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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal quarter ended September 30, 2002
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 1-11263
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EXIDE TECHNOLOGIES
(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 Number)
210 Carnegie Center, Suite 500
Princeton, New Jersey 08540
(Address of principal executive offices) (Zip Code)
(609) 627-7200
(Registrant's telephone number, including area code)
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Indicate by a check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
As of November 12, 2002, 27,383,084 shares of common stock were outstanding.
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EXIDE TECHNOLOGIES AND SUBSIDIARIES
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)................................ 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE
AND SIX MONTHS ENDED SEPTEMBER 30, 2002 AND SEPTEMBER 30, 2001 3
CONDENSED CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2002 AND
MARCH 31, 2002................................................ 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX
MONTHS ENDED SEPTEMBER 30, 2002 AND SEPTEMBER 30, 2001........ 5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS............ 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS......................................... 24
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS..... 33
ITEM 4. CONTROLS AND PROCEDURES......................................... 33
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS............................................... 36
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS....................... 38
ITEM 3. DEFAULTS UPON SENIOR SECURITIES................................. 38
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............. 38
ITEM 5. OTHER INFORMATION............................................... 38
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................ 38
SIGNATURES.............................................................. 39
2
EXIDE TECHNOLOGIES AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per-share data)
For the Three Months Ended For the Six Months Ended
-------------------------- --------------------------
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
------------- ------------- ------------- -------------
NET SALES.......................................... $579,363 $624,245 $1,134,352 $1,255,482
COST OF SALES...................................... 451,406 495,255 896,065 987,631
-------- -------- ---------- ----------
Gross profit................................ 127,957 128,990 238,287 267,851
-------- -------- ---------- ----------
OPERATING EXPENSES:
Selling, marketing and advertising.............. 63,828 65,823 125,880 139,783
General and administrative...................... 47,252 36,890 92,345 77,626
Restructuring and other (Note 11)............... 3,997 11,058 10,285 11,058
Purchased research and development.............. -- (8,185) -- (8,185)
Goodwill impairment charge (Note 7)............. -- -- 37,000 --
Other (income) expense, net..................... (1,690) 17,126 (6,893) 18,609
-------- -------- ---------- ----------
113,387 122,712 258,617 238,891
-------- -------- ---------- ----------
Operating income (loss)..................... 14,570 6,278 (20,330) 28,960
-------- -------- ---------- ----------
INTEREST EXPENSE, net (Note 13).................... 24,343 33,570 51,958 67,192
REORGANIZATION ITEMS, net (Note 5)................. 8,020 -- 20,118 --
-------- -------- ---------- ----------
Loss before income taxes, minority interest and
cumulative effect of change in accounting
principle..................................... (17,793) (27,292) (92,406) (38,232)
INCOME TAX PROVISION............................... 3,934 4,777 5,982 729
-------- -------- ---------- ----------
Loss before minority interest and cumulative
effect of change in accounting principle...... (21,727) (32,069) (98,388) (38,961)
MINORITY INTEREST.................................. (88) 451 (109) 282
-------- -------- ---------- ----------
Net loss before cumulative effect of change in
accounting principle.......................... (21,639) (32,520) (98,279) (39,243)
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE............................. -- -- -- (496)
-------- -------- ---------- ----------
Net loss.................................... $(21,639) $(32,520) $ (98,279) $ (39,739)
======== ======== ========== ==========
NET LOSS PER SHARE, BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE:
Basic and Diluted............................... $ (0.79) $ (1.20) $ (3.59) $ (1.50)
======== ======== ========== ==========
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE PER SHARE................... $ -- $ -- $ -- $ (0.02)
======== ======== ========== ==========
NET LOSS PER SHARE (Note 14):
Basic and Diluted............................... $ (0.79) $ (1.20) $ (3.59) $ (1.52)
======== ======== ========== ==========
WEIGHTED AVERAGE SHARES:
Basic and Diluted............................... 27,383 27,022 27,383 26,200
======== ======== ========== ==========
The accompanying notes are an integral part of these statements.
3
EXIDE TECHNOLOGIES AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except per-share data)
September 30, March 31,
2002 2002
------------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................................................. $ 50,078 $ 31,703
Receivables, net of allowance for doubtful accounts of $62,040 and $53,203, respectively
(Note 12)................................................................................. 584,516 304,797
Inventories (Note 8)....................................................................... 422,133 404,667
Prepaid expenses and other................................................................. 48,275 19,302
Deferred income taxes...................................................................... 27,619 28,900
---------- ----------
Total current assets.................................................................... 1,132,621 789,369
---------- ----------
PROPERTY, PLANT AND EQUIPMENT, Net............................................................. 528,327 530,220
---------- ----------
OTHER ASSETS:
Goodwill, net (Note 7)..................................................................... 426,278 416,926
Other intangibles, net (Note 7)............................................................ 48,120 48,680
Investments in affiliates.................................................................. 5,750 4,821
Deferred financing costs, net.............................................................. 6,555 12,610
Deferred income taxes...................................................................... 68,285 69,819
Other...................................................................................... 50,354 43,423
---------- ----------
605,342 596,279
---------- ----------
Total assets............................................................................ $2,266,290 $1,915,868
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Short-term borrowings (Note 12)............................................................ $ 11,177 $ 10,999
Current maturities of long-term debt (Note 12)............................................. 38,349 1,075,925
Accounts payable........................................................................... 199,104 290,378
Accrued expenses........................................................................... 234,999 363,933
---------- ----------
Total current liabilities............................................................... 483,629 1,741,235
LONG-TERM DEBT (Note 12)....................................................................... 653,879 326,348
NONCURRENT RETIREMENT OBLIGATIONS.............................................................. 126,369 176,675
OTHER NONCURRENT LIABILITIES................................................................... 32,454 209,336
LIABILITIES SUBJECT TO COMPROMISE (Note 6)..................................................... 1,577,606 --
---------- ----------
Total liabilities....................................................................... 2,873,937 2,453,594
---------- ----------
COMMITMENTS AND CONTINGENCIES (Notes 9 and 10)
MINORITY INTEREST.............................................................................. 19,881 18,016
---------- ----------
STOCKHOLDERS' DEFICIT
Common stock, $.01 par value 100,000 shares authorized; 27,383 shares issued and
outstanding............................................................................... 274 274
Additional paid-in capital................................................................. 570,589 570,589
Accumulated deficit........................................................................ (889,398) (791,119)
Notes receivable--stock award plan......................................................... (665) (665)
Accumulated other comprehensive loss (Note 4).............................................. (308,328) (334,821)
---------- ----------
Total stockholders' deficit............................................................. (627,528) (555,742)
---------- ----------
Total liabilities and stockholders' deficit............................................. $2,266,290 $1,915,868
========== ==========
The accompanying notes are an integral part of these statements.
4
EXIDE TECHNOLOGIES AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
For the Six Months Ended
--------------------------
September 30, September 30,
2002 2001
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss....................................................................... $ (98,279) $ (39,739)
Adjustments to reconcile net loss to net cash used in operating activities--
Depreciation and amortization............................................... 44,759 51,107
Net loss (gain) on asset sales.............................................. 82 (1,391)
Deferred income taxes....................................................... 736 9,070
Amortization of original issue discount on notes............................ 428 5,742
Provision for doubtful accounts............................................. 3,224 4,304
Non-cash provision for restructuring........................................ 3,013 --
Goodwill impairment charge.................................................. 37,000 --
Minority interest........................................................... (109) 269
Amortization of deferred financing costs.................................... 8,178 5,278
Purchased research and development.......................................... -- (8,185)
Debt-to-equity conversion - non-cash charge................................. -- 13,873
Net change from. sales of receivables
European securitization.................................................. (124,793) --
U.S. securitization...................................................... (117,455) --
Other, net............................................................... (19,475) (6,406)
Changes in assets and liabilities, excluding effects of acquisitions
and divestitures...............................................................
Receivables.................................................................... 243 51,590
Inventories.................................................................... 7,379 9,342
Prepaid expenses and other..................................................... (13,902) 137
Accounts payable............................................................... (12,631) (32,583)
Accrued expenses............................................................... 40,563 (62,198)
Noncurrent liabilities......................................................... (12,654) (8,872)
Other, net..................................................................... (7,976) 693
--------- ---------
Net cash used in operating activities................................. (261,669) (7,969)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
GNB acquisition................................................................ -- (965)
Capital expenditures........................................................... (16,616) (43,570)
Proceeds from sales of assets.................................................. 1,096 4,833
--------- ---------
Net cash used in investing activities................................. (15,520) (39,702)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in short-term borrowings, net.............................. (286) 8,782
Borrowings under Senior Secured Credit Facilities Agreement.................... 6,191 437,648
Repayments under Senior Secured Credit Facilities Agreement.................... (2,727) (395,908)
Borrowings under DIP Credit Facility........................................... 466,666 --
Repayments under DIP Credit Facility........................................... (271,533)
European asset securitization.................................................. 119,346 --
Decrease in other debt......................................................... (5,957) (5,053)
Financing costs and other...................................................... (20,772) (4,119)
Dividends paid................................................................. -- (1,051)
--------- ---------
Net cash provided by financing activities............................. 290,928 40,299
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS....................... 4,636 671
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................... 18,375 (6,701)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD..................................... 31,703 23,072
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD........................................... $ 50,078 $ 16,371
========= =========
The accompanying notes are an integral part of these statements.
5
EXIDE TECHNOLOGIES AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(Dollars in thousands, except per-share data)
(Unaudited)
(1) BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements include the
accounts of Exide Technologies (referred together with its subsidiaries, unless
the context requires otherwise, as "Exide" or the "Company") and all of its
majority-owned subsidiaries. The accompanying financial statements are
presented in accordance with the requirements of Form 10-Q and consequently do
not include all of the disclosures normally required by generally accepted
accounting principles or those normally made in the Company's Annual Report on
Form 10-K. Accordingly, the reader of this Form 10-Q may wish to refer to the
Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2002
for further information. The financial information contained herein is
unaudited.
The financial information has been prepared in accordance with the Company's
customary accounting practices. In the opinion of management, the accompanying
consolidated financial information includes all adjustments of a normal
recurring nature necessary for a fair statement of the results of operations
and financial position for the periods presented.
The accompanying interim unaudited condensed consolidated financial
statements as of September 30, 2002 and for the three and six months then ended
have been prepared in accordance with Statement of Position 90-7 ("SOP 90-7"),
"Financial Reporting by Entities in Reorganization under the Bankruptcy Code"
(see Note 2). Accordingly, all pre-petition liabilities subject to compromise
have been segregated in the unaudited condensed consolidated balance sheets and
classified as Liabilities Subject To Compromise, at the estimated amount of
allowable claims. Liabilities not subject to compromise are separately
classified. Additional pre-petition claims (liabilities subject to compromise)
may arise due to the rejection of executory contracts or unexpired leases, or
as a result of the allowance of contingent or disputed claims. Revenues,
expenses, realized gains and losses, and provision for losses resulting from
the reorganization are reported separately as Reorganization items, net, in the
unaudited condensed consolidated statements of operations. However, because the
Chapter 11 filing occurred subsequent to March 31, 2002, the accompanying
fiscal 2002 unaudited condensed consolidated financial statements have not been
prepared in accordance with SOP 90-7, and may lack comparability to that
extent. These interim unaudited condensed consolidated financial statements
have been prepared on a going concern basis, which assumes continuity of
operations and realization of assets and satisfaction of liabilities in the
ordinary course of business.
The ability of the Company to continue as a going concern is predicated,
among other things, on the confirmation of a reorganization plan, compliance
with the provisions of the debtor-in-possession financing facility ("DIP Credit
Facility"), the ability of the Company to generate the required cash flows from
operations and, where necessary, obtaining financing sources sufficient to
satisfy future obligations. As a result of the Chapter 11 filing and
consideration of various strategic alternatives, including possible asset
sales, the Company expects that any reorganization plan will likely result in
material changes to the carrying amount of assets and liabilities in the
unaudited condensed consolidated financial statements.
In the first quarter of fiscal 2002, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities", as amended by SFAS 138 (collectively,
"SFAS 133"). SFAS 133 establishes accounting and reporting standards for
derivative instruments and hedging activities. The adoption of SFAS 133
resulted in an income statement charge, reflected as a Cumulative effect of
change in accounting principle, of $496, or $0.02 per basic and diluted share
in the first quarter of fiscal 2002. Also, a cumulative effect adjustment
reduced Accumulated other comprehensive loss by $541 in the same period.
6
EXIDE TECHNOLOGIES AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Certain reclassifications of prior period financial statements have been
made to conform to the current interim period presentation but not to conform
with SOP 90-7.
(2) PROCEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
On April 15, 2002 ("Petition Date"), Exide and three of its wholly-owned,
U.S. subsidiaries (RBD Liquidation, LLC, Exide Delaware, LLC and Exide
Illinois, Inc.; together with Exide collectively, the "Debtors") filed
voluntary petitions for reorganization under Chapter 11 of the federal
bankruptcy laws ("Bankruptcy Code" or "Chapter 11") in the United States
Bankruptcy Court for the District of Delaware ("Bankruptcy Court") under case
numbers 02-11125 through 02-11128 (jointly administered for procedural purposes
before the Bankruptcy Court under case number 02-11125KJC).
The Debtors are currently operating their business as debtors-in-possession
pursuant to the Bankruptcy Code.
The Company decided to file itself and certain of its subsidiaries for
reorganization under Chapter 11 as it offered the most efficient alternative to
restructure its balance sheet and access new working capital while continuing
to operate in the ordinary course of business. The Company has a heavy debt
burden, caused largely by a debt-financed acquisition strategy and the
significant costs of integrating those acquisitions. Other factors leading to
the reorganization included the impact of adverse economic conditions on the
Company's markets, particularly telecommunications, ongoing competitive
pressures and recent capital market volatility. These factors contributed to a
loss of revenues and resulted in significant operating losses and negative cash
flows, severely impacting the Company's financial condition and its ability to
maintain compliance with debt covenants.
As debtors in possession under Chapter 11, the Debtors are authorized to
continue to operate as an ongoing business, but may not engage in transactions
outside the ordinary course of business without the approval of the Bankruptcy
Court. The Company's operations outside of the U.S. are not included in the
Chapter 11 proceedings. However, in connection with the Chapter 11 filing, the
Company entered into a "Standstill and Subordination Agreement" with its
pre-petition Senior Secured Global Credit Facility Lenders, whereby those
lenders have agreed to forbear collection of principal payments on foreign
borrowings under this facility from non-debtor subsidiaries until December
2003, subject to earlier termination upon the occurrence of certain events.
On May 10, 2002, the Company received final Bankruptcy Court approval for
its $250,000 DIP Credit Facility. The DIP Credit Facility is being used to
supplement cash flows from operations during the reorganization process
including the payment of post-petition ordinary course trade and other
payables, the payment of certain permitted pre-petition claims, working capital
needs, letter of credit requirements and for other general corporate purposes.
Under Section 362 of the Bankruptcy Code, actions to collect pre-petition
indebtedness, as well as most other pending litigation, are stayed. Absent an
order of the Bankruptcy Court, substantially all pre-petition liabilities are
subject to settlement under a plan of reorganization to be approved by the
Bankruptcy Court. Although the Debtors expect to file a reorganization plan
that provides for emergence from bankruptcy as a going concern, there can be no
assurance that a reorganization plan will be proposed by the Debtors or
confirmed by the Bankruptcy Court, or that any such plan will be successfully
implemented.
Under the Bankruptcy Code, the Debtors may also assume or reject executory
contracts, including lease obligations, subject to the approval of the
Bankruptcy Court and certain other conditions. Parties affected by these
rejections may file claims with the Bankruptcy Court in accordance with the
reorganization process. Due to
7
EXIDE TECHNOLOGIES AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the timing of the Chapter 11 proceedings, the Company cannot currently estimate
or anticipate what impact the rejection and subsequent claims of executory
contracts may have on the reorganization process.
On June 14, 2002, the Company filed with the Bankruptcy Court schedules and
statements of financial affairs setting forth, among other things, the assets
and liabilities of the Debtors as shown by our books and records on the
Petition Date, subject to the assumptions contained in certain notes filed in
connection therewith. The Company expects to file amended schedules and
statements of financial affairs by November 30, 2002. The Bankruptcy Code
provides for a claims reconciliation and resolution process, although a bar
date for filing claims has not yet been established. As the ultimate number and
amount of allowed claims is not presently known, and because any settlement
terms of such allowed claims are subject to a confirmed plan of reorganization,
the ultimate distribution with respect to allowed claims is not presently
ascertainable.
The United States Trustee has appointed an unsecured creditors committee.
The official committee and its legal representatives have a right to be heard
on all matters that come before the Bankruptcy Court. The Bankruptcy Court
determined that the United States Trustee should appoint an official committee
of equity holders, which it has done. The U.S. District Court for the District
of Delaware subsequently issued an order directing the U.S. Trustee not to make
such appointment during the pendancy of Exide's appeal of the Bankruptcy
Court's determination.
At this time, it is not possible to predict the effect of the Chapter 11
reorganization process on our business, various creditors and security holders,
or when it may be possible for the Company to emerge from Chapter 11. Our
future results are dependent upon our confirming and implementing, on a timely
basis, a plan of reorganization. The Company believes, however, that under any
reorganization plan, the Company's common stock would likely be substantially,
if not completely, diluted or cancelled as a result of the conversion of debt
to equity or any other compromise of interests. Further, it is also likely that
the Company's 10% senior notes and convertible senior subordinated notes will
suffer substantial impairment.
The ultimate recovery, if any, by creditors, security holders and/or common
shareholders will not be determined until confirmation of a plan or plans of
reorganization. No assurance can be given as to what value, if any, will be
ascribed in the bankruptcy proceedings to each of these constituencies.
Accordingly, Exide urges appropriate caution be exercised with respect to
existing and future investments in any of these securities.
8
EXIDE TECHNOLOGIES AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(3) DEBTORS' FINANCIAL INFORMATION
The unaudited condensed combined financial statements of the Debtors are
presented below. These statements reflect the financial position, results of
operations and cash flows of the combined Debtor subsidiaries, including
certain amounts and activities between Debtors and non-debtor subsidiaries of
the Company which are eliminated in the unaudited condensed consolidated
financial statements. The unaudited condensed combined financial statements of
the Debtors are presented as follows:
DEBTORS' CONDENSED COMBINED STATEMENTS OF OPERATIONS
(Unaudited, in thousands)
For the Period
From
For the Three April 15, 2002
Months Ended Through
September 30, September 30,
2002 2002
------------- --------------
NET SALES......................................... $255,606 $471,454
COST OF SALES..................................... 203,258 378,077
-------- --------
Gross profit............................... 52,348 93,377
-------- --------
OPERATING EXPENSES:
Selling, marketing and advertising............. 25,985 48,055
General and administrative..................... 19,920 37,460
Restructuring and other........................ 2,266 6,878
Other income, net.............................. (644) (1,322)
-------- --------
Operating income........................... 4,821 2,306
-------- --------
INTEREST EXPENSE, net............................. 14,046 26,843
REORGANIZATION ITEMS, net (Note 5)................ 7,907 18,466
-------- --------
Loss before income taxes....................... (17,132) (43,003)
INCOME TAX PROVISION.............................. -- --
-------- --------
NET LOSS.......................................... $(17,132) $(43,003)
======== ========
9
EXIDE TECHNOLOGIES AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DEBTORS' CONDENSED COMBINED BALANCE SHEETS
(Unaudited, in thousands)
September 30, June 30,
2002 2002
------------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................... $ 3,820 $ 4,315
Receivables, net.................................... 158,806 149,937
Intercompany receivables............................ 56,186 41,706
Inventories......................................... 163,351 176,955
Prepaid expenses and other.......................... 25,402 24,464
---------- ----------
Total current assets............................ 407,565 397,377
---------- ----------
PROPERTY, PLANT AND EQUIPMENT, net..................... 258,371 265,149
---------- ----------
OTHER ASSETS:
Goodwill and other intangibles, net................. 40,965 40,965
Investments in affiliates........................... 2,381 2,324
Deferred financing costs, net....................... 6,332 9,558
Intercompany notes receivable....................... 229,467 225,548
Other............................................... 7,843 7,595
---------- ----------
286,988 285,990
---------- ----------
Total assets.................................... $ 952,924 $ 948,516
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable.................................... $ 39,074 $ 59,589
Accrued interest payable............................ 12,449 13,128
Accrued expenses, other............................. 43,128 21,380
---------- ----------
Total current liabilities....................... 94,651 94,097
LONG-TERM DEBT (DIP Facility).......................... 195,133 157,492
NONCURRENT RETIREMENT OBLIGATIONS...................... 5,371 2,204
LIABILITIES SUBJECT TO COMPROMISE...................... 1,577,606 1,597,428
---------- ----------
Total liabilities............................... 1,872,761 1,851,221
STOCKHOLDERS' DEFICIT
Total stockholders' deficit..................... (919,837) (902,705)
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT..... $ 952,924 $ 948,516
========== ==========
10
EXIDE TECHNOLOGIES AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DEBTORS' CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
For the Period From
For the Three April 15, 2002
Months Ended Through
September 30, September 30,
2002 2002
------------- -------------------
CASH RECEIPTS:
Third party receipts................................ $ 253,495 $ 487,468
Borrowings under DIP Credit Facility................ 211,598 466,666
Intercompany loan repayments by non-Debtor entities. 16,085 16,085
--------- ---------
Total cash receipts............................. 481,178 970,219
CASH DISBURSEMENTS:
Supplier payments................................... (89,799) (160,919)
Repurchase of securitized accounts receivable....... -- (117,455)
Financing costs, fees and interest.................. (10,694) (28,119)
Capital expenditures................................ (5,117) (8,448)
Freight and logistics............................... (28,913) (45,622)
Leasing and rental costs............................ (10,805) (17,443)
Payroll and benefits................................ (67,438) (121,597)
Professional / consulting fees...................... (4,562) (9,226)
Taxes............................................... (5,822) (11,613)
Utilities........................................... (13,417) (20,858)
Other disbursements................................. (47,149) (79,281)
Intercompany loans to non-Debtor entities........... (24,000) (79,000)
Repayments under DIP Credit Facility................ (173,957) (271,533)
--------- ---------
Total cash disbursements........................ (481,673) (971,114)
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS.............. (495) (895)
CASH AT BEGINNING OF PERIOD............................ 4,315 4,715
--------- ---------
CASH AT END OF PERIOD.................................. $ 3,820 $ 3,820
========= =========
The unaudited condensed consolidated statements of operations also include
Reorganization items, net (consisting primarily of professional fees) for the
period prior to the Petition Date from April 1 to April 14, 2002 and
professional fees incurred by non-Debtor subsidiaries.
(4) COMPREHENSIVE LOSS
Total comprehensive loss and its components are as follows:
For the Three Months Ended For the Six Months Ended
-------------------------- --------------------------
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Net loss........................................ $(21,639) $(32,520) $(98,279) $(39,739)
Cumulative effect of change in accounting
principle..................................... -- -- -- 541
Reclassification to earnings of cash flow hedges -- -- 2,083 --
Change in fair value of cash flow hedges........ -- (196) -- (4,281)
Change in cumulative translation adjustment..... (1,605) 9,764 24,410 (1,541)
-------- -------- -------- --------
Total comprehensive loss..................... $(23,244) $(22,952) $(71,786) $(45,020)
======== ======== ======== ========
11
EXIDE TECHNOLOGIES AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(5) REORGANIZATION ITEMS
Reorganization items represent amounts the Company incurred as a result of
the Chapter 11 process and are presented separately in the unaudited condensed
consolidated statements of operations. For the three and six months ended
September 30, 2002, the following have been incurred:
For the Three For the Six
Months Ended Months Ended
September 30, September 30,
2002 2002
------------- -------------
Professional fees............. $8,140 $18,310
Employee costs................ 375 750
Interest income............... (495) (1,025)
Other......................... -- 2,083
------ -------
Total reorganization items. $8,020 $20,118
====== =======
Net cash paid for reorganization items during the three and six months ended
September 30, 2002 was $4,487 and $9,123, respectively.
The following paragraphs provide additional information relating to the
above reorganization items for the three and six months ended September 30,
2002:
Professional fees
In the three and six months ended September 30, 2002, the Company recorded
$8,140 and $18,310, respectively for professional fees. Professional fees
include financial, legal and valuation services directly associated with the
reorganization process.
Employee costs
The Company has implemented a retention plan that has received final
Bankruptcy Court approval which provides for cash incentives to key members of
our management team. The retention plan is a milestone-based plan expected to
encourage employees to continue their employment through the reorganization
process. During the three and six months ended September 30, 2002, the Company
recognized charges of $375 and $750, respectively related to this program. No
payments were made during the six months ended September 30, 2002.
Interest income
Interest income represents interest income earned by the Debtors as a result
of assumed excess cash balances due to the Chapter 11 filing.
Other
Other represents contractual claims arising from termination of pre-petition
financial instruments.
(6) LIABILITIES SUBJECT TO COMPROMISE
Under U.S. bankruptcy law, actions by creditors to collect indebtedness the
Company owed prior to the Petition Date are stayed and certain other
pre-petition contractual obligations may not be enforced against the
12
EXIDE TECHNOLOGIES AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Debtors. The Company has received approval from the Bankruptcy Court to pay
certain pre-petition liabilities including certain employee salaries, wages and
benefits and other obligations. All pre-petition liabilities of the Debtors
have been classified as liabilities subject to compromise in the unaudited
condensed consolidated balance sheets. Adjustments to these amounts may result
from negotiations, payments authorized by the Bankruptcy Court, rejection of
executory contracts including leases or other events. Amounts that we have
recorded may ultimately be different than amounts filed by our creditors under
the Bankruptcy Court claims reconciliation and resolution process.
The following table summarizes the components of the liabilities classified
as Liabilities Subject To Compromise in the unaudited condensed consolidated
balance sheet as of September 30, 2002:
September 30,
2002
-------------
Accounts payable........................... $ 95,485
Accrued interest payable................... 19,403
Restructuring reserve...................... 11,924
Warranty reserve........................... 23,947
Accrued expenses........................... 153,447
Retirement obligations..................... 77,180
Long-term debt............................. 1,053,629
Other liabilities.......................... 142,591
----------
Total liabilities subject to compromise. $1,577,606
==========
(7) ACCOUNTING FOR GOODWILL AND INTANGIBLES
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141
"Business Combinations" ("SFAS 141") and SFAS No. 142 "Goodwill and Other
Intangible Assets" ("SFAS 142"). SFAS 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001.
SFAS 141 also specifies the criteria applicable to intangible assets acquired
in a purchase method business combination to be recognized and reported apart
from goodwill. SFAS 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead be tested for
impairment, at least annually. The Company intends to complete its annual
impairment assessment in the third quarter to coincide with its annual
budgeting process. SFAS 142 also requires that intangible assets with definite
useful lives be amortized over their respective estimated useful lives to their
estimated residual values, and be reviewed for impairment.
The Company adopted SFAS 141 and 142 effective April 1, 2001. Upon adoption
of SFAS 142, the Company no longer amortizes goodwill.
During the first quarter of fiscal 2003, the Company experienced
deterioration in the performance of its European Network Power business. This
deterioration was not known or forecasted as of March 31, 2002. In accordance
with the provisions of SFAS 142, the goodwill associated with the Network Power
business was reviewed for impairment due to the fact that circumstances
indicated the carrying value may not be recoverable. As a result, the Company
recognized a goodwill impairment charge in the first quarter of fiscal 2003 of
$37,000. This amount is additional to the $105,000 goodwill impairment recorded
in the third quarter of fiscal 2002 within the Network Power segment. The
impairment charge was determined based upon a comparison of the book carrying
value of this reporting segment, including goodwill, against its fair value,
estimated using a discounted cash flow model. After giving effect to the first
quarter fiscal 2003 impairment charge, all goodwill of the Network Power
segment has been written off.
13
EXIDE TECHNOLOGIES AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Summarized goodwill activity for fiscal 2003 is as follows:
Six Months Ended
September 30,
2002
----------------
Goodwill, net at March 31, 2002.... $416,926
Impairment charge.................. (37,000)
Currency translation............... 46,352
--------
Goodwill, net at September 30, 2002 $426,278
========
Subsequent to the first quarter fiscal 2003 impairment charge mentioned
above, the amounts of Goodwill, net at September 30, 2002 allocated to the
Company's Transportation and Motive Power segments were approximately $248,000
and $178,000, respectively. If the assumptions used in determining the fair
value of reporting units change or there is significant erosion of business
results, such changes could result in additional impairment charges in future
periods.
(8) INVENTORIES
Inventories, valued by the first-in, first-out ("FIFO") method, consist of:
September 30, March 31,
2002 2002
------------- ---------
Raw materials.. $ 97,422 $ 81,089
Work-in-process 79,315 79,416
Finished goods. 245,396 244,162
-------- --------
$422,133 $404,667
======== ========
In connection with the inventory management component of the Company's
restructuring and reorganization programs, during fiscal 2002, the Company
recorded a charge to write-down excess inventories by approximately $10,000.
The charge was determined after an assessment of the Company's five-year
business plan and updated demand forecasts, the continued weakening of the
Company's business segments, particularly the telecommunications market, and
the Company's ongoing stock keeping unit (SKU) rationalization.
(9) ENVIRONMENTAL MATTERS
The Company, particularly as a result of its manufacturing, distribution and
recycling operations, is subject to numerous environmental laws and regulations
and is exposed to liabilities and compliance costs arising from its past and
current handling, release, storage and disposal of hazardous substances and
hazardous wastes. The Company's operations are also subject to occupational
safety and health laws and regulations, particularly relating to monitoring of
employee health. The Company devotes certain of its resources to attaining and
maintaining compliance with environmental and occupational health and safety
laws and regulations and does not currently believe environmental, health or
safety compliance issues will have a material adverse effect on the Company's
business, financial condition or results of operations. The Company believes
that it is in substantial compliance with all material environmental, health
and safety requirements.
North America
The Company has been advised by the U.S. Environmental Protection Agency or
state agencies that it is a "Potentially Responsible Party" ("PRP") under the
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA")
or similar state laws at 91 federally defined Superfund or state equivalent
sites. At 61 of these sites, the Company has either paid or is in the process
of paying its share of the liability. In most
14
EXIDE TECHNOLOGIES AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
instances, the Company's obligations are not expected to be significant because
its portion of any potential liability appears to be minor or insignificant in
relation to the total liability of all PRPs that have been identified and are
financially viable. The Company's share of the anticipated remediation costs
associated with all of the Superfund sites where it has been named a PRP, based
on the Company's estimated volumetric contribution of waste to each site, is
included in the environmental remediation reserves discussed below.
Because the Company's liability under such statutes may be imposed on a
joint and several basis, the Company's liability may not necessarily be based
on volumetric allocations and could be greater than the Company's estimates.
Management believes, however, that its PRP status at these Superfund sites will
not have a material adverse effect on the Company's business or financial
condition because, based on the Company's experience, it is reasonable to
expect that the liability will be roughly proportionate to its volumetric
contribution of waste to the sites.
The Company currently has greater than 50% liability at three Superfund
sites. Other than these sites, the Company's allocation exceeds 5% at seven
sites for which the Company's share of liability has not been paid as of
September 30, 2002. The current allocation at these seven sites averages
approximately 22%.
The Company is also involved in the assessment and remediation of various
other properties, including certain Company owned or operated facilities. Such
assessment and remedial work is being conducted pursuant to a number of state
and federal environmental laws and with varying degrees of involvement by state
and federal authorities. Where probable and reasonably estimable, the costs of
such projects have been accrued by the Company, as discussed below. In
addition, certain environmental matters concerning the Company are pending in
federal and state courts or with certain environmental regulatory agencies.
International
The Company is subject to numerous environmental, health and safety
requirements and is exposed to differing degrees of liabilities, compliance
costs, and cleanup requirements arising from its past and current activities in
various international locations including Europe. The laws and regulations
applicable to such activities differ from country to country and also
substantially differ from U.S. laws and regulations. The Company believes that
it is in substantial compliance with all material environmental, health and
safety requirements in each country.
The Company expects that its international 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.
Consolidated
While the ultimate outcome of the foregoing environmental matters is
uncertain, after consultation with legal counsel, management does not believe
the resolution of these matters, individually or in the aggregate, will have a
material adverse effect on the Company's long-term business, financial
condition or results of operations.
The Company has established reserves for on-site and off-site environmental
remediation costs and believes that such reserves are adequate. As of September
30, 2002 and March 31, 2002 the amount of such reserves on the Company's
unaudited condensed consolidated balance sheets was $76,156 and $70,543,
respectively.
Because environmental liabilities are not accrued until a liability is
determined to be probable and reasonably estimable, not all potential future
environmental liabilities have been included in the Company's environmental
reserves and, therefore, additional earnings charges are possible. Also, future
findings or changes in estimates could have a material effect on the recorded
reserves and cash flows.
15
EXIDE TECHNOLOGIES AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In the U.S., the Company has advised each state and federal authority with
whom we have negotiated plans for environmental investigations or remediation
of the Company's Chapter 11 filing as required by those agreements or
applicable rules. In some cases these authorities may require the Company to
undertake certain agreed remedial activities under a modified schedule, or may
seek to negotiate or require modified remedial activities. Such requests have
been received at several sites and are the subject of ongoing discussions. At
this time no requests or directives have been received which, individually or
in the aggregate, would materially alter the Company's reserves or have a
material adverse effect on the Company's business, financial condition or
results of operations.
(10) COMMITMENTS AND CONTINGENCIES
Bankruptcy Considerations
As of the Petition Date, substantially all pending litigation against the
Debtors was stayed and, absent further order of the Bankruptcy Court, no party
may take any action to recover on pre-petition claims against the Debtors. We
cannot predict what action, if any, the Bankruptcy Court may take with respect
to pending litigation. Litigation against the Company's non-Debtor foreign
subsidiaries has not been stayed.
Former Senior Executives of the Company: Arthur M. Hawkins, Douglas N.
Pearson and Alan E. Gauthier.
Exide established a $13,400 reserve in fiscal 2000 to cover litigation
related to allegations that used batteries were sold as new. The Company has
resolved these claims, including the third quarter fiscal 2002 settlement of
the sole remaining "legacy" action, Houlihan v. Exide. As a result of the
Houlihan settlement, the Company recorded an additional expense in the third
quarter of fiscal 2002 of $1,400 for reimbursement of legal fees. At September
30, 2002, there is approximately a $2,500 reserve remaining, representing the
Company's estimate of its remaining obligations under the Houlihan and other
"legacy" settlements.
On March 23, 2001, Exide reached a plea agreement with the U.S. Attorney for
the Southern District of Illinois, resolving an investigation of the conduct of
certain former senior executives of the Company. Under the terms of that
settlement Exide agreed to pay a fine of $27,500 over five years, to five years
probation and to cooperate with the U.S. Attorney in the prosecution of Arthur
M. Hawkins, Douglas N. Pearson and Alan E. Gauthier, former senior executives
of the Company. The payment terms of the plea agreement are dependent upon the
Company's compliance with the plea agreement during the five-year probation
period. Generally, the terms of the probation would permit the U.S. Government
to reopen the case against Exide if the Company violates the terms of the plea
agreement or other provisions of law. The plea agreement was lodged with the
U.S. District Court for the Southern District of Illinois, and accepted on
February 27, 2002. The Company reserved $31,000 for this matter, including
expected costs and out-of-pocket expenses, in the first quarter of fiscal 2001,
and an additional $1,000 in the third quarter of fiscal 2002. At September 30,
2002, approximately $27,500 of this reserve remains. As a result of the
imposition of the automatic stay arising upon the Company's Chapter 11 filing,
the Company has not made the first installment payment of its $27,500 fine. The
Company is uncertain what effect this non-payment and the Bankruptcy Code may
have with respect to the plea agreement.
Exide is currently involved in litigation with the former senior executives
named above. The former senior executives made claims to enforce separation
agreements, reimbursement of legal fees, and other contracts, and Exide has
filed claims and counterclaims asserting fraud, breach of fiduciary duties,
misappropriation of corporate assets and civil conspiracy. In addition, Exide
has filed an action in the Bankruptcy Court against the former senior
executives to recover certain payments of legal fees Exide was required to
advance to such individuals prior to the Petition Date.
16
EXIDE TECHNOLOGIES AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company has filed two claims with its insurers for reimbursement of the
amounts paid to the former executives, and intends to seek reimbursement for
those amounts. However, the Company has not recognized any receivable for such
reimbursements as of September 30, 2002.
Hazardous Materials
Exide is involved in several lawsuits pending in state and federal courts in
South Carolina, Pennsylvania, Indiana, and Tennessee. These actions allege that
Exide and its predecessors allowed hazardous materials used in the battery
manufacturing process to be released from certain of its facilities, allegedly
resulting in personal injury and/or property damage. In January 2002, the
counsel that brought the South Carolina actions filed additional claims in the
Circuit Court for Greenville County, South Carolina. The Company's preliminary
review of these claims suggest they are without merit, and the Company plans to
vigorously defend itself in these matters. The Company does not believe any
reserves are currently warranted for any of these claims.
GNB Acquisition
In July 2001, Pacific Dunlop Holdings (US), Inc. ("PDH") and several of its
foreign affiliates (the "Sellers") under the various agreements through which
Exide acquired GNB, filed a complaint in the Circuit Court for Cook County,
Illinois alleging breach of contract, unjust enrichment, and conversion against
Exide and three of its foreign affiliates. The Sellers maintain they are
entitled to approximately $17,000 in cash assets acquired by the defendants
through their acquisition of GNB. In December, 2001, the Court denied the
defendants' motion to dismiss the complaint, without prejudice to re-filing the
same motion after discovery proceeds. The defendants have filed an answer and
counterclaim. On July 8, 2002, the Court authorized discovery to proceed as to
all parties except Exide. In August 2002, the case was removed to the U.S.
Bankruptcy Court for the Northern District of Illinois and, in October 2002,
the parties presented oral arguments, in the case of PDH, to remand the case to
Illinois state court and, in the case of Exide, to transfer the case to the
U.S. Bankruptcy Court for the District of Delaware. To the extent this action
implicates Exide's interests, management plans to vigorously defend the action
and pursue the counterclaim.
In December 2001, PDH filed a separate action in the Circuit Court for Cook
County, Illinois, seeking recovery of $3,100 for amounts allegedly owed by
Exide under various agreements between the parties. The claim arises from
letters of credit and other security for workers compensation insurance
policies allegedly provided by PDH for GNB's performance of certain of GNB's
obligations to third parties, that PDH claims Exide was obligated to replace.
Exide's answer contested the amounts claimed by PDH and Exide filed a
counterclaim. Although this action has been consolidated with the Cook County
suit concerning GNB's cash assets, the claims relating to this action are
currently subject to the automatic bankruptcy stay.
Other
On June 6, 2002, McKinsey & Company International filed suit against Exide
Holding Europe, S.A., Compagnie Europeene D'accumulateurs, S.A., Euro Exide
Corporation Ltd., Exide Italia S.r.l, Deutsche Exide GmbH and Exide
Transportation Holding Europe, S.L. in the U.S. District Court for the Southern
District of New York, seeking to compel arbitration of McKinsey's request for
payment of approximately $5,000 in consulting fees. The Company intends to
vigorously defend the suit. The Company has recorded a liability related to
this matter which is classified as a liability subject to compromise in the
unaudited condensed consolidated balance sheet at September 30, 2002. McKinsey
also has initiated arbitration to resolve the dispute, and the arbitration is
17
EXIDE TECHNOLOGIES AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
proceeding over respondents' objection before the American Arbitration
Association's International Centre for Dispute Resolution. The arbitration is
expected to conclude during 2003.
Exide is a defendant in an arbitration proceeding initiated in October of
2001, by Margulead Limited ("Margulead"). In June of 1997, GNB, now an
operating division of Exide, entered into an agreement with Margulead to build
a facility to test and develop certain lead acid battery recycling technology
developed by Margulead. This agreement was terminated by Exide after the
Margulead technology failed to meet initial performance criteria. Margulead now
alleges breach of contract and has requested damages in the amount of
approximately $2,600, which represents the projected cost of building a testing
facility. Margulead has indicated that it may amend its claim to seek up to
$9,000 in damages. Because Margulead is a foreign entity and the arbitration is
pending in London, the arbitration is currently proceeding notwithstanding
Exide's Chapter 11 proceedings. The Company intends to defend the claim and
denies liability thereunder.
The Company is involved in various other claims and litigation incidental to
the conduct of its business. Based on consultation with legal counsel,
management does not believe that any such claims or litigation to which the
Company is a party, either individually or in the aggregate, will have a
material adverse effect on the Company's business, financial condition, cash
flows or results of operations, although quarterly or annual operating results
may be materially affected.
(11) RESTRUCTURING
The Company previously implemented certain restructuring activities as part
of an overall program to reduce costs, eliminate excess capacity and improve
cash flows, including activities in connection with the September 2000
acquisition of GNB.
In addition, during the first and second quarters of fiscal 2003 the Company
recognized restructuring charges of $6,288 and $3,997, representing $3,339 and
$3,933 for severance and related costs and $2,949 and $64 for a non-cash
charges related to the write-down of machinery and equipment. The charges for
the first quarter of fiscal 2003 related to the downsizing of a North American
Network Power facility and the closure of a Transport facility in Cwmbran,
Wales. Approximately 300 positions, principally plant employees, have been
eliminated in connection with the first quarter fiscal 2003 plans. Further
severance charges are expected to be recognized in future periods in connection
with the Cwmbran, Wales facility closure as additional positions are
eliminated. The charges for the second quarter of fiscal 2003 principally
resulted from corporate severance and the closure of a North American
Transportation facility. Approximately 120 positions have been eliminated in
connection with the second quarter fiscal 2003 plans.
Summarized restructuring reserve activity for these programs are as follows:
Severance Costs Write-Offs Closure Costs Total
--------------- ---------- ------------- --------
Balance at March 31, 2002.... $16,500 $ -- $15,300 $ 31,800
Charges, fiscal 2003......... 6,119 3,013 1,153 10,285
Payments and charge-offs..... (8,441) (3,013) (2,635) (14,089)
Currency changes............. 1,302 -- 869 2,171
------- ------- ------- --------
Balance at September 30, 2002 $15,480 $ -- $14,687 $ 30,167
======= ======= ======= ========
18
EXIDE TECHNOLOGIES AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(12) DEBT
At September 30, 2002, short-term borrowings of $11,177 consisted of various
operating lines of credit and working capital facilities maintained by certain
of the Company's non-U.S.subsidiaries. Certain of these borrowings are secured
by receivables, inventories and/or property. These borrowing facilities, which
are typically for one-year renewable terms, generally bear interest at current
local market rates plus up to one percent.
Total long-term debt at September 30, 2002 comprises the following:
September 30,
2002
-------------
Debt Not Subject To Compromise:
DIP Credit Facility--Borrowings at LIBOR plus 3.75%............................................ $ 195,133
Senior Secured Global Credit Facilities Agreement (Europe)--Borrowings primarily at
LIBOR plus 4.75% to 5.25%.................................................................... 261,866
9.125% Senior Notes (Deutsche mark denominated, due April 15, 2004)............................ 88,232
European Accounts Receivable Securitization.................................................... 126,199
Other, including capital lease obligations and other loans at interest rates generally ranging
from 0.0% to 11.0% due in installments through 2015(1)....................................... 20,798
----------
Total debt not subject to compromise....................................................... 692,228
Less--current maturities (included in total debt not subject to compromise above).............. 38,349
----------
$ 653,879
==========
Debt Subject To Compromise:
Senior Secured Global Credit Facilities Agreement (U.S.)--Borrowings primarily at LIBOR
plus 4.75% to 5.25%.......................................................................... $ 431,121
10% Senior Notes, due April 15, 2005........................................................... 300,000
Convertible Senior Subordinated Notes, due December 15, 2005................................... 321,132
Other.......................................................................................... 1,376
----------
Total debt subject to compromise........................................................... $1,053,629
==========
--------
(1) Includes various operating lines of credit and working capital facilities
maintained by certain of the Company's non-U.S. subsidiaries.
Total debt at September 30, 2002 and March 31, 2002 was $1,757,034
(including amounts subject to compromise) and $1,413,272, respectively.
On April 15, 2002, the Company and three of its wholly-owned U.S.
subsidiaries filed voluntary petitions for reorganization under Chapter 11 of
the Bankruptcy Code. In connection with the filing, the Company also entered
into a "Standstill and Subordination Agreement" with its pre-petition Senior
Secured Global Credit Facility lenders, whereby the lenders have agreed to
forbear collections of principal payments on foreign borrowings under this
facility from non-Debtor subsidiaries until December 2003, subject to earlier
termination upon the occurrence of certain events. Borrowings under the Senior
Secured Global Credit Facility by Debtors within the Chapter 11 case are
subject to compromise. Interest obligations for the non-Debtor subsidiaries
will continue to be accrued and paid when due. The Standstill and Subordination
Agreement contains essentially the same financial covenants as the DIP Credit
Facility. See Note 2 for further discussion of the Company's bankruptcy
considerations and reorganization plans.
19
EXIDE TECHNOLOGIES AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On April 17, 2002, the Company received interim Bankruptcy Court approval of
a $250,000 DIP Credit Facility and final Bankruptcy Court approval for such
facility on May 10, 2002. The DIP Credit Facility is being used to supplement
cash flows from operations during the reorganization process including the
payment of post-petition ordinary course trade and other payables, the payment
of certain permitted pre-petition claims, working capital needs, letter of
credit requirements and other general corporate purposes.
On April 17, 2002, approximately $129,000 of the DIP Credit Facility was
drawn down, $117,000 being used to terminate and repurchase uncollected
securitized accounts receivable under the Company's then existing U.S.
receivables sale facility and the balance for financing costs and related fees.
The DIP Credit Facility is a secured revolving credit and term loan facility
under which Exide Technologies is the borrower with certain U.S. and foreign
subsidiaries acting as guarantors. The DIP Credit Facility is afforded super
priority claim status in the Chapter 11 case and is collateralized by first
liens on certain eligible U.S. assets of the Company, principally accounts
receivable, inventory and property.
The revolving credit tranche of the DIP Credit Facility provides for
borrowing up to $121,000, of which up to $65,000 is available to Exide
Technologies for on-lending to its foreign subsidiaries. An additional $50,000
sub-facility is also available to the foreign subsidiaries based on certain
collateral asset values in the United Kingdom and Canada. To the extent funds
are borrowed under the DIP and on-lent to foreign subsidiaries, additional
liens on certain assets of the borrowing foreign subsidiary and related
guarantees are required. Up to $40,000 of the revolving credit tranche is
available for letters of credit. Total availability under the DIP Credit
Facility as of September 30, 2002 and November 13, 2002 was approximately
$30,800 and $41,400, respectively.
Borrowings under the DIP Credit Facility bear interest at base rate plus
2.75% per annum or Libor plus 3.75% per annum. Borrowings are limited to
eligible collateral under the DIP Credit Facility. Eligible collateral under
the DIP Credit Facility includes accounts receivable, inventory and certain
property. Availability to the Company is impacted by changes in both the
amounts of the collateral and qualitative factors (such as aging of accounts
receivable and inventory reserves) as well as cash requirements of the business
such as trade credit terms. The DIP Credit Facility contains certain financial
covenants requiring the Company to maintain monthly specified levels of
earnings before interest, taxes, depreciation, amortization, restructuring and
certain other defined charges, as well as limits on capital expenditures and
cash restructuring expenditures. The DIP Credit Facility also contains other
customary covenants, including certain reporting requirements and covenants
that restrict the Company's ability to incur indebtedness, create or incur
liens or guarantees, enter into leases, sell or dispose of assets, change the
nature of the Company's business or enter into related party transactions. The
Company believes it was in compliance with the DIP Credit Facility covenants as
of September 30, 2002. The Company has presented to its banks an operating plan
which assumes that the Company will maintain compliance with its covenants
through September 30, 2003. Currently, the Company expects to maintain adequate
financial resources during the next twelve months (considering both funds
available under the DIP Credit Facility and cash flows generated from
operations) while pursuing its strategic options and development of a plan of
reorganization. However, no assurance can be given that the Company will
maintain compliance with its covenants or have adequate financial resources
available during the next twelve months. Failure to maintain compliance with
these covenants in the future would result in an event of default which, absent
cure within defined grace periods or obtaining appropriate waivers, would
restrict the Company's availability to funds necessary to maintain its
operations and assist in funding of its reorganization plans.
The Company has obtained waivers and consents under the DIP Credit Facility
and Standstill and Subordination Agreement primarily to (i) maintain until
March 2003 cash balances outside the United States in excess of those otherwise
permitted under the agreements, (ii) modify the terms for the payment of
interest related to the conversion of certain Euro Currency Loans to Base Rate
Loans under the pre-petition credit
20
EXIDE TECHNOLOGIES AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
facility, (iii) dilute below 50 percent the Company's interest in a
non-material joint venture and (iv) provide relief for the Company to address
certain non-material civil litigation commenced against a non-Debtor subsidiary.
The DIP Credit Facility matures on the earlier of February 15, 2004, 30 days
before the pre-petition Revolving Credit and Tranche A Senior Secured Credit
Facilities mature or the date on which the Company emerges from bankruptcy.
On May 31, 2002, the Company entered into a new $177,500 European accounts
receivable securitization facility. This facility replaced the Company's then
existing $175,000 European securitization program. The new facility is
accounted for as a secured borrowing in accordance with the requirements of
SFAS 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" whereby the accounts receivable and related
borrowings are recorded on the Company's unaudited condensed consolidated
balance sheet.
(13) INTEREST EXPENSE, NET
Interest income of $434 and $1,013 is included in Interest expense, net in
the unaudited condensed consolidated statements of operations for the three
months ended September 30, 2002 and September 30, 2001, respectively. Interest
income of $814 and $1,449 is included in Interest expense, net for the six
months ended September 30, 2002 and September 30, 2001, respectively. Interest
income earned as a result of assumed excess cash balances due to the Chapter 11
filing is recorded in Reorganization items, net in the unaudited condensed
consolidated statements of operations, for the three and six months ended
September 30, 2002. See Note 5.
As of the Petition Date, the Company ceased accruing interest on certain
unsecured pre-petition debt classified as Liabilities subject to compromise in
the unaudited condensed consolidated balance sheets in accordance with SOP
90-7. Interest is being accrued on certain pre-petition debt to the extent that
the Company believes it is probable of being deemed an allowed claim by the
Bankruptcy Court. Interest at the stated contractual amount on pre-petition
debt that was not charged to results of operations for the three and six months
ended September 30, 2002 was approximately $10,381 and $19,007 respectively.
(14) NET LOSS PER SHARE
Basic loss per share is computed using the weighted average number of common
shares outstanding for the
period, while diluted loss per share is computed assuming conversion of all
dilutive securities such as options, convertible debt and warrants. In all
periods presented net losses were incurred, therefore, dilutive common stock
equivalents were not used in the calculation of earnings per share as they
would have an anti-dilutive effect.
(15) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 146, "Accounting for
Exit or Disposal Activities" ("SFAS 146"). SFAS 146 provides guidance on the
recognition and measurement of liabilities for costs associated with exit or
disposal activities that are initiated after December 31, 2002. The Company is
currently reviewing SFAS 146 to determine the impact upon adoption.
In May 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No's. 4, 44, and 64 Amendment of FASB Statement No. 13, and Technical
Corrections." This Statement requires gains and losses from extinguishments of
debt to be classified as an extraordinary item only if the criteria in Opinion
30 has been met. Further, lease modification with economic effects similar to
sale-leaseback transactions must be accounted
21
EXIDE TECHNOLOGIES AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
for in the same manner as sale-leaseback transactions. While the technical
corrections to existing pronouncements are not substantive in nature, in some
instances they may change accounting practice. The provision of this Statement
related to the rescission of SFAS No. 4 and the amendment of SFAS No. 13 are
effective beginning in fiscal 2003 and for transactions occurring after May 15,
2002, respectively, and are not expected to have a significant impact on the
Company's unaudited condensed consolidated financial statements. All other
provisions are effective for financial statements issued on or after May 15,
2002, and did not have a significant impact on our unaudited condensed
consolidated financial statements presented herein.
In June 2001 and August 2001, the FASB issued SFAS No. 143 "Accounting for
Asset Retirement Obligations", ("SFAS 143") and SFAS No. 144 "Accounting for
the Impairment or Disposal of Long-Lived Assets", ("SFAS 144"), respectively.
SFAS 143 is effective for financial statements issued for fiscal years
beginning after June 15, 2002. The Company is required to adopt SFAS 143 on
April 1, 2003. The provisions of SFAS 143 address financial accounting and
reporting requirements for obligations associated with the retirement of
tangible long-lived assets and the associated retirement costs and requires
companies to record an asset and related liability for the cost associated with
the retirement of long-lived tangible assets if a legal liability to retire the
asset exists. The Company is in the process of completing its evaluation of the
impact of this statement.
SFAS 144 is effective for the company beginning April 1, 2003. SFAS 144
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets, and supersedes SFAS No. 121 and the accounting and reporting
provisions of the Accounting Principles Board ("APB") opinion No. 30. SFAS 144
retains the basic principles of SFAS 121 for long lived assets to be disposed
of by sale or held and used and broadens discontinued operations presentation
to include a component of an entity that is held for sale or that has been
disposed of.
(16) SEGMENT INFORMATION
Beginning October 1, 2001, the Company changed its organizational structure
such that operations are managed and reported in three segments:
Transportation, Motive Power and Network Power.
The Company previously operated its battery business within the
Transportation and Industrial segments through September 30, 2001. The previous
Industrial segment was split between Network Power and Motive Power. Network
Power applications include batteries for telecommunications systems, electric
utilities, railroads, photovoltaic and other critical uninterruptible power
supply markets. Motive Power applications include batteries for a broad range
of equipment uses including lift trucks, mining and other commercial vehicles.
Transportation uses include automotive, heavy duty, agricultural, marine and
other batteries, as well as new technologies being developed for hybrid
vehicles and new 42-volt automobile applications.
The prior year segment data below has been reclassified to reflect the
current year presentation. In addition, prior year segment data has been
reclassified to reflect the current year presentation of corporate costs not
allocated to business segments. Certain asset information required to be
disclosed is not reflected below as it is not allocated by segment nor utilized
by management in the Company's operations.
22
EXIDE TECHNOLOGIES AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Selected financial information concerning the Company's reportable segments
is as follows:
For the Three Months Ended September 30, 2002
-----------------------------------------------------------
Network
Transportation Motive Power Power Other Consolidated
-------------- ------------ -------- -------- ------------
Net sales.................. $374,815 $112,945 $ 91,603 $ -- $579,363
Gross profit............... 78,265 26,234 23,458 -- 127,957
Operating income (loss) (c) 37,218 4,815 5,700 (33,163) 14,570
For the Three Months Ended September 30, 2001
-----------------------------------------------------------
Network
Transportation Motive Power Power Other(a) Consolidated
-------------- ------------ -------- -------- ------------
Net sales.................. $393,565 $120,206 $110,474 $ -- $624,245
Gross profit............... 68,477 31,363 29,150 -- 128,990
Operating income (loss) (d) 26,204 9,407 7,083 (36,416) 6,278
For the Six Months Ended September 30, 2002
-----------------------------------------------------------
Network
Transportation Motive Power Power(b) Other Consolidated
-------------- ------------ -------- -------- ------------
Net sales.................. $728,284 $223,833 $182,235 $ -- $1,134,352
Gross profit............... 142,159 51,110 45,018 -- 238,287
Operating income (loss) (e) 60,147 8,351 (32,390) (56,438) (20,330)
For the Six Months Ended September 30, 2001
-------------------------------------------------------
Motive Network
Transportation Power Power Other(a) Consolidated
-------------- -------- -------- -------- ------------
Net sales.................. $772,215 $241,900 $241,367 $ -- $1,255,482
Gross profit............... 132,056 63,923 71,872 -- 267,851
Operating income (loss) (d) 43,582 19,947 29,164 (63,733) 28,960
--------
(a) Includes a credit of $8,185 related to the termination of a purchased
research and development agreement with Lion Compact Energy and a $13,873
charge related to debt-for-equity exchanges.
(b) Includes $37,000 goodwill impairment charge recorded in the first quarter
of fiscal 2003.
(c) Includes restructuring charges of $1,873, $90, $407 and $1,627 within
Transportation, Motive, Network and Other, respectively.
(d) Includes restructuring charges of $3,544, $1,880, $3,154 and $2,480 within
Transportation, Motive, Network and Other, respectively.
(e) Includes restructuring charges of $3,720, $279, $5,943 and $343 within
Transportation, Motive, Network and Other, respectively.
23
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in thousands, except per-share data)
Overview
On April 15, 2002, Exide Technologies and three of its wholly-owned U.S.
subsidiaries (the "Debtors") filed voluntary petitions for reorganization under
Chapter 11 of the Bankruptcy Code as it offered the most efficient alternative
to restructure its balance sheet and access new working capital while
continuing to operate in the ordinary course of business. The Company has a
heavy debt burden, caused largely by a debt-financed acquisition strategy and
the significant costs of integrating those acquisitions. Other factors leading
to the reorganization included the impact of current adverse economic
conditions, particularly in the telecommunications industry, ongoing
competitive pressures, and recent capital market volatility. These factors
contributed to a loss of revenues and have resulted in significant operating
losses and negative cash flows, severely impacting the Company's financial
condition and its ability to maintain compliance with debt covenants.
The Company's operations outside of the U.S. are not included in the Chapter
11 proceedings.
On May 10, 2002 the Company received final Bankruptcy Court approval for its
$250,000 DIP Credit Facility. The DIP Credit Facility requires maintenance of
certain financial covenants and other restrictions on matters such as
indebtedness, guarantees and future asset sales.
Under the Bankruptcy Code, actions to collect pre-petition indebtedness, as
well as most other pending litigation, are stayed. In addition, the Debtors may
also assume or reject executory contracts, including lease obligations, subject
to the approval of the Bankruptcy Court and certain other conditions.
Factors Which Affect Our Financial Performance
Competition. The global Transportation, Motive Power and Network Power
battery markets, particularly in North America and Europe, are highly
competitive. In recent years, competition has continued to intensify and we
continue to come under increasing pressure for price reductions. This
competition has been exacerbated by excess capacity and fluctuating lead prices
as well as low-priced Asian imports impacting our markets.
Exchange Rates. We are exposed to foreign currency risk in most European
countries, principally from fluctuations in the Euro and British Pound. We are
also exposed, although to a lesser extent, to foreign currency risk in
Australia and the Pacific Rim. Movements of exchange rates against the U.S.
dollar can result in variations in the U.S. dollar value of our non-U.S. sales
and expenses. In some instances, gains in one currency may be offset by losses
in another. Our results for the periods presented herein were impacted by
movements in European currencies.
Markets. We are subject to concentrations of customers and sales in several
geographic regions and are dependent on customers in certain industries,
including the automotive, telecommunications, and material handling markets.
Economic difficulties experienced in these markets and geographic locations
have and continue to impact our financial results.
Weather. Unusually cold winters or hot summers accelerate automotive
battery failure and increase demand for automotive replacement batteries.
Interest Rates. The Company is exposed to fluctuations in interest rates on
its variable rate debt.
Lead. Lead is the principal material by weight used in the manufacture of
batteries, representing approximately one-quarter of our cost of goods sold.
The market price of lead fluctuates. Generally, when lead prices decrease, many
of our customers seek disproportionate price reductions from us, and when lead
prices increase, customers resist price increases.
24
Critical Accounting Policies and Estimates
The Company's discussion and analysis of its financial condition and results
of operations are based upon the Company's unaudited condensed consolidated
financial statements, which have been prepared in accordance with accounting
principles generally accepted in the U.S. The preparation of these financial
statements requires the Company to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and the related
disclosure of contingent assets and liabilities. On an ongoing basis, the
Company evaluates its estimates based on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions.
The Company believes that the critical accounting policies and estimates
disclosed in the Company's Annual Report on Form 10-K (the "10-K") for the
fiscal year ended March 31, 2002 effect the preparation of its unaudited
condensed consolidated financial statements. The reader of this Report may wish
to refer to the 10-K for further information.
The accompanying unaudited condensed consolidated financial statements have
been prepared on a going concern basis, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business,
and with respect to fiscal 2003, in accordance with SOP 90-7 with regard to the
reporting requirements of entities in reorganization under the Bankruptcy Code.
The ability of the Company to continue as a going concern is predicated
upon, among other things, confirmation of a bankruptcy reorganization plan,
compliance with the provisions of both the DIP Credit Facility and other
ongoing borrowing arrangements as well as the ability to generate cash flows
from operations and where necessary obtaining financing sources sufficient to
satisfy the Company's future obligations. As a result of the Chapter 11 filing,
and consideration of various strategic alternatives, including possible asset
sales, the Company would expect that any reorganization plan will likely result
in material changes to the carrying amount of assets and liabilities in the
unaudited condensed consolidated financial statements. The unaudited condensed
consolidated financial statements do not, however, include adjustments, if any,
to reflect the possible future effects on the recoverability and classification
of recorded assets or the amounts and classifications of liabilities that may
result from the outcome of these uncertainties.
Results of Operations
Three months ended September 30, 2002 compared with the three months ended
September 30, 2001.
Overview
Net loss for the second quarter of fiscal 2003 was $21,639 or $0.79 per
diluted share versus net loss of $32,520 or $1.20 per diluted share last year.
Second quarter fiscal 2003 results include restructuring costs of $3,997 and
reorganization items in connection with the bankruptcy of $8,020. In the second
quarter of fiscal 2002, the Company recorded restructuring charges of $11,058
primarily for severance related to work force reductions as well as a $13,873
non-cash charge related to debt-for-equity exchanges. In addition, the Company
recorded a credit of $8,185 during the second quarter of fiscal 2002 related to
the early termination of a purchased research and development agreement with
Lion Compact Energy (LCE).
Net Sales
Net sales were $579,363 in the second quarter of fiscal 2003 versus $624,245
in the second quarter of fiscal 2002. The decrease in net sales was due to
sales declines in all three of the Company's business segments. Currency
positively impacted net sales by $26,313 principally from appreciation of the
Euro against the U.S. dollar.
25
Net sales in the Transportation segment were $374,815 in the second quarter
of fiscal 2003 versus $393,565 in the second quarter of fiscal 2002.
Transportation revenues in North America declined due to reduced unit volumes
principally due to lost business and territories in our aftermarket accounts,
while European volumes were also lower than the prior year. These reductions
were partially offset by benefits from warranty management programs in North
America. Currency positively impacted Transportation net sales, principally in
Europe, in fiscal 2003 by approximately $12,853.
Motive Power sales for the second quarter of fiscal 2003 were $112,945
versus $120,206 in the second quarter of fiscal 2002. The decrease was due to
general softness in the overall economies in Motive Power's two major markets:
the U.S. and Western Europe. Currency positively impacted Motive Power net
sales in fiscal 2003 by approximately $7,826.
Network Power sales for the second quarter of fiscal 2003 were $91,603
versus $110,474 in the second quarter of fiscal 2002. The decrease was
attributable to lower sales volumes which were a direct result of the
significantly weaker telecommunications markets including the adverse effect of
the slowdown in Europe and Asia, similar to that seen in North America during
fiscal 2002. Currency positively impacted Network Power net sales in fiscal
2003 by approximately $5,634.
Gross Profit
Gross profit was $127,957 in the second quarter of fiscal 2003 versus
$128,990 in the second quarter in the prior year. The gross profit margin
increased to 22.1% in the second quarter of fiscal 2003 from 20.7% in the
second quarter of fiscal 2002, primarily due to the Company's continued plant
rationalization and headcount reduction programs and lower lead pricing in
Europe offset partially by lower sales volumes and higher production costs
related to under-absorption of fixed overheads. Stronger European currencies
versus the U.S. dollar favorably impacted gross profit by approximately $6,486.
Transportation gross profit was $78,265 in the second quarter versus $68,477
last year. The effect of lower North American sales volumes was more than
offset by the benefits from plant rationalization and headcount reductions,
lead pricing in Europe and European currency effects. Gross margins were 20.9%
in the current year versus 17.4% in the prior year.
Motive Power gross profit was $26,234 this quarter versus $31,363 in the
same quarter last year. The decrease was due to lower sales volumes, an
unfavorable sales mix (smaller size battery systems) and higher production
costs related to under-absorption of fixed overheads. Gross margin as a percent
of net sales was 23.2% in the current year versus 26.1% last year.
Network Power gross profit was $23,458 this quarter versus $29,150 in the
same quarter last year. The decrease was due to significantly weaker demand in
the telecommunications market and higher production costs related to
under-absorption of fixed overheads. Gross profit margins were also negatively
impacted by changes in sales mix including reduced sales of higher margin
products. Gross margin as a percent of net sales was 25.6% in the current year
versus 26.4% last year.
Operating Expenses
Operating expenses decreased from $122,712 in the second quarter of fiscal
2002 to $113,387 in the same period during fiscal 2003. Included in operating
expenses in the second quarter of fiscal 2003 are restructuring charges of
$3,997. Second quarter fiscal 2002 operating expenses include a credit of
$8,185 related to the early termination of a purchased research and development
agreement with LCE, $11,058 for restructuring charges related primarily to
reductions in work force as well as a $13,873 non-cash charge included in Other
(income) expense, net related to debt-for-equity exchanges. Excluding these
items, operating expenses were $109,390 and $105,966 for the second quarter of
fiscal 2003 and 2002, respectively. Stronger European currencies unfavorably
26
impacted operating expenses by approximately $4,781 in fiscal 2003. The change
in operating expenses was impacted by the following matters: (i) Fiscal 2003
selling, marketing and advertising costs in each of the Company's business
segments were favorably impacted by the Company's cost-reduction programs,
primarily through headcount reductions, and lower sales volumes; and (ii)
General and administrative expenses in fiscal 2003 were unfavorably impacted by
higher pension costs, ongoing information technology costs and consulting fees
unrelated to reorganization efforts.
Transportation operating expenses decreased from $42,273 in the second
quarter of fiscal 2002 to $41,047 in fiscal 2003, Motive Power operating
expenses decreased from $21,956 in the second quarter of fiscal 2002 to $21,419
in fiscal 2003, and Network Power operating expenses decreased from $22,067 in
fiscal 2002 to $17,758 in fiscal 2003.
Corporate and other operating expenses were $33,163 in the second quarter of
fiscal 2003 versus $36,416 in the second quarter of fiscal 2002. Second quarter
fiscal 2002 results include a credit of $8,185 related to the early termination
of a purchased research and development agreement with LCE and the $13,873
debt-for-equity non-cash charge.
Income Taxes
In the second quarter of fiscal 2003, an income tax provision of $3,934 was
recorded on a pre-tax loss of $17,793. In fiscal 2002, an income tax provision
of $4,777 was recorded on a pre-tax loss of $27,292. The effective tax rate was
(22.1)% and (17.5)% in the second quarter of fiscal 2003 and fiscal 2002,
respectively.
The effective tax rate for the second quarter of fiscal year 2003 was
impacted by recognition of valuation allowances on tax benefits generated from
current period losses, in both the U.S. and certain international regions. The
effective tax rate for the second quarter of fiscal 2002 was impacted by
recognition of valuation allowances on tax benefits generated from current and
prior period losses, primarily in the U.S. The remaining 2002 effect relates to
treatment of the debt for equity exchanges and the LCE agreement termination.
Interest Expense, Net
Interest expense, net decreased $9,227 from $33,570 in the second quarter of
fiscal 2002 to $24,343 in the same period of fiscal 2003. The decrease in
interest expense is principally attributed to ceasing accruing certain interest
on pre-petition debt classified as Liabilities subject to compromise in the
Company's unaudited condensed consolidated balance sheet in accordance with SOP
90-7. Interest at the stated contractual amount on debt that was not charged to
operations for the three months ended September 30, 2002 was approximately
$10,381. Excluding interest not charged pursuant to the Bankruptcy, higher
interest costs were driven by the new DIP Credit Facility and amortization of
deferred financing costs.
Reorganization Items
Reorganization items represent amounts the Company incurred as a result of
the Chapter 11 filing and are presented separately in the unaudited
consolidated statements of operations. Reorganization charges for the three
months ended September 30, 2002 were $8,020. These charges comprise the
following items: professional fees including financial and legal services;
employee retention costs for key members of management; and interest income
earned as a result of having assumed excess cash balances due to the Chapter 11
filing. See Note 5.
Six months ended September 30, 2002 compared with the six months ended
September 30, 2001.
Overview
Net loss for the first half of fiscal 2003 was $98,279 or $3.59 per basic
and diluted share versus net loss of $39,739 or $1.52 per basic and diluted
share during the same period last year. Included in the consolidated net
27
loss for the first six months of fiscal 2003 is a non-cash charge of $37,000
for goodwill impairment resulting from an evaluation of results and updated
projections of the Network Power business, following the recent deterioration
of this segment's European performance. Results also include fiscal 2003
restructuring costs of $10,285 and reorganization items in connection with the
Bankruptcy of $20,118. Fiscal 2002 results included second quarter
restructuring costs of $11,058 related to work force reductions and $13,873 of
non-cash charges related to debt-for- equity exchanges. In addition, the
Company recorded a credit of $8,185 during the second quarter of fiscal 2002
relating to the early termination of a purchased research and development
agreement with LCE.
Net Sales
Net sales were $1,134,352 in the first half of fiscal 2003 versus $1,255,482
in the first six months of fiscal 2002. The decrease in net sales was due to
sales declines in all three of the Company's business segments. Currency
positively impacted net sales by $39,700 during this period, principally from
appreciation of the Euro against the U.S. dollar.
Net sales in the Transportation segment were $728,284 in the first six
months of fiscal 2003 versus $772,215 in the first six months of fiscal 2002.
Transportation revenues in North America declined due to reduced unit volumes
principally due to lost business and territories in our aftermarket accounts,
while European volumes were down slightly from the prior year. These reductions
were partially offset by benefits from warranty management programs in North
America. Currency positively impacted Transportation net sales, principally in
Europe, in the first six months of fiscal 2003 by approximately $19,389.
Motive Power sales for the first half of fiscal 2003 were $223,833 versus
$241,900 in the first six months of fiscal 2002. The decrease was due to
general softness in the overall economies in Motive Power's two major markets:
the U.S. and Western Europe. Currency positively impacted Motive Power net
sales in fiscal 2003 by approximately $11,814.
Network Power sales for the first six months of fiscal 2003 were $182,235
versus $241,367 in the first six months of fiscal 2002. Lower sales were a
direct result of the significantly weaker telecommunications markets, including
the adverse effect of the slowdown in Europe and Asia similar to that seen in
North America during fiscal 2002. Currency positively impacted Network Power
net sales in the first six months of fiscal 2003 by approximately $8,497.
Gross Profit
Gross profit was $238,287 in the first half of fiscal 2003 versus $267,851
in the first half of the prior year. The gross profit margin decreased slightly
to 21.0% in the first six months of fiscal 2003 from 21.3% in the first six
months of fiscal 2002, primarily due to the lower sales volumes and higher
production costs related to under-absorption of fixed overheads. The
unfavorable absorption impacts were partially offset by the Company's continued
plant rationalization and headcount reduction programs and lower lead pricing
in Europe. Stronger European currencies versus the U.S. dollar favorably
impacted gross profit by approximately $9,663.
Transportation gross profit was $142,159 in the first half of fiscal 2003
versus $132,056 for the same period last year. The effect of lower North
American sales volumes was more than offset by the benefits from plant
rationalization and headcount reductions, lead pricing in Europe and European
currency effects. Gross margin was 19.5% for the first half of the current year
versus 17.1% in the prior year.
Motive Power gross profit was $51,110 for the first half of fiscal 2003
versus $63,923 in the same period last year. The decrease was due to lower
sales volumes, an unfavorable sales mix (smaller size battery systems) and
higher production costs related to under-absorption of fixed overheads. Gross
margin as a percent of net sales was 22.8% in the current year versus 26.4%
last year.
28
Network Power gross profit was $45,018 for the first half of fiscal 2003
versus $71,872 in the same period last year. The decrease was due to
significantly weaker demand in the telecommunications market and higher
production costs related to under-absorption of fixed overheads. Gross profit
margins were also negatively impacted by changes in sales mix including reduced
sales of higher margin products. Gross margin as a percent of net sales was
24.7% in the current year versus 29.8% last year.
Operating Expenses
Operating expenses increased from $238,891 in the first six months of fiscal
2002 to $258,617 in fiscal 2003. Included in operating expenses are
restructuring charges of $10,285 and a goodwill impairment charge of $37,000
this year. Fiscal 2002 operating expenses include a credit of $8,185 related to
the early termination of a purchased research and development agreement with
LCE, a restructuring charge in the amount of $11,058 as well as a $13,873
non-cash charge included in Other (income) expense, net related to
debt-for-equity exchanges. Excluding these items, operating expenses were
$211,332 and $222,145 respectively, for the first half of fiscal 2003 and
fiscal 2002. Stronger European currencies unfavorably impacted operating
expenses by approximately $7,220 in fiscal 2003. The change in operating
expenses was impacted by the following matters: (i) Fiscal 2003 selling,
marketing and advertising costs in each of the Company's business segments were
favorably impacted by the Company's cost-reduction programs, primarily through
headcount reductions, and lower sales volumes, and (ii) General and
administrative expenses in fiscal 2003 were unfavorably impacted by higher
pension costs, ongoing information technology costs and consulting fees
unrelated to reorganization efforts.
Transportation operating expenses decreased from $88,474 in the first half
of fiscal 2002 to $82,012 in the same period during fiscal 2003, Motive Power
operating expenses decreased from $43,976 in fiscal 2002 to $42,759 in the
first half of fiscal 2003, and Network Power operating expenses increased from
$42,708 in fiscal 2002 to $77,408 in fiscal 2003. Excluding the first quarter
fiscal 2003 impairment charge, Network Power operating expenses were $40,408.
Corporate and other operating expenses were $56,438 in the first half of
fiscal 2003 versus $63,733 in fiscal 2002. During the second quarter of fiscal
2002, the Company recorded a credit of $8,185 relating to the early termination
of a purchased research and development agreement with LCE and a $13,873
debt-for-equity non-cash charge. The decrease in expenses is due primarily to
currency translation gains on U.S. dollar denominated borrowings in Europe
which had been hedged in the prior period.
Income Taxes
For the first six months of fiscal 2003, an income tax provision of $5,982
was recorded on a pre-tax loss of $92,406. In the same period of fiscal 2002,
an income tax provision of $729 was recorded on a pre-tax loss of $38,232. The
effective tax rate was (6.5)% and (1.9)% in the first half of fiscal 2003 and
fiscal 2002, respectively.
The effective tax rate for the first six months of fiscal year 2003 was
impacted by recognition of valuation allowances on tax benefits generated from
current period losses, in both the U.S. and certain international regions, as
well as the nondeductibility of the Network Power goodwill impairment charge.
The effective tax rate for the first half of fiscal 2002 was impacted by a
valuation allowance on the tax benefits generated from primarily domestic
losses as well as by the treatment of the debt-for-equity exchanges and the LCE
agreement termination.
Interest Expense, Net
Interest expense, net decreased $15,234 from $67,192 in the first six months
of fiscal 2002 to $51,958 in the same period of fiscal 2003. The decrease in
interest expense is principally attributed to ceasing accruing certain interest
on pre-petition debt classified as Liabilities subject to compromise in the
Company's unaudited
29
condensed consolidated balance sheet in accordance with SOP 90-7. Interest at
the stated contractual amount on debt that was not charged to operations for
the six months ended September 30, 2002 was approximately $19,007. Excluding
interest not charged pursuant to the Bankruptcy, higher interest costs were
driven by the new DIP Credit Facility and amortization of deferred financing
costs.
Reorganization Items
Reorganization items represent amounts the Company incurred as a result of
the Chapter 11 filing and are presented separately in the unaudited
consolidated statements of operations. Reorganization charges for the six
months ended September 30, 2002 were $20,118. These charges comprise the
following items: professional fees including financial and legal services;
employee retention costs for key members of management; charge for termination
of an interest rate swap as a consequence of the bankruptcy; and interest
income earned as a result of having assumed excess cash balances due to the
Chapter 11 filing. See Note 5.
Liquidity and Capital Resources
Capital Structure
Following discussions with the Company's principal lenders and evaluation of
possible capital structure alternatives, on April 15, 2002 Exide Technologies
and three of its wholly-owned U.S. subsidiaries filed for reorganization under
Chapter 11 as it offered the most efficient alternative to restructure its
balance sheet and access new working capital while continuing to operate in the
ordinary course of business. The Company's operations outside of the U.S. are
not included in the Chapter 11 proceedings. However, in connection with the
bankruptcy filing, the Company entered into a "Standstill and Subordination
Agreement" with the pre-petition Senior Secured Global Credit Facility Lenders,
whereby the lenders agreed to forbear collection of principal payments on
foreign borrowings under this facility from non-Debtor subsidiaries until
December 2003, subject to earlier termination for the occurrence of certain
events. In addition, the Company continues to accrue and pay interest of the
Debtors under the pre-petition Senior Secured Global Credit Facility subject to
liquidity calculations prescribed in the DIP Credit Facility.
On April 17, 2002 the Company received interim Bankruptcy Court approval of
a $250,000 DIP Credit Facility and final Bankruptcy Court approval for such
facility on May 10, 2002. The DIP Credit Facility was arranged by Citicorp
N.A., and Salomon Smith Barney and is being used to supplement cash flows from
operations during the reorganization process including the payment of certain
permitted pre-petition claims, working capital needs, letter of credit
requirements and other general corporate purposes.
Upon closing, approximately $129,000 of the DIP Credit Facility was drawn
down, approximately $117,000 being used to terminate and repurchase uncollected
securitized accounts receivable under the Company's then existing U.S.
receivables sale facility and the balance for financing costs and related fees.
The DIP Credit Facility is a secured revolving credit and term loan facility
under which Exide Technologies is the borrower with certain U.S. and foreign
subsidiaries acting as guarantors. The DIP Credit Facility is afforded super
priority claim status in the Chapter 11 case and is collateralized by first
liens on certain eligible U.S. assets of the Company, principally accounts
receivable, inventory and property.
The revolving credit tranche of the facility provides for borrowings up to
$121,000, of which up to $65,000 is available to Exide Technologies for
on-lending to its foreign subsidiaries, subject to borrowing base availability.
An additional $50,000 sub-facility is also available to the foreign
subsidiaries based on certain collateral asset values in the United Kingdom and
Canada. To the extent funds are borrowed under the DIP Credit Facility and
on-lent to foreign subsidiaries, additional liens on certain assets of the
borrowing foreign subsidiary and related guarantees are required. Up to $40,000
of the revolving credit tranche is available for letters of credit.
30
Borrowings under the DIP Credit Facility bear interest at base rate plus
2.75% per annum or LIBOR plus 3.75% per annum. Borrowings are limited to
eligible collateral under the DIP Credit Facility. Availability to the Company
is impacted by changes in both the amounts of the collateral and qualitative
factors (such as aging of accounts receivable and inventory reserves) as well
as cash requirements of the business such as trade credit terms. The DIP Credit
Facility contains certain financial covenants requiring the Company to maintain
specified levels of monthly earnings before interest, taxes, depreciation,
amortization, restructuring and certain other defined charges, as well as
limits on capital expenditures and cash restructuring expenditures. The DIP
Credit Facility also contains other customary covenants, including certain
reporting requirements and covenants that restrict the Company's ability to
incur indebtedness, create or incur liens or guarantees, make investments or
restricted payments, enter into leases, sell or dispose of assets, change the
nature of its business or enter into related party transactions. The Company
believes it was in compliance with DIP Credit Facility covenants as of
September 30, 2002. The Company has presented to its banks an operating plan
which assumes that the Company will maintain compliance with its covenants
through September 30, 2003. Currently the Company expects to maintain adequate
financial resources during the next twelve months (considering both funds
available under the DIP Credit facility and cash flows generated from
operations) while pursuing its strategic options and development of a plan of
reorganization. However, no assurance can be given that the Company will
maintain compliance with its covenants or have adequate financial resources
available during the next twelve months. Failure to maintain compliance with
these covenants would result in an event of default, which absent cure within
defined grace periods or obtaining appropriate waivers, would restrict the
Company's access to funds necessary to maintain its operations and assist in
funding of our reorganization plans.
The Company has obtained waivers and consents under the DIP Credit Facility
and Standstill and Subordination Agreement primarily to (i) maintain until
March 2003 cash balances outside the United States in excess of those otherwise
permitted under the agreements, (ii) modify the terms for the payment of
interest related to the conversion of certain Euro Currency Loans to Base Rate
Loans under the pre-petition credit facility, (iii) dilute below 50 percent the
Company's interest in a non-material joint venture and (iv) provide relief for
the Company to address certain non-material civil litigation commenced against
a non-Debtor subsidiary.
The DIP Credit Facility matures on the earlier of February 15, 2004, 30 days
before the pre-petition Revolving Credit and Tranche A Senior Secured Credit
Facility matures or the date on which the Company emerges from bankruptcy.
As of September 30, 2002 and November 13, 2002 total availability under the
DIP Credit Facility was approximately $30,800 and $41,400, respectively.
As described above, in connection with its Bankruptcy filing, the Company
also entered into a "Standstill and Subordination Agreement" with its
pre-petition Senior Secured Global Credit Facility lenders. Under the agreement
the lenders agreed to forbear collection of any principal payments on foreign
borrowings under this facility by non-Debtor subsidiaries until December 2003,
subject to earlier termination upon the occurrence of certain events.
Borrowings under the pre-petition Senior Secured Global Credit Facility by the
Debtors are subject to compromise.
Interest obligations for the non-Debtor subsidiaries will continue to be
accrued and paid when due. The Standstill and Subordination Agreement contains
essentially the same financial covenants as the DIP Credit Facility.
On May 31, 2002 the Company entered into a new $177,500 European accounts
receivable securitization facility. This facility replaced the Company's
existing $175,000 European securitization program. The new facility is
accounted for as a secured borrowing in accordance with the requirements of
SFAS 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" whereby the accounts receivable and related
borrowings are recorded on the Company's unaudited condensed consolidated
balance sheet.
31
Sources of Cash
Cash flows provided by financing activities were $290,928 and $40,299 in the
first six months of fiscal 2003 and fiscal 2002, respectively. The cash flows
provided by financing activities in the first six months of fiscal 2003 relate
primarily to net borrowings under the DIP Credit Facility and the impact of the
European asset securitization refinancing. The cash flows provided by financing
activities in the first six months of fiscal 2002 related primarily to net
borrowings under the Senior Secured Global Credit Facilities Agreement.
Prior to the Company's Chapter 11 filing and since that time the Company has
experienced a tightening of trade credit availability and terms. In the future,
there can be no assurance that the Company will be able to obtain and return to
trade credit on terms traditionally obtained.
The Company generated $1,096 and $4,833 in cash from the sale of non-core
businesses and other assets in the first six months of fiscal 2003 and fiscal
2002, respectively. Proceeds from these sales were primarily used to reduce
debt.
Total debt at September 30, 2002 (including amounts subject to compromise)
was $1,757,034. See Note 12 to the unaudited condensed consolidated financial
statements for composition of such debt. Indebtedness of the Debtors as of the
Petition Date, amounting to $1,053,629, is subject to settlement under a plan
of reorganization to be voted upon by creditors and equity holders and approved
by the Bankruptcy Court.
Going forward, in addition to operating cash flows, the Company's principal
sources of liquidity will be the DIP Credit Facility, plus proceeds from any
asset sales. The Company is considering various asset sales, and in connection
therewith has engaged The Blackstone Group to evaluate potential opportunities.
No commitments have been made as to any specific asset sales.
Uses of Cash
Cash flows used by operating activities were $261,669 (including $261,723
usage of cash related to the net change from sales of receivables) in the first
half of fiscal 2003. This compares to cash flows used by operating activities
of $7,969 (of which $6,406 cash usage related to the net change from sales of
receivables) in the same period of fiscal 2002. Excluding the effect of
accounts receivable securitization activity, comparative cash flows benefited
from higher prior year payments of accounts payable and accrued expenses in the
first half of fiscal 2002, offset by the effect of lower general sales volumes.
The uncertainties of the Chapter 11 filing could also have a negative impact on
the Company's ability to attract and retain customers. NAPA, a major customer
of the Transportation segment, recently advised the Company of its intent to
source a component of its requirements from competitors. The Company currently
estimates that this action could result in potential lost volume of up to
800,000 units annually.
The Company's liquidity needs arise primarily from the funding of working
capital needs, obligations on indebtedness and capital expenditures. Because of
the seasonality of our business, more cash has been typically generated in our
third and fourth fiscal quarters than the first and second quarters. Greatest
cash demands from operations have historically occurred during the months of
June through October.
Capital expenditures were $16,616 and $43,570 in the first six months of
fiscal 2003 and fiscal 2002, respectively. Capital expenditures during the
first six months of fiscal 2003 were impacted by the timing of the Chapter 11
filing and related liquidity availability.
The Company has noncontributory defined benefit pension plans covering
substantially all hourly employees in North America. Cash contributions to
these plans are made in accordance with the minimum requirements of ERISA.
Because of the recent down-turn in equity markets, among other factors, these
plans are currently significantly under-funded. Based upon current assumptions
and regulatory requirements the Company's minimum future cash contribution
requirements are expected to increase significantly in fiscal years 2004
through 2007.
32
Financial Instruments and Market Risk
The Company on occasion has used financial instruments, including fixed and
variable rate debt as well as swap, forward and option contracts to finance its
operations and to hedge interest rate currency and certain lead purchasing
requirements. The swap, forward, and option contracts are entered into for
periods consistent with related underlying exposures and do not constitute
positions independent of those exposures. The Company does not enter into
contracts for speculative purposes nor is it a party to any leveraged
instruments.
On October 18, 2000, we entered into a $60,000 two year interest rate swap
agreement for which the Company paid a quarterly fixed rate of 6.55% and
received a three-month LIBOR rate. This swap hedged a portion of the variable
interest exposure on our $900,000 Senior Secured Global Credit Facilities
Agreement Tranche B Term Loans. The swap was terminated in connection with the
bankruptcy and the cost of settlement reflected as a Reorganization item and
Liability Subject to Compromise in the unaudited condensed consolidated
financial statements.
The Company's ability to utilize financial instruments has been
significantly restricted because of the Chapter 11 cases and the resultant
tightening, and/or elimination of credit availability with counter-parties.
Accordingly, the Company is now exposed to greater risk with respect to its
ability to manage exposures to fluctuations in foreign currencies, interest
rates, and lead prices.
Related and Certain Other Parties
The services of Lisa J. Donahue, Chief Financial Officer and Chief
Restructuring Officer, are provided to the Company pursuant to a Services
Agreement, dated October 25, 2001, between the Company and JA&A Services LLC.
Under the Services Agreement, the Company is charged an hourly fee for Ms.
Donahue's and other temporary employees' services, and Ms. Donahue, a principal
in JA&A Services LLC, is compensated independently by JA&A Services LLC. JA&A
Services LLC is an affiliate of Alix Partners, LLC, a financial advisory and
consulting firm specializing in corporate restructuring, which has been
retained by the Company in connection with its financial restructuring. Ms.
Donahue is also a principal in Jay Alix & Associates. Fees incurred by the
Company during the three and six months ended September 30, 2002 under the
Services Agreement were $2,226 and $5,348, respectively.
Other Matters
The SEC has issued comments on the following reports of the Company: Annual
Report on Form 10-K for the fiscal year ended March 31, 2001; Amended Form 10-K
for the fiscal year ended March 31, 2001; Quarterly Report on Form 10-Q for the
quarter ended June 30, 2001; Quarterly Report on Form 10-Q for the quarter
ended September 30, 2001; Form 8-K/A dated December 13, 2000; and Form 8-K
dated March 23, 2001. The Company has responded to the SEC's comments. The
Company believes the information in this report fairly presents in all material
respects the financial condition and results of operation of the Company. There
can be no assurance, however, that the SEC will not have additional comments or
reach a determination different than that of the Company's.
Item 3. Quantitative and Qualitative Disclosures About Market Risks
Changes to the quantitative and qualitative market risks as of September 30,
2002 are described in Management's Discussion and Analysis--Liquidity and
Capital Resources. Also, see our Form 10-K for the fiscal year ended March 31,
2002 for further information.
Item 4. Controls and Procedures
(a) Within the 90 days prior to the filing of this Report, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Chief Executive Officer and
33
Chief Financial Officer, of the effectiveness of the design and operation of
the Company's "disclosure controls and procedures" (as defined in Rule
13a-14(c) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")), in accordance with Rule 13a-15 of the Exchange Act. Based upon that
evaluation, The Chief Executive Officer and Chief Financial Officer, together
with the other members of management participating in the evaluation, concluded
that the Company is in compliance with the requirements of Rule 13a-15(a) of
the Exchange Act and that its disclosure controls and procedures are effective
for their intended purpose as implemented at the date of the evaluation. It
should be recognized that the design of any system of controls is based upon
certain assumptions about the scope of the tasks to be performed and the
environment in which such tasks are to be performed, and there can be no
assurance that any system will achieve its intended results under all
circumstances.
(b) There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of the Company's evaluation of its disclosure controls
and procedures.
The Company has been engaged in a program to enhance its financial reporting
process, particularly in response to (a) a substantial turnover in personnel
following certain changes in the membership of the Company's senior management
and (b) the reporting and other administrative obligations arising from the
Company's Chapter 11 filing, entering into the DIP Credit Facility and the
adoption of the certification requirements by the Securities and Exchange
Commission in its June 27, 2002 Order and under the Sarbanes-Oxley Act of 2002.
In this regard the Company has hired additional personnel and contracted to
acquire other resources to enhance the control environment, and undertaken to
develop and provide enhanced training and education to staff members and
initiated other organizational changes to improve the Company's ability timely
to file complete and accurate reports in compliance with the Exchange Act. In
addition, in connection with preparation of certain of the Company's Annual
Reports, including for the fiscal year ended March 31, 2002, the Company's
independent accountants have identified certain reportable conditions related
to the Company's control environment which have been reported to the Company
and the Audit Committee of the Company's Board of Directors, and with respect
to which the Company has taken steps and developed plans to address such
conditions.
34
CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISION OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
Except for historical information, this report may be deemed to contain
"forward-looking" statements. The Company desires to avail itself of the Safe
Harbor provisions of the Private Securities Litigation Reform Act of 1995 (the
"Act") and is including this cautionary statement for the express purpose of
availing itself of the protection afforded by the Act.
Examples of forward-looking statements include, but are not limited to (a)
projections of revenues, cost of raw materials, income or loss, earnings or
loss per share, capital expenditures, growth prospects, dividends, the effect
of currency translations, capital structure and other financial items, (b)
statements of plans of and objectives of the Company or its management or Board
of Directors, including the introduction of new products, or estimates or
predictions of actions by customers, suppliers, competitors or regulating
authorities, (c) statements of future economic performance and (d) statements
of assumptions, such as the prevailing weather conditions in the Company's
market areas, underlying other statements and statements about the Company or
its business.
Factors that could cause actual results to differ materially from these
forward looking statements include, but are not limited to, the following
General Factors such as: (i) the Company's ability to implement business
strategies and financial reorganization and restructuring plans, (ii)
unseasonable weather (warm winters and cool summers) which adversely affects
demand for automotive and some industrial batteries, (iii) the Company's
substantial debt and debt service requirements which restrict the Company's
operational and financial flexibility, as well as imposing significant interest
and financing costs, (iv) the Company is subject to a number of litigation
proceedings, the results of which could have a material adverse effect on the
Company and its business, (v) the Company's assets include the tax benefits of
net operating loss carry forwards, realization of which are dependent upon
future taxable income, (vi) lead, which experiences significant fluctuations in
market price and which, as a hazardous material, may give rise to costly
environmental and safety claims, can affect the Company's results because it is
a major constituent in most of the Company's products, (vii) the battery
markets in North America and Europe are very competitive and, as a result, it
is often difficult to maintain margins, (viii) the Company's consolidation and
rationalization of acquired entities requires substantial management time and
financial and other resources and is not without risk, (ix) foreign operations
involve risks such as disruption of markets, changes in import and export laws,
currency restrictions and currency exchange rate fluctuations, (x) the Company
is exposed to fluctuations in interest rates on our variable debt which can
affect the Company's results, (xi) general economic conditions, (xii) the
ability to acquire goods and services and/or fulfill labor needs at budgeted
costs and Bankruptcy considerations such as: (a) the Company's ability to
continue as a going concern, (b) the Company's ability to operate in accordance
with the terms of and maintain compliance with covenants of the DIP Credit
Facility and other financing arrangements, (c), the Company's ability to obtain
Bankruptcy Court approval with respect to motions in the Chapter 11 cases from
time to time, (d) the Company's ability to develop, confirm and consummate a
plan of reorganization with respect to the Chapter 11 cases, (e) the Company's
ability to attract, motivate and retain key personnel, (f) the Company's
ability to obtain and maintain normal terms with vendors and service providers,
(g) the Company's ability to maintain contracts that are critical to our
business, and (h) the Company's ability to attract and retain customers.
Therefore, the Company cautions each reader of this report carefully to
consider those factors hereinabove set forth, because such factors have, in
some instances, affected and in the future could affect, the ability of the
Company to achieve its projected results and may cause actual results to differ
materially from those expressed herein.
35
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Bankruptcy Considerations
As of the Petition Date, substantially all pending litigation against the
Debtors was stayed. We cannot predict what action, if any, the Bankruptcy Court
may take with respect to pending litigation.
Former Senior Executives of the Company: Arthur M. Hawkins, Douglas N.
Pearson and Alan E. Gauthier.
Exide established a $13,400 reserve in fiscal 2000 to cover litigation
related to allegations that used batteries were sold as new. The Company has
resolved these claims, including the third quarter fiscal 2002 settlement of
the sole remaining "legacy" action, Houlihan v. Exide. As a result of the
Houlihan settlement, the Company recorded an additional expense in the third
quarter of fiscal 2002 of $1,400 for reimbursement of legal fees. At September
30, 2002, there is approximately a $2,500 reserve remaining, representing the
Company's estimate of its remaining obligations under the Houlihan and other
"legacy" settlements.
On March 23, 2001, Exide reached a plea agreement with the U.S. Attorney for
the Southern District of Illinois, resolving an investigation of the conduct of
certain former senior executives of the Company. Under the terms of that
settlement Exide agreed to pay a fine of $27,500 over five years, to
five-years' probation and to cooperate with the U.S. Attorney in prosecuting
Arthur M. Hawkins, Douglas N. Pearson and Alan E. Gauthier, former senior
executives of the Company. The payment terms of the plea agreement are
dependent upon the Company's compliance with the plea agreement during the
five-year probation period. Generally, the terms of the probation would permit
the U.S. Government to reopen the case against Exide if the Company violates
the terms of the plea agreement or other provisions of law. The plea agreement
was lodged with the U.S. District Court for the Southern District of Illinois,
and accepted on February 27, 2002. The Company reserved $31,000 for this
matter, including expected costs and out-of-pocket expenses, in the first
quarter of fiscal 2001, and an additional $1,000 in the third quarter of fiscal
2002. At September 30, 2002, approximately $27,500 of this reserve remains. As
a result of the imposition of the automatic stay arising upon the Company's
Chapter 11 filing, the Company has not made the first installment payment of
its $27,500 fine. The Company is uncertain as to the effect of this non-payment
and the Bankruptcy Code with respect to the plea agreement.
Exide is currently involved in litigation with the former senior executives
referenced above. The former senior executives made claims to enforce
separation agreements, reimbursements of legal fees, and other contracts, and
Exide has filed claims and counterclaims asserting fraud, breach of fiduciary
duties, misappropriation of corporate assets and civil conspiracy. In addition,
Exide has filed an action in the Bankruptcy Court against the former senior
executives to recover certain payments of legal fees Exide was required to
advance to such individuals prior to the Petition Date.
The Company has filed two claims with its insurers for reimbursement of the
amounts paid to the former executives, and intends to seek reimbursement for
those amounts. However, the Company has not recognized any receivable for such
reimbursements at September 30, 2002.
Hazardous Materials
Exide is involved in several lawsuits pending in state and federal courts in
South Carolina, Pennsylvania, Indiana, and Tennessee. These actions allege that
Exide and its predecessors allowed hazardous materials used in the battery
manufacturing process to be released from certain of its facilities, allegedly
resulting in personal injury and/or property damage. In January 2002, the
counsel that brought the South Carolina actions filed additional claims in the
Circuit Court for Greenville County, South Carolina. The Company's preliminary
review of these claims suggest they are without merit, and the Company plans to
vigorously defend itself in these matters. The Company does not believe any
reserves are currently warranted for any of these claims.
36
GNB Acquisition
In July 2001, Pacific Dunlop Holdings (US), Inc. ("PDH") and several of its
foreign affiliates (the "Sellers") under the various agreements through which
Exide and its affiliates acquired GNB, filed a complaint in the Circuit Court
for Cook County, Illinois alleging breach of contract, unjust enrichment, and
conversion against Exide and three of its foreign affiliates. The Sellers
maintain they are entitled to approximately $16,400 in cash assets acquired by
the defendants through their acquisition of GNB. In December 2001, the Court
denied the defendants' motion to dismiss the complaint, without prejudice to
re-filing the same motion after discovery proceeds. The defendants have filed
an answer and a counterclaim. On July 8, 2002, the Court authorized discovery
to proceed as to all parties except Exide. In August 2002, the case was removed
to the U.S. Bankruptcy Court for the Northern District of Illinois and in
October 2002, the parties presented oral arguments, in the case of PDH, to
remand the case to Illinois state court and, in the case of Exide, to transfer
the case to the U.S. Bankruptcy Court for the District of Delaware. To the
extent this action implicates Exide's interests, management plans to vigorously
defend the action and pursue the counterclaim.
In December 2001, PDH filed a separate action in the Circuit Court for Cook
County, Illinois seeking recovery of approximately $3,100 for amounts allegedly
owed by Exide under various agreements between the parties. The claim arises
from letters of credit and other security allegedly provided by PDH for GNB's
performance of certain of GNB's obligations to third parties that PDH claims
Exide was obligated to replace. Exide's answer contested the amounts claimed by
PDH and Exide filed a counterclaim. Although this action has been consolidated
with the Cook County suit concerning GNB's cash assets, the claims relating to
this action are currently subject to the automatic bankruptcy stay.
Other
On June 6, 2002, McKinsey & Company International filed suit against Exide
Holding Europe, S.A., Compagnie Europeene D'accumulateurs, S.A., Euro Exide
Corporation Ltd., Exide Italia S.r.l, Deutsche Exide GmbH and Exide
Transportation Holding Europe, S.L. in the U.S. District Court for the Southern
District of New York, seeking to compel arbitration of McKinsey's request for
payment of approximately $5,000 for consulting services. The Company intends to
vigorously defend the suit. The Company has recorded a liability related to
this matter which is classified as a liability subject to compromise in the
unaudited condensed consolidated balance sheet at September 30, 2002. McKinsey
also has initiated arbitration to resolve the dispute, and the arbitration is
proceeding over respondents' objection before the American Arbitration
Association's International Centre for Dispute Resolution. The arbitration is
expected to conclude during 2003.
Exide is a defendant in an arbitration proceeding initiated in October of
2001, by Margulead Limited ("Margulead"). In June of 1997, GNB, now an
operating division of Exide, entered into an agreement with Margulead to build
a facility to test and develop certain lead acid battery recycling technology
developed by Margulead. This agreement was terminated by Exide after the
Margulead technology failed to meet initial performance criteria. Margulead now
alleges breach of contract and has requested damages in the amount of
approximately $2,600, which represents the projected cost of building a testing
facility. Margulead has indicated that it may amend its claim to seek up to
$9,000 in damages. Because Margulead is a foreign entity and the arbitration is
pending in London, the arbitration is currently proceeding notwithstanding
Exide's Chapter 11 proceedings. The Company intends to defend the claim and
denies liability thereunder.
The Company is involved in various other claims and litigation incidental to
the conduct of its business. Based on consultation with legal counsel,
management does not believe that any such claims or litigation to which the
Company is a party, either individually or in the aggregate, will have a
material adverse effect on the Company's business, financial condition, cash
flows or results of operations, although quarterly or annual operating results
may be materially affected.
37
Item 2. Changes in Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
As a result of the Chapter 11 cases, certain of the Company's pre-petition
debt arrangements are in default. See Note 2 (Proceedings Under Chapter 11 of
the Bankruptcy Code) and Note 12 (Debt) to the Company's unaudited condensed
consolidated financial statements.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
Effective September 1, 2002, John Van Zile resigned as Executive Vice
President, General Counsel and Secretary of the Company and Stuart H. Kupinsky,
age 34, was elected Senior Vice President, General Counsel and Secretary. Prior
to joining Exide, beginning in January 2001 Mr. Kupinsky was Senior Vice
President, General Counsel and Secretary of Teligent, Inc., a provider of
wireless telecommunications services and applications which emerged from
reorganization under Chapter 11 of the Bankruptcy Code in September 2002. Prior
to that Mr. Kupinsky was Vice President, Legal and Business Affairs at
Teligent, Inc. from 1999 to 2001 and Associate General Counsel from 1997 to
1999. Prior to joining Teligent Inc., Mr. Kupinsky worked for two years in the
Antitrust Division of the U.S. Department of Justice.
On September 17, 2002, the Board of Directors of the Company expanded the
number of directors constituting the entire Board to nine and appointed Daniel
W. Miller a director of the Company. Mr. Miller, 51, is the President and Chief
Executive Officer of Russell-Stanley Holdings, Inc., a manufacturer of steel
and plastic industrial containers and provider of related services. He recently
led that company through the restructuring of its capital and a change in
ownership. Prior to his affiliation with Russell-Stanley, Mr. Miller held
executive positions with Vestar Resources, Inc., an affiliate of Vestar Capital
Partners, a private equity firm. Mr. Miller's prior experience also includes
executive positions at Wesray Capital Corporation, Forstmann Little & Co. and
Dresser Industries, Inc.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
10.1 Form of employment agreement of Stuart H. Kupinsky
99.1 Certifications pursuant to Section 906 of Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K.
On July 15, 2002, the Company filed an interim report on Form 8-K
stating that it expected to file its Annual Report on Form 10-K for the
fiscal year ended March 31, 2002 on or prior to July 31, 2002.
On August 1, 2002, the Company filed an interim report on Form 8-K
stating that it expected to file its Annual Report on Form 10-K for the
fiscal year ended March 31, 2002 by August 31, 2002.
On October 8, 2002 the Company filed an interim report on Form 8-K
announcing the election of Daniel W. Miller as a Director of the Company.
38
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EXIDE TECHNOLOGIES
By: /s/ LISA J. DONAHUE
-----------------------------
Lisa J. Donahue
Chief Financial Officer and
Chief Restructuring Officer
November 14, 2002
EXIDE TECHNOLOGIES
By: /s/ IAN J. HARVIE
-----------------------------
Ian J. Harvie
Vice President, Corporate
Controller
November 14, 2002
39
CERTIFICATION
I, Craig H. Muhlhauser certify that:
1. I have reviewed this quarterly report on Form 10-Q of Exide
Technologies;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
By: /s/ CRAIG H. MUHLHAUSER
-----------------------------
Craig H. Muhlhauser
Chairman, President and Chief
Executive Officer
Date: November 14, 2002
40
CERTIFICATION
I, Lisa J. Donahue certify that:
1. I have reviewed this quarterly report on Form 10-Q of Exide
Technologies;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
By: /s/ LISA J. DONAHUE
-----------------------------
Lisa J. Donahue
Chief Financial Officer and
Chief Restructuring Officer
Date: November 14, 2002
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