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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange
Act of 1934
For the fiscal year ended March 31, 1999
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934
For the transition period from ___________ to __________
Commission File Number 1-11263
_______________________________
EXIDE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 23-0552730
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
645 Penn Street
Reading, Pennsylvania 19601
Telephone: (610) 378-0500
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class Name of Each Exchange on Which Registered
- ---------------------------------- --------------------------------------------
Common Stock, $.01 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ].
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of June 25, 1999 was approximately $297,755,000. There were
21,363,577 outstanding shares of the Registrant's common stock as of June 25,
1999.
(DOCUMENTS INCORPORATED BY REFERENCE)
Portions of the Proxy Statement relating to the Annual Meeting of
Stockholders to be held August 11, 1999, are incorporated into Part III of this
report.
EXIDE CORPORATION
TABLE OF CONTENTS
Page
----
PART I
Item 1 Business......................................................... 1
Item 2 Properties....................................................... 16
Item 3 Legal Proceedings................................................ 18
Item 4 Submission of Matters to a Vote of Security Holders.............. 19
PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters.............................................. 20
Item 6 Selected Financial Data.......................................... 21
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 23
Item 8 Financial Statements and Supplementary Data...................... 33
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure......................................... 33
PART III
Item 10 Directors and Executive Officers of the Registrant............... 34
Item 11 Executive Compensation........................................... 35
Item 12 Description of Capital Stock..................................... 35
Item 13 Certain Relationships and Related Transactions................... 35
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K.. 36
SIGNATURES................................................................ 38
INDEX TO EXHIBITS......................................................... 39
EXIDE CORPORATION
PART I
Item 1. Business
(1) General Discussion of Business
Exide is a Delaware corporation organized in 1966 to succeed to the
business of a New Jersey corporation founded in 1888. Our principal executive
offices are located at 645 Penn Street, Reading, Pennsylvania 19601 and our
telephone number is (610) 378-0500.
Exide is the largest manufacturer and marketer of lead acid batteries in
the world, with fiscal 1999 net sales of approximately $2.4 billion. We
manufacture automotive batteries in North America and automotive and industrial
batteries in Europe. We market our automotive batteries to a broad range of
retailers and distributors of replacement batteries and automotive original
equipment manufacturers. Our industrial batteries consist of traction batteries,
such as those for use in forklift trucks and other electric vehicles, and
standby batteries used for back-up power applications, such as those for
telecommunications systems. Prior to 1994, we operated primarily in North
America. As a result of an aggressive acquisition program, we have become the
largest battery manufacturer in Europe. Our European and North American
operations represented 63% and 37%, respectively, of our fiscal 1999 net sales.
Our customers include NAPA, DaimlerChrysler, CSK, Kmart, The Pep Boys, and
Volkswagen in the North American market and Volkswagen, Fiat, Telefonica and the
Linde Group in the European market.
In recent years, Exide failed to achieve levels of operating performance
and profitability that our board of directors considered satisfactory. Exide's
weak financial results were primarily caused by production and sales strategies
that focused on volume and market share, often at the expense of profitability,
and by the large amount of debt we incurred in connection with our European
acquisitions. In late 1998 our board decided to replace key members of our
management with new senior executives committed to improving Exide's operating
performance and profitability.
Robert A. Lutz leads our new management team as Chairman, President and
Chief Executive Officer. Mr. Lutz was most recently the vice chairman,
president and chief operating officer of Chrysler and has held a number of other
senior operating positions with major automotive manufacturers in the United
States and Europe over his 40 year career in the automotive industry. The new
management team also includes as of June 26, 1999 four new independent board
members, a new chief financial officer, a new treasurer, a new corporate
controller and a new European chief financial officer.
Our new management team has conducted an in-depth strategic assessment of
Exide to identify our competitive strengths and to formulate new operating and
growth strategies. As a result, we established three broad goals. These goals
are to (1) stabilize our existing business, (2) reduce our high level of debt
and (3) pursue growth opportunities that capitalize on our advanced technologies
and world-class manufacturing expertise.
To stabilize our existing business, we are taking action on a number of
fundamental corporate issues. We are (1) rebuilding our credibility with
customers and investors by
1
adopting policies of more frequent and more comprehensive communication, (2)
addressing outstanding legal matters--we have recently settled two major legal
proceedings, (3) upgrading our financial controls and reporting systems by
expanding our accounting, information technology, tax and treasury departments
and (4) developing new incentive compensation plans to align management
compensation with the creation of shareholder value.
We plan to reduce our high level of debt to improve our financial
flexibility, lower our borrowing costs, improve our credit ratings and allow us
to better pursue growth opportunities. In addition, we plan to sell non-core and
excess assets identified in our strategic assessment and use a substantial
portion of their sale proceeds to repay debt. We are also reducing debt by
lowering our working capital needs through simplifying our product offerings and
implementing more efficient "demand pull" manufacturing methods. In the U.S.,
we have (1) retained financial advisors to help us sell certain non-core
business assets, (2) reduced our stock keeping units by over 40% and (3) begun
to implement demand pull manufacturing. We have evaluated our major customers to
assess overall profitability and, as a result, our contract with Sears was
recently terminated.
To grow our business over the longer term, we have identified a number of
further initiatives, including (1) focusing on the introduction and marketing of
advanced, higher margin products, (2) taking advantage of changing automotive
market standards, such as the emerging higher voltage electrical systems
expected to be introduced in Europe as early as the 2001 model year, (3)
pursuing geographic expansion, particularly in Latin America and Asia, and (4)
expanding into the North American industrial battery market by capitalizing on
the technology and experience of our European operations.
(2) Financial Information About Industry Segments
We are primarily engaged in one industry segment, namely, the manufacture,
distribution and sale of lead acid batteries. See Note 16 to the Company's
Consolidated Financial Statements appearing elsewhere herein.
(3) Narrative Description of Business
Exide is the largest manufacturer and marketer of lead acid batteries in
the world, with fiscal 1999 net sales of approximately $2.4 billion. We
manufacture automotive batteries in North America and automotive and industrial
batteries in Europe.
Markets
In North America, we are the second largest manufacturer of automotive
batteries. We believe that sales of automotive batteries (including similar
batteries for marine and other applications) in North America totaled
approximately $3.1 billion in 1999. About 83% of these batteries were sold as
replacement batteries in the aftermarket and the remainder were sold to original
equipment manufacturers. The North American automotive battery market has a
more concentrated customer base than that in Europe. We compete for sales in
both the aftermarket and the original equipment market primarily with three
other major battery manufacturers. The North American automotive battery market
has experienced aggressive price competition for many years, partly as a result
of Exide's strategy of maintaining and growing market share, often at the
expense of profitability. This price competition appears to have eased somewhat,
as manufacturers have been able to implement limited price increases in recent
months.
2
In Europe, we are the largest manufacturer of both automotive and
industrial batteries, with a broad range of product offerings and a pan-European
customer base. We estimate that total European sales of automotive batteries in
1999 were approximately $1.7 billion, about 70% of which were in the aftermarket
and about 30% of which were to original equipment manufacturers. We believe
that total European sales of industrial batteries in 1999 were approximately
$1.5 billion, roughly half of which were standby batteries and half of which
were traction batteries. The European battery market has undergone consolidation
in recent years, and Exide has been a major participant in this process.
Historically, there was less price competition in European battery markets than
in North America. Recently, however, intense price competition has emerged as a
number of competitors have sought to increase market share. This price
competition has been made worse by an environment of low-priced imports, excess
capacity and declining lead prices. Prices are continuing to decline in Europe,
but at a slower rate, due in part to improvements in the Asian economies and
recent lead price increases in April and May of 1999.
Products
Automotive Batteries
Automotive batteries represented 65% of our net sales for fiscal 1999. We
believe we have the most complete and technologically innovative line of
automotive batteries in the North American and European markets.
North America. Our principal North American automotive battery products
include the following:
Product Description
- ----------------------- ------------------------------------------------------
Exide Mega Cell This is our principal product line and includes a
comprehensive range of maintenance free lead acid
batteries from our basic low cost battery, to our
premium battery. We sell these batteries both under
the Exide brand name and under various private labels.
Exide NASCAR Select Our NASCAR Select batteries sell for a premium over
ordinary batteries due to the strong brand loyalty of
NASCAR fans. NASCAR Select batteries include a number
of features that differentiate them from ordinary
batteries, including their increased durability,
resistance to vibration and premature failure.
Orbital We recently introduced this innovative spiral wound
battery in North America as the Exide Select
Orbital/NASCAR. Through its patented technology and
state-of-the-art recombinant design, this battery
holds its charge longer than conventional batteries
and can be recharged in a fraction of the time needed
for conventional batteries, has greater power output
and resists vibration better than any standard lead
acid battery, including our NASCAR Select line. The
unique design of this battery, including the absence
of free electrolyte, allows it to be shipped via
overnight carrier.
3
We also produce automotive-type batteries for commercial applications, such
as trucks, farm equipment, tractors and other off-road vehicles, as well as
specialty batteries for marine and garden tractor applications for the
recreational vehicle market. We produce the Full Timer battery, which employs
advanced technology as the large engines, sophisticated electronics and
extensive on-board accessories common in today's recreational vehicles require
increased power. For the marine market, we produce the Nautilus high
performance, dual terminal battery, as well as a battery that allows boaters to
instantly check their battery power. We believe that the markets for these
specialty batteries is increasing faster than the market for conventional
automotive batteries.
Europe. Our European product offerings vary by market. We generally offer
a basic model, an upgrade model, a premium model and various niche products in
each market. The following describes our product offerings in the United
Kingdom and is representative of our product offerings elsewhere in Europe:
Product Description
- ------------------------ ------------------------------------------------------
Basic This is our standard low cost battery. It uses
traditional lead acid technology, has average power
and cold cranking capabilities, carries a 12-month
warranty and is adequate for most conventional
automotive uses. The same or similar battery is
marketed under private label brand names in France,
Germany and Spain, under the Basic name in Italy and
under various other names in other markets.
Classic This is our upgrade model. It still uses traditional
lead acid technology, but has increased power and cold
cranking capabilities. This battery carries a 24 month
warranty and sells for an approximate 15% premium over
our Basic battery. The same or similar batteries are
marketed under the Equipe name in France, the Classic
name in Germany, the Leader name in Italy and the
Tudor name in Spain and under various other names in
other markets.
Ultra This is our premium model. It has a number of features
that differentiate it from ordinary batteries,
including 30% more power. The Ultra sells for an
approximate 25% premium over our Basic battery. The
same or similar batteries are marketed under the
Formula name in France, the Top Start Plus name in
Germany, the Ultra name in Italy and the Millennium 3
name in Spain and under various other names in other
markets.
STR/STE Our STR batteries use recombination technology to
allow a lead acid battery to be installed in the
passenger compartment of an automobile with no risk of
fluid loss or acid fumes. We recently announced the
introduction of batteries using our new STE (sealed
technology evolution) technology, which uses a gas
permeable membrane to prevent leakage of battery fluid
while permitting gas to escape. Our STE technology has
been approved for use by BMW and will be included in
some models as early as the 2000 model year.
Maxxima This is the equivalent of the Exide Select
Orbital/NASCAR described
4
above. We market this battery under the Maxxima brand
name throughout Europe.
Industrial Batteries
Sales of industrial batteries represented 31% of our net sales for fiscal
1999. We are the largest manufacturer and marketer in Europe of industrial
batteries. Our industrial batteries consist of traction batteries, such as
those for use in forklift trucks and other electric vehicles, and standby
batteries used for back-up power applications, including in telecommunications
systems. In 1991, we sold our North American industrial battery product line to
Yuasa, Inc., an entity in which we have a 13.5% interest.
Traction Batteries. We sell traction batteries, chargers and accessories
to original equipment manufacturers of material handling vehicles. These
manufacturers increasingly rent rather than sell to end users. This trend tends
to favor us, as we have larger market shares in the original equipment market.
We offer a complete package of batteries, chargers and service and,
increasingly, are providing full service maintenance contracts. Our batteries
are made in a variety of sizes and are manufactured according to British
standards and DIN specifications. Our products use a variety of technologies,
ranging from conventional vented lead acid batteries using liquid electrolyte
employing our leading edge tubular positive plate cell designs to our
maintenance-free gelled electrolyte technology in smaller bloc batteries.
Our principal products in this category include:
End Use Description
- ------------------------ ------------------------------------------------------
Materials handling The largest market for traction batteries is for the
equipment many different types of electric vehicles used in the
materials handling industry, including forklifts,
pedestrian pallet trucks, pedestrian pallet stackers,
low level order pickers, reach trucks, turret trucks,
tow tractors, counterbalance trucks, platform trucks
and reach stackers.
Electric road vehicles Road vehicle applications predominantly include trucks
for doorstep delivery of milk and other products and
mining locomotives.
Other electric vehicles We produce monobloc and high energy density batteries
used in tow trucks, platform trucks, personnel
carriers, luggage and service carts and electric buses
primarily used in the airline industry.
Floor cleaning equipment Electric floor cleaning equipment includes battery
powered sweeper/scrubber/dryer machines used in large
areas such as shopping malls and airport concourses.
Other applications Other applications include lifting platforms, scissor
lifts, electric boats, locomotives and leisure
equipment.
5
End Use Description
- ------------------------ ------------------------------------------------------
Battery charging We sell a variety of chargers for use with traction
batteries ranging from the least costly uncontrolled
basic models to higher end and more sophisticated
electronically controlled chargers. We have recently
introduced a range of technologically advanced, energy
efficient high frequency chargers.
Battery maintenance Our traction accessories are primarily battery
maintenance equipment for refilling and monitoring.
Battery room equipment We produce battery-handling systems for storage and
exchange of batteries for increased floor space,
efficiency and safety.
Standby Batteries. Our standby batteries come in a variety of shapes and
sizes and are generally categorized according to their end use. Many of our
standby batteries, sold under our Sonnenschein brand name feature our
proprietary Dryfit technology. These maintenance free sealed lead acid
batteries use a gelled electrolyte, and feature a service life of up to 18
years, horizontal installation capability, low gassing, easy installation and
enhanced cycling capabilities.
Examples of the uses of our standby batteries include:
End Use Description
- ------------------------ ------------------------------------------------------
Telecommunications Standby batteries are used in virtually all
telecommunications installations, from the massive
batteries used in central telecommunications switching
offices, to smaller batteries used in remote repeater
stations or cellular service towers. These batteries
use various technologies, from conventional lead acid
to advanced gel technology, have lives of five to
fifteen years and are sold both to original
telecommunications equipment manufacturers and to end
users of such equipment.
Uninterruptable power These systems ensure a continuous flow of power to
supplies ("UPS") computer and other power-sensitive systems and range
in size from very small, for use in connection with
personal computers, to very large, for use in
connection with mainframe computers and power
sensitive industrial applications, such as computer
chip manufacturing. For example, our standby batteries
are used in the UPS for the U.K. social security
mainframe computer.
Power utilities Power utilities need standby power in order to restore
power to the main system in the event of a power
outage.
Other Other uses of standby batteries include railways and
other public transportation, mobile equipment, medical
equipment and security systems. We are also one of
Europe's leading suppliers of standby submarine
batteries and our customers include the navies of
Germany, France, Italy, and Spain.
6
Quality
We recognize that product performance and quality are critical to our
success and have spent the past four years in a company-wide quality improvement
effort, with a particular focus on North America, where we had experienced
inconsistent product quality. As a result, we now believe that our product
performance and quality are equal to or better than that of any market
participant.
Our quality effort begins in the design phase. We design our batteries to
meet and exceed industry benchmark quality standards, using robust design
parameters and quality materials to achieve reliability and durability. Our
commitment to quality continues through our production process. We have quality
audit processes in each of our production facilities and our plant managers'
compensation is based, in part, on the achievement of quality objectives. Our
quality program extends past the point of sale. We offer warranties on our
products and conduct regular customer satisfaction surveys. These efforts have
led to QS 9000 certification for all of our U.S. manufacturing facilities.
In Europe, all of our major factories are ISO 9001 approved and we have
grade A quality certification from Renault and PSA Group, BMW, VW/Audi and Fiat
and Q1 approval from Ford. In addition, several of our European plants are AQAP
approved by the military. We also hold individual certifications from 100% of
our major industrial battery customers, such as Deutsche Telecom, Telecom
Italia, Telefonica, French Railways (SNCF), as well as from large systems
integrators such as Siemens, Ericsson and Alcatel. All of our traction
batteries meet the applicable BSI or DIN standards.
Marketing/Customers
North America
We market our automotive batteries in North America to a broad range of
retailers and distributors of aftermarket batteries and to automotive original
equipment manufacturers. We are the leading supplier for many of the largest
battery retailers in the United States, including NAPA Distribution Centers,
Kmart, CSK and The Pep Boys. Our original equipment manufacturer customers
include DaimlerChrysler, John Deere, Navistar, E-Z-GO, New Holland, and others.
We market our products under various trademarks including Exide, Willard
and Prestolite, and have strengthened our brand recognition through promotional
activities, including sponsoring a NASCAR Winston Cup racing team. We also
produce and market, under license from NASCAR, the Exide NASCAR Select line of
batteries. We also advertise on national television and syndicated radio
programs and participate in various trade promotions.
Europe
The European market for our products is highly fragmented, along product
lines as well as geographically. Our marketing efforts vary according to the
country, the product and the market.
Automotive Batteries. We sell our automotive batteries in Europe both in
the aftermarket and to original equipment manufacturers. We sell our
aftermarket batteries under a variety of well-known brand names, including
Fulmen, Sonnenschein, DETA, Tudor, Hagen Batterie, York,
7
Saem, SONNAK, Anker, BIG and Exide. We have a leading position in the automotive
aftermarket in most European countries and our customers include Norauto, Tecar
and many other leading aftermarket battery distributors. The five largest
markets for our aftermarket batteries in Europe are Germany, France, Spain,
Italy and the United Kingdom. Our marketing efforts in the automotive battery
aftermarket are directed at retailers and distributors and their customers on-
site. We provide retailers with promotional materials and signs and emphasize
point of sale marketing to their customers. We run limited advertising on
television, radio and print media.
We are one of the major suppliers to Fiat, the Volkswagen group (Volkswagen
AG/AUDI AG/Seat/Skoda Automobilova AS), the PSA group (Peugeot S.A./Citroen),
the Renault group and BMW. We are also a supplier to Ford in Europe. As
development supplier to the PSA group and several other automobile
manufacturers, we work closely with such customers as they develop new models
with varying requirements.
Industrial Batteries. We have the leading position in both the traction
and standby segments of the industrial battery market in many European
countries. Technical expertise and assistance and customer service are more
important in the industrial battery markets than in the automotive battery
markets and we have technical service agreements with a number of our customers.
As with automotive batteries, we work closely with our customers as they develop
new products to design batteries to meet their individual needs. We primarily
built our European industrial battery business by acquiring existing
manufacturers with established brand names, and we continue to market our
products under these brands, as they each have an established reputation for
quality and expertise in particular technologies. For example, our Sonnenschein
brand is well known for its gel technology, which are maintenance free even in
robust or adverse applications.
Our major traction customers in Europe include the material handling
operations of the Linde Group (German), Junghreinrich Group (German), Atlet
(Swedish), BT Rolatruc (Swedish) and Nacco Material Handling (U.S.). We also
sell our traction products to a wide range of customers in the aftermarket,
ranging from large industrial concerns and retail distributors to small
warehouse and manufacturing operations. In Europe, we generally sell customers
a complete package of batteries, chargers and services. Elsewhere, these
products and services tend to be sold separately by us and others. The majority
of our sales are to original equipment manufacturers and this is increasing as
these manufacturers increasingly rent, rather than sell, their electric vehicles
to end users. This trend tends to favor us, as we have larger market share in
the original equipment market. We sell our traction batteries, chargers,
accessories and post sale service primarily through our own sales organization
in each country and use distributors and agents for export from Europe. Our
service group, the largest in Europe, is an important component of our marketing
efforts, particularly as truck manufacturers make up a larger part of the market
and require service assistance whenever they sell or rent their products.
Our major standby battery product customers include telecommunications
companies, such as France Telecom, Deutsche Telecom, Telecom Italia and SFR,
manufacturers of telecommunications equipment, such as Ericsson, manufacturers
and end users of uninterruptable power supplies primarily for mainframe computer
systems, such as Siemens, electrical generating companies and various European
governments and armed forces. We sell our products directly to these customers
and promote our products by holding seminars, participating in trade shows and
distributing technical literature.
8
Distribution Networks
North America. We have a network of approximately 135 wholesale
distribution branches throughout the United States and Canada that sell and
distribute batteries and other products to local auto parts retailers, service
stations, repair shops, fleet operators, battery jobbers and other smaller
volume customers. The branches also deliver batteries to our national account
customers' stores and collect used and spent batteries for recycling. Our branch
system is one of the largest automotive battery distribution systems in North
America. Our ability to deliver small numbers of batteries through our branch
system to small customers, when they need them and on credit terms, gives us an
advantage over other suppliers which require much larger deliveries on a pre-
paid basis. Some of our branches, such as those in Florida, California, New
York, New Jersey and Minnesota, are quite large, with sales of $5-8 million per
year. Our Sears contract required our branches to devote a substantial amount of
effort to serving Sears' stores that they can now devote to selling to their
local higher margin customers. Our branch system is supplemented by regional
accounts, small battery wholesalers and installers.
Europe. Our European operations distribute their aftermarket automotive
batteries primarily through battery wholesalers, original equipment manufacturer
dealer networks, hypermarkets and European purchasing centers, although on a
country by country basis distribution strategy varies greatly. Battery
wholesalers sell and distribute batteries to a network of automotive parts
retailers, service stations, independent retailers and supermarkets throughout
Europe. Wholesalers, who sell to repair shops and service stations, and
original equipment manufacturer dealers represent the large majority of this
market, but supermarket chains, replacement parts stores (which are represented
by purchasing associations) and hypermarkets have become increasingly important.
Our distribution network will be enhanced as we convert manufacturing facilities
closed in our ongoing rationalization and consolidation effort to distribution
centers.
Given the importance of service and technical assistance, our European
operations generally ship standby batteries directly to system suppliers and
uninterruptible power supply manufacturers which include the standby batteries
in their equipment and distribute products to end users. We distribute traction
batteries through original equipment manufacturer dealers, independent
distributors and directly to large fleet users. Our European operations also
distribute both standby and traction batteries through their own branch network.
Technology
We are committed to introducing new and technologically advanced products
that provide better performance and value to the customer. To support this
commitment, we dedicate significant effort to research and development. Our
European research and development efforts are partially funded by various
governmental and other research organizations, such as Brite-Uram and ALABC
(Advanced Lead Acid Battery Consortium).
We operate five research and development facilities in the United States
and Europe. Scientists and engineers at each of these facilities cooperate
under the central coordination of our head of research and development and are
currently focused on projects to enhance the lead acid battery, as well as
batteries featuring lithium primary, lithium ion rechargeable, nickel cadmium,
nickel metal hydride, aluminum air and super capacitor technologies. We believe
that our research and development efforts have benefited from sharing technology
between North America and Europe. For example, by using technology developed in
our North America
9
operations, we have been able to introduce maintenance-free lead calcium
technology to the European market before our competitors. Similarly, spiral
technology, which was developed and initially introduced in Europe, is critical
to our new Orbital battery, which has now been introduced to the North American
market.
We also operate six product/process development centers around the world.
These centers work cooperatively to define and improve our production processes
and are currently working on projects related to continuous grid making
processes, battery assembly automation and various other efficiency and quality
improvement programs. By maintaining these various sites, we have been able to
transfer technologies and processes among our various operating facilities,
thereby adapting best practices from around the world for use in our various
production facilities.
We believe our research and development efforts provide us with a
competitive advantage in technological innovation. An example is our
introduction in 1997 of the NASCAR Select line, featuring superior performance
and durability characteristics, and our new Orbital battery, a spiral wound
automotive battery which holds its charge longer, has greater power output and
resists vibration better than ordinary batteries. We have also recently
introduced batteries using our new STE (sealed technology evolution) technology,
which allows lead acid batteries to be installed in the passenger compartment of
an automobile with no risk of fluid loss or acid fumes. This technology has
been approved for use by BMW and Renault. Other new developments include smart
batteries, which will be capable of indicating state of charge, advanced
batteries with gelled electrolyte for military applications and other programs.
We are also working closely with European original equipment manufacturers
to develop, and have supplied them with prototypes of, new 36-volt batteries for
the next generation of dual-battery automotive electrical systems. These new
systems will generally require a conventional 12 volt battery for lighting
systems and other low power consumption accessories within the automobile and a
36 volt battery, which is needed for the next generation of combined starter
motor/alternators and for high power consumption accessories such as electrical
heating and cooling systems. We have entered into a strategic alliance with
Continental, Inc. to participate in their development of an integrated starter
motor/alternator system. European original equipment manufacturers plan to
include these electrical systems in certain luxury models as early as the 2001
model year. We believe our European experience with these higher voltage
electrical systems will provide us with a competitive advantage when the North
American original equipment manufacturers move toward a higher voltage
electrical system.
Although our core business is lead acid batteries, we are also an important
provider of non-lead acid batteries for high technology military and space
applications. We are continuing our advanced development of lithium ion
rechargeable batteries.
Patents, Trademarks and Licenses
We own or have a license to use various trademarks which are of value in
the conduct of our business. For example, we have an agreement with the
National Association for Stock Car Auto Racing, Inc. pursuant to which we have
the exclusive right to market batteries and related accessories under the
officially licensed NASCAR name and logo until 2002, which allowed us to begin
marketing the NASCAR Select line in 1997. While we believe such trademarks and
trade names enhance the brand recognition of our products and therefore are
important to our
10
business, we also believe that our products, engineering skills, reputation for
quality and relationships with our customers are equally important for the
maintenance and growth of our business. An unaffiliated firm has rights to the
Exide mark in approximately 37 foreign countries and Exide Electronics Group,
Inc., an unaffiliated company, is licensed to use the Exide name on certain
devices.
We have been issued many patents worldwide, including 15 U.S. patents
issued since 1994. Additionally, we have several patents in process covering
design of lead acid batteries and battery manufacturing equipment. While we
believe that patents are important to our business operations, we also believe
that the loss of any single patent or several patents would not have a material
adverse effect on our company. A competitor manufactures and sells a spiral
wound automotive battery which has some similarities to our new Orbital battery.
Although we believe that our new battery does not infringe this competitor's
patents, we cannot assure you that this competitor will not claim that it does.
Manufacturing, Raw Materials and Suppliers
North America. The major reasons for our emergence as the low-cost
producer in the United States and Canadian automotive battery industry have been
the achievement of economies of scale through strategic acquisitions, the
consolidation of facilities, our relatively low labor costs and increased
vertical integration in the areas of lead smelting, plastics and battery
separators. Although we plan to reassess our vertical integration strategy in
North America, we believe a certain degree of vertical integration is valuable,
cost-effective and augments our position as the low-cost producer in the United
States. Since 1985 and following the acquisition of General Battery in May
1987, we consolidated the operations of nine plants and eight distribution
centers into larger, more efficient locations with lower labor costs. This has
led to a significant reduction in unit costs and improved labor productivity.
We are also a leader in developing advanced production techniques, such as
continuous plate processing, statistical process control and computer-aided
design and manufacturing. Our manufacturing plant in Salina, Kansas is the
highest volume and one of the lowest cost automotive battery plants in the
world. We continue to increase production at our manufacturing facility in
Bristol, Tennessee, a modern, highly efficient battery manufacturing plant
similar to our Salina, Kansas facility.
We believe our overall unit conversion costs (production costs other than
raw materials) are significantly below the conversion costs of our major United
States and Canadian competitors. These cost efficiencies result from our high
volume of production, emphasis on cost control and competitive labor costs. Our
relatively high level of vertical integration reduces the effects of changes in
the market prices of raw materials on production costs and results in
substantial raw material cost savings. Lead is the principal raw material in
the manufacture of batteries, representing approximately one-third of the cost
of goods sold. We can obtain substantially all of our domestic lead
requirements through the operation of four secondary lead smelters, which
reclaim lead by recycling spent lead-acid batteries. Prior to our acquisition
of two such smelters in August 1995 through our purchase of Schuylkill, we were
purchasing a larger portion of our lead requirements, making the cost of our
batteries more sensitive to lead price changes. We obtain batteries for
recycling from our customers and through our wholesale distribution outlet
system. We believe we have a significant competitive advantage from our in-
house lead smelting and from back hauling of spent batteries for recycling
through our distribution network and wholesale distribution outlets. When lead
market prices decline, our lead cost advantage from vertical integration can be
reduced or eliminated. Because we adjust
11
our pricing to a substantial number of customers pursuant to a formula based on
a published price of lead, if market prices were to decline below our lead
production cost for an extended period of time, we could be forced to obtain
more of our requirements from third parties.
We also produce most of our U.S. plastic molding requirements utilizing
plastic obtained through in-house reclamation of spent battery cases as part of
our recycling program.
Other key raw materials and components in the production of batteries
include lead oxide and chemicals, which are generally available from multiple
sources. We currently produce substantially all of our North American
requirements of battery separators. We have not experienced any material
stoppage or slowdown in production as a result of the unavailability, or delays
in the availability, of raw materials.
Europe. We operate manufacturing plants in France, Italy, Spain, Portugal,
Germany, Poland, Turkey, the United Kingdom and elsewhere in Europe.
We have five secondary lead smelters in Europe that supply approximately
one-third of our European lead requirements. Major investments have been made
in these plants in recent years to improve lead treatment and recycling
processes. We produce most of our own plastic components.
We continue to implement a cohesive overall rationalization and
consolidation strategy with respect to our European acquisitions. We continue
to lower fixed and variable production costs through plant closings, thereby
increasing capacity utilization at the remaining plants, shifting production to
lower cost areas and reducing overhead. In conjunction with our plant closings,
we are rationalizing our distribution system, reducing the number of warehouses
and improving our delivery systems. In addition, we are reducing administrative
expenses by eliminating duplicate functions and services and plan to rationalize
our product range, significantly reducing the number of stock keeping units and
improving inventory management. To further reduce our costs we are actively
evaluating shifting the production of some of our smaller products to suppliers
in the Far East. We anticipate that this consolidation and rationalization will
continue to produce significant cost savings.
Competition
Our North American and European markets are each very competitive and some
of our competitors are larger and have greater financial resources than Exide.
The manufacturers in these markets compete primarily on the basis of price,
quality, technical innovation, service and warranty period. Well-recognized
brand names are also important for aftermarket customers who do not purchase
batteries made under their own labels. Most sales are made without long term
contracts.
North America. In the North American automotive aftermarket, we believe
that Johnson Controls has the largest market position, followed by Exide. Other
principal competitors in this market are GNB, Delphi and East Penn. Price
competition in this market has been severe in recent years, but prices have
firmed somewhat and we have instituted price increases in the range of 3% to 5%
in late 1998. Competition is strongest in the mass merchandiser channel where
large customers use their buying power to command lower prices. Pricing, while
still important, is less of a factor than service with smaller customers such as
those served by our branch system.
12
Our largest competitors in the North American original equipment market are
Delphi, Johnson Controls and GNB. Original equipment manufacturers change
battery suppliers less frequently than aftermarket customers, but because of
their size, force market participants to compete on price and other terms.
We expect North American competition to remain intense. We will seek,
consistent with our new strategy, to maintain and grow our market positions
through our branding and emphasis on technologically advanced products, such as
the Orbital battery, our NASCAR branded products and our substantially improved
product quality and customer service.
Europe. Exide has the largest market position in Europe in automotive
batteries, both aftermarket and original equipment, as well as in industrial
batteries. Our closest competitor in the automotive markets is Varta, followed
by Fiamm, Hoppeke, and Autosil. In the industrial market Hawker is the next
largest after Exide, followed by Fiamm, Hoppeke and Yuasa.
The European battery markets, particularly in the automotive original
equipment and industrial areas, have undergone severe price competition.
Cost savings from our plant rationalization program will allow us to
continue to meet this strong price competition in order to maintain our customer
relationships and market positions until the competitive environment improves.
We will also continue to compete on the basis of our pan-European presence and
our technological capabilities, as well as our strong brands.
Environmental, Health and Safety Matters
As a result of our manufacturing and secondary lead smelting operations, we
are subject to numerous environmental laws and regulations and are exposed to
liabilities and compliance costs arising from the past and current storage,
handling, release and disposal of hazardous substances and hazardous wastes. Our
operations are also subject to occupational safety and health laws and
regulations, particularly relating to the monitoring of employee health. The
Company devotes significant resources to attaining and maintaining compliance
with environmental and occupational health and safety laws and regulations and
does not currently believe that environmental, health or safety compliance
issues will have a material adverse effect on our business or financial
condition.
North America. We have been advised by the U.S. Environmental Protection
Agency or state agencies that we are a Potentially Responsible Party under the
Comprehensive Environmental Response, Compensation and Liability Act or similar
state laws at 75 federally defined Superfund or state equivalent sites. At 42
of these sites, we have either paid or are in the process of paying our share of
liability. In most instances, our obligations are not expected to be
significant because our portion of any potential liability appears to be minor
to insignificant in relation to the total liability of all potentially
responsible parties that have been identified and are viable. Our share of the
anticipated remediation costs associated with all of the Superfund sites where
we have been named a Potentially Responsible Party, based on our estimated
volumetric contribution to each site, is included in the environmental
remediation reserves discussed below.
13
Because our liability under such statutes may, as a technical matter, be
imposed on a joint and several basis, our liability may not necessarily be based
on volumetric allocations and could be greater than our estimates. We believe,
however, that our Potentially Responsible Party status at these Superfund sites
will not have a material adverse effect on our business or financial condition
because, based on our experience, it is reasonable to expect that our liability
will be roughly proportionate to our volumetric contribution of waste to the
sites.
We currently have greater than 50% liability at only one Superfund site,
discussed below. Other than this site, our allocation exceeds 5% at only five
sites at which our share of liability has not been paid as of March 31, 1999.
The current allocation at these five sites averages approximately 18%.
We are the primary Potentially Responsible Party at the Brown's Battery
Breaking Superfund site located in Pennsylvania. The site was operated by
third-party owners in the 1960s and early 1970s. In 1992, the Environmental
Protection Agency issued a Record of Decision identifying several alternate
remedies. During fiscal 1997, we signed a consent decree and paid $3.0 million
of the Environmental Protection Agency's past costs and we are not responsible
for any other past costs. We have established reserves based upon our estimates
of the remediation cost.
We are also involved in the assessment and remediation of various other
properties, including certain Exide-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 reserved as discussed below. In addition, certain
environmental matters concerning our company are pending in federal and state
courts or with regulatory agencies.
We are involved in certain legal proceedings in Indiana and West Virginia
in which state authorities allege that we have improperly characterized and
handled plastic wastes generated in connection with our materials recycling
program (see below). While the final resolution of these proceedings is not yet
known, we may incur civil penalties in connection with such resolution, which
could in some cases exceed $100,000. We do not expect that the resolution of
any of these proceedings will substantially effect either the continued
functioning of our recycling program or our operations generally.
Environmental conditions at our properties could lead to claims for
personal injury, property damage or damages to natural resources. We are
currently subject to a number of such claims, including matters alleging illness
arising from exposures to lead in the vicinity of our former facility in
Frankfort, Indiana and property damage and personal injury claims associated
with our Reading, Pennsylvania facilities. We have established reserves based
upon our estimates of exposure associated with these matters, which are included
in the environmental reserves discussed below.
While the ultimate outcome of the foregoing environmental matters is
uncertain, after consultation with legal counsel, we do not believe the
resolution of the foregoing matters will have a material adverse effect on our
business, cash flows, financial condition or results of operations. We have
established reserves for onsite and offsite environmental remediation costs and
litigation exposures and believe that such reserves are adequate. These
reserves consist of amounts accrued for our active facilities, closed
facilities, and specifically for 16 of the
14
Superfund sites. While we believe our current estimates of future remediation
costs are reasonable, future findings or changes in estimates could have a
material effect on the recorded reserves. Because environmental liabilities may
in the future arise which today are neither probable nor reasonably estimable,
not all potential future environmental liabilities have been included in our
environmental reserves and, therefore, additional earnings charges are possible.
In fiscal 1997, we reached a settlement with most of our insurance
carriers, whereby the insurance companies reimbursed and we indemnified them for
certain response costs, property damage and bodily injury claims allegedly
resulting from environmental conditions.
During fiscal 1998, we reached an agreement with former owners of our
company whereby we agreed to release and indemnify the former owners from all
environmental matters relative to certain sites. We received $6.3 million under
this Agreement. An additional $3.7 million will be received in two annual
installments.
We have taken an active role in addressing environmental issues associated
with our business and have a staff of more than 50, not including consultants,
focusing on environmental, safety and health matters. We maintain numerous
permits with the Environmental Protection Agency, various state agencies and
provincial regulatory authorities which allow us to transport, store and recycle
spent lead acid batteries, lead-bearing hazardous wastes and certain other
hazardous wastes within and between the United States and Canada.
To protect the environment, minimize future liability and help ensure a
stable supply of lead to our battery manufacturing facilities, we have developed
a comprehensive materials recycling program. Under this program, we obtain spent
lead-acid batteries through our wholesale distribution outlet system and lead-
bearing materials from third parties. These materials are transported to our
secondary lead smelting facilities. Batteries are separated at the smelters into
three constituent units: lead, dilute sulfuric acid and plastic casing material.
The lead is reclaimed and refined into lead alloys for use at our battery
manufacturing facilities. The plastic from battery cases is broken into pieces
and extruded into pellets by adding strengtheners and other additives. The
pellets are sold or used at our battery casing molding facility to make new
battery cases. The dilute sulfuric acid solution is neutralized and discharged
in accordance with federal, state and provincial permits.
Europe. We are subject to numerous environmental, health and safety
requirements and are exposed to differing degrees of liabilities, compliance
costs, and cleanup requirements arising from our past and current activities in
various European countries. The laws and regulations applicable to such
activities differ from country to country and also substantially differ from
U.S. laws and regulations. We expect that our European operations will continue
to incur capital and operating expenses in order to maintain compliance with
evolving environmental, health and safety requirements or more stringent
enforcement of existing requirements in each country. In addition, accelerated
consolidation of our European operations could increase our expenditures.
During fiscal 1999, the Company sold its plant in Soest, Germany to an
unrelated entity. As part of that sale, the Company indemnified the purchasers
against certain environmental liabilities. Also during fiscal 1999, the Company
completed an assessment of the environmental condition of its Cubas de Sangre
smelter in Spain, and was advised by the Madrid regional authorities that a
cleanup would be required. The Company has proposed remediating the Cubas site
with an advanced technology which would remove lead impacts
15
over an extended period of time. The Company has established reserves for the
Soest and Cubas sites, as part of its global environmental reserves.
Employees
North America. As of March 31, 1999, we employed approximately 1,500
salaried employees and approximately 4,300 hourly employees in North America.
Approximately 47% of such salaried employees are engaged in sales, service and
marketing and approximately 43% in manufacturing and engineering. Approximately
29% of our hourly employees are represented by unions. Relations with the unions
are generally good. Contracts covering approximately 410 and 375 of our union
employees expire in fiscal 2000 and 2001, respectively, and the remainder
thereafter.
Europe. As of March 31, 1999, we employed over 3,800 salaried employees
and over 6,700 hourly employees in Europe. Approximately 50% of such salaried
employees are engaged in sales, service and marketing and approximately 25% in
manufacturing and engineering. Our hourly employees are generally represented by
unions. Relations with the unions are generally good. Contracts covering most of
our European union employees expire on various dates through calendar year 1999.
Backlog
We do not have a material amount of backlog orders.
(4) Financial Information About Foreign and Domestic Operations and Export
Sales
See Note 16 to the Company's Consolidated Financial Statements appearing
elsewhere herein.
Item 2. Properties
The chart below lists the location of our principal facilities. All of the
facilities are owned unless otherwise indicated. All owned properties and the
leases for the leased properties are subject to liens under our credit
agreement. The leases for leased facilities expire at various dates through
2015. In addition to these properties, Tudor owns undeveloped land totaling
approximately 39 acres which is currently being marketed.
Approximate
Location Square Footage Use
- ----------------------------------------------------------------------------------------------------------
North America:
Baton Rouge, LA 176,000 Secondary Lead Smelting
Bristol, TN 220,000 (leased) Automotive Accessory Manufacturing
Bristol, TN 631,000 Battery Manufacturing
Burlington, IA 193,000 Battery Manufacturing
Cannon Hollow, MO 137,000 Secondary Lead Smelting
Cooper, TX 30,000 (leased) Starter and Alternator Manufacturing
16
Approximate
Location Square Footage Use
- ----------------------------------------------------------------------------------------------------------
Corydon, IN 161,000 Separator Manufacturing
Lampeter, PA 82,000 Battery Plastics Manufacturing
Manchester, IA 286,000 Battery Manufacturing
Maple, Ontario, Canada 169,000 Distribution and Administration
Muncie, IN 174,000 Secondary Lead Smelting
North Bay, Ontario, Canada 30,000 Battery Charger Manufacturing
Reading, PA 125,000 Secondary Lead Smelting and Poly Reprocess
Reading, PA 135,000 Executive Offices
Reading, PA 280,000 Battery Manufacturing
Reading, PA 77,000 Distribution Center
Salina, KS 260,000 (leased) Battery Manufacturing
Salina, KS 100,000 Distribution Center
Europe and Other:
Florival, Belgium 290,000 Distribution Center
Bolton, England 274,000 Industrial Battery Manufacturing
Auxerre, France 176,000 Automotive Battery Manufacturing
Gennevilliers, France 55,000 (leased) Executive Offices
Lille, France 484,000 Industrial Battery Manufacturing
Nanterre, France 169,000 Automotive Battery Manufacturing
Pont Ste Maxence, France 71,000 Secondary Lead Smelting
Bad Lauterberg, Germany 458,500 Manufacturing, Administrative and Warehouse
Budingen, Germany 258,000 Industrial Battery Manufacturing
Weiden, Germany 208,000 Industrial Battery Manufacturing
Casalnuovo, Italy 483,000 Industrial Battery Manufacturing
Romano Di Lombardia, Italy 266,000 (leased) Automotive Battery Manufacturing
Poznan, Poland (five) 887,000 Automotive Battery Manufacturing
Cubas, Spain 323,000 Secondary Lead Smelting
Azuqueca de Henares, Spain 434,000 Automotive Battery Manufacturing and
Research
Malpica, Zaragoza, Spain 213,000 Automotive Battery Manufacturing
Manzanares, Spain 438,000 Automotive Battery Manufacturing
Madrid, Spain 7,200 (leased) Executive Offices
Zaragoza, Spain 269,000 Industrial Battery Manufacturing
Nol, Sweden 447,000 Automotive Battery and Industrial Battery
Manufacturing
Manisa, Turkey 145,000 Automotive Battery Manufacturing
Cwmbran, Wales 105,000 Automotive Battery Manufacturing
In addition, we also lease distribution outlets in the U.S. and Europe.
We believe that our facilities are in good operating condition, adequately
maintained, and suitable to meet our present needs and future plans.
17
Item 3. Legal Proceedings
In December 1997, the Attorney General of the State of Florida initiated an
investigation into certain alleged business practices of Exide, including
falsifying bids to the State of Florida, selling defective batteries, selling
used batteries as new, mislabeling batteries with regard to warranty coverage,
cold cranking amps, intended use and point of manufacture; and also considered
related allegations concerning improperly transferring credits among customer
accounts, procuring falsified test data, making payments to employees of certain
customers to obtain business, securities fraud, and anti-trust violations. This
investigation was resolved by a settlement agreement with the Attorney General
dated May 24, 1999, which released Exide from all liabilities and claims which
have been or could be asserted against Exide in any civil or administrative
action arising out of, related to or connected with, directly or indirectly, the
following investigated matters: falsifying bids to the State of Florida; selling
defective batteries; selling used batteries as new; mislabeling batteries with
regard to warranty coverage, cold cranking amps, intended use and point of
manufacture; and improperly transferring credits among customer accounts.
When our current management learned of the Florida Attorney General's
investigation, we elected to fully cooperate with the Attorney General. That
cooperation led to the settlement agreement. It was expressly understood and
agreed that the settlement agreement was not to be construed as an admission of
liability or any acknowledgement of the claims asserted against Exide.
Under the settlement agreement, we agreed to pay the State of Florida $2.75
million in installments, with $1.25 million to be directed to a Florida
university of the attorney general's choosing. In addition, we have agreed to
make restitution at an estimated cost of $500,000 and to take certain further
actions, including ceasing the alleged practices, instituting certain battery
labeling practices and instituting a corporate ethics program. The settlement
applies to all batteries sold up to and including June 23, 1999.
While we believe the settlement marks the end of the Florida investigation,
the settlement does not preclude the Florida Attorney General from bringing
further claims with respect to the matters not covered by the settlement. We
also cannot assure you that other federal or state agencies or private claimants
will not investigate or bring charges with respect to these or other matters.
Exide is now or recently has been involved in several lawsuits pending in
state and federal courts in Alabama, North Carolina, Pennsylvania, South
Carolina, Tennessee and Texas, some of which were brought as purported class
actions. These actions allege that Exide sold old or used batteries as new
batteries, sold defective and mislabeled batteries and improperly credited
customer accounts and seek compensatory and punitive damages and, in one case,
injunctive relief. The following lawsuits of this type are currently pending:
Mathews v. Exide Corporation, et al., CV-95-91-TH, Circuit Court for Montgomery
County, Alabama, Exide Corporation v. East Alabama Auto Parts, CV-96-348,
Circuit Court for Calhoun County, Alabama, The Battery Shop, et al. v. Exide
Corporation, et al., CV 9606976, Circuit Court for Jefferson County, Alabama,
Dynamic Enterprises v. Exide Corporation, No. 5:98CV119, United States District
Court for the Eastern District of Texas, Dynamic Enterprises v. Exide
Corporation, No. 5:98CV120, United States District Court for the Eastern
District of Texas, Martin v. Exide Corporation, No. 3:98-2035-10, United States
District Court for the District of South Carolina, Mathis Battery Company, et
al. v. Exide Corporation, et al., No. 15735, Chancercy Court for Weakley County,
Tennessee and Gamma Group, et al. v. Exide Corporation, No. 99-2942, United
States District Court for the Eastern District of Pennsylvania. We cannot
18
assure you that we will be successful in the defense of these claims or that
additional claims will not be brought.
On May 3, 1999, we went to trial in the case of Exide Corporation v. East
Alabama Auto Parts Anniston, Inc. The case involved our breach of contract claim
against East Alabama to collect an outstanding receivable of $13,000 and their
breach of contract and fraud counterclaims, alleging that Exide sold them
defective batteries. The jury returned a verdict for Exide on its breach of
contract claim, for Exide on the East Alabama's breach of contract counterclaim
and for East Alabama on its fraud counterclaim. The jury awarded zero
compensatory damages and $1.5 million punitive damages. The judge declared a
mistrial due to the inconsistency between the compensatory damages verdict and
the punitive damages awarded. We have petitioned the Alabama Supreme Court to
compel the trial judge to enter the verdict as rendered, which we believe would
render the punitive damages verdict unenforceable. The trial judge has reset
this matter for trial on July 19, 1999.
We recently entered into an agreement to settle a class action lawsuit
pending against the Company and three of its former senior officers who were
also directors that alleges violations of the anti-fraud provisions of Section
10(b) of the Securities Exchange Act and Rule 10b-5 promulgated thereunder. The
complaint alleges that the market price of the Company's stock was artificially
inflated as a result of alleged misstatements and omissions regarding the
quality, adequacy and honesty of the Company's manufacturing processes, the
Company's revenues, cost of goods sold, warranty expenses, net income,
inventory, accounts receivable and warranty liability. Specifically, the
complaint alleges that senior executives of the Company instructed employees to
inflate publicly reported financial results and sold old or used batteries as
new batteries, sold defective and mislabeled batteries and improperly credited
customer accounts. We have entered into a settlement agreement with the
plaintiffs in this lawsuit, providing for a payment by the Company's insurers
of $10.25 million in satisfaction of all claims. The court has preliminarily
approved the settlement, certified a class of all persons who purchased the
Company's common stock from June 27, 1995 through July 29, 1998 and ordered that
notice be sent to the class. A final hearing will be held on September 2, 1999
and, if the settlement is approved, will result in the claims asserted in this
action, as well as any other claims relating to the Company's common stock, SEC
filings or the conduct of the Company's business during the class period, being
released and dismissed with prejudice.
Our current senior management and Board of Directors have retained outside
counsel to investigate and will continue to investigate the allegations involved
in the foregoing matters. The Company has no tolerance for the practices alleged
and senior management has taken and will take action to prevent such practices
in the future.
We are also involved in various other claims and litigation incidental to
the conduct of our business. For a discussion of environmental issues relating
to our business, see "Business--Environmental, Health & Safety Matters."
Item 4 Submission of Matters to a Vote of Security Holders
None
19
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Our common stock is listed and traded on The New York Stock Exchange under
the symbol "EX." The following table presents the high and low sales prices for
our common stock as reported on The New York Stock Exchange Composite Tape and
dividends paid for the quarters indicated.
DIVIDENDS
SALES PRICES DECLARED
- -----------------------------------------------------------------------------------------------------------
FISCAL YEAR ENDING MARCH 31 HIGH LOW (PER SHARE)
1997:
First Quarter....................................... $ 30.250 $ 18.875 $ 0.02
Second Quarter...................................... 28.500 22.500 0.02
Third Quarter....................................... 28.875 22.625 0.02
Fourth Quarter...................................... 25.500 16.000 0.02
1998:
First Quarter....................................... $ 23.125 $ 14.625 $ 0.02
Second Quarter...................................... 23.125 18.750 0.02
Third Quarter....................................... 34.250 20.563 0.02
Fourth Quarter...................................... 27.000 16.313 0.02
1999:
First Quarter....................................... $ 21.750 $ 16.625 $ 0.02
Second Quarter...................................... 19.125 9.125 0.02
Third Quarter....................................... 20.938 5.375 0.02
Fourth Quarter...................................... 21.500 11.000 0.02
The last reported sale price of the common stock on The New York Stock
Exchange on June 25, 1999 was $13.9375 per share. As of June 25, 1999, we had
approximately 21,363,577 shares of our common stock outstanding and there were
549 record holders of common stock.
20
Item 6. Selected Financial Data (In thousands, except per share data):
The following table sets forth selected financial data for Exide. You
should read this information in conjunction with our consolidated financial
statements and notes and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" that appear elsewhere in this document.
Fiscal Year Ended March 31
-------------------------------------------------------------------------------------
1995 1996 1997 1998 1999
---------------- --------------- --------------- --------------- ----------------
Income Statement Data
Net sales....................... $ 1,198,546 $ 2,342,616 $ 2,333,230 $ 2,273,126 $ 2,374,278
Gross profit.................... 264,018 552,806 595,276 602,718 556,329
Selling, marketing and
advertising expenses........... 135,774 276,076 290,076 311,683 334,638
General and administrative
expenses....................... 59,744 137,086 145,869 135,606 169,744
Goodwill amortization........... 4,338 15,969 17,853 16,922 20,016
Operating income................ 64,162 123,675 141,478 138,507 31,931
Interest expense, net........... 52,565 120,600 118,837 112,301 111,679
Income taxes.................... 5,160 6,300 14,732 13,475 23,001
Income (loss) before
extraordinary loss............. 4,491 939 18,992 18,697 (129,620)
Extraordinary loss
(1)(2)(3)(4)(5)................ (3,597) (9,600) (2,767) (28,513) (301)
Net income (loss)............... $ 894 $ (8,661) $ 16,225 $ (9,816) $ (129,921)
Basic net income (loss) per $ 0.06 $ (0.44) $ 0.79 $ (0.48) $ (6.12)
share..........................
Diluted net income (loss) per $ 0.06 $ (0.42) $ 0.77 $ (0.45) $ (6.12)
share..........................
Other Financial Data
EBITDA (6)...................... $ 110,759 $ 230,131 $ 267,309 $ 259,552 $ 138,726
Cash provided by (used in):
Operating activities........ (69,134) 36,058 78,126 167,499 77,219
Investing activities........ (322,896) (499,830) (61,652) (76,182) (22,356)
Financing activities........ 418,314 449,473 (17,000) (95,446) (70,238)
Capital expenditures............ 61,257 106,385 84,200 87,315 76,211
Ratio of earnings to fixed
charges (7).................... 1.2x 1.0x 1.2x 1.2x 0.2x
Balance Sheet Data (at period end)
Working capital................. $ 395,875 $ 598,895 $ 616,128 $ 538,916 $ 438,772
Property, plant and equipment,
net............................ 423,876 578,722 521,836 535,113 498,660
Total assets.................... 1,637,589 2,711,429 2,452,807 2,348,616 2,167,841
Total debt...................... 645,135 1,340,025 1,289,682 1,248,983 1,205,806
Common stockholders' equity..... 413,230 439,400 371,410 294,948 151,202
21
1. During fiscal 1995, the Company recorded a loss of $3,597 (net of a tax
benefit of $2,300) resulting from the early retirement of the former U.S.
Credit Agreement in connection with entering into a new U.S. Credit
Agreement.
2. During fiscal 1996, the Company recorded a loss of $9,600 (net of a tax
benefit of $5,958) from the early retirement of debt under the U.S. Credit
Agreement.
3. During fiscal 1997, the Company recorded a loss of $2,767 with no income tax
effect resulting from a modification of debt in connection with entering
into a series of bond swap agreements for $38,000 (principal amount) of its
10% and 10 3/4% Senior Notes.
4. During fiscal 1998, the Company recorded a loss of $28,513 (net of a tax
benefit of $3,667) resulting from a modification of debt in connection with
entering a bond swap agreement for $21,000 (principal amount) of its 10%
Senior Notes; the retirement of its 10.75% Senior Notes and the remainder of
its 12.25% Senior Subordinated Deferred Coupon Debentures; the retirement of
the U.S. Credit Agreements and European Facilities Agreement in connection
with entering into the Senior Secured Global Credit Facilities Agreement; a
modification of debt in connection with reducing the maximum commitment on
the European Facilities Agreement; and the redemption of $108,119 (face
value) of its outstanding 12.25% Zero-Coupon Bonds.
5. During fiscal 1999, the Company recorded a loss of $301 with no income tax
effect resulting from a modification of debt in connection with entering
into bond swap agreements for $4,430 (principal amount) of its 10% Senior
Notes.
6. Represents earnings before interest, taxes, depreciation of property, plant
and equipment, goodwill and other amortization and losses on sales of
receivables. EBITDA should not be considered as an alternative to net income
as an indicator of the Company's operating performance or to cash flows as a
measure of liquidity. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
7. For purposes of computing the ratio of earnings to fixed charges, earnings
consist of income (loss) before income taxes plus fixed charges (excluding
capitalized interest) and amortization of capitalized interest. Fixed
charges consist of interest expense, amortization of debt expense,
capitalized interest, and one-third of rent expense, representative of the
interest factor.
22
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Factors Which Affect Our Financial Performance
In the last three fiscal years, our financial performance has been affected
by several major factors.
Lead. Lead is the principal raw material used in the manufacture of
batteries, representing approximately one-third of our cost of goods sold. The
market price of lead fluctuates significantly. Generally, when lead prices
decrease, many of our customers seek disproportionate price reductions from us,
and when lead prices increase, customers tend to be more accepting of price
increases. Lead market prices declined substantially over the last three fiscal
years.
Competition. The automotive battery market in North America and the
automotive and industrial battery markets in Europe are highly competitive. In
recent years, competition has increased and we have come under increasing
pressure for price reductions. Price competition in Europe has been particularly
intense. This price competition has been exacerbated by an environment of low-
priced Asian imports, excess capacity and declining lead prices. Prices are
continuing to decline in Europe, but at a slower rate, due in part to
improvements in the Asian economies and recent lead price increases.
Exchange Rates. We are exposed to foreign currency risk in most European
countries, principally Germany, France, United Kingdom, Spain, and Italy.
Movements of exchange rates against the U.S. dollar can result in variations in
the U.S. dollar value of our non-US sales. In some instances gains in one
currency may be offset by losses in another. Our results for fiscal 1997 and
1998 were adversely impacted by weakness in all European currencies except the
pound sterling.
Weather. Unusually cold winters or hot summers accelerate battery failure
and increase demand for automotive replacement batteries. During the periods
discussed below, unusually warm winters resulted in fewer automotive battery
failures in North America and Europe and this adversely affected our aftermarket
sales.
Sears. Sears, whom we began supplying in fiscal 1995, accounted for a
significant portion of our North American aftermarket sales (approximately $82
million, $86 million, and $94 million in fiscal 1997, 1998 and 1999,
respectively). Our aggressive pricing to obtain the Sears business resulted in
prices to them about one-third less than our average sales prices on other North
American aftermarket sales. In addition, our selling and distribution costs
were greater for Sears than our other major customers. After extensive
discussions in fiscal 1999, we terminated our supply relationship with Sears.
Acquisition of DETA. We purchased DETA, a German battery manufacturer, in
September 1997 for approximately $34 million, plus approximately $64.6 million
of assumed debt. Accordingly, DETA's results of operations were included for
seven months of fiscal 1998 and all of fiscal 1999. DETA's sales in fiscal 1999
were $222.0 million compared to $124.0 million for fiscal 1998.
23
Write downs of non-core and excess assets. In fiscal 1999, our earnings
were reduced by $48.0 million as a result of charges for certain non-core assets
which we decided to sell and the closure of certain facilities.
Results of Operations
Year Ended March 31, 1999 Compared with Year Ended March 31, 1998
Net Sales. Net sales increased $101.2 million or 4.4% to $2,374.3 million
as compared to $2,273.1 million in fiscal 1998. The increase was primarily
attributable to the following factors:
. The inclusion of DETA (a German industrial and automotive battery
manufacturer) acquired on September 1, 1997 for 12 months of fiscal 1999
versus 7 months of fiscal 1998 ($75.5 million).
. Higher automotive battery volumes in North America of 5.2% ($40.0 million)
offset by higher sales deductions of $11.7 million.
Along with a full year of DETA sales, European sales were also favorably
impacted by exchange rates ($17.8 million) and slightly higher automotive unit
volume. These increases were partially offset by unfavorable automotive battery
pricing/mix in Europe ($6.2 million), lower industrial sales (excluding the full
year effect of DETA) of $8.9 million and a reduction in other European sales
($10.3 million). Industrial battery sales (included above) for fiscal 1999 were
$730.7 million for fiscal 1999 versus $691.4 million in 1998.
Gross Profit. Gross profit for fiscal 1999 decreased $46.4 million or 7.7%
to $556.3 million. The decrease in gross profit is largely a result of the items
discussed above and the following:
. A $44.3 million charge related to write-downs associated with exiting non-
core business activities and the closure of certain facilities,
. A $6.6 million loss on lead hedging contracts in North America,
. A $6.1 million charge for an adverse appellate court ruling in a patent
infringement lawsuit,
. A $3.7 million charge for the write-off of inventory and equipment related
to an abandoned project and
. A $2.1 million charge for the write-off of unsaleable inventory specified
for the Russian market.
These decreases were partially offset by reduced manufacturing costs,
particularly in Europe, along with the impact of sales volume increases
mentioned above and a greater emphasis on sales of higher profit margin
batteries.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $60.2 million or 13.0% to $524.4 million. The
impact of including DETA for 12 months in fiscal 1999 versus only 7 months in
fiscal 1998 resulted in approximately $19.3 million of the increase. Also
contributing to this increase was:
. Charges of $8.8 million related to specific legal expenses, including
settlement of the Florida Attorney General investigation.
. A $8.5 million charge for increased bad debt reserves primarily related to
North American
24
customers who have filed for bankruptcy,
. A $7.1 million charge related to separation packages of 25 executives and
additional retirement charges,
. A $4.8 million charge for uncollectable receivables from sales in Russia,
. The unfavorable impact of foreign exchange rates ($3.9 million) and
. A $2.4 million charge relating to write-downs associated with existing non-
core buisness activities.
Goodwill amortization increased $3.1 million or 18.3% to $20.0 million from
$16.9 million in 1998, resulting primarily from the write-off of goodwill
associated with the closure of a smelter operation and the write-off of impaired
goodwill from certain branch acquisitions of $2.4 million.
Operating Income. Operating income decreased $106.6 million as a result of
the matters discussed above.
Interest Expense. Interest expense decreased $0.6 million or 0.6% to
$111.7 million versus $112.3 million in 1998 as a result of lower rates achieved
through debt restructuring completed in the third and fourth quarters of fiscal
year 1998.
Other (Income) Expense, net. Other (income) expense, net in 1999 was $28.9
million versus ($5.9) million in 1998 for a change of $34.8 million.
Contributing to this change was:
. Currency transaction losses in 1999 of $8.6 million versus currency
transaction gains of $6.8 million in 1998,
. A $6.0 million charge in 1999 recorded for an amendment fee related to
interest rate swap agreements and
. Additionally, fiscal 1998 included a $5.6 million gain from an involuntary
conversion due to a fire.
Income Tax Provision. Income tax expense increased $9.5 million to $23.0
million despite the $140.7 million reduction in pre-tax earnings. This increase
relates principally to the Company's inability to further tax benefit its U.S.
and certain European tax losses.
Net Income/Loss. The net loss increased from $9.8 million in fiscal 1998
to $129.9 million in fiscal 1999 primarily as a result of the matters discussed
above offset by a $28.2 million reduction in its extraordinary loss relating to
the early retirement of debt.
Year Ended March 31, 1998 Compared with Year Ended March 31, 1997
Net Sales. Net sales decreased 2.6% ($60.1 million) to $2,273.1 million in
fiscal 1998 from $2,333.2 million in fiscal 1997. The decrease was principally
attributable to the impact of changes in foreign exchange rates ($171.4 million)
and the fiscal 1997 divestiture of Evanite ($27.3 million) offset by the fiscal
1998 acquisition of DETA ($123.5 million). Industrial battery sales (included
above) for fiscal year 1998 were $691.4 versus $631.1 million in fiscal 1997.
Gross Profit. Although sales decreased 2.6% in fiscal 1998 as compared to
fiscal 1997, gross profit increased $7.4 million in fiscal 1998 versus 1997. The
gross profit margin
25
was 26.5% in fiscal 1998 versus 25.5% in fiscal 1997. The increase in gross
profit is largely the result of:
. the acquisition of DETA in fiscal 1998 ($34.9 million),
. manufacturing cost reductions related to the continuing European
rationalization/consolidation process and
. the favorable effects of certain environmental developments during fiscal
1998.
These favorable items were offset in part by the effects of weaker European
currencies ($52.4 million) and the fiscal 1997 divestiture of Evanite which
contributed $5.7 million of gross profit in fiscal 1997. The gross profit was
also favorably affected by the higher gross margins (28.3%) of the DETA
acquisition and product mix, including the higher margin Exide NASCAR Select
products.
Selling, Marketing and Advertising Expenses. Selling, marketing and
advertising expenses increased $21.6 million or 7.4% largely due to the
acquisition of DETA ($17.6 million), higher U.S. advertising costs for the
launch of the Exide NASCAR Select line of products and higher provisions ($2.4
million) for accounts receivable losses primarily as a result of the bankruptcy
filings by certain major U.S. retailers mostly during the fourth fiscal quarter.
Offsetting these increases were the effects of weaker currencies ($24.1
million), the 1997 Evanite divestiture ($0.6 million) and savings from headcount
reductions in Europe resulting from the rationalization/consolidation.
General and Administrative Expenses. General and administrative expenses
decreased $10.3 million or 7% in fiscal 1998 versus 1997 due to the effects of
weaker currencies ($10.4 million), the 1997 Evanite divestiture ($3.0 million)
and savings from headcount reductions in Europe resulting from
rationalization/consolidation offset by the increase due to DETA ($10.8
million). Goodwill amortization decreased slightly as a result of the weakening
of European currencies offset by the increased amortization resulting from the
DETA acquisition.
Operating Income. Operating income decreased $3.0 million, or 2.1%, as a
result of the matters discussed above.
Interest Expense. Interest expense decreased $6.5 million, or 5.5%,
primarily due to the effect of changes in foreign exchange rates ($5.5 million)
and to the lower rates related to the refinancing of debt in fiscal 1998, offset
by the increased expense for the borrowing related to the acquisition of DETA.
Other Income. Other income, net was $5.9 million for fiscal 1998 versus
$12.4 million for fiscal 1997. The $6.5 million decrease principally relates to
the fiscal 1997 gain on sale of Evanite ($8.3 million) and increased losses on
the sales of accounts receivable and associated fees in Europe in fiscal 1998
($7.6 million). Offsetting this decrease was a gain from an involuntary
conversion due to a fire in fiscal 1998 ($5.6 million).
Net Income. Net income decreased $26.0 million to a loss of $9.8 million
in fiscal 1998, primarily as a result of a $28.5 million extraordinary loss (net
of income tax benefit of $3.7 million) related to the early retirement of debt.
26
Seasonality and Weather
We sell most of our automotive batteries during the fall and early winter
(our second and third fiscal quarters). Retailers buy automotive batteries
during these periods so they will have enough inventory when cold weather
strikes. In addition, many of our industrial battery customers in Europe do not
place their battery orders until the end of the calendar year. The seasonality
of our business increases our working capital requirements.
Demand for automotive batteries is significantly affected by the weather.
Unusually cold winters or hot summers accelerate battery failure and increase
demand for automotive replacement batteries. Mild winters and cool summers have
the opposite effect. As a result, if our sales are reduced by an unusually warm
winter or cool summer, it is not possible for us to recover these sales in later
periods. Further, if our sales are adversely affected by the weather, we cannot
make offsetting cost reductions to protect our gross margins because a large
portion of our manufacturing and distribution costs are fixed. We have a number
of products, such as marine batteries and lawn and garden tractor batteries that
tend to offset this seasonality somewhat.
Liquidity and Capital Resources
Our liquidity requirements arise primarily from the funding of seasonal
working capital needs, obligations on our indebtedness and capital expenditures.
Historically, we have met these liquidity requirements through operating cash
flows, borrowed funds and the proceeds of sales of accounts receivable and sale
leaseback transactions. We have a U.S. receivables purchase agreement and a
European receivables purchase agreement under which the other parties have
committed (subject to certain exceptions) to purchase selected accounts
receivable from us, up to a maximum commitment of $75.0 million and $175.0
million, respectively. Our greatest cash demands from operations occur during
the months of June through October. We believe we will be able to meet our
requirements for liquidity with cash generated from operations, reduced working
capital requirements, borrowings under the revolving credit portion of our
credit agreement and the proceeds from sales of accounts receivable under our
securitization facilities and/or sales of non-core assets.
Our cash flow from operating activities was $78.1 million, $167.5 million
(including $134.2 million of receivables sales) and $77.2 million (including
$29.3 million of receivables sales) in fiscal 1997, 1998 and 1999, respectively.
Because of the seasonality of our business, more cash is typically generated in
our third and fourth fiscal quarters than the first and second quarters. In the
next several years, we will evaluate the cost and benefit of closing additional
plants in Europe which would necessitate cash payments for severance and other
closure costs. We are reviewing all aspects of our operations and are planning
to divest certain other non-core operations in order to generate cash.
Exide's capital expenditures were $84.2 million, $87.3 million and $76.2
million in fiscal 1997, 1998 and 1999, respectively. The credit agreement
restricts the amount of capital expenditures which we can make, but we believe
that such restrictions will not adversely effect our capital expenditure
programs.
As of March 31, 1999, we had $448.1 million outstanding and $146.6 million
available under our credit agreement after consideration of $24.0 million of
outstanding letters of credit. Increases in interest rates on such obligations
could adversely affect our results of operations and financial condition. The
credit agreement is fully secured by guarantees of our European
27
subsidiaries and by most of our fixed assets, inventory and receivables. We have
an interest rate collar agreement which reduces the impact of changes in
interest rates on a portion of our floating rate debt. The collar agreement
effectively limits the PIBOR (Paris Interbank Offered Rate) base interest rate
on 593.1 million French francs (U.S. $100 million) of borrowings to no more than
6.6% and no less than 3.5% through December 23, 2000. We have two currency and
interest rate swap agreements which effectively convert $175 million of
borrowings under the credit agreement into 778.8 million French francs
(U.S. $133 million) and 25.2 million British pounds sterling (U.S. $42 million).
We receive LIBOR (London Interbank Offered Rate) and pay PIBOR and pounds
sterling LIBOR.
The Company has an 81.5% investment in a European joint venture. The other
party to the transaction has the right to require the Company to purchase its
18.5% interest in the joint venture at any time after September, 1999 for a
defined multiple of earnings of the joint venture.
As of March 31, 1999, we have significant net operating loss carryforwards
in Europe and in the United States which are available, subject to certain
restrictions, to offset future U.S. and certain European countries taxable
income. ( See Note 9 to our Consolidated Financial Statements).
The Company's net deferred tax assets include certain amounts of net
operating loss carryforwards principally in the U.S., which management believes
are realizable through a combination of anticipated tax planning strategies and
forecasted future taxable income. In fiscal 1997 and fiscal 1998, the Company
implemented certain tax planning strategies which utilized a portion of such
deferred tax assets. Failure to achieve forecasted future taxable income might
affect the ultimate realization of any remaining recorded net deferred tax
assets.
Effects of Inflation
Inflation has not had a material impact on our operations during the past
three years. We generally have been able to offset the effects of inflation
with price increases, cost-reduction programs and operating efficiencies.
Future Environmental Developments
We are subject to extensive federal, state, local and foreign
environmental, health and safety laws and regulations. Future environmental,
health and safety standards may be more stringent. We anticipate that such
potential standards could cause an increase in our capital expenditures and
operating costs. Unless and until the standards are adopted it is not possible
to estimate these costs with any certainty or to predict whether they will have
a material effect on our financial condition or results of operations. See
"Business--Environment, Health and Safety Matters."
28
Year 2000 Issue
We rely on information technology systems (hardware, operating systems,
software applications) to support many key operations of our business, including
sales order processing, production scheduling, purchasing, distribution,
financial accounting, and others. We have conducted initial assessments of all
systems and have determined that many were not Year 2000 compliant. We believe
all of these systems must be made compliant to ensure no material business
interruption. To date, the majority of our information technology systems have
been made compliant. Additionally, our Year 2000 plans include the assessment
and related remediation of any non-information technology systems that may
incorporate embedded computer chip technology. Some of our manufacturing
equipment contains such technology.
We have identified the systems/equipment that need remediation, as well as
the actions, resources needed, and the time frames to perform the remediation.
Compliance assessments are ongoing and we make modifications to individual
project plans as needed. We are monitoring our overall remediation status on a
regular basis, including periodic reporting to our audit committee.
We have made significant progress in our Year 2000 remediation efforts.
Costs for North American Year 2000 remediation are approximately $1.5 million,
of which $0.9 million has been expended to date.
We expect to achieve Year 2000 compliance in Europe for information
technology and non-information technology systems by September 30, 1999. The
estimated costs for our European Year 2000 remediation efforts is approximately
$3.5 million of which $1.4 million has been expended to date.
In addition to our own Year 2000 compliance, we believe that our business
could potentially be adversely impacted if our key suppliers do not achieve
timely and successful Year 2000 compliance with their systems and equipment. We
have been in contact with our key business partners regarding their Year 2000
readiness. Our vertically integrated structure, particularly in North America
and to a lesser extent in Europe, might mitigate the adverse impact of third
parties' Year 2000 issues on us.
We are implementing our Year 2000 program in the following seven phases,
some of which have been completed, while others are being conducted
concurrently:
Inventory. This phase involved the identification and validation of an
inventory of all systems that could be affected by the Year 2000 issue. The
inventory phase has been completed.
Assessment. This phase involved the initial testing and code scanning to
determine whether remediation is needed and to develop a remediation plan, if
applicable. The assessment of business information systems for both North
America and Europe was completed by April 1998. The assessment of
infrastructure items and embedded systems was substantially completed by June
1998 for North America and by December 1998 for Europe.
Remediation. This phase involves the design and execution of a remediation
plan. We have substantially completed the remediation of our critical systems
and are on track to meet our remediation targets.
29
System Test. This phase involves the testing of remediation items to ensure
that they function normally after being returned to their original operating
environment. It is closely related to the remediation phase and follows
essentially the same schedule.
Implementation. This phase involves the return of items to normal
operation after satisfactory performance in system testing. It follows
essentially the same schedule as remediation and system testing.
Readiness Testing. This phase involves the planning for and testing of
integrated systems in a Year 2000-ready environment, including ongoing auditing
and follow-up. This phase commenced in the second quarter of 1999 and is
expected to be a major focus of the Year 2000 program throughout 1999.
Contingency Planning. This phase involves the development and execution of
plans that narrow the focus on specific areas of significant concern and
concentrate resources to address them. We currently believe that the most
reasonably likely worst case scenario is that there will be some localized
disruptions of systems that will affect individual business processes,
facilities or suppliers for a short time rather than systemic or long-term
problems affecting our business operation as a whole. Our contingency planning
will continue to review systems and other aspects of our business throughout
1999. Because there is uncertainty as to which activities may be affected and
the exact nature of the problems that may arise, our contingency planning will
focus on minimizing the scope and duration of any disruptions by having
sufficient personnel and other resources in place to permit a flexible, real-
time response to specific problems as they may arise at individual locations
around the world. Specific contingency plans and resources for permitting the
necessary flexibility of response have been identified and are being put into
place.
The cost of our Year 2000 program is being expensed as incurred with the
exception of capitalizable replacement hardware. Total Year 2000 remediation
spending is estimated at approximately $5.0 million (of which $2.3 million has
been incurred as of March 31, 1999) and is not expected to be material to our
operation, liquidity or capital resources.
We do not currently anticipate that we will experience a significant
disruption of our business as a result of the Year 2000 issue. However, there
is still uncertainty about the broader scope of the Year 2000 issue as it may
affect Exide and third parties, including our customers, that are critical to
our operations. For example, lack of readiness by electrical and water
utilities, financial institutions, governmental agencies or other providers of
general infrastructure could, in some geographic areas, pose significant
impediments to our ability to carry on our normal operations in the area or
areas so affected. In the event that we are unable to complete our remedial
actions as described above and are unable to implement adequate contingency
plans in the event that problems are encountered, there could be a material
adverse effect on our business.
Conversion to the Euro Currency
On January 1, 1999, certain member countries of the European Union
established fixed conversion rates between their existing currencies and a
common currency, the Euro. We conduct significant business in these member
countries. The transition period for the introduction of the Euro is between
January 1, 1999 and June 30, 2002. We are addressing the issues involved with
the introduction of the Euro. The more important issues facing us include:
30
. converting information technology systems,
. reassessing currency risk,
. negotiating and amending contracts, and
. processing tax and accounting records.
Based upon progress to date, we believe that use of the Euro has not and
will not have a significant impact on the manner in which we conduct our
business affairs and process our business and accounting records. Accordingly,
conversion to the Euro has not and is not expected to have a material effect on
our financial condition or results of operations.
Quantitative and Qualitative Disclosures About Market Risks
We are exposed to market risks from changes in foreign currency exchange
rates, certain commodity prices and interest rates. In order to manage these
risks, we participate in a risk management program, which includes entering into
a variety of foreign exchange and commodity forward contracts and options.
A discussion of our accounting policies for derivative instruments is
provided in Notes 1 and 3 to the financial statements. We maintain risk
management control systems to monitor foreign exchange, commodity and interest
rate risks, and related hedge positions. Positions are monitored using a variety
of analytical techniques including market value, sensitivity analysis, and
value-at-risk models. The following analyses are based on sensitivity analysis
tests which assume instantaneous, parallel shift in exchange rates and commodity
prices. For options and instruments with non-linear returns, appropriate models
are utilized to determine the impact of sensitivity shifts.
Foreign Currency Exchange Rate Risk
We have foreign currency exposures related to buying, selling and financing
in currencies other than the local currencies in which we operate. More
specifically, we are exposed to foreign currency risk related to uncertainty to
which future earnings or assets and liability values are exposed due to
operating cash flows and various financial instruments that are denominated in
foreign currencies. Currently, our most significant foreign currency exposures
relate to France, Italy, United Kingdom, Spain and Germany.
As of March 31, 1999, the net fair value asset of financial instruments
with exposure to foreign currency risk was about $4.9 million. The potential
loss in fair value liability for such financial instruments from a hypothetical
10% adverse change in quoted foreign currency exchange rates would be about
$12.0 million. The model assumes a parallel shift in foreign currency exchange
rates; however, exchange rates rarely move in the same direction. The
assumption that exchange rates change in a parallel fashion may overstate the
impact of changing exchange rates.
Commodity Price Risk
We enter into commodity forward and option contracts. Such contracts are
executed to offset our exposure to the potential change in prices mainly for
various metals used in the manufacturing of our lead acid batteries. The net
fair value liability of such contracts, excluding
31
the underlying exposures, as of March 31, 1999 was about $19.8 million. The
potential change in the fair value of commodity forward and option contracts,
assuming a 10% change in underlying commodity price, would be about $2.0 million
at March 31, 1999. This amount excludes the offsetting impact of the price risk
inherent in the physical purchase of the underlying commodities.
Interest Rate Risk
We have historically entered into interest rate swaps and other interest
sensitive forward and option contracts. Such contracts are executed to offset
our exposure to interest rate risk on our debt.
Certain Hedging Activities
On May 11, 1998, we entered into an interest rate bond swap agreement for
$4.4 million (principal amount) of our 10% senior notes. Under the agreement,
we paid LIBOR plus 1.75% to a counterparty and received from the counterparty
the fixed coupon rate payments we made. At the end of the agreement, the
counterparty was guaranteed repayment of its open market purchase price of the
notes, which exceeded face value by $233,000. This debt modification was
accounted for as an extinguishment of debt, and the related write-off of
unamortized deferred financing costs, along with the premium paid by the
counterparty, resulted in an extraordinary loss of $301,000.
In October 1998, we paid an amendment fee of $6.0 million to the
counterparty to the interest rate swap agreements related to $45.1 million of
our 10% senior notes due 2005. This fee was recorded as other expense in the
third fiscal quarter of 1999. In November 1998, we terminated the $45.1 million
interest rate swap agreements. In connection with such termination, we made a
cash payment of $4.6 million, of which $2.5 million was recorded as a bond
discount. In January 1999, we amended certain provisions (effective December 27,
1998) of our existing credit agreement. After consideration of the amendments,
we were in compliance with all covenants. As of March 31, 1999, the net fair
value of the foreign currency and interest rate protection agreements was $3.9
million. These agreements effectively converted $175.0 million of debt into 788
million French francs (U.S. $133.0 million) and 25.2 million pounds sterling
(U.S. $42.0 million).
Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
requires recognition of all derivative financial instruments as either assets or
liabilities in consolidated balance sheets at fair value and determines the
method(s) of gain/loss recognition. We are required to adopt SFAS No. 133 with
our fiscal year ending March 31, 2002 and are currently assessing the effect
that it may have on our consolidated financial statements.
SFAS No. 133 provides that, if certain conditions are met, a derivative may
be specifically designated as:
. a hedge of the exposure to changes in the fair value of a recognized asset
or liability or an unrecognized firm commitment (a "fair value hedge");
32
. a hedge of the exposure to variable cash flows of a forecasted transaction
(a "cash flow hedge"); or
. a hedge of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale security
or a foreign-currency-denominated forecasted transaction (a "foreign
currency hedge").
Under SFAS No. 133, the accounting for changes in the fair value of a derivative
depends on its intended use and designation. For a fair value hedge, the gain or
loss is recognized in earnings in the period of change together with the
offsetting loss or gain on the hedged item. For a cash flow hedge, the effective
portion of the derivative's gain or loss is initially reported as a component of
other comprehensive income and subsequently reclassified into earnings when the
forecasted transaction affects earnings. For a foreign currency hedge, the gain
or loss is reported in other comprehensive income as part of the cumulative
translation adjustment. For all other items not designated as hedging
instruments, the gain or loss is recognized in earnings in the period of change.
Item 8. Financial Statements and Supplementary Data
See Index to Consolidated Financial Statements and Schedule at page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
33
PART III
Item 10. Directors and Executive Officers of the Registrant
The following sets forth certain biographical data regarding our current
directors and executive officers:
Robert A. Lutz, 67, has served as Chairman, President and Chief Executive
Officer of Exide since December 1998. Mr. Lutz retired in July 1998 as Vice
Chairman of Chrysler. Previously, Mr. Lutz was Chrysler's President and Chief
Operating Officer responsible for its car and truck operations worldwide. Prior
to joining Chrysler, Mr. Lutz held senior executive and operating positions with
Ford, GM and BMW. Mr. Lutz is also a director of Northrop Grumman, ASCOM, a
Swiss telecommunications and electronics company, and Silicon Graphics.
Santiago Ramirez, 47, has been the chief executive officer of Exide Holding
Europe, our principal European subsidiary, since July 1995. He joined Exide in
1994 when we acquired Sociedad Espanola del Acumulador Tudor, S.A. ("Tudor"), a
European lead acid battery manufacturer. At the time we acquired Tudor, Mr.
Ramirez was its chief executive officer.
James M. Diasio, 42, has been our Executive Vice President and Chief
Financial Officer since October 1998. He returned to Exide after serving, since
October 1997, as the Vice President, Finance at American Meter Company, a
worldwide supplier of gas meters, regulators, instrumentation and controls. Mr.
Diasio previously served as Exide's Vice President and Controller from August
1996 to September 1997 and Controller from April 1994 to August 1996.
Ronald J. Gardhouse, 52, has been Executive Vice President and Chief
Financial Officer Exide Holding Europe since May 1999, following his retirement
from a 24-year career with Chrysler. During his tenure at Chrylser, Mr.
Gardhouse served as Assistant Treasurer from 1993 to 1996 and President, Asia
Pacific Operations from July 1996 to April 1999.
Jack J. Sosiak, 60, has been Exide's senior executive in charge of human
resources since 1983, most recently as Executive Vice President since February
1995.
John R. Van Zile, 47, has been our Vice President and General Counsel since
October 1996. Prior to joining Exide, Mr. Van Zile was Assistant General
Counsel/Assistant Secretary of Coltec Industries, a manufacturer of commercial,
industrial and aerospace products, a position he held since January 1985.
Francois J. Castaing, 54, has served as a director of Exide since March
1999. Mr. Castaing is President of Castaing & Associates, an automotive
industry consulting firm. From 1987 until his retirement in 1997, Mr. Castaing
was an executive with Chrysler, most recently an Executive Vice President,