
$
|
1,027.7
|
|
|||
|
Net
proceeds from the issuance of 8,695,653 shares of common
stock
|
199.2
|
—
|
—
|
|
||||||
|
Stock-based
compensation
|
30.7
|
43.8
|
26.4
|
|
||||||
|
Cumulative
effect of a change in accounting principle
|
(0.4
|
)
|
—
|
—
|
|
|||||
|
Tax
benefit of stock options exercised
|
—
|
0.4
|
10.3
|
|
||||||
|
Balance
at end of period
|
$
|
1,338.1
|
$
|
1,108.6
|
$
|
1,064.4
|
|
|||
|
Treasury
Stock
|
|
|||||||||
|
Balance
at beginning of period
|
$
|
(225.5
|
)
|
$
|
(204.1
|
)
|
$
|
(110.8
|
)
|
|
|
Issuances
of 362,531 shares at an average price of $42.40
|
15.3
|
—
|
—
|
|
||||||
|
Purchases
of 490,900 shares at an average price of $51.75
|
—
|
(25.4
|
)
|
—
|
|
|||||
|
Issuances
of 126,529 shares at an average price of $31.99
|
—
|
4.0
|
—
|
|
||||||
|
Purchases
of 1,834,300 shares at an average price of $53.29
|
—
|
—
|
(97.7
|
)
|
||||||
|
Issuances
of 395,126 shares at an average price of $11.12 per share in
settlement of
stock-based compensation |
—
|
—
|
4.4
|
|
||||||
|
Balance
at end of period
|
$
|
(210.2
|
)
|
$
|
(225.5
|
)
|
$
|
(204.1
|
)
|
|
|
Retained
Earnings (Deficit)
|
|
|||||||||
|
Balance
at beginning of period
|
$
|
361.8
|
$
|
1,810.5
|
$
|
1,441.8
|
|
|||
|
Net
income (loss)
|
(707.5
|
)
|
(1,381.5
|
)
|
422.2
|
|
||||
|
Dividends
declared of $0.25 per share in 2006, $1.00 per share in 2005 and
$0.80 per share in 2004
|
(16.8
|
)
|
(67.2
|
)
|
(53.5
|
)
|
||||
|
Balance
at end of period
|
$
|
(362.5
|
)
|
$
|
361.8
|
$
|
1,810.5
|
|
||
|
Accumulated
Other Comprehensive Income (Loss)
|
|
|||||||||
|
Defined
Benefit Plans
|
|
|||||||||
|
Balance
at beginning of period
|
$
|
(115.0
|
)
|
$
|
(72.6
|
)
|
$
|
(62.2
|
)
|
|
|
Defined
benefit plan adjustments
|
17.4
|
(42.4
|
)
|
(10.4
|
)
|
|||||
|
Adoption
of SFAS No. 158
|
(166.6
|
)
|
—
|
—
|
|
|||||
|
Balance
at end of period
|
$
|
(264.2
|
)
|
$
|
(115.0
|
)
|
$
|
(72.6
|
)
|
|
|
Derivative
Instruments and Hedging Activities
|
|
|||||||||
|
Balance
at beginning of period
|
$
|
9.0
|
$
|
17.4
|
$
|
(13.7
|
)
|
|||
|
Derivative
instruments and hedging activities adjustments
|
5.7
|
(8.4
|
)
|
31.1
|
|
|||||
|
Balance
at end of period
|
$
|
14.7
|
$
|
9.0
|
$
|
17.4
|
|
|||
|
Cumulative
Translation Adjustments
|
|
|||||||||
|
Balance
at beginning of period
|
$
|
(86.8
|
)
|
$
|
65.6
|
$
|
(61.5
|
)
|
||
|
Cumulative
translation adjustments
|
90.7
|
(152.4
|
)
|
127.1
|
|
|||||
|
Balance
at end of period
|
$
|
3.9
|
$
|
(86.8
|
)
|
$
|
65.6
|
|
||
|
Deferred
Income Tax Asset
|
|
|||||||||
|
Balance
at beginning of period
|
$
|
58.2
|
$
|
48.2
|
$
|
35.5
|
|
|||
|
Deferred
income tax asset adjustments
|
23.3
|
10.0
|
12.7
|
|
||||||
|
Balance
at end of period
|
$
|
81.5
|
$
|
58.2
|
$
|
48.2
|
|
|||
|
Accumulated
other comprehensive income (loss)
|
$
|
(164.1
|
)
|
$
|
(134.6
|
)
|
$
|
58.6
|
|
|
|
Total
Stockholders’ Equity
|
$
|
602.0
|
$
|
1,111.0
|
$
|
2,730.1
|
|
|||
|
Comprehensive
Income (Loss)
|
|
|||||||||
|
Net
income (loss)
|
$
|
(707.5
|
)
|
$
|
(1,381.5
|
)
|
$
|
422.2
|
|
|
|
Defined
benefit plan adjustments
|
17.4
|
(42.4
|
)
|
(10.4
|
)
|
|||||
|
Derivative
instruments and hedging activities adjustments
|
5.7
|
(8.4
|
)
|
31.1
|
|
|||||
|
Cumulative
translation adjustments
|
90.7
|
(152.4
|
)
|
127.1
|
|
|||||
|
Deferred
income tax asset adjustments
|
23.3
|
10.0
|
12.7
|
|
||||||
|
Comprehensive
Income (Loss)
|
$
|
(570.4
|
)
|
$
|
(1,574.7
|
)
|
$
|
582.7
|
|
|
The
accompanying notes
are an integral part of these consolidated financial
statements.
F-10
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
For
the Year Ended
December 31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
(In
millions)
|
||||||||||
|
Cash
Flows from Operating Activities:
|
||||||||||
|
Net
income (loss)
|
|
$
|
(707.5
|
)
|
$
|
(1,381.5
|
)
|
$
|
422.2
|
|
|
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities —
|
||||||||||
|
Cumulative
effect of a change in accounting principle
|
(2.9
|
)
|
—
|
—
|
||||||
|
Goodwill
impairment charges
|
2.9
|
1,012.8
|
—
|
|||||||
|
Loss
on divestiture of Interior business
|
636.0
|
—
|
—
|
|||||||
|
Fixed
asset impairment charges
|
15.8
|
97.4
|
3.0
|
|||||||
|
Deferred
tax provision (benefit)
|
(55.0
|
)
|
44.7
|
8.7
|
||||||
|
Equity
in net (income) loss of affiliates
|
(16.2
|
)
|
51.4
|
(2.6
|
)
|
|||||
|
Depreciation
and amortization
|
392.2
|
393.4
|
355.1
|
|||||||
|
Net
change in recoverable customer engineering and tooling
|
194.9
|
(112.5
|
)
|
(32.5
|
)
|
|||||
|
Net
change in working capital items
|
(110.1
|
)
|
9.7
|
(62.4
|
)
|
|||||
|
Net
change in sold accounts receivable
|
(178.0
|
)
|
411.1
|
(70.4
|
)
|
|||||
|
Other,
net
|
113.2
|
34.3
|
54.8
|
|||||||
|
Net
cash provided by operating activities
|
285.3
|
560.8
|
675.9
|
|||||||
|
Cash
Flows from Investing Activities:
|
||||||||||
|
Additions
to property, plant and equipment
|
(347.6
|
)
|
(568.4
|
)
|
(429.0
|
)
|
||||
|
Cost
of acquisitions, net of cash acquired
|
(30.5
|
)
|
(11.8
|
)
|
(103.0
|
)
|
||||
|
Net
proceeds from disposition of businesses and other assets
|
65.9
|
33.3
|
56.3
|
|||||||
|
Other,
net
|
—
|
5.3
|
3.2
|
|||||||
|
Net
cash used in investing activities
|
(312.2
|
)
|
(541.6
|
)
|
(472.5
|
)
|
||||
|
Cash
Flows from Financing Activities:
|
||||||||||
|
Issuance
of senior notes
|
900.0
|
—
|
399.2
|
|||||||
|
Repayment
of senior notes
|
(1,356.9
|
)
|
(600.0
|
)
|
—
|
|||||
|
Primary
credit facility borrowings, net
|
597.0
|
400.0
|
—
|
|||||||
|
Other
long-term debt repayments, net
|
(36.5
|
)
|
(32.7
|
)
|
(49.4
|
)
|
||||
|
Short-term
debt repayments, net
|
(11.8
|
)
|
(23.8
|
)
|
(29.8
|
)
|
||||
|
Net
proceeds from the sale of common stock
|
199.2
|
—
|
—
|
|||||||
|
Dividends
paid
|
(16.8
|
)
|
(67.2
|
)
|
(68.0
|
)
|
||||
|
Proceeds
from exercise of stock options
|
0.2
|
4.7
|
24.4
|
|||||||
|
Repurchase
of common stock
|
—
|
(25.4
|
)
|
(97.7
|
)
|
|||||
|
Increase
(decrease) in drafts
|
3.0
|
(3.3
|
)
|
(12.6
|
)
|
|||||
|
Other,
net
|
—
|
0.7
|
—
|
|||||||
|
Net
cash provided by (used in) financing activities
|
277.4
|
(347.0
|
)
|
166.1
|
||||||
|
Effect
of foreign currency translation
|
54.9
|
(59.8
|
)
|
46.1
|
||||||
|
Net
Change in Cash and Cash Equivalents
|
305.4
|
(387.6
|
)
|
415.6
|
||||||
|
Cash
and Cash Equivalents at Beginning of Year
|
197.3
|
584.9
|
169.3
|
|||||||
|
Cash
and Cash Equivalents at End of Year
|
$
|
502.7
|
$
|
197.3
|
$
|
584.9
|
||||
|
Changes
in Working Capital:
|
||||||||||
|
Accounts
receivable
|
$
|
153.2
|
$
|
(250.3
|
)
|
$
|
(147.7
|
)
|
||
|
Inventories
|
29.4
|
(76.9
|
)
|
(7.0
|
)
|
|||||
|
Accounts
payable
|
(358.9
|
)
|
298.1
|
189.8
|
||||||
|
Accrued
liabilities and other
|
66.2
|
38.8
|
(97.5
|
)
|
||||||
|
Net
change in working capital items
|
$
|
(110.1
|
)
|
$
|
9.7
|
$
|
(62.4
|
)
|
||
|
Supplementary
Disclosure:
|
||||||||||
|
Cash
paid for interest
|
$
|
218.5
|
$
|
172.6
|
$
|
153.5
|
||||
|
Cash
paid
for income taxes, net of refunds received of $30.7 in 2006,
$76.7 in 2005 and $52.7 in 2004 |
$
|
84.8
|
$
|
112.7
|
$
|
140.0
|
||||
The
accompanying notes
are an integral part of these consolidated financial
statements.
F-11
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of
Presentation
The
consolidated financial statements include the accounts of Lear Corporation
(“Lear” or the “Parent”), a Delaware corporation and the wholly owned and less
than wholly owned subsidiaries controlled by Lear (collectively, the “Company”).
In addition, Lear consolidates variable interest entities in which it bears
a
majority of the risk of the entities’ potential losses or stands to gain from a
majority of the entities’ expected returns. Investments in affiliates in which
Lear does not have control, but does have the ability to exercise significant
influence over operating and financial policies, are accounted for under the
equity method (Note 6, “Investments in Affiliates and Other Related Party
Transactions”).
The
Company and its affiliates design and manufacture complete automotive seat
systems, electrical distribution systems and various electronic products. The
Company also supplies automotive interior systems and components, including
instrument panels and cockpit systems, headliners and overhead systems, door
panels and flooring and acoustic systems. The Company’s main customers are
automotive original equipment manufacturers. The Company operates facilities
worldwide (Note 13, “Segment Reporting”).
(2) Summary of
Significant Accounting Policies
Assets and
Liabilities of Business Held for Sale
In
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company
classifies the assets and liabilities of a business as held for sale when
management approves and commits to a formal plan of sale and it is probable
that
the sale will be completed. The carrying value of the net assets of the business
held for sale are then recorded at the lower of their carrying value or fair
market value, less costs to sell. As of December 31, 2006, the assets and
liabilities of the Company’s North American interior business are classified as
held for sale and all prior period balance sheet information has been restated
(Note 3, “Divestiture of Interior Business”).
Cash and Cash
Equivalents
Cash
and
cash equivalents include all highly liquid investments with original maturities
of ninety days or less.
Accounts Receivable
The
Company records accounts receivable as its products are shipped to its
customers. The Company’s customers are the major automotive manufacturers in the
world. The Company records accounts receivable reserves for known collectibility
issues, as such issues relate to specific transactions or customer balances.
As
of December 31, 2006 and 2005, accounts receivable are reflected net of
reserves of $14.9 million and $20.4 million, respectively. The Company
writes off accounts receivable when it becomes apparent based upon age or
customer circumstances that such amounts will not be collected. Generally,
the
Company does not require collateral for its accounts receivable.
F-12
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(2) Summary of
Significant Accounting Policies – (continued)
Inventories
Inventories
are stated at the lower of cost or market. Cost is determined using the
first-in, first-out method. Finished goods and work-in-process inventories
include material, labor and manufacturing overhead costs. The Company records
inventory reserves for inventory in excess of production and/or forecasted
requirements and for obsolete inventory in production and service inventories.
As of December 31, 2006 and 2005, inventories are reflected net of reserves
of $87.1 million and $85.7 million, respectively. A summary of
inventories is shown below (in millions):
|
December 31,
|
||||||
|
2006
|
2005
|
|||||
|
Raw
materials
|
|
$
|
439.9
|
|
$
|
449.2
|
|
Work-in-process
|
35.6
|
36.7
|
||||
|
Finished
goods
|
106.0
|
109.7
|
||||
|
Inventories
|
$
|
581.5
|
$
|
595.6
|
||
Pre-Production
Costs Related to Long-Term Supply Arrangements
The
Company incurs pre-production engineering, research and development (“ER&D”)
and tooling costs related to the products produced for its customers under
long-term supply agreements. The Company expenses all pre-production ER&D
costs for which reimbursement is not contractually guaranteed by the customer.
In addition, the Company expenses all pre-production tooling costs related
to
customer-owned tools for which reimbursement is not contractually guaranteed
by
the customer or for which the customer has not provided a non-cancelable right
to use the tooling. During 2006 and 2005, the Company capitalized
$122.0 million and $227.2 million, respectively, of pre-production
ER&D costs for which reimbursement is contractually guaranteed by the
customer. During 2006 and 2005, the Company also capitalized $449.0 million
and $638.6 million, respectively, of pre-production tooling costs related
to customer-owned tools for which reimbursement is contractually guaranteed
by
the customer or for which the customer has provided a non-cancelable right
to
use the tooling. These amounts are included in other current and other long-term
assets in the consolidated balance sheets. During 2006 and 2005, the Company
collected $765.0 million and $715.8 million, respectively, of cash
related to ER&D and tooling costs.
During
2006 and 2005, the Company capitalized $17.4 million and
$44.4 million, respectively, of Company-owned tooling. These amounts are
included in property, plant and equipment, net, in the consolidated balance
sheets.
The
classification of capitalized pre-production ER&D and tooling costs related
to long-term supply agreements is shown below (in millions):
|
December 31,
|
||||||
|
2006
|
2005
|
|||||
|
Current
|
|
$
|
87.7
|
|
$
|
160.4
|
|
Long-term
|
116.2
|
146.9
|
||||
|
Recoverable
customer engineering and
tooling
|
$
|
203.9
|
$
|
307.3
|
||
Gains
and
losses related to ER&D and tooling projects are reviewed on an aggregate
program basis. Net gains on projects are deferred and recognized over the life
of the related long-term supply agreement. Net losses on projects are recognized
as costs are incurred.
F-13
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(2) Summary of
Significant Accounting Policies – (continued)
Property, Plant
and
Equipment
Property,
plant and equipment is stated at cost. Depreciable property is depreciated
over
the estimated useful lives of the assets, using principally the straight-line
method as follows:
|
Buildings
and
improvements
|
|
20 to 40 years
|
|
Machinery
and equipment
|
5 to 15
years
|
A
summary of property, plant and equipment is shown below (in millions):
|
December 31,
|
|||||||
|
2006
|
2005
|
||||||
|
Land
|
|
$
|
131.0
|
|
$
|
131.5
|
|
|
Buildings
and improvements
|
516.7
|
572.8
|
|||||
|
Machinery
and equipment
|
2,077.5
|
2,116.0
|
|||||
|
Construction
in progress
|
60.7
|
56.1
|
|||||
|
Total
property, plant and equipment
|
2,785.9
|
2,876.4
|
|||||
|
Less —
accumulated depreciation
|
(1,314.2
|
)
|
(1,261.7
|
)
|
|||
|
Net
property, plant and equipment
|
$
|
1,471.7
|
$
|
1,614.7
|
|||
Depreciation
expense was $387.0 million, $388.5 million and $350.6 million for
the years ended December 31, 2006, 2005 and 2004, respectively.
Costs
associated with the repair and maintenance of the Company’s property, plant and
equipment are expensed as incurred. Costs associated with improvements which
extend the life, increase the capacity or improve the efficiency or safety
of
the Company’s property, plant and equipment are capitalized and depreciated over
the remaining life of the related asset.
Impairment of
Goodwill
Goodwill
is not amortized but is tested for impairment on at least an annual basis.
Impairment testing is required more often than annually if an event or
circumstance indicates that an impairment, or decline in value, may have
occurred. In conducting its impairment testing, the Company compares the fair
value of each of its reporting units to the related net book value. If the
fair
value of a reporting unit exceeds its net book value, goodwill is considered
not
to be impaired. If the net book value of a reporting unit exceeds its fair
value, an impairment loss is measured and recognized. The Company conducts
its
annual impairment testing on the first day of the fourth quarter each year.
The
Company utilizes an income approach to estimate the fair value of each of its
reporting units. The income approach is based on projected debt-free cash flow
which is discounted to the present value using discount factors that consider
the timing and risk of cash flows. The Company believes that this approach
is
appropriate because it provides a fair value estimate based upon the reporting
unit’s expected long-term operating cash flow performance. This approach also
mitigates the impact of cyclical trends that occur in the industry. Fair value
is estimated using recent automotive industry and specific platform production
volume projections, which are based on both third-party and internally-developed
forecasts, as well as commercial, wage and benefit, inflation and discount
rate
assumptions. Other significant assumptions include terminal value growth rates,
terminal value margin rates, future capital expenditures and changes in future
working capital requirements. While there are inherent uncertainties related
to
the assumptions used and to management’s application of these assumptions to
this analysis, the Company believes that the income approach provides a
reasonable estimate of the fair value of its reporting units.
F-14
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(2) Summary of
Significant Accounting Policies – (continued)
The
Company’s 2006 annual goodwill impairment analysis, completed as of
October 1, resulted in no impairment.
During
the third and fourth quarters of 2005, events occurred which indicated a
significant decline in the fair value of the Company’s interior segment, as well
as an impairment of the related goodwill. These events included unfavorable
operating results, primarily as a result of higher raw material costs, lower
production volumes on key platforms, industry overcapacity, insufficient
customer pricing and changes in certain customers’ sourcing strategies, as well
as the Company’s decision to evaluate strategic alternatives with respect to
this segment. The Company evaluated the net book value of goodwill within its
interior segment by comparing the fair value of the reporting unit to the
related net book value. As a result, the Company recorded total goodwill
impairment charges of $1.0 billion in 2005 related to the interior segment.
The Company also recognized a $2.9 million goodwill impairment charge
related to this segment during the second quarter of 2006. The goodwill resulted
from a $19.0 million purchase price adjustment for an indemnification claim
related to the Company’s acquisition of UT Automotive, Inc. (“UT Automotive”)
from United Technologies Corporation (“UTC”) in May 1999. The purchase
price adjustment was allocated to the Company’s electronic and electrical and
interior segments (Note 12, “Commitments and Contingencies”).
A
summary of the changes in the carrying amount of goodwill, by reportable
operating segment, for each of the two years in the period ended
December 31, 2006, is shown below (in millions):
|
Seating
|
Electronic
and
Electrical |
Interior
|
Total
|
||||||||||
|
Balance
as of January 1,
2005
|
|
$
|
1,075.7
|
|
$
|
945.9
|
|
$
|
1,017.8
|
|
$
|
3,039.4
|
|
|
Goodwill
impairment charges
|
—
|
—
|
(1,012.8
|
)
|
(1,012.8
|
)
|
|||||||
|
Foreign
currency translation and other
|
(41.5
|
)
|
(40.3
|
)
|
(5.0
|
)
|
(86.8
|
)
|
|||||
|
Balance
as of December 31, 2005
|
$
|
1,034.2
|
$
|
905.6
|
$
|
—
|
$
|
1,939.8
|
|||||
|
Purchase
price adjustment
|
—
|
16.1
|
2.9
|
19.0
|
|||||||||
|
Goodwill
impairment charges
|
—
|
—
|
(2.9
|
)
|
(2.9
|
)
|
|||||||
|
Foreign
currency translation and other
|
26.5
|
14.3
|
—
|
40.8
|
|||||||||
|
Balance
as of December 31, 2006
|
$
|
1,060.7
|
$
|
936.0
|
$
|
—
|
$
|
1,996.7
|
|||||
Intangible
Assets
The
Company’s intangible assets acquired through business acquisitions are valued
based on independent appraisals. A summary of intangible assets as of
December 31, 2006 and 2005, is shown below (in millions):
|
Gross
Carrying Value |
Accumulated
Amortization |
Net
Carrying Value |
Weighted
Average Useful Life (Years) |
||||||||
|
Technology
|
|
$
|
2.8
|
|
$
|
(0.8
|
)
|
$
|
2.4
|
|
10.0
|
|
Customer
contracts
|
23.0
|
(8.4
|
)
|
14.6
|
7.7
|
||||||
|
Customer
relationships
|
29.8
|
(4.5
|
)
|
25.3
|
19.0
|
||||||
|
Balance
as of December 31, 2006
|
$
|
55.6
|
$
|
(13.7
|
)
|
$
|
41.9
|
14.7
|
|||
F-15
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(2) Summary of
Significant Accounting Policies – (continued)
|
Gross
Carrying Value |
Accumulated
Amortization |
Net
Carrying Value |
Weighted
Average Useful Life (Years) |
||||||||
|
Technology
|
|
$
|
2.8
|
|
$
|
(0.4
|
)
|
$
|
2.4
|
|
10.0
|
|
Customer
contracts
|
20.8
|
(4.9
|
)
|
15.9
|
7.7
|
||||||
|
Customer
relationships
|
27.2
|
(2.4
|
)
|
24.8
|
18.8
|
||||||
|
Balance
as of December 31, 2005
|
$
|
50.8
|
$
|
(7.7
|
)
|
$
|
43.1
|
14.2
|
|||
Excluding
the impact of any future acquisitions, the Company’s estimated annual
amortization expense is approximately $5.0 million in each of the three
succeeding years, decreasing to approximately $4.5 and $4.0 million in the
two years thereafter.
Impairment
of
Long-Lived Assets
The
Company monitors its long-lived assets for impairment indicators on an ongoing
basis in accordance with SFAS No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets.” If impairment indicators exist, the Company
performs the required analysis and records impairment charges in accordance
with
SFAS No. 144. In conducting its analysis, the Company compares the undiscounted
cash flows expected to be generated from the long-lived assets to the related
net book values. If the undiscounted cash flows exceed the net book value,
the
long-lived assets are considered not to be impaired. If the net book value
exceeds the undiscounted cash flows, an impairment loss is measured and
recognized. An impairment loss is measured as the difference between the net
book value and the fair value of the long-lived assets. Fair value is estimated
based upon either discounted cash flow analyses or estimated salvage values.
Cash flows are estimated using internal budgets based on recent sales data,
independent automotive production volume estimates and customer commitments,
as
well as assumptions related to discount rates. Changes in economic or operating
conditions impacting these estimates and assumptions could result in the
impairment of long-lived assets.
The
Company recorded fixed asset impairment charges related to certain operating
locations within its interior segment of $10.0 million and
$82.3 million in the years ended December 31, 2006 and 2005,
respectively. The remaining fixed assets of the Company’s North American
interior business were written down to zero in the fourth quarter of 2006 as
a
result of entering into the agreement relating to the divestiture of the North
American interior business (Note 3, “Divestiture of Interior Business”).
In
the years ended December 31, 2006 and 2005, the Company also recognized
fixed asset impairment charges of $5.8 million and $15.1 million,
respectively, in conjunction with its restructuring actions. In the year ended
December 31, 2004, the Company recognized fixed asset impairment charges of
$3.0 million related to certain facility consolidations. See Note 5,
“Restructuring.” The Company has certain other facilities that have generated
operating losses in recent years. The results of the related impairment analyses
indicated that impairment of the fixed assets was not required. However, the
Company will continue to monitor the operating plans of these facilities for
potential impairment.
These
fixed asset impairment charges are recorded in cost of sales in the consolidated
statements of operations for the years ended December 31, 2006, 2005 and
2004.
Revenue
Recognition and Sales Commitments
The
Company enters into agreements with its customers to produce products at the
beginning of a vehicle’s life. Although such agreements do not provide for
minimum quantities, once the Company enters into such agreements, the Company
is
generally required to fulfill its customers’ purchasing requirements for the
entire production life of the vehicle. These agreements generally may be
terminated by the customer at any time. Historically, terminations of these
agreements have been minimal. In certain instances, the Company may be committed
under existing agreements to supply products to its customers at selling prices
which are not sufficient to cover the direct cost to produce such products.
In
such situations, the Company recognizes losses as they are incurred.
F-16
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(2) Summary of
Significant Accounting Policies – (continued)
The
Company receives blanket purchase orders from its customers on an annual basis.
Generally, each purchase order provides the annual terms, including pricing,
related to a particular vehicle model. Purchase orders do not specify
quantities. The Company recognizes revenue based on the pricing terms included
in its annual purchase orders as its products are shipped to its customers.
The
Company is asked to provide its customers with annual cost reductions as part
of
certain agreements. The Company accrues for such amounts as a reduction of
revenue as its products are shipped to its customers. In addition, the Company
has ongoing adjustments to its pricing arrangements with its customers based
on
the related content, the cost of its products and other commercial factors.
Such
pricing accruals are adjusted as they are settled with the Company’s customers.
Amounts
billed to customers related to shipping and handling costs are included in
net
sales in the consolidated statements of operations. Shipping and handling costs
are included in cost of sales in the consolidated statements of operations.
Cost of Sales
and
Selling, General and Administrative Expenses
Cost
of sales includes material, labor and overhead costs associated with the
manufacture and distribution of the Company’s products. Distribution costs
include inbound freight costs, purchasing and receiving costs, inspection costs,
warehousing costs and other costs of the Company’s distribution network.
Selling, general and administrative expenses include selling, research and
development and administrative costs not directly associated with the
manufacture and distribution of the Company’s products.
Research and
Development
Costs
incurred in connection with the development of new products and manufacturing
methods, to the extent not recoverable from the Company’s customers, are charged
to selling, general and administrative expenses as incurred. These costs
amounted to $169.8 million, $174.0 million and $197.6 million for
the years ended December 31, 2006, 2005 and 2004, respectively.
Other Expense,
Net
Other
expense includes state and local non-income related taxes, foreign exchange
gains and losses, discounts and expenses associated with the Company’s
asset-based securitization and factoring facilities, losses on the
extinguishment of debt (see Note 8, “Long-Term Debt”), gains and losses on the
sales of fixed assets and other miscellaneous income and expense. A summary
of
other expense is shown below (in millions):
|
For
the Year Ended
December 31, |
|||||||||
|
2006
|
2005
|
2004
|
|||||||
|
Other
expense
|
|
$
|
101.3
|
|
$
|
41.8
|
|
$
|
38.6
|
|
Other
income
|
(15.6
|
)
|
(3.8
|
)
|
—
|
||||
|
Other
expense, net
|
$
|
85.7
|
$
|
38.0
|
$
|
38.6
|
|||
Foreign Currency
Translation
With
the exception of foreign subsidiaries operating in highly inflationary
economies, which are measured in U.S. dollars, assets and liabilities of foreign
subsidiaries are translated into U.S. dollars at the foreign exchange rates
in
effect at the end of the period. Revenues and expenses of foreign subsidiaries
are translated using an average of the foreign exchange rates in effect during
the period. Translation adjustments that arise from translating a foreign
subsidiary’s financial statements from the functional currency to U.S. dollars
are reflected in accumulated other comprehensive loss in the consolidated
balance sheets.
Transaction
gains and losses that arise from foreign exchange rate fluctuations on
transactions denominated in a currency other than the functional currency,
except those transactions which operate as a hedge of a foreign currency
investment position, are included in the statements of operations as incurred.
F-17
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(2) Summary of
Significant Accounting Policies – (continued)
Stock-Based
Compensation
On
January 1, 2006, the Company adopted the provisions of SFAS No. 123(R),
“Share-Based Payment,” using the modified prospective transition method and
recognized income of $2.9 million as a cumulative effect of a change in
accounting principle related to a change in accounting for forfeitures. There
was no income tax effect resulting from this adoption (Note 9, “Income Taxes”).
SFAS No. 123(R) requires the estimation of expected forfeitures at the grant
date and the recognition of compensation cost only for those awards expected
to
vest. Previously, the Company accounted for forfeitures as they occurred. The
adoption of SFAS No. 123(R) did not result in the recognition of
additional compensation cost related to outstanding unvested awards, as the
Company recognized compensation cost using the fair value provisions of SFAS
No.
123, “Accounting for Stock-Based Compensation,” for all employee awards granted
after January 1, 2003. The pro forma effect on net income (loss) and net
income (loss) per share, as if the fair value recognition provisions had been
applied to all outstanding and unvested awards granted prior to January 1,
2003, is shown below (in millions, except per share data):
|
For
the Year Ended
December 31,
|
|||||||
|
2005
|
2004
|
||||||
|
Net
income (loss), as
reported
|
|
$
|
(1,381.5
|
)
|
$
|
422.2
|
|
|
Add:
Stock-based employee compensation expense included in reported
net income (loss) |
14.7
|
10.9
|
|||||
|
Deduct:
Total stock-based employee compensation expense determined under
fair value based method for all awards |
(18.1
|
)
|
(21.6
|
)
|
|||
|
Net
income (loss), pro forma
|
$
|
(1,384.9
|
)
|
$
|
411.5
|
||
|
Net
income (loss) per share:
|
|||||||
|
Basic
– as reported
|
$
|
(20.57
|
)
|
$
|
6.18
|
||
|
Basic
– pro forma
|
$
|
(20.62
|
)
|
$
|
6.03
|
||
|
Diluted
– as reported
|
$
|
(20.57
|
)
|
$
|
5.77
|
||
|
Diluted
– pro forma
|
$
|
(20.62
|
)
|
$
|
5.63
|
||
For the
year ended December 31, 2006, total stock-based employee compensation
expense was $32.0 million.
For further information
related to the Company’s stock-based compensation programs, see Note 11,
“Stock-Based Compensation.”
Net Income (Loss)
Per Share
Basic
net income (loss) per share is computed using the weighted average common shares
outstanding during the period. Diluted net income (loss) per share includes
the
dilutive effect of common stock equivalents using the average share price during
the period. In addition, when the impact is dilutive, diluted net income per
share is calculated by increasing net income for the after-tax interest expense
on convertible debt and by increasing total shares outstanding by the number
of
shares that would be issuable upon conversion. Prior to the repurchase of
substantially all of the Company’s outstanding zero-coupon convertible notes
during 2006, there were 4,813,056 shares issuable upon conversion of the
Company’s convertible zero-coupon senior notes. Tables summarizing net income
(loss), for diluted net income (loss) per share (in millions) and shares
outstanding are shown below:
|
For
the Year Ended
December 31,
|
|||||||||
|
2006
|
2005
|
2004
|
|||||||
|
|
|
||||||||
|
Net
income
(loss)
|
|
$
|
(707.5
|
)
|
$
|
(1,381.5
|
)
|
$
|
422.2
|
|
Add:
After-tax interest expense on convertible debt
|
—
|
—
|
9.3
|
||||||
|
Net
income (loss), for diluted net income (loss) per share
|
$
|
(707.5
|
)
|
$
|
(1,381.5
|
)
|
$
|
431.5
|
|
F-18
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(2) Summary of
Significant Accounting Policies – (continued)
|
For
the Year Ended
December 31,
|
||||||
|
2006
|
2005
|
2004
|
||||
|
Weighted
average common shares
outstanding
|
|
68,607,262
|
|
67,166,668
|
|
68,278,858
|
|
Dilutive
effect of common stock equivalents
|
—
|
—
|
1,635,349
|
|||
|
Shares
issuable upon conversion of convertible debt
|
—
|
—
|
4,813,056
|
|||
|
Diluted
shares outstanding
|
68,607,262
|
67,166,668
|
74,727,263
|
|||
For
further information related to the zero-coupon convertible senior notes, see
Note 8, “Long-Term Debt.”
The
shares issuable upon conversion of the Company’s outstanding zero-coupon
convertible debt and the effect of common stock equivalents, including options,
restricted stock units, performance units and stock appreciation rights were
excluded from the computation of diluted shares outstanding for the years ended
December 31, 2006 and 2005, as inclusion would have resulted in
antidilution. A summary of these options and their exercise prices, as well
as
these restricted stock units, performance units and stock appreciation rights,
is shown below:
|
For
the Year Ended
December 31,
|
||||||||
|
2006
|
2005
|
2004
|
||||||
|
|
||||||||
|
Options
|
||||||||
|
Antidilutive
options
|
|
2,790,305
|
|
2,983,405
|
|
—
|
||
|
Exercise
prices
|
$
|
22.12 – $55.33
|
$
|
22.12 – $55.33
|
—
|
|||
|
Restricted
stock units
|
1,964,571
|
2,234,122
|
—
|
|||||
|
Performance
units
|
169,909
|
123,672
|
—
|
|||||
|
Stock
appreciation rights
|
1,751,854
|
1,215,046
|
—
|
|||||
Use of Estimates
The
preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts
of
assets and liabilities as of the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the reporting period.
During 2006, there were no material changes in the methods or policies used
to
establish estimates and assumptions. Generally, matters subject to estimation
and judgment include amounts related to accounts receivable realization,
inventory obsolescence, asset impairments, useful lives of intangible and fixed
assets and unsettled pricing discussions with customers and suppliers (Note
2,
“Summary of Significant Accounting Policies”); restructuring accruals (Note 5,
“Restructuring”); deferred tax asset valuation allowances and income taxes (Note
9, “Income Taxes”); pension and other postretirement benefit plan assumptions
(Note 10, “Pension and Other Postretirement Benefit Plans”); accruals related to
litigation, warranty and environmental remediation costs (Note 12, “Commitments
and Contingencies”); and self-insurance accruals. Actual results may differ from
estimates provided.
Reclassifications
Certain
amounts in prior years’ financial statements have been reclassified to conform
to the presentation used in the year ended December 31, 2006.
F-19
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(3) Divestiture of
Interior Business
European Interior
Business
On
October 16, 2006, the Company completed the contribution of substantially
all of its European interior business to International Automotive Components
Group, LLC (“IAC Europe”), the Company’s joint venture with WL Ross & Co.
LLC (“WL Ross”) and Franklin Mutual Advisers, LLC (“Franklin”), in exchange for
a one-third equity interest. In connection with the transaction, the Company
entered into various ancillary agreements providing the Company with customary
minority shareholder rights and registration rights with respect to its equity
interest in IAC Europe. The Company’s European interior business included
substantially all of its interior components business in Europe (other than
Italy and one facility in France), consisting of nine manufacturing facilities
in five countries supplying door panels, overhead systems, instrument panels,
cockpits and interior trim to various original equipment manufacturers. IAC
Europe also owns the European interior business formerly held by Collins &
Aikman Corporation.
In
connection with this transaction, the Company recorded the fair market value
of
its initial investment in IAC Europe at $105.6 million and recognized a
pretax loss of approximately $29.1 million. This loss is recorded as part
of the Company’s loss on divestiture of interior business in the statement of
operations for the year ended December 31, 2006. The Company did not
account for the divestiture of its European interior business as a discontinued
operation due to its continuing involvement with IAC Europe. The Company’s
investment in IAC Europe is accounted for under the equity method of accounting
(Note 6, “Investments in Affiliates and Other Related Party Transactions”).
North American
Interior Business
On
November 30, 2006, the Company entered into an Asset Purchase Agreement
with International Automotive Components Group North America, Inc. and
International Automotive Components Group North America, LLC (together, “IAC
North America”), WL Ross and Franklin, under which the Company agreed to
transfer substantially all of the assets of the Company’s North American
interior business, as well as interests in two China joint ventures and
$25 million of cash, to IAC North America. Under the terms of the
agreement, the Company will receive a 25% equity interest in IAC North America
and warrants to purchase an additional 7% equity interest. In addition, under
the terms of the agreement, the Company will be obligated to fund up to an
additional $40 million to the IAC North America joint venture, in the event
that the joint venture does not meet certain financial targets in 2007. The
Asset Purchase Agreement also contains a closing date net working capital
adjustment provision and requires the Company to have a minimum level of
recoverable customer engineering and tooling as of the closing date. The closing
of the transaction contemplated by the agreement is subject to various
conditions, including the receipt of required third-party consents, as well
as
other closing conditions customary for transactions of this type. The
transaction is expected to close in the first quarter of 2007.
F-20
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(3) Divestiture of
Interior Business – (continued)
The
Company accounted for the North American interior business as held for sale
as
of December 31, 2006, in accordance with SFAS No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets.” Accordingly, the Company recorded
an estimated pretax loss of $606.9 million to adjust the net carrying value
of the assets and liabilities of the North American interior business to their
recovery value under the terms of the agreement. The Company expects to incur
additional losses on the divestiture through the transaction closure date.
The
total pretax loss is expected to be in the range of $650 million to
$675 million. The Company will not account for the divestiture as a
discontinued operation due to its continuing involvement with IAC North America.
The Company will account for its investment in IAC North America under the
equity method of accounting effective upon the closing of the transaction.
The
major classes of the assets and liabilities of the Company’s North American
interior business that are classified as held for sale in the Company’s
consolidated balance sheets are shown below (in millions):
|
December 31,
|
||||||
|
2006
|
2005
|
|||||
|
Cash
and cash
equivalents
|
|
$
|
19.2
|
|
$
|
10.3
|
|
Accounts
receivable
|
284.5
|
337.5
|
||||
|
Inventories
|
69.2
|
92.7
|
||||
|
Recoverable
customer engineering and tooling
|
52.7
|
157.2
|
||||
|
Other
current assets
|
2.2
|
10.0
|
||||
|
Current
assets of business held for sale
|
427.8
|
607.7
|
||||
|
Property,
plant and equipment, net
|
—
|
404.5
|
||||
|
Other
long-term assets
|
—
|
80.7
|
||||
|
Long-term
assets of business held for sale
|
—
|
485.2
|
||||
|
Total
assets of business held for sale
|
$
|
427.8
|
$
|
1,092.9
|
||
|
December 31,
|
||||||
|
2006
|
2005
|
|||||
|
Accounts
payable and
drafts
|
|
323.7
|
|
477.6
|
||
|
Accrued
liabilities
|
79.8
|
71.7
|
||||
|
Current
portion of long-term debt
|
2.2
|
—
|
||||
|
Current
liabilities of business held for sale
|
405.7
|
549.3
|
||||
|
Long-term
debt
|
19.6
|
—
|
||||
|
Other
long-term liabilities
|
28.9
|
27.6
|
||||
|
Long-term
liabilities of business held for sale
|
48.5
|
27.6
|
||||
|
Total
liabilities of business held for sale
|
$
|
454.2
|
$
|
576.9
|
||
The total
assets of business held for sale include recoverable customer engineering and
tooling contracts and other monetary assets amounting to $92.9 million for
which valuation allowances have been recorded in consolidation in order to
determine the loss on the transaction. The fair value of these monetary assets
approximates the carrying value indicated above before any valuation allowances.
For
further information on the operating results of the Company’s interior business,
see Note 13, “Segment Reporting.”
(4) Sale of Common
Stock
On
November 8, 2006, the Company completed the sale of 8,695,653 shares of
common stock for an aggregate purchase price of $23 per share to affiliates
of
and funds managed by Carl C. Icahn. The net proceeds from the sale of
$199.2 million will be used for general corporate purposes, including
strategic investments in the Company’s core businesses.
F-21
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(5)
Restructuring
2006 and
2005
In order
to address unfavorable industry conditions, the Company began to implement
consolidation and census actions in the second quarter of 2005. These actions
are part of a comprehensive restructuring strategy intended to (i) better align
the Company’s manufacturing capacity with the changing needs of its customers,
(ii) eliminate excess capacity and lower the operating costs of the Company
and
(iii) streamline the Company’s organizational structure and reposition its
business for improved long-term profitability.
In
connection with the restructuring actions, the Company currently expects to
incur pre-tax costs of approximately $300 million, although all aspects of
the restructuring actions have not been finalized. Such costs will include
employee termination benefits, asset impairment charges and contract termination
costs, as well as other incremental costs resulting from the restructuring
actions. These incremental costs will principally include equipment and
personnel relocation costs. The Company also expects to incur incremental
manufacturing inefficiency costs at the operating locations impacted by the
restructuring actions during the related restructuring implementation period.
Restructuring costs will be recognized in the Company’s consolidated financial
statements in accordance with accounting principles generally accepted in the
United States. Generally, charges will be recorded as elements of the
restructuring strategy are finalized. Actual costs recorded in the Company’s
consolidated financial statements may vary from current estimates.
In
connection with the Company’s restructuring actions, the Company recorded
charges of $93.2 million in 2006. This consists of $81.9 million
recorded as cost of sales and $17.2 million recorded as selling, general
and administrative expenses, offset by net gains on the sales of two facilities
and machinery and equipment, which are recorded as other expense, net. The
2006
charges consist of employee termination benefits of $79.3 million, asset
impairment charges of $5.8 million and contract termination costs of
$6.5 million, as well as other net costs of $1.6 million. Employee
termination benefits were recorded based on existing union and employee
contracts, statutory requirements and completed negotiations. Asset impairment
charges relate to the disposal of buildings, leasehold improvements and
machinery and equipment with carrying values of $5.8 million in excess of
related estimated fair values. Contract termination costs include lease
cancellation costs of $0.8 million, which was paid in 2006, the repayment
of various government-sponsored grants of $0.7 million, costs associated
with the termination of subcontractor and other relationships of
$4.1 million and pension benefit curtailment charges of $0.9 million.
A
summary of the 2006 restructuring charges, excluding the $0.9 million
pension and other postretirement benefit plan curtailments, is shown below
(in
millions):
|
Accrual
as
of
December 31, 2005 |
Charges
|
Utilization |
Accrual
as
of
December 31, 2006 |
||||||||||||
|
Cash
|
Non-cash
|
||||||||||||||
|
Employee
termination
benefits
|
|
$
|
15.1
|
|
$
|
79.3
|
|
$
|
(58.0
|
)
|
$
|
—
|
|
$
|
36.4
|
|
Asset
impairments
|
—
|
5.8
|
—
|
(5.8
|
)
|
—
|
|||||||||
|
Contract
termination costs
|
5.0
|
5.6
|
(7.2
|
)
|
—
|
3.4
|
|||||||||
|
Other
related costs
|
—
|
1.6
|
(1.6
|
)
|
—
|
—
|
|||||||||
|
Total
|
$
|
20.1
|
$
|
92.3
|
$
|
(66.8
|
)
|
$
|
(5.8
|
)
|
$
|
39.8
|
|||
In
connection with the Company’s restructuring actions, the Company recorded
charges of $88.9 million in 2005, including $84.6 million recorded as
cost of sales and $6.2 million recorded as selling, general and
administrative expenses. The remaining amounts include a gain on the sale of
a
facility, which is recorded as other expense, net. The 2005 charges consist
of
employee termination benefits of $56.5 million, asset impairment charges of
$15.1 million and contract termination costs of $13.5 million, as well
as other net costs of $3.8 million. Employee termination benefits were
recorded based on existing union and employee contracts, statutory requirements
and completed negotiations. Asset impairment charges relate to the disposal
of
buildings, leasehold improvements and machinery and equipment with carrying
values of $15.1 million in excess of related estimated fair values.
Contract
F-22
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(5) Restructuring
–
(continued)
termination costs include
lease cancellation costs of $3.4 million, which are expected to be paid
through 2006, the repayment of various government-sponsored grants of
$4.8 million, the termination of joint venture, subcontractor and other
relationships of $3.2 million and pension and other postretirement benefit
plan curtailments of $2.1 million.
A
summary of the 2005 restructuring charges, excluding the $2.1 million
pension and other postretirement benefit plan curtailments, is shown below
(in
millions):
|
Utilization |
Accrual
as
of
December 31, 2005 |
|||||||||||
|
Charges
|
Cash
|
Non-cash
|
||||||||||
|
Employee
termination
benefits
|
|
$
|
56.5
|
|
$
|
(41.4
|
)
|
$
|
—
|
|
$
|
15.1
|
|
Asset
impairments
|
15.1
|
—
|
(15.1
|
)
|
—
|
|||||||
|
Contract
termination costs
|
11.4
|
(6.4
|
)
|
—
|
5.0
|
|||||||
|
Other
related costs
|
3.8
|
(3.8
|
)
|
—
|
—
|
|||||||
|
Total
|
$
|
86.8
|
$
|
(51.6
|
)
|
$
|
(15.1
|
)
|
$
|
20.1
|
||
2004
In 2004,
the Company recorded $7.8 million for employee termination benefits and
asset impairments at two U.S. seating facilities. In addition, the Company
also
incurred $39.9 million in estimated costs related to additional facility
consolidations and closures and census reductions.
F-23
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(6) Investments in
Affiliates and Other Related Party Transactions
The
Company’s beneficial ownership in affiliates accounted for under the equity
method is shown below:
|
December 31,
|
|||||||
|
2006
|
2005
|
2004
|
|||||
|
|
|
|
|||||
|
Honduras
Electrical Distribution Systems S. de R.L. de C.V. (Honduras)
|
|
60
|
%
|
60
|
%
|
60
|
%
|
|
Lear-Kyungshin
Sales and Engineering LLC
|
60
|
60
|
60
|
||||
|
Shanghai
Lear STEC Automotive Parts Co., Ltd. (China)
|
55
|
55
|
55
|
||||
|
Lear
Shurlok Electronics (Proprietary) Limited (South Africa)
|
51
|
51
|
—
|
||||
|
Industrias
Cousin Freres, S.L. (Spain)
|
50
|
50
|
50
|
||||
|
Hanil
Lear India Private Limited (India)
|
50
|
50
|
50
|
||||
|
Nanjing
Lear Xindi Automotive Interiors Systems Co., Ltd. (China)
|
50
|
50
|
50
|
||||
|
Lear
Dongfeng Automotive Seating Co., Ltd. (China)
|
50
|
50
|
50
|
||||
|
Dong
Kwang Lear Yuhan Hoesa (Korea)
|
50
|
50
|
50
|
||||
|
Tacle
Seating USA, LLC
|
49
|
—
|
—
|
||||
|
Jiangxi
Jiangling Lear Interior Systems Co. Ltd. (China)
|
41
|
41
|
41
|
||||
|
Beijing
Lear Dymos Automotive Seating and Interior Co., Ltd. (China)
|
40
|
40
|
50
|
||||
|
Total
Interior Systems — America, LLC
|
39
|
39
|
39
|
||||
|
UPM
S.r.L. (Italy)
|
39
|
39
|
39
|
||||
|
Markol
Otomotiv Yan Sanayi VE Ticaret A.S. (Turkey)
|
35
|
35
|
35
|
||||
|
International
Automotive Components Group, LLC
|
33
|
—
|
—
|
||||
|
Lear
Diamond Electro-Circuit Systems Co., Ltd. (Japan)
|
—
|
50
|
50
|
||||
|
RecepTec
Holdings, L.L.C.
|
—
|
21
|
21
|
||||
|
Shenyang
Lear Automotive Seating and Interior Systems Co., Ltd. (China)
|
—
|
—
|
60
|
||||
|
Lear
Furukawa Corporation
|
—
|
—
|
51
|
||||
|
Lear-NHK
Seating and Interior Co., Ltd. (Japan)
|
—
|
—
|
50
|
||||
|
Bing
Assembly Systems, L.L.C.
|
—
|
—
|
49
|
||||
|
JL
Automotive, LLC
|
—
|
—
|
49
|
||||
|
Precision
Fabrics Group, Inc.
|
—
|
—
|
43
|
||||
|
Klingel
Italiana S.R.L. (Italy)
|
—
|
—
|
40
|
||||
Summarized
group financial information for affiliates accounted for under the equity method
as of December 31, 2006 and 2005, and for the years ended December 31,
2006, 2005 and 2004, is shown below (unaudited; in millions):
|
December 31,
|
||||||
|
2006
|
2005
|
|||||
|
Balance
sheet data:
|
||||||
|
Current
assets
|
|
$
|
580.1
|
|
$
|
183.8
|
|
Non-current
assets
|
317.2
|
64.5
|
||||
|
Current
liabilities
|
610.0
|
186.0
|
||||
|
Non-current
liabilities
|
12.9
|
16.5
|
||||
|
For
the Year Ended
December 31,
|
|||||||||
|
2006
|
2005
|
2004
|
|||||||
|
Income
statement data:
|
|||||||||
|
Net
sales
|
|
$
|
956.8
|
|
$
|
1,248.4
|
|
$
|
1,127.1
|
|
Gross
profit
|
50.7
|
56.1
|
87.7
|
||||||
|
Income
before provision for income taxes
|
16.3
|
0.9
|
16.0
|
||||||
|
Net
income (loss)
|
11.5
|
(4.2
|
)
|
11.3
|
|||||
F-24
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(6) Investments in
Affiliates and Other Related Party Transactions – (continued)
As of
December 31, 2006 and 2005, the Company’s aggregate investment in
affiliates was $141.3 million and $28.5 million, respectively. In
addition, the Company had notes and advances due from affiliates of
$12.8 million and $2.8 million as of December 31, 2006 and 2005,
respectively.
A
summary of transactions with affiliates and other related parties is shown
below
(in millions):
|
For
the Year Ended
December 31,
|
|||||||||
|
2006
|
2005
|
2004
|
|||||||
|
Sales
to
affiliates
|
|
$
|
35.8
|
|
$
|
144.9
|
|
$
|
140.3
|
|
Purchases
from affiliates
|
51.1
|
|
224.9
|
120.9
|
|||||
|
Purchases
from other related parties(1)
|
12.5
|
|
13.6
|
12.5
|
|||||
|
Management
and other fees for services provided to affiliates
|
—
|
|
0.6
|
3.3
|
|||||
|
Dividends
received from affiliates
|
1.6
|
|
5.3
|
3.2
|
|||||
——————
(1)
Includes
$4.0 million, $4.3 million and $3.5 million in 2006, 2005 and
2004, respectively, paid to CB Richard Ellis (formerly Trammell Crow Company
in
2005 and 2004) for real estate brokerage, as well as property and project
management services; includes $6.6 million, $7.0 million and
$7.3 million in 2006, 2005 and 2004, respectively, paid to Analysts
International, Sequoia Services Group for the purchase of computer equipment
and
for computer-related services; includes $0.5 million, $0.4 million and
$0.4 million in 2006, 2005 and 2004, respectively, paid to Elite Support
Management Group, L.L.C. for the provision of information technology temporary
support personnel; includes $1.4 million, $1.9 million and
$1.3 million in 2006, 2005 and 2004, respectively, paid to Creative Seating
Innovations, Inc. for prototype tooling and parts; and includes
$0.7 million and $2.4 million in 2006 and 2005, respectively, paid to
the Materials Group for plastic resins. Each entity employed a relative of
the
Company’s Chairman and Chief Executive Officer in 2006. In addition, Elite
Support Management and Creative Seating Innovations were each partially owned
by
relatives of the Company’s Chairman and Chief Executive Officer in 2006. As a
result, such entities may be deemed to be related parties. These purchases
were
made in the ordinary course of the Company’s business and in accordance with the
Company’s normal procedures for engaging service providers or normal sourcing
procedures for suppliers, as applicable.
The
Company’s investments in Honduras Electrical Distribution Systems S. de R.L. de
C.V., Lear-Kyungshin Sales and Engineering LLC and Shanghai Lear STEC Automotive
Parts Co., Ltd. are accounted for under the equity method as the result of
certain approval rights granted to the minority shareholder.
The
Company guarantees 60% of certain of the debt of Honduras Electrical
Distribution Systems S. de R.L. de C.V., 40% of certain of the debt of Beijing
Lear Dymos Automotive Seating and Interior Co., Ltd. and 39% of certain of
the
debt of Total Interior Systems — America, LLC. As of December 31, 2006, the
amount of debt guaranteed by the Company was $17.9 million.
2006
In
October 2006, the Company completed the contribution of substantially all
of its European interior business to International Automotive Components Group,
LLC, a joint venture the Company formed with WL Ross and Franklin (Note 3,
“Divestiture of Interior Business”). In February 2006, the Company formed
Tacle Seating USA, LLC, a joint venture with Tachi-S Engineering U.S.A., Inc.,
to manufacture and supply seat systems.
Also
in
2006, the Company divested its ownership interest in RecepTec Holdings, L.L.C,
recognizing a gain of $13.4 million, which is reflected in equity in net
(income) loss in affiliates in the consolidated statement of operations for
the
year ended December 31, 2006. In addition, the Company and its joint
venture partner dissolved Lear Diamond Electro-Circuit Systems Co., Ltd.
F-25
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(6) Investments in
Affiliates and Other Related Party Transactions – (continued)
2005
In
December 2005, the Company engaged in the restructuring of two of its
previously unconsolidated affiliates, Bing Assembly Systems, L.L.C. (“BAS”) and
JL Automotive, LLC (“JLA”), which involved capital restructurings, changes in
the investors and amendments to the related operating agreements. Each venture
assembles, sequences and manufactures automotive interior components. These
restructurings resulted in the recognition of a $29.8 million loss, which
is reflected in equity in net (income) loss of affiliates in the accompanying
statement of operations for the year ended December 31, 2005. In addition,
as part of the restructurings, a new joint venture partner, Comer Holdings,
LLC,
acquired a 51% ownership interest in Integrated Manufacturing and Assembly,
LLC
(formerly BAS) and CL Automotive, LLC (formerly JLA) with Lear retaining a
49%
ownership interest in both of these ventures. Upon the completion of these
restructurings, which were effective December 31, 2005, it was determined
that both of these ventures are variable interest entities and that the Company
is the primary beneficiary due to its financing of the ventures through member
loans and through various amendments to the respective operating agreements.
Accordingly, the assets and liabilities of these ventures are reflected in
the
Company’s consolidated financial statements. The equity interests of the
ventures not owned by the Company are reflected as minority interests in the
Company’s consolidated financial statements as of December 31, 2005. The
operating results of these ventures are included in the consolidated statements
of operations from the date of consolidation, December 31, 2005.
In
January 2005, the Company acquired an additional 29% of Lear Furukawa
Corporation (“Lear Furukawa”) for $2.3 million, increasing its ownership
interest to 80%. The acquisition was accounted for as a purchase, and
accordingly, the assets purchased and liabilities assumed are reflected in
the
Company’s consolidated financial statements. The operating results of Lear
Furukawa are included in the consolidated statement of operations from the
date
of acquisition. The operating results of the Company, after giving pro forma
effect to this acquisition, are not materially different from reported results.
Previously, Lear Furukawa was accounted for under the equity method as
shareholder resolutions required a two-thirds majority vote for approval of
corporate actions.
In
July 2005, the Company began reflecting the financial position and results
of operations of Shenyang Lear Automotive Seating and Interior Systems Co.,
Ltd.
(“Shenyang”) in its consolidated financial statements, due to a change in the
approval rights granted to the minority shareholder. Previously, Shenyang was
accounted for under the equity method as certain shareholder resolutions
required unanimous shareholder approval.
Also
in
2005, the Company divested its ownership interest in Precision Fabrics Group,
Inc. (“Precision Fabrics”) and recognized a charge of $16.9 million. This
charge is reflected in equity in net (income) loss of affiliates in the
consolidated statement of operations for the year ended December 31, 2005.
In addition, in 2005, the Company sold its ownership interests in Klingel
Italiana S.R.L and dissolved Lear-NHK Seating and Interior Co., Ltd.
2004
In
December 2004, the Company formed Dong Kwang Lear Yuhan Hoesa, a joint
venture with Dong Kwang Tech Co., Ltd., to manufacture and supply seat systems
in Korea. In October 2004, the Company formed Beijing Lear Dymos Automotive
Seating and Interior Co., Ltd., a joint venture with Dymos Incorporated, to
manufacture and supply seat systems in China. In February 2004, the Company
formed two joint ventures, Lear-Kyungshin Sales and Engineering LLC and Honduras
Electrical Distribution Systems S. de R.L. de C.V. (collectively, the “Kyungshin
affiliates”), with Kyungshin Industrial Co., Ltd. to manufacture and supply wire
harnesses.
Also
in
2004, the Company sold its ownership interests in Corporate Eagle Two, L.L.C.,
Saturn Electronics Texas, L.L.C. and Nawon Ind. Co., Ltd. (“Nawon”).
In
conjunction with the acquisition of GHW Grote & Hartmann GmbH in
July 2004, the Company assumed a 40% ownership interest in Klingel Italiana
S.R.L.
F-26
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(7) Short-Term
Borrowings
The
Company utilizes other uncommitted lines of credit as needed for its short-term
working capital fluctuations. As of December 31, 2006, the Company had
unused unsecured lines of credit available from banks of $165.0 million,
subject to certain restrictions imposed by the New Credit Agreement (Note 8,
“Long-Term Debt”). As of December 31, 2006 and 2005, the weighted average
interest rate on outstanding borrowings was 4.0% and 5.0%, respectively.
(8) Long-Term
Debt
A
summary of long-term debt and the related weighted average interest rates,
including the effect of hedging activities described in Note 14, “Financial
Instruments,” is shown below (in millions):
|
December 31,
|
|||||||||||
|
2006
|
2005
|
||||||||||
|
Debt
Instrument
|
Long-Term
Debt |
Weighted
Average Interest Rate |
Long-Term
Debt |
Weighted
Average Interest Rate |
|||||||
|
Amended
and Restated Primary Credit
Facility
|
|
$
|
997.0
|
|
7.49
|
%
|
$
|
400.0
|
|
5.67
|
%
|
|
8.50% Senior
Notes, due 2013
|
300.0
|
8.50
|
%
|
—
|
—
|
||||||
|
8.75% Senior
Notes, due 2016
|
600.0
|
8.75
|
%
|
—
|
—
|
||||||
|
5.75% Senior
Notes, due 2014
|
399.3
|
5.635
|
%
|
399.3
|
5.635
|
%
|
|||||
|
Zero-Coupon
Convertible Senior Notes, due 2022
|
3.6
|
4.75
|
%
|
300.1
|
4.75
|
%
|
|||||
|
8.125% Senior
Notes, due 2008
|
73.3
|
8.125
|
%
|
295.6
|
8.125
|
%
|
|||||
|
8.11% Senior
Notes, due 2009
|
41.4
|
8.11
|
%
|
800.0
|
8.35
|
%
|
|||||
|
Other
|
45.5
|
7.06
|
%
|
57.5
|
6.34
|
%
|
|||||
|
2,460.1
|
2,252.5
|
||||||||||
|
Less
— current portion
|
(25.6
|
)
|
(9.4
|
)
|
|||||||
|
Long-term
debt
|
$
|
2,434.5
|
$
|
2,243.1
|
|||||||
Primary Credit
Facility
On
April 25, 2006, the Company entered into a $2.7 billion Amended and
Restated Credit and Guarantee Agreement (the “New Credit Agreement”), which
provides for maximum revolving borrowing commitments of $1.7 billion and a
term loan facility of $1.0 billion. The New Credit Agreement replaced the
Company’s prior primary credit facility. The $1.7 billion revolving credit
facility matures on March 23, 2010, and the $1.0 billion term loan
facility matures on April 25, 2012. The New Credit Agreement provides for
multicurrency borrowings in a maximum aggregate amount of $750 million,
Canadian borrowings in a maximum aggregate amount of $200 million and
swing-line borrowings in a maximum aggregate amount of $300 million, the
commitments for which are part of the aggregate revolving credit facility
commitment.
Of the
$1.0 billion proceeds under the term loan facility, $400.0 million was
used to repay the term loan facility under the Company’s prior primary credit
facility and $521.1 million was used to repurchase outstanding zero-coupon
convertible senior notes with an accreted value of $303.2 million, Euro
13.0 million aggregate principal amount of the Company’s senior notes due
2008 and $206.6 million aggregate principal amount of the Company’s senior
notes due 2009. In connection with these transactions, the Company recognized
a
net gain of $0.6 million on the extinguishment of debt, which is included
in other expense, net in the consolidated statement of operations for the year
ended December 31, 2006.
F-27
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(8) Long-Term Debt
–
(continued)
As
of
December 31, 2006, the Company had $997.0 million in borrowings
outstanding under the New Credit Agreement, all of which were outstanding under
the term loan facility. There were no revolving borrowings outstanding. As
of
December 31, 2006, the commitment fee on the $1.7 billion revolving
credit facility was 0.50% per annum. Borrowings and repayments under the
Company’s New Credit Agreement (as well as predecessor facilities) are shown
below (in millions):
|
Year
|
Borrowings
|
Repayments
|
||||
|
2006
|
|
$
|
11,978.2
|
|
$
|
11,381.2
|
|
2005
|
8,942.4
|
8,542.4
|
||||
|
2004
|
4,153.1
|
4,153.1
|
||||
Zero-Coupon
Convertible Senior Notes
In
February 2002, the Company issued $640.0 million aggregate principal
amount at maturity of zero-coupon convertible senior notes due 2022 (the
“Convertible Notes”), yielding gross proceeds of $250.3 million. The
Convertible Notes are unsecured and rank equally with the Company’s other
unsecured senior indebtedness, including the Company’s other senior notes. Each
Convertible Note of $1,000 principal amount at maturity was issued at a price
of
$391.06, representing a yield to maturity of 4.75%. Holders of the Convertible
Notes may convert their notes at any time on or before the maturity date at
a
conversion rate, subject to adjustment, of 7.5204 shares of the Company’s common
stock per note, provided that the average per share price of the Company’s
common stock for the 20 trading days immediately prior to the conversion date
is
at least a specified percentage, beginning at 120% upon issuance and declining
1/2% each year thereafter to 110% at maturity, of the accreted value of the
Convertible Note, divided by the conversion rate (the “Contingent Conversion
Trigger”). The Convertible Notes are also convertible (1) if the long-term
credit rating assigned to the Convertible Notes by either Moody’s Investors
Service or Standard & Poor’s Ratings Services is reduced below Ba3 or BB-,
respectively (which is currently the case), or either ratings agency withdraws
its long-term credit rating assigned to the notes, (2) if the Company calls
the
Convertible Notes for redemption or (3) upon the occurrence of specified other
events.
As
discussed above, during the second quarter of 2006, the Company repurchased
substantially all of the Convertible Notes with borrowings under its New Credit
Agreement. As of December 31, 2006, notes with an accreted value of
$3.6 million were outstanding.
Other Senior
Notes
In
November 2006, the Company issued $300 million aggregate principal
amount of unsecured 8.50% senior notes due 2013 (the “2013 Notes”) and
$600 million aggregate principal amount of unsecured 8.75% senior notes due
2016 (the “2016 Notes”). The notes are unsecured and rank equally with the
Company’s other unsecured senior indebtedness, including the Company’s other
senior notes. The proceeds from these notes were used to repurchase the
Company’s senior notes due 2008 (the “2008 Notes”) and senior notes due 2009
(the “2009 Notes”). The Company repurchased 2008 Notes and 2009 Notes with an
aggregate principal amount of Euro 181.4 million and $552.0 million,
respectively, for an aggregate purchase price of $835.8 million, including
related fees. In connection with these transactions, the Company recognized
a
loss of $48.5 million on the extinguishment of debt, which is included in
other expense, net in the consolidated statement of operations for the year
ended December 31, 2006. In January 2007, the Company completed an
exchange offer of the 2013 Notes and the 2016 Notes for substantially identical
notes registered under the Securities Act of 1933, as amended. Interest on
both
the 2013 Notes and 2016 Notes is payable on June 1 and December 1 of
each year.
F-28
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(8) Long-Term Debt
–
(continued)
The
Company may redeem all or part of the 2013 Notes and the 2016 Notes, at its
option, at any time subsequent to December 1, 2010, in the case of the 2013
Notes, and December 1, 2011, in the case of the 2016 Notes, at the
redemption prices set forth below, together with any interest accrued but not
yet paid to the date of redemption. These redemption prices, expressed as a
percentage of the principal amount due, are set forth below:
|
Twelve-Month
Period
Commencing December 1, |
||||||
|
2013
Notes
|
2016
Notes
|
|||||
|
2010
|
|
104.250
|
%
|
|
N/A
|
|
|
2011
|
102.125
|
%
|
104.375
|
%
|
||
|
2012
|
100.0
|
%
|
102.917
|
%
|
||
|
2013
|
100.0
|
%
|
101.458
|
%
|
||
|
2014
and thereafter
|
100.0
|
%
|
100.0
|
%
|
||
The
Company may redeem all or part of the 2013 Notes and the 2016 Notes, at its
option, at any time prior to December 1, 2010, in the case of the 2013
Notes, and December 1, 2011, in the case of the 2016 Notes, at the greater
of (a) 100% of the principal amount of the notes to be redeemed or (b) the
sum
of the present values of the redemption price set forth above and the remaining
scheduled interest payments from the redemption date through December 1,
2010, in the case of the 2013 Notes, or December 1, 2011, in the case of
the 2016 Notes, discounted to the redemption date on a semiannual basis at
the
applicable treasury rate plus 50 basis points, together with any interest
accrued but not yet paid to the date of redemption.
In
addition to the senior notes discussed above, the Company has outstanding
$399.3 million aggregate principal amount of senior notes due 2014 (the
“2014 Notes”). Interest on the 2014 Notes is payable on February 1 and
August 1 of each year. The Company also has outstanding Euro
55.6 million ($73.3 million based on the exchange rate in effect as of
December 31, 2006) aggregate principal amount of 2008 Notes. Interest on
the 2008 Notes is payable on April 1 and October 1 of each year.
During 2006, the Company repurchased an aggregate principal amount of Euro
194.4 million ($257.0 million based on the exchange rates in effect as
of the transaction dates) of the 2008 Notes using proceeds from the issuance
of
the 2013 Notes and 2016 Notes and borrowings under the New Credit Agreement.
In
addition, the Company has outstanding $41.4 million aggregate principal
amount of 2009 Notes. Interest on the 2009 Notes is payable on May 15 and
November 15 of each year. During 2006, the Company repurchased an aggregate
principal amount of $758.6 million of the 2009 Notes using proceeds from
the issuance of the 2013 Notes and 2016 Notes and borrowings under the New
Credit Agreement.
The
Company may redeem all or part of the 2014 Notes, the 2008 Notes and the 2009
Notes, at its option, at any time, at the greater of (a) 100% of the principal
amount of the notes to be redeemed or (b) the sum of the present values of
the
remaining scheduled payments of principal and interest thereon from the
redemption date to the maturity date, discounted to the redemption date on
a
semiannual basis at the applicable treasury rate plus 20 basis points in the
case of the 2014 Notes, at the Bund rate plus 50 basis points in the case of
the
2008 Notes and at the applicable treasury rate plus 50 basis points in the
case
of the 2009 Notes, together with any interest accrued but not yet paid to the
date of the redemption.
Guarantees
The
senior notes of the Company are senior unsecured obligations and rank pari
passu
in right of payment with all of the Company’s existing and future unsubordinated
unsecured indebtedness. The Company’s obligations under the senior notes are
guaranteed, on a joint and several basis, by certain of its subsidiaries, which
are primarily domestic subsidiaries and all of which are directly or indirectly
wholly owned by the Company (Note 18, “Supplemental Guarantor Condensed
Consolidating Financial Statements”). The Company’s obligations under the New
Credit Agreement are secured by a pledge of all or a portion of the capital
stock of certain of its subsidiaries, including substantially all of its
first-tier subsidiaries, and are partially secured by a security interest in
the
Company’s assets and the assets of certain of its domestic subsidiaries. In
addition, the Company’s obligations under the New Credit Agreement are
guaranteed by the same subsidiaries that guarantee the Company’s obligations
under the senior notes.
F-29
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(8) Long-Term Debt
–
(continued)
Covenants
The New
Credit Agreement contains certain affirmative and negative covenants, including
(i) limitations on fundamental changes involving the Company or its
subsidiaries, asset sales and restricted payments, (ii) a limitation on
indebtedness with a maturity shorter than the term loan facility, (iii) a
limitation on aggregate subsidiary indebtedness to an amount which is no more
than 4% of consolidated total assets, (iv) a limitation on aggregate secured
indebtedness to an amount which is no more than $100 million and (v)
requirements that the Company maintain an initial leverage ratio of not more
than 4.0 to 1, as of December 31, 2006, with decreases over time and an
initial interest coverage ratio of not less than 2.50 to 1 with increases over
time.
The
leverage and interest coverage ratios, as well as the related components of
their computation, are defined in the New Credit Agreement. The leverage ratio
is calculated as the ratio of consolidated indebtedness to consolidated
operating profit. For the purpose of the covenant calculation, (i) consolidated
indebtedness is generally defined as reported debt, net of cash and excludes
transactions related to the Company’s asset-backed securitization and factoring
facilities and (ii) consolidated operating profit is generally defined as net
income excluding income taxes, interest expense, depreciation and amortization
expense, other income and expense, minority interests in income of subsidiaries
in excess of net equity earnings in affiliates, certain restructuring and other
non-recurring charges, extraordinary gains and losses and other specified
non-cash items. Consolidated operating profit is a non-GAAP financial measure
that is presented not as a measure of operating results, but rather as a measure
used to determine covenant compliance under the Company’s primary credit
facility. The interest coverage ratio is calculated as the ratio of consolidated
operating profit to consolidated interest expense. For the purpose of the
covenant calculation, consolidated interest expense is generally defined as
interest expense plus any discounts or expenses related to the Company’s
asset-backed securitization facility less amortization of deferred finance
fees
and interest income. As of December 31, 2006, the Company was in compliance
with all covenants set forth in the New Credit Agreement. The Company’s leverage
and interest coverage ratios were 2.4 to 1 and 4.2 to 1, respectively.
Reconciliations
of (i) consolidated indebtedness to reported debt, (ii) consolidated operating
profit to income before provision for income taxes and cumulative effect of
a
change in accounting principle and (iii) consolidated interest expense to
reported interest expense are shown below (in millions):
|
December 31,
2006 |
|||
|
Consolidated
indebtedness
|
|
$
|
1,996.7
|
|
Cash
and cash equivalents
|
502.7
|
||
|
Reported
debt
|
$
|
2,499.4
|
|
F-30
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(8) Long-Term
Debt
– (continued)
|
Year
Ended
December 31, 2006 |
||||
|
Consolidated
operating profit
|
|
$
|
835.9
|
|
|
Depreciation
and amortization
|
(392.2
|
)
|
||
|
Consolidated
interest expense
|
(200.4
|
)
|
||
|
Loss
on divestiture of interior business
|
(636.0
|
)
|
||
|
Other
expense, net (excluding certain costs related to asset-backed
securitization facility)
|
(77.7
|
)
|
||
|
Restructuring
charges
|
(105.5
|
)
|
||
|
Impairment
charges
|
(12.9
|
)
|
||
|
Other
non-cash items
|
(64.6
|
)
|
||
|
Loss
before provision for income taxes, minority interests in consolidated
subsidiaries, equity
in net income of affiliates and cumulative effect of a change in accounting principle |
$
|
(653.4
|
)
|
|
|
Consolidated
interest expense
|
$
|
200.4
|
||
|
Certain
costs related to asset-backed securitization facility
|
(8.0
|
)
|
||
|
Amortization
of deferred financing fees
|
8.7
|
|||
|
Bank
facility and other fees
|
8.7
|
|||
|
Reported
interest expense
|
$
|
209.8
|
||
The New
Credit Agreement also contains customary events of default, including an event
of default triggered by a change of control of the Company. The senior notes
due
2013 and 2016 (having an aggregate principal amount outstanding of
$900 million as of December 31, 2006) provide holders of the notes the
right to require the Company to repurchase all or any part of their notes at
a
purchase price equal to 101% of their principal amount, plus accrued and unpaid
interest, upon a “change of control” (as defined in the indenture governing the
notes). The transaction contemplated by the Agreement and Plan of Merger with
affiliates of American Real Estate Partners, L.P. would not constitute a change
of control for these purposes (Note 17, “Subsequent Event”). The indentures
governing the Company’s other senior notes do not contain a change in control
repurchase obligation.
With
the
exception of the Convertible Notes, the senior notes also contain covenants
restricting the ability of the Company and its subsidiaries to incur liens
and
to enter into sale and leaseback transactions. With respect to the indenture
governing the Company’s Convertible Notes, the Company received consents from a
majority of the holders of the Convertible Notes allowing the Company to execute
a supplemental indenture which eliminated the covenants and related provisions
in the indenture that restricted the Company’s ability to incur liens and to
enter into sale and leaseback transactions. As of December 31, 2006, the
Company was in compliance with all covenants and other requirements set forth
in
its senior notes.
Other
As of
December 31, 2006, other long-term debt was principally made up of amounts
outstanding under term loans and capital leases.
F-31
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(8) Long-Term
Debt
– (continued)
Scheduled
Maturities
As
of
December 31, 2006, the scheduled maturities of long-term debt for the five
succeeding years are shown below (in millions):
|
Year
|
Maturities
|
||
|
2007
|
|
$
|
25.6
|
|
2008
|
85.9
|
||
|
2009
|
53.1
|
||
|
2010
|
10.7
|
||
|
2011
|
8.6
|
||
(9) Income
Taxes
A
summary of income (loss) before provision for income taxes, minority interests
in consolidated subsidiaries and equity in net (income) loss of affiliates
and
the components of provision for income taxes is shown below (in millions):
|
For
the Year Ended
December 31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Income
(loss) before provision for income taxes, minority interests
in
consolidated subsidiaries, equity in net (income) loss of affiliates and cumulative effect of a change in accounting principle |
||||||||||
|
Domestic
|
|
$
|
(785.3
|
)
|
$
|
(1,520.8
|
)
|
$
|
47.7
|
|
|
Foreign
|
131.9
|
392.2
|
516.6
|
|||||||
|
$
|
(653.4
|
)
|
$
|
(1,128.6
|
)
|
$
|
564.3
|
|||
|
Domestic
provision for income taxes:
|
||||||||||
|
Current
provision (benefit)
|
$
|
30.6
|
$
|
(12.9
|
)
|
$
|
7.2
|
|||
|
Deferred
provision (benefit)
|
(1.6
|
)
|
65.3
|
(4.0
|
)
|
|||||
|
Total
domestic provision
|
29.0
|
52.4
|
3.2
|
|||||||
|
Foreign
provision for income taxes:
|
||||||||||
|
Current
provision
|
79.3
|
162.5
|
112.1
|
|||||||
|
Deferred
provision (benefit)
|
(53.4
|
)
|
(20.6
|
)
|
12.7
|
|||||
|
Total
foreign provision
|
25.9
|
141.9
|
124.8
|
|||||||
|
Provision
for income taxes
|
$
|
54.9
|
$
|
194.3
|
$
|
128.0
|
||||
The
domestic provision includes withholding taxes related to dividends and royalties
paid by the Company’s foreign subsidiaries. The foreign deferred provision
(benefit) includes the benefit of prior unrecognized net operating loss
carryforwards of $14.1 million, $1.8 million and $5.7 million for
the years ended December 31, 2006, 2005 and 2004, respectively.
F-32
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(9) Income Taxes
–
(continued)
A
summary of the differences between the provision (benefit) for income taxes
calculated at the United States federal statutory income tax rate of 35% and
the
consolidated provision for income taxes is shown below (in millions):
|
For
the Year Ended
December 31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Income
(loss) before provision for income taxes, minority interests
in
consolidated subsidiaries, equity in net (income) loss of affiliates and cumulative effect of a change in accounting principle multiplied by the United States federal statutory rate |
|
$
|
(228.7
|
)
|
$
|
(395.0
|
)
|
$
|
197.5
|
|
|
Differences
in income taxes on foreign earnings, losses and remittances
|
10.2
|
(34.0
|
)
|
(46.5
|
)
|
|||||
|
Valuation
allowance adjustments
|
259.4
|
275.2
|
13.3
|
|||||||
|
Research
and development credits
|
(11.4
|
)
|
(22.6
|
)
|
(16.6
|
)
|
||||
|
Goodwill
impairment
|
1.0
|
354.4
|
—
|
|||||||
|
Investment
credit / grants
|
(6.7
|
)
|
(22.8
|
)
|
(7.4
|
)
|
||||
|
Other
|
31.1
|
39.1
|
(12.3
|
)
|
||||||
|
Provision
for income taxes
|
$
|
54.9
|
$
|
194.3
|
$
|
128.0
|
||||
For the
years ended December 31, 2006, 2005 and 2004, income in foreign
jurisdictions with tax holidays was $109.2 million, $54.7 million and
$143.4 million, respectively. Such tax holidays generally expire from 2007
through 2018.
Deferred
income taxes represent temporary differences in the recognition of certain
items
for income tax and financial reporting purposes. A summary of the components
of
the net deferred income tax asset (liability) is shown below (in millions):
|
December 31,
|
|||||||
|
2006
|
2005
|
||||||
|
Deferred
income tax assets:
|
|||||||
|
Tax
loss
carryforwards
|
|
$
|
451.1
|
|
$
|
259.0
|
|
|
Tax
credit carryforwards
|
140.1
|
85.7
|
|||||
|
Retirement
benefit plans
|
113.5
|
90.1
|
|||||
|
Accrued
liabilities
|
66.7
|
71.7
|
|||||
|
Reserves
related to current assets
|
41.1
|
29.7
|
|||||
|
Self-insurance
reserves
|
19.6
|
20.6
|
|||||
|
Defined
benefit plan liability adjustments
|
84.0
|
39.5
|
|||||
|
Deferred
compensation
|
15.3
|
20.2
|
|||||
|
Recoverable
customer engineering and tooling
|
—
|
57.5
|
|||||
|
Long-term
asset basis differences
|
102.2
|
—
|
|||||
|
Derivative
instruments and hedging
|
8.2
|
22.0
|
|||||
|
Other
|
0.2
|
—
|
|||||
|
1,042.0
|
696.0
|
||||||
|
Valuation
allowance
|
(843.9
|
)
|
(478.3
|
)
|
|||
|
$
|
198.1
|
$
|
217.7
|
||||
F-33
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(9) Income Taxes
–
(continued)
|
December 31,
|
|||||||
|
2006
|
2005
|
||||||
|
Deferred
income tax liabilities:
|
|||||||
|
Long-term
asset basis
differences
|
|
$
|
—
|
|
$
|
(137.4
|
)
|
|
Recoverable
customer engineering and tooling
|
(14.7
|
)
|
—
|
||||
|
Undistributed
earnings of foreign subsidiaries
|
(106.4
|
)
|
(86.8
|
)
|
|||
|
Other
|
—
|
(4.3
|
)
|
||||
|
$
|
(121.1
|
)
|
$
|
(228.5
|
)
|
||
|
Net
deferred income tax asset (liability)
|
$
|
77.0
|
$
|
(10.8
|
)
|
||
During
2005, the Company concluded that it was no longer more likely than not that
it
would realize its U.S. deferred tax assets. As a result, in the fourth quarter
of 2005, the Company recorded a tax charge of $300.3 million comprised of
(i) a full valuation allowance in the amount of $255.0 million with respect
to its net U.S. deferred tax assets and (ii) an increase in related tax reserves
of $45.3 million. During 2006, the Company continued to incur losses in the
United States for which no tax benefit was recorded and the related U.S.
valuation allowance increased to $545.0 million. In addition, deferred tax
assets have been fully offset by a valuation allowance in certain foreign
jurisdictions due to a history of operating losses. The Company intends to
maintain these valuation allowances until it is more likely than not that the
deferred taxes within these countries will be realized. The classification
of
the net deferred income tax liability is shown below (in millions):
|
December 31,
|
|||||||
|
2006
|
2005
|
||||||
|
Deferred
income tax assets:
|
|||||||
|
Current
|
|
$
|
83.3
|
|
$
|
138.6
|
|
|
Long-term
|
110.5
|
76.0
|
|||||
|
Deferred
income tax liabilities:
|
|||||||
|
Current
|
(20.8
|
)
|
(33.3
|
)
|
|||
|
Long-term
|
(96.0
|
)
|
(192.1
|
)
|
|||
|
Net
deferred income tax asset (liability)
|
$
|
77.0
|
$
|
(10.8
|
)
|
||
Deferred
income taxes have not been provided on $975.6 million of certain
undistributed earnings of the Company’s foreign subsidiaries as such amounts are
considered to be permanently reinvested. It is not practicable to determine
the
unrecognized deferred income tax liability on these earnings because the actual
tax liability on these earnings, if any, is dependent on circumstances existing
when remittance occurs.
The
Company operates in multiple jurisdictions throughout the world, and its tax
returns are periodically audited or subject to review by both domestic and
foreign tax authorities. The Company reviews its income tax positions on a
continuous basis and records a tax reserve when it believes a liability is
probable and can be reasonably estimated in accordance with SFAS No. 5,
“Accounting for Contingencies.” The tax issues which resulted in reserves will
be resolved on an item by item basis upon the occurrence of certain events,
which may include the resolution of tax audits and the expiration of the statute
of limitations for the relevant taxing authority to examine the Company’s tax
position. In addition, the reserves may be affected by changes in tax laws,
the
issuance of new or proposed regulations or the availability of new information
that impacts a tax exposure item. Reserves associated with income tax
uncertainties are included in either accrued liabilities or other long-term
liabilities and are not included as a component of deferred tax assets or
liabilities. Interest and penalties, where applicable, are included in the
tax
reserves.
As of
December 31, 2006, the Company had tax loss carryforwards of
$1.5 billion. Of the total loss carryforwards, $872.0 million has no
expiration date and $600.9 million expires from 2007 through 2026. In
addition, the Company had tax credit carryforwards of $140.1 million
comprised principally of U.S. foreign tax credits, research and development
credits and investment tax credits that generally expire between 2015 and 2026.
F-34
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(10) Pension and
Other
Postretirement Benefit Plans
The
Company has noncontributory defined benefit pension plans covering certain
domestic employees and certain employees in foreign countries, principally
Canada. The Company’s salaried pension plans provide benefits based on final
average earnings formulas. The Company’s hourly pension plans provide benefits
under flat benefit and cash balance formulas. The Company also has contractual
arrangements with certain employees which provide for supplemental retirement
benefits. In general, the Company’s policy is to fund its pension benefit
obligation based on legal requirements, tax considerations and local practices.
The
Company has postretirement benefit plans covering a portion of the Company’s
domestic and Canadian employees. The Company’s postretirement benefit plans
generally provide for the continuation of medical benefits for all eligible
employees who complete ten years of service after age 45 and retire from the
Company at age 55 or older. The Company does not fund its postretirement benefit
obligation. Rather, payments are made as costs are incurred by covered retirees.
Obligations and
Funded Status
A
reconciliation of the change in benefit obligation, the change in plan assets
and the net amount recognized in the consolidated balance sheets is shown below
(based on a September 30 measurement date, in millions):
|
December 31,
|
|||||||||||||
|
Pension
|
Other
Postretirement
|
||||||||||||
|
2006
|
2005
|
2006
|
2005
|
||||||||||
|
Change
in benefit obligation:
|
|||||||||||||
|
Benefit
obligation at beginning of
year
|
|
$
|
788.3
|
|
$
|
630.8
|
|
$
|
265.5
|
|
$
|
222.1
|
|
|
Service
cost
|
50.3
|
41.0
|
12.7
|
11.7
|
|||||||||
|
Interest
cost
|
44.2
|
37.6
|
15.0
|
13.5
|
|||||||||
|
Amendments
|
3.5
|
5.6
|
—
|
(1.0
|
)
|
||||||||
|
Actuarial
(gain) loss
|
(30.5
|
)
|
96.0
|
(16.3
|
)
|
22.4
|
|||||||
|
Benefits
paid
|
(24.9
|
)
|
(21.6
|
)
|
(9.1
|
)
|
(7.8
|
)
|
|||||
|
Curtailment
(gain) loss
|
(4.6
|
)
|
(1.7
|
)
|
—
|
0.1
|
|||||||
|
Special
termination benefits
|
1.7
|
0.1
|
0.4
|
0.3
|
|||||||||
|
Settlements
|
—
|
(1.5
|
)
|
—
|
—
|
||||||||
|
Acquisitions,
new plans and other
|
22.5
|
0.5
|
—
|
—
|
|||||||||
|
Translation
adjustment
|
10.4
|
1.5
|
(0.3
|
)
|
4.2
|
||||||||
|
Benefit
obligation at end of year
|
$
|
860.9
|
$
|
788.3
|
$
|
267.9
|
$
|
265.5
|
|||||
F-35
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(10) Pension and
Other Postretirement Benefit Plans – (continued)
|
December 31,
|
|||||||||||||
|
Pension
|
Other
Postretirement
|
||||||||||||
|
2006
|
2005
|
2006
|
2005
|
||||||||||
|
Change
in plan assets:
|
|||||||||||||
|
Fair
value of plan assets at beginning of
year
|
|
$
|
474.2
|
|
$
|
394.5
|
|
$
|
—
|
|
$
|
—
|
|
|
Actual
return on plan assets
|
42.7
|
45.6
|
—
|
—
|
|||||||||
|
Employer
contributions
|
69.5
|
48.7
|
9.1
|
7.8
|
|||||||||
|
Benefits
paid
|
(24.9
|
)
|
(21.6
|
)
|
(9.1
|
)
|
(7.8
|
)
|
|||||
|
Settlements
|
—
|
(1.5
|
)
|
—
|
—
|
||||||||
|
Acquisitions,
new plans and other
|
11.5
|
0.2
|
—
|
—
|
|||||||||
|
Translation
adjustment
|
0.6
|
8.3
|
—
|
—
|
|||||||||
|
Fair
value of plan assets at end of year
|
$
|
573.6
|
$
|
474.2
|
$
|
—
|
$
|
—
|
|||||
|
Funded
status
|
$
|
(287.3
|
)
|
$
|
(314.1
|
)
|
$
|
(267.9
|
)
|
$
|
(265.5
|
)
|
|
|
Contributions
between September 30 and December 31
|
11.9
|
15.8
|
2.1
|
1.8
|
|||||||||
|
(275.4
|
)
|
(298.3
|
)
|
(265.8
|
)
|
(263.7
|
)
|
||||||
|
Unrecognized
net actuarial loss
|
182.9
|
111.3
|
|||||||||||
|
Unrecognized
net transition (asset) obligation
|
(0.2
|
)
|
8.9
|
||||||||||
|
Unrecognized
prior service cost (credit)
|
50.5
|
(37.1
|
)
|
||||||||||
|
Net
amount recognized
|
$
|
(275.4
|
)
|
$
|
(65.1
|
)
|
$
|
(265.8
|
)
|
$
|
(180.6
|
)
|
|
|
Amounts
recognized in the consolidated balance sheets:
|
|||||||||||||
|
Accrued
liabilities
|
$
|
(4.9
|
)
|
$
|
(19.8
|
)
|
$
|
(10.0
|
)
|
$
|
(7.6
|
)
|
|
|
Other
long-term liabilities
|
(270.5
|
)
|
(208.8
|
)
|
(255.8
|
)
|
(173.0
|
)
|
|||||
|
Other
long-term assets (intangible asset)
|
48.5
|
—
|
|||||||||||
|
Accumulated
other comprehensive loss
|
115.0
|
—
|
|||||||||||
|
Net
amount recognized
|
$
|
(275.4
|
)
|
$
|
(65.1
|
)
|
$
|
(265.8
|
)
|
$
|
(180.6
|
)
|
|
As of
December 31, 2006 and 2005, the accumulated benefit obligation for all of
the Company’s pension plans was $766.2 million and $697.2 million,
respectively. As of December 31, 2006, the majority of the Company’s
pension plans had accumulated benefit obligations in excess of plan assets.
As
of December 31, 2005, all of the Company’s pension plans had accumulated
benefit obligations in excess of plan assets. The projected benefit obligation,
the accumulated benefit obligation and the fair value of plan assets of pension
plans with accumulated benefit obligations in excess of plan assets were
$860.4 million, $765.9 million and $573.3 million, respectively,
as of December 31, 2006, and $788.3 million, $697.2 million and
$474.2 million, respectively, as of December 31, 2005.
F-36
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(10) Pension and
Other Postretirement Benefit Plans – (continued)
New Accounting
Pronouncement
The
Financial Accounting Standards Board (“FASB”) issued SFAS No. 158, “Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans — an
amendment of FASB Statements No. 87, 88, 106, and 132(R).” This statement
requires recognition of the funded status of a company’s defined benefit pension
and postretirement benefit plans as an asset or liability on the balance sheet.
Previously, under the provisions of SFAS No. 87, “Employers’ Accounting for
Pensions,” and SFAS No. 106, “Employers’ Accounting for Postretirement Benefits
Other Than Pensions,” the asset or liability recorded on the balance sheet
reflected the funded status of the plan, net of certain unrecognized items
that
qualified for delayed income statement recognition. Under SFAS
No. 158, these previously unrecognized items are to be recorded in accumulated other comprehensive loss when the recognition provisions are adopted. The Company adopted the recognition provisions as of December 31, 2006, and the funded status of its defined benefit plans is reflected in its consolidated balance sheet as of December 31, 2006. In accordance with the transition provisions of SFAS No. 158, prior periods have not been restated. The incremental effect of applying the recognition provisions of SFAS No. 158 on the Company’s consolidated balance sheet as of December 31, 2006, is shown below (in millions):
No. 158, these previously unrecognized items are to be recorded in accumulated other comprehensive loss when the recognition provisions are adopted. The Company adopted the recognition provisions as of December 31, 2006, and the funded status of its defined benefit plans is reflected in its consolidated balance sheet as of December 31, 2006. In accordance with the transition provisions of SFAS No. 158, prior periods have not been restated. The incremental effect of applying the recognition provisions of SFAS No. 158 on the Company’s consolidated balance sheet as of December 31, 2006, is shown below (in millions):
|
Before
Adoption of SFAS No. 158 |
Adjustments
|
After
Adoption of SFAS No. 158 |
||||||||
|
Intangible
assets (other long-term
assets)
|
|
$
|
45.7
|
|
$
|
(45.7
|
)
|
$
|
—
|
|
|
Liability
for defined benefit plan obligations (current and
long-term liabilities) |
(420.3
|
)
|
(120.9
|
)
|
(541.2
|
)
|
||||
|
Accumulated
other comprehensive loss — (stockholders’ equity)
|
97.6
|
166.6
|
264.2
|
|||||||
See Note
16, “Accounting Pronouncements,” for a discussion of other provisions of SFAS
No. 158 that have not yet been adopted by the Company.
Accumulated Other
Comprehensive Loss
Amounts
recorded in accumulated other comprehensive loss not yet recognized in net
periodic benefit cost as of December 31, 2006, are shown below:
|
Pension
|
Other
Postretirement |
||||||
|
Net
actuarial
loss
|
|
$
|
150.1
|
|
$
|
91.8
|
|
|
Net
transition (asset) obligation
|
(0.1
|
)
|
7.8
|
||||
|
Prior
service cost (credit)
|
47.9
|
(33.3
|
)
|
||||
|
$
|
197.9
|
$
|
66.3
|
||||
Amounts
recorded in accumulated other comprehensive loss that are expected to be
recognized as components of net periodic benefit cost in the year ended
December 31, 2007, are shown below (in millions):
|
|
Pension
|
Other
Postretirement |
|||||
|
Amortization
of actuarial
loss
|
|
$
|
3.1
|
|
$
|
4.5
|
|
|
Amortization
of net transition (asset) obligation
|
(0.1
|
)
|
1.0
|
||||
|
Amortization
of prior service cost (credit)
|
4.7
|
(3.5
|
)
|
||||
|
$
|
7.7
|
$
|
2.0
|
||||
F-37
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(10) Pension and
Other Postretirement Benefit Plans – (continued)
Net Periodic
Benefit Cost
The
components of the Company’s net periodic benefit cost are shown below (in
millions):
|
For
the Year Ended
December 31,
|
|||||||||||||||||||
|
Pension
|
Other
Postretirement
|
||||||||||||||||||
|
2006
|
2005
|
2004
|
2006
|
2005
|
2004
|
||||||||||||||
|
Service
cost
|
|
$
|
50.3
|
|
$
|
41.0
|
|
$
|
36.7
|
|
$
|
12.7
|
|
$
|
11.7
|
|
$
|
13.1
|
|
|
Interest
cost
|
44.2
|
37.6
|
32.2
|
15.0
|
13.5
|
12.3
|
|
||||||||||||
|
Expected
return on plan assets
|
(39.4
|
)
|
(30.2
|
)
|
(24.3
|
)
|
—
|
—
|
—
|
|
|||||||||
|
Amortization
of actuarial loss
|
7.1
|
3.0
|
2.8
|
5.8
|
3.6
|
3.9
|
|
||||||||||||
|
Amortization
of transition (asset) obligation
|
(0.1
|
)
|
(0.2
|
)
|
(0.3
|
)
|
1.0
|
1.1
|
1.2
|
|
|||||||||
|
Amortization
of prior service cost (credit)
|
5.4
|
5.4
|
4.3
|
(3.7
|
)
|
(3.1
|
)
|
(2.8
|
)
|
||||||||||
|
Special
termination benefits
|
1.7
|
—
|
0.1
|
0.4
|
0.3
|
0.2
|
|
||||||||||||
|
Settlement
loss
|
—
|
1.0
|
0.5
|
—
|
—
|
—
|
|
||||||||||||
|
Curtailment
(gain) loss
|
0.9
|
0.5
|
1.9
|
—
|
1.4
|
(7.7
|
)
|
||||||||||||
|
Net
periodic benefit cost
|
$
|
70.1
|
$
|
58.1
|
$
|
53.9
|
$
|
31.2
|
$
|
28.5
|
$
|
20.2
|
|||||||
Assumptions
The
weighted-average actuarial assumptions used in determining the benefit
obligation are shown below:
|
December 31,
|
|||||||||
|
Pension
|
Other
Postretirement |
||||||||
|
2006
|
2005
|
2006
|
2005
|
||||||
|
Discount
rate:
|
|
||||||||
|
Domestic
plans
|
|
6.00
|
%
|
5.75
|
%
|
5.90
|
%
|
5.70
|
%
|
|
Foreign
plans
|
5.00
|
%
|
5.00
|
%
|
5.30
|
%
|
5.30
|
%
|
|
|
Rate
of compensation increase:
|
|
||||||||
|
Domestic
plans
|
3.75
|
%
|
3.75
|
%
|
N/A
|
N/A
|
|||
|
Foreign
plans
|
4.00
|
%
|
3.25
|
%
|
N/A
|
N/A
|
|||
The
weighted-average actuarial assumptions used in determining net periodic benefit
cost are shown below:
|
For
the Year Ended
December 31,
|
|||||||||||||
|
Pension
|
Other
Postretirement
|
||||||||||||
|
2006
|
2005
|
2004
|
2006
|
2005
|
2004
|
||||||||
|
Discount
rate:
|
|||||||||||||
|
Domestic
plans
|
|
5.75
|
%
|
6.00
|
%
|
6.25
|
%
|
5.70
|
%
|
6.00
|
%
|
6.25
|
%
|
|
Foreign
plans
|
5.00
|
%
|
6.00
|
%
|
6.25
|
%
|
5.30
|
%
|
6.50
|
%
|
6.50
|
%
|
|
|
Expected
return on plan assets:
|
|||||||||||||
|
Domestic
plans
|
8.25
|
%
|
7.75
|
%
|
7.75
|
%
|
N/A
|
N/A
|
N/A
|
||||
|
Foreign
plans
|
6.90
|
%
|
7.00
|
%
|
7.00
|
%
|
N/A
|
N/A
|
N/A
|
||||
|
Rate
of compensation increase:
|
|||||||||||||
|
Domestic
plans
|
3.75
|
%
|
3.00
|
%
|
3.00
|
%
|
N/A
|
N/A
|
N/A
|
||||
|
Foreign
plans
|
3.90
|
%
|
3.25
|
%
|
3.25
|
%
|
N/A
|
N/A
|
N/A
|
||||
F-38
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(10) Pension and
Other Postretirement Benefit Plans – (continued)
The
expected return on plan assets is determined based on several factors, including
adjusted historical returns, historical risk premiums for various asset classes
and target asset allocations within the portfolio. Adjustments made to the
historical returns are based on recent return experience in the equity and
fixed
income markets and the belief that deviations from historical returns are likely
over the relevant investment horizon.
For
measurement purposes, domestic healthcare costs were assumed to increase 9%
in
2007, grading down over time to 5% in seven years. Foreign healthcare costs
were
assumed to increase 7% in 2007, grading down over time to 4% in eleven years
on
a weighted average basis.
Assumed
healthcare cost trend rates have a significant effect on the amounts reported
for the postretirement benefit plans. A 1% increase in the assumed rate of
healthcare cost increases each year would increase the postretirement benefit
obligation as of December 31, 2006, by $59.1 million and increase the
postretirement net periodic benefit cost by $7.0 million for the year then
ended. A 1% decrease in the assumed rate of healthcare cost increases each
year
would decrease the postretirement benefit obligation as of December 31,
2006, by $46.2 million and decrease the postretirement net periodic benefit
cost by $5.4 million for the year then ended.
Plan
Assets
The
Company’s pension plan asset allocations by asset category are shown below
(based on a September 30 measurement date). Pension plan asset allocations
for the foreign plans relate to the Company’s Canadian pension plans.
|
December 31,
|
|||||
|
2006
|
2005
|
||||
|
Equity
securities:
|
|||||
|
Domestic
plans
|
|
69
|
%
|
71
|
%
|
|
Foreign
plans
|
58
|
%
|
59
|
%
|
|
|
Debt
securities:
|
|||||
|
Domestic
plans
|
28
|
%
|
27
|
%
|
|
|
Foreign
plans
|
36
|
%
|
38
|
%
|
|
|
Cash
and other:
|
|||||
|
Domestic
plans
|
3
|
%
|
2
|
%
|
|
|
Foreign
plans
|
6
|
%
|
3
|
%
|
|
The
Company’s investment policies incorporate an asset allocation strategy that
emphasizes the long-term growth of capital. The Company believes this strategy
is consistent with the long-term nature of plan liabilities and ultimate cash
needs of the plans. For the domestic portfolio, the Company targets an equity
allocation of 60% – 80% of plan assets, a fixed income allocation of 15% – 40%
and cash allocation of 0% – 15%. For the foreign portfolio, the Company targets
an equity allocation of 50% – 70% of plan assets, a fixed income allocation of
30% – 50% and a cash allocation of 0% – 10%. Differences in the target
allocations of the domestic and foreign portfolios are reflective of differences
in the underlying plan liabilities. Diversification within the investment
portfolios is pursued by asset class and investment management style. The
investment portfolios are reviewed on a quarterly basis to maintain the desired
asset allocations, given the market performance of the asset classes and
investment management styles.
The
Company utilizes investment management firms to manage these assets in
accordance with the Company’s investment policies. Retained investment managers
are provided investment guidelines that indicate prohibited assets, which
include commodities contracts, futures contracts, options, venture capital,
real
estate and interest-only or principal-only strips. Derivative instruments are
also prohibited without the specific approval of the Company. Investment
managers are limited in the maximum size of individual security holdings and
the
maximum exposure to any one industry relative to the total portfolio. Fixed
income managers are provided further investment guidelines that indicate minimum
credit ratings for debt securities and limitations on weighted average maturity
and portfolio duration.
F-39
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(10) Pension and
Other Postretirement Benefit Plans – (continued)
The
Company evaluates investment manager performance against market indices which
the Company believes are appropriate to the investment management style for
which the investment manager has been retained. The Company’s investment
policies incorporate an investment goal of aggregate portfolio returns which
exceed the returns of the appropriate market indices by a reasonable spread
over
the relevant investment horizon.
Contributions
The
Company expects to contribute approximately $60 million to its domestic and
foreign pension plan asset portfolios in 2007. Contributions to the pension
plans are consistent with minimum funding requirements of the relevant
governmental authorities. The Company may make contributions in excess of these
minimums when the Company believes it is financially advantageous to do so
and
based on its other capital requirements. In addition, the Company’s future
funding obligations may be affected by changes in applicable legal requirements.
Benefit
Payments
As
of
December 31, 2006, the Company’s estimate of expected benefit payments in
each of the five succeeding years and in the aggregate for the five years
thereafter are shown below (in millions):
|
Pension
|
Other
Postretirement |
|||||
|
2007
|
|
$
|
27.1
|
|
$
|
10.0
|
|
2008
|
29.0
|
10.7
|
||||
|
2009
|
31.1
|
11.5
|
||||
|
2010
|
34.8
|
12.2
|
||||
|
2011
|
37.6
|
12.6
|
||||
|
Five
years thereafter
|
241.9
|
73.5
|
||||
Defined
Contribution and Multi-employer Pension Plans
The
Company also sponsors defined contribution plans and participates in
government-sponsored programs in certain foreign countries. Contributions are
determined as a percentage of each covered employee’s salary. The Company also
participates in multi-employer pension plans for certain of its hourly
employees. Contributions are based on collective bargaining agreements. For
the
years ended December 31, 2006, 2005 and 2004, the aggregate cost of the
defined contribution and multi-employer pension plans was $22.7 million,
$25.8 million and $25.1 million, respectively.
Subsequent
Events
In 2006,
the Company elected to freeze its U.S. salaried defined benefit pension plan
effective December 31, 2006. In conjunction with this, the Company
established a new defined contribution retirement plan for its salaried
employees effective January 1, 2007. Contributions to this plan will be
determined as a percentage of each covered employee’s salary and are expected to
be in the range of $18 million to $25 million in 2007. Subsequent to
the measurement date of September 30, 2006, the Company incurred
curtailment gains of approximately $36.5 million and $14.7 million
with respect to pension and other postretirement benefit plans, respectively.
The pension plan curtailment gain resulted from the suspension of the accrual
of
defined benefits related to the Company’s U.S. salaried defined benefit pension
plan. The other postretirement benefit plan curtailment gain resulted from
employee terminations associated with a facility closure in the fourth quarter
of 2006. The Company uses a September 30 measurement date for its U.S.
pension and other postretirement benefit plans, and as these curtailments
occurred after the measurement date, the related curtailment gains will be
recognized by the Company in the first quarter of 2007.
F-40
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(11) Stock-Based
Compensation
The
Company has three plans under which it has issued stock options: the 1994 Stock
Option Plan, the 1996 Stock Option Plan and the Long-Term Stock Incentive Plan.
Options issued to date under these plans generally vest three years following
the grant date and expire ten years from the issuance date.
A
summary of option transactions during each of the three years in the period
ended December 31, 2006, is shown below:
|
Stock
Options
|
Price
Range
|
|||
|
Outstanding
as of January 1,
2004
|
|
4,002,625
|
|
$15.50 – $55.33
|
|
Expired
or cancelled
|
(14,450
|
)
|
$15.50 – $54.22
|
|
|
Exercised
|
(693,495
|
)
|
$15.50 – $54.22
|
|
|
Outstanding
as of December 31, 2004
|
3,294,680
|
$22.12 – $55.33
|
||
|
Expired
or cancelled
|
(176,800
|
)
|
$22.12 – $54.22
|
|
|
Exercised
|
(134,475
|
)
|
$22.12 – $54.22
|
|
|
Outstanding
as of December 31, 2005
|
2,983,405
|
$22.12 – $55.33
|
||
|
Expired
or cancelled
|
(186,100
|
)
|
$22.12 – $54.22
|
|
|
Exercised
|
(7,000
|
)
|
$22.12
|
|
|
Outstanding
as of December 31, 2006
|
2,790,305
|
$22.12 –
$55.33
|
A
summary of options outstanding as of December 31, 2006, is shown below:
|
Range
of exercise
prices
|
|
$
|
22.12 – 27.25
|
|
$
|
33.00 – 39.83
|
|
$
|
41.83 – 42.32
|
|
$
|
54.22 – 55.33
|
|
Options
outstanding and exercisable:
|
|
|||||||||||
|
Number
outstanding and exercisable
|
215,475
|
795,080
|
1,389,300
|
390,450
|
||||||||
|
Weighted
average remaining contractual
life (years) |
3.16
|
3.56
|
5.42
|
1.56
|
||||||||
|
Weighted
average exercise price
|
$
|
22.58
|
$
|
36.98
|
$
|
41.83
|
$
|
54.27
|
As of
December 31, 2005, 2,967,405 options were exercisable. During 2006, an
additional 16,000 options became exercisable. As of December 31, 2006, all
outstanding options were exercisable.
The
Long-Term Stock Incentive Plan also permits the grants of stock appreciation
rights, restricted stock, restricted stock units, performance shares and
performance units (collectively, “Incentive Units”) to officers and other key
employees of the Company. As of December 31, 2006, the Company had
outstanding stock-settled stock appreciation rights covering 1,751,854 shares
with a weighted average exercise price of $28.99 per right and outstanding
restricted stock and performance shares convertible into a maximum of 2,134,480
shares of common stock of the Company. Restricted stock and performance shares
include 1,285,387 restricted stock units at no cost to the employee, 679,184
restricted stock units at a weighted average cost to the employee of $40.86
per
unit and 169,909 performance shares at no cost to the employee. As of
December 31, 2006, the Company also had outstanding 463,748 cash-settled
stock appreciation rights with a weighted average exercise price of $28.74
per
right.
Stock
appreciation rights granted prior to 2006 vest on a graded basis over one to
three years following the grant date and expire seven years from the grant
date.
Stock appreciation rights granted in 2006 vest three years following the grant
date and expire seven years from the grant date. Restricted stock units granted
prior to 2006 vest on a graded basis over two to five years following the grant
date. Restricted stock units granted in 2006 vest on a graded basis over two
to
four years following the grant date. Performance shares vest three years
following the grant date.
F-41
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(11) Stock-Based
Compensation – (continued)
A
summary of Incentive Unit transactions during each of the three years in the
period ended December 31, 2006, is shown below:
|
Stock
Appreciation Rights(1) |
Restricted
Stock Units |
Performance
Shares(2) |
|||||
|
Outstanding
as of January 1,
2004
|
|
—
|
|
1,394,716
|
|
256,158
|
|
|
Granted
|
—
|
954,637
|
53,193
|
||||
|
Expired
or cancelled
|
—
|
(39,332
|
)
|
(6,664
|
)
|
||
|
Distributed
|
—
|
(476,337
|
)
|
(93,660
|
)
|
||
|
Outstanding
as of December 31, 2004
|
—
|
1,833,684
|
209,027
|
||||
|
Granted
|
1,215,046
|
605,811
|
56,733
|
||||
|
Expired
or cancelled
|
—
|
(74,528
|
)
|
(67,452
|
)
|
||
|
Distributed
|
—
|
(130,845
|
)
|
(74,636
|
)
|
||
|
Outstanding
as of December 31, 2005
|
1,215,046
|
2,234,122
|
123,672
|
||||
|
Granted
|
642,285
|
406,086
|
130,655
|
||||
|
Expired
or cancelled
|
(91,002
|
)
|
(146,045
|
)
|
(84,418
|
)
|
|
|
Distributed
or exercised
|
(14,475
|
)
|
(529,592
|
)
|
—
|
||
|
Outstanding
as of December 31, 2006
|
1,751,854
|
1,964,571
|
169,909
|
——————
(1)
Does
not
include cash-settled stock appreciation rights.
(2)
Performance
shares reflected as “granted” are notional shares granted at the beginning of a
three-year performance period whose eventual payout is subject to satisfaction
of performance criteria. Performance shares reflected as “distributed” are those
that are paid out in shares of common stock upon satisfaction of the performance
criteria at the end of the three-year performance period.
As of
December 31, 2005, all outstanding stock appreciation rights were
nonvested. During 2006, 375,331 stock appreciation rights vested and 360,856
of
these remain outstanding as of December 31, 2006. All outstanding
restricted stock units and performance shares are nonvested. Restricted stock
units and performance shares are distributed when vested. As of
December 31, 2006, unrecognized compensation cost related to nonvested
Incentive Units was $41.9 million. This amount is expected to be recognized
over the next 1.6 years on a weighted average basis.
The fair
values of the stock-settled stock appreciation right grants, which have a
seven-year term, were estimated as of the grant dates using the Black-Scholes
option pricing model with the following weighted average assumptions: expected
dividend yields of 0.00% in 2006 and 1.91% in 2005; expected life of 5 years
in
2006 and 41/2 years in 2005; risk-free interest rate of 4.58% in 2006 and 4.40%
in 2005; and expected volatility of 40.00% in 2006 and 2005. The weighted
average fair value of the stock-settled stock appreciation right grants were
$13.21 per right in 2006 and $9.30 per right in 2005.
(12) Commitments
and
Contingencies
Legal and Other
Contingencies
As of
December 31, 2006 and December 31, 2005, the Company had recorded
reserves for pending legal disputes, including commercial disputes and other
matters, of $18.0 million and $49.2 million, respectively. Such
reserves reflect amounts recognized in accordance with accounting principles
generally accepted in the United States and typically exclude the cost of legal
representation. Product warranty liabilities are recorded separately from legal
liabilities, as described below.
F-42
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(12) Commitments
and
Contingencies – (continued)
Commercial
Disputes
The
Company is involved from time to time in legal proceedings and claims,
including, without limitation, commercial or contractual disputes with its
suppliers, competitors and customers. These disputes vary in nature and are
usually resolved by negotiations between the parties.
On
January 29, 2002, Seton Company (“Seton”), one of the Company’s leather
suppliers, filed a suit alleging that the Company had breached a purported
agreement to purchase leather from Seton for seats for the life of the General
Motors GMT 800 program. Seton filed the lawsuit in the U.S. District Court
for
the Eastern District of Michigan seeking compensatory and exemplary damages
totaling approximately $96.5 million, plus interest, on breach of contract
and promissory estoppel claims. In May 2005, this case proceeded to trial,
and the jury returned a $30.0 million verdict against the Company. On
September 27, 2005, the Court denied the Company’s post-trial motions
challenging the judgment and granted Seton’s motion to award prejudgment
interest in the amount of approximately $4.7 million. On October 4,
2006, the Sixth Circuit Court of Appeals affirmed the judgment of the trial
court. On October 18, 2006, the Company filed a Petition for Rehearing with
the court which was denied on November 16, 2006. On December 7, 2006,
the Court of Appeals issued a mandate indicating that the order affirming the
judgment was final. In December 2006, the Company paid the principal and
all remaining interest on the judgment.
On
January 26, 2004, the Company filed a patent infringement lawsuit against
Johnson Controls Inc. and Johnson Controls Interiors LLC (together, “JCI”) in
the U.S. District Court for the Eastern District of Michigan alleging that
JCI’s
garage door opener products infringed certain of the Company’s radio frequency
transmitter patents. JCI counterclaimed seeking a declaratory judgment that
the
subject patents are invalid and unenforceable, and that JCI is not infringing
these patents. JCI also has filed motions for summary judgment asserting that
its garage door opener products do not infringe the Company’s patents and that
one of the Company’s patents is invalid and unenforceable. The Company is
vigorously pursuing its claims against JCI. A trial date has not been scheduled.
After
the
Company filed its patent infringement action against JCI, affiliates of JCI
sued
one of the Company’s vendors and certain of the vendor’s employees in Ottawa
County, Michigan Circuit Court on July 8, 2004, alleging misappropriation
of trade secrets and disclosure of confidential information. The suit alleges
that the defendants misappropriated and shared with the Company trade secrets
involving JCI’s universal garage door opener product. JCI seeks to enjoin the
defendants from selling or attempting to sell a competing product, as well
as
compensatory damages and attorney fees. The Company is not a defendant in this
lawsuit; however, the agreements between the Company and the defendants contain
customary indemnification provisions. The Company does not believe that its
garage door opener product benefited from any allegedly misappropriated trade
secrets or technology. However, JCI has sought discovery of certain information
which the Company believes is confidential and proprietary, and the Company
has
intervened in the case as a non-party for the limited purpose of protecting
its
rights with respect to JCI’s discovery efforts. The trial has been rescheduled
to October 2007.
On
June 13, 2005, The Chamberlain Group (“Chamberlain”) filed a lawsuit
against the Company and Ford Motor Company (“Ford”) in the Northern District of
Illinois alleging patent infringement. Two counts were asserted against the
Company and Ford based upon two Chamberlain rolling-code garage door opener
system patents. Two additional counts were asserted against Ford only (not
the
Company) based upon different Chamberlain patents. The Chamberlain lawsuit
was
filed in connection with the marketing of the Company’s universal garage door
opener system, which competes with a product offered by JCI. JCI obtained
technology from Chamberlain to operate its product. In October 2005, JCI
joined the lawsuit as a plaintiff along with Chamberlain. In October 2006,
Ford was dismissed from the suit. JCI and Chamberlain have filed a motion for
a
preliminary injunction, and the Company is vigorously defending the claims
asserted in this lawsuit. A trial date has not yet been scheduled.
F-43
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(12) Commitments
and
Contingencies – (continued)
Product Liability Matters
In the
event that use of the Company’s products results in, or is alleged to result in,
bodily injury and/or property damage or other losses, the Company may be subject
to product liability lawsuits and other claims. In addition, the Company is
a
party to warranty-sharing and other agreements with its customers relating
to
its products. These customers may pursue claims against the Company for
contribution of all or a portion of the amounts sought in connection with
product liability and warranty claims. The Company can provide no assurances
that it will not experience material claims in the future or that it will not
incur significant costs to defend such claims. In addition, if any of the
Company’s products are, or are alleged to be, defective, the Company may be
required or requested by its customers to participate in a recall or other
corrective action involving such products. Certain of the Company’s customers
have asserted claims against the Company for costs related to recalls or other
corrective actions involving its products. In certain instances, the allegedly
defective products were supplied by
tier II suppliers against whom the Company has sought or will seek contribution. In this regard, in the first quarter of 2007, the Company received notice of a potential warranty claim concerning a component produced by a tier II supplier and incorporated into a product supplied by the Company. The alleged non-conformity is not safety-related. The Company is continuing to work with the customer and the tier II supplier to evaluate the matter and determine the appropriate corrective action, if any. The Company has also placed its tier II supplier on notice of the potential claim and of the Company’s intention to seek full contribution and reimbursement for any loss. The Company carries insurance for certain legal matters, including product liability claims, but such coverage may be limited. The Company does not maintain insurance for product warranty or recall matters.
tier II suppliers against whom the Company has sought or will seek contribution. In this regard, in the first quarter of 2007, the Company received notice of a potential warranty claim concerning a component produced by a tier II supplier and incorporated into a product supplied by the Company. The alleged non-conformity is not safety-related. The Company is continuing to work with the customer and the tier II supplier to evaluate the matter and determine the appropriate corrective action, if any. The Company has also placed its tier II supplier on notice of the potential claim and of the Company’s intention to seek full contribution and reimbursement for any loss. The Company carries insurance for certain legal matters, including product liability claims, but such coverage may be limited. The Company does not maintain insurance for product warranty or recall matters.
The
Company records product warranty liabilities based on its individual customer
agreements. Product warranty liabilities are recorded for known warranty issues
when amounts related to such issues are probable and reasonably estimable.
In
certain product liability and warranty matters, the Company may seek recovery
from its suppliers that supply materials or services included within the
Company’s products that are associated with the related claims.
A
summary of the changes in product warranty liabilities for each of the two
years
in the period ended December 31, 2006, is shown below (in millions):
|
Balance
as of January 1,
2005
|
|
$
|
43.4
|
|
|
Expense,
net
|
16.7
|
|||
|
Settlements
|
(26.0
|
)
|
||
|
Foreign
currency translation and other
|
(1.7
|
)
|
||
|
Balance
as of December 31, 2005
|
32.4
|
|||
|
Expense,
net
|
17.5
|
|||
|
Settlements
|
(12.4
|
)
|
||
|
Foreign
currency translation and other
|
3.4
|
|||
|
Balance
as of December 31, 2006
|
$
|
40.9
|
Environmental
Matters
The
Company is subject to local, state, federal and foreign laws, regulations and
ordinances which govern activities or operations that may have adverse
environmental effects and which impose liability for clean-up costs resulting
from past spills, disposals or other releases of hazardous wastes and
environmental compliance. The Company’s policy is to comply with all applicable
environmental laws and to maintain an environmental management program based
on
ISO 14001 to ensure compliance. However, the Company currently is, has been
and
in the future may become the subject of formal or informal enforcement actions
or procedures.
F-44
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(12) Commitments
and
Contingencies – (continued)
The
Company has been named as a potentially responsible party at several third-party
landfill sites and is engaged in the cleanup of hazardous waste at certain
sites
owned, leased or operated by the Company, including several properties acquired
in its 1999 acquisition of UT Automotive. Certain present and former properties
of
UT Automotive are subject to environmental liabilities which may be significant. The Company obtained agreements and indemnities with respect to certain environmental liabilities from UTC in connection with its acquisition of UT Automotive. UTC manages and directly funds these environmental liabilities pursuant to its agreements and indemnities with the Company.
UT Automotive are subject to environmental liabilities which may be significant. The Company obtained agreements and indemnities with respect to certain environmental liabilities from UTC in connection with its acquisition of UT Automotive. UTC manages and directly funds these environmental liabilities pursuant to its agreements and indemnities with the Company.
As of
December 31, 2006 and December 31, 2005, the Company had recorded
reserves for environmental matters of $3.6 million and $3.2 million,
respectively. While the Company does not believe that the environmental
liabilities associated with its current and former properties will have a
material adverse effect on its business, consolidated financial position,
results of operations or cash flows no assurances can be given in this regard.
One of
the Company’s subsidiaries and certain predecessor companies were named as
defendants in an action filed by three plaintiffs in August 2001 in the
Circuit Court of Lowndes County, Mississippi, asserting claims stemming from
alleged environmental contamination caused by an automobile parts manufacturing
plant located in Columbus, Mississippi. The plant was acquired by the Company
as
part of its acquisition of UT Automotive in May 1999 and sold almost
immediately thereafter, in June 1999, to Johnson Electric Holdings Limited
(“Johnson Electric”). In December 2002, 61 additional cases were filed by
approximately 1,000 plaintiffs in the same court against the Company and other
defendants relating to similar claims. In September 2003, the Company was
dismissed as a party to these cases. In the first half of 2004, the Company
was
named again as a defendant in these same 61 additional cases and was also named
in five new actions filed by approximately 150 individual plaintiffs related
to
alleged environmental contamination from the same facility. The plaintiffs
in
these actions are persons who allegedly were either residents and/or owned
property near the facility or worked at the facility. In November 2004, two
additional lawsuits were filed by 28 plaintiffs (individuals and organizations),
alleging property damage as a result of the alleged contamination. Each of
these
complaints seeks compensatory and punitive damages.
All of
the plaintiffs subsequently dismissed their claims for health effects and
personal injury damages and the cases proceeded with approximately 280
plaintiffs alleging property damage claims only. In March 2005, the venue
for these lawsuits was transferred from Lowndes County, Mississippi, to
Lafayette County, Mississippi. In April 2005, certain plaintiffs filed an
amended complaint alleging negligence, nuisance, intentional tort and conspiracy
claims and seeking compensatory and punitive damages.
In the
first quarter of 2006, co-defendant UTC entered into a settlement agreement
with
the plaintiffs. During the third quarter of 2006, the Company and co-defendant
Johnson Electric entered into a settlement memorandum with the plaintiffs’
counsel outlining the terms of a global settlement, including establishing
the
requisite percentage of executed settlement agreements and releases that were
required to be obtained from the individual plaintiffs for a final settlement
to
proceed. Since November 2006, the Company has reached a final settlement
with respect to approximately 85% of the plaintiffs involving an aggregate
payment of $875,000 and is in the process of attempting to resolve the remaining
claims.
UTC,
the
former owner of UT Automotive, and Johnson Electric have each sought
indemnification for losses associated with the Mississippi claims from the
Company under the respective acquisition agreements, and the Company has claimed
indemnification from them under the same agreements. In the first quarter of
2006, UTC filed a lawsuit against the Company in the State of Connecticut
Superior Court, District of Hartford, seeking declaratory relief and
indemnification from the Company for the settlement amount, attorney fees,
costs
and expenses UTC paid in settling and defending the Columbus, Mississippi
lawsuits. In the second quarter of 2006, the Company filed a motion to dismiss
this matter and filed a separate action against UTC and Johnson Electric in
the
State of Michigan, Circuit Court for the County of Oakland, seeking declaratory
relief and indemnification from UTC or Johnson Electric for the settlement
amount, attorney fees, costs and expenses the Company has paid, or will pay,
in
settling and defending the Columbus, Mississippi lawsuits. During the fourth
quarter of 2006, UTC agreed to dismiss the
F-45
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(12) Commitments
and
Contingencies – (continued)
lawsuit filed in the State
of Connecticut Superior Court, District of Hartford and agreed to proceed with
the lawsuit filed in the State of Michigan, Circuit Court for the County of
Oakland. During the first quarter of 2007, Johnson Electric and UTC each filed
counter-claims against the Company seeking declaratory relief and
indemnification from the Company for the settlement amount, attorney fees,
costs
and expenses each has paid or will pay in settling and defending the Columbus,
Mississippi lawsuits. To date, no company admits to, or has been found to have,
an obligation to fully defend and indemnify any other. The Company intends
to
vigorously pursue its claims against UTC and Johnson Electric and believes
that
it is entitled to indemnification from either UTC or Johnson Electric for its
losses. However, the ultimate outcome of these matters is unknown.
Other Matters
In
January 2004, the Securities and Exchange Commission (the “SEC”) commenced
an informal inquiry into the Company’s September 2002 amendment of its 2001
Form 10-K. The amendment was filed to report the Company’s employment of
relatives of certain of its directors and officers and certain related party
transactions. The SEC’s inquiry does not relate to the Company’s consolidated
financial statements. In February 2005, the staff of the SEC informed the
Company that it proposed to recommend to the SEC that it issue an administrative
“cease and desist” order as a result of the Company’s failure to disclose the
related party transactions in question prior to the amendment of its 2001 Form
10-K. The Company expects to consent to the entry of the order as part of a
settlement of this matter.
In
April 2006, a former employee of the Company filed a purported class action
lawsuit in the U.S. District Court for the Eastern District of Michigan against
the Company, members of its Board of Directors, members of its Employee Benefits
Committee (the “EBC”) and certain members of its human resources personnel
alleging violations of the Employment Retirement Income Security Act (“ERISA”)
with respect to the Company’s retirement savings plans for salaried and hourly
employees. In the second quarter of 2006, the Company was served with three
additional purported class action ERISA lawsuits, each of which contained
similar allegations against the Company, members of its Board of Directors,
members of its EBC and certain members of its senior management and its human
resources personnel. At the end of the second quarter of 2006, the court entered
an order consolidating these four lawsuits. During the third quarter of 2006,
plaintiffs filed their consolidated complaint, which alleges breaches of
fiduciary duties substantially similar to those alleged in the four individually
filed lawsuits. The consolidated complaint continues to name certain current
and
former members of the Board of Directors and the EBC and certain members of
senior management and adds certain other current and former members of the
EBC.
The consolidated complaint generally alleges that the defendants breached their
fiduciary duties to plan participants in connection with the administration
of
the Company’s retirement savings plans for salaried and hourly employees. The
fiduciary duty claims are largely based on allegations of breaches of the
fiduciary duties of prudence and loyalty and of over-concentration of plan
assets in the Company’s common stock. The plaintiffs purport to bring these
claims on behalf of the plans and all persons who were participants in or
beneficiaries of the plans from October 21, 2004, to the present and seek
to recover losses allegedly suffered by the plans. The complaints do not specify
the amount of damages sought. During the fourth quarter of 2006, the defendants
filed a motion to dismiss all defendants and all counts in the consolidated
complaint. No determination has been made that a class action can be maintained,
and there have been no decisions on the merits of the cases. The Company intends
to vigorously defend the consolidated lawsuit.
Between
February 9, 2007 and February 21, 2007, certain stockholders filed six
purported class action lawsuits against the Company, certain members of the
Company’s Board of Directors and American Real Estate Partners, L.P. and
certain of its affiliates (collectively, “AREP”). Three of the lawsuits were
filed in the Delaware Court of Chancery and have since been consolidated into
a
single action. Three of the lawsuits were filed in Michigan Circuit Court.
The
class action complaints, which are substantially similar, generally allege
that
the Agreement and Plan of Merger (“Merger Agreement”) unfairly limits the
process of selling the Company and that certain members of the Company’s Board
of Directors have breached their fiduciary duties in connection with the Merger
Agreement and have acted with conflicts of interest in approving the Merger
Agreement. The lawsuits seek to enjoin the merger, to invalidate the Merger
Agreement and to enjoin the operation of certain provisions of the
F-46
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(12) Commitments
and
Contingencies – (continued)
Merger Agreement, a
declaration that certain members of the Company’s Board of Directors breached
their fiduciary duties in approving the Merger Agreement and an award of
unspecified damages or rescission in the event that the proposed merger with
AREP is completed. On February 23, 2007, the plaintiffs in the consolidated
Delaware action filed a consolidated amended complaint, a motion for expedited
proceedings and a motion to preliminarily enjoin the merger contemplated by
the
Merger Agreement. The Company believes that the lawsuits are without merit
and
intends to defend against them vigorously.
Prior
to
the acquisition of UT Automotive from UTC in May 1999, one of the Company’s
subsidiaries purchased the stock of a UT Automotive subsidiary. In connection
with the acquisition, the Company agreed to indemnify UTC for certain matters,
including tax consequences if the Internal Revenue Service (the “IRS”)
overturned UTC’s tax treatment of the transaction. On June 28, 2006, this
matter was settled with the Appeals Office of the IRS. As a result of the IRS
settlement in the second quarter of 2006, the Company was required to make
an
indemnity payment to UTC of $20.5 million. The payment has been recorded as
an adjustment to the original purchase price and allocated to goodwill in a
manner consistent with the original purchase price allocation. The amount
allocated to the Interiors — Americas unit of $2.9 million was immediately
written off as this unit’s goodwill is fully impaired. On September 1,
2006, the Company entered into a Payment Agreement and Limited Release with
UTC
in order to settle its indemnity obligation related to this issue. In connection
with this agreement, the Company made a payment to UTC in the amount of
$20.6 million, including interest up to the date of the agreement.
Although
the Company records reserves for legal, product warranty and environmental
matters in accordance with SFAS No. 5, “Accounting for Contingencies,” the
outcomes of these matters are inherently uncertain. Actual results may differ
significantly from current estimates.
The
Company is involved in certain other legal actions and claims arising in the
ordinary course of business, including, without limitation, commercial disputes,
intellectual property matters, personal injury claims, tax claims and employment
matters. Although the outcome of any legal matter cannot be predicted with
certainty, the Company does not believe that any of these other legal
proceedings or matters in which the Company is currently involved, either
individually or in the aggregate, will have a material adverse effect on its
business, consolidated financial position, results of operations or cash flows.
Employees
Approximately
78% of the Company’s employees are members of industrial trade unions and are
employed under the terms of collective bargaining agreements. Collective
bargaining agreements covering approximately 58% of the Company’s unionized
workforce of approximately 81,500 employees, including 20% of the Company’s
unionized workforce in the United States and Canada, are scheduled to expire
in
2007. Management does not anticipate any significant difficulties with respect
to the agreements as they are renewed.
Lease
Commitments
A
summary of lease commitments as of December 31, 2006, under non-cancelable
operating leases with terms exceeding one year is shown below (in millions):
|
2007
|
|
$
|
93.7
|
|
2008
|
75.6
|
||
|
2009
|
65.3
|
||
|
2010
|
52.9
|
||
|
2011
|
43.5
|
||
|
2012
and thereafter
|
71.3
|
||
|
Total
|
$
|
402.3
|
F-47
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(12) Commitments
and
Contingencies – (continued)
The
Company previously guaranteed the residual value of certain of its leased
assets. In October 2006, the residual value guarantees were released in
conjunction with the expiration of the related leases. The Company was not
required to make any payments related to these residual value guarantees.
The
Company’s operating leases cover principally buildings and transportation
equipment. Rent expense was $133.8 million, $136.1 million and
$125.0 million for the years ended December 31, 2006, 2005 and 2004,
respectively.
(13) Segment
Reporting
Historically,
the Company has had three reportable operating segments: seating, electronic
and
electrical and interior. The seating segment includes seat systems and
components thereof. The electronic and electrical segment includes electronic
products and electrical distribution systems, primarily wire harnesses and
junction boxes; interior control and entertainment systems; and wireless
systems. The interior segment includes instrument panels and cockpit systems,
headliners and overhead systems, door panels, flooring and acoustic systems
and
other interior products. See Note 3, “Divestiture of Interior Business.”
Each
of
the Company’s operating segments reports its results from operations and makes
its requests for capital expenditures directly to the chief operating
decision-making group. The economic performance of each operating segment is
driven primarily by automobile production volumes in the geographic regions
in
which it operates, as well as by the success of the vehicle platforms for which
it supplies products. Also, each operating segment operates in the competitive
tier I automotive supplier environment and is continually working with its
customers to manage costs and improve quality. The Company’s manufacturing
facilities generally use just-in-time manufacturing techniques to produce and
distribute their automotive interior products. The Company’s production
processes generally make use of unskilled labor, dedicated facilities,
sequential manufacturing processes and commodity raw materials. The Other
category includes the corporate headquarters, geographic headquarters and the
elimination of intercompany activities, none of which meets the requirements
of
being classified as an operating segment.
The
accounting policies of the Company’s operating segments are the same as those
described in Note 2, “Summary of Significant Accounting Policies.” The Company
evaluates the performance of its operating segments based primarily on (i)
revenues from external customers, (ii) income (loss) before goodwill impairment
charges, loss on divestiture of interior business, interest, other expense,
provision for income taxes, minority interests in consolidated subsidiaries,
equity in net (income) loss of affiliates and cumulative effect of a change
in
accounting principle (“segment earnings”) and (iii) cash flows, being defined as
segment earnings less capital expenditures plus depreciation and amortization.
A
summary of revenues from external customers and other financial information
by
reportable operating segment is shown below (in millions):
|
2006
|
|||||||||||||||
|
Seating
|
Electronic
and Electrical |
Interior
|
Other
|
Consolidated
|
|||||||||||
|
Revenues
from external
customers
|
|
$
|
11,624.8
|
|
$
|
2,996.9
|
|
$
|
3,217.2
|
|
$
|
—
|
|
$
|
17,838.9
|
|
Segment
earnings(1)
|
604.0
|
102.5
|
(183.8
|
)
|
|
(241.7
|
)
|
281.0
|
|||||||
|
Depreciation
and amortization
|
167.3
|
110.1
|
93.8
|
|
21.0
|
392.2
|
|||||||||
|
Capital
expenditures
|
161.1
|
77.0
|
98.7
|
|
10.8
|
347.6
|
|||||||||
|
Total
assets
|
4,386.4
|
2,374.5
|
528.3
|
|
561.3
|
7,850.5
|
|||||||||
F-48
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(13) Segment
Reporting – (continued)
|
2005
|
||||||||||||||||
|
Seating
|
Electronic
and Electrical |
Interior
|
Other
|
Consolidated |
||||||||||||
|
Revenues
from external
customers
|
|
$
|
11,035.0
|
|
$
|
2,956.6
|
|
$
|
3,097.6
|
|
$
|
—
|
|
$
|
17,089.2
|
|
|
Segment
earnings(1)
|
323.3
|
180.0
|
(191.1
|
)
|
(206.8
|
)
|
105.4
|
|
||||||||
|
Depreciation
and amortization
|
150.7
|
106.0
|
116.6
|
20.1
|
393.4
|
|
||||||||||
|
Capital
expenditures
|
229.2
|
102.9
|
190.9
|
45.4
|
568.4
|
|
||||||||||
|
Total
assets
|
3,985.2
|
2,122.4
|
1,506.8
|
674.0
|
8,288.4
|
|||||||||||
|
2005
|
||||||||||||||||
|
Seating
|
Electronic
and Electrical |
Interior
|
Other
|
Consolidated |
||||||||||||
|
Revenues
from external
customers
|
|
$
|
11,314.6
|
|
$
|
2,680.4
|
|
$
|
2,965.0
|
|
$
|
—
|
|
$
|
16,960.0
|
|
|
Segment
earnings(1)
|
682.1
|
210.9
|
85.1
|
(209.7
|
)
|
768.4
|
|
|||||||||
|
Depreciation
and amortization
|
133.4
|
89.9
|
108.9
|
22.9
|
355.1
|
|
||||||||||
|
Capital
expenditures
|
208.6
|
116.4
|
86.9
|
17.1
|
429.0
|
|
||||||||||
|
Total
assets
|
4,172.7
|
2,122.4
|
2,403.6
|
1,070.8
|
9,944.4
|
|||||||||||
——————
(1)
See
definition above.
In 2005,
the Company changed its allocation of cash and cash equivalents. Cash and cash
equivalents, previously reflected in the reportable operating segments, has
been
reflected in total in “Other.” Total assets by reportable operating segment as
of December 31, 2004, reflect this change. In addition, prior years’
reportable operating segment information has been reclassified to reflect the
current organizational structure of the Company.
For the
year ended December 31, 2006, segment earnings include restructuring
charges of $39.9 million, $42.6 million, $10.1 million and
$6.5 million in the seating, electronic and electrical and interior
segments and in the other category, respectively (Note 5, “Restructuring”). In
addition, 2006 segment earnings include additional fixed asset impairment
charges of $10.0 million in the interior segment (Note 2, “Summary of
Significant Accounting Policies”).
For the
year ended December 31, 2005, segment earnings includes restructuring
charges of $30.9 million, $30.0 million, $27.9 million and
$2.0 million in the seating, electronic and electrical and interior
segments and in the other category, respectively. In addition, 2005 segment
earnings include additional fixed asset impairment charges of $82.3 million
in the interior segment.
For the
year ended December 31, 2004, segment earnings include restructuring
charges of $7.8 million in the seating segment.
F-49
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(13) Segment
Reporting – (continued)
A
reconciliation of consolidated income before goodwill impairment charges, loss
on divestiture of interior business, interest, other expense, provision for
income taxes, minority interests in consolidated subsidiaries, equity in net
(income) loss of affiliates and cumulative effect of a change in accounting
principal to income (loss) before provision for income taxes, minority interests
in consolidated subsidiaries, equity in net (income) loss of affiliates and
effect of a change in accounting principle is shown below (in millions):
|
For
the Year Ended
December 31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Segment
earnings
|
|
$
|
522.7
|
|
$
|
312.2
|
|
$
|
978.1
|
|
|
Corporate
and geographic headquarters and elimination of intercompany
activity (“Other”) |
(241.7
|
)
|
(206.8
|
)
|
(209.7
|
)
|
||||
|
Income
before goodwill impairment charges, loss on divestiture of
Interior
business, interest, other expense, provision for income taxes, minority interests in consolidated subsidiaries, equity in net (income) loss of affiliates and cumulative effect of a change in accounting principle |
281.0
|
105.4
|
768.4
|
|||||||
|
Goodwill
impairment charges
|
2.9
|
1,012.8
|
—
|
|||||||
|
Loss
on divestiture of Interior business
|
636.0
|
—
|
—
|
|||||||
|
Interest
expense
|
209.8
|
183.2
|
165.5
|
|||||||
|
Other
expense, net
|
85.7
|
38.0
|
38.6
|
|||||||
|
Income
(loss) before provision for income taxes, minority interests
in
consolidated subsidiaries and equity in net (income) loss of affiliates and cumulative effect of a change in accounting principle |
$
|
(653.4
|
)
|
$
|
(1,128.6
|
)
|
$
|
564.3
|
||
Revenues
from external customers and tangible long-lived assets for each of the
geographic areas in which the Company operates is shown below (in millions):
|
For
the Year Ended
December 31,
|
|||||||||
|
2006
|
2005
|
2004
|
|||||||
|
Revenues
from external customers:
|
|||||||||
|
United
States
|
|
$
|
6,624.3
|
|
$
|
6,252.2
|
|
$
|
6,200.7
|
|
Canada
|
1,375.3
|
1,374.1
|
1,317.8
|
||||||
|
Germany
|
2,034.3
|
2,123.4
|
2,026.0
|
||||||
|
Mexico
|
1,789.5
|
1,595.6
|
1,475.7
|
||||||
|
Other
countries
|
6,015.5
|
5,743.9
|
5,939.8
|
||||||
|
Total
|
$
|
17,838.9
|
$
|
17,089.2
|
$
|
16,960.0
|
|||
|
December 31,
|
||||||
|
2006
|
2005
|
|||||
|
Tangible
long-lived assets:
|
||||||
|
United
States
|
|
$
|
472.6
|
|
$
|
563.3
|
|
Canada
|
51.5
|
50.6
|
||||
|
Germany
|
161.3
|
185.1
|
||||
|
Mexico
|
168.2
|
153.9
|
||||
|
Other
countries
|
618.1
|
661.8
|
||||
|
Total
|
$
|
1,471.7
|
$
|
1,614.7
|
||
F-50
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(13) Segment
Reporting – (continued)
A
substantial majority of the Company’s consolidated and reportable operating
segment revenues are from four automotive manufacturing companies, with General
Motors and Ford and their respective affiliates accounting for 55%, 53% and
56%
of the Company’s net sales in 2006, 2005 and 2004, respectively. Excluding net
sales to Saab, Volvo, Jaguar and Land Rover, which are affiliates of General
Motors or Ford, General Motors and Ford accounted for approximately 47%, 44%
and
46% of the Company’s net sales in 2006, 2005 and 2004, respectively. The
following is a summary of the percentage of revenues from major customers:
|
For
the Year Ended
December 31,
|
|||||||
|
2006
|
2005
|
2004
|
|||||
|
General
Motors
Corporation
|
|
31.9
|
%
|
28.3
|
%
|
31.4
|
%
|
|
Ford
Motor Company
|
22.6
|
24.7
|
24.1
|
||||
|
DaimlerChrysler
|
10.3
|
11.4
|
11.8
|
||||
|
BMW
|
7.4
|
7.6
|
7.5
|
||||
In
addition, a portion of the Company’s remaining revenues are from the above
automotive manufacturing companies through various other automotive suppliers.
(14) Financial
Instruments
The
carrying values of the Company’s senior notes vary from their fair values. The
fair values were determined by reference to quoted market prices of these
securities. As of December 31, 2006 and 2005, the aggregate carrying value
of the Company’s senior notes was $1.4 billion and $1.8 billion,
respectively, as compared to an estimated fair value of $1.3 billion and
$1.6 billion, respectively. As of December 31, 2006 and 2005, the
carrying values of the Company’s other senior indebtedness and other financial
instruments approximated their fair values, which were determined based on
related instruments currently available to the Company for similar borrowings
with like maturities.
Certain
of the Company’s European and Asian subsidiaries periodically factor their
accounts receivable with financial institutions. Such receivables are factored
without recourse to the Company and are excluded from accounts receivable in
the
consolidated balance sheets. As of December 31, 2006 and December 31,
2005, the amount of factored receivables was $256.3 million and
$256.2 million, respectively. The Company cannot provide any assurances
that these factoring facilities will be available or utilized in the future.
Asset-Backed
Securitization Facility
The
Company and several of its U.S. subsidiaries sell certain accounts receivable
to
a wholly owned, consolidated, bankruptcy-remote special purpose corporation
(Lear ASC Corporation) under an asset-backed securitization facility (the “ABS
facility”). In turn, Lear ASC Corporation transfers undivided interests in up to
$150 million of the receivables to bank-sponsored commercial paper
conduits. The level of funding utilized under this facility is based on the
credit ratings of the Company’s major customers, the level of aggregate accounts
receivable in a specific month and the Company’s funding requirements. Should
the Company’s major customers experience further reductions in their credit
ratings, the Company may be unable or choose not to utilize the ABS facility
in
the future. Should this occur, the Company would utilize its New Credit
Agreement to replace the funding currently provided by the ABS facility. In
addition, the ABS facility providers can elect to discontinue the program in
the
event the Company’s senior secured debt credit rating declines to below B- or B3
by Standard & Poor’s Ratings Services or Moody’s Investors Service,
respectively. In October 2006, the ABS facility was amended to extend the
termination date from October 2006 to October 2007. No assurances can
be given that the ABS facility will be extended upon its maturity.
The
Company retains a subordinated ownership interest in the pool of receivables
sold to Lear ASC Corporation. This retained interest is recorded at fair value,
which is generally based on a discounted cash flow analysis. As of
December 31, 2006, accounts receivable totaling $568.6 million had
been transferred to Lear ASC
F-51
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(14) Financial
Instruments – (continued)
Corporation, but no
undivided interests in the receivables were transferred to the conduits. As
such, this retained interest is included in accounts receivable in the
consolidated balance sheet as of December 31, 2006. As of December 31,
2005, accounts receivable totaling $673.4 million had been transferred to
Lear ASC Corporation, including $523.4 million of retained interests, which
serves as credit enhancement for the facility and is included in accounts
receivable in the consolidated balance sheet as of December 31, 2005, and
$150.0 million of undivided interests, which was transferred to the
conduits and is excluded from accounts receivable in the consolidated balance
sheet as of December 31, 2005.
During
the years ended December 31, 2006, 2005 and 2004, the Company and its
subsidiaries sold to Lear ASC Corporation adjusted accounts receivable totaling
$4.4 billion, $4.2 billion and $4.7 billion, respectively, under
the ABS facility and recognized discounts of $8.0 million,
$4.7 million and $1.4 million, respectively. These discounts are
included in other expense, net, in the consolidated statements of operations
for
the years ended December 31, 2006, 2005 and 2004. The Company continues to
service the transferred receivables and receives an annual servicing fee of
1.0%
of the sold accounts receivable. The conduit investors and Lear ASC Corporation
have no recourse to the other assets of the Company or its subsidiaries for
the
failure of the accounts receivable obligors to pay timely on the accounts
receivable.
Certain
cash flows received from and paid to Lear ASC Corporation are shown below (in
millions):
|
For
the Year
Ended
December 31, |
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Proceeds
from (repayments of)
securitizations
|
|
$
|
(150.0
|
)
|
$
|
150.0
|
|
$
|
—
|
|
|
Proceeds
from collections reinvested in securitizations
|
4,476.2
|
4,288.1
|
4,664.4
|
|
||||||
|
Servicing
fees received
|
6.1
|
5.3
|
5.5
|
|
||||||
Under
the
provisions of FASB Interpretation (“FIN”) No. 46R, “Consolidation of Variable
Interest Entities,” Lear ASC Corporation is a variable interest entity. The
accounts of this entity have historically been included in the consolidated
financial statements of the Company, as this entity is a wholly owned subsidiary
of Lear. In addition, the bank conduits, which purchase undivided interests
in
the Company’s sold accounts receivable, are variable interest entities. Under
the current ABS facility, the provisions of FIN No. 46R do not require the
Company to consolidate any of the bank conduits’ assets or liabilities.
Derivative
Instruments and Hedging Activities
The
Company uses derivative financial instruments, including forward foreign
exchange, futures, option and swap contracts, to manage its exposures to
fluctuations in foreign exchange rates and interest rates. The use of these
financial instruments mitigates the Company’s exposure to these risks with the
intent of reducing the variability of the Company’s operating results. The
Company is not a party to leveraged derivatives. On the date a derivative
contract is entered into, the Company designates the derivative as either (1)
a
hedge of a recognized asset or liability or of an unrecognized firm commitment
(a fair value hedge), (2) a hedge of a forecasted transaction or of the
variability of cash flows to be received or paid related to a recognized asset
or liability (a cash flow hedge) or (3) a hedge of a net investment in a foreign
operation (a net investment hedge).
For a
fair value hedge, both the effective and ineffective portions of the change
in
the fair value of the derivative are recorded in earnings and reflected in
the
consolidated statement of operations on the same line as the gain or loss on
the
hedged item attributable to the hedged risk. For a cash flow hedge, the
effective portion of the change in the fair value of the derivative is recorded
in accumulated other comprehensive income (loss) in the consolidated balance
sheet. When the underlying hedged transaction is realized, the gain or loss
included in accumulated other comprehensive income (loss) is recorded in
earnings and reflected in the consolidated statement of operations on the same
line as the gain or loss on the hedged item attributable to the hedged risk.
For
a net investment hedge of a foreign operation, the effective portion of the
change in the fair value of the derivative is recorded in cumulative translation
adjustment, which is a component of accumulated other comprehensive income
F-52
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(14) Financial
Instruments – (continued)
(loss) in the
consolidated balance sheet. In addition, for both cash flow and net investment
hedges, changes in the fair value excluded from the Company’s effectiveness
assessments and the ineffective portion of changes in the fair value are
recorded in earnings and reflected in the consolidated statement of operations
as other expense, net.
The
Company formally documents its hedge relationships, including the identification
of the hedging instruments and the hedged items, as well as its risk management
objectives and strategies for undertaking the hedge transaction. Derivatives
are
recorded at fair value in other current and long-term assets and other current
and long-term liabilities in the consolidated balance sheet. This process
includes linking derivatives that are designated as hedges of specific assets,
liabilities, firm commitments or forecasted transactions. The Company also
formally assesses, both at inception and at least quarterly thereafter, whether
a derivative used in a hedging transaction is highly effective in offsetting
changes in either the fair value or cash flows of the hedged item. When it
is
determined that a derivative ceases to be a highly effective hedge, the Company
discontinues hedge accounting.
Forward
foreign exchange, futures and option contracts — The Company uses forward
foreign exchange, futures and option contracts to reduce the effect of
fluctuations in foreign exchange rates on short-term, foreign currency
denominated intercompany transactions and other known foreign currency
exposures. Gains and losses on the derivative instruments are intended to offset
gains and losses on the hedged transaction in an effort to reduce the earnings
volatility resulting from fluctuations in foreign exchange rates. The principal
currencies hedged by the Company include the Mexican peso and the Canadian
dollar, as well as the Euro and other European currencies. Forward foreign
exchange, futures and option contracts are accounted for as cash flow hedges
when the hedged item is a forecasted transaction or the variability of cash
flows to be received or paid related to a recognized asset or liability. As
of
December 31, 2006, contracts designated as cash flow hedges with
$464.9 million of notional amount were outstanding with maturities of less
than twelve months. As of December 31, 2006, the fair market value of these
contracts was approximately $15.0 million. As of December 31, 2006,
other foreign currency derivative contracts that did not qualify for hedge
accounting had a total notional amount outstanding of $346.7 million. These
foreign currency derivative contracts consist principally of cash transactions
between three and thirty days, hedges of intercompany loans and hedges of
certain other balance sheet exposures. As of December 31, 2006, the fair
market value of these contracts was approximately $1.6 million.
Interest
rate swap contracts — The Company uses interest rate swap contracts to manage
its exposure to fluctuations in interest rates. Interest rate swap contracts
which fix the interest payments of certain variable rate debt instruments or
fix
the market rate component of anticipated fixed rate debt instruments are
accounted for as cash flow hedges. Interest rate swap contracts which hedge
the
change in fair market value of certain fixed rate debt instruments are accounted
for as fair value hedges. As of December 31, 2006, contracts representing
$800.0 million of notional amount were outstanding with maturity dates of
August 2007 through September 2011. All of these contracts modify the
variable rate characteristics of the Company’s variable rate debt instruments,
which are generally set at three-month LIBOR rates. These contracts convert
variable rate obligations into fixed rate obligations with a weighted average
interest rate of 4.902%. The fair market value of all outstanding interest
rate
swap contracts is subject to changes in value due to changes in interest rates.
As of December 31, 2006, the fair market value of these contracts was
approximately negative $2.7 million.
As of
December 31, 2006 and 2005, net gains of approximately $14.7 million
and $9.0 million, respectively, related to derivative instruments and
hedging activities were recorded in accumulated other comprehensive loss. During
the years ended December 31, 2006, 2005 and 2004, net gains (losses) of
approximately $(2.2) million, $33.5 million and $(7.4) million,
respectively, related to the Company’s hedging activities were reclassified from
accumulated other comprehensive loss into earnings. During the year ending
December 31, 2007, the Company expects to reclassify into earnings net
gains of approximately $16.0 million recorded in accumulated other
comprehensive loss. Such gains will be reclassified at the time the underlying
hedged transactions are realized. During the years ended December 31, 2006,
2005 and 2004, amounts recognized in the consolidated statements of operations
related to changes in the fair value of cash flow and fair value hedges excluded
from the effectiveness assessments and the ineffective portion of changes in
the
fair value of cash flow and fair value hedges were not material.
F-53
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(14) Financial
Instruments – (continued)
Non-U.S.
dollar financing transactions — The Company has designated its Euro-denominated
senior notes (Note 8, “Long-Term Debt”) as a net investment hedge of long-term
investments in its Euro-functional subsidiaries. As of December 31, 2006,
the amount recorded in accumulated other comprehensive loss related to the
effective portion of the net investment hedge of foreign operations was
approximately negative $147.2 million. Such amount will be included in
accumulated other comprehensive loss until the Company liquidates its related
net investment in its designated foreign operations.
(15) Quarterly
Financial Data (unaudited)
|
Thirteen
Weeks Ended
|
|||||||||||||
|
April 1,
2006 |
July 1,
2006 |
September 30,
2006 |
December 31,
2006 |
||||||||||
|
Net
sales
|
|
$
|
4,678.5
|
|
$
|
4,810.2
|
|
$
|
4,069.7
|
|
$
|
4,280.5
|
|
|
Gross
profit
|
219.2
|
284.1
|
186.8
|
237.6
|
|||||||||
|
Goodwill
impairment charges
|
—
|
2.9
|
—
|
—
|
|||||||||
|
Loss
on divestiture of Interior business
|
—
|
—
|
28.7
|
607.3
|
|||||||||
|
Income
(loss) before cumulative effect of a change in
accounting principle |
15.0
|
(6.4
|
)
|
(74.0
|
)
|
(645.0
|
)
|
||||||
|
Net
income (loss)
|
17.9
|
(6.4
|
)
|
(74.0
|
)
|
(645.0
|
)
|
||||||
|
Basic
net income (loss) per share before cumulative effect
of a change in accounting accounting principle |
0.22
|
(0.10
|
)
|
(1.10
|
)
|
(8.90
|
)
|
||||||
|
Basic
net income (loss) per share
|
0.27
|
(0.10
|
)
|
(1.10
|
)
|
(8.90
|
)
|
||||||
|
Diluted
net income (loss) per share before cumulative effect
of a change in accounting accounting principle |
0.22
|
(0.10
|
)
|
(1.10
|
)
|
(8.90
|
)
|
||||||
|
Diluted
net income (loss) per share
|
0.26
|
(0.10
|
)
|
(1.10
|
)
|
(8.90
|
)
|
||||||
|
Thirteen
Weeks Ended
|
|||||||||||||
|
April 2,
2005 |
July 2,
2005 |
October 1,
2005 |
December 31,
2005 |
||||||||||
|
Net
sales
|
|
$
|
4,286.0
|
|
$
|
4,419.3
|
|
$
|
3,986.6
|
|
$
|
4,397.3
|
|
|
Gross
profit
|
199.9
|
220.8
|
86.4
|
228.9
|
|||||||||
|
Goodwill
impairment charges
|
—
|
—
|
670.0
|
342.8
|
|||||||||
|
Net
income (loss)
|
15.6
|
(44.4
|
)
|
(750.1
|
)
|
(602.6
|
)
|
||||||
|
Basic
net income (loss) per share
|
0.23
|
(0.66
|
)
|
(11.17
|
)
|
(8.97
|
)
|
||||||
|
Diluted
net income (loss) per share
|
0.23
|
(0.66
|
)
|
(11.17
|
)
|
(8.97
|
)
|
||||||
(16) Accounting
Pronouncements
Inventory
Costs — The FASB issued SFAS No. 151, “Inventory Costs — an amendment of ARB No.
43, Chapter 4.” This statement clarifies the requirement that abnormal
inventory-related costs be recognized as current-period charges and requires
that the allocation of fixed production overheads to inventory conversion costs
be based on the normal capacity of the production facilities. The provisions
of
this statement are to be applied prospectively to inventory costs incurred
during fiscal years beginning after June 15, 2005. The effects of adoption
were not significant.
Nonmonetary
Assets — The FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets — an
amendment of APB Opinion No. 29.” APB Opinion No. 29, in general, requires the
use of fair value as the measurement basis for exchanges of nonmonetary assets.
This statement eliminates the exception to the fair value measurement principle
for nonmonetary exchanges of similar productive assets and replaces it with
a
general exception for nonmonetary asset exchanges that lack commercial
substance. The provisions of this statement are to be applied prospectively
to
nonmonetary asset exchanges occurring in fiscal periods beginning after
June 15, 2005. The effects of adoption were not significant.
F-54
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(16) Accounting
Pronouncements – (continued)
Financial
Instruments — The FASB issued SFAS No. 155, “Accounting for Certain Hybrid
Financial Instruments — an amendment of FASB Statements No. 133 and 140.” This
statement resolves issues related to the application of SFAS No. 133,
“Accounting for Derivative Instruments and Hedging Activities,” to beneficial
interests in securitized assets. The provisions of this statement are to be
applied prospectively to all financial instruments acquired or issued during
fiscal years beginning after September 15, 2006. The Company is currently
evaluating the provisions of this statement but does not expect the effects
of
adoption to be significant.
The FASB
issued SFAS No. 156, “Accounting for Servicing of Financial Assets — an
amendment of FASB Statement No. 140.” This statement requires that all servicing
assets and liabilities be initially measured at fair value. The provisions
of
this statement are to be applied prospectively to all servicing transactions
beginning after September 15, 2006. The effects of adoption were not
significant.
Fair
Value Measurements — The FASB issued SFAS No. 157, “Fair Value Measurements.”
This statement defines fair value, establishes a framework for measuring fair
value and expands disclosures about fair value measurements. The provisions
of
this statement are to generally be applied prospectively in fiscal years
beginning after November 15, 2007. The Company is currently evaluating the
impact of this statement on its financial statements.
Pension
and Other Postretirement Benefits — The FASB issued SFAS No. 158, “Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans — an
amendment of FASB Statements No. 87, 88, 106 and 132(R).” The Company adopted
the funded status recognition provisions of SFAS No. 158 as of December 31,
2006. For a discussion of the effects of adopting the recognition provisions
of
SFAS No. 158, see Note 10, “Pension and Other Postretirement Benefit Plans.”
This
statement also requires the measurement of defined benefit plan asset and
liabilities as of the annual balance sheet date. Currently, the Company measures
its plan assets and liabilities using an early measurement date of
September 30, as allowed by the original provisions of SFAS No. 87,
“Employers’ Accounting for Pensions,” and SFAS No. 106, “Employers’ Accounting
for Postretirement Benefits Other Than Pensions.” The measurement date
provisions of SFAS No. 158 are effective for fiscal years ending after
December 15, 2008. The Company is currently evaluating the measurement date
provisions of this statement.
Income
Taxes — The FASB issued Interpretation (“FIN”) No. 48, “Accounting for
Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109.” FIN
48 clarifies the accounting for uncertainty in income taxes by establishing
minimum standards for the recognition and measurement of tax positions taken
or
expected to be taken in a tax return. Under the requirements of FIN 48, the
Company must review all of its uncertain tax positions and make a determination
as to whether its position is more-likely-than-not to be sustained upon
examination by regulatory authorities. If a position meets the
more-likely-than-not criterion, then the related tax benefit is measured based
on the cumulative probability analysis of the amount that is
more-likely-than-not to be realized upon ultimate settlement. FIN 48 is
effective for fiscal years beginning after December 15, 2006. The
cumulative impact of the initial adoption of FIN 48 will be reported as an
adjustment to the Company’s beginning retained deficit balance in 2007. The
Company is currently evaluating the impact of this interpretation on its
financial statements.
Financial
Statement Reporting — The SEC issued Staff Accounting Bulletin (“SAB”) No. 108.
SAB 108 provides interpretive guidance on how the effects of the carryover
or
reversal of prior year misstatements should be considered in quantifying a
current year misstatement. The interpretive guidance is effective for financial
statements covering fiscal years ending after November 15, 2006. The effect
of adoption was not significant.
F-55
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(17) Subsequent
Event
On
February 9, 2007, the Company entered into an Agreement and Plan of Merger
(the “Merger Agreement”) with AREP Car Holdings Corp., a Delaware corporation
(“Parent”), and AREP Car Acquisition Corp., a Delaware corporation and a wholly
owned subsidiary of Parent (“Merger Sub”). Under the terms of the Merger
Agreement, Merger Sub would be merged with and into the Company, and as a
result, the Company would continue as the surviving corporation and a wholly
owned subsidiary of Parent. Parent and Merger Sub are affiliates of Carl C.
Icahn.
Pursuant
to the Merger Agreement, as of the effective time of the merger, each issued
and
outstanding share of common stock of the Company, other than shares (i) owned
by
Parent, Merger Sub or any subsidiary of Parent and (ii) owned by any
shareholders who are entitled to and who properly exercise appraisal rights
under Delaware law, will be canceled and automatically converted into the right
to receive $36.00 in cash, without interest.
The
Merger Agreement contains provisions pursuant to which the Company may solicit
alternative acquisition proposals for forty-five days after the date of the
Merger Agreement (the “Solicitation Period”) and receive unsolicited proposals
thereafter. The Company may terminate the Merger Agreement under certain
circumstances, including if its board of directors determines in good faith
that
it has received a Superior Proposal (as defined in the Merger Agreement) and
otherwise complies with certain terms of the Merger Agreement. In connection
with such termination, and in certain other limited circumstances, the Company
would be required to pay a fee of $85.2 million to Parent plus up to
$15.0 million of Parent’s out-of-pocket expenses (including fees and
expenses of financing sources, counsel, accountants, investment bankers, experts
and consultants) relating to the Merger Agreement. If such termination is to
accept a Superior Proposal prior to the end of the Solicitation Period, the
Company would be required to pay a fee of $73.5 million to Parent plus up
to $6.0 million of Parent’s out-of-pocket expenses.
Parent
has obtained debt financing commitments for the transaction contemplated by
the
Merger Agreement. Consummation of the merger is not subject to a financing
condition, but is subject to other conditions, including receipt of the
affirmative vote of the holders of a majority of the outstanding shares of
the
Company’s common stock, antitrust approvals and other customary closing
conditions.
In
connection with the execution of the Merger Agreement, the Company entered
into
a voting agreement with Icahn Partners LP, Icahn Partners Master Fund LP, Koala
Holding LLC and High River Limited Partnership. In the aggregate, such holders
beneficially own approximately 15% of the Company’s outstanding common stock.
Pursuant to the voting agreement, such holders agreed to vote in favor of the
merger and, subject to certain exceptions, not to dispose of any shares of
common stock prior to consummation of the merger. Such holders have also agreed
to vote in favor of a Superior Proposal under certain circumstances. In
addition, American Real Estate Partners, L.P. has provided a limited guaranty
in
favor of the Company with respect to the performance by Parent and Merger Sub
of
certain payment obligations under the Merger Agreement.
For
further information regarding the Merger Agreement, please refer to the Merger
Agreement and certain related documents which are incorporated by reference
as
exhibits to this Report.
F-56
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(18) Supplemental
Guarantor Condensed Consolidating Financial Statements
|
December 31,
2006
|
|||||||||||||||
|
Parent
|
Guarantors
|
Non-
Guarantors |
Eliminations
|
Consolidated
|
|||||||||||
|
(in
millions)
|
|||||||||||||||
|
ASSETS
|
|||||||||||||||
|
Current
Assets:
|
|||||||||||||||
|
Cash
and cash equivalents
|
|
$
|
195.8
|
|
$
|
4.0
|
|
$
|
302.9
|
|
$
|
—
|
|
$
|
502.7
|
|
Accounts
receivable
|
12.7
|
243.5
|
1,750.7
|
—
|
2,006.9
|
||||||||||
|
Inventories
|
15.2
|
136.9
|
429.4
|
—
|
581.5
|
||||||||||
|
Current
assets of business held for sale
|
77.1
|
217.1
|
133.6
|
—
|
427.8
|
||||||||||
|
Other
|
45.9
|
29.9
|
295.6
|
—
|
371.4
|
||||||||||
|
Total
current assets
|
346.7
|
631.4
|
2,912.2
|
—
|
3,890.3
|
||||||||||
|
Long-Term
Assets:
|
|||||||||||||||
|
Property,
plant and equipment, net
|
230.9
|
284.1
|
956.7
|
—
|
1,471.7
|
||||||||||
|
Goodwill,
net
|
454.5
|
551.1
|
991.1
|
—
|
1,996.7
|
||||||||||
|
Investments
in subsidiaries
|
3,691.2
|
3,257.4
|
—
|
(6,948.6
|
)
|
—
|
|||||||||
|
Other
|
233.7
|
24.1
|
234.0
|
—
|
491.8
|
||||||||||
|
Total
long-term assets
|
4,610.3
|
4,116.7
|
2,181.8
|
(6,948.6
|
)
|
3,960.2
|
|||||||||
|
$
|
4,957.0
|
$
|
4,748.1
|
$
|
5,094.0
|
$
|
(6,948.6
|
)
|
$
|
7,850.5
|
|||||
|
LIABILITIES
AND STOCKHOLDERS’
EQUITY
|
|||||||||||||||
|
Current
Liabilities:
|
|||||||||||||||
|
Short-term
borrowings
|
$
|
—
|
$
|
—
|
$
|
39.3
|
$
|
—
|
$
|
39.3
|
|||||
|
Accounts
payable and drafts
|
157.0
|
395.7
|
1,764.7
|
—
|
2,317.4
|
||||||||||
|
Other
accrued liabilities
|
322.3
|
145.8
|
631.2
|
—
|
1,099.3
|
||||||||||
|
Current
liabilities of business held for sale
|
60.4
|
226.1
|
119.2
|
—
|
405.7
|
||||||||||
|
Current
portion of long-term debt
|
6.0
|
—
|
19.6
|
—
|
25.6
|
||||||||||
|
Total
current liabilities
|
545.7
|
767.6
|
2,574.0
|
—
|
3,887.3
|
||||||||||
|
Long-Term
Liabilities:
|
|||||||||||||||
|
Long-term
debt
|
2,413.2
|
—
|
21.3
|
—
|
2,434.5
|
||||||||||
|
Long-term
liabilities of business held for sale
|
—
|
0.1
|
48.4
|
—
|
48.5
|
||||||||||
|
Intercompany
accounts, net
|
1,193.7
|
503.1
|
(1,696.8
|
)
|
—
|
—
|
|||||||||
|
Other
|
202.4
|
176.5
|
499.3
|
—
|
878.2
|
||||||||||
|
Total
long-term liabilities
|
3,809.3
|
679.7
|
(1,127.8
|
)
|
—
|
3,361.2
|
|||||||||
|
Stockholders’
Equity
|
602.0
|
3,300.8
|
3,647.8
|
(6,948.6
|
)
|
602.0
|
|||||||||
|
$
|
4,957.0
|
$
|
4,748.1
|
$
|
5,094.0
|
$
|
(6,948.6
|
)
|
$
|
7,850.5
|
|||||
F-57
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(18) Supplemental
Guarantor Condensed Consolidating Financial Statements –
(continued)
|
December 31,
2005
|
|||||||||||||||
|
Parent
|
Guarantors
|
Non-
Guarantors |
Eliminations
|
Consolidated
|
|||||||||||
|
(in
millions)
|
|||||||||||||||
|
ASSETS
|
|||||||||||||||
|
Current
Assets:
|
|||||||||||||||
|
Cash
and cash equivalents
|
|
$
|
38.6
|
|
$
|
4.8
|
|
$
|
153.9
|
|
$
|
—
|
|
$
|
197.3
|
|
Accounts
receivable
|
46.1
|
208.7
|
1,745.3
|
—
|
2,000.1
|
||||||||||
|
Inventories
|
24.6
|
176.9
|
394.1
|
—
|
595.6
|
||||||||||
|
Current
assets of business held for sale
|
228.7
|
264.3
|
114.7
|
—
|
607.7
|
||||||||||
|
Other
|
151.4
|
68.5
|
225.8
|
—
|
445.7
|
||||||||||
|
Total
current assets
|
489.4
|
723.2
|
2,633.8
|
—
|
3,846.4
|
||||||||||
|
Long-Term
Assets:
|
|||||||||||||||
|
Property,
plant and equipment, net
|
216.7
|
479.8
|
918.2
|
—
|
1,614.7
|
||||||||||
|
Goodwill,
net
|
454.5
|
536.5
|
948.8
|
—
|
1,939.8
|
||||||||||
|
Long-term
assets of business held for sale
|
108.5
|
267.3
|
109.4
|
—
|
485.2
|
||||||||||
|
Investments
in subsidiaries
|
3,274.0
|
2,895.0
|
—
|
(6,169.0
|
)
|
—
|
|||||||||
|
Other
|
104.9
|
26.9
|
270.5
|
—
|
402.3
|
||||||||||
|
Total
long-term assets
|
4,158.6
|
4,205.5
|
2,246.9
|
(6,169.0
|
)
|
4,442.0
|
|||||||||
|
$
|
4,648.0
|
$
|
4,928.7
|
$
|
4,880.7
|
$
|
(6,169.0
|
)
|
$
|
8,288.4
|
|||||
|
LIABILITIES
AND STOCKHOLDERS’
EQUITY
|
|||||||||||||||
|
Current
Liabilities:
|
|||||||||||||||
|
Short-term
borrowings
|
$
|
—
|
$
|
—
|
$
|
23.4
|
$
|
—
|
$
|
23.4
|
|||||
|
Accounts
payable and drafts
|
223.0
|
560.2
|
1,732.8
|
—
|
2,516.0
|
||||||||||
|
Other
accrued liabilities
|
238.8
|
161.2
|
608.6
|
—
|
1,008.6
|
||||||||||
|
Current
liabilities of business held for sale
|
169.6
|
275.7
|
104.0
|
—
|
549.3
|
||||||||||
|
Current
portion of long-term debt
|
2.1
|
2.1
|
5.2
|
—
|
9.4
|
||||||||||
|
Total
current liabilities
|
633.5
|
999.2
|
2,474.0
|
—
|
4,106.7
|
||||||||||
|
Long-Term
Liabilities:
|
|||||||||||||||
|
Long-term
debt
|
2,194.7
|
8.4
|
40.0
|
—
|
2,243.1
|
||||||||||
|
Long-term
liabilities of business held for sale
|
—
|
0.3
|
27.3
|
—
|
27.6
|
||||||||||
|
Intercompany
accounts, net
|
410.0
|
1,012.5
|
(1,422.5
|
)
|
—
|
—
|
|||||||||
|
Other
|
298.8
|
157.7
|
343.5
|
—
|
800.0
|
||||||||||
|
Total
long-term liabilities
|
2,903.5
|
1,178.9
|
(1,011.7
|
)
|
—
|
3,070.7
|
|||||||||
|
Stockholders’
Equity
|
1,111.0
|
2,750.6
|
3,418.4
|
(6,169.0
|
)
|
1,111.0
|
|||||||||
|
$
|
4,648.0
|
$
|
4,928.7
|
$
|
4,880.7
|
$
|
(6,169.0
|
)
|
$
|
8,288.4
|
|||||
F-58
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(18) Supplemental
Guarantor Condensed Consolidating Financial Statements –
(continued)
|
For
the Year Ended December 31,
2006
|
||||||||||||||||
|
Parent
|
Guarantors
|
Non-
Guarantors |
Eliminations
|
Consolidated
|
||||||||||||
|
(in
millions)
|
||||||||||||||||
|
Net
sales
|
|
$
|
1,580.3
|
|
$
|
6,889.8
|
|
$
|
12,729.4
|
|
$
|
(3,360.6
|
)
|
$
|
17,838.9
|
|
|
Cost
of sales
|
1,691.5
|
6,755.6
|
11,824.7
|
(3,360.6
|
)
|
16,911.2
|
||||||||||
|
Selling,
general and administrative expenses
|
240.5
|
75.0
|
331.2
|
—
|
646.7
|
|||||||||||
|
Goodwill
impairment charges
|
—
|
2.9
|
—
|
—
|
2.9
|
|||||||||||
|
Loss
on divestiture of Interior business
|
240.4
|
259.6
|
136.0
|
—
|
636.0
|
|||||||||||
|
Interest
(income) expense
|
(114.4
|
)
|
126.1
|
198.1
|
—
|
209.8
|
||||||||||
|
Intercompany
(income) expense, net
|
(281.2
|
)
|
77.4
|
203.8
|
—
|
—
|
||||||||||
|
Other
expense, net
|
27.6
|
48.8
|
9.3
|
—
|
85.7
|
|||||||||||
|
Income
(loss) before provision (benefit) for
income taxes, minority interests in consolidated subsidiaries and equity in net (income) loss of affiliates and subsidiaries |
(224.1
|
)
|
(455.6
|
)
|
26.3
|
—
|
(653.4
|
)
|
||||||||
|
Provision
(benefit) for income taxes
|
5.4
|
(67.4
|
)
|
116.9
|
—
|
54.9
|
||||||||||
|
Minority
interests in consolidated subsidiaries
|
—
|
—
|
18.3
|
—
|
18.3
|
|||||||||||
|
Equity
in net (income) loss of affiliates
|
(12.7
|
)
|
(5.2
|
)
|
1.7
|
—
|
(16.2
|
)
|
||||||||
|
Equity
in net (income) loss of subsidiaries
|
493.6
|
(80.1
|
)
|
—
|
(413.5
|
)
|
—
|
|||||||||
|
Loss
before cumulative effect of a change in
accounting principle |
(710.4
|
)
|
(302.9
|
)
|
(110.6
|
)
|
413.5
|
(710.4
|
)
|
|||||||
|
Cumulative
effect of a change in accounting
principle |
2.9
|
—
|
—
|
—
|
2.9
|
|||||||||||
|
Net
loss
|
$
|
(707.5
|
)
|
$
|
(302.9
|
)
|
$
|
(110.6
|
)
|
$
|
413.5
|
$
|
(707.5
|
)
|
||
F-59
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(18) Supplemental
Guarantor Condensed Consolidating Financial Statements –
(continued)
|
For
the Year Ended December 31,
2005
|
||||||||||||||||
|
Parent
|
Guarantors
|
Non-
Guarantors |
Eliminations
|
Consolidated
|
||||||||||||
|
(in
millions)
|
||||||||||||||||
|
Net
sales
|
|
$
|
1,657.2
|
|
$
|
6,599.0
|
|
$
|
11,350.1
|
|
$
|
(2,517.1
|
)
|
$
|
17,089.2
|
|
|
Cost
of sales
|
1,727.4
|
6,568.4
|
10,574.5
|
(2,517.1
|
)
|
16,353.2
|
||||||||||
|
Selling,
general and administrative expenses
|
309.6
|
2.8
|
318.2
|
—
|
630.6
|
|||||||||||
|
Goodwill
impairment charges
|
—
|
1,012.8
|
—
|
—
|
1.012.8
|
|||||||||||
|
Interest
expense
|
45.9
|
94.2
|
43.1
|
—
|
183.2
|
|||||||||||
|
Intercompany
(income) expense, net
|
(373.7
|
)
|
308.2
|
65.5
|
—
|
—
|
||||||||||
|
Other
expense, net
|
6.4
|
19.4
|
12.2
|
—
|
38.0
|
|||||||||||
|
Income
(loss) before provision (benefit) for
income taxes, minority interests in consolidated subsidiaries and equity in net (income) loss of affiliates and subsidiaries |
(58.4
|
)
|
(1,406.8
|
)
|
336.6
|
—
|
(1,128.6
|
)
|
||||||||
|
Provision
(benefit) for income taxes
|
270.2
|
(140.6
|
)
|
64.7
|
—
|
194.3
|
||||||||||
|
Minority
interests in consolidated subsidiaries
|
—
|
—
|
7.2
|
—
|
7.2
|
|||||||||||
|
Equity
in net (income) loss of affiliates
|
40.6
|
(3.5
|
)
|
14.3
|
—
|
51.4
|
||||||||||
|
Equity
in net (income) loss of subsidiaries
|
1,012.3
|
(193.9
|
)
|
—
|
(818.4
|
)
|
—
|
|||||||||
|
Net
income (loss)
|
$
|
(1,381.5
|
)
|
$
|
(1,068.8
|
)
|
$
|
250.4
|
$
|
818.4
|
$
|
(1,381.5
|
)
|
|||
F-60
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(18) Supplemental
Guarantor Condensed Consolidating Financial Statements –
(continued)
|
For
the Year Ended December 31,
2004
|
||||||||||||||||
|
Parent
|
Guarantors
|
Non-
Guarantors |
Eliminations
|
Consolidated
|
||||||||||||
|
(in
millions)
|
||||||||||||||||
|
Net
sales
|
|
$
|
1,652.1
|
|
$
|
6,937.7
|
|
$
|
10,990.3
|
|
$
|
(2,620.1
|
)
|
$
|
16,960.0
|
|
|
Cost
of sales
|
1,739.9
|
6,270.1
|
10,168.0
|
(2,620.1
|
)
|
15,557.9
|
||||||||||
|
Selling,
general and administrative expenses
|
205.3
|
129.5
|
298.9
|
—
|
633.7
|
|||||||||||
|
Interest
expense
|
30.2
|
100.5
|
34.8
|
—
|
165.5
|
|||||||||||
|
Intercompany
(income) expense, net
|
(317.2
|
)
|
339.4
|
(22.2
|
)
|
—
|
—
|
|||||||||
|
Other
(income) expense, net
|
(17.8
|
)
|
29.5
|
26.9
|
—
|
38.6
|
||||||||||
|
Income
before provision (benefit) for income
taxes, minority interests in consolidated subsidiaries and equity in net (income) loss of affiliates and subsidiaries |
11.7
|
68.7
|
483.9
|
—
|
564.3
|
|||||||||||
|
Provision
(benefit) for income taxes
|
(17.9
|
)
|
25.1
|
120.8
|
—
|
128.0
|
||||||||||
|
Minority
interests in consolidated subsidiaries
|
—
|
—
|
16.7
|
—
|
16.7
|
|||||||||||
|
Equity
in net (income) loss of affiliates
|
0.3
|
(3.3
|
)
|
0.4
|
—
|
(2.6
|
)
|
|||||||||
|
Equity
in net income of subsidiaries
|
(392.9
|
)
|
(305.8
|
)
|
—
|
698.7
|
—
|
|||||||||
|
Net
income
|
$
|
422.2
|
$
|
352.7
|
$
|
346.0
|
$
|
(698.7
|
)
|
$
|
422.2
|
|||||
F-61
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(18) Supplemental
Guarantor Condensed Consolidating Financial Statements –
(continued)
|
For
the Year Ended December 31,
2006
|
||||||||||||||||
|
Parent
|
Guarantors
|
Non-
Guarantors |
Eliminations
|
Consolidated
|
||||||||||||
|
(in
millions)
|
||||||||||||||||
|
Net
Cash Provided by Operating Activities
|
|
$
|
28.9
|
|
$
|
(102.0
|
)
|
$
|
358.4
|
|
$
|
—
|
|
$
|
285.3
|
|
|
Cash
Flows from Investing Activities:
|
||||||||||||||||
|
Additions
to property, plant and equipment
|
(47.8
|
)
|
(94.8
|
)
|
(205.0
|
)
|
—
|
(347.6
|
)
|
|||||||
|
Cost
of acquisitions, net of cash acquired
|
—
|
(24.9
|
)
|
(5.6
|
)
|
—
|
(30.5
|
)
|
||||||||
|
Net
proceeds from disposition of businesses and other assets
|
(1.4
|
)
|
22.5
|
44.8
|
—
|
65.9
|
||||||||||
|
Net
cash used in investing activities
|
(49.2
|
)
|
(97.2
|
)
|
(165.8
|
)
|
—
|
(312.2
|
)
|
|||||||
|
Cash
Flows from Financing Activities:
|
|
|||||||||||||||
|
Issuance
of senior notes
|
900.0
|
—
|
—
|
—
|
900.0
|
|||||||||||
|
Repayment
of senior notes
|
(1,356.9
|
)
|
—
|
—
|
—
|
(1,356.9
|
)
|
|||||||||
|
Primary
credit facility borrowings, net
|
597.0
|
—
|
—
|
—
|
597.0
|
|||||||||||
|
Other
long-term debt repayments, net
|
(44.8
|
)
|
(10.5
|
)
|
18.8
|
—
|
(36.5
|
)
|
||||||||
|
Short-term
debt repayments, net
|
—
|
—
|
(11.8
|
)
|
—
|
(11.8
|
)
|
|||||||||
|
Change
in intercompany accounts
|
(102.0
|
)
|
192.6
|
(90.6
|
)
|
—
|
—
|
|||||||||
|
Net
proceeds from the sale of common stock
|
199.2
|
—
|
—
|
—
|
199.2
|
|||||||||||
|
Dividends
paid
|
(16.8
|
)
|
—
|
—
|
—
|
(16.8
|
)
|
|||||||||
|
Proceeds
from exercise of stock options
|
0.2
|
—
|
—
|
—
|
0.2
|
|||||||||||
|
Increase
in drafts
|
1.6
|
(2.3
|
)
|
3.7
|
—
|
3.0
|
||||||||||
|
Net
cash provided by financing activities
|
177.5
|
179.8
|
(79.9
|
)
|
—
|
277.4
|
||||||||||
|
Effect
of foreign currency translation
|
—
|
18.6
|
36.3
|
—
|
54.9
|
|||||||||||
|
Net
Change in Cash and Cash Equivalents
|
157.2
|
(0.8
|
)
|
149.0
|
—
|
305.4
|
||||||||||
|
Cash
and Cash Equivalents at Beginning of Year
|
38.6
|
4.8
|
153.9
|
—
|
197.3
|
|||||||||||
|
Cash
and Cash Equivalents at End of Year
|
$
|
195.8
|
$
|
4.0
|
$
|
302.9
|
$
|
—
|
$
|
502.7
|
||||||
F-62
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(18) Supplemental
Guarantor Condensed Consolidating Financial Statements –
(continued)
|
For
the Year Ended December 31,
2005
|
||||||||||||||||
|
Parent
|
Guarantors
|
Non-
Guarantors |
Eliminations
|
Consolidated
|
||||||||||||
|
(in
millions)
|
||||||||||||||||
|
Net
Cash Provided by Operating Activities
|
|
$
|
(260.7
|
)
|
$
|
(15.8
|
)
|
$
|
837.3
|
|
$
|
—
|
|
$
|
560.8
|
|
|
Cash
Flows from Investing Activities:
|
||||||||||||||||
|
Additions
to property, plant and equipment
|
(123.0
|
)
|
(235.9
|
)
|
(209.5
|
)
|
—
|
(568.4
|
)
|
|||||||
|
Cost
of acquisitions, net of cash acquired
|
—
|
—
|
(11.8
|
)
|
—
|
(11.8
|
)
|
|||||||||
|
Net
proceeds from disposition of businesses
and other assets |
7.8
|
16.1
|
9.4
|
—
|
33.3
|
|||||||||||
|
Other,
net
|
1.9
|
0.6
|
2.8
|
—
|
5.3
|
|||||||||||
|
Net
cash used in investing activities
|
(113.3
|
)
|
(219.2
|
)
|
(209.1
|
)
|
—
|
(541.6
|
)
|
|||||||
|
Cash
Flows from Financing Activities:
|
||||||||||||||||
|
Repayment
of senior notes
|
(600.0
|
)
|
—
|
—
|
—
|
(600.0
|
)
|
|||||||||
|
Primary
credit facility borrowings, net
|
400.0
|
—
|
—
|
—
|
400.0
|
|||||||||||
|
Other
long-term debt repayments, net
|
(17.7
|
)
|
(2.2
|
)
|
(12.8
|
)
|
—
|
(32.7
|
)
|
|||||||
|
Short-term
debt repayments, net
|
—
|
—
|
(23.8
|
)
|
—
|
(23.8
|
)
|
|||||||||
|
Change
in intercompany accounts
|
601.1
|
234.5
|
(835.6
|
)
|
—
|
—
|
||||||||||
|
Dividends
paid
|
(67.2
|
)
|
—
|
—
|
—
|
(67.2
|
)
|
|||||||||
|
Proceeds
from exercise of stock options
|
4.7
|
—
|
—
|
—
|
4.7
|
|||||||||||
|
Repurchase
of common stock
|
(25.4
|
)
|
—
|
—
|
—
|
(25.4
|
)
|
|||||||||
|
Decrease
in drafts
|
(7.1
|
)
|
1.5
|
2.3
|
—
|
(3.3
|
)
|
|||||||||
|
Other,
net
|
0.7
|
—
|
—
|
—
|
0.7
|
|||||||||||
|
Net
cash used in financing activities
|
289.1
|
233.8
|
(869.9
|
)
|
—
|
(347.0
|
)
|
|||||||||
|
Effect
of foreign currency translation
|
—
|
2.2
|
(62.0
|
)
|
—
|
(59.8
|
)
|
|||||||||
|
Net
Change in Cash and Cash Equivalents
|
(84.9
|
)
|
1.0
|
(303.7
|
)
|
—
|
(387.6
|
)
|
||||||||
|
Cash
and Cash Equivalents at Beginning
of Year |
123.5
|
3.8
|
457.6
|
—
|
584.9
|
|||||||||||
|
Cash
and Cash Equivalents at End of Year
|
$
|
38.6
|
$
|
4.8
|
$
|
153.9
|
$
|
—
|
$
|
197.3
|
||||||
F-63
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(18) Supplemental
Guarantor Condensed Consolidating Financial Statements –
(continued)
|
For
the Year Ended December 31,
2004
|
||||||||||||||||
|
Parent
|
Guarantors
|
Non-
Guarantors |
Eliminations
|
Consolidated
|
||||||||||||
|
(in
millions)
|
||||||||||||||||
|
Net
Cash Provided by Operating Activities
|
|
$
|
100.6
|
|
$
|
64.6
|
|
$
|
510.7
|
|
$
|
—
|
|
$
|
675.9
|
|
|
Cash
Flows from Investing Activities:
|
||||||||||||||||
|
Additions
to property, plant and equipment
|
(71.6
|
)
|
(146.2
|
)
|
(211.2
|
)
|
—
|
(429.0
|
)
|
|||||||
|
Cost
of acquisitions, net of cash acquired
|
(14.1
|
)
|
(3.3
|
)
|
(85.6
|
)
|
—
|
(103.0
|
)
|
|||||||
|
Net
proceeds from disposition of businesses and
other assets |
15.3
|
13.2
|
27.8
|
—
|
56.3
|
|||||||||||
|
Other,
net
|
0.8
|
0.1
|
2.3
|
—
|
3.2
|
|||||||||||
|
Net
cash used in investing activities
|
(69.6
|
)
|
(136.2
|
)
|
(266.7
|
)
|
—
|
(472.5
|
)
|
|||||||
|
Cash
Flows from Financing Activities:
|
||||||||||||||||
|
Issuance
of senior notes
|
399.2
|
—
|
—
|
—
|
399.2
|
|||||||||||
|
Other
long-term debt repayments, net
|
(11.4
|
)
|
1.0
|
(39.0
|
)
|
—
|
(49.4
|
)
|
||||||||
|
Short-term
debt repayments, net
|
(0.3
|
)
|
(0.1
|
)
|
(29.4
|
)
|
—
|
(29.8
|
)
|
|||||||
|
Change
in intercompany accounts
|
(189.1
|
)
|
66.2
|
122.9
|
—
|
—
|
||||||||||
|
Dividends
paid
|
(68.0
|
)
|
—
|
—
|
—
|
(68.0
|
)
|
|||||||||
|
Proceeds
from exercise of stock options
|
24.4
|
—
|
—
|
—
|
24.4
|
|||||||||||
|
Repurchase
of common stock
|
(97.7
|
)
|
—
|
—
|
—
|
(97.7
|
)
|
|||||||||
|
Decrease
in drafts
|
(6.1
|
)
|
(5.3
|
)
|
(1.2
|
)
|
—
|
(12.6
|
)
|
|||||||
|
Net
cash provided by financing activities
|
51.0
|
61.8
|
53.3
|
—
|
166.1
|
|||||||||||
|
Effect
of foreign currency translation
|
—
|
4.5
|
41.6
|
—
|
46.1
|
|||||||||||
|
Net
Change in Cash and Cash Equivalents
|
82.0
|
(5.3
|
)
|
338.9
|
—
|
415.6
|
||||||||||
|
Cash
and Cash Equivalents at Beginning
of Year |
41.5
|
9.1
|
118.7
|
—
|
169.3
|
|||||||||||
|
Cash
and Cash Equivalents at End of Year
|
$
|
123.5
|
$
|
3.8
|
$
|
457.6
|
$
|
—
|
$
|
584.9
|
||||||
Basis
of
Presentation — Certain of the Company’s wholly owned subsidiaries (the
“Guarantors”) have unconditionally fully guaranteed, on a joint and several
basis, the punctual payment when due, whether at stated maturity, by
acceleration or otherwise, of all of the Company’s obligations under the New
Credit Agreement and the indentures governing the Company’s senior notes,
including the Company’s obligations to pay principal, premium, if any, and
interest with respect to the senior notes. The senior notes consist of
$300 million aggregate principal amount of 8.50% senior notes due 2013,
$600 million aggregate principal amount of 8.75% senior notes due 2016,
$399 million aggregate principal amount of 5.75% senior notes due 2014,
$4 million aggregate principal amount of zero-coupon convertible senior
notes due 2022, Euro 56 million aggregate principal amount of 8.125% senior
notes due 2008 and $41 million aggregate principal amount of 8.11% senior
notes due 2009. The Guarantors under the indentures are currently Lear
Automotive Dearborn, Inc., Lear Automotive (EEDS) Spain S.L., Lear Corporation
EEDS and Interiors, Lear Corporation (Germany) Ltd., Lear Corporation Mexico,
S.
de R.L. de C.V., Lear Operations Corporation and Lear Seating Holdings Corp.
#50. Lear Automotive Dearborn, Inc. became a Guarantor under the indentures
effective April 25, 2006. In lieu of providing separate audited financial
statements for the Guarantors, the Company has included the audited supplemental
guarantor condensed consolidating financial statements above. These financial
statements reflect the guarantors listed above for all periods presented.
Management does not believe that separate financial statements of the Guarantors
are material to investors. Therefore, separate financial statements and other
disclosures concerning the Guarantors are not presented.
As of
and
for the years ended December 31, 2005 and 2004, the supplemental guarantor
condensed consolidating financial statements have been restated to reflect
certain changes to the equity investments of the guarantor subsidiaries.
Distributions
— There are no significant restrictions on the ability of the Guarantors to make
distributions to the Company.
F-64
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(18) Supplemental
Guarantor Condensed Consolidating Financial Statements –
(continued)
Selling,
General and Administrative Expenses — During 2006, 2005 and 2004, the Parent
allocated $50.0 million, $62.3 million and $63.3 million,
respectively, of corporate selling, general and administrative expenses to
its
operating subsidiaries. The allocations were based on various factors, which
estimate usage of particular corporate functions, and in certain instances,
other relevant factors, such as the revenues or the number of employees of
the
Company’s subsidiaries.
Long-Term
Debt of the Parent and the Guarantors — A summary of long-term debt of the
Parent and the Guarantors on a combined basis is shown below (in millions):
|
December 31,
|
|||||||
|
2006
|
2005
|
||||||
|
Amended
and restated primary credit
facility
|
|
$
|
997.0
|
|
$
|
400.0
|
|
|
Senior
notes
|
1,417.6
|
1,795.0
|
|||||
|
Other
long-term debt
|
4.6
|
12.3
|
|||||
|
2,419.2
|
2,207.3
|
||||||
|
Less
— current portion
|
(6.0
|
)
|
(4.2
|
)
|
|||
|
$
|
2,413.2
|
$
|
2,203.1
|
||||
The
obligations of foreign subsidiary borrowers under the New Credit Agreement
are
guaranteed by the Parent.
For a
more detailed description of the above indebtedness, see Note 8, “Long-Term
Debt.”
The
aggregate minimum principal payment requirements on long-term debt of the Parent
and the Guarantors, including capital lease obligations, in each of the five
years subsequent to December 31, 2006, are shown below (in millions):
|
Year
|
Maturities
|
||
|
2007
|
|
$
|
6.0
|
|
2008
|
79.3
|
||
|
2009
|
47.2
|
||
|
2010
|
6.0
|
||
|
2011
|
6.0
|
||
F-65
SCHEDULE
II — VALUATION AND QUALIFYING
ACCOUNTS
|
Balance
as of Beginning of Year |
Additions
|
Retirements
|
Other
Changes |
Balance
as of End of Year |
|||||||||||
|
(in
millions)
|
|||||||||||||||
|
FOR
THE YEAR ENDED DECEMBER 31, 2006:
|
|||||||||||||||
|
Valuation
of accounts deducted from related assets:
|
|||||||||||||||
|
Allowance
for doubtful accounts
|
|
$
|
20.4
|
|
$
|
7.7
|
|
$
|
(12.2
|
)
|
$
|
(1.0
|
)
|
$
|
14.9
|
|
Reserve
for unmerchantable inventories
|
85.7
|
28.4
|
(23.3
|
)
|
(3.7
|
)
|
87.1
|
||||||||
|
Restructuring
reserves
|
25.5
|
92.3
|
(75.9
|
)
|
—
|
41.9
|
|||||||||
|
Allowance
for deferred tax assets
|
478.3
|
364.6
|
(28.4
|
)
|
29.4
|
843.9
|
|||||||||
|
$
|
609.9
|
$
|
493.0
|
$
|
(139.8
|
)
|
$
|
24.7
|
$
|
987.8
|
|||||
|
FOR
THE YEAR ENDED DECEMBER 31, 2005:
|
|||||||||||||||
|
Valuation
of accounts deducted from related assets:
|
|||||||||||||||
|
Allowance
for doubtful accounts
|
$
|
26.7
|
$
|
12.5
|
$
|
(15.8
|
)
|
$
|
(3.0
|
)
|
$
|
20.4
|
|||
|
Reserve
for unmerchantable inventories
|
86.4
|
33.8
|
(23.3
|
)
|
(11.2
|
)
|
85.7
|
||||||||
|
Restructuring
reserves
|
20.9
|
86.8
|
(80.3
|
)
|
(1.9
|
)
|
25.5
|
||||||||
|
Allowance
for deferred tax assets
|
277.7
|
276.3
|
(44.5
|
)
|
(31.2
|
)
|
478.3
|
||||||||
|
$
|
411.7
|
$
|
409.4
|
$
|
(163.9
|
)
|
$
|
(47.3
|
)
|
$
|
609.9
|
||||
|
FOR
THE YEAR ENDED DECEMBER 31, 2004:
|
|||||||||||||||
|
Valuation
of accounts deducted from related assets:
|
|||||||||||||||
|
Allowance
for doubtful accounts
|
$
|
30.6
|
$
|
11.7
|
$
|
(16.0
|
)
|
$
|
0.4
|
$
|
26.7
|
||||
|
Reserve
for unmerchantable inventories
|
55.8
|
45.5
|
(16.0
|
)
|
1.1
|
86.4
|
|||||||||
|
Restructuring
reserves
|
8.1
|
18.8
|
(6.0
|
)
|
—
|
20.9
|
|||||||||
|
Allowance
for deferred tax assets
|
220.8
|
84.4
|
(27.5
|
)
|
—
|
277.7
|
|||||||||
|
$
|
315.3
|
$
|
160.4
|
$
|
(65.5
|
)
|
$
|
1.5
|
$
|
411.7
|
|||||
F-66
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
March
31,
2007 |
December
31,
2006 |
||||||
|
(unaudited)
|
|||||||
|
(in
millions, except share data)
|
|||||||
|
ASSETS
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
330.4
|
|
$
|
502.7
|
|
|
Accounts
receivable
|
|
|
2,412.7
|
|
|
2,006.9
|
|
|
Inventories
|
|
|
599.0
|
|
|
581.5
|
|
|
Current
assets of business held for sale
|
|
|
38.3
|
|
|
427.8
|
|
|
Other
|
|
|
317.6
|
|
|
371.4
|
|
|
Total
current assets
|
|
|
3,698.0
|
|
|
3,890.3
|
|
|
Long-Term
Assets:
|
|
|
|
|
|
||
|
Property,
plant and equipment, net
|
|
|
1,425.9
|
|
|
1,471.7
|
|
|
Goodwill,
net
|
|
|
2,006.6
|
|
|
1,996.7
|
|
|
Other
|
|
|
530.5
|
|
|
491.8
|
|
|
Total
long-term assets
|
|
|
3,963.0
|
|
|
3,960.2
|
|
|
|
|
$
|
7,661.0
|
|
$
|
7,850.5
|
|
|
LIABILITIES
AND STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
||
|
Current
Liabilities:
|
|
|
|
|
|
||
|
Short-term
borrowings
|
|
$
|
11.5
|
|
$
|
39.3
|
|
|
Accounts
payable and drafts
|
|
|
2,480.3
|
|
|
2,317.4
|
|
|
Accrued
liabilities
|
|
|
1,152.8
|
|
|
1,099.3
|
|
|
Current
liabilities of business held for
sale
|
|
|
16.7
|
|
|
405.7
|
|
|
Current
portion of long-term debt
|
|
|
26.4
|
|
|
25.6
|
|
|
Total
current liabilities
|
|
|
3,687.7
|
|
|
3,887.3
|
|
|
Long-Term
Liabilities:
|
|
|
|
|
|
||
|
Long-term
debt
|
|
|
2,431.8
|
|
|
2,434.5
|
|
|
Long-term
liabilities of business held for sale
|
|
|
21.6
|
|
|
48.5
|
|
|
Other
|
|
|
827.4
|
|
|
878.2
|
|
|
Total
long-term liabilities
|
|
|
3,280.8
|
|
|
3,361.2
|
|
|
Stockholders’
Equity:
|
|
|
|
|
|
||
|
Common
stock, $0.01 par value, 150,000,000 shares authorized;
82,166,506 shares and 81,984,306 shares issued as of March 31, 2007 and December 31, 2006, respectively |
|
|
0.7
|
|
|
0.7
|
|
|
Additional
paid-in capital
|
|
|
1,357.3
|
|
|
1,338.1
|
|
|
Common
stock held in treasury, 5,508,097 shares as of March 31, 2007,
and
5,732,316 shares as of December 31, 2006, at cost |
|
|
(201.9
|
)
|
|
(210.2
|
)
|
|
Retained
deficit
|
|
|
(308.0
|
)
|
|
(362.5
|
)
|
|
Accumulated
other comprehensive loss
|
|
|
(155.6
|
)
|
|
(164.1
|
)
|
|
Total
stockholders’ equity
|
|
|
692.5
|
|
|
602.0
|
|
|
|
|
$
|
7,661.0
|
|
$
|
7,850.5
|
|
The accompanying notes are an integral
part of these condensed consolidated balance sheets.
F-67
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
|
Three
Months Ended
|
|||||||
|
March
31,
2007 |
April
1,
2006 |
||||||
|
(unaudited;
in millions,
except per share data) |
|||||||
|
Net
sales
|
|
$
|
4,406.1
|
|
$
|
4,678.5
|
|
|
Cost
of sales
|
|
|
4,095.2
|
|
|
4,459.3
|
|
|
Selling,
general and administrative expenses
|
|
|
126.5
|
|
|
165.0
|
|
|
Loss
on divestiture of Interior business
|
|
|
25.6
|
|
|
—
|
|
|
Interest
expense
|
|
|
51.5
|
|
|
47.7
|
|
|
Other
(income) expense, net
|
|
|
25.0
|
|
|
(8.3
|
)
|
|
Income
before provision (benefit) for income taxes and cumulative effect
of
a
change in accounting principle |
|
|
82.3
|
|
|
14.8
|
|
|
Provision
(benefit) for income taxes
|
|
|
32.4
|
|
|
(0.2
|
)
|
|
Income
before cumulative effect of a change in accounting
principle
|
|
|
49.9
|
|
|
15.0
|
|
|
Cumulative
effect of a change in accounting principle
|
|
|
—
|
|
|
2.9
|
|
|
Net
income
|
|
$
|
49.9
|
|
$
|
17.9
|
|
|
Basic
net income per share:
|
|
|
|
|
|
||
|
Income
before cumulative effect of a change in accounting principle
|
|
$
|
0.65
|
|
$
|
0.22
|
|
|
Cumulative
effect of a change in accounting principle
|
|
|
—
|
|
|
0.05
|
|
|
Basic
net income per share
|
|
$
|
0.65
|
|
$
|
0.27
|
|
|
Diluted
net
income per share:
|
|
|
|
|
|
||
|
Income
before cumulative effect of a change in accounting principle
|
|
$
|
0.64
|
|
$
|
0.22
|
|
|
Cumulative
effect of a change in accounting principle
|
|
|
—
|
|
|
0.04
|
|
|
Diluted
net income per share
|
|
$
|
0.64
|
|
$
|
0.26
|
|
The accompanying notes are an integral
part of these condensed consolidated statements.
F-68
CONDENSED
CONSOLIDATED STATEMENTS OF CASH
FLOWS
|
Three
Months Ended
|
|||||||
|
March
31,
2007 |
April
1,
2006 |
||||||
|
(unaudited;
in millions)
|
|||||||
|
Cash Flows from Operating
Activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
49.9
|
|
$
|
17.9
|
|
|
Adjustments
to reconcile net income to net cash provided by (used in)
operating activities: |
|
|
|
|
|
||
|
Cumulative
effect of a change in accounting principle
|
|
|
—
|
|
|
(2.9
|
)
|
|
Loss
on divestiture of Interior business
|
|
|
25.6
|
|
|
—
|
|
|
Depreciation
and amortization
|
|
|
74.5
|
|
|
97.8
|
|
|
Net
change in recoverable customer engineering and tooling
|
|
|
23.8
|
|
|
128.6
|
|
|
Net
change in working capital items
|
|
|
(150.4
|
)
|
|
(235.8
|
)
|
|
Net
change in sold accounts receivable
|
|
|
(38.9
|
)
|
|
38.1
|
|
|
Other,
net
|
|
|
(26.3
|
)
|
|
(4.3
|
)
|
|
Net
cash provided by (used in) operating activities
|
|
|
(41.8
|
)
|
|
39.4
|
|
|
Cash
Flows from Investing Activities:
|
|
|
|
|
|
||
|
Additions to property, plant and
equipment
|
|
|
(29.2
|
)
|
|
(92.6
|
)
|
|
Divestiture of Interior business
|
|
|
(57.3
|
)
|
|
—
|
|
|
Other, net
|
|
|
(28.6
|
)
|
|
27.9
|
|
|
Net cash used in investing
activities
|
|
|
(115.1
|
)
|
|
(64.7
|
)
|
|
Cash
Flows
from Financing Activities:
|
|
|
|
|
|
||
|
Long-term debt repayments, net
|
|
|
(3.6
|
)
|
|
(6.1
|
)
|
|
Short-term debt repayments, net
|
|
|
(11.0
|
)
|
|
—
|
|
|
Dividends paid
|
|
|
—
|
|
|
(16.8
|
)
|
|
Proceeds from exercise of stock options
|
|
|
5.7
|
|
|
—
|
|
|
Increase (decrease) in drafts
|
|
|
(13.5
|
)
|
|
1.1
|
|
|
Net cash used in financing
activities
|
|
|
(22.4
|
)
|
|
(21.8
|
)
|
|
Effect of foreign currency translation
|
|
|
7.0
|
|
|
10.7
|
|
|
Net
Change in Cash and Cash Equivalents
|
|
|
(172.3
|
)
|
|
(36.4
|
)
|
|
Cash and Cash Equivalents as of
Beginning
of Period
|
|
|
502.7
|
|
|
207.6
|
|
|
Cash
and Cash Equivalents as of End of Period
|
|
$
|
330.4
|
|
$
|
171.2
|
|
|
Changes
in Working Capital Items:
|
|
|
|
|
|
||
|
Accounts receivable
|
|
$
|
(434.2
|
)
|
$
|
(428.2
|
)
|
|
Inventories
|
|
|
(20.6
|
)
|
|
14.0
|
|
|
Accounts payable
|
|
|
224.5
|
|
|
103.9
|
|
|
Accrued liabilities and other
|
|
|
79.9
|
|
|
74.5
|
|
|
Net
change in working capital items
|
|
$
|
(150.4
|
)
|
$
|
(235.8
|
)
|
|
Supplementary
Disclosure:
|
|
|
|
|
|
||
|
Cash paid for interest
|
|
$
|
36.9
|
|
$
|
26.6
|
|
|
Cash paid for income taxes
|
|
$
|
45.7
|
|
$
|
42.9
|
|
The accompanying notes are an integral
part of these condensed consolidated statements.
F-69
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of
Presentation
The
condensed consolidated financial statements include the accounts of Lear
Corporation (“Lear” or the “Parent”), a Delaware corporation and the wholly
owned and less than wholly owned subsidiaries controlled by Lear (collectively,
the “Company”). In addition, Lear consolidates variable interest entities in
which it bears a majority of the risk of the entities’ potential losses or
stands to gain from a majority of the entities’ expected returns. Investments in
affiliates in which Lear does not have control, but does have the ability to
exercise significant influence over operating and financial policies, are
accounted for under the equity method.
The
Company and its affiliates design and manufacture complete automotive seat
systems, electrical distribution systems and select electronic products. Through
the first quarter of 2007, the Company also supplied automotive interior systems
and components, including instrument panels and cockpit systems, headliners
and
overhead systems, door panels and flooring and acoustic systems (Note 3,
“Divestiture of Interior Business”). The Company’s main customers are automotive
original equipment manufacturers. The Company operates facilities
worldwide.
Certain
amounts in the prior period’s financial statements have been reclassified to
conform to the presentation used in the quarter ended March 31, 2007.
(2) Merger
Agreement
On
February 9, 2007, the Company entered into an Agreement and Plan of Merger
(the
“Merger Agreement”) with AREP Car Holdings Corp., a Delaware corporation
(“Parent”), and AREP Car Acquisition Corp., a Delaware corporation and a wholly
owned subsidiary of Parent (“Merger Sub”). Under the terms of the Merger
Agreement, Merger Sub would be merged with and into the Company, and as a
result, the Company would continue as the surviving corporation and a wholly
owned subsidiary of Parent. Parent and Merger Sub are affiliates of Carl C.
Icahn.
Pursuant
to the Merger Agreement, as of the effective time of the merger, each issued
and
outstanding share of common stock of the Company, other than shares (i) owned
by
Parent, Merger Sub or any subsidiary of Parent and (ii) owned by any
shareholders who are entitled to and who have properly exercised appraisal
rights under Delaware law, will be canceled and automatically converted into
the
right to receive $36.00 in cash, without interest.
The
Merger Agreement contains provisions pursuant to which the Company was permitted
to solicit alternative acquisition proposals for forty-five days after the
date
of the Merger Agreement (the “Solicitation Period”) and continue ongoing
discussions or negotiations thereafter. The Solicitation Period ended on March
26, 2007, and no alternative acquisition proposals have been received as of
the
date of this Report. The Company may terminate the Merger Agreement under
certain circumstances, including if its board of directors determines in good
faith that it has received a Superior Proposal (as defined in the Merger
Agreement) and otherwise complies with certain terms of the Merger Agreement.
In
connection with such termination, and in certain other limited circumstances,
the Company would be required to pay a fee of $85.2 million to Parent plus
up to
$15.0 million of Parent’s out-of-pocket expenses (including fees and expenses of
financing sources, counsel, accountants, investment bankers, experts and
consultants) relating to the Merger Agreement.
Parent
has obtained debt financing commitments for the transaction contemplated by
the
Merger Agreement. Consummation of the merger is not subject to a financing
condition, but is subject to other conditions, including receipt of the
affirmative vote of the holders of a majority of the outstanding shares of
the
Company’s common stock, antitrust approvals and other customary closing
conditions.
In
connection with the execution of the Merger Agreement, the Company entered
into
a voting agreement with Icahn Partners LP, Icahn Partners Master Fund LP, Koala
Holding Limited Partnership and High River Limited Partnership. In the
aggregate, such holders beneficially own approximately 16% of the Company’s
outstanding common stock. Pursuant to the voting agreement, such holders agreed
to vote in favor of the merger and, subject to certain exceptions, not to
dispose of any shares of common stock prior to consummation of the merger.
Such
holders have also agreed to vote in favor of a Superior Proposal under certain
circumstances. In addition, American Real
F-70
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(2) Merger Agreement
–
(continued)
Estate Partners, L.P. has
provided a limited guaranty in favor of the Company with respect to the
performance by Parent and Merger Sub of certain payment obligations under the
Merger Agreement.
If
presented, the transaction contemplated by the Merger Agreement will be voted
on
by shareholders of record as of May 14, 2007, at the Company’s annual
stockholders’ meeting, which has been scheduled for June 27, 2007.
For
further information regarding the Merger Agreement, please refer to the Merger
Agreement and certain related documents, which are incorporated by reference
as
exhibits to this Report.
(3) Divestiture of
Interior Business
On
March 31, 2007, the Company completed the transfer of substantially all of
the
assets of the Company’s North American interior business (as well as its
interests in two China joint ventures and $27.4 million of cash) to
International Automotive Components Group North America, Inc. and International
Automotive Components Group North America, LLC (together, “IAC North America”),
in exchange for a 25% equity interest in IAC North America and warrants for
an
additional 7% of the current outstanding equity of IAC North America. In
addition, under the terms of the divestiture agreement, the Company has agreed
to fund up to an additional $40 million to IAC North America, in the event
that
IAC North America does not meet certain financial targets in 2007. The legal
transfer of certain assets included in this transaction is subject to the
satisfaction of certain post-closing conditions. In connection with this
transaction, IAC North America assumed the ordinary course liabilities of the
Company’s North American interior business, and the Company retained certain
pre-closing liabilities, including pension and postretirement healthcare
liabilities incurred through the closing date of the transaction.
The
Company recorded a loss on divestiture of interior business of $606.9 million
in
the fourth quarter of 2006 and an additional charge of $29.4 million in the
first quarter of 2007, including $6.2 million recorded as cost of sales, $2.0
million recorded as selling, general and administrative expenses and $21.2
million recorded as loss on divestiture of interior business. Approximately
$22.5 million of the first quarter 2007 charge represented cash costs. As of
March 31, 2007, the beneficial ownership interests of certain less than wholly
owned subsidiaries were transferred to IAC North America, however, as described
above, the transfer of legal ownership is subject to the satisfaction of certain
post-closing conditions. Accordingly, these assets and liabilities remain
classified as held for sale on the Company’s condensed consolidated balance
sheet as of March 31, 2007. A summary of the major classes of the assets and
liabilities of the Company’s North American interior business that are
classified as held for sale in the Company’s condensed consolidated balance
sheets are shown below (in millions):
|
March
31,
2007 |
December
31,
2006 |
|||||
|
Cash and cash equivalents
|
|
$
|
12.8
|
|
$
|
19.2
|
|
Accounts receivable
|
|
17.3
|
|
|
284.5
|
|
|
Inventories
|
|
3.9
|
|
|
69.2
|
|
|
Other current
assets
|
|
4.3
|
|
|
54.9
|
|
|
Current
assets of business held for sale
|
$
|
38.3
|
|
$
|
427.8
|
|
|
Accounts payable
and
drafts
|
$
|
8.4
|
|
$
|
323.7
|
|
|
Accrued liabilities
|
|
5.4
|
|
|
79.8
|
|
|
Current portion of long-term debt
|
|
2.9
|
|
|
2.2
|
|
|
Current
liabilities of business held for sale
|
|
16.7
|
|
|
405.7
|
|
|
Long-term
debt
|
|
18.2
|
|
|
19.6
|
|
|
Other long-term liabilities
|
|
3.4
|
|
|
28.9
|
|
|
Long-term
liabilities of business held for sale
|
|
21.6
|
|
|
48.5
|
|
|
Total
liabilities of business held for sale
|
$
|
38.3
|
|
$
|
454.2
|
|
F-71
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(3) Divestiture of
Interior Business – (continued)
The
Company did not account for the divestiture of its North American interior
business as a discontinued operation due to its continuing involvement with
IAC
North America. The Company’s investment in IAC North America is accounted for
under the equity method of accounting.
The
divestiture of the Company’s North American interior business substantially
completes the disposition of the Company’s interior business. On October 16,
2006, the Company completed the contribution of substantially all of its
European interior business to International Automotive Components Group, LLC
(“IAC Europe”), in exchange for a one-third equity interest in IAC Europe. In
connection with this transaction, the Company recorded a loss on divestiture
of
interior business of $33.5 million, of which $4.4 million was recorded in the
first quarter of 2007 and $29.1 million was recorded in 2006.
(4) Stock-Based
Compensation
On
January 1, 2006, the Company adopted the provisions of Statement of Financial
Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment,” using the
modified prospective transition method and recognized income of $2.9 million
as
a cumulative effect of a change in accounting principle related to a change
in
accounting for forfeitures. There was no income tax effect resulting from this
adoption. SFAS No. 123(R) requires the estimation of expected forfeitures at
the
grant date and the recognition of compensation cost only for those awards
expected to vest. Previously, the Company accounted for forfeitures as they
occurred. In the first quarters of 2007 and 2006, there were no outstanding
unvested awards for which no compensation cost was recognized as the Company
adopted the fair value recognition provisions of SFAS No. 123, “Accounting for
Stock-Based Compensation,” for all employee awards granted after January 1,
2003.
(5)
Restructuring
In order
to address unfavorable industry conditions, the Company began to implement
consolidation and census actions in the second quarter of 2005. These actions
are part of a comprehensive restructuring strategy intended to (i) better align
the Company’s manufacturing capacity with the changing needs of its customers,
(ii) eliminate excess capacity and lower the operating costs of the Company
and
(iii) streamline the Company’s organizational structure and reposition its
business for improved long-term profitability.
The
Company currently expects to incur pretax costs of approximately $300 million,
in connection with the restructuring actions, although all aspects of the
restructuring actions have not been finalized. Such costs include employee
termination benefits, asset impairment charges and contract termination costs,
as well as other incremental costs resulting from the restructuring actions.
These incremental costs principally include equipment and personnel relocation
costs. The Company also expects to incur incremental manufacturing inefficiency
costs at the operating locations impacted by the restructuring actions during
the related restructuring implementation period. Restructuring costs are
recognized in the Company’s consolidated financial statements in accordance with
accounting principles generally accepted in the United States. Generally,
charges are recorded as elements of the restructuring strategy are finalized.
Actual costs recorded in the Company’s consolidated financial statements may
vary from current estimates.
In
connection with the Company’s restructuring actions, the Company recorded net
charges of $13.6 million in the first quarter of 2007, including $11.1 million
recorded as cost of sales and $2.5 million recorded as selling, general and
administrative expenses. The first quarter 2007 charges consist of employee
termination benefits of $24.1 million, fixed asset impairment charges of $0.4
million, net contract termination costs of $(12.7) million and other costs
of
$1.8 million. Employee termination benefits were recorded based on existing
union and employee contracts, statutory requirements and completed negotiations.
Asset impairment charges relate to the disposal of machinery and equipment
with
carrying values of $0.4 million in excess of related estimated fair values.
Contract termination costs include lease cancellation costs, the repayment
of
various government-sponsored grants and a net pension and other postretirement
benefit plan curtailment gain of $13.9 million.
F-72
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(5) Restructuring
–
(continued)
A
summary of the first quarter 2007 restructuring charges, excluding the net
pension and other postretirement benefit plan curtailment gain of $13.9 million
is shown below (in millions):
|
Accrual
as of
December 31, 2006 |
2007
Charges |
2007
Utilization |
Accrual
as of
March 31, 2007 |
||||||||||||
|
Cash
|
Non-cash
|
||||||||||||||
|
Employee
termination
benefits
|
|
$
|
36.4
|
|
$
|
24.1
|
|
$
|
(36.9
|
)
|
$
|
—
|
|
$
|
23.6
|
|
Asset
impairments
|
|
|
—
|
|
0.4
|
|
|
—
|
|
(0.4
|
)
|
|
—
|
||
|
Contract
termination costs
|
|
|
3.4
|
|
1.2
|
|
|
(1.4
|
)
|
|
—
|
|
|
3.2
|
|
|
Other
related costs
|
|
|
—
|
|
1.8
|
|
|
(1.8
|
)
|
|
—
|
|
|
—
|
|
|
Total
|
|
$
|
39.8
|
$
|
27.5
|
|
$
|
(40.1
|
)
|
$
|
(0.4
|
)
|
$
|
26.8
|
|
(6)
Inventories
Inventories
are stated at the lower of cost or market. Cost is determined using the
first-in, first-out method. Finished goods and work-in-process inventories
include material, labor and manufacturing overhead costs. A summary of
inventories is shown below (in millions):
|
March
31,
2007 |
December
31,
2006 |
|||||
|
Raw
materials
|
|
$
|
439.9
|
|
$
|
439.9
|
|
Work-in-process
|
|
36.2
|
|
|
35.6
|
|
|
Finished
goods
|
|
122.9
|
|
|
106.0
|
|
|
Inventories
|
$
|
599.0
|
|
$
|
581.5
|
|
(7) Property, Plant
and Equipment
Property,
plant and equipment is stated at cost. Depreciable property is depreciated
over
the estimated useful lives of the assets, principally using the straight-line
method. A summary of property, plant and equipment is shown below (in
millions):
|
March
31,
2007 |
December
31,
2006 |
||||||
|
Land
|
|
$
|
132.6
|
|
$
|
133.5
|
|
|
Buildings
and
improvements
|
|
|
607.5
|
|
|
559.1
|
|
|
Machinery
and equipment
|
|
|
2,024.1
|
|
|
2,081.3
|
|
|
Construction
in progress
|
|
|
22.0
|
|
|
12.0
|
|
|
Total
property, plant and equipment
|
|
|
2,786.2
|
|
|
2,785.9
|
|
|
Less
– accumulated depreciation
|
|
|
(1,360.3
|
)
|
|
(1,314.2
|
)
|
|
Net
property, plant and equipment
|
|
$
|
1,425.9
|
|
$
|
1,471.7
|
|
Depreciation
expense was $73.2 million and $96.6 million in the three months ended March
31,
2007 and April 1, 2006, respectively.
Costs
associated with the repair and maintenance of the Company’s property, plant and
equipment are expensed as incurred. Costs associated with improvements which
extend the life, increase the capacity or improve the efficiency or safety
of
the Company’s property, plant and equipment are capitalized and depreciated over
the remaining life of the related asset.
F-73
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(8)
Goodwill
A
summary of the changes in the carrying amount of goodwill, by reportable
operating segment, for the three months ended March 31, 2007, is shown below
(in
millions):
|
Seating
|
Electronic
and
Electrical |
Total
|
|||||||
|
Balance
as of January 1, 2007
|
|
$
|
1,060.7
|
|
$
|
936.0
|
|
$
|
1,996.7
|
|
Foreign
currency translation and
other
|
|
7.6
|
|
|
2.3
|
|
|
9.9
|
|
|
Balance
as of March 31, 2007
|
$
|
1,068.3
|
|
$
|
938.3
|
|
$
|
2,006.6
|
|
(9) Long-Term
Debt
A
summary of long-term debt and the related weighted average interest rates,
including the effect of hedging activities described in Note 19, “Financial
Instruments,” is shown below (in millions):
|
March
31, 2007
|
December
31, 2006
|
|||||||||||
|
Long-Term
Debt |
Weighted
Average Interest Rate |
Long-Term
Debt |
Weighted
Average Interest Rate |
|||||||||
|
|
|
|
|
|||||||||
|
Primary
Credit Facility
|
|
$
|
997.0
|
|
7.49
|
%
|
|
$
|
997.0
|
|
7.49
|
%
|
|
8.50%
Senior Notes, due 2013
|
|
|
300.0
|
|
8.50
|
%
|
|
300.0
|
|
8.50
|
%
|
|
|
8.75%
Senior Notes, due 2016
|
|
|
600.0
|
|
8.75
|
%
|
|
600.0
|
|
8.75
|
%
|
|
|
5.75%
Senior Notes, due 2014
|
|
|
399.4
|
|
5.635
|
%
|
|
399.3
|
|
5.635
|
%
|
|
|
8.125%
Euro-denominated Senior Notes, due 2008
|
|
|
74.2
|
|
8.125
|
%
|
|
73.3
|
|
8.125
|
%
|
|
|
8.11%
Senior Notes, due 2009
|
|
|
41.4
|
|
8.11
|
%
|
|
41.4
|
|
8.11
|
%
|
|
|
Zero-coupon
Convertible Senior Notes, due
2022
|
|
|
0.7
|
|
4.75
|
%
|
|
3.6
|
|
4.75
|
%
|
|
|
Other
|
|
|
45.5
|
|
7.03
|
%
|
|
45.5
|
|
7.06
|
%
|
|
|
|
|
2,458.2
|
|
|
|
|
2,460.1
|
|
|
|||
|
Current
portion
|
|
|
(26.4
|
)
|
|
|
|
(25.6
|
)
|
|
||
|
Long-term
debt
|
|
$
|
2,431.8
|
|
|
|
$
|
2,434.5
|
|
|
||
Primary Credit
Facility
The
Company’s Primary Credit Facility consists of an Amended and Restated Credit and
Guarantee Agreement, which provides for maximum revolving borrowing commitments
of $1.7 billion and a term loan facility of $1.0 billion. As of March 31, 2007
and December 31, 2006, the Company had $997.0 million in borrowings outstanding
under the Primary Credit Facility, all of which were outstanding under the
term
loan facility. There were no revolving borrowings outstanding.
The
Company’s obligations under the Primary Credit Facility are secured by a pledge
of all or a portion of the capital stock of certain of its subsidiaries,
including substantially all of its first-tier subsidiaries, and are partially
secured by a security interest in the Company’s assets and the assets of certain
of its domestic subsidiaries. In addition, the Company’s obligations under the
Primary Credit Facility are guaranteed, on a joint and several basis, by certain
of its subsidiaries, which are primarily domestic subsidiaries and all of which
are directly or indirectly 100% owned by the Company.
The
Primary Credit Facility contains certain affirmative and negative covenants,
including (i) limitations on fundamental changes involving the Company or its
subsidiaries, asset sales and restricted payments, (ii) a limitation on
indebtedness with a maturity shorter than the term loan facility, (iii) a
limitation on aggregate subsidiary indebtedness to an amount which is no more
than 4% of consolidated total assets, (iv) a limitation on aggregate secured
indebtedness to an amount which is no more than $100 million and (v)
requirements that the Company
F-74
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(9) Long-Term Debt
–
(continued)
maintain a leverage ratio
of
not more than 4.0 to 1, as of March 31, 2007, with decreases over time and
an
interest coverage ratio of not less than 2.50 to 1 with increases over time.
The
leverage and interest coverage ratios, as well as the related components of
their computation, are defined in the Primary Credit Facility. The leverage
ratio is calculated as the ratio of consolidated indebtedness to consolidated
operating profit. For the purpose of the covenant calculation, (i) consolidated
indebtedness is generally defined as reported debt, net of cash and excludes
transactions related to the Company’s asset-backed securitization and factoring
facilities and (ii) consolidated operating profit is generally defined as net
income excluding income taxes, interest expense, depreciation and amortization
expense, other income and expense, minority interests in income of subsidiaries
in excess of net equity earnings in affiliates, certain restructuring and other
non-recurring charges, extraordinary gains and losses and other specified
non-cash items. Consolidated operating profit is a non-GAAP financial measure
that is presented not as a measure of operating results, but rather as a measure
used to determine covenant compliance under the Company’s Primary Credit
Facility. The interest coverage ratio is calculated as the ratio of consolidated
operating profit to consolidated interest expense. For the purpose of the
covenant calculation, consolidated interest expense is generally defined as
interest expense plus any discounts or expenses related to the Company’s
asset-backed securitization facility less amortization of deferred finance
fees
and interest income. As of March 31, 2007, the Company was in compliance with
all covenants set forth in the Primary Credit Facility. The Company’s leverage
and interest coverage ratios were 2.3 to 1 and 4.6 to 1, respectively.
Reconciliations
of (i) consolidated indebtedness to reported debt, (ii) consolidated operating
profit to income before provision for income taxes and (iii) consolidated
interest expense to reported interest expense are shown below (in
millions):
|
March
31,
2007 |
|||
|
Consolidated
indebtedness
|
|
$
|
2,139.3
|
|
Cash
and cash equivalents
|
330.4
|
||
|
Reported
debt
|
$
|
2,469.7
|
|
|
Three
Months Ended
March 31, 2007 |
||||
|
Consolidated
operating profit
|
|
$
|
266.6
|
|
|
Depreciation
and amortization
|
(74.5
|
)
|
||
|
Consolidated
interest expense
|
(45.3
|
)
|
||
|
Costs
related to divestiture of interior business
|
(33.8
|
)
|
||
|
Other
expense, net (excluding certain amounts related to
asset-backed
securitization facility) |
(26.3
|
)
|
||
|
Restructuring
charges
|
(15.8
|
)
|
||
|
Other
excluded items
|
27.0
|
|||
|
Other
non-cash items
|
(15.6
|
)
|
||
|
Income
before provision for income taxes
|
$
|
82.3
|
||
|
Consolidated
interest expense
|
$
|
45.3
|
||
|
Certain
amounts related to asset-backed securitization
facility
|
1.3
|
|||
|
Amortization
of deferred financing fees
|
2.3
|
|||
|
Bank
facility and other fees
|
2.6
|
|||
|
Reported
interest expense
|
$
|
51.5
|
||
F-75
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(9) Long-Term Debt
–
(continued)
The
Primary Credit Facility also contains customary events of default, including
an
event of default triggered by a change of control of the Company. The senior
notes due 2013 and 2016 (having an aggregate principal amount outstanding of
$900 million as of March 31, 2007) provide holders of the notes the right to
require the Company to repurchase all or any part of their notes at a purchase
price equal to 101% of the principal amount, plus accrued and unpaid interest,
upon a “change of control” (as defined in the indenture governing the notes).
The transaction contemplated by the Merger Agreement with affiliates of American
Real Estate Partners, L.P. would not constitute a change of control for these
purposes (Note 2, “Merger Agreement”). The indentures governing the Company’s
other senior notes do not contain a change of control repurchase
obligation.
The
Company’s senior notes also contain covenants restricting the ability of the
Company and its subsidiaries to incur liens and to enter into sale and leaseback
transactions. As of March 31, 2007, the Company was in compliance with all
covenants and other requirements set forth in its senior notes.
All of
the Company’s senior notes are guaranteed by the same subsidiaries that
guarantee the Primary Credit Facility. In the event that any such subsidiary
ceases to be a guarantor under the Primary Credit Facility, such subsidiary
will
be released as a guarantor of the senior notes. The Company’s obligations under
the senior notes are not secured by the pledge of the assets or capital stock
of
any of its subsidiaries.
(10) Pension and
Other
Postretirement Benefit Plans
Net Periodic
Benefit Cost
The
components of the Company’s net periodic benefit cost are shown below (in
millions):
|
Pension
|
Other
Postretirement
|
||||||||||||
|
Three
Months Ended
|
Three
Months Ended
|
||||||||||||
|
March
31,
2007 |
April
1,
2006 |
March
31,
2007 |
April
1,
2006 |
||||||||||
|
Service
cost
|
|
$
|
8.0
|
|
$
|
12.6
|
|
$
|
2.9
|
|
$
|
3.2
|
|
|
Interest
cost
|
10.4
|
10.8
|
3.7
|
3.7
|
|||||||||
|
Expected
return on plan assets
|
(10.2
|
)
|
(9.7
|
)
|
—
|
—
|
|||||||
|
Amortization
of actuarial loss
|
0.8
|
1.8
|
1.1
|
1.4
|
|||||||||
|
Amortization
of transition
obligation
|
—
|
—
|
0.2
|
0.2
|
|||||||||
|
Amortization
of prior service cost
|
1.1
|
1.3
|
(0.9
|
)
|
(0.9
|
)
|
|||||||
|
Curtailment
gain, net
|
(36.9
|
)
|
—
|
(13.4
|
)
|
—
|
|||||||
|
Special
termination benefits
|
5.7
|
0.1
|
0.8
|
0.1
|
|||||||||
|
Net
periodic benefit cost (gain)
|
$
|
(21.1
|
)
|
$
|
16.9
|
$
|
(5.6
|
)
|
$
|
7.7
|
|||
In the
first quarter of 2007, the Company recorded a pension plan curtailment gain
of
$36.4 million and an other postretirement benefit plan curtailment gain of
$14.7
million. The pension plan curtailment gain resulted from the suspension of
the
accrual of defined benefits related to the Company’s U.S. salaried defined
benefit pension plan as the Company elected to freeze its U.S. salaried defined
benefit plan effective December 31, 2006. The other postretirement benefit
plan
curtailment gain resulted from employee terminations associated with a facility
closure in 2006. As both curtailment gains were incurred subsequent to the
Company’s defined benefit plan measurement date of September 30, 2006, they were
recorded in the first quarter of 2007. The Company recognized additional net
pension and other postretirement benefit costs of $5.2 million and $1.3 million,
respectively, related to other restructuring actions and the divestiture of
the
Company’s North American interior business.
F-76
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(10) Pension and
Other
Postretirement Benefit Plans – (continued)
Contributions
Employer
contributions to the Company’s domestic and foreign pension plans for the three
months ended March 31, 2007, were approximately $9.5 million, in aggregate.
The
Company expects to contribute an additional $45 million to $50 million, in
aggregate, to its domestic and foreign pension portfolios in 2007.
(11) Cost of Sales
and
Selling, General and Administrative Expenses
Cost
of
sales includes material, labor and overhead costs associated with the
manufacture and distribution of the Company’s products. Distribution costs
include inbound freight costs, purchasing and receiving costs, inspection costs,
warehousing costs and other costs of the Company’s distribution network.
Selling, general and administrative expenses include selling, research and
development and administrative costs not directly associated with the
manufacture and distribution of the Company’s products.
(12) Other (Income)
Expense, Net
Other
(income) expense includes state and local non-income taxes, foreign exchange
gains and losses, fees associated with the Company’s asset-backed securitization
and factoring facilities, minority interests in consolidated subsidiaries,
equity in net income of affiliates, gains and losses on the sales of assets
and
other miscellaneous income and expense. A summary of other (income) expense,
net
is shown below (in millions):
|
March
31,
2007 |
April
1,
2006 |
||||||
|
Other
expense
|
|
$
|
28.6
|
|
$
|
18.4
|
|
|
Other
income
|
(3.6
|
)
|
(26.7
|
)
|
|||
|
Other
(income) expense,
net
|
$
|
25.0
|
$
|
(8.3
|
)
|
||
For the
first quarter of 2007, other expense includes a loss of $3.9 million related
to
the acquisition of the minority interest in an affiliate. For the first quarter
of 2006, other income includes gains of $25.9 million related to the sales
of
the Company’s interests in two affiliates.
(13) Income
Taxes
The
provision for income taxes was $32.4 million in the first quarter of 2007,
representing an effective tax rate of 39.4%, as compared to a benefit for income
taxes of $0.2 million, representing an effective tax rate of negative 1.4%,
in
the first quarter of 2006. The provision for income taxes in the first quarter
of 2007 was impacted by costs of $33.8 million related to the divestiture of
the
Company’s interior business, for a significant portion of which no tax benefit
was provided as it was incurred in the United States. This was offset by the
impact of the U.S. salaried pension plan curtailment gain of $36.4 million,
for
which no tax expense was provided. The provision for income taxes in the first
quarter of 2007 was also impacted by a portion of the Company’s restructuring
charges and costs related to the Merger Agreement, for which no tax benefit
was
provided as the charges were incurred in certain countries for which no tax
benefit is likely to be realized due to a history of operating losses in those
countries. Excluding these items, the effective tax rate in the first quarter
of
2007 approximated the U.S. federal statutory income tax rate of 35% adjusted
for
income taxes on foreign earnings, losses and remittances, foreign valuation
allowances, the U.S. valuation allowance, tax credits, income tax incentives
and
other permanent items. Further, the Company’s current and future provision for
income taxes is significantly impacted by the recognition of valuation
allowances in certain countries, particularly the United States. The Company
intends to maintain these allowances until it is more likely than not that
the
deferred tax assets will be realized. The Company’s future income tax expense
will include no tax benefit with respect to U.S. losses and no tax expense
with
respect to U.S. income until the allowance is eliminated. Accordingly, income
taxes are impacted by the U.S. valuation allowance and the mix of earnings
among
jurisdictions. The benefit for income taxes in the first quarter of 2006
includes a one-time tax
F-77
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(13) Income Taxes
–
(continued)
benefit of $8.6 million
resulting from a tax audit resolution and court rulings in certain
jurisdictions. The benefit for income taxes in the first quarter of 2006 was
also impacted by gains on the sales of the Company’s interests in two U.S.
affiliates, for which no tax expense was recognized, and a portion of the
Company’s restructuring charges, for which no tax benefit was provided as the
charges were incurred in certain countries for which no tax benefit is likely
to
be realized due to a history of operating losses in those countries.
On
January 1, 2007 the Company adopted the provisions of Interpretation (“FIN”) No.
48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB
Statement No. 109.” FIN 48 clarifies the accounting for uncertainty in income
taxes by establishing minimum standards for the recognition and measurement
of
tax positions taken or expected to be taken in a tax return. Under the
requirements of FIN 48, the Company must review all of its tax positions and
make a determination as to whether its position is more-likely-than-not to
be
sustained upon examination by regulatory authorities. If a tax position meets
the more-likely-than-not standard, then the related tax benefit is measured
based on the cumulative probability analysis of the amount that is
more-likely-than-not to be realized upon ultimate settlement or disposition
of
the underlying issue.
The
Company recognized the cumulative impact of adopting FIN 48 as a $4.5 million
decrease to its liability for unrecognized tax benefits with a corresponding
decrease to the Company’s retained deficit balance as of January 1, 2007.
As of January 1, 2007, the Company’s gross unrecognized tax benefits were $148.6
million (including interest and penalties), of which $114.9 million, if
recognized, would affect the Company’s effective tax rate. The gross
unrecognized tax benefits differ from the amount that would affect the effective
tax rate due primarily to the impact of the valuation allowance.
The
Company continues to recognize both interest and penalties accrued with respect
to unrecognized tax benefits as income tax expense. As of January 1, 2007 the
Company had recorded reserves for the payment of interest and penalties in
the
amount of $28.6 million. During the three months ended March 31, 2007, the
Company recognized an increase in liability for gross interest and penalties
of
approximately $4.4 million.
The
Company operates in multiple jurisdictions throughout the world, and its tax
returns are periodically audited or subject to review by both domestic and
foreign tax authorities. The Company considers its significant tax jurisdictions
to include Canada, Germany, Hungary, Mexico, Poland, Spain and the United
States. The Company or its subsidiaries remain subject to income tax examination
in certain U.S. state and local jurisdictions for years after 1998, in Germany,
Mexico and Poland for years after 2000, in Spain for years after 2001 and in
the
U.S. federal jurisdiction, Canada and Hungary for years after 2002.
(14) Net Income Per
Share
Basic
net income per share is computed using the weighted average common shares
outstanding during the period. Diluted net income per share includes the
dilutive effect of common stock equivalents using the average share price during
the period, as well as shares issuable upon conversion of the Company’s
outstanding zero-coupon convertible senior notes. A summary of shares
outstanding is shown below:
|
Three
Months Ended
|
||||||
|
March
31,
2007 |
April
1,
2006 |
|||||
|
Weighted
average common shares
outstanding
|
|
76,410,482
|
|
67,216,992
|
||
|
Dilutive
effect of common stock equivalents
|
1,579,369
|
724,075
|
||||
|
Diluted
shares outstanding
|
77,989,851
|
67,941,067
|
||||
|
Diluted
net income per share
|
$
|
0.64
|
$
|
0.26
|
||
Shares
issuable upon conversion of the Company’s outstanding zero-coupon convertible
debt and the effect of certain common stock equivalents, including options,
restricted stock units, performance units and stock appreciation rights, were
excluded from the computation of diluted shares outstanding for the three months
ended
F-78
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(14) Net Income Per
Share – (continued)
March 31, 2007 and April
1, 2006, as inclusion would have resulted in antidilution. A summary of these
options and their exercise prices, as well as these restricted stock units
and
stock appreciation rights, is shown below:
|
Three
Months Ended
|
||||
|
March
31, 2007
|
April
1, 2006
|
|||
|
Options
|
||||
|
Antidilutive
options
|
|
2,236,780
|
|
2,907,005
|
|
Exercise
price
|
$35.93 – $55.33
|
$22.12 – $55.33
|
||
|
Restricted
stock units
|
—
|
821,237
|
||
|
Performance
units
|
—
|
48,563
|
||
|
Stock
appreciation
rights
|
642,285
|
1,138,114
|
||
(15) Comprehensive
Income
Comprehensive
income is defined as all changes in a Company’s net assets except changes
resulting from transactions with stockholders. It differs from net income in
that certain items currently recorded in equity are included in comprehensive
income. A summary of comprehensive income is shown below (in millions):
|
Three
Months Ended
|
|||||||
|
March
31,
2007 |
April
1,
2006 |
||||||
|
Net
income
|
|
$
|
49.9
|
|
$
|
17.9
|
|
|
Other
comprehensive income (loss):
|
|||||||
|
Derivative
instruments and hedging
activities
|
(5.0
|
)
|
(5.8
|
)
|
|||
|
Foreign
currency translation adjustment
|
13.5
|
15.6
|
|||||
|
Other
comprehensive income
|
8.5
|
9.8
|
|||||
|
Comprehensive
income
|
$
|
58.4
|
$
|
27.7
|
|||
(16) Pre-Production
Costs Related to Long-Term Supply Agreements
The
Company incurs pre-production engineering, research and development (“ER&D”)
and tooling costs related to the products produced for its customers under
long-term supply agreements. The Company expenses all pre-production ER&D
costs for which reimbursement is not contractually guaranteed by the customer.
In addition, the Company expenses all pre-production tooling costs related
to
customer-owned tools for which reimbursement is not contractually guaranteed
by
the customer or for which the customer has not provided a non-cancelable right
to use the tooling. During the first quarters of 2007 and 2006, the Company
capitalized $22.4 million and $38.8 million, respectively, of pre-production
ER&D costs for which reimbursement is contractually guaranteed by the
customer. In addition, during the first quarters of 2007 and 2006, the Company
capitalized $42.5 million and $173.9 million, respectively, of pre-production
tooling costs related to customer-owned tools for which reimbursement is
contractually guaranteed by the customer or for which the customer has provided
a non-cancelable right to use the tooling. These amounts are included in other
current and long-term assets in the condensed consolidated balance sheets.
During the first quarters of 2007 and 2006, the Company collected $91.6 million
and $298.5 million, respectively, of cash related to ER&D and tooling costs.
During
the first quarter of 2007, the Company did not capitalize any Company-owned
tooling. During the first quarter of 2006, the Company capitalized $1.4 million
of Company-owned tooling. Amounts capitalized as Company-owned tooling are
included in property, plant and equipment, net in the condensed consolidated
balance sheets.
F-79
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(16) Pre-Production
Costs Related to Long-Term Supply Agreements – (continued)
The
classification of recoverable customer engineering and tooling is shown below
(in millions):
|
March
31,
2007 |
December
31,
2006 |
|||||
|
Current
|
|
$
|
61.4
|
|
$
|
87.7
|
|
Long-term
|
112.8
|
116.2
|
||||
|
Recoverable
customer engineering and
tooling
|
$
|
174.2
|
$
|
203.9
|
||
Gains
and
losses related to ER&D and tooling projects are reviewed on an aggregated
program basis. Net gains on projects are deferred and recognized over the life
of the long-term supply agreement. Net losses on projects are recognized as
costs are incurred.
(17) Legal and Other
Contingencies
As of
March 31, 2007 and December 31, 2006, the Company had recorded reserves for
pending legal disputes, including commercial disputes and other matters, of
$21.3 million and $18.0 million, respectively. Such reserves reflect amounts
recognized in accordance with accounting principles generally accepted in the
United States and typically exclude the cost of legal representation. Product
warranty liabilities are recorded separately from legal liabilities, as
described below.
Commercial
Disputes
The
Company is involved from time to time in legal proceedings and claims,
including, without limitation, commercial or contractual disputes with its
suppliers, competitors and customers. These disputes vary in nature and are
usually resolved by negotiations between the parties.
On
January 29, 2002, Seton Company (“Seton”), one of the Company’s leather
suppliers, filed a suit alleging that the Company had breached a purported
agreement to purchase leather from Seton for seats for the life of the General
Motors GMT 800 program. Seton filed the lawsuit in the U.S. District Court
for
the Eastern District of Michigan seeking compensatory and exemplary damages
totaling approximately $96.5 million, plus interest, on breach of contract
and
promissory estoppel claims. In May 2005, this case proceeded to trial, and
the
jury returned a $30.0 million verdict against the Company. On September 27,
2005, the Court denied the Company’s post-trial motions challenging the judgment
and granted Seton’s motion to award prejudgment interest in the amount of
approximately $4.7 million. On October 4, 2006, the Sixth Circuit Court of
Appeals affirmed the judgment of the trial court. On October 18, 2006, the
Company filed a Petition for Rehearing with the court which was denied on
November 16, 2006. On December 7, 2006, the Court of Appeals issued a mandate
indicating that the order affirming the judgment was final. In December 2006,
the Company paid the principal and all remaining interest on the judgment.
On
January 26, 2004, the Company filed a patent infringement lawsuit against
Johnson Controls Inc. and Johnson Controls Interiors LLC (together, “JCI”) in
the U.S. District Court for the Eastern District of Michigan alleging that
JCI’s
garage door opener products infringed certain of the Company’s radio frequency
transmitter patents. JCI counterclaimed seeking a declaratory judgment that
the
subject patents are invalid and unenforceable, and that JCI is not infringing
these patents. JCI also has filed motions for summary judgment asserting that
its garage door opener products do not infringe the Company’s patents and that
one of the Company’s patents is invalid and unenforceable. The Company is
vigorously pursuing its claims against JCI. A trial date has not been
scheduled.
After
the
Company filed its patent infringement action against JCI, affiliates of JCI
sued
one of the Company’s vendors and certain of the vendor’s employees in Ottawa
County, Michigan Circuit Court on July 8, 2004, alleging misappropriation of
trade secrets and disclosure of confidential information. The suit alleges
that
the defendants misappropriated and shared with the Company trade secrets
involving JCI’s universal garage door opener product. JCI seeks to enjoin the
defendants from selling or attempting to sell a competing product, as well
as
compensatory
F-80
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(17) Legal and Other
Contingencies – (continued)
damages and attorney fees.
The Company is not a defendant in this lawsuit; however, the agreements between
the Company and the defendants contain customary indemnification provisions.
The
Company does not believe that its garage door opener product benefited from
any
allegedly misappropriated trade secrets or technology. However, JCI has sought
discovery of certain information which the Company believes is confidential
and
proprietary, and the Company has intervened in the case as a non-party for
the
limited purpose of protecting its rights with respect to JCI’s discovery
efforts. The trial has been rescheduled to October 2007.
On June
13, 2005, The Chamberlain Group (“Chamberlain”) filed a lawsuit against the
Company and Ford Motor Company (“Ford”) in the Northern District of Illinois
alleging patent infringement. Two counts were asserted against the Company
and
Ford based upon two Chamberlain rolling-code garage door opener system patents.
Two additional counts were asserted against Ford only (not the Company) based
upon different Chamberlain patents. The Chamberlain lawsuit was filed in
connection with the marketing of the Company’s universal garage door opener
system, which competes with a product offered by JCI. JCI obtained technology
from Chamberlain to operate its product. In October 2005, JCI joined the lawsuit
as a plaintiff along with Chamberlain. In October 2006, Ford was dismissed
from
the suit. JCI and Chamberlain have filed a motion for a preliminary injunction,
and on March 30, 2007, the Court issued a decision granting plaintiffs’ motion
for a preliminary injunction but did not enter an injunction at that time.
In
response, the Company filed a motion seeking to stay the effectiveness of any
injunction that may be entered and General Motors Corporation (“GM”) moved to
intervene. On April 25, 2007, the court granted GM’s motion to intervene,
entered a preliminary injunction order that exempts the Company’s existing GM
programs and denied the Company’s motion to stay the effectiveness of the
preliminary injunction order pending appeal. On April 27, 2007, the Company
filed its notice of appeal from the granting of the preliminary injunction
and
the denial of its motion to stay its effectiveness. No trial date has been
set
by the district court.
Product Liability
Matters
In the
event that use of the Company’s products results in, or is alleged to result in,
bodily injury and/or property damage or other losses, the Company may be subject
to product liability lawsuits and other claims. In addition, the Company is
a
party to warranty-sharing and other agreements with its customers relating
to
its products. These customers may pursue claims against the Company for
contribution of all or a portion of the amounts sought in connection with
product liability and warranty claims. The Company can provide no assurances
that it will not experience material claims in the future or that it will not
incur significant costs to defend such claims. In addition, if any of the
Company’s products are, or are alleged to be, defective, the Company may be
required or requested by its customers to participate in a recall or other
corrective action involving such products. Certain of the Company’s customers
have asserted claims against the Company for costs related to recalls or other
corrective actions involving its products. In certain instances, the allegedly
defective products were supplied by tier II suppliers against whom the Company
has sought or will seek contribution. The Company carries insurance for certain
legal matters, including product liability claims, but such coverage may be
limited. The Company does not maintain insurance for product warranty or recall
matters.
The
Company records product warranty liabilities based on its individual customer
agreements. Product warranty liabilities are recorded for known warranty issues
when amounts related to such issues are probable and reasonably estimable.
In
certain product liability and warranty matters, the Company may seek recovery
from its suppliers that supply materials or services included within the
Company’s products that are associated with the related claims.
F-81
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(17) Legal and Other
Contingencies – (continued)
A
summary of the changes in product warranty liabilities for the three months
ended March 31, 2007, is shown below (in millions):
|
Balance
as of January 1, 2007
|
|
$
|
40.9
|
|
|
Expense
|
1.4
|
|||
|
Income
related to favorable
settlements
|
(2.7
|
)
|
||
|
Settlements
|
(5.8
|
)
|
||
|
Foreign
currency translation and other
|
(1.2
|
)
|
||
|
Balance
as of March 31, 2007
|
$
|
32.6
|
Environmental
Matters
The
Company is subject to local, state, federal and foreign laws, regulations and
ordinances which govern activities or operations that may have adverse
environmental effects and which impose liability for clean-up costs resulting
from past spills, disposals or other releases of hazardous wastes and
environmental compliance. The Company’s policy is to comply with all applicable
environmental laws and to maintain an environmental management program based
on
ISO 14001 to ensure compliance. However, the Company currently is, has been
and
in the future may become the subject of formal or informal enforcement actions
or procedures.
The
Company has been named as a potentially responsible party at several third-party
landfill sites and is engaged in the cleanup of hazardous waste at certain
sites
owned, leased or operated by the Company, including several properties acquired
in its 1999 acquisition of UT Automotive, Inc. (“UT Automotive”). Certain
present and former properties of UT Automotive are subject to environmental
liabilities which may be significant. The Company obtained agreements and
indemnities with respect to certain environmental liabilities from United
Technologies Corporation (“UTC”) in connection with its acquisition of UT
Automotive. UTC manages and directly funds these environmental liabilities
pursuant to its agreements and indemnities with the Company.
As of
March 31, 2007 and December 31, 2006, the Company had recorded reserves for
environmental matters of $2.8 million and $3.2 million, respectively. While
the
Company does not believe that the environmental liabilities associated with
its
current and former properties will have a material adverse effect on its
business, consolidated financial position, results of operations or cash flows,
no assurances can be given in this regard.
One of
the Company’s subsidiaries and certain predecessor companies were named as
defendants in an action filed by three plaintiffs in August 2001 in the Circuit
Court of Lowndes County, Mississippi, asserting claims stemming from alleged
environmental contamination caused by an automobile parts manufacturing plant
located in Columbus, Mississippi. The plant was acquired by the Company as
part
of its acquisition of UT Automotive in May 1999 and sold almost immediately
thereafter, in June 1999, to Johnson Electric Holdings Limited (“Johnson
Electric”). In December 2002, 61 additional cases were filed by approximately
1,000 plaintiffs in the same court against the Company and other defendants
relating to similar claims. In September 2003, the Company was dismissed as
a
party to these cases. In the first half of 2004, the Company was named again
as
a defendant in these same 61 additional cases and was also named in five new
actions filed by approximately 150 individual plaintiffs related to alleged
environmental contamination from the same facility. The plaintiffs in these
actions are persons who allegedly were either residents and/or owned property
near the facility or worked at the facility. In November 2004, two additional
lawsuits were filed by 28 plaintiffs (individuals and organizations), alleging
property damage as a result of the alleged contamination. Each of these
complaints seeks compensatory and punitive damages.
All of
the plaintiffs subsequently dismissed their claims for health effects and
personal injury damages and the cases proceeded with approximately 280
plaintiffs alleging property damage claims only. In March 2005, the venue for
these lawsuits was transferred from Lowndes County, Mississippi, to Lafayette
County, Mississippi. In April 2005, certain plaintiffs filed an amended
complaint alleging negligence, nuisance, intentional tort and conspiracy claims
and seeking compensatory and punitive damages.
F-82
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(17) Legal and Other
Contingencies – (continued)
In the
first quarter of 2006, co-defendant UTC entered into a settlement agreement
with
the plaintiffs. During the third quarter of 2006, the Company and co-defendant
Johnson Electric entered into a settlement memorandum with the plaintiffs’
counsel outlining the terms of a global settlement, including establishing
the
requisite percentage of executed settlement agreements and releases that were
required to be obtained from the individual plaintiffs for a final settlement
to
proceed. Since November 2006, the Company has reached a final settlement with
respect to approximately 85% of the plaintiffs involving aggregate payments
of
$875,000 and is in the process of attempting to resolve the remaining
claims.
UTC,
the
former owner of UT Automotive, and Johnson Electric have each sought
indemnification for losses associated with the Mississippi claims from the
Company under the respective acquisition agreements, and the Company has claimed
indemnification from them under the same agreements. In the first quarter of
2006, UTC filed a lawsuit against the Company in the State of Connecticut
Superior Court, District of Hartford, seeking declaratory relief and
indemnification from the Company for the settlement amount, attorney fees,
costs
and expenses UTC paid in settling and defending the Columbus, Mississippi
lawsuits. In the second quarter of 2006, the Company filed a motion to dismiss
this matter and filed a separate action against UTC and Johnson Electric in
the
State of Michigan, Circuit Court for the County of Oakland, seeking declaratory
relief and indemnification from UTC or Johnson Electric for the settlement
amount, attorney fees, costs and expenses the Company has paid, or will pay,
in
settling and defending the Columbus, Mississippi lawsuits. During the fourth
quarter of 2006, UTC agreed to dismiss the lawsuit filed in the State of
Connecticut Superior Court, District of Hartford and agreed to proceed with
the
lawsuit filed in the State of Michigan, Circuit Court for the County of Oakland.
During the first quarter of 2007, Johnson Electric and UTC each filed
counter-claims against the Company seeking declaratory relief and
indemnification from the Company for the settlement amount, attorney fees,
costs
and expenses each has paid or will pay in settling and defending the Columbus,
Mississippi lawsuits. To date, no company admits to, or has been found to have,
an obligation to fully defend and indemnify any other. The Company intends
to
vigorously pursue its claims against UTC and Johnson Electric and believes
that
it is entitled to indemnification from either UTC or Johnson Electric for its
losses. However, the ultimate outcome of these matters is unknown.
Other
Matters
In
January 2004, the Securities and Exchange Commission (the “SEC”) commenced an
informal inquiry into the Company’s September 2002 amendment of its 2001 Form
10-K. The amendment was filed to report the Company’s employment of relatives of
certain of its directors and officers and certain related party transactions.
The SEC’s inquiry does not relate to the Company’s consolidated financial
statements. In February 2005, the staff of the SEC informed the Company that
it
proposed to recommend to the SEC that it issue an administrative “cease and
desist” order as a result of the Company’s failure to disclose the related party
transactions in question prior to the amendment of its 2001 Form 10-K. The
Company expects to consent to the entry of the order as part of a settlement
of
this matter.
In April
2006, a former employee of the Company filed a purported class action lawsuit
in
the U.S. District Court for the Eastern District of Michigan against the
Company, members of its Board of Directors, members of its Employee Benefits
Committee (the “EBC”) and certain members of its human resources personnel
alleging violations of the Employment Retirement Income Security Act (“ERISA”)
with respect to the Company’s retirement savings plans for salaried and hourly
employees. In the second quarter of 2006, the Company was served with three
additional purported class action ERISA lawsuits, each of which contained
similar allegations against the Company, members of its Board of Directors,
members of its EBC and certain members of its senior management and its human
resources personnel. At the end of the second quarter of 2006, the court entered
an order consolidating these four lawsuits as In re: Lear Corp. ERISA
Litigation. During the third quarter of 2006, plaintiffs filed their
consolidated complaint, which alleges breaches of fiduciary duties substantially
similar to those alleged in the four individually filed lawsuits. The
consolidated complaint continues to name certain current and former members
of
the Board of Directors and the EBC and certain members of senior management
and
adds certain other current and former members of the EBC. The consolidated
complaint generally alleges that the defendants breached their
F-83
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(17) Legal and Other
Contingencies – (continued)
fiduciary duties to plan
participants in connection with the administration of the Company’s retirement
savings plans for salaried and hourly employees. The fiduciary duty claims
are
largely based on allegations of breaches of the fiduciary duties of prudence
and
loyalty and of over-concentration of plan assets in the Company’s common stock.
The plaintiffs purport to bring these claims on behalf of the plans and all
persons who were participants in or beneficiaries of the plans from October
21,
2004, to the present and seek to recover losses allegedly suffered by the plans.
The complaints do not specify the amount of damages sought. During the fourth
quarter of 2006, the defendants filed a motion to dismiss all defendants and
all
counts in the consolidated complaint. The filings related to the motion to
dismiss have been made, but the Court has not yet ruled on the motion. No
determination has been made that a class action can be maintained, and there
have been no decisions on the merits of the cases. The Company intends to
vigorously defend the consolidated lawsuit.
On March
1, 2007, a purported class action ERISA lawsuit was filed on behalf of
participants in the Company’s 401(k) plans. The lawsuit was filed in the United
States District Court for the Eastern District of Michigan and alleges that
the
Company, members of its Board of Directors, and members of the Employee Benefits
Committee (collectively, the “Lear Defendants”) breached their fiduciary duties
to the participants in the 401(k) plans by approving the Agreement and Plan
of
Merger (the “Merger Agreement”) with AREP Car Holdings Corp. and AREP Car
Acquisition Corp. (collectively the “AREP Entities”). On March 8, 2007, the
plaintiff filed a motion for expedited discovery to support a potential motion
for preliminary injunction to enjoin the Merger Agreement. The Lear Defendants
filed an opposition to the motion for expedited discovery on March 22, 2007.
Plaintiff filed a reply on April 11, 2007. On April 18, 2007, the Judge denied
plaintiff’s motion for expedited discovery. On March 15, 2007, the plaintiff
requested that the case be reassigned to the Judge overseeing In re: Lear
Corp. ERISA Litigation (described above). The Lear Defendants have opposed
the reassignment. On March 22, 2007, the Lear Defendants filed a motion to
dismiss all counts of the complaint against the Lear Defendants. Plaintiff
also
filed a motion for preliminary injunction and expedited briefing schedule on
April 10, 2007. The Lear Defendants’ opposition brief is due May 10, 2007. The
Court has not set a hearing date on either of these motions.
Between
February 9, 2007 and February 21, 2007, certain stockholders filed six purported
class action lawsuits against the Company, certain members of the Company’s
Board of Directors and American Real Estate Partners, L.P. and certain of its
affiliates (collectively, “AREP”). Three of the lawsuits were filed in the
Delaware Court of Chancery and have since been consolidated into a single
action. Three of the lawsuits were filed in Michigan Circuit Court; those too
have since been consolidated into a single action. The class action complaints,
which are substantially similar, generally allege that the Merger Agreement
unfairly limits the process of selling the Company and that certain members
of
the Company’s Board of Directors have breached their fiduciary duties in
connection with the Merger Agreement and have acted with conflicts of interest
in approving the Merger Agreement. The lawsuits seek to enjoin the merger,
to
invalidate the Merger Agreement and to enjoin the operation of certain
provisions of the Merger Agreement, a declaration that certain members of the
Company’s Board of Directors breached their fiduciary duties in approving the
Merger Agreement and an award of unspecified damages or rescission in the event
that the proposed merger with AREP is completed. On February 23, 2007, the
plaintiffs in the consolidated Delaware action filed a consolidated amended
complaint, a motion for expedited proceedings and a motion to preliminarily
enjoin the transactions contemplated by the Merger Agreement. On March 27,
2007,
the plaintiffs in the consolidated Delaware action filed a consolidated second
amended complaint. On May 9, 2007, the court overseeing the consolidated
Michigan action will hear the Company’s motion to dismiss that action. A hearing
on the plaintiffs’ motion for preliminary injunction in the consolidated
Delaware action is scheduled for June 6, 2007, and a trial is scheduled for
the
fourth quarter of 2007. The Company believes that the lawsuits are without
merit
and intends to defend against them vigorously.
Although
the Company records reserves for legal, product warranty and environmental
matters in accordance with SFAS No. 5, “Accounting for Contingencies,” the
outcomes of these matters are inherently uncertain. Actual results may differ
significantly from current estimates.
The
Company is involved in certain other legal actions and claims arising in the
ordinary course of business, including, without limitation, commercial disputes,
intellectual property matters, personal injury claims, tax claims
F-84
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(17) Legal and Other
Contingencies – (continued)
and employment matters.
Although the outcome of any legal matter cannot be predicted with certainty,
the
Company does not believe that any of these other legal proceedings or matters
in
which the Company is currently involved, either individually or in the
aggregate, will have a material adverse effect on its business, consolidated
financial position, results of operations or cash flows.
(18) Segment
Reporting
Historically,
the Company has had three reportable operating segments: seating, electronic
and
electrical and interior. The seating segment includes seat systems and
components thereof. The electronic and electrical segment includes electronic
products and electrical distribution systems, primarily wire harnesses and
junction boxes, interior control and entertainment systems and wireless systems.
The interior segment includes instrument panels and cockpit systems, headliners
and overhead systems, door panels, flooring and acoustic systems and other
interior products (Note 3, “Divestiture of Interior Business”). The Other
category includes unallocated costs related to corporate headquarters,
geographic headquarters and the elimination of intercompany activities, none
of
which meets the requirements of being classified as an operating segment.
The
Company evaluates the performance of its operating segments based primarily
on
(i) revenues from external customers, (ii) income (loss) before loss on
divestiture of interior business, interest expense, other (income) expense,
provision (benefit) for income taxes and cumulative effect of a change in
accounting principle (“segment earnings”) and (iii) cash flows, being defined as
segment earnings less capital expenditures plus depreciation and amortization.
A
summary of revenues from external customers and other financial information
by
reportable operating segment is shown below (in millions):
|
Three
Months Ended March 31,
2007
|
|||||||||||||||
|
Seating
|
Electronic
and
Electrical |
Interior
|
Other
|
Consolidated
|
|||||||||||
|
Revenues
from external
customers
|
|
$
|
2,994.2
|
|
$
|
788.7
|
|
$
|
623.2
|
|
$
|
—
|
|
$
|
4,406.1
|
|
Segment
earnings
|
197.1
|
17.5
|
8.8
|
(39.0
|
)
|
184.4
|
|||||||||
|
Depreciation
and amortization
|
40.8
|
28.3
|
1.3
|
4.1
|
74.5
|
||||||||||
|
Capital
expenditures
|
20.2
|
8.6
|
0.1
|
0.3
|
29.2
|
||||||||||
|
Total
assets
|
4,371.0
|
2,277.7
|
134.7
|
877.6
|
7,661.0
|
||||||||||
|
Three
Months Ended April 1, 2006
|
|||||||||||||||
|
Seating
|
Electronic
and
Electrical |
Interior
|
Other
|
Consolidated
|
|||||||||||
|
Revenues
from external
customers
|
|
$
|
2,992.5
|
|
$
|
787.3
|
|
$
|
898.7
|
|
$
|
—
|
|
$
|
4,678.5
|
|
Segment
earnings
|
125.9
|
53.1
|
(59.5
|
)
|
(65.3
|
)
|
54.2
|
||||||||
|
Depreciation
and amortization
|
40.4
|
26.8
|
24.8
|
5.8
|
97.8
|
||||||||||
|
Capital
expenditures
|
36.8
|
15.7
|
33.1
|
7.0
|
92.6
|
||||||||||
|
Total
assets
|
4,170.6
|
2,178.1
|
1,511.1
|
621.5
|
8,481.3
|
||||||||||
For the
three months ended March 31, 2007, segment earnings include restructuring
charges of ($4.7) million, $17.9 million and $0.4 million in the seating and
electronic and electrical segments and in the other category, respectively.
For
the three months ended April 1, 2006, segment earnings include restructuring
charges of $15.1 million, $2.0 million and $5.8 million in the seating,
electronic and electrical and interior segments, respectively (Note 5,
“Restructuring”).
F-85
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(18) Segment Reporting
– (continued)
A
reconciliation of consolidated segment earnings to consolidated income before
provision (benefit) for income taxes and cumulative effect of a change in
accounting principle is shown below (in millions):
|
Three
Months Ended
|
|||||||
|
March 31,
2007 |
April 1,
2006 |
||||||
|
Segment
earnings
|
|
$
|
184.4
|
|
$
|
54.2
|
|
|
Loss
on divestiture of Interior
business
|
25.6
|
—
|
|||||
|
Interest
expense
|
51.5
|
47.7
|
|||||
|
Other
(income) expense, net
|
25.0
|
(8.3
|
)
|
||||
|
Income
before provision (benefit) for income taxes and cumulative
effect of a change in accounting principle |
$
|
82.3
|
$
|
14.8
|
|||
(19) Financial
Instruments
Certain
of the Company’s European and Asian subsidiaries periodically factor their
accounts receivable with financial institutions. Such receivables are factored
without recourse to the Company and are excluded from accounts receivable in
the
condensed consolidated balance sheets. As of March 31, 2007 and December 31,
2006, the amount of factored receivables was $219.9 million and $256.3 million,
respectively. The Company cannot provide any assurances that these factoring
facilities will be available or utilized in the future.
Asset-Backed
Securitization Facility
The
Company and several of its U.S. subsidiaries sell certain accounts receivable
to
a wholly-owned, consolidated, bankruptcy-remote special purpose corporation
(Lear ASC Corporation) under an asset-backed securitization facility (the “ABS
facility”). In turn, Lear ASC Corporation transfers undivided interests in up to
$150 million of the receivables to bank-sponsored commercial-paper conduits.
As
of March 31, 2007 and December 31, 2006, accounts receivable totaling $445.4
million and $568.6 million, respectively, had been transferred to Lear ASC
Corporation, but no undivided interests in the receivables were transferred
to
the conduits. As such, these retained interests are included in accounts
receivable in the condensed consolidated balance sheets as of March 31, 2007
and
December 31, 2006. In the first quarter of 2006, a discount on the sale of
receivables of $1.6 million was recognized and is reflected in other (income)
expense, net in the condensed consolidated statement of income.
The
Company retains a subordinated ownership interest in the pool of receivables
sold to Lear ASC Corporation. This retained interest is recorded at fair value,
which is generally based on a discounted cash flow analysis. The Company
continues to service the transferred receivables for an annual servicing fee.
The conduit investors and Lear ASC Corporation have no recourse to the Company
or its subsidiaries for the failure of the accounts receivable obligors to
pay
timely on the accounts receivable.
F-86
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(19) Financial
Instruments – (continued)
The
following table summarizes certain cash flows received from and paid to Lear
ASC
Corporation (in millions):
|
Three
Months Ended
|
||||||
|
March
31,
2007 |
April
1,
2006 |
|||||
|
Proceeds
from collections reinvested in
securitizations
|
|
$
|
932.7
|
|
$
|
1,071.6
|
|
Servicing
fees received
|
1.2
|
1.5
|
||||
Derivative
Instruments and Hedging Activities
Forward
foreign exchange, futures and option contracts — The Company uses forward
foreign exchange, futures and option contracts to reduce the effect of
fluctuations in foreign exchange rates on short-term, foreign currency
denominated intercompany transactions and other known foreign currency
exposures. Gains and losses on the derivative instruments are intended to offset
gains and losses on the hedged transaction in an effort to reduce the earnings
volatility resulting from fluctuations in foreign exchange rates. The principal
currencies hedged by the Company include the Mexican peso and the Hungarian
forint, as well as the Euro and other European currencies. Forward foreign
exchange, futures and option contracts are accounted for as cash flow hedges
when the hedged item is a forecasted transaction or the variability of cash
flows to be received or paid related to a recognized asset or liability. As
of
March 31, 2007, contracts designated as cash flow hedges with $380.4 million
of
notional amount were outstanding with maturities of less than nine months.
As of
March 31, 2007, the fair market value of these contracts was approximately
$9.4
million. As of March 31, 2007, other foreign currency derivative contracts
that
did not qualify for hedge accounting with $439.8 million of notional amount
were
outstanding. These foreign currency derivative contracts consist principally
of
cash transactions between three and thirty days, hedges of intercompany loans
and hedges of certain other balance sheet exposures. As of March 31, 2007,
the
fair market value of these contracts was approximately $1.6 million.
Interest
rate swap contracts — The Company uses interest rate swap contracts to manage
its exposure to fluctuations in interest rates. Interest rate swap contracts
which fix the interest payments of certain variable rate debt instruments or
fix
the market rate component of anticipated fixed rate debt instruments are
accounted for as cash flow hedges. Interest rate swap contracts which hedge
the
change in fair market value of certain fixed rate debt instruments are accounted
for as fair value hedges. As of March 31, 2007, contracts representing $800.0
million of notional amount were outstanding with maturity dates of August 2007
through September 2011. All of these contracts modify the variable rate
characteristics of the Company’s variable rate debt instruments, which are
generally set at three-month LIBOR rates. These contracts convert variable
rate
obligations into fixed rate obligations with a weighted average interest rate
of
4.902%. The fair market value of all outstanding interest rate swap contracts
is
subject to changes in value due to changes in interest rates. As of March 31,
2007, the fair market value of these contracts was approximately negative $5.0
million.
Commodity
swap contracts — The Company uses derivative instruments including financially
settled forward, swap and option contracts to manage its exposure to
fluctuations in certain commodity prices. All derivative instruments are
currently designated as cash flow hedges, as the hedged item is a forecasted
transaction. Gains and losses on the derivative instruments are intended to
offset gains and losses on the hedged transaction in an effort to reduce the
earnings volatility resulting from fluctuations in commodity prices. As of
March
31, 2007, the fair market value of these commodity instruments was $1.1 million
with maturity dates through December 2008.
As of
March 31, 2007 and December 31, 2006, net gains of approximately $9.8 million
and $14.7 million, respectively, related to derivative instruments and hedging
activities were recorded in accumulated other comprehensive loss. In the three
months ended March 31, 2007 and April 1, 2006, net gains of $3.6 million and
$1.6 million, respectively, related to the Company’s hedging activities were
reclassified from accumulated other comprehensive loss into earnings. During
the
twelve month period ending March 29, 2008, the Company expects to reclassify
into earnings net gains of approximately $11.5 million recorded in accumulated
other comprehensive loss.
F-87
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(19) Financial
Instruments – (continued)
Such gains will be
reclassified at the time the underlying hedged transactions are realized. During
the three months ended March 31, 2007 and April 1, 2006, amounts recognized
in
the condensed consolidated statements of income related to changes in the fair
value of cash flow and fair value hedges excluded from the effectiveness
assessments and the ineffective portion of changes in the fair value of cash
flow and fair value hedges were not material.
Non-U.S.
dollar financing transactions — The Company designated its previously
outstanding Euro-denominated senior notes (Note 9, “Long-Term Debt”) as a net
investment hedge of long-term investments in its Euro-functional subsidiaries.
As of March 31, 2007, the amount recorded in accumulated other comprehensive
loss related to the effective portion of the net investment hedge of foreign
operations was approximately negative $148.0 million. Such amount will be
included in accumulated other comprehensive loss until the Company liquidates
its related net investment in its designated foreign operations.
(20) Accounting
Pronouncements
Financial
Instruments
The FASB
issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments — an
amendment of FASB Statements No. 133 and 140.” This statement resolves issues
related to the application of SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities,” to beneficial interests in securitized
assets. The provisions of this statement are to be applied prospectively to
all
financial instruments acquired or issued during fiscal years beginning after
September 15, 2006. The effects of adoption were not significant.
The FASB
issued SFAS No. 156, “Accounting for Servicing of Financial Assets — an
amendment of FASB Statement No. 140.” This statement requires that all servicing
assets and liabilities be initially measured at fair value. The provisions
of
this statement are to be applied prospectively to all servicing transactions
beginning after September 15, 2006. The effects of adoption were not
significant.
Fair Value
Measurements
The FASB
issued SFAS No. 157, “Fair Value Measurements.” This statement defines fair
value, establishes a framework for measuring fair value and expands disclosures
about fair value measurements. The provisions of this statement are to generally
be applied prospectively in fiscal years beginning after November 15, 2007.
The
Company is currently evaluating the impact of this statement on its financial
statements.
Pension and Other
Postretirement Benefits
The FASB
issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and
Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106 and
132(R).” The Company adopted the funded status recognition provisions of SFAS
No. 158 as of December 31, 2006.
This
statement also requires the measurement of defined benefit plan asset and
liabilities as of the annual balance sheet date. Currently, the Company measures
its plan assets and liabilities using an early measurement date of September
30,
as allowed by the original provisions of SFAS No. 87, “Employers’ Accounting for
Pensions,” and SFAS No. 106, “Employers’ Accounting for Postretirement Benefits
Other Than Pensions.” The measurement date provisions of SFAS No. 158 are
effective for fiscal years ending after December 15, 2008. The Company is
currently evaluating the measurement date provisions of this statement.
Fair Value
Option
The FASB
issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities – including an amendment of FASB Statement No. 115.” This statement
allows entities to measure eligible financial instruments and certain other
items at fair value that are not currently required to be measured at fair
value. The
F-88
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(20) Accounting
Pronouncements – (continued)
provisions of this statement
are effective as of the beginning of an entity’s first fiscal year beginning
after November 15, 2007. The Company is currently evaluating the impact of
this statement on its financial statements.
(21) Supplemental
Guarantor Condensed Consolidating Financial Statements
|
March
31, 2007
|
|||||||||||||||
|
Parent
|
Guarantors
|
Non-
guarantors |
Eliminations
|
Consolidated
|
|||||||||||
|
(unaudited;
in millions)
|
|||||||||||||||
|
ASSETS
|
|||||||||||||||
|
Current
Assets:
|
|||||||||||||||
|
Cash
and cash equivalents
|
|
$
|
100.0
|
|
$
|
6.2
|
|
$
|
224.2
|
|
$
|
—
|
|
$
|
330.4
|
|
Accounts
receivable
|
26.5
|
333.9
|
2,052.3
|
—
|
2,412.7
|
||||||||||
|
Inventories
|
14.5
|
128.7
|
455.8
|
—
|
599.0
|
||||||||||
|
Current
assets of business held for sale
|
—
|
—
|
38.3
|
—
|
38.3
|
||||||||||
|
Other
|
33.8
|
19.8
|
264.0
|
—
|
317.6
|
||||||||||
|
Total
current assets
|
174.8
|
488.6
|
3,034.6
|
—
|
3,698.0
|
||||||||||
|
Long-Term
Assets:
|
|||||||||||||||
|
Property,
plant and equipment, net
|
199.4
|
284.9
|
941.6
|
—
|
1,425.9
|
||||||||||
|
Goodwill,
net
|
454.5
|
551.1
|
1,001.0
|
—
|
2,006.6
|
||||||||||
|
Investments
in subsidiaries
|
3,890.6
|
2,343.1
|
—
|
(6,233.7
|
)
|
—
|
|||||||||
|
Other
|
237.8
|
24.4
|
268.3
|
—
|
530.5
|
||||||||||
|
Total
long-term assets
|
4,782.3
|
3,203.5
|
2,210.9
|
(6,233.7
|
)
|
3,963.0
|
|||||||||
|
$
|
4,957.1
|
$
|
3,692.1
|
$
|
5,245.5
|
$
|
(6,233.7
|
)
|
$
|
7,661.0
|
|||||
|
LIABILITIES
AND STOCKHOLDERS’
EQUITY
|
|||||||||||||||
|
Current
Liabilities:
|
|||||||||||||||
|
Short-term
borrowings
|
$
|
—
|
$
|
—
|
$
|
11.5
|
$
|
—
|
$
|
11.5
|
|||||
|
Accounts
payable and drafts
|
148.0
|
399.5
|
1,932.8
|
—
|
2,480.3
|
||||||||||
|
Accrued
liabilities
|
310.7
|
193.9
|
648.2
|
—
|
1,152.8
|
||||||||||
|
Current
liabilities of business held for sale
|
—
|
—
|
16.7
|
—
|
16.7
|
||||||||||
|
Current
portion of long-term debt
|
6.0
|
—
|
20.4
|
—
|
26.4
|
||||||||||
|
Total
current liabilities
|
464.7
|
593.4
|
2,629.6
|
—
|
3,687.7
|
||||||||||
|
Long-Term
Liabilities:
|
|||||||||||||||
|
Long-term
debt
|
2,411.2
|
—
|
20.6
|
—
|
2,431.8
|
||||||||||
|
Long-term
liabilities of business held for sale
|
—
|
—
|
21.6
|
—
|
21.6
|
||||||||||
|
Intercompany
accounts, net
|
1,219.6
|
604.0
|
(1,823.6
|
)
|
—
|
—
|
|||||||||
|
Other
|
169.1
|
170.6
|
487.7
|
—
|
827.4
|
||||||||||
|
Total
long-term liabilities
|
3,799.9
|
774.6
|
(1,293.7
|
)
|
—
|
3,280.8
|
|||||||||
|
Stockholders’
Equity
|
692.5
|
2,324.1
|
3,909.6
|
(6,233.7
|
)
|
692.5
|
|||||||||
|
$
|
4,957.1
|
$
|
3,692.1
|
$
|
5,245.5
|
$
|
(6,233.7
|
)
|
$
|
7,661.0
|
|||||
F-89
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(21) Supplemental
Guarantor Condensed Consolidating Financial Statements –
(continued)
|
December
31, 2006
|
|||||||||||||||
|
Parent
|
Guarantors
|
Non-guarantors
|
Eliminations
|
Consolidated
|
|||||||||||
|
(in
millions)
|
|||||||||||||||
|
ASSETS
|
|||||||||||||||
|
Current
Assets:
|
|||||||||||||||
|
Cash
and cash equivalents
|
|
$
|
195.8
|
|
$
|
4.0
|
|
$
|
302.9
|
|
$
|
—
|
|
$
|
502.7
|
|
Accounts
receivable
|
12.7
|
243.5
|
1,750.7
|
—
|
2,006.9
|
||||||||||
|
Inventories
|
15.2
|
136.9
|
429.4
|
—
|
581.5
|
||||||||||
|
Current
assets of business held for sale
|
77.1
|
217.1
|
133.6
|
—
|
427.8
|
||||||||||
|
Other
|
45.9
|
29.9
|
295.6
|
—
|
371.4
|
||||||||||
|
Total
current assets
|
346.7
|
631.4
|
2,912.2
|
—
|
3,890.3
|
||||||||||
|
Long-Term
Assets:
|
|||||||||||||||
|
Property,
plant and equipment, net
|
230.9
|
284.1
|
956.7
|
—
|
1,471.7
|
||||||||||
|
Goodwill,
net
|
454.5
|
551.1
|
991.1
|
—
|
1,996.7
|
||||||||||
|
Investments
in subsidiaries
|
3,691.2
|
3,257.4
|
—
|
(6,948.6
|
)
|
—
|
|||||||||
|
Other
|
233.7
|
24.1
|
234.0
|
—
|
491.8
|
||||||||||
|
Total
long-term assets
|
4,610.3
|
4,116.7
|
2,181.8
|
(6,948.6
|
)
|
3,960.2
|
|||||||||
|
$
|
4,957.0
|
$
|
4,748.1
|
$
|
5,094.0
|
$
|
(6,948.6
|
)
|
$
|
7,850.5
|
|||||
|
LIABILITIES
AND
STOCKHOLDERS’
EQUITY |
|||||||||||||||
|
Current
Liabilities:
|
|||||||||||||||
|
Short-term
borrowings
|
$
|
—
|
$
|
—
|
$
|
39.3
|
$
|
—
|
$
|
39.3
|
|||||
|
Accounts
payable and drafts
|
157.0
|
395.7
|
1,764.7
|
—
|
2,317.4
|
||||||||||
|
Accrued
liabilities
|
322.3
|
145.8
|
631.2
|
—
|
1,099.3
|
||||||||||
|
Current
liabilities of business held for sale
|
60.4
|
226.1
|
119.2
|
—
|
405.7
|
||||||||||
|
Current
portion of long-term debt
|
6.0
|
—
|
19.6
|
—
|
25.6
|
||||||||||
|
Total
current liabilities
|
545.7
|
767.6
|
2,574.0
|
—
|
3,887.3
|
||||||||||
|
Long-Term
Liabilities:
|
|||||||||||||||
|
Long-term
debt
|
2,413.2
|
—
|
21.3
|
—
|
2,434.5
|
||||||||||
|
Long-term
liabilities of business held for sale
|
—
|
0.1
|
48.4
|
—
|
48.5
|
||||||||||
|
Intercompany
accounts, net
|
1,193.7
|
503.1
|
(1,696.8
|
)
|
—
|
—
|
|||||||||
|
Other
|
202.4
|
176.5
|
499.3
|
—
|
878.2
|
||||||||||
|
Total
long-term liabilities
|
3,809.3
|
679.7
|
(1,127.8
|
)
|
—
|
3,361.2
|
|||||||||
|
Stockholders’
Equity
|
602.0
|
3,300.8
|
3,647.8
|
(6,948.6
|
)
|
602.0
|
|||||||||
|
$
|
4,957.0
|
$
|
4,748.1
|
$
|
5,094.0
|
$
|
(6,948.6
|
)
|
$
|
7,850.5
|
|||||
F-90
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(21) Supplemental
Guarantor Condensed Consolidating Financial Statements –
(continued)
|
For
the Three Months Ended March 31,
2007
|
|||||||||||||||
|
Parent
|
Guarantors
|
Non-
guarantors |
Eliminations
|
Consolidated
|
|||||||||||
|
(unaudited;
in millions)
|
|||||||||||||||
|
Net
sales
|
|
$
|
288.3
|
|
$
|
1,525.5
|
|
$
|
3,614.7
|
|
$
|
(1,022.4
|
)
|
$
|
4,406.1
|
|
Cost
of sales
|
298.9
|
1,499.1
|
3,319.6
|
(1,022.4
|
)
|
4,095.2
|
|||||||||
|
Selling,
general and administrative
expenses
|
34.1
|
14.0
|
78.4
|
—
|
126.5
|
||||||||||
|
Loss
on divestiture of Interior business
|
(17.2
|
)
|
28.2
|
14.6
|
—
|
25.6
|
|||||||||
|
Interest
expense
|
21.8
|
28.3
|
1.4
|
—
|
51.5
|
||||||||||
|
Intercompany
(income) expense, net
|
(79.6
|
)
|
16.8
|
62.8
|
—
|
—
|
|||||||||
|
Other
expense, net
|
2.0
|
10.0
|
13.0
|
—
|
25.0
|
||||||||||
|
Income
(loss) before income taxes and
equity in net income of subsidiaries |
28.3
|
(70.9
|
)
|
124.9
|
—
|
82.3
|
|||||||||
|
Provision
(benefit) for income taxes
|
—
|
(9.8
|
)
|
42.2
|
—
|
32.4
|
|||||||||
|
Equity
in net income of subsidiaries
|
(21.6
|
)
|
(5.9
|
)
|
—
|
27.5
|
—
|
||||||||
|
Net
income (loss)
|
$
|
49.9
|
$
|
(55.2
|
)
|
$
|
82.7
|
$
|
(27.5
|
)
|
$
|
49.9
|
|||
|
For
the Three Months Ended April 1,
2006
|
||||||||||||||||
|
Parent
|
Guarantors
|
Non-
guarantors |
Eliminations
|
Consolidated
|
||||||||||||
|
(unaudited;
in millions)
|
||||||||||||||||
|
Net
sales
|
|
$
|
475.6
|
|
$
|
1,889.0
|
|
$
|
3,152.5
|
|
$
|
(838.6
|
)
|
$
|
4,678.5
|
|
|
Cost
of sales
|
500.6
|
1,850.8
|
2,946.5
|
(838.6
|
)
|
4,459.3
|
||||||||||
|
Selling,
general and administrative
expenses
|
59.4
|
27.3
|
78.3
|
—
|
165.0
|
|||||||||||
|
Interest
expense
|
15.1
|
23.5
|
9.1
|
—
|
47.7
|
|||||||||||
|
Intercompany
(income) expense, net
|
(131.8
|
)
|
87.5
|
44.3
|
—
|
—
|
||||||||||
|
Other
(income) expense, net
|
(31.3
|
)
|
12.0
|
11.0
|
—
|
(8.3
|
)
|
|||||||||
|
Income
(loss) before income taxes, equity
in net (income) loss of subsidiaries and cumulative effect of a change in accounting principle |
63.6
|
(112.1
|
)
|
63.3
|
—
|
14.8
|
||||||||||
|
Provision
(benefit) for income taxes
|
(2.9
|
)
|
1.7
|
1.0
|
—
|
(0.2
|
)
|
|||||||||
|
Equity
in net (income) loss of subsidiaries
|
51.5
|
(41.2
|
)
|
—
|
(10.3
|
)
|
—
|
|||||||||
|
Income
(loss) before cumulative effect
of a change in accounting principle |
15.0
|
(72.6
|
)
|
62.3
|
10.3
|
15.0
|
||||||||||
|
Cumulative
effect of a change in accounting
principle |
2.9
|
—
|
—
|
—
|
2.9
|
|||||||||||
|
Net
income
|
$
|
17.9
|
$
|
(72.6
|
)
|
$
|
62.3
|
$
|
10.3
|
$
|
17.9
|
|||||
F-91
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(21) Supplemental
Guarantor Condensed Consolidating Financial Statements –
(continued)
|
For
the Three Months Ended March 31,
2007
|
||||||||||||||||
|
Parent
|
Guarantors
|
Non-
guarantors |
Eliminations
|
Consolidated
|
||||||||||||
|
(unaudited;
in millions)
|
||||||||||||||||
|
Net
cash used in operating activities
|
|
$
|
15.2
|
|
$
|
(54.2
|
)
|
$
|
(2.8
|
)
|
$
|
—
|
|
$
|
(41.8
|
)
|
|
Cash
Flows from Investing Activities:
|
||||||||||||||||
|
Additions
to property, plant and
equipment |
(2.8
|
)
|
(17.7
|
)
|
(8.7
|
)
|
—
|
(29.2
|
)
|
|||||||
|
Divestiture
of Interior business
|
(6.5
|
)
|
(12.9
|
)
|
(37.9
|
)
|
—
|
(57.3
|
)
|
|||||||
|
Other,
net
|
0.6
|
0.3
|
(29.5
|
)
|
—
|
(28.6
|
)
|
|||||||||
|
Net
cash used in investing activities
|
(8.7
|
)
|
(30.3
|
)
|
(76.1
|
)
|
—
|
(115.1
|
)
|
|||||||
|
Cash
Flows from Financing Activities:
|
||||||||||||||||
|
Long-term
debt repayments, net
|
(2.9
|
)
|
—
|
(0.7
|
)
|
—
|
(3.6
|
)
|
||||||||
|
Short-term
debt repayments, net
|
—
|
—
|
(11.0
|
)
|
—
|
(11.0
|
)
|
|||||||||
|
Proceeds
from exercise of stock options
|
5.7
|
—
|
—
|
—
|
5.7
|
|||||||||||
|
Decrease
in drafts
|
(1.0
|
)
|
(2.5
|
)
|
(10.0
|
)
|
—
|
(13.5
|
)
|
|||||||
|
Change
in intercompany accounts
|
(104.1
|
)
|
86.5
|
17.6
|
—
|
—
|
||||||||||
|
Net
cash used in financing activities
|
(102.3
|
)
|
84.0
|
(4.1
|
)
|
—
|
(22.4
|
)
|
||||||||
|
Effect
of foreign currency
translation
|
—
|
2.7
|
4.3
|
—
|
7.0
|
|||||||||||
|
Net
Change in Cash and Cash
Equivalents |
(95.8
|
)
|
2.2
|
(78.7
|
)
|
(172.3
|
)
|
|||||||||
|
Cash
and Cash Equivalents as of
Beginning of Period |
195.8
|
4.0
|
302.9
|
—
|
502.7
|
|||||||||||
|
Cash
and Cash Equivalents as of
End of Period |
$
|
100.0
|
$
|
6.2
|
$
|
224.2
|
$
|
—
|
$
|
330.4
|
||||||
F-92
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(21) Supplemental
Guarantor Condensed Consolidating Financial Statements –
(continued)
|
For
the Three Months Ended April 1,
2006
|
||||||||||||||||
|
Parent
|
Guarantors
|
Non-
guarantors |
Eliminations
|
Consolidated
|
||||||||||||
|
(unaudited;
in millions)
|
||||||||||||||||
|
Net
cash provided by operating activities
|
|
$
|
154.7
|
|
$
|
(41.3
|
)
|
$
|
(74.0
|
)
|
$
|
—
|
|
$
|
39.4
|
|
|
Cash
Flows from Investing Activities:
|
||||||||||||||||
|
Additions
to property, plant and equipment
|
(14.4
|
)
|
(30.6
|
)
|
(47.6
|
)
|
(92.6
|
)
|
||||||||
|
Other,
net
|
31.2
|
(3.0
|
)
|
(0.3
|
)
|
—
|
27.9
|
|||||||||
|
Net
cash used in investing activities
|
16.8
|
(33.6
|
)
|
(47.9
|
)
|
—
|
(64.7
|
)
|
||||||||
|
Cash
Flows from Financing Activities:
|
||||||||||||||||
|
Long-term
debt repayments, net
|
(2.1
|
)
|
(0.1
|
)
|
(3.9
|
)
|
—
|
(6.1
|
)
|
|||||||
|
Dividends
paid
|
(16.8
|
)
|
—
|
—
|
—
|
(16.8
|
)
|
|||||||||
|
Increase
in drafts
|
7.6
|
(0.6
|
)
|
(5.9
|
)
|
—
|
1.1
|
|||||||||
|
Change
in intercompany accounts
|
(152.5
|
)
|
78.3
|
74.2
|
—
|
—
|
||||||||||
|
Net
cash used in financing activities
|
(163.8
|
)
|
77.6
|
64.4
|
—
|
(21.8
|
)
|
|||||||||
|
Effect
of foreign currency translation
|
—
|
3.7
|
7.0
|
—
|
10.7
|
|||||||||||
|
Net
Change in Cash and Cash Equivalents
|
7.7
|
6.4
|
(50.5
|
)
|
(36.4
|
)
|
||||||||||
|
Cash
and Cash Equivalents as of Beginning of Period
|
38.6
|
4.8
|
164.2
|
—
|
207.6
|
|||||||||||
|
Cash
and Cash Equivalents as of End of Period
|
$
|
46.3
|
$
|
11.2
|
$
|
113.7
|
$
|
—
|
$
|
171.2
|
||||||
Basis
of
Presentation — Certain of the Company’s wholly-owned subsidiaries (the
“Guarantors”) have unconditionally fully guaranteed, on a joint and several
basis, the punctual payment when due, whether at stated maturity, by
acceleration or otherwise, of all of the Company’s obligations under the Primary
Credit Facility and the indentures governing the Company’s senior notes,
including the Company’s obligations to pay principal, premium, if any, and
interest with respect to the senior notes. The senior notes consist of $300
million aggregate principal amount of 8.50% senior notes due 2013, $600 million
aggregate principal amount of 8.75% senior notes due 2016, $399 million
aggregate principal amount of 5.75% senior notes due 2014, Euro 56 million
aggregate principal amount of 8.125% senior notes due 2008, $41 million
aggregate principal amount of 8.11% senior notes due 2009 and $1 million
aggregate principal amount of zero-coupon convertible senior notes due 2022.
The
Guarantors under the indentures are currently Lear Automotive Dearborn, Inc.,
Lear Automotive (EEDS) Spain S.L., Lear Corporation EEDS and Interiors, Lear
Corporation (Germany) Ltd., Lear Corporation Mexico, S. de R.L. de C.V., Lear
Operations Corporation and Lear Seating Holdings Corp. #50. Lear Automotive
Dearborn, Inc. became a Guarantor under the indentures effective April 25,
2006.
In lieu of providing separate audited financial statements for the Guarantors,
the Company has included the audited supplemental guarantor condensed
consolidating financial statements above. These financial statements reflect
the
guarantors listed above for all periods presented. Management does not believe
that separate financial statements of the Guarantors are material to investors.
Therefore, separate financial statements and other disclosures concerning the
Guarantors are not presented.
As of
December 31, 2006 and for the three months ended April 1, 2006, the supplemental
guarantor condensed consolidating financial statements have been restated to
reflect certain changes to the equity investments of guarantor
subsidiaries.
Distributions
— There are no significant restrictions on the ability of the Guarantors to make
distributions to the Company.
Selling,
General and Administrative Expenses — During the three months ended March 31,
2007 and April 1, 2006, the Parent allocated $2.5 million and $12.9 million,
respectively, of corporate selling, general and administrative expenses to
its
operating subsidiaries. The allocations were based on various factors, which
estimate
F-93
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(21) Supplemental
Guarantor Condensed Consolidating Financial Statements –
(continued)
usage of particular
corporate functions, and in certain instances, other relevant factors, such
as
the revenues or the number of employees of the Company’s subsidiaries.
Long-term
debt of the Parent and the Guarantors — A summary of long-term debt of the
Parent and the Guarantors on a combined basis is shown below (in
millions):
|
March
31,
2007 |
December
31,
2006 |
||||||
|
Amended
and restated primary credit
facility
|
|
$
|
997.0
|
|
$
|
997.0
|
|
|
Senior
notes
|
1,415.7
|
1,417.6
|
|||||
|
Other
long-term debt
|
4.5
|
4.6
|
|||||
|
2,417.2
|
2,419.2
|
||||||
|
Less
— current portion
|
(6.0
|
)
|
(6.0
|
)
|
|||
|
$
|
2,411.2
|
$
|
2,413.2
|
||||
The
obligations of foreign subsidiary borrowers under the Primary Credit Facility
are guaranteed by the Parent.
For more
information on the above indebtedness, see Note 9, “Long-Term Debt.”
F-94
PART
II.
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item 14. Other
Expenses of Issuance and Distribution
The
SEC registration fee and the estimated expenses in connection with the offering
are as follows:
|
Securities
and Exchange Commission registration fee
|
|
$
|
13,191.77
|
|
Accounting
fees and expenses
|
[_]
|
||
|
Legal
fees and expenses
|
[_]
|
||
|
Printing
expenses
|
[_]
|
||
|
Miscellaneous
|
[_]
|
||
|
TOTAL
|
[_]
|
Item 15.
Indemnification of Directors and Officers.
Indemnification
Under the Delaware Revised Uniform Limited Partnership Act and the American
Real
Estate Partners, L.P. Amended and Restated Agreement of Limited
Partnership
AREP
is
organized under the laws of Delaware. Section 17-108 of the Delaware Act,
provides that a limited partnership may, and shall have the power to, indemnify
and hold harmless any partners or other persons from and against any and all
claims and demands whatsoever, subject to such standards and restrictions set
forth in the partnership agreement.
Section
6.15 of the AREP partnership agreement, dated as of May 12, 1987, as amended,
provides that the general partner, its affiliates, and all officers, directors,
employees and agents of the general partner and its affiliates (individually,
an
“Indemnitee”), to the fullest extent permitted by law, will be indemnified and
held harmless from and against any and all losses, claims, demands, costs,
damages, liabilities, joint and several, expenses of any nature (including
attorneys’ fees and disbursements), judgments, fines, settlements, and other
amounts arising from any and all claims, demands, actions, suits or proceedings,
whether civil, criminal, administrative or investigative, in which the
Indemnitee may be involved, or threatened to be involved, as a party or
otherwise by reason of its status as (x) the general partner or an affiliate
thereof or (y) a partner, shareholder, director, officer, employee or agent
of
the general partner or an affiliate thereof or (z) a person serving at the
request of the partnership in another entity in a similar capacity, which relate
to, arise out of or are incidental to the partnership, its property, business
or
affairs, including, without limitation, liabilities under the federal and state
securities laws, regardless of whether the Indemnitee continues to be a general
partner, an affiliate, or an officer, director, employee or agent of the general
partner or of an affiliate thereof at the time any such liability or expense
is
paid or incurred, if (i) the Indemnitee acted in good faith and in a manner
it
believed to be in, or not opposed to, the best interests of the partnership,
and, with respect to any criminal proceeding, had no reasonable cause to believe
its conduct was unlawful and (ii) the Indemnitee’s conduct did not constitute
willful misconduct. Our partnership agreement further provides that an
Indemnitee shall not be denied indemnification in whole or in part under Section
6.15 by reason of the fact that the Indemnitee had an interest in the
transaction with respect to which the indemnification applies if the transaction
was otherwise permitted by the terms of the partnership agreement. Any
indemnification under Section 6.15 shall be satisfied solely out of the assets
of the partnership. The record holders of the depositary units shall not be
subject to personal liability by reason of the indemnification provision.
Item 16.
Exhibits
(a)
Exhibits
See the
accompanying Exhibit Index.
Item 17.
Undertakings
The
undersigned registrants hereby undertake:
(1)
To file, during any period in which
offers or sales are being made, a post-effective amendment to this registration
statement
II-1
(i)
To include any prospectus required
by Section 10(a)(3) of the Securities Act;
(ii)
To reflect in the prospectus any
facts or events arising after the effective date of the Registration Statement
(or the most recent post-effective amendment thereof) which, individually or
in
the aggregate, represent a fundamental change in the information set forth
in
the Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price represent no more
than a 20% change in the maximum aggregate offering price set forth in the
“Calculation of Registration Fee” table in the effective Registration Statement;
and
(iii)
To include any material information
with respect to the plan of distribution not previously disclosed in the
Registration Statement or any material change to such information in the
Registration Statement; provided, however, that paragraphs (1)(i), (1)(ii)
and
(1)(iii) do not apply if the information required to be included in a
post-effective amendment by those paragraphs is contained in periodic reports
filed with or furnished to the SEC by the registrants pursuant to Section 13
or
15(d) of the Exchange Act that are incorporated by reference in the registration
statement, or is contained in a form of prospectus filed pursuant to Rule 424(b)
that is a part of the Registration Statement.
(2)
That, for the purpose of
determining any liability under the Securities Act, each such post-effective
amendment shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3)
To remove from registration by
means of a post-effective amendment any of the securities being registered
that
remain unsold at the termination of the offering.
(4)
That, for the purpose of
determining liability under the Securities Act to any purchaser:
(i)
If the registrant is relying on
Rule 430B:
(A)
Each prospectus filed by the
registrant pursuant to Rule 424(b)(3) shall be deemed to be part of the
registration statement as of the date the filed prospectus was deemed part
of
and included in the Registration Statement; and
(B)
Each prospectus required to be
filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7) as part of a registration
statement in reliance on Rule 430B relating to an offering made pursuant to
Rule
415(a)(l)(i), (vii) or (x) for the purpose of providing the information required
by section 10(a) of the Securities Act shall be deemed to be part of and
included in the Registration Statement as of the earlier of the date such form
of prospectus is first used after effectiveness or the date of the first
contract of sale of securities in the offering described in the prospectus.
As
provided in Rule 430B, for liability purposes of the issuer and any person
that
is at that date an underwriter, such date shall be deemed to be a new effective
date of the Registration Statement relating to the securities in the
Registration Statement to which that prospectus relates, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof. Provided, however, that no statement made in a registration
statement or prospectus that is part of the Registration Statement or made
in a
document incorporated or deemed incorporated by reference into the Registration
Statement or prospectus that is part of the Registration Statement will, as
to a
purchaser with a time of contract of sale prior to such effective date,
supersede or modify any statement that was made in the Registration Statement
or
prospectus that was part of the Registration Statement or made in any such
document immediately prior to such effective date; or
(ii)
If the registrant is subject to
Rule 430C, each prospectus filed pursuant to Rule 424(b) as part of a
Registration Statement relating to an offering, other than Registration
Statements relying on Rule 430B or other than prospectuses filed in reliance
on
Rule 430A, shall be deemed to be part of and included in the Registration
Statement as of the date it is first used after effectiveness. Provided,
however, that no statement made in a Registration Statement or prospectus that
is part of the Registration Statement or made in a document incorporated or
deemed incorporated by reference into the Registration Statement or prospectus
that is part of the Registration Statement will, as to a purchaser with a time
of contract of
II-2
sale
prior to such first use, supersede or modify any statement that was made in
the
Registration Statement or prospectus that was part of the Registration Statement
or made in any such document immediately prior to such date of first use.
(5)
That, for the purpose of
determining liability of the registrant under the Securities Act to any
purchaser in the initial distribution of the securities, in a primary offering
of securities of the undersigned registrants pursuant to the Registration
Statement, regardless of the underwriting method used to sell the securities
to
the purchaser, if the securities are offered or sold to such purchaser by means
of any of the following communications, the undersigned registrants will be
a
seller to the purchaser and will be considered to offer or sell such securities
to such purchaser:
(i)
Any preliminary prospectus or
prospectus of the undersigned registrant relating to the offering required
to be
filed pursuant to Rule 424;
(ii)
Any free writing prospectus
relating to the offering prepared by or on behalf of the undersigned registrants
or used or referred to by the undersigned registrant;
(iii)
The portion of any other free
writing prospectus relating to the offering containing material information
about the undersigned registrant or its securities provided by or on behalf
of
the undersigned registrant; and
(iv)
Any other communication that is
an
offer in the offering made by the undersigned registrant to the purchaser.
(6)
That, for purposes of determining
any liability under the Securities Act, each filing of the registrant’s annual
report pursuant to Section 13(a) or 15(d) of the Exchange Act (and, where
applicable, each filing of an employee benefit plan’s annual report pursuant to
Section 15(d) of the Exchange Act) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(7)
Insofar as indemnification for
liabilities arising under the Securities Act may be permitted to directors,
officers and controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrants have been advised that in the opinion
of the SEC such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim
for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer of controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrants will, unless
in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
(8)
For purposes of determining any
liability under the Securities Act, the information omitted from the form of
prospectus filed as part of a registration statement in reliance upon Rule
430A
and contained in the form of prospectus filed by the registrants pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be
part of the Registration Statement as of the time it was declared
effective.
(9)
For the purpose of determining
any
liability under the Securities Act, each post-effective amendment that contains
a form of prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
SIGNATURES
Pursuant
to
the requirements of the Securities Act of 1933, as amended, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing a Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in New York, New York on June 21, 2007.
|
AMERICAN REAL ESTATE PARTNERS, L.P.
|
|||
|
By:
|
American Property Investors, Inc., its general
partner
|
||
|
By:
|
/s/ Keith A. Meister
|
||
|
Keith A. Meister
Principal Executive Officer and Vice Chairman of the Board |
|||
KNOW
BY
ALL MEN BY THESE PRESENTS that each person whose signature appears below hereby
constitutes and appoints Keith A. Meister as his true and lawful
attorney-in-fact and agent with full power of substitution and resubstitution,
to act for him and in his name, place and stead, in any and all capacities,
to
sign any or all amendments (including pre-effective and post-effective
amendments) to this Registration Statement, including any subsequent
registration statement for the same offering that may be filed under Rule 462(b)
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto
said attorney-in-fact and agent full power and authority to do and perform
each
and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent
or his substitute may lawfully do or cause to be done by virtue hereof.
Pursuant
to
the requirements of the Securities Act of 1933, as amended, this Registration
Statement has been signed by the following persons in the capacities and on
the
dates indicated:
|
/s/
Keith
A. Meister
|
|
Principal Executive Officer
and Vice Chairman of the Board (Principal Executive Officer) |
|
June 21, 2007
|
|
Keith
A.
Meister
|
||||
|
/s/
Andrew
Skobe
|
Chief Financial Officer (Principal Financial
Officer)
and Chief Accounting Officer (Principal Accounting Officer) |
June 21, 2007
|
||
|
Andrew
Skobe
|
||||
|
|
||||
|
/s/
Jack G.
Wasserman
|
Director
|
June 21, 2007
|
||
|
Jack
G.
Wasserman
|
||||
|
|
||||
|
/s/ William A. Leidesdorf
|
Director
|
June 21, 2007
|
||
|
William
A.
Leidesdorf
|
||||
|
/s/
James
L. Nelson
|
Director
|
June 21, 2007
|
||
|
James
L.
Nelson
|
||||
|
/s/
Vincent
J. Intrieri
|
Director
|
June 21, 2007
|
||
|
Vincent
J.
Intrieri
|
||||
|
|
Chairman of the Board
|
|
||
|
Carl
C.
Icahn
|
EXHIBIT
INDEX
Item 16.
Exhibits
|
Exhibit
No.
|
|
Description
|
|
4.1
|
Indenture, dated as of April 5, 2007, by
and
among American Real Estate Partners, L.P., American Real Estate Finance
Corp., AREH, as guarantor and Wilmington Trust Company, as Trustee
(incorporated by reference to Exhibit 10.43 to AREP’s Form 8-K (SEC File
No. 1-9516), filed on April 5, 2007).
|
|
|
4.2
|
Form of Variable Rate Senior Convertible
Notes
due 2013 (incorporated by reference to Exhibit 10.44 to AREP’s Form 8-K
(SEC File No. 1-9516), filed on April 17, 2007).
|
|
|
4.3
|
Registration Rights Agreement, dated as of
April
4, 2007 (incorporated by reference to Exhibit 10.42 to AREP’s Form 8-K
(SEC File No. 1-9516), filed on April 5, 2007).
|
|
|
5.1
|
Opinion of Proskauer Rose LLP.(1)
|
|
|
23.1
|
Consent of Grant Thornton LLP.
|
|
|
23.2
|
Consent of Grant Thornton LLP.
|
|
|
23.3
|
Consent of KPMG LLP.
|
|
|
23.4
|
Consent of KPMG LLP.
|
|
|
23.5
|
Consent of KPMG LLP.
|
|
|
23.6
|
Consent of Ernst & Young LLP.
|
|
|
23.7
|
Consent of Proskauer Rose LLP (included in
Exhibit 5.1).(1)
|
|
|
24.1
|
Power of Attorney (included on the signature
page
to the S-3).
|
——————
(1)
To be
filed by amendment.
E-1
Exhibit
23.1
CONSENT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We
have
issued our reports dated March 2, 2007, accompanying the consolidated financial
statements and management’s assessment
of
the effectiveness of internal control over financial reporting included in
the
Annual Report of American Real Estate Partners, L.P. on Form 10-K for the
year
ended December 31, 2006 which are incorporated by reference in this Registration
Statement and Prospectus. We hereby consent to the incorporation by reference
of
said reports in this Registration Statement and Prospectus, and to the use
of
our name as it appears under the caption “Experts.” Our audit report on the
consolidated financial statements expressed an unqualified opinion and contains
an explanatory paragraph relating to the change in accounting for the
Partnership's investment in Imclone Systems Incorporated and Subsidiary
from an available for sale security to the equity method.
| /s/ Grant Thornton LLP | |||
| New York, New York June 15, 2007 |
Exhibit
23.2
CONSENT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We
have
issued our report
dated June 15, 2007, accompanying the balance sheet of American Property
Investors, Inc. as of December 31, 2006, which is included in this Registration
Statement and Prospectus. We consent to the use of the aforementioned report
in
the Registration Statement and Prospectus, and to the use of our name as
it
appears under the caption “Experts.”
| /s/ Grant Thornton LLP | |||
| New
York, New
York June 15, 2007 |
Exhibit
23.3
CONSENT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We
consent to the use of our report dated March 1, 2007, with respect to the
consolidated balance sheets of ImClone Systems Incorporated and subsidiary
as of
December 31, 2006 and 2005, and the related consolidated statements of
operations, stockholders’ equity (deficit) and comprehensive income, for the
years then ended, incorporated herein by reference and to the reference to
our
firm under the heading “Experts” in the prospectus. Our report on the
consolidated financial statements refers to the Company’s adoption of the
provisions of Statement of Financial Accounting Standards No. 123R, “Share-Based
Payment.”
| /s/ KPMG LLP | |||
| Princeton, New Jersey June 15, 2007 |
Exhibit
23.4
CONSENT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We
consent to the use of our report dated March 1, 2007, with respect to the
consolidated balance sheets of ImClone Systems Incorporated and subsidiary
as of
December 31, 2006 and 2005, and the related consolidated statements of
operations, stockholders’ equity (deficit) and comprehensive income and cash
flows for each of the years in the three year period ended December 31, 2006,
incorporated herein by reference and to the reference to our firm under the
heading “Experts” in the prospectus. Our report on the consolidated financial
statements refers to the Company’s adoption of the provisions of Statement of
Financial Accounting Standards No. 123R, “Share-Based Payment.”
| /s/ KPMG LLP | |||
| Princeton, New Jersey June 15, 2007 |
Exhibit
23.5
Consent
of Independent Registered Public Accounting Firm
We
consent to the use of our report dated March 11, 2005, with respect to
the
consolidated statements of operations, changes in shareholders’ equity, and
cash flows
for the year ended December 31, 2004 for GB Holdings, Inc. and subsidiaries,
incorporated herein by reference and to the reference to our firm under
the
heading “Experts”
in the
Registration Statement. Our report dated March 11, 2005 contains an explanatory
paragraph that states that GB Holdings Inc. has suffered recurring net
losses,
has a net working capital deficiency and has significant debt obligations
which
are due within one year that raise substantial doubt about its ability
to
continue as a going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of that
uncertainty.
| /s/ KPMG LLP | |||
| Short Hills, New Jersey June 15, 2007 |
Exhibit
23.6
Consent
of Independent Registered Public Accounting Firm
We
consent to the reference to our firm under the caption “Experts”
and to the use of
our report dated February 20, 2007, with respect to the consolidated financial
statements and schedule of Lear Corporation included in the Registration
Statement (Form S-3) and related Prospectus of American Real Estate Partners,
L.P. for the registration of 4,525,058 depositary units.
| /s/ Ernst & Young LLP | |||
| Detroit, Michigan June 18, 2007 |