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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal quarter ended December 31, 2002
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 1-11263
-----------------
EXIDE TECHNOLOGIES
(Exact Name of Registrant as Specified in Its Charter)
Delaware 23-0552730
(State or other (I.R.S. Employer)
jurisdiction of Identification Number)
Incorporation or
organization)
210 Carnegie Center,
Suite 500
Princeton, New Jersey 08540
(Address of principal (Zip Code)
executive offices)
(609) 627-7200
(Registrant's telephone number, including area code)
-----------------
Indicate by a check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
As of February 12, 2003, 27,383,084 shares of common stock were outstanding.
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EXIDE TECHNOLOGIES AND SUBSIDIARIES
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)............................... 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE
AND NINE MONTHS ENDED DECEMBER 31, 2002 AND DECEMBER 31, 2001 3
CONDENSED CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2002 AND
MARCH 31, 2002............................................... 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE
MONTHS ENDED DECEMBER 31, 2002 AND DECEMBER 31, 2001......... 5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS........... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS........................................ 25
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.... 35
ITEM 4. CONTROLS AND PROCEDURES........................................ 36
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.............................................. 38
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS...................... 40
ITEM 3. DEFAULTS UPON SENIOR SECURITIES................................ 40
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 40
ITEM 5. OTHER INFORMATION.............................................. 40
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................... 41
SIGNATURES............................................................. 42
2
EXIDE TECHNOLOGIES AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per-share data)
For the Three Months Ended For the Nine Months Ended
------------------------ ------------------------
December 31, December 31, December 31, December 31,
2002 2001 2002 2001
------------ ------------ ------------ ------------
NET SALES.............................................. $622,140 $ 633,194 $1,756,492 $1,888,677
COST OF SALES.......................................... 469,315 523,153 1,365,380 1,510,784
-------- --------- ---------- ----------
Gross profit.................................... 152,825 110,041 391,112 377,893
-------- --------- ---------- ----------
OPERATING EXPENSES:
Selling, marketing and advertising.................. 67,258 85,064 193,138 224,847
General and administrative.......................... 44,810 57,085 137,155 134,711
Restructuring and other (Note 11)................... 3,837 13,626 14,122 24,684
Purchased research and development.................. -- -- -- (8,185)
Goodwill impairment charge (Note 7)................. -- 105,000 37,000 105,000
Other (income) expense, net (Note 14)............... (5,347) 5,727 (12,240) 24,338
-------- --------- ---------- ----------
Operating income (loss)......................... 42,267 (156,461) 21,937 (127,502)
-------- --------- ---------- ----------
INTEREST EXPENSE, net (Note 13)........................ 28,212 35,462 80,170 102,654
REORGANIZATION ITEMS, net (Note 5)..................... 8,455 -- 28,573 --
-------- --------- ---------- ----------
Income (loss) before income taxes, minority
interest and cumulative effect of change in
accounting principle.............................. 5,600 (191,923) (86,806) (230,156)
INCOME TAX PROVISION................................... 12,254 8,262 18,236 8,991
-------- --------- ---------- ----------
Loss before minority interest and cumulative effect
of change in accounting principle................. (6,654) (200,185) (105,042) (239,147)
MINORITY INTEREST...................................... 337 286 228 568
-------- --------- ---------- ----------
Net loss before cumulative effect of change in
accounting principle.............................. (6,991) (200,471) (105,270) (239,715)
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE................................. -- -- -- (496)
-------- --------- ---------- ----------
Net loss........................................ $ (6,991) $(200,471) $ (105,270) $ (240,211)
======== ========= ========== ==========
NET LOSS PER SHARE, BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE:
Basic and Diluted................................... $ (0.26) $ (7.33) $ (3.84) $ (9.01)
======== ========= ========== ==========
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE PER SHARE....................... $ -- $ -- $ -- $ (0.02)
======== ========= ========== ==========
NET LOSS PER SHARE (Note 15):
Basic and Diluted................................... $ (0.26) $ (7.33) $ (3.84) $ (9.03)
======== ========= ========== ==========
WEIGHTED AVERAGE SHARES:
Basic and Diluted................................... 27,383 27,345 27,383 26,602
======== ========= ========== ==========
The accompanying notes are an integral part of these statements.
3
EXIDE TECHNOLOGIES AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except per-share data)
December 31, March 31,
2002 2002
------------ ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................................... $ 51,779 $ 31,703
Receivables, net of allowance for doubtful accounts of $58,776 and $53,203,
respectively (Note 12)..................................................... 647,356 304,797
Inventories (Note 8)......................................................... 431,036 404,667
Prepaid expenses and other................................................... 47,171 19,302
Deferred income taxes........................................................ 28,527 28,900
---------- ----------
Total current assets..................................................... 1,205,869 789,369
---------- ----------
PROPERTY, PLANT AND EQUIPMENT, Net.............................................. 532,635 530,220
---------- ----------
OTHER ASSETS:
Goodwill, net (Note 7)....................................................... 452,502 416,926
Other intangibles, net....................................................... 47,834 48,680
Investments in affiliates.................................................... 5,805 4,821
Deferred financing costs, net................................................ 3,206 12,610
Deferred income taxes........................................................ 64,276 69,819
Other........................................................................ 67,965 43,423
---------- ----------
641,588 596,279
---------- ----------
Total assets............................................................. $2,380,092 $1,915,868
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Short-term borrowings (Note 12).............................................. $ 15,165 $ 10,999
Current maturities of long-term debt (Note 12)............................... 602,444 1,075,925
Accounts payable............................................................. 213,922 290,378
Accrued expenses............................................................. 283,610 363,933
---------- ----------
Total current liabilities................................................ 1,115,141 1,741,235
LONG-TERM DEBT (Note 12)........................................................ 113,950 326,348
NONCURRENT RETIREMENT OBLIGATIONS............................................... 135,211 176,675
OTHER NONCURRENT LIABILITIES.................................................... 36,388 209,336
LIABILITIES SUBJECT TO COMPROMISE (Note 6)...................................... 1,561,828 --
---------- ----------
Total liabilities........................................................ 2,962,518 2,453,594
---------- ----------
COMMITMENTS AND CONTINGENCIES (Notes 9 and 10)
MINORITY INTEREST............................................................... 21,307 18,016
---------- ----------
STOCKHOLDERS' DEFICIT
Common stock, $.01 par value 100,000 shares authorized; 27,383 shares issued
and outstanding............................................................ 274 274
Additional paid-in capital................................................... 570,589 570,589
Accumulated deficit.......................................................... (896,389) (791,119)
Notes receivable--stock award plan........................................... (665) (665)
Accumulated other comprehensive loss (Note 4)................................ (277,542) (334,821)
---------- ----------
Total stockholders' deficit.............................................. (603,733) (555,742)
---------- ----------
Total liabilities and stockholders' deficit.............................. $2,380,092 $1,915,868
========== ==========
The accompanying notes are an integral part of these statements.
4
EXIDE TECHNOLOGIES AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
For the Nine Months Ended
------------------------
December 31, December 31,
2002 2001
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................................................ $(105,270) $(240,211)
Adjustments to reconcile net loss to net cash used in operating activities--
Depreciation and amortization........................................................ 67,919 75,763
Net loss (gain) on asset sales....................................................... 176 (1,391)
Deferred income taxes................................................................ 3,208 (3,340)
Amortization of original issue discount on notes..................................... 428 8,056
Provision for doubtful accounts...................................................... 5,417 22,472
Non-cash provision for restructuring................................................. 3,139 19,191
Goodwill impairment charge........................................................... 37,000 105,000
Minority interest.................................................................... 228 128
Amortization of deferred financing costs............................................. 11,553 12,534
Purchased research and development................................................... -- (8,185)
Debt-to-equity conversion - non-cash charge.......................................... -- 13,873
Net change from sales of receivables
European securitization.............................................................. (124,793) --
U.S. securitization.................................................................. (117,455) --
Other, net........................................................................... (19,475) 1,237
Changes in assets and liabilities, excluding effects of acquisitions and divestitures
Receivables.......................................................................... (27,533) 58,246
Inventories.......................................................................... 13,345 23,641
Prepaid expenses and other........................................................... (11,623) 1,330
Accounts payable..................................................................... (11,762) (35,936)
Accrued expenses..................................................................... 41,847 (58,223)
Noncurrent liabilities............................................................... (13,764) 8,169
Other, net........................................................................... (6,739) (1,378)
--------- ---------
Net cash (used in) provided by operating activities............................ (254,154) 976
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
GNB acquisition......................................................................... -- (965)
Capital expenditures.................................................................... (28,626) (53,466)
Investment in joint venture............................................................. -- (1,007)
Proceeds from sales of assets........................................................... 1,096 4,833
--------- ---------
Net cash used in investing activities.......................................... (27,530) (50,605)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in short-term borrowings, net....................................... 2,908 5,127
Borrowings under Senior Secured Credit Facilities Agreement............................. 6,191 738,138
Repayments under Senior Secured Credit Facilities Agreement............................. (2,727) (664,943)
Borrowings under DIP Credit Facility.................................................... 691,116 --
Repayments under DIP Credit Facility.................................................... (514,865) --
European asset securitization........................................................... 139,156 --
Decrease in other debt.................................................................. (6,406) (6,856)
Financing costs and other............................................................... (20,772) (5,489)
Dividends paid.......................................................................... -- (1,051)
--------- ---------
Net cash provided by financing activities...................................... 294,601 64,926
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS................................ 7,159 392
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS................................................... 20,076 15,689
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............................................. 31,703 23,072
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................................................... $ 51,779 $ 38,761
========= =========
The accompanying notes are an integral part of these statements.
5
EXIDE TECHNOLOGIES AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002
(Dollars in thousands, except per-share data)
(Unaudited)
(1) BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements include the
accounts of Exide Technologies (referred together with its subsidiaries, unless
the context requires otherwise, as "Exide" or the "Company") and all of its
majority-owned subsidiaries. The accompanying financial statements are
presented in accordance with the requirements of Form 10-Q and consequently do
not include all of the disclosures normally required by generally accepted
accounting principles or those normally made in the Company's Annual Report on
Form 10-K. Accordingly, the reader of this Form 10-Q may wish to refer to the
Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2002
for further information. The financial information contained herein is
unaudited.
The financial information has been prepared in accordance with the Company's
customary accounting practices. In the opinion of management, the accompanying
consolidated financial information includes all adjustments of a normal
recurring nature necessary for a fair statement of the results of operations
and financial position for the periods presented.
The accompanying interim unaudited condensed consolidated financial
statements as of December 31, 2002 and for the three and nine months then ended
have been prepared in accordance with Statement of Position 90-7 ("SOP 90-7"),
"Financial Reporting by Entities in Reorganization under the Bankruptcy Code"
(see Note 2). Accordingly, all pre-petition liabilities subject to compromise
have been segregated in the unaudited condensed consolidated balance sheets and
classified as Liabilities Subject To Compromise, at the estimated amount of
allowable claims. Liabilities not subject to compromise are separately
classified. Additional pre-petition claims (liabilities subject to compromise)
may arise due to the rejection of executory contracts or unexpired leases, or
as a result of the allowance of contingent or disputed claims. Revenues,
expenses, realized gains and losses, and provision for losses resulting from
the reorganization are reported separately as Reorganization items, net, in the
unaudited condensed consolidated statements of operations. However, because the
Chapter 11 filing occurred subsequent to March 31, 2002, the accompanying
fiscal 2002 unaudited condensed consolidated financial statements have not been
prepared in accordance with SOP 90-7, and may lack comparability to that
extent. These interim unaudited condensed consolidated financial statements
have been prepared on a going concern basis, which assumes continuity of
operations and realization of assets and satisfaction of liabilities in the
ordinary course of business.
The ability of the Company to continue as a going concern is predicated
upon, among other things, confirmation of a bankruptcy reorganization plan,
compliance with the provisions of both the debtor-in-possession financing
facility ("DIP Credit Facility") and other ongoing borrowing arrangements, the
ability to generate cash flows from operations and, where necessary, obtaining
financing sources sufficient to satisfy the Company's future obligations, as
well as the contingencies related to Former Senior Executives and Battery
Quality Matters described in Note 10. Based upon recently updated business
plans, the Company expects that it will require amendments to its existing
financial covenants in order to maintain compliance during fiscal 2004.
Currently, the Company expects that it will be able to obtain such amendments,
and thereby maintain adequate financial resources during the next twelve months
(considering both funds available under the DIP Credit Facility and cash flows
generated from operations) while pursuing its strategic options and development
of a plan of reorganization. However, no assurance can be given that the
Company will be able to obtain such amendments or maintain compliance with its
covenants or have adequate financial resources available during the next twelve
months. Failure to maintain compliance with these covenants in the future would
result in an event of default which, absent cure within defined grace periods
or obtaining appropriate waivers, would restrict the Company's availability to
funds necessary to maintain its operations and assist in funding of its
reorganization plans. As a
6
EXIDE TECHNOLOGIES AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
result of the Chapter 11, filing and consideration of various strategic
alternatives, including possible asset sales, the Company would expect that any
reorganization plan will likely result in material changes to the carrying
amount of assets and liabilities in the unaudited condensed consolidated
financial statements. The unaudited condensed consolidated financial statements
do not, however, include adjustments, if any, to reflect the possible future
effects on the recoverability and classification of recorded assets or the
amounts and classifications of liabilities that may result from the outcome of
these uncertainties.
In the first quarter of fiscal 2002, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities", as amended by SFAS 138 (collectively,
"SFAS 133"). SFAS 133 establishes accounting and reporting standards for
derivative instruments and hedging activities. The adoption of SFAS 133
resulted in an income statement charge, reflected as a Cumulative effect of
change in accounting principle, of $496, or $0.02 per basic and diluted share
in the first quarter of fiscal 2002. Also, a cumulative effect adjustment
reduced Accumulated other comprehensive loss by $541 in the same period.
Certain reclassifications of prior period financial statements have been
made to conform to the current interim period presentation but not to conform
to SOP 90-7.
(2) PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
On April 15, 2002 ("Petition Date"), Exide and three of its wholly-owned,
U.S. subsidiaries (RBD Liquidation, LLC ("RBD"), Exide Delaware, LLC ("Exide
Delaware") and Exide Illinois, Inc. ("Exide Illinois") filed voluntary
petitions for reorganization under Chapter 11 of the federal bankruptcy laws
("Bankruptcy Code" or "Chapter 11") in the United States Bankruptcy Court for
the District of Delaware ("Bankruptcy Court") under case numbers 02-11125
through 02-11128. On November 21, 2002, Refined Metals Corporation ("Refined")
and Dixie Metals Company ("Dixie"), both wholly owned, non-operating
subsidiaries of Exide, filed voluntary petitions for reorganization under
Chapter 11 of the Bankruptcy Code in the Bankruptcy Court under case numbers
02-13449 and 02-13450. Refined and Dixie have no employees and negligible, if
any, assets. RBD, Exide Delaware, Exide Illinois, Dixie and Refined, together
with Exide are hereinafter referred to as the "Debtors." All of the foregoing
cases are being jointly administered for procedural purposes before the
Bankruptcy Court under case number 02-11125KJC.
The Debtors are currently operating their business as debtors-in-possession
pursuant to the Bankruptcy Code.
The Company decided to file itself and certain of its subsidiaries for
reorganization under Chapter 11 as it offered the most efficient alternative to
restructure its balance sheet and access new working capital while continuing
to operate in the ordinary course of business. The Company has a heavy debt
burden, caused largely by a debt-financed acquisition strategy and the
significant costs of integrating those acquisitions. Other factors leading to
the reorganization included the impact of adverse economic conditions on the
Company's markets, particularly telecommunications, ongoing competitive
pressures and capital market volatility. These factors contributed to a loss of
revenues and resulted in significant operating losses and negative cash flows,
severely impacting the Company's financial condition and its ability to
maintain compliance with debt covenants.
As debtors in possession under Chapter 11, the Debtors are authorized to
continue to operate as an ongoing business, but may not engage in transactions
outside the ordinary course of business without the approval of the Bankruptcy
Court. The Company's operations outside of the U.S. are not included in the
Chapter 11 proceedings. However, in connection with the Chapter 11 filing, the
Company entered into a "Standstill and Subordination
7
EXIDE TECHNOLOGIES AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Agreement" with its pre-petition Senior Secured Global Credit Facility lenders,
whereby those lenders have agreed to forbear collection of principal payments
on foreign borrowings under this facility from non-debtor subsidiaries until
December 2003, subject to earlier termination upon the occurrence of certain
events. No such events have occurred as of December 31, 2002 or through the
date of this Report. See Note 12.
On May 10, 2002, the Company received final Bankruptcy Court approval for
its $250,000 DIP Credit Facility. The DIP Credit Facility is being used to
supplement cash flows from operations during the reorganization process
including the payment of post-petition ordinary course trade and other
payables, the payment of certain permitted pre-petition claims, working capital
needs, letter of credit requirements and for other general corporate purposes.
Under Section 362 of the Bankruptcy Code, actions to collect pre-petition
indebtedness from the Debtors, as well as most other pending pre-petition
litigation, are stayed. Absent an order of the Bankruptcy Court, substantially
all pre-petition liabilities are subject to settlement under a plan of
reorganization to be approved by the Bankruptcy Court. Although the Debtors
expect to file a reorganization plan that provides for emergence from
bankruptcy as a going concern, there can be no assurance that a reorganization
plan will be proposed by the Debtors or confirmed by the Bankruptcy Court, or
that any such plan will be successfully implemented.
Under the Bankruptcy Code, the Debtors may also assume or reject executory
contracts, including lease obligations, subject to the approval of the
Bankruptcy Court and certain other conditions. Parties affected by these
rejections may file claims with the Bankruptcy Court in accordance with the
reorganization process. Due to the timing of the Chapter 11 proceedings, the
Company cannot currently estimate or anticipate what impact the rejection and
subsequent claims of executory contracts may have on the reorganization process.
On June 14, 2002, the Company filed with the Bankruptcy Court schedules and
statements of financial affairs setting forth, among other things, the assets
and liabilities of the Debtors as shown by our books and records on the
Petition Date, subject to the assumptions contained in certain notes filed in
connection therewith. The Bankruptcy Code provides for a claims reconciliation
and resolution process. The Company has filed a motion in Bankruptcy Court
requesting a bar date of April 11, 2003 relating to general unsecured claims. A
motion requesting a separate bar date for certain other claims is expected to
be filed during February 2003. Pre-petition claims against the Company must be
submitted to the Bankruptcy Court prior to the applicable bar date to be
eligible to participate in any distribution of assets from the Company in
connection with its plan of reorganization. As the ultimate number and amount
of allowed claims is not presently known, and because any settlement terms of
such allowed claims are subject to a confirmed plan of reorganization, the
ultimate distribution with respect to allowed claims is not presently
ascertainable.
The United States Trustee has appointed an unsecured creditors committee.
The official committee and its legal representatives have a right to be heard
on all matters that come before the Bankruptcy Court. The Bankruptcy Court
determined that the United States Trustee should appoint an official committee
of equity holders, which it has done. The U.S. District Court for the District
of Delaware subsequently issued an order directing the U.S. Trustee not to make
such appointment during the pendancy of Exide's appeal of the Bankruptcy
Court's determination, which order was subsequently reversed. The Company
intends to appeal the matter to the United States Circuit Court of Appeals for
the Third Circuit.
At this time, it is not possible to predict the effect of the Chapter 11
reorganization process on our business, various creditors and security holders,
or when it may be possible for the Debtors to emerge from Chapter 11. Our
future results are dependent upon our confirming and implementing, on a timely
basis, a plan of reorganization. The Company believes, however, that under any
reorganization plan, the Company's common stock would likely be substantially,
if not completely, diluted or cancelled as a result of the conversion of debt
to equity or any other compromise of interests. Further, it is also likely that
the Company's 10% senior notes and convertible senior subordinated notes will
suffer substantial impairment.
8
EXIDE TECHNOLOGIES AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The ultimate recovery, if any, by creditors, security holders and/or common
shareholders will not be determined until confirmation of a plan or plans of
reorganization. No assurance can be given as to what value, if any, will be
ascribed in the bankruptcy proceedings to each of these constituencies.
Accordingly, Exide urges appropriate caution be exercised with respect to
existing and future investments in any of these securities.
(3) DEBTORS' FINANCIAL INFORMATION
The unaudited condensed combined financial statements of the Debtors are
presented below. These statements reflect the financial position, results of
operations and cash flows of the combined Debtor subsidiaries, including
certain amounts and activities between Debtors and non-debtor subsidiaries of
the Company which are eliminated in the unaudited condensed consolidated
financial statements. The unaudited condensed combined financial statements of
the Debtors are presented as follows:
DEBTORS' CONDENSED COMBINED STATEMENTS OF OPERATIONS
(Unaudited, in thousands)
For the Period
From
For the Three April 15, 2002
Months Ended Through
December 31, December 31,
2002 2002
------------- --------------
NET SALES............................. $243,659 $715,113
COST OF SALES......................... 188,815 566,892
-------- --------
Gross profit................... 54,844 148,221
-------- --------
OPERATING EXPENSES:
Selling, marketing and advertising. 27,322 75,377
General and administrative......... 20,677 58,137
Restructuring and other............ 2,369 9,247
Other income, net.................. (4,319) (5,641)
-------- --------
Operating income............... 8,795 11,101
-------- --------
INTEREST EXPENSE, net................. 13,696 40,539
REORGANIZATION ITEMS, net (Note 5).... 7,043 25,509
-------- --------
Loss before income taxes........... (11,944) (54,947)
INCOME TAX PROVISION.................. -- --
-------- --------
NET LOSS.............................. $(11,944) $(54,947)
======== ========
9
EXIDE TECHNOLOGIES AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DEBTORS' CONDENSED COMBINED BALANCE SHEETS
(Unaudited, in thousands)
December 31, September 30,
2002 2002
------------ -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................... $ 5,691 $ 3,820
Receivables, net.................................... 155,934 158,806
Intercompany receivables............................ 44,348 56,186
Inventories......................................... 159,939 163,351
Prepaid expenses and other.......................... 20,972 25,402
---------- ----------
Total current assets............................ 386,884 407,565
---------- ----------
PROPERTY, PLANT AND EQUIPMENT, net..................... 250,719 258,371
---------- ----------
OTHER ASSETS:
Goodwill and other intangibles, net................. 40,965 40,965
Investments in affiliates........................... 1,804 2,381
Deferred financing costs, net....................... 3,086 6,332
Intercompany notes receivable....................... 242,001 229,467
Other............................................... 25,219 7,843
---------- ----------
313,075 286,988
---------- ----------
Total assets.................................... $ 950,678 $ 952,924
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable.................................... $ 32,790 $ 39,074
Accrued interest payable............................ 20,636 12,449
Accrued expenses, other............................. 72,446 43,128
Current maturities of long-term debt (DIP Facility). 176,251 --
---------- ----------
Total current liabilities....................... 302,123 94,651
LONG-TERM DEBT (DIP Facility).......................... -- 195,133
NONCURRENT RETIREMENT OBLIGATIONS...................... 7,868 5,371
LIABILITIES SUBJECT TO COMPROMISE...................... 1,561,828 1,577,606
---------- ----------
Total liabilities............................... 1,871,819 1,872,761
STOCKHOLDERS' DEFICIT
Total stockholders' deficit..................... (921,141) (919,837)
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT..... $ 950,678 $ 952,924
========== ==========
10
EXIDE TECHNOLOGIES AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DEBTORS' CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
For the Period From
For the Three April 15, 2002
Months Ended Through
December 31, December 31,
2002 2002
------------- -------------------
CASH RECEIPTS:
Third party receipts................................ $265,481 $ 752,949
Borrowings under DIP Credit Facility................ 224,450 691,116
Intercompany loan repayments by non-Debtor entities. 48,987 65,072
-------- ----------
Total cash receipts............................. 538,918 1,509,137
CASH DISBURSEMENTS:
Supplier payments................................... 89,559 250,478
Repurchase of securitized accounts receivable....... -- 117,455
Financing costs, fees and interest.................. 3,120 31,239
Capital expenditures................................ 3,247 11,695
Freight and logistics............................... 26,417 72,039
Leasing and rental costs............................ 13,803 31,246
Payroll and benefits................................ 66,038 187,635
Professional / consulting fees...................... 8,469 17,695
Taxes............................................... 2,397 14,010
Utilities........................................... 13,974 34,832
Other disbursements................................. 42,191 121,472
Intercompany loans to non-Debtor entities........... 24,500 103,500
Repayments under DIP Credit Facility................ 243,332 514,865
-------- ----------
Total cash disbursements........................ 537,047 1,508,161
-------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS.............. 1,871 976
CASH AT BEGINNING OF PERIOD............................ 3,820 4,715
-------- ----------
CASH AT END OF PERIOD.................................. $ 5,691 $ 5,691
======== ==========
The unaudited condensed consolidated statements of operations also include
Reorganization items, net (consisting primarily of professional fees) for the
period prior to the Petition Date from April 1 to April 14, 2002 and
professional fees incurred by non-Debtor subsidiaries.
(4) COMPREHENSIVE INCOME (LOSS)
Total comprehensive income (loss) and its components are as follows:
For the Three Months Ended For the Nine Months Ended
------------------------ ------------------------
December 31, December 31, December 31, December 31,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net loss........................................... $(6,991) $(200,471) $(105,270) $(240,211)
Cumulative effect of change in accounting principle -- -- -- 541
Reclassification to earnings of cash flow hedges... -- -- 2,083 --
Change in fair value of cash flow hedges........... -- 810 -- (3,471)
Change in cumulative translation adjustment........ 30,786 (6,477) 55,196 (8,018)
------- --------- --------- ---------
Total comprehensive income (loss)............... $23,795 $(206,138) $ (47,991) $(251,159)
======= ========= ========= =========
11
EXIDE TECHNOLOGIES AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(5) REORGANIZATION ITEMS
Reorganization items represent amounts the Company incurred as a result of
the Chapter 11 process and are presented separately in the unaudited condensed
consolidated statements of operations. For the three and nine months ended
December 31, 2002, the following have been incurred:
For the Three For the Nine
Months Ended Months Ended
December 31, December 31,
2002 2002
------------- ------------
Professional fees............. $8,525 $26,835
Employee costs................ 375 1,125
Interest income............... (445) (1,470)
Other......................... -- 2,083
------ -------
Total reorganization items. $8,455 $28,573
====== =======
Net cash paid for reorganization items during the three and nine months
ended December 31, 2002 was $8,781 and $17,904, respectively.
The following paragraphs provide additional information relating to the
above reorganization items for the three and nine months ended December 31,
2002:
Professional fees
In the three and nine months ended December 31, 2002, the Company recorded
$8,525 and $26,835, respectively for professional fees. Professional fees
include financial, legal and valuation services directly associated with the
reorganization process, including fees incurred related to possible asset sales.
Employee costs
The Company has implemented a Bankruptcy Court-approved retention plan that
provides for cash incentives to key members of our management team. The
retention plan is a milestone-based plan expected to encourage employees to
continue their employment through the reorganization process. During the three
and nine months ended December 31, 2002, the Company recognized charges of $375
and $1,125, respectively related to this program. No payments were made during
the nine months ended December 31, 2002.
Interest income
Interest income represents interest income earned by the Debtors as a result
of assumed excess cash balances due to the Chapter 11 filing.
Other
Other represents contractual claims arising from termination of pre-petition
financial instruments.
(6) LIABILITIES SUBJECT TO COMPROMISE
Under U.S. bankruptcy law, actions by creditors to collect indebtedness the
Debtors owed prior to the Petition Date are stayed and certain other
pre-petition contractual obligations may not be enforced against the Debtors.
The Debtors have received approval from the Bankruptcy Court to pay certain
pre-petition liabilities including certain employee salaries, wages and
benefits and other obligations. All pre-petition liabilities of the Debtors
have been classified as liabilities subject to compromise in the unaudited
condensed consolidated balance sheets. Adjustments to these amounts may result
from negotiations, payments authorized by the Bankruptcy Court, rejection of
executory contracts including leases or other events. Amounts that we have
recorded may ultimately be different than amounts filed by our creditors under
the Bankruptcy Court claims reconciliation and resolution process.
12
EXIDE TECHNOLOGIES AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes the components of the liabilities classified
as Liabilities Subject To Compromise in the unaudited condensed consolidated
balance sheet as of December 31, 2002:
December 31,
2002
------------
Accounts payable........................... $ 91,892
Accrued interest payable................... 19,403
Restructuring reserve...................... 9,650
Warranty reserve........................... 17,684
Accrued expenses........................... 132,171
Retirement obligations..................... 77,180
Long-term debt (Note 12)................... 1,075,106
Other liabilities.......................... 138,742
----------
Total liabilities subject to compromise. $1,561,828
==========
(7) ACCOUNTING FOR GOODWILL AND INTANGIBLES
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141
"Business Combinations" ("SFAS 141") and SFAS No. 142 "Goodwill and Other
Intangible Assets" ("SFAS 142"). SFAS 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001.
SFAS 141 also specifies the criteria applicable to intangible assets acquired
in a purchase method business combination to be recognized and reported apart
from goodwill. SFAS 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead be tested for
impairment, at least annually. SFAS 142 also requires that intangible assets
with definite useful lives be amortized over their respective estimated useful
lives to their estimated residual values, and be reviewed for impairment.
The Company adopted SFAS 141 and 142 effective April 1, 2001. Upon adoption
of SFAS 142, the Company no longer amortizes goodwill.
During the first quarter of fiscal 2003, the Company experienced
deterioration in the performance of its European Network Power business. This
deterioration was not known or forecasted as of March 31, 2002. In accordance
with the provisions of SFAS 142, the goodwill associated with the Network Power
business was reviewed for impairment due to the fact that circumstances
indicated the carrying value may not be recoverable. As a result, the Company
recognized a goodwill impairment charge in the first quarter of fiscal 2003 of
$37,000. This amount is in addition to the $105,000 goodwill impairment
recorded in the third quarter of fiscal 2002 within the Network Power segment.
The impairment charge was determined based upon a comparison of the book
carrying value of this reporting segment, including goodwill, against its fair
value, estimated using a discounted cash flow model. After giving effect to the
first quarter fiscal 2003 impairment charge, all goodwill of the Network Power
segment has been written off.
The Company completed its annual impairment assessment of goodwill effective
December 31, 2002, utilizing its most recently updated five-year business plan
as the basis for development of discounted cash flows and an estimate of fair
values. As a result of the comparison of the book carrying values of its
reporting segments, including goodwill, against these estimated fair values,
the Company determined that no goodwill impairment charges were required. As a
result of the Chapter 11 filing, and consideration of various strategic
alternatives, including possible asset sales, the Company would expect that any
reorganization plan will likely result in material changes to the carrying
amount of assets and liabilities in the unaudited condensed consolidated
financial statements.
13
EXIDE TECHNOLOGIES AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Summarized goodwill activity for fiscal 2003 is as follows:
Nine Months
Ended
December 31, 2002
-----------------
Goodwill, net at March 31, 2002... $416,926
Impairment charge................. (37,000)
Currency translation.............. 72,576
--------
Goodwill, net at December 31, 2002 $452,502
========
Subsequent to the impairment charges mentioned above, the remaining amounts
of Goodwill, net at December 31, 2002 allocated to the Company's Transportation
and Motive Power segments were approximately $262,500 and $190,002,
respectively. If the assumptions used in determining the fair value of
reporting units' change or there is significant erosion of business results,
such changes could result in additional impairment charges in future periods.
(8) INVENTORIES
Inventories, valued by the first-in, first-out ("FIFO") method, consist of:
December 31, March 31,
2002 2002
------------ ---------
Raw materials.. $ 96,860 $ 81,089
Work-in-process 79,061 79,416
Finished goods. 255,115 244,162
-------- --------
$431,036 $404,667
======== ========
In connection with the inventory management component of the Company's
restructuring and reorganization programs, during fiscal 2002, the Company
recorded a charge to write-down excess inventories by approximately $10,000.
The charge was determined after an assessment of the Company's five-year
business plan and updated demand forecasts, the continued weakening of the
Company's business segments, particularly the telecommunications market, and
the Company's ongoing stock keeping unit (SKU) rationalization.
(9) ENVIRONMENTAL MATTERS
The Company, particularly as a result of its manufacturing, distribution and
recycling operations, is subject to numerous environmental laws and regulations
and is exposed to liabilities and compliance costs arising from its past and
current handling, release, storage and disposal of hazardous substances and
hazardous wastes. The Company's operations are also subject to occupational
safety and health laws and regulations, particularly relating to monitoring of
employee health.
North America
The Company has been advised by the U.S. Environmental Protection Agency or
state agencies that it is a "Potentially Responsible Party" ("PRP") under the
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA")
or similar state laws at 91 federally defined Superfund or state equivalent
sites. At 61 of these sites, the Company has either paid or is in the process
of paying its share of the liability. In most instances, the Company's
obligations are not expected to be significant because its portion of any
potential liability appears to be minor or insignificant in relation to the
total liability of all PRPs that have been identified and are financially
viable. The Company's share of the anticipated remediation costs associated
with all of the Superfund sites where it has been named a PRP, based on the
Company's estimated volumetric contribution of waste to each site, is included
in the environmental remediation reserves discussed below.
14
EXIDE TECHNOLOGIES AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Because the Company's liability under such statutes may be imposed on a
joint and several basis, the Company's liability may not necessarily be based
on volumetric allocations and could be greater than the Company's estimates.
Management believes, however, that its PRP status at these Superfund sites will
not have a material adverse effect on the Company's business or financial
condition because, based on the Company's experience, it is reasonable to
expect that the liability will be roughly proportionate to its volumetric
contribution of waste to the sites.
The Company currently has greater than 50% liability at three Superfund
sites. Other than these sites, the Company's allocation exceeds 5% at seven
sites for which the Company's share of liability has not been paid as of
December 31, 2002. The current allocation at these seven sites averages
approximately 22%.
The Company is also involved in the assessment and remediation of various
other properties, including certain Company owned or operated facilities. Such
assessment and remedial work is being conducted pursuant to a number of state
and federal environmental laws and with varying degrees of involvement by state
and federal authorities. Where probable and reasonably estimable, the costs of
such projects have been accrued by the Company, as discussed below. In
addition, certain environmental matters concerning the Company are pending in
federal and state courts or with certain environmental regulatory agencies.
International
The Company is subject to numerous environmental, health and safety
requirements and is exposed to differing degrees of liabilities, compliance
costs, and cleanup requirements arising from its past and current activities in
various international locations including Europe. The laws and regulations
applicable to such activities differ from country to country and also
substantially differ from U.S. laws and regulations.
The Company expects that its international operations will continue to incur
capital and operating expenses in connection with evolving environmental,
health and safety requirements or more stringent enforcement of existing
requirements in each country.
Consolidated
While the ultimate outcome of the foregoing environmental matters is
uncertain, after consultation with legal counsel, management does not believe
the resolution of these matters, individually or in the aggregate, will have a
material adverse effect on the Company's long-term business, financial
condition or results of operations.
The Company has established reserves for on-site and off-site environmental
remediation costs and believes that such reserves are adequate. As of December
31, 2002 and March 31, 2002 the amount of such reserves on the Company's
unaudited condensed consolidated balance sheets was $77,396 and $70,543,
respectively.
Because environmental liabilities are not accrued until a liability is
determined to be probable and reasonably estimable, not all potential future
environmental liabilities have been included in the Company's environmental
reserves and, therefore, additional earnings charges are possible. Also, future
findings or changes in estimates could have a material effect on the recorded
reserves and cash flows.
In the U.S., the Company has advised each state and federal authority with
whom we have negotiated plans for environmental investigations or remediation
of the Debtors' Chapter 11 filing as required by those agreements or applicable
rules. In some cases these authorities may require the Company to undertake
certain agreed remedial activities under a modified schedule, or may seek to
negotiate or require modified remedial activities. Such requests have been
received at several sites and are the subject of ongoing discussions. At this
time no requests or directives have been received which, individually or in the
aggregate, would materially alter the Company's reserves or have a material
adverse effect on the Company's business, financial condition or results of
operations.
15
EXIDE TECHNOLOGIES AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(10) COMMITMENTS AND CONTINGENCIES
Bankruptcy Considerations
As of the Petition Date, substantially all pending litigation against the
Debtors was stayed and, absent further order of the Bankruptcy Court, no party
may take any action to recover on pre-petition claims against the Debtors. We
cannot predict what action, if any, the Bankruptcy Court may take with respect
to pending litigation. Litigation against the Company's non-Debtor foreign
subsidiaries has not been stayed.
Former Senior Executives and Battery Quality Matters
Exide established a $13,400 reserve in fiscal 2000 to cover litigation
related to allegations that used batteries were sold as new. The Company has
resolved these claims, including the third quarter fiscal 2002 settlement of
the sole remaining "legacy" action, Houlihan v. Exide. As a result of the
Houlihan settlement, the Company recorded an additional expense in the third
quarter of fiscal 2002 of $1,400 for reimbursement of legal fees. At December
31, 2002, there is approximately a $2,500 reserve remaining, representing the
Company's estimate of its remaining obligations under the Houlihan and other
"legacy" settlements.
On March 23, 2001, Exide reached a plea agreement with the U.S. Attorney for
the Southern District of Illinois, resolving an investigation of the conduct of
certain former senior executives of the Company. Under the terms of that
settlement Exide agreed to pay a fine of $27,500 over five years, to five years
probation and to cooperate with the U.S. Attorney in the prosecution of Arthur
M. Hawkins, Douglas N. Pearson and Alan E. Gauthier, former senior executives
of the Company. The payment terms of the plea agreement are dependent upon the
Company's compliance with the plea agreement during the five-year probation
period. Generally, the terms of the probation would permit the U.S. Government
to reopen the case against Exide if the Company violates the terms of the plea
agreement or other provisions of law. The Company reserved $31,000 for this
matter, including expected costs and out-of-pocket expenses, in the first
quarter of fiscal 2001, and an additional $1,000 in the third quarter of fiscal
2002. At December 31, 2002, approximately $27,500 of this reserve remains. As a
result of the imposition of the automatic stay arising upon the Debtors'
Chapter 11 filings, the Company has not paid any of its $27,500 fine. The
Company is uncertain what effect this non-payment and the Bankruptcy Code may
have with respect to the plea agreement.
Exide is currently involved in litigation with the former senior executives
named above. The former senior executives made claims to enforce separation
agreements, reimbursement of legal fees, and other contracts, and Exide has
filed claims and counterclaims asserting fraud, breach of fiduciary duties,
misappropriation of corporate assets and civil conspiracy. In addition, Exide
has filed an action in the Bankruptcy Court against the former senior
executives to recover certain payments of legal fees Exide was required to
advance to such individuals prior to the Petition Date.
The Company has filed two claims with its insurers for reimbursement of the
amounts paid to the former executives, and intends to seek reimbursement for
those amounts. However, the Company has not recognized any receivable for such
reimbursements as of December 31, 2002.
The Company has completed an investigation and determined that due to a
deviation from manufacturing procedures approximately 950,000 automotive
aftermarket batteries sold during 2001 and 2002 in North America did not
contain one minor feature of several advertised for the batteries. In all cases
the batteries performed in accordance with their labeled specifications. The
feature was reinstated and the Company is in the process of discussing the
situation with its customers. The Company cannot predict at this time the
effects of this matter on its business, but the remediation to be offered is
not expected to be material to its financial condition, cash flows or results
of operations.
16
EXIDE TECHNOLOGIES AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Hazardous Materials
Exide is involved in several lawsuits pending in state and federal courts in
South Carolina, Pennsylvania, Indiana, Texas and Tennessee. These actions
allege that Exide and its predecessors allowed hazardous materials used in the
battery manufacturing process to be released from certain of its facilities,
allegedly resulting in personal injury and/or property damage. In January 2002,
the counsel that brought the South Carolina actions filed additional claims in
the Circuit Court for Greenville County, South Carolina. The Company's
preliminary review of these claims suggest they are without merit, and the
Company plans to vigorously defend itself in these matters. The Company does
not believe any reserves are currently warranted for any of these claims.
GNB Acquisition
In July 2001, Pacific Dunlop Holdings (US), Inc. ("PDH") and several of its
foreign affiliates (the "Sellers") under the various agreements through which
Exide acquired GNB, filed a complaint in the Circuit Court for Cook County,
Illinois alleging breach of contract, unjust enrichment, and conversion against
Exide and three of its foreign affiliates. The Sellers maintain they are
entitled to approximately $17,000 in cash assets acquired by the defendants
through their acquisition of GNB. In December, 2001, the Court denied the
defendants' motion to dismiss the complaint, without prejudice to re-filing the
same motion after discovery proceeds. The defendants have filed an answer and
counterclaim. On July 8, 2002, the Court authorized discovery to proceed as to
all parties except Exide. In August 2002, the case was removed to the U.S.
Bankruptcy Court for the Northern District of Illinois and, in October 2002,
the parties presented oral arguments, in the case of PDH, to remand the case to
Illinois state court and, in the case of Exide, to transfer the case to the
U.S. Bankruptcy Court for the District of Delaware. On February 4, 2003, the
U.S. Bankruptcy Court transferred the case to the U.S. Bankruptcy Court in
Delaware, where the plaintiff's motion to abstain or remand will be heard. To
the extent this action implicates Exide's interests, management plans to
vigorously defend the action and pursue the counterclaim.
In December 2001, PDH filed a separate action in the Circuit Court for Cook
County, Illinois, seeking recovery of $3,100 for amounts allegedly owed by
Exide under various agreements between the parties. The claim arises from
letters of credit and other security for workers compensation insurance
policies allegedly provided by PDH for GNB's performance of certain of GNB's
obligations to third parties, that PDH claims Exide was obligated to replace.
Exide's answer contested the amounts claimed by PDH and Exide filed a
counterclaim. Although this action has been consolidated with the Cook County
suit concerning GNB's cash assets, the claims relating to this action are
currently subject to the automatic bankruptcy stay.
Guarantees
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an Interpretation of FASB Nos. 5, 57 and
107 and Rescission of FASB Interpretation No. 34." This Interpretation
addresses the disclosures to be made by a guarantor in its interim and annual
financial statements about obligations under guarantees. This Interpretation
also clarifies the requirements related to the recognition of a liability by a
guarantor at the inception of a guarantee for the obligations the guarantor has
undertaken in issuing that guarantee. The initial recognition and initial
measurement provisions shall be applied only on a prospective basis to
guarantees issued or modified after December 31, 2002. The disclosure
requirements are effective for financial statements for interim or annual
periods ending after December 15, 2002. The Company is in the process of
completing its evaluation of the accounting impact of this statement.
At December 31, 2002 the Company had letters of credit with a face value of
$9,684 ($3,838 of which is
17
EXIDE TECHNOLOGIES AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
pre-petition) and surety bonds with a face value of $58,465 outstanding. The
majority of the letters of credit and surety bonds have been issued as
collateral or financial assurance with respect to certain liabilities the
Company has recorded, including but not limited to environmental clean-up
obligations and self-insured workers compensation reserves. Failure of the
Company to satisfy its obligations with respect to the primary obligations
secured by the letters of credit or surety bonds could entitle the beneficiary
of the related letter of credit or surety bond to demand payments pursuant to
such instruments. The letters of credit generally have terms up to one year.
The surety bonds have annual terms but are generally renewable by the Company.
It is expected that limited availability of new surety bonds from traditional
sources and restricted credit availability under the Company's DIP Credit
Facility may impact the Company's liquidity needs in future periods.
Warranty
The Company provides customers various warranty or return privileges in each
of its three segments. The estimated cost of warranty is recognized as a
reduction of sales in the period in which the related revenue is recognized.
These estimates are based upon historical trends and claims experience, and
include assessment of the anticipated lag between the date of sale and claim
date.
A reconciliation of changes in the Company's consolidated warranty liability
for the nine month period ended December 31, 2002 follows:
Balance at March 31, 2002............................. $ 65,409
Accrual for warranties provided during the period..... 39,103
Accrual/release of pre-existing warranties............ (4,800)
Settlements made (in cash or credit) during the period (33,859)
--------
Balance at December 31, 2002.......................... $ 65,853
========
Other
In a February 2003 report, the Company's principal French subsidiary was
notified by local competition authorities that in connection with certain sales
of batteries by several French manufacturers in 1997, the subsidiary may have
violated local competition laws. While significant fines could be imposed for
such actions, the Company does not believe that the subsidiary acted improperly
and intends to defend this matter vigorously. The Company does not believe any
reserves are currently warranted for this matter.
On June 6, 2002, McKinsey & Company International filed suit against Exide
Holding Europe, S.A., Compagnie Europeene D'accumulateurs, S.A., Euro Exide
Corporation Ltd., Exide Italia S.r.l, Deutsche Exide GmbH and Exide
Transportation Holding Europe, S.L. in the U.S. District Court for the Southern
District of New York, seeking to compel arbitration of McKinsey's request for
payment of approximately $5,000 in consulting fees allegedly incurred by Exide.
The Company intends to vigorously defend the suit. The Company has recorded a
liability related to this matter that is classified as a liability subject to
compromise in the unaudited condensed consolidated balance sheet at December
31, 2002. McKinsey also has initiated arbitration to resolve the dispute, and
the arbitration is proceeding over respondents' objection before the American
Arbitration Association's International Centre for Dispute Resolution. The
arbitration is expected to conclude during 2003.
Exide is a defendant in an arbitration proceeding initiated in October of
2001, by Margulead Limited ("Margulead"). In June of 1997, GNB, now an
operating division of Exide, entered into an agreement with Margulead which
Margulead contends obligated Exide to build a facility to test and develop
certain lead acid battery recycling technology allegedly developed by
Margulead. Exide terminated this agreement after the Margulead technology
failed to meet success criteria represented by Margulead. Margulead now alleges
breach of contract and has requested damages in the amount of approximately
$2,600, which represents the alleged projected cost of building a testing
facility. Margulead has indicated that it may amend its claim to seek higher
damage amounts. Because Margulead is a foreign entity and the arbitration is
pending in London, the arbitration is currently proceeding notwithstanding
Exide's Chapter 11 proceedings. The Company intends to defend the claim and
denies liability thereunder.
18
EXIDE TECHNOLOGIES AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company is involved in various other claims and litigation incidental to
the conduct of its business. Based on consultation with legal counsel,
management does not believe that any such claims or litigation to which the
Company is a party, either individually or in the aggregate, will have a
material adverse effect on the Company's business, financial condition, cash
flows or results of operations, although quarterly or annual operating results
may be materially affected.
(11) RESTRUCTURING
The Company previously implemented certain restructuring activities as part
of an overall program to reduce costs, eliminate excess capacity and improve
cash flows, including activities in connection with the September 2000
acquisition of GNB.
In addition, during the first, second and third quarters of fiscal 2003 the
Company recognized restructuring charges of $6,288, $3,997 and $3,837,
representing $3,339, $3,933 and $3,711 for severance and related closure costs
and $2,949, $64 and $126 for non-cash charges related to the write-down of
machinery and equipment. The charges for the first quarter of fiscal 2003
related to the downsizing of a North American Network Power facility and the
closure of a Transport facility in Cwmbran, Wales. Approximately 300 positions,
principally plant employees, have been eliminated in connection with the first
quarter fiscal 2003 plans. The charges for the second quarter of fiscal 2003
principally resulted from corporate severance and the closure of a North
American Transportation facility. Approximately 120 positions have been
eliminated in connection with the second quarter fiscal 2003 plans. The charges
for the third quarter of fiscal 2003 resulted from European headcount
reductions, change to prior estimates of fiscal 2002 North American pension
curtailment obligations and ongoing costs associated with fiscal 2003 North
American plastics and manufacturing facility closures. Approximately 15
positions have been eliminated in connection with these third quarter actions.
Summarized restructuring reserve activity for these programs are as follows:
Severance Costs Write-Offs Closure Costs Total
--------------- ---------- ------------- --------
Balance at March 31, 2002... $ 16,500 $ -- $15,300 $ 31,800
Charges, fiscal 2003........ 9,142 3,139 1,841 14,122
Payments and charge-offs.... (12,058) (3,139) (6,090) (21,287)
Currency changes............ 1,922 -- 1,458 3,380
-------- ------- ------- --------
Balance at December 31, 2002 $ 15,506 $ -- $12,509 $ 28,015
======== ======= ======= ========
(12) DEBT
At December 31, 2002, short-term borrowings of $15,165 consisted of various
operating lines of credit and working capital facilities maintained by certain
of the Company's non-U.S. subsidiaries. Certain of these borrowings are secured
by receivables, inventories and/or property. These borrowing facilities, which
are typically for one-year renewable terms, generally bear interest at current
local market rates plus up to one percent.
19
EXIDE TECHNOLOGIES AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Total long-term debt at December 31, 2002 comprises the following:
December 31,
2002
------------
Debt Not Subject To Compromise:
DIP Credit Facility--Borrowings at LIBOR plus 3.75%(2)......................................... $ 176,251
Senior Secured Global Credit Facilities Agreement (Europe)--Borrowings primarily at
LIBOR plus 4.75% to 5.25%(2)................................................................. 269,888
9.125% Senior Notes (Deutsche mark denominated, due April 15, 2004)............................ 93,825
European Accounts Receivable Securitization(2)................................................. 154,641
Other, including capital lease obligations and other loans at interest rates generally ranging
from 0.0% to 11.0% due in installments through 2015(1)....................................... 21,789
----------
Total debt not subject to compromise....................................................... 716,394
Less--current maturities (included in total debt not subject to compromise above).............. 602,444
----------
$ 113,950
==========
Debt Subject To Compromise:
Senior Secured Global Credit Facilities Agreement (U.S.)--Borrowings primarily at LIBOR
plus 4.75% to 5.25%.......................................................................... $ 431,121
10% Senior Notes, due April 15, 2005........................................................... 300,000
Convertible Senior Subordinated Notes, due December 15, 2005................................... 321,132
Other.......................................................................................... 22,853
----------
Total debt subject to compromise (Note 6).................................................. $1,075,106
==========
- --------
(1) Includes various operating lines of credit and working capital facilities
maintained by certain of the Company's non-U.S. subsidiaries.
(2) Debt classified as current as of December 31, 2002 based upon maturity
dates of the DIP Credit Facility and Standstill and Subordination Agreement.
Total debt at December 31, 2002 and March 31, 2002 was $1,806,665 (including
amounts subject to compromise) and $1,413,272, respectively.
On April 15, 2002, the Company and three of its wholly-owned U.S.
subsidiaries filed voluntary petitions for reorganization under Chapter 11 of
the Bankruptcy Code. In connection with the filing, the Company also entered
into a "Standstill and Subordination Agreement" with its pre-petition Senior
Secured Global Credit Facility lenders, whereby the lenders have agreed to
forbear collections of principal payments on foreign borrowings under this
facility from non-Debtor subsidiaries until December 18, 2003, subject to
earlier termination upon the occurrence of certain events. No such events have
occurred as of December 31, 2002 or through the date of this Report. Borrowings
under the Senior Secured Global Credit Facility by the Debtors are subject to
compromise. Interest obligations for the non-Debtor subsidiaries will continue
to be accrued and paid when due. The Standstill and Subordination Agreement
contains essentially the same financial covenants as the DIP Credit Facility.
See Note 2 for further discussion of the Company's bankruptcy considerations
and reorganization plans.
On April 17, 2002, the Company received interim Bankruptcy Court approval of
a $250,000 DIP Credit Facility and final Bankruptcy Court approval for such
facility on May 10, 2002. The DIP Credit Facility is being used to supplement
cash flows from operations during the reorganization process including the
payment of post-petition ordinary course trade and other payables, the payment
of certain permitted pre-petition claims, working capital needs, letter of
credit requirements and other general corporate purposes.
20
EXIDE TECHNOLOGIES AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On April 17, 2002, approximately $129,000 of the DIP Credit Facility was
drawn down, $117,000 being used to terminate and repurchase uncollected
securitized accounts receivable under the Company's then existing U.S.
receivables sale facility and the balance for financing costs and related fees.
The DIP Credit Facility is a secured revolving credit and term loan facility
under which Exide Technologies is the borrower with certain U.S. and foreign
subsidiaries acting as guarantors. The DIP Credit Facility is afforded super
priority claim status in the Chapter 11 case and is collateralized by first
liens on certain eligible U.S. assets of the Company, principally accounts
receivable, inventory and property.
The revolving credit tranche of the DIP Credit Facility provides for
borrowing up to $121,000, of which up to $65,000 is available to Exide
Technologies for on-lending to its foreign subsidiaries. An additional $50,000
sub-facility is also available to the foreign subsidiaries based on certain
collateral asset values in the United Kingdom and Canada. To the extent funds
are borrowed under the DIP and on-lent to foreign subsidiaries, additional
liens on certain assets of the borrowing foreign subsidiary and related
guarantees are required. Up to $40,000 of the revolving credit tranche is
available for letters of credit. Total availability under the DIP Credit
Facility as of December 31, 2002 was approximately $37,250.
Borrowings under the DIP Credit Facility bear interest at base rate plus
2.75% per annum or Libor plus 3.75% per annum. Borrowings are limited to
eligible collateral under the DIP Credit Facility. Eligible collateral under
the DIP Credit Facility includes accounts receivable, inventory and certain
property. Availability to the Company is impacted by changes in both the
amounts of the collateral and qualitative factors (such as aging of accounts
receivable and inventory reserves) as well as cash requirements of the business
such as trade credit terms. The DIP Credit Facility contains certain financial
covenants requiring the Company to maintain monthly specified levels of
earnings before interest, taxes, depreciation, amortization, restructuring and
certain other defined charges, as well as limits on capital expenditures and
cash restructuring expenditures. The DIP Credit Facility also contains other
customary covenants, including certain reporting requirements and covenants
that restrict the Company's ability to incur indebtedness, create or incur
liens or guarantees, make investments or restricted payments, enter into
leases, sell or dispose of assets, change the nature of the Company's business
or enter into related party transactions. The Company believes it was in
compliance with the DIP Credit Facility covenants as of December 31, 2002.
Based upon recently updated business plans, the Company expects that it will
require amendments to its existing financial covenants in order to maintain
compliance during fiscal 2004. Currently, the Company expects that it will be
able to obtain such amendments, and thereby maintain adequate financial
resources during the next twelve months (considering both funds available under
the DIP Credit Facility and cash flows generated from operations) while
pursuing its strategic options and development of a plan of reorganization.
However, no assurance can be given that the Company will be able to obtain such
amendments or maintain compliance with its covenants or have adequate financial
resources available during the next twelve months. Failure to maintain
compliance with these covenants in the future would result in an event of
default which, absent cure within defined grace periods or obtaining
appropriate waivers, would restrict the Company's availability to funds
necessary to maintain its operations and assist in funding of its
reorganization plans.
The Company has obtained waivers and consents under the DIP Credit Facility
and Standstill and Subordination Agreement primarily to (i) maintain until
March 2003 cash balances outside the United States in excess of those otherwise
permitted under the agreements, (ii) modify the terms for the payment of
interest related to the conversion of certain Euro Currency Loans to Base Rate
Loans under the pre-petition credit facility, (iii) dilute below 50 percent the
Company's interest in a non-material joint venture and (iv) provide relief for
the Company to address certain non-material civil litigation commenced against
a non-Debtor subsidiary.
The DIP Credit Facility matures on the earlier of February 15, 2004, 30 days
before the pre-petition Revolving Credit and Tranche A Senior Secured Credit
Facilities mature (December 18, 2003) or the date on which the Company emerges
from bankruptcy.
21
EXIDE TECHNOLOGIES AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On May 31, 2002, the Company entered into a new $177,500 European accounts
receivable securitization facility. This facility replaced the Company's then
existing $175,000 European securitization program. The new facility is
accounted for as a secured borrowing in accordance with the requirements of
SFAS 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" whereby the accounts receivable and related
borrowings are recorded on the Company's unaudited condensed consolidated
balance sheet.
(13) INTEREST EXPENSE, NET
Interest income of $498 and $1,203 is included in Interest expense, net in
the unaudited condensed consolidated statements of operations for the three
months ended December 31, 2002 and December 31, 2001, respectively. Interest
income of $1,312 and $2,652 is included in Interest expense, net for the nine
months ended December 31, 2002 and December 31, 2001, respectively. Interest
income earned as a result of assumed excess cash balances due to the Chapter 11
filing is recorded in Reorganization items, net in the unaudited condensed
consolidated statements of operations, for the three and nine months ended
December 31, 2002. See Note 5.
As of the Petition Date, the Company ceased accruing interest on certain
unsecured pre-petition debt classified as Liabilities subject to compromise in
the unaudited condensed consolidated balance sheets in accordance with SOP
90-7. Interest is being accrued on certain pre-petition debt to the extent that
the Company believes it is probable of being deemed an allowed claim by the
Bankruptcy Court. Interest at the stated contractual amount on pre-petition
debt that was not charged to results of operations for the three and nine
months ended December 31, 2002 was approximately $10,411 and $29,418,
respectively.
(14) OTHER (INCOME) EXPENSE, NET
For the Three Months Ended For the Nine Months Ended
------------------------ ------------------------
December 31, December 31, December 31, December 31,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Losses on sales of accounts receivable $ 2,829 $3,195 $ 8,566 $10,534
Equity income......................... (513) (437) (1,436) (1,312)
Debt-to-equity conversion............. -- -- -- 13,873
Currency (gain) loss.................. (8,191) 3,001 (20,448) 2,688
Other................................. 528 (32) 1,078 (1,445)
------- ------ -------- -------
$(5,347) $5,727 $(12,240) $24,338
======= ====== ======== =======
Losses on sales of receivables represent expenses related to the Company's
receivables sales facilities. See Note 12.
In fiscal 2002, the Company incurred a non-cash charge for the
debt-to-equity conversion of Convertible Senior Subordinated Notes.
In fiscal 2003, the Company has recognized net currency gains, primarily
from the translation of U.S. dollar denominated borrowings in Europe.
(15) NET LOSS PER SHARE
Basic loss per share is computed using the weighted average number of common
shares outstanding for the period, while diluted loss per share is computed
assuming conversion of all dilutive securities such as options, convertible
debt and warrants. In all periods presented net losses were incurred,
therefore, dilutive common stock equivalents were not used in the calculation
of earnings per share as they would have an anti-dilutive effect.
22
EXIDE TECHNOLOGIES AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(16) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In July 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 146, "Accounting for
Exit or Disposal Activities" ("SFAS 146"). SFAS 146 provides guidance on the
recognition and measurement of liabilities for costs associated with exit or
disposal activities that are initiated after December 31, 2002. The Company is
currently reviewing SFAS 146 to determine the impact upon adoption.
In May 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No's. 4, 44, and 64 Amendment of FASB Statement No. 13, and Technical
Corrections." This Statement requires gains and losses from extinguishments of
debt to be classified as an extraordinary item only if the criterion in Opinion
30 has been met. Further, lease modification with economic effects similar to
sale-leaseback transactions must be accounted for in the same manner as
sale-leaseback transactions. While the technical corrections to existing
pronouncements are not substantive in nature, in some instances they may change
accounting practice. The provision of this Statement related to the rescission
of SFAS No. 4 and the amendment of SFAS No. 13 are effective beginning in
fiscal 2003 and for transactions occurring after May 15, 2002, respectively,
and are not expected to have a significant impact on the Company's unaudited
condensed consolidated financial statements. All other provisions are effective
for financial statements issued on or after May 15, 2002, and did not have a
significant impact on our unaudited condensed consolidated financial statements
presented herein.
In June 2001 and August 2001, the FASB issued SFAS No. 143 "Accounting for
Asset Retirement Obligations", ("SFAS 143") and SFAS No. 144 "Accounting for
the Impairment or Disposal of Long-Lived Assets", ("SFAS 144"), respectively.
SFAS 143 is effective for financial statements issued for fiscal years
beginning after June 15, 2002. The Company is required to adopt SFAS 143 on
April 1, 2003. The provisions of SFAS 143 address financial accounting and
reporting requirements for obligations associated with the retirement of
tangible long-lived assets and the associated retirement costs and requires
companies to record an asset and related liability for the cost associated with
the retirement of long-lived tangible assets if a legal liability to retire the
asset exists. The Company is in the process of completing its evaluation of the
impact of this statement.
SFAS 144 is effective for the Company beginning April 1, 2003. SFAS 144
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets, and supersedes SFAS No. 121 and the accounting and reporting
provisions of the Accounting Principles Board ("APB") opinion No. 30. SFAS 144
retains the basic principles of SFAS 121 for long lived assets to be disposed
of by sale or held and used and broadens discontinued operations presentation
to include a component of an entity that is held for sale or that has been
disposed of.
In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation
of Variable Interest Entities, an Interpretation of ARB 51. This Interpretation
addresses consolidation by business enterprises of certain variable interest
entities ("VIEs"). The Interpretation is effective immediately for all
enterprises with variable interests in VIEs created after January 31, 2003. For
variable interests in VIEs created before February 1, 2003, the provisions of
this Interpretation will be applicable no later than the beginning of the first
interim or annual period beginning after June 15, 2003. Further, the disclosure
requirements of the Interpretation are applicable for all financial statements
initially issued after January 31, 2003, regardless of the date on which the
VIE was created.
The Company is in the process of completing its evaluation of the impact of
these statements.
(17) SEGMENT INFORMATION
Beginning October 1, 2001, the Company changed its organizational structure
such that operations are managed and reported in three segments:
Transportation, Motive Power and Network Power.
23
EXIDE TECHNOLOGIES AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company previously operated its battery business within the
Transportation and Industrial segments through September 30, 2001. The previous
Industrial segment was split between Network Power and Motive Power. Network
Power applications include batteries for telecommunications systems, electric
utilities, railroads, photovoltaic and other critical uninterruptible power
supply markets. Motive Power applications include batteries for a broad range
of equipment uses including lift trucks, mining and other commercial vehicles.
Transportation uses include automotive, heavy duty, agricultural, marine and
other batteries, as well as new technologies being developed for hybrid
vehicles and new 42-volt automobile applications.
The prior year segment data below has been reclassified to reflect the
current year presentation. In addition, prior year segment data has been
reclassified to reflect the current year presentation of corporate costs not
allocated to business segments. Certain asset information required to be
disclosed is not reflected below as it is not allocated by segment nor utilized
by management in the Company's operations.
Selected financial information concerning the Company's reportable segments
is as follows:
For the Three Months Ended December 31, 2002
-------------------------------------------------------------
Network
Transportation Motive Power Power Other Consolidated
-------------- ------------ --------- --------- ------------
Net sales.................. $ 397,878 $125,599 $ 98,663 $ -- $ 622,140
Gross profit............... 95,121 28,806 28,898 -- 152,825
Operating income (loss) (c) 53,120 7,129 12,981 (30,963) 42,267
For the Three Months Ended December 31, 2001
-------------------------------------------------------------
Network
Transportation Motive Power Power Other Consolidated
-------------- ------------ --------- --------- ------------
Net sales.................. $ 408,440 $120,417 $ 104,337 $ -- $ 633,194
Gross profit............... 62,248 29,244 18,549 -- 110,041
Operating income (loss) (d) (442) 5,273 (117,378) (43,914) (156,461)
For the Nine Months Ended December 31, 2002
-------------------------------------------------------------
Network
Transportation Motive Power Power(b) Other Consolidated
-------------- ------------ --------- --------- ------------
Net sales.................. $1,126,162 $349,432 $ 280,898 $ -- $1,756,492
Gross profit............... 237,280 79,916 73,916 -- 391,112
Operating income (loss) (e) 113,267 15,480 (19,409) (87,401) 21,937
For the Nine Months Ended December 31, 2001
-------------------------------------------------------------
Network
Transportation Motive Power Power Other(a) Consolidated
-------------- ------------ --------- --------- ------------
Net sales.................. $1,180,655 $362,316 $ 345,706 $ -- $1,888,677
Gross profit............... 194,304 93,167 90,422 -- 377,893
Operating income (loss) (f) 43,140 25,220 (88,215) (107,647) (127,502)
- --------
(a) Includes a credit of $8,185 related to the termination of a purchased
research and development agreement with Lion Compact Energy and a $13,873
charge related to debt-for-equity exchanges.
(b) Includes $37,000 goodwill impairment charge recorded in the first quarter
of fiscal 2003.
(c) Includes restructuring charges of $3,212, $(224), $(437) and $1,286 within
Transportation, Motive, Network and Other, respectively.
(d) Includes restructuring charges of $2,199, $1,218, $8,241 and $1,968 within
Transportation, Motive, Network and Other, respectively.
(e) Includes restructuring charges of $7,081, $54, $5,357 and $1,630 within
Transportation, Motive, Network and Other, respectively.
(f) Includes restructuring charges of $5,744, $2,662, $11,899 and $4,379 within
Transportation, Motive, Network and Other, respectively.
24
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in thousands, except per-share data)
Overview
On April 15, 2002 ("Petition Date"), Exide and three of its wholly-owned,
U.S. subsidiaries (RBD Liquidation, LLC ("RBD"), Exide Delaware, LLC ("Exide
Delaware") and Exide Illinois, Inc. ("Exide Illinois") filed voluntary
petitions for reorganization under Chapter 11 of the federal bankruptcy laws
("Bankruptcy Code" or "Chapter 11") in the United States Bankruptcy Court for
the District of Delaware ("Bankruptcy Court") under case numbers 02-11125
through 02-11128. On November 21, 2002, Refined Metals Corporation ("Refined")
and Dixie Metals Company ("Dixie"), both wholly owned, non-operating
subsidiaries of Exide, filed voluntary petitions for reorganization under
Chapter 11 of the Bankruptcy Code in the Bankruptcy Court under case numbers
02-13449 and 02-13450. Refined and Dixie have no employees and negligible, if
any, assets. RBD, Exide Delaware, Exide Illinois, Dixie and Refined, together
with Exide are hereinafter referred to as the "Debtors." All of the foregoing
cases are being jointly administered for procedural purposes before the
Bankruptcy Court under case number 02-11125KJC.
The Company decided to file itself and certain of its subsidiaries for
reorganization under Chapter 11 as it offered the most efficient alternative to
restructure its balance sheet and access new working capital while continuing
to operate in the ordinary course of business. The Company has a heavy debt
burden, caused largely by a debt-financed acquisition strategy and the
significant costs of integrating those acquisitions. Other factors leading to
the reorganization included the impact of adverse economic conditions on the
Company's markets, particularly telecommunications, ongoing competitive
pressures and capital market volatility. These factors contributed to a loss of
revenues and resulted in significant operating losses and negative cash flows,
severely impacting the Company's financial condition and its ability to
maintain compliance with debt covenants.
The Company's operations outside of the U.S. are not included in the Chapter
11 proceedings.
On May 10, 2002 the Company received final Bankruptcy Court approval for its
$250,000 DIP Credit Facility. The DIP Credit Facility requires maintenance of
certain financial covenants and other restrictions on matters such as
indebtedness, guarantees and future asset sales.
Under the Bankruptcy Code, actions to collect pre-petition indebtedness, as
well as most other pending litigation, are stayed. In addition, the Debtors may
also assume or reject executory contracts, including lease obligations, subject
to the approval of the Bankruptcy Court and certain other conditions.
Factors That Affect Our Financial Performance
Competition. The global Transportation, Motive Power and Network Power
battery markets, particularly in North America and Europe, are highly
competitive. In recent years, competition has continued to intensify and we
continue to come under increasing pressure for price reductions. This
competition has been exacerbated by excess capacity and fluctuating lead prices
as well as low-priced Asian imports impacting our markets.
Exchange Rates. We are exposed to foreign currency risk in most European
countries, principally from fluctuations in the Euro and British Pound. We are
also exposed, although to a lesser extent, to foreign currency risk in
Australia and the Pacific Rim. Movements of exchange rates against the U.S.
dollar can result in variations in the U.S. dollar value of our non-U.S. sales
and expenses. In some instances, gains in one currency may be offset by losses
in another. Movements in European currencies impacted our results for the
periods presented herein.
Markets. We are subject to concentrations of customers and sales in several
geographic regions and are dependent on customers in certain industries,
including the automotive, telecommunications, and material handling markets.
Economic difficulties experienced in these markets and geographic locations
have and continue to impact our financial results.
25
Weather. Unusually cold winters or hot summers accelerate automotive
battery failure and increase demand for automotive replacement batteries.
Interest Rates. The Company is exposed to fluctuations in interest rates on
its variable rate debt.
Lead. Lead is the principal material by weight used in the manufacture of
batteries, representing approximately one-quarter of our cost of goods sold.
The market price of lead fluctuates. Generally, when lead prices decrease, many
of our customers seek disproportionate price reductions from us, and when lead
prices increase, customers resist price increases.
Critical Accounting Policies and Estimates
The Company's discussion and analysis of its financial condition and results
of operations are based upon the Company's unaudited condensed consolidated
financial statements, which have been prepared in accordance with accounting
principles generally accepted in the U.S. The preparation of these financial
statements requires the Company to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and the related
disclosure of contingent assets and liabilities. On an ongoing basis, the
Company evaluates its estimates based on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions.
The Company believes that the critical accounting policies and estimates
disclosed in the Company's Annual Report on Form 10-K (the "10-K") for the
fiscal year ended March 31, 2002 affect the preparation of its unaudited
condensed consolidated financial statements. The reader of this Report may wish
to refer to the 10-K for further information.
The accompanying unaudited condensed consolidated financial statements have
been prepared on a going concern basis, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business,
and with respect to fiscal 2003, in accordance with SOP 90-7 with regard to the
reporting requirements of entities in reorganization under the Bankruptcy Code.
The ability of the Company to continue as a going concern is predicated
upon, among other things, confirmation of a bankruptcy reorganization plan,
compliance with the provisions of both the DIP Credit Facility and other
ongoing borrowing arrangements, the ability to generate cash flows from
operations and, where necessary, obtaining financing sources sufficient to
satisfy the Company's future obligations as well as the contingencies related
to Former Senior Executives and Battery Quality Matters described in Note 10.
Based upon recently updated business plans, the Company expects that it will
require amendments to its existing financial covenants in order to maintain
compliance during fiscal 2004. Currently, the Company expects that it will be
able to obtain such amendments, and thereby maintain adequate financial
resources during the next twelve months (considering both funds available under
the DIP Credit Facility and cash flows generated from operations) while
pursuing its strategic options and development of a plan of reorganization.
However, no assurance can be given that the Company will be able to obtain such
amendments or maintain compliance with its covenants or have adequate financial
resources available during the next twelve months. Failure to maintain
compliance with these covenants in the future would result in an event of
default which, absent cure within defined grace periods or obtaining
appropriate waivers, would restrict the Company's availability to funds
necessary to maintain its operations and assist in funding of its
reorganization plans. As a result of the Chapter 11 filing, and consideration
of various strategic alternatives, including possible asset sales, the Company
would expect that any reorganization plan will likely result in material
changes to the carrying amount of assets and liabilities in the unaudited
condensed consolidated financial statements. The unaudited condensed
consolidated financial statements do not, however, include adjustments, if any,
to reflect the possible future effects on the recoverability and classification
of recorded assets or the amounts and classifications of liabilities that may
result from the outcome of these uncertainties.
26
Results of Operations
Three months ended December 31, 2002 compared with the three months ended
December 31, 2001.
Overview
Net loss for the third quarter of fiscal 2003 was $6,991 or $0.26 per
diluted share versus net loss of $200,471 or $7.33 per diluted share last year.
Third quarter fiscal 2003 results include restructuring costs of $3,837,
primarily for severance and costs related to work force reductions, and
reorganization items in connection with the bankruptcy of $8,455. In the third
quarter of fiscal 2002, the Company recorded a goodwill impairment charge of
$105,000 and restructuring charges of $13,626, primarily for severance related
to work force reductions as well as the closure of the Maple, Ontario
manufacturing operation. Currency favorably impacted operating income by $2,997
in the third quarter of fiscal 2003. In addition, currency remeasurement gains
of $8,191, primarily on U.S. dollar denominated debt in Europe, have been
recognized in operating income.
Net Sales
Net sales were $622,140 in the third quarter of fiscal 2003 versus $633,194
in the third quarter of fiscal 2002. The decrease in net sales was due to sales
volumes declines in each of the Company's business segments. Currency
positively impacted net sales by $35,626, principally from appreciation of the
Euro against the U.S. dollar.
Net sales in the Transportation segment were $397,878 in the third quarter
of fiscal 2003 versus $408,440 in the third quarter of fiscal 2002.
Transportation revenues in North America declined due to reduced unit volumes
principally due to lost business and territories in our aftermarket accounts,
while European volumes were also lower than the prior year. These reductions
were partially offset by benefits from warranty management programs in North
America. Results for the third quarter of fiscal 2003 were also favorably
impacted by approximately $4,800 from changes in estimates of historical
warranty obligations based upon new commercial arrangements. Currency
positively impacted Transportation net sales, principally in Europe, in fiscal
2003 by approximately $18,473.
Motive Power sales for the third quarter of fiscal 2003 were $125,599 versus
$120,417 in the third quarter of fiscal 2002. General softness in the overall
economies in the U.S. and Western Europe resulted in lower sales volume in
Motive Power. Currency positively impacted Motive Power net sales in fiscal
2003 by approximately $10,172.
Network Power sales for the third quarter of fiscal 2003 were $98,663 versus
$104,337 in the third quarter of fiscal 2002. The decrease was attributable to
lower sales volumes which were a direct result of the significantly weaker
telecommunications markets including the adverse effect of a slowdown in Europe
and Asia, similar to that seen in North America during fiscal 2002. Currency
positively impacted Network Power net sales in fiscal 2003 by approximately
$6,981.
Gross Profit
Gross profit was $152,825 in the third quarter of fiscal 2003 versus
$110,041 in the third quarter of fiscal 2002. The gross margin increased to
24.6% in the third quarter of fiscal 2003 from 17.4% in the third quarter of
fiscal 2002. Third quarter fiscal 2002 gross profit was negatively impacted by
a charge of $15,500 related to increased reserves for purchase commitments and
a $10,000 charge to write down excess inventories. The remaining favorable
change in gross profit is primarily due to the Company's continued plant
rationalization and headcount reduction programs, warranty management programs
in North America and lower lead pricing in Europe, offset partially by lower
sales volumes and higher production costs related to under-absorption of fixed
overheads. Stronger European currencies versus the U.S. dollar favorably
impacted gross profit by approximately $9,212.
27
Transportation gross profit was $95,121 in the third quarter versus $62,248
in the third quarter of fiscal 2002. The effect of lower North American sales
volumes was more than offset by the benefits from plant rationalization and
headcount reductions, North American warranty management programs, including a
$4,800 reduction in warranty reserves related to a change in estimate of
historical obligations, lead pricing in Europe and European currency effects.
Third quarter fiscal 2002 gross profit included charges to cost of sales of
$15,500 to increase reserves for purchase commitments and $3,000 to write down
excess inventories. Gross margin was 23.9% in the third quarter of fiscal 2003
versus 15.2% in the third quarter of fiscal 2002. Stronger European currencies
versus the U.S. dollar favorably impacted gross profit by approximately $4,735.
Motive Power gross profit was $28,806 in the third quarter versus $29,244 in
the third quarter of fiscal 2002. The decrease was due to lower sales volumes,
an unfavorable sales mix (smaller size battery systems) and higher production
costs related to under-absorption of fixed overheads. Third quarter fiscal 2002
gross profit included a charge to cost of sales of $4,000 to write down excess
inventories. Gross margin was 22.9% in the third quarter of fiscal 2003 versus
24.3% in the third quarter of fiscal 2002. Stronger European currencies versus
the U.S. dollar favorably impacted gross profit by approximately $2,476.
Network Power gross profit was $28,898 in the third quarter versus $18,549
in the third quarter of fiscal 2002. Third quarter fiscal 2002 gross profit
included charges of $3,000 to write down excess inventories, $2,200 to write
off inventory in the Company's China operation and also reflected the negative
impact of under-absorption of fixed overheads due to production schedule
reductions. Gross margin was 29.3% in the third quarter of fiscal 2003 versus
17.8% in the third quarter of fiscal 2002. Stronger European currencies versus
the U.S. dollar favorably impacted gross profit by approximately $2,001.
Opera