SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C.Washington, D.C. 20549FORMForm 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One) x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF
THE SECURITIES EXCHANGE ACT OF 1934For the
quarterquarterly period endedAugust 31, 2002February 28, 2003OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to .
Commission file number 333-49957-01
------------- EAGLE-PICHER HOLDINGS, INC. --------------------------- (Exact name of registrant as specified in its charter) DELAWARE 13-3989553 - ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S.EaglePicher Holdings, Inc.
A Delaware Corporation
I.R.S. Employer Identification
No.) incorporation or organization)13-398955311201 North Tatum Blvd.
,Suite 110, Phoenix, Arizona 85028---------------------------------------------------------- (Address of principal executive offices) Zip Code Registrant'sRegistrant’s telephone number, including area
codecode:
602-923-7200------------- (Not Applicable) -----------------------------------------Former
name, former address and former fiscal year, if changed since last report EAGLE-PICHERNameEagle-Picher Holdings, Inc.EAGLEPICHER HOLDINGS, INC. IS FILING THIS REPORT VOLUNTARILY IN ORDER TO COMPLY WITH THE REQUIREMENTS OF THE TERMS OF ITS 9 3/8% SENIOR SUBORDINATED NOTES AND 11 3/4% SERIES B CUMULATIVE EXCHANGEABLE PREFERRED STOCK AND IS NOT REQUIRED TO FILE THIS REPORT PURSUANT TO EITHER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.1934Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
twelve12 months, and (2) has been subject to such filing requirements for the past 90 days.(See explanatory note immediately above.) Yes No x ---- ----
Yes o No x (See explanatory note immediately above.) Indicate by check mark whether the
additionalregistrantEagle-Picher Industries, Inc., has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securitiesis an accelerated filer (as defined in Exchange Actof 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes x No ---- ---- 963,500Rule 12b-2)
Yes o No x 930,500 shares of common capital stock, $.01 par value each, were outstanding at
October 15, 2002.April 14, 20031
TABLE OF ADDITIONAL REGISTRANTS
Jurisdiction of IRS Employer Incorporation or Commission File Identification Name Organization Number Number ---- ------------ ------ ------Eagle-Picher Industries, Inc. Ohio 333-49957 31-0268670 Daisy Parts, Inc. Michigan 333-49957-02 38-1406772 Eagle-Picher Development Co., Inc. Delaware 333-49957-03 31-1215706 Eagle-Picher Far East, Inc. Delaware 333-49957-04 31-1235685 Eagle-Picher Minerals, Inc. Nevada 333-49957-06 31-1188662 Eagle-Picher Technologies, LLC Delaware 333-49957-09 31-1587660 Hillsdale Tool & Manufacturing Co. Michigan 333-49957-07 38-0946293 EPMR Corporation (f/k/a Michigan Automotive Research Corp.) Michigan 333-49957-08 38-21859092TABLE OF CONTENTSTABLE OF ADDITIONAL REGISTRANTS
Jurisdiction IRS Employer Incorporation or Commission Identification Names Former Names Organization File Number Number EaglePicher Incorporated Eagle-Picher Industries, Inc Ohio 333-49957 31-0268670 Daisy Parts, Inc. N/A Michigan 333-49957-02 38-1406772 EaglePicher Development Co., Inc. Eagle-Picher Development Co.,Inc Delaware 333-49957-03 31-1215706 EaglePicher Far East, Inc. Eagle-Picher Far East, Inc Delaware 333-49957-04 31-1235685 EaglePicher Filtration and Minerals, Inc. Eagle-Picher Minerals, Inc Nevada 333-49957-06 31-1188662 EaglePicher Technologies, LLC Eagle-Picher Technologies, LLC Delaware 333-49957-09 31-1587660 Hillsdale Tool & Manufacturing Co. N/A Michigan 333-49957-07 38-0946293 EPMR Corporation (f/k/a Michigan
Automotive Research Corp.)N/A Michigan 333-49957-08 38-2185909 TABLE OF CONTENTS
Page Number PART I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) Condensed Consolidated Balance Sheets 3 Condensed Consolidated Statements of Income (Loss) 4 Condensed Consolidated Statements of Cash Flows 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 19 Item 3. Quantitative and Qualitative Disclosures About Market Risk 30 Item 4. Controls and Procedures 31 PART II. OTHER INFORMATION Item 1. Legal Proceedings 31 Item 6. Exhibits and Reports on Form 8-K 31 Signatures 32 Certifications 41 Exhibit Index 43 32
PART I.FINANCIAL INFORMATION
ITEMItem 1.
FINANCIAL STATEMENTS. EAGLE-PICHER HOLDINGS, INC.Financial Statements.EaglePicher Holdings, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
November 30, 2002 and February 28, 2003
(unaudited) (in thousands of dollars)
November 30, February 28, 2002 2003 Current Assets: Cash and cash equivalents $ 31,522 $ 32,290 Receivables, net 23,704 24,373 Retained interest in EaglePicher Funding Corporation, net 29,400 29,409 Costs and estimated earnings in excess of billings 16,942 20,142 Inventories 54,718 54,447 Net assets of operations to be sold 643 494 Prepaid expenses and other assets 15,667 18,861 Deferred income taxes 10,798 10,798 183,394 190,814 Property, Plant and Equipment, net 183,405 176,524 Goodwill, net 163,940 163,940 Prepaid Pension 54,796 54,613 Other Assets, net 27,506 25,777 $ 613,041 $ 611,668 Current Liabilities: Accounts payable $ 85,055 $ 74,987 Current portion of long-term debt 18,625 150,393 Compensation and employee benefits 21,044 18,385 Billings in excess of costs and estimated earnings 944 1,048 Accrued divestiture reserve 17,662 15,198 Other accrued liabilities 37,653 37,955 180,983 297,966 Long-Term Debt, net of current portion 355,100 233,600 Postretirement Benefits Other Than Pensions 17,635 17,476 Other Long-Term Liabilities 8,928 9,506 562,646 558,548 11.75% Cumulative Redeemable Exchangeable Preferred Stock 137,973 141,910 Commitments and Contingencies Shareholders’ Equity (Deficit): Common stock 10 10 Additional paid-in capital 99,991 99,991 Accumulated deficit (175,112 ) (177,881 ) Accumulated other comprehensive loss (4,376 ) (2,819 ) Treasury stock (8,091 ) (8,091 ) (87,578 ) (88,790 ) $ 613,041 $ 611,668 The accompanying notes are an integral part of these consolidated balance sheets.
3
EaglePicher Holdings, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(UNAUDITED) (Dollars in
Three Months Ended February 28, 2002 and 2003
(unaudited) (in thousands of dollars, except share and per share amounts)
Three Months Ended Nine Months Ended August 31 August 31, ----------------------- --------------------- 2002 2001 2002 2001 --------- --------- --------- ---------Net Sales $ 169,053 $ 169,520 $ 509,729 $ 517,676 --------- --------- --------- --------- Operating Costs and Expenses: Cost of products sold (exclusive of depreciation) 131,617 139,673 397,943 417,300 Selling and administrative 14,295 13,054 49,210 37,925 Depreciation 11,926 11,250 34,257 32,882 Amortization of intangibles 4,214 4,135 12,734 12,240 Restructuring -- -- 2,998 -- Divestitures 161 -- 6,131 500 Management compensation - special 524 609 2,905 2,498 Insurance related losses -- -- 3,100 -- Other (83) 107 (305) (162) --------- --------- --------- --------- 162,654 168,828 508,973 503,183 --------- --------- --------- --------- Operating Income 6,399 692 756 14,493 Interest expense (9,632) (9,920) (31,935) (30,170) Other income (expense), net 412 1,600 1,388 2,439 --------- --------- --------- --------- Loss from Continuing Operations Before Taxes (2,821) (7,628) (29,791) (13,238) Income Taxes (Benefit) 750 (2,525) 1,955 (4,300) --------- --------- --------- --------- Loss from Continuing Operations (3,571) (5,103) (31,746) (8,938) Discontinued Operations: Loss from operations of discontinued segment, net of income taxes (benefit) of $(900) -- -- -- (1,657) Loss on disposal of business segment including provisions of $1,733 and $4,138 for operating losses during phase-out periods, net of income tax benefits of $2,000 and $11,800 -- (5,500) -- (23,700) --------- --------- --------- --------- Net Loss $ (3,571) $ (10,603) $ (31,746) $ (34,295) ========= ========= ========= ========= Loss Applicable to Common Shareholders $ (7,289) $ (13,921) $ (42,695) $ (44,065) ========= ========= ========= ========= Comprehensive Income (Loss) $ (3,468) $ (12,180) $ (30,300) $ (36,769) ========= ========= ========= ========= Basic Loss per Share to Common Shareholders: Loss from continuing operations $ (7.57) $ (8.58) $ (44.22) $ (19.02) Discontinued operations net loss -- (5.60) -- (25.79) --------- --------- --------- --------- Net Loss $ (7.57) $ (14.18) $ (44.22) $ (44.81) ========= ========= ========= =========See
2002 2003 Net Sales $ 163,229 $ 170,310 Operating Costs and Expenses: Cost of products sold (exclusive of depreciation) 129,772 133,112 Selling and administrative 13,482 14,551 Depreciation and amortization of intangibles 11,038 11,607 Goodwill amortization 3,956 — Loss from divestitures 125 — 158,373 159,270 Operating Income 4,856 11,040 Interest expense (11,081 ) (9,409 ) Other income, net 403 433 Income (Loss) Before Taxes (5,822 ) 2,064 Income Taxes 385 896 Net Income (Loss) (6,207 ) 1,168 Preferred Stock Dividends Accreted 3,512 3,937 Loss Applicable to Common Shareholders $ (9,719 ) $ (2,769 ) Basic and Diluted Net Loss per Share Applicable to Common Shareholders $ (10.04 ) $ (2.98 ) Weighted Average Number of Common Shares 968,417 930,500 The accompanying notes
to the condensedare an integral part of these consolidated financial statements.4
EAGLE-PICHER HOLDINGS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Dollars in thousands)
August 31 November 30 ASSETS 2002 2001 -------- --------CURRENT ASSETS Cash and cash equivalents $ 12,575 $ 24,620 Receivables, net 60,234 100,052 Inventories: Raw materials and supplies 25,059 24,737 Work in process 28,002 32,038 Finished goods 14,820 18,569 -------- -------- 67,881 75,344 Net assets held for sale 1,753 3,258 Prepaid expenses 12,071 15,122 Deferred income taxes 24,287 24,287 -------- -------- Total current assets 178,801 242,683 -------- -------- PROPERTY, PLANT AND EQUIPMENT 359,001 352,883 Less accumulated depreciation 165,719 136,128 -------- -------- Net property, plant and equipment 193,282 216,755 GOODWILL, net of accumulated amortization of $69,492 and $57,624, respectively 167,894 179,762 OTHER ASSETS 87,023 86,711 -------- -------- Total Assets $627,000 $725,911 ======== ======== LIABILITIES AND SHAREHOLDERS' DEFICIT CURRENT LIABILITIES Accounts payable $ 71,584 $ 86,297 Long-term debt - current portion 20,966 41,957 Other accrued liabilities 81,006 73,025 -------- -------- Total current liabilities 173,556 201,279 LONG-TERM DEBT - less current portion 358,831 401,169 DEFERRED INCOME TAXES 7,088 6,277 OTHER LONG-TERM LIABILITIES 28,553 27,755 -------- -------- Total Liabilities 568,028 636,480 -------- -------- 11-3/4% CUMULATIVE REDEEMABLE EXCHANGEABLE PREFERRED STOCK; 50,000 shares authorized; 14,191 issued and outstanding shares 134,035 123,086 -------- --------5EAGLE-PICHER HOLDINGS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Dollars in thousands)
August 31 November 30 2002 2001 --------- ---------SHAREHOLDERS' EQUITY (DEFICIT) Common stock, voting - $.01 par value each: 1,000,000 shares authorized and issued 10 10 Additional paid-in capital 99,991 99,991 Accumulated deficit (166,088) (123,393) Other comprehensive loss (4,284) (5,730) Treasury Stock, at cost: 36,500 and 27,750 shares (4,692) (4,533) --------- --------- Total Shareholders' Deficit (75,063) (33,655) --------- --------- Total Liabilities and Shareholders' Deficit $ 627,000 $ 725,911 ========= =========See accompanying notes to the condensed consolidated financial statements. 6EAGLE-PICHER HOLDINGS, INC.EaglePicher Holdings, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) (Dollars in thousands)
Nine Months Ended August 31 2002 2001 -------- --------CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(31,746) $(34,295) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 49,344 47,611 Provision for discontinued operations -- 23,700 Loss on divestitures 6,131 500 Deferred income taxes 811 -- Changes in assets and liabilities, net of effect of non cash loss on divestitures: Sale of receivables (see Note F) 40,975 -- Receivables (3,573) (7,840) Inventories 2,323 2,899 Prepaid expenses 3,025 (1,268) Other assets (4,736) (4,569) Accounts payable (13,325) 13,055 Accrued liabilities 3,823 (5,317) Other -- (2,084) -------- -------- Net cash provided by operating activities 53,052 32,392 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of divisions 8,917 -- Capital expenditures (12,611) (34,874) Proceeds from sale of property and equipment and other 639 (966) -------- -------- Net cash used in investing activities (3,055) (35,840) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Reduction of long-term debt (22,579) (14,322) Net borrowings (repayments) under revolving credit agreements (40,750) 26,765 Acquisition of treasury stock (159) (1,692) Other -- 1,432 -------- -------- Net cash provided by (used in) financing activities (63,488) 12,183 -------- -------- NET CASH PROVIDED BY DISCONTINUED OPERATIONS -- 1,027 -------- -------- Effect of exchange rates on cash 1,446 (2,474) -------- --------7EAGLE-PICHER HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Dollars in thousands)
Nine Months Ended August 31 2002 2001 -------- --------Net increase (decrease) in cash and cash equivalents (12,045) 7,288 Cash and cash equivalents, beginning of period 24,620 7,467 -------- -------- Cash and cash equivalents, end of period $ 12,575 $ 14,755 ======== ======== Supplemental cash flow information: Cash paid during the nine months ended August 31: Interest paid $ 23,209 $ 23,135 ======== ======== Income taxes paid (refunded), net $ (4,835) $ (1,695) ======== ========See
Three-Months Ended February 28, 2002 and 2003
(unaudited) (in thousands of dollars)
2002 2003 Cash Flows From Operating Activities: Net income (loss) $ (6,207 ) $ 1,168 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 15,649 12,390 Loss from divestitures 125 — Changes in assets and liabilities: Sale of receivables, net (See Note F) 43,775 — Receivables and retained interest in EaglePicher Funding Corporation, net 2,897 (678 ) Inventories 5,507 271 Prepaid expenses 171 (3,194 ) Other assets (1,323 ) 126 Accounts payable (9,527 ) (10,068 ) Accrued liabilities 6,332 (4,717 ) Other, net (7,118 ) (2,883 ) Net cash provided by (used in) operating activities 50,281 (7,585 ) Cash Flows From Investing Activities: Proceeds from sales of divisions 6,300 — Proceeds from the sale of property and equipment, and other, net — 329 Capital expenditures (5,106 ) (3,903 ) Other, net 122 — Net cash provided by (used in) investing activities 1,316 (3,574 ) Cash Flows From Financing Activities: Reduction of long-term debt (12,800 ) (4,232 ) Net borrowings (repayments) under revolving credit agreements (36,088 ) 14,500 Acquisition of treasury stock 156 — Net cash (used in) provided by financing activities (48,732 ) 10,268 Effect of Exchange Rates on Cash 151 1,659 Net Increase in Cash and Cash Equivalents 3,016 768 Cash and Cash Equivalents, beginning of period 24,620 31,522 Cash and Cash Equivalents, end of period $ 27,636 $ 32,290 Supplemental Cash Flow Information: Interest paid $ 5,003 $ 3,068 Income taxes paid (refunded), net $ 267 $ — The accompanying notes
to the condensedare an integral part of these consolidated financial statements.8EAGLE-PICHER HOLDINGS, INC.5
EaglePicher Holdings, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(unaudited)A.BASIS OF REPORTING FOR INTERIM FINANCIAL STATEMENTS
TheOur accompanying unaudited condensed consolidated financial statements
of Eagle-Picher Holdings, Inc. (the "Company")have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission("SEC"(“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations, althoughthe Company believeswe believe that the disclosures are adequate to make the information presented not misleading. These financial statements should be read in conjunction withtheour financial statements and notes thereto for the fiscal year ended November 30,20012002 presented inthe Company'sour Form 10-K, filed with the SEC onFebruary 15, 2002, as amended September 20, 2002. Certain amounts herein have been reclassified to conform to the reclassifications made in the amended Form 10-K filed on September 20, 2002.March 3, 2003.The financial statements presented herein reflect all adjustments (consisting of normal and recurring
accruals)adjustments), which, intheour opinionof management,are necessary to fairly state the results of operations for the threemonths and nine monthsmonth periods endedAugust 31,February 28, 2002 and2001.2003. Results of operations for interim periods are not necessarily indicative of results to be expected for an entire year.Certain prior yearIn the fourth quarter of fiscal 2002, we restated our financial statements to reflect the appropriate adoption of EITF 00-10, “Accounting for Shipping and Handling Fees and Costs,” which we should have adopted in 2001. EITF 00-10 states that all amounts billed to a customer in a sale transaction related to shipping and handling represent revenues earned for the goods provided and should be classified as revenue. Prior to the adoption of EITF 00-10, some of the costs billed to customers for shipping and handling costs (our transportation expenses) were included as an offset to our costs. This restatement had no impact on operating income, net income, or cash flows. The impacts to the financial statements for the three months ended February 28, 2002 was an increase in Net Sales and Cost of Products Sold by $3.9 million. In addition, certain amounts in 2002 have been reclassified to conform to
current yearthe 2003 financial statement presentation.B. BASIC LOSS PER SHARE The calculationInventories
Inventories consisted of
net loss per share is based upontheaverage numberfollowing at November 30, 2002 and February 28, 2003 (in thousands ofcommon shares outstanding, which was 963,500 indollars):
2002 2003 Raw materials and supplies $ 25,365 $ 28,124 Work-in-process 14,058 13,331 Finished goods 15,295 12,992 $ 54,718 $ 54,447 Comprehensive Income (Loss)
During the three months ended
August 31,February 28, 2002965,472and 2003 our comprehensive loss was as follows (in thousands of dollars):
2002 2003 Net income (loss) $ (6,207 ) $ 1,168 Gain (loss) on interest rate swap agreements 45 545 Gain (loss) on forward foreign currency contracts 323 (647 ) Change in currency translation adjustment (217 ) 1,659 $ (6,056 ) $ 2,725 6
B.GOODWILL
On December 1, 2002, we adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” The ratable amortization of goodwill and other intangible assets with indefinite lives was replaced with an annual test for impairment. Accordingly, we ceased amortization of goodwill on December 1, 2002. We have determined that we have six reporting units, as defined in
the nine months ended August 31,SFAS No. 142, within our three reportable business segments. The following goodwill amounts by reporting unit were recorded as of November 30, 2002981,417 in the three months ended August 31, 2001and983,361 in the nine months ended August 31, 2001.February 28, 2003 (in thousands of dollars):
Reporting Unit Segment Amount Hillsdale Division Automotive $ 34,816 Wolverine Division Automotive 47,268 Power Group Technologies 44,486 Specialty Materials Group Technologies 31,398 Pharmaceutical Services (formerly ChemSyn) Technologies 2,929 Filtration and Minerals Filtration and Minerals 3,043 $ 163,940 We have completed our initial impairment test as of December 1, 2002, and determined that no impairment charge exists. Our fair values for each reporting unit were determined based on our estimate of future cash flows by reporting unit, which were derived from our annual forecasting process.
The following pro forma disclosure presents our net
lossincome (loss) and basic and diluted net income (loss) per share applicable to common shareholdersrepresents the net loss increased by accreted dividends on preferred stock of $3,718 and $10,949for thethreethree-months ended February 28, 2002 andnine months ended August 31, 2002, respectively2003 as if SFAS No. 142 had been adopted on December 1, 2001 (in thousands of dollars, except per share amounts):
2002 2003 Reported Net Income (Loss) $ (6,207 ) $ 1,168 Goodwill amortization 3,956 — As Adjusted Net Income (Loss) $ (2,251 ) $ 1,168 Reported Basic and Diluted Net Income (Loss) per Share Applicable to Common Shareholders $ (10.04 ) $ 2.98 Goodwill amortization 4.09 — As Adjusted Basic and Diluted Net Income (Loss) per Share Applicable to Common Shareholders $ (5.95 ) $ 2.98 C.RECENTLY RELEASED OR ADOPTED ACCOUNTING STANDARDS
In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations,” which requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived assets and
$3,318 and $9,770depreciated over their estimated useful life while the liability is accreted to its expected obligation amount upon retirement. We adopted SFAS No. 143 on December 1, 2002. The adoption did not have a material impact on our financial condition or results of operations.In September 2001, the FASB issued SFAS No. 144, “Accounting for the
threeImpairment or Disposal of Long-Lived Assets,” which superceded SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets andnine months ended August 31, 2001, respectively. No potential common stock was outstanding duringfor Long-Lived Assets to Be Disposed of.” The primary difference is that goodwill and certain intangibles with indefinite lives have been removed from thethreescope of SFAS No. 144, as they are covered by SFAS No. 142, as described above. It also broadens the presentation of discontinued operations to include a component of an entity rather than a segment of a business. A component of an entity comprises operations andnine months ended August 31, 2002 or 2001. C. DISCONTINUED OPERATIONS The assetscash flows that can clearly be distinguished operationally andbusinessfor financial accounting purposes from the rest of theConstruction Equipment Division (CED),entity. We adopted SFAS No. 144 on December 1, 2002. The adoption did not have a material impact on our financial condition or results of operations.7
In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or disposal Activities,” which
comprisedis effective for exit or disposal activities initiated after December 31, 2002. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” The adoption of this statement did not have a material impact on our financial condition or results of operations.In November 2002, the
Company's Machinery Segment, were sold December 14, 2001 as noted inFASB issued Interpretation No. 45 (“FIN 45”) “Guarantor’s Accounting and Disclosure requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45 elaborates on the10-K filingexisting disclosure requirements for most guarantees, including loan guarantees. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for theyear ended November 30, 2001. Pursuantfair value, or market value, of the obligations it assumes under that guarantee. However, the provisions related to recognizing a liability at inception of the guarantee for the fair value of the guarantor’s obligations does not apply to product warranties or to guarantees accounted for as derivatives. The initial recognition and initial measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements of FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. FIN 45 does not affect the accounting for guarantees issued prior to thetransaction, $5,600effective date, unless the guarantee is modified subsequent to December 31, 2002. We adopted the disclosure requirements on December 1, 2002, and the initial recognition and measurement provisions in our February 28, 2003 financial statements. The adoption ofliabilities were assumedFIN 45 did not have a material impact on our financial condition orretained asresults of operations.In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”) “Consolidation of Variable Interest Entities.” Until this interpretation, a company generally included another entity in its consolidated financial statements only if it controlled the entity through voting interests. FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns. FIN 46 applies to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest in after that date. A public entity with a variable interest in a variable interest entity created before February 1, 2003, shall apply the provisions of this interpretation (other than the transition disclosure provisions in paragraph 26) to that entity no later than the beginning of the first interim or annual reporting period beginning after June 15, 2003. The related disclosure requirements are effective immediately. The impact of this interpretation is not expected to have a material impact on our financial condition or results of operations.
In November
30, 2001. At August 31,2002, theremaining balanceEITF issued EITF 00-21, “Revenue Arrangements with Multiple Deliverables.” EITF 00-21 prescribes a method to account for contracts that have multiple elements or deliverables. It provides guidance on how to allocate the value ofthose liabilities was approximately $2,600 recorded in Other Accrued Liabilities. Thea contract to its different deliverables, as well as guidance on when to recognize revenue allocated to each deliverable over its performance period. We are required to adopt EITF 00-21 on December 1, 2003. We are evaluating the impact EITF 00-21 will have on us, but do not expect it to have a material impact on our financial condition or results ofthe Machinery Segment's operations were reported separately as discontinued operations throughout 2001. Inventory of approximately $1,416 remains in Net Assets Held for Sale at August 31, 2002, which the purchaser of CED is obligated to purchase during 2002. The Company believes that the purchaser of CED has defaulted on its obligation to purchase this inventory and has initiated litigation to recover this amount.operations.D.RESTRUCTURING
In the fourth quarter ofDuring 2001,
the Companywe recorded asset write-downs and other charges totaling$14,163$14.1 million in connection with a restructuring plan (the"Plan"“Plan”) announced in November 2001. The Plan primarilyrelocates the Company'srelocated our corporate headquarters from Cincinnati, Ohio to Phoenix, Arizona andclosesclosed three plants in the Technologies Segment asit eliminatesa result of the elimination of certain product lines in theSpecial Purpose Battery category. The costs relatedPower Group business.In May 2002, we announced we would exit the Gallium business in our Technologies Segment due to the
Plan, which were recognized as a separate component of operating expensesdownturn in thefourth quarterfiber-optic, telecommunication and semiconductor markets, the primary markets for our Gallium products. This action resulted in a $5.5 million charge to restructuring expense.8
The remaining balance of
2001, included approximately $5,425 related to the facilities, $5,044 related to involuntary severance$2.2 million as ofapproximately 165 employees and $3,694 in other costs to exit business activities. The Company anticipates substantially completing the restructuring by year-end 2002. Facility costs include a non-cash adjustment of $1,250 to write down the carrying value of the three plants to their estimated fair value in holding them for sale. A non - cash charge of $2,325 represents the estimated loss on abandoning the machinery and equipment and other assets at the plant locations and corporate headquarters, and $1,850 represents an estimate of the total lease commitments less estimated proceeds received from subleasing the various spaces. The asset impairment adjustments are recorded against Property Plant and Equipment and the liability for future lease commitmentsFebruary 28, 2003, is included in Other Accrued Liabilities inthe condensed consolidatedour balance sheets.9The Company has determined that a portion of the assets in its over-funded pension plan at November 30, 2001 could be made available to pay severance costs related to the restructuring plan. The Company has amended the pension plan and has provided new or amended severance plans to allow for such payments. Approximately $2,664 of severance has been paid out or is expected to be paid out of the pension plan. During the second quarter of 2002, this resulted in a reduction of the restructuring provision originally recorded in the fourth quarter of 2001. The other shutdown costs to exit the business consist primarily of $3,000 in non-cash charges related to inventory. The remaining balance in other costs is included in Other Accrued Liabilities. On May 31, 2002 the Company announced it would exit the Gallium business in its Technologies segment due to the downturn in the fiber-optic, tele-communication and semiconductor markets, the primary markets for its Gallium products. This action resulted in a $5,482 charge to restructuring expense in the quarter ended May 31, 2002. This charge consists of an inventory impairment totaling $2,943 representing the loss to be incurred from the liquidation of current inventory. The charge also consists of an accrual totaling $2,339 recorded in Other Accrued Liabilities representing the loss to be incurred from the liquidation of inventory to be purchased under firm purchase commitments, lease impairments and severance. A $200 asset impairment was recorded against Property, Plant and Equipment at May 31, 2002. In the third quarter, $732 of impairment was recorded against the inventory (reducing the accrual recorded in Other Accrued Liabilities) purchased in the third quarter under the previously mentioned firm purchase commitments.An analysis of theasset impairment, accrued liabilitiesfacilities, severance andamounts utilizedother costs incurred related tothe plansrestructuring reserves since November 30, 2002 is asfollows:
FACILITIES SEVERANCE OTHER TOTAL -------- -------- -------- --------Original Charges $ 5,425 $ 5,044 $ 3,694 $ 14,163 Amounts offset against asset values (3,575) -- (3,000) (6,575) Amounts utilized -- (202) -- (202) -------- -------- -------- -------- Balancefollows (in thousands of dollars):
Other Facilities Severance Costs Total Balance at November 30, 2002 $ 1,629 $ 314 $ 1,340 $ 3,283 Amounts spent (271 ) (55 ) (745 ) (1,071 ) Balance at February 28, 2003 $ 1,358 $ 259 $ 595 $ 2,212 E.DIVESTITURES AND DISCONTINUED OPERATIONS
Divestitures
We have indemnified buyers of our former divisions and subsidiaries for certain liabilities related to items such as environmental remediation and warranty issues on divisions sold in previous years. We had previously recorded liabilities for these exposures; however, from time to time, as additional information becomes available, additional amounts need to be recorded.
An analysis of the liabilities related to divestitures is as follows (in thousands of dollars):
Balance at November 30, 2002 $ 17,662 Amounts spent (2,464 ) Balance at February 28, 2003 $ 15,198 Discontinued Operations
Effective December 14, 2001, we sold certain of the assets of our former Construction Equipment Division. This division represented our entire former Machinery Segment. The sale price was $6.1 million in cash, plus an estimated working capital adjustment of $1.0 million, and the assumption of approximately $6.7 million of current liabilities. We retained the land and buildings of the Construction Equipment Division’s main facility in Lubbock, Texas and leased the facility to the buyer for a five-year term. The buyer has an option to buy the facility for $2.5 million, increasing $100,000 per year over the term of the lease. We also retained $900,000 of accounts receivable, and approximately $2.3 million of raw materials inventory, which the buyer was required to purchase within one year. The buyer failed to purchase approximately $400,000 of the inventory. We are pursuing collection actions. The Net Assets of Operations to be Sold at
November 30, 2001 1,850 4,842 694 7,386 Amounts utilized (201) (1,670) (276) (2,147) Amounts added/(reversed) -- (2,664) 180 (2,484) New restructuring (exiting the Gallium business) -- 15 5,467 5,482 Amounts offset against asset values -- -- (3,143) (3,143) -------- -------- -------- -------- Balance at May 31, 2002 1,649 523 2,922 5,094 Amounts utilized (160) (80) (209) (449) Amounts offset against asset values -- -- (732) (732) -------- -------- -------- -------- Balance at August 31, 2002 $ 1,489 $ 443 $ 1,981 $ 3,913 ======== ======== ======== ========E. DIVESTITURES The $17,766 in reserves previously established for divestitures as noted in the Company's Annual Report on Form 10-K for the fiscal year endedNovember 30,2001, totaled approximately $17,8882002 and February 28, 2003 are primarily the remaining balance of the inventory, as the liabilities associated with this transaction, totaling $2.9 million and representing primarily environmental liabilities, had been transferred to the Accrued Divestitures reserve atAugust 31,November 30, 2002.The activity in these reserves, recorded in Other Accrued Liabilities, for
F. ACCOUNTS RECEIVABLE ASSET-BACKED SECURITIZATION (QUALIFYING SPECIAL PURPOSE ENTITY) During the
nine months ended August 31, 2002 was $3,147 in utilization and expenditures against reserves and approximately $3,269 in additional accruals recorded primarily in the secondfirst quarter of 2002,for costs related to certain litigation issues and environmental remediation. In the quarter ended May 31, 2002 the Company signed a letter of intent to sell certain assets and liabilities of the Precision Products business in its Technologies Segment to a group of employees and divisional management personnel. In the second quarter, the Company recorded a $2,806 loss on sale disclosed in the Divestitures line item on the condensed consolidated statements of income (loss). The sale occurred on July 17, 2002, subject to potential working capital adjustments. The Company has recorded an additional $337 in Net Assets Held for Sale at August 31, 2002 related to the working capital adjustment. 10F. ACCOUNTS RECEIVABLE ASSET BACKED SECURITIZATION In January 2002 the Companywe entered into an agreement with a major U.S. financial institution to sell anundividedinterest in certain receivablesof the Company and certain of its domestic subsidiariesthrough an unconsolidated qualifying special purpose entity,Eagle-PicherEaglePicher Funding Corporation("EPFC"(“EPFC”). Initially$47,000$47.0 million of proceeds from this new facility were used primarily to payoff amounts outstanding underthe Company'sour existing Receivables Loan Agreement withits wholly-ownedour wholly owned subsidiary,Eagle-PicherEaglePicher AcceptanceCorporation on the closing date andCorporation. This agreement provides forother corporate purposes. The agreement involvesthe sale ofreceivables of the Company andcertainof its domestic subsidiariesreceivables to EPFC, which in turn sells anundivided beneficialinterest in a revolving pool of receivables to the financial institution. EPFC has no recourse againstthe Company and its subsidiariesus for failure of the debtors to pay when due. The agreement provides for the continuation of the program on a revolving basisfor approximately a three-year period, provideduntil theCompany has refinanced or extended itsearlier of a) the maturity of our senior credit facility,by October 31, 2003. The Company accountsor b) assuming we are able to refinance our senior credit facility, the fourth quarter of 2004.We account for the securitization of
accountsthese sold receivables in accordance with SFAS No. 140,"Accounting“Accounting for Transfers and Servicing of Financial Assets andExtinguishmentsExtinguishment ofLiabilities,Liabilities—areplacementReplacement of FASB Statement No. 125." At” Under this9
guidance, at the time the receivables are sold, the balances are removed from our financial statements. For purposes of calculating our debt covenant compliance under our Credit Agreement, we include the
condensed consolidated balance sheets. Costs associated with the transactions, primarily related to the discount, are charged to the condensed consolidated statement of income (loss).debt outstanding on EPFC.In conjunction with the initial transaction
$82,475during 2002, we sold $82.5 million of receivableswere soldto EPFC, andthe Companywe incurred charges ofapproximately $1,500$1.5 million, which are included in Interest Expenseonin the accompanying condensed consolidated statements of income (loss). The Company continuesfor the three-months ended February 28, 2002. We continue to servicethesold receivables andreceivesreceive a monthly servicingfeesfee from EPFC of approximately 1% per annum of the receivable pool’s averagebalancebalance. As this servicing fee approximates our cost to service, no servicing asset or liability has been recorded at November 30, 2002 or February 28, 2003. We retain an interest in a portion of the receivablespool.transferred, representing an over collateralization on the securitization. Our involvement with both this over collateralization interest and the transferred receivables is generally limited to the servicing performed. TheCompany's retainedcarrying value of our interest in the receivablesareis carried at fair value, which is estimated astheits net realizablevalue.value due to the short duration of the receivables transferred. The net realizable value considers the collection period and includes an estimated provision for credit losses and returns andallowances.allowances, which is based on our historical results and probable future losses.At
August 31,November 30, 2002,the Company's retainedour interest in EPFC, including a service fee receivable,of $91,wasapproximately $36,800$29.4 million and the revolving pool of receivables thatthe Company serviceswe serviced totaledapproximately $80,194. The$77.5 million. At November 30, 2002, the outstanding balance of theundividedinterest sold to the financial institution recorded onEPFCEPFC’s financial statements was$40,975 at August 31, 2002.$46.5 million. During the three monthsand nine monthsendedAugust 31,February 28, 2002,proceeds from new securitizationswe sold, outside of the initial sale,were $147,539 and $422,044, respectively, and proceeds from collections$109.0 million of accounts receivable to EPFC. During the same period, EPFC collected $104.5 million of cash that was reinvested insecuritizationsnew securitizations. At February 28, 2003, our interest in EPFC, including a service fee receivable, was $29.4 million and the revolving pool of receivables that we serviced totaled$144,997 and $403,000, respectively.$75.0 million. At February 28, 2003, the outstanding balance of the interest sold to the financial institution recorded on EPFC’s financial statements was $43.8 million. During the three months ended February 28, 2003, we sold $138.6 million of accounts receivable to EPFC. During the same period, EPFC collected $130.9 million of cash that was reinvested in new securitizations. The effective interest rate as of February 28, 2003 in the securitization was approximately2.9%2.5%.G.
INSURANCE RELATED LOSSES In the second quarter ended May 31, 2002, the Company recorded a charge against an insurance receivable related to the fire at its Harrisonville, Missouri bulk pharmaceutical manufacturing plant. This charge resulted from a potential shortfall on insurance proceeds due to the insurance underwriter contesting coverage. The fire occurred in the third quarter of 2001 in the Technologies Segment. H.LEGAL MATTERSFor other information on legal proceedings, see Item 3 of the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 2001.On January 25, 1996, Richard Darrell Peoples, a former employee,
of Eagle-Picher Industries, Inc.,filed aQui Tam suit under seallawsuit in the United States District Court for the Western District of Missouri(the "Missouri Court"). A Qui Tam suit isclaiming that we violated the federal False Claims Act based on alleged irregularities in testing procedures in connection with certain U.S. Government contracts. Mr. Peoples filed this lawsuit under alawsuit brought byprocedure which gives a private individualpursuantthe right tofederalfile a lawsuit for a violation of a Federal statuteallegedly on behalfand be awarded up to 30% of any recovery. The government has theU.S. Government.right to intervene and take control of such a lawsuit. Following an extensive investigation, the U.S. Government declined the opportunity to intervene or take control of thisQui Tamsuit.EPI became aware of the suit on October 20, 1997, when it was served on EPI, after it had been unsealed. The suit involves allegations of irregularities in testing procedures in connection with certain U.S. Government contracts.The allegations in the lawsuit are similar to allegations made bythe former employee,Mr. Peoples, and investigated by our outside counsel,for EPI,prior to the filing of theQui Tam suit. Outside counsel'slawsuit. Our outside counsel’s investigation found no evidence to support any ofthe employee'sMr. Peoples’ allegations, except for some inconsequential expense account matters. The case is in a discovery phase.EPI 11intendsRecently the court disqualified Mr. Peoples’ lawyer from the case after he read some of our attorney-client privileged documents that Mr. Peoples took from our lawyers’ offices without authorization. We intend to contest this suitvigorously. EPI doesvigorously and do not believe that the resolution of this lawsuit will have a material adverse effect onEPI'sour financial condition, results of operations or cash flows.On May 8, 1997, Caradon Doors and Windows, Inc.
("Caradon"(“Caradon”), filed a suit againstthe Company's wholly owned subsidiary, Eagle-Picher Industries, Inc. ("EPI")us in the United States District Court for the Northern District of Georgia(the "Georgia Court")alleging breach of contract, negligent misrepresentation, and contributory infringement and seeking contribution and indemnification inanthe amountnot less than $10 million (the "Caradon Suit"). The Caradonof approximately $20.0 million. This suit arose out of patent infringement litigation between Caradon and Therma-Tru Corporation extending over the 1989-1996 time period, the result of which was for Caradon to be held liable for patentinfringement in an amount believed to be in excess of $10 million.infringement. In June 1997,EPIwe filed aMotionmotion with the United States Bankruptcy Court for the Southern District of Ohio, Western Division,("Bankruptcy Court")seeking an orderenforcing EPI's plan of reorganization as confirmedthat Caradon’s claims had been discharged by our bankruptcy and enjoining Caradon from pursuing its lawsuit. On December 24, 1997, the Bankruptcy Courtin November 1996 (the "Plan") against Caradon, and enjoining the Caradon suit from going forward. The Bankruptcy Court in a decision entered on December 24, 1997,held thatthe Caradon suit did violate the PlanCaradon’s claims had been discharged and enjoined Caradon from pursuingthe Caradon suit.its lawsuit. Caradon appealed the BankruptcyCourt'sCourt’s decision to the United States District Court for the Southern District of Ohio,(the "District Court"),andin a decision enteredon February 3, 1999, the District Court reversed on the grounds that the Bankruptcy Court had not done the proper factual analysis and remanded the matter back to the Bankruptcy Court. The Bankruptcy Court held a hearing on this matter on September 24 and 25, 2001, andagainon May 9, 2002 again held thatthe Caradon suit violated the Plan and therefore Caradon'sCaradon’s claims had been discharged and enjoined Caradon from pursuing the Caradon Suit. Caradon has again appealed this decision to the District Court.EPI intendsWe intend to contest this suitvigorously. EPI doesvigorously and do not believe that the resolution of this suit will have a material adverse effect onEPI'sour financial condition, results of operations or cash flows.On December 1, 1999, Eagle-Picher Technologies, LLC ("EPT") acquired the depleted zinc distribution business (the "DZ Business") of Isonics Corporation ("Isonics") for approximately $8.2 million, payable $6.7 million at closing and $1.5 million in three installments of $500,000 each payable on the first three anniversaries of the closing. At the time of the acquisition, a single customer represented approximately 55% of the DZ Business. Following the completion of the acquisition, this customer informed EPT that it would no longer be purchasing depleted zinc from an outside supplier. EPT initiated binding arbitration against Isonics on March 26, 2001 with the American Arbitration Association in Dallas, Texas for fraud and misrepresentation pursuant to contractual dispute resolution procedures. In connection with the purchase of the DZ Business, EPT agreed to sell 200 kg of isotopically purified silicon-28 to Isonics. Due to various factors, EPT did not deliver any silicon-28 to Isonics. Isonics asserted a claim against EPI and EPT for $75.0 million for the failure to deliver silicon-28. On July 24, 2002, EPT paid $2.5 million to Isonics to settle all claims among EPI, EPT and Isonics including the remaining installment payments totaling $1.5 million for the DZ Business, and the parties signed mutual general releases. On September 25, 2001, Andries Ruijssenaars, former President and Chief Executive Officer of the Company, filed a lawsuit against the Company, certain of its directors and ABN AMRO Bank in the U.S. District Court for the Southern District of Ohio, Western Division, relating to the purchase of Mr. Ruijssenaar's common stock in the Company and his benefits under the EPI's Supplemental Executive Retirement Plan (SERP). Mr. Ruijssenaars claims that the per share price for 2001 under the Company's Incentive Stock Plan, which is generally applicable to all Plan participants and results in approximately $2.8 million for Mr. Ruijssenaars' 30,000 shares of common stock, was not correctly determined and claims approximately $4.7 million for his shares. Mr. Ruijssenaars' lawsuit also challenges a rule adopted by the committee for the SERP, deferring the obligation of the Company to repurchase stock in the event contracts to which the Company is a party, including its debt agreements, restrict such repurchase. Mr. Ruijssenaars' lawsuit also challenges EPI's determination of benefits under the SERP and claims that EPI is obligated to purchase an annuity for his additional SERP benefit accrued after 2000 based on theories of promissory estoppel, equitable estoppel, breach of contract and ERISA. Mr. Ruijssenaars has also asserted claims of fraud, conspiracy, breach of fiduciary duty and conversion. Mr. Ruijssenaars seeks approximately $2.3 million with respect to the SERP, as well as punitive damages. The Company reached a tentative agreement with Mr. Ruijssenaars to settle this litigation, subject to negotiation of documentation, but the parties were unable to reach agreement on documentation. The Company intends to contest this suit vigorously. The Company does not believe that resolution of this lawsuit will have a material adverse effect on its financial condition, result of operations or cash flows. On October 30, 2001, GMAC Business Credit, LLC (GMAC) and Eagle Trim, Inc. filed a lawsuit in the United States District Court for the Eastern District of Michigan, Southern Division, against EPI arising out of the sale of EPI's former automotive interior trim division to Eagle Trim. In connection with that sale, EPI guaranteed to GMAC, which funded the acquisition, that approximately $3.9 million of receivables relating to tooling purchased by EPI on behalf of customers would be paid by November 2001. Eagle Trim ceased operations during 2001. At that time, Eagle Trim and GMAC alleged that approximately $2.7 million of the tooling receivables had not been collected and did not exist at the time of the sale. On September 30, 2002, EPI settled this matter by agreeing to pay $5.4 million to GMAC, payable $1.5 million by December 5, 2002, $1.7 million in monthly installments from January 2003 through June 2003 and $2.2 million in monthly installments from July 2003 through October 2005 plus interest at 4.5% per annum. 1210
In addition,
the Company iswe are involved in routine litigation, environmental proceedings and claims pending with respect to matters arising out of the normal course of our business. Inmanagement'sour opinion, the ultimate liability resulting from all claims, individually or in the aggregate, will not materially affectthe Company's consolidatedour financial position, results of operations or cash flows.I.H.BUSINESS SEGMENT
REPORTING The Company has the following reportable segments: Automotive, Technologies and Minerals. The method for determining what information to report is based on the way management organizes the operating segments within the Company for making operational decisions and assessing performance. The operations in theINFORMATIONOur Automotive Segment
provideprovides mechanical and structural parts and raw materials for passenger cars, trucks, vanstrucksand sport utility vehicles for original equipment manufacturers and replacement markets.The operationsResources are concentrated in serving the North American, European and Pacific Rim markets. Our Hillsdale operation is a precision-machined components business, and our Wolverine operation is a rubber coated metal products business.Our Technologies Segment
produceis avarietydiverse group ofproductsbusinesses with a broad spectrum of technologies and capabilities. It is a major supplier of batteries and power systems components for aerospace, defense and telecommunications applications. In addition, it produces high-purity specialty material compounds and rare metals, industrial chemicals, bulk pharmaceuticals and super-clean containers, which meet strict EPA protocols, for environmental sampling. This segment serves the commercial aerospace, nuclear,telecommunications,telecommunication electronics and other industrialmarkets. The operationsmarkets globally. Some of these products are also used inthedefense applications.Our Filtration and Minerals Segment
minemines andrefinerefines diatomaceous earthproducts.products, which are used globally in high purity filtration applications, primarily by the food and beverage industry. These products are also used as industrial absorbents.Sales between segments were not material.
The
accounting policies usedfollowing data represents financial information about our reportable business segments for the three-months ended February 28, 2002 and 2003. During 2002, we elected todevelopmodify our internal methodology of allocating certain expenses from the corporate segment to the operating segments. In the following tables, the financial informationcorrespondfor the three-months ended February 28, 2002 has been restated tothose disclosedconform to the new presentation (in thousands of dollars).
2002 2003 Hillsdale Division $ 85,834 $ 83,282 Wolverine Division 17,648 20,718 Automotive 103,482 104,000 Power Group 22,870 32,283 Precision Products- divested July 17, 2002 1,215 — Specialty Materials Group 13,031 13,219 Pharmaceutical Services (formerly ChemSyn) 3,405 1,902 Technologies 40,521 47,404 Filtration and Minerals 19,226 18,906 $ 163,229 $ 170,310 Automotive $ 3,516 $ 5,141 Technologies 668 8,046 Filtration and Minerals 1,306 (111 ) Divested Divisions (125 ) — Corporate/ Intersegment (509 ) (2,036 ) $ 4,856 $ 11,040 11
2002 2003 Automotive $ 9,801 $ 8,946 Technologies 3,659 1,616 Filtration and Minerals 1,420 1,258 Corporate/ Intersegment 114 (213 ) $ 14,994 $ 11,607 I.SUBSEQUENT EVENT
In April 2003, we reached an agreement in principle for the
Company's consolidated financial statementssale of certain assets at our Hillsdale U.K. Automotive operation for cash of $1.1 million. In addition, we will be winding down the remaining operations of our Hillsdale U.K. Automotive operation and expect to incur $1.5 million to $2.0 million of shutdown costs during 2003. In addition to the shutdown costs, we believe we will realize a loss of approximately $2.0 million to $3.0 million during the second quarter of 2003 related to this sale. We also believe we will realize net cash proceeds from the sale of this operation of $1.5 million to $2.0 million (including the $1.1 million above related to the sale of the operation) during 2003. We will account for this sale as a Discontinued Operation when we file our second quarter of 2003 Form 10-Q. During the year ended November 30,2001 included2002, our Hillsdale U.K. Automotive operation had $13.9 million inForm 10-K. Sales between segments are not material. The Company does not allocate certain corporate expenses to its segments. Information about reported segment income or loss isrevenues, and asfollows forof November 30, 2002, had $11.5 million in total assets, which were comprised of primarily inventory, accounts receivable, and property, plant and equipment. During the threeand ninemonths endedAugust 31, 2002 and 2001:
Three Months Ended Nine Months Ended August 31 August 31 ---------------------- ---------------------- 2002 2001 2002 2001 --------- --------- --------- --------- (In thousands of dollars) Net SalesPrecision Machined Components $ 84,690 $ 86,498 $ 267,566 $ 264,269 Rubber Coated Metal Products 21,196 17,996 58,552 55,763 --------- --------- --------- --------- Automotive 105,886 104,494 326,118 320,032 Special Purpose Batteries 27,768 25,674 76,450 73,472 Specialty Materials 14,130 18,912 44,025 57,855 Precision Products - divested July 17, 2002 832 2,238 3,435 8,476 Other Technologies Products 3,097 1,857 10,277 9,205 --------- --------- --------- --------- Technologies 45,827 48,681 134,187 149,008 Minerals 17,340 16,345 49,424 48,636 --------- --------- --------- --------- Total $ 169,053 $ 169,520 $ 509,729 $ 517,676 ========= ========= ========= ========= Income (Loss) from Continuing Operations Before Taxes: Automotive $ (4,622) $ (5,885) $ (9,078) $ (9,271) Technologies 1,364 (1,814) (14,646) (2,711) Minerals 932 (51) 3,865 (348) Divested Operations (161) -- (6,131) (500) Corporate (334) 122 (3,801) (408) --------- --------- --------- --------- Total $ (2,821) $ (7,628) $ (29,791) $ (13,238) ========= ========= ========= ========= EBITDA Automotive $ 11,122 $ 9,173 $ 37,497 $ 35,601 Technologies 8,014 5,577 6,361 19,215 Minerals 3,013 2,152 10,151 6,160 Divested Operations (161) -- (6,131) (500) Corporate 963 775 1,257 1,578 --------- --------- --------- --------- Total $ 22,951 $ 17,677 $ 49,135 $ 62,054 ========= ========= ========= =========EBITDA, earnings before interest, taxes, depreciation and amortization, may not be comparable to similarly titled measures reported by other companies and should not be construed as an alternative to operating income or cash flows from operating activities, as determined by accounting principles generally accepted inFebruary 28, 2003, theUnited States of America. 13
Three Months Ended Nine Months Ended August 31 August 31 ------------------ ------------------ 2002 2001 2002 2001 ------- ------- ------- ------- (In thousands of dollars)Depreciation and Amortization: Automotive $11,133 $ 9,982 $31,737 $29,365 Technologies 3,548 3,803 10,823 11,166 Minerals 1,327 1,466 4,075 4,206 Corporate 132 134 356 385 ------- ------- ------- ------- Total $16,140 $15,385 $46,991 $45,122 ======= ======= ======= ======= Interest Expense: Automotive $ 4,611 $ 5,076 $14,838 $15,507 Technologies 3,102 3,588 10,184 10,760 Minerals 754 737 2,211 2,302 Corporate/Intersegment 1,165 519 4,702 1,601 ------- ------- ------- ------- Total $ 9,632 $ 9,920 $31,935 $30,170 ======= ======= ======= =======
August 31, November 30, 2002 2001 -------- ---------Identifiable Assets: Automotive $ 293,829 $ 334,414 Technologies 170,276 206,033 Minerals 50,031 51,997 Corporate/Intersegment 112,864 133,467 ------- --------- $ 627,000 $ 725,911 ========= =========J. SUPPLEMENTAL GUARANTOR INFORMATION The indebtedness of EPI includes a syndicated secured loan facility ("Credit Agreement") and $220.0Hillsdale U.K. Automotive operation had $3.4 million insenior subordinated notes ("Subordinated Notes"). Both therevenues.J.SUBSIDIARY GUARANTORS AND NON-GUARANTORS
Our Credit Agreement and the Senior Subordinated Notes were issued by our wholly owned subsidiary, EaglePicher Incorporated (“EPI”), and are guaranteed on a full, unconditional, and joint and several basis by
the Companyus and certain ofEPI'sour wholly-owned domestic subsidiaries("(“SubsidiaryGuarantors"Guarantors”).Management hasWe have determined that full financial statements and other disclosures concerning EPI or the Subsidiary Guarantors would not be material to investors, and such financial statements are not presented.The following supplemental condensed combining financial statements present information regarding EPI, the Subsidiary Guarantors and the subsidiaries that did not guarantee the debt.EPI and the Subsidiary Guarantors are subject to restrictions on the payment of dividends under the terms of both the Credit Agreement and theIndenture supportingSenior Subordinated Notes. The following supplemental condensed combining financial statements present information regarding EPI, as theSubordinated Notes, bothIssuer, the Subsidiary Guarantors and Non-Guarantor Subsidiaries.12
EAGLEPICHER HOLDINGS, INC.
SUPPLEMENTAL CONDENSED COMBINING BALANCE SHEETS
AS OF NOVEMBER 30, 2002
(in thousands ofwhich were filed with the Company's Form S-4 Registration Statement No. 333-49957-01 on April 11, 1998 as amended on May 20, 1998 and June 5, 1998, and bothdollars)
Guarantors Non-Guarantors EaglePicher Subsidiary Foreign Issuer Holdings, Inc. Guarantors Subsidiaries Eliminations Total ASSETS Current Assets: Cash and cash equivalents $ 27,694 $ 1 $ (4,895 ) $ 7,902 $ 820 $ 31,522 Receivables and retained interest, net 2,535 — 31,472 19,097 — 53,104 Costs and estimated earnings in excess of billings — — 16,942 — — 16,942 Intercompany accounts receivable 1,997 — 6,228 2,037 (10,262 ) — Inventories 3,957 — 39,394 13,283 (1,916 ) 54,718 Net assets of operations to be sold 643 — — — — 643 Prepaid expenses 7,840 — 4,755 4,686 (1,614 ) 15,667 Deferred income taxes 10,798 — — — — 10,798 55,464 1 93,896 47,005 (12,972 ) 183,394 Property, Plant and Equipment, net 24,016 — 129,052 30,337 — 183,405 Investment in Subsidiaries 239,864 58,509 18,286 — (316,659 ) — Goodwill, net 37,339 — 116,586 13,154 (3,139 ) 163,940 Prepaid Pension 54,796 — — — — 54,796 Other Assets 14,296 (8,091 ) 21,744 11,070 (11,513 ) 27,506 $ 425,775 $ 50,419 $ 379,564 $ 101,566 $ (344,283 ) $ 613,041 LIABILITIES AND SHAREHOLDERS’ EQUITY(DEFICIT) Current Liabilities: Accounts payable $ 15,398 $ — $ 53,151 $ 15,686 $ 820 $ 85,055 Intercompany accounts payable 3,171 — 5,887 1,184 (10,242 ) — Long-term debt-current portion 18,625 — — — — 18,625 Other accrued liabilities 46,313 �� 25,128 5,862 — 77,303 83,507 — 84,166 22,732 (9,422 ) 180,983 Long-term Debt, less current portion 355,100 — — 11,491 (11,491 ) 355,100 Postretirement Benefits Other Than Pensions 17,635 — — — — 17,635 Deferred Income Taxes — — — — — — Other Long-term Liabilities 8,687 — — 216 25 8,928 464,929 — 84,166 34,439 (20,888 ) 562,646 Intercompany Accounts (282,707 ) 24 269,573 23,930 (10,820 ) — Preferred Stock — 137,973 — — — 137,973 Shareholders’ Equity(Deficit) 243,553 (87,578 ) 25,825 43,197 (312,575 ) (87,578 ) $ 425,775 $ 50,419 $ 379,564 $ 101,566 $ (344,283 ) $ 613,041 13
EAGLEPICHER HOLDINGS, INC.
SUPPLEMENTAL CONDENSED COMBINING BALANCE SHEETS
AS OF FEBRUARY 28, 2003
(in thousands ofwhich were incorporated by reference to the Company's Form 10-K which was filed on February 15, 2002 and amended on September 20, 2002.dollars)
Guarantors Non-Guarantors EaglePicher Subsidiary Foreign Issuer Holdings, Inc. Guarantors Subsidiaries Eliminations Total ASSETS Current Assets: Cash and cash equivalents $ 19,714 $ 1 $ 2,178 $ 10,397 $ — $ 32,290 Receivables and retained interest, net 2,427 — 30,187 21,168 — 53,782 Costs and estimated earnings in excess of billings — — 17,485 2,657 — 20,142 Intercompany accounts receivable 2,783 — 5,863 132 (8,778 ) — Inventories 4,353 — 39,219 12,917 (2,042 ) 54,447 Net assets of operations to be sold 494 — — — — 494 Prepaid expenses 9,163 — 5,813 3,885 — 18,861 Deferred income taxes 10,798 — — — — 10,798 49,732 1 100,745 51,156 (10,820 ) 190,814 Property, Plant and Equipment, net 23,761 — 121,671 31,092 — 176,524 Investment in Subsidiaries 237,685 61,229 17,467 1 (316,382 ) — Goodwill, net 37,339 — 116,586 13,154 (3,139 ) 163,940 Prepaid Pension 54,613 — — — — 54,613 Other Assets 22,517 (8,091 ) 22,868 13,082 (24,599 ) 25,777 $ 425,647 $ 53,139 $ 379,337 $ 108,485 $ (354,940 ) $ 611,668 LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT) Current Liabilities: Accounts payable $ 13,310 $ — $ 52,473 $ 9,204 $ — $ 74,987 Intercompany accounts payable — — 124 8,453 (8,577 ) — Long-term debt - current portion 150,393 — — — — 150,393 Other accrued liabilities 44,136 — 21,920 6,530 — 72,586 207,839 — 74,517 24,187 (8,577 ) 297,966 Long-term Debt, less current portion 233,600 — — 12,941 (12,941 ) 233,600 Postretirement Benefits Other Than Pensions 17,476 — — — — 17,476 Other Long-term Liabilities 7,861 — 131 1,514 — 9,506 466,776 — 74,648 38,642 (21,518 ) 558,548 Intercompany Accounts (286,286 ) 19 281,711 25,902 (21,346 ) — Preferred Stock — 141,910 — — — 141,910 Shareholders’ Equity (Deficit) 245,157 (88,790 ) 22,978 43,941 (312,076 ) (88,790 ) $ 425,647 $ 53,139 $ 379,337 $ 108,485 $ (354,940 ) $ 611,668 14
EAGLE-PICHEREAGLEPICHER HOLDINGS,INC.
SUPPLEMENTAL CONDENSED COMBINING STATEMENTS OF INCOME (LOSS)
THREE MONTHS ENDEDAUGUST 31,FEBRUARY 28, 2002(in thousands)
GUARANTORS ---------------------------- NON-GUARANTORS EAGLE-PICHER SUBSIDIARY FOREIGN ISSUER HOLDINGS, INC. GUARANTORS SUBSIDIARIES ELIMINATIONS TOTAL --------- --------- --------- --------- --------- ---------Net Sales: Customers $ 13,492 $ -- $ 132,359 $ 23,202 $ -- $ 169,053 Intercompany 4,914 -- 4,108 -- (9,022) -- Operating Costs and Expenses: Cost of products sold (exclusive of depreciation) 10,907 -- 110,706 19,026 (9,022) 131,617 Selling and administrative 6,059 -- 6,173 1,963 100 14,295 Intercompany charges (3,064) -- 2,660 504 (100) -- Depreciation 1,592 -- 9,144 1,190 -- 11,926 Amortization of intangibles 935 -- 2,947 332 -- 4,214 Other 4,124 -- (3,629) 107 -- 602 --------- --------- --------- --------- --------- --------- Total 20,553 -- 128,001 23,122 (9,022) 162,654 --------- --------- --------- --------- --------- --------- Operating Income (Loss) (2,147) -- 8,466 80 -- 6,399 Other Income (Expense) Interest expense (2,826) -- (5,838) (1,387) 419 (9,632) Other income (expense), net 701 -- (176) 306 (419) 412 Equity in earnings (loss) of consolidated subsidiaries 701 (3,571) 436 -- 2,434 -- --------- --------- --------- --------- --------- --------- Income (Loss) from Continuting (3,571) (3,571) 2,888 (1,001) 2,434 (2,821) Operations Before Taxes Income Taxes (Benefit) -- -- -- 750 -- 750 --------- --------- --------- --------- --------- --------- Income (Loss) from Continuing Operations (3,571) (3,571) 2,888 (1,751) 2,434 (3,571) Discontinued Operations -- -- -- -- -- -- --------- --------- --------- --------- --------- --------- Net Income (Loss) $ (3,571) $ (3,571) $ 2,888 $ (1,751) $ 2,434 $ (3,571) ========= ========= ========= ========= ========= =========
(in thousands of dollars)
Guarantors Non-Guarantors EaglePicher Subsidiary Foreign Issuer Holdings, Inc. Guarantors Subsidiaries Eliminations Total Net Sales: Customers $ 11,635 $ — $ 130,645 $ 20,949 $ — $ 163,229 Intercompany 3,623 — 2,826 2 (6,451 ) — 15,258 — 133,471 20,951 (6,451 ) 163,229 Operating Costs and Expenses: Cost of products sold (exclusive of depreciation) 8,512 — 110,775 16,936 (6,451 ) 129,772 Selling and administrative 6,295 — 5,317 1,917 (47 ) 13,482 Intercompany charges (2,650 ) — 2,466 137 47 — Depreciation and amortization 1,147 — 9,125 766 — 11,038 Goodwill amortization 934 — 2,775 247 — 3,956 Divestitures 125 — — — — 125 14,363 — 130,458 20,003 (6,451 ) 158,373 Operating Income (Loss) 895 — 3,013 948 — 4,856 Other Income (Expense): Interest (expense) income (2,931 ) — (7,522 ) (1,273 ) 645 (11,081 ) Other income (expense), net 478 — 404 166 (645 ) 403 Equity in earnings (losses) of consolidated subsidiaries (4,070 ) (6,207 ) 579 — 9,698 — Income (Loss) Before Taxes (5,628 ) (6,207 ) (3,526 ) (159 ) 9,698 (5,822 ) Income Taxes — — 12 373 — 385 Net Income (Loss) $ (5,628 ) $ (6,207 ) $ (3,538 ) $ (532 ) $ 9,698 $ (6,207 ) 15
EAGLE-PICHEREAGLEPICHER HOLDINGS,INC.
SUPPLEMENTAL CONDENSED COMBINING STATEMENTS OF INCOME (LOSS)
THREE MONTHS ENDEDAUGUST 31, 2001 (in thousands)FEBRUARY 28, 2003
GUARANTORS ------------------------- NON-GUARANTORS EAGLE-PICHER SUBSIDIARY FOREIGN ISSUER HOLDINGS, INC. GUARANTORS SUBSIDIARIES ELIMINATIONS TOTAL --------- --------- --------- --------- --------- ---------Net Sales: Customers $ 11,536 $ -- $ 137,332 $ 20,652 $ -- $ 169,520 Intercompany 4,522 -- 3,099 -- (7,621) -- Operating Costs and Expenses: Cost of products sold (exclusive of depreciation) 9,890 -- 120,215 16,981 (7,413) 139,673 Selling and administrative 5,208 4 5,966 1,965 (89) 13,054 Intercompany charges (1,642) -- 1,618 (65) 89 -- Depreciation 950 -- 9,427 873 -- 11,250 Amortization of intangibles 936 -- 2,846 353 -- 4,135 Other 630 -- 112 (26) -- 716 --------- --------- --------- --------- --------- --------- Total 15,972 4 140,184 20,081 (7,413) 168,828 --------- --------- --------- --------- --------- --------- Operating Income (Loss) 86 (4) 247 571 (208) 692 Other Income (Expense): Interest expense (2,482) -- (8,923) (344) 1,829 (9,920) Other income (expense) 438 -- 2,349 73 (1,260) 1,600 Equity in earnings (loss) of -- consolidated subsidiaries (6,416) (10,599) (390) -- 17,405 -- --------- --------- --------- --------- --------- --------- Income (Loss) from Continuting (8,374) (10,603) (6,717) 300 17,766 (7,628) Operations Before Taxes Income Taxes (Benefit) (3,275) -- 7 743 -- (2,525) --------- --------- --------- --------- --------- --------- Income (Loss) from Continuing Operations (5,099) (10,603) (6,724) (443) 17,766 (5,103) Discontinued Operations (5,500) -- -- 40 (40) (5,500) --------- --------- --------- --------- --------- --------- Net Income (Loss) $ (10,599) $ (10,603) $ (6,724) $ (403) $ 17,726 $ (10,603) ========= ========= ========= ========= ========= =========
(in thousands of dollars)
Guarantors Non-Guarantors EaglePicher Subsidiary Foreign Issuer Holdings, Inc. Guarantors Subsidiaries Eliminations Total Net Sales: Customers $ 12,714 $ — $ 128,647 $ 28,949 $ — $ 170,310 Intercompany 4,516 — 4,450 314 (9,280 ) — 17,230 — 133,097 29,263 (9,280 ) 170,310 Operating Costs and Expenses: Cost of products sold (exclusive of depreciation) 11,085 — 107,192 24,114 (9,279 ) 133,112 Selling and administrative 6,399 1 6,144 2,007 — 14,551 Intercompany charges (1,656 ) — 1,615 41 — — Depreciation and amortization 947 — 9,260 1,400 — 11,607 16,775 1 124,211 27,562 (9,279 ) 159,270 Operating Income (Loss) 455 (1 ) 8,886 1,701 (1 ) 11,040 Other Income (Expense): Interest (expense) income 3,273 — (12,653 ) (29 ) — (9,409 ) Other income (expense), net 55 — 420 (42 ) — 433 Equity in earnings (losses) of consolidated subsidiaries (2,179 ) 1,169 510 — 500 — Income (Loss) Before Taxes 1,604 1,168 (2,837 ) 1,630 499 2,064 Income Taxes — — 10 886 — 896 Net Income (Loss) $ 1,604 $ 1,168 $ (2,847 ) $ 744 $ 499 $ 1,168 16
EAGLE-PICHER HOLDINGS,INC. SUPPLEMENTAL CONDENSED COMBINING STATEMENTS OF INCOME (LOSS) NINE MONTHS ENDED AUGUST 31, 2002 (in thousands)
GUARANTORS --------------------------- NON-GUARANTORS EAGLE-PICHER SUBSIDIARY FOREIGN ISSUER HOLDINGS, INC. GUARANTORS SUBSIDIARIES ELIMINATIONS TOTAL --------- --------- --------- --------- --------- ---------Net Sales: Customers $ 38,192 $ -- $ 404,608 $ 66,929 $ -- $ 509,729 Intercompany 12,524 -- 10,465 4 (22,993) -- Operating Costs and Expenses: Cost of products sold (exclusive of depreciation) 29,559 -- 337,294 54,083 (22,993) 397,943 Selling and administrative 18,228 2 24,936 6,044 -- 49,210 Intercompany charges (8,924) -- 7,642 1,282 -- -- Depreciation 3,506 -- 27,935 2,816 -- 34,257 Amortization of intangibles 2,801 -- 9,048 885 -- 12,734 Other 1,048 -- 13,674 107 -- 14,829 --------- --------- --------- --------- --------- --------- Total 46,218 2 420,529 65,217 (22,993) 508,973 --------- --------- --------- --------- --------- --------- Operating Income (Loss) 4,498 (2) (5,456) 1,716 -- 756 Other Income (Expense): Interest expense (9,151) -- (19,894) (4,267) 1,377 (31,935) Other income (expense), net 1,462 -- 628 675 (1,377) 1,388 Equity in earnings (loss) of consolidated subsidiaries (28,553) (31,744) 1,604 -- 58,693 -- --------- --------- --------- --------- --------- --------- Income (Loss) from Continuting (31,744) (31,746) (23,118) (1,876) 58,693 (29,791) Operations Before Taxes Income Taxes (Benefit) -- -- 12 1,943 -- 1,955 --------- --------- --------- --------- --------- --------- Income (Loss) from Continuing Operations (31,744) (31,746) (23,130) (3,819) 58,693 (31,746) Discontinued Operations -- -- -- -- -- -- --------- --------- --------- --------- --------- --------- Net Income (Loss) $ (31,744) $ (31,746) $ (23,130) $ (3,819) $ 58,693 $ (31,746) ========= ========= ========= ========= ========= =========17EAGLE-PICHER HOLDINGS,INC. SUPPLEMENTAL CONDENSED COMBINING STATEMENTS OF INCOME (LOSS) NINE MONTHS ENDED AUGUST 31, 2001 (in thousands)
GUARANTORS ------------------------- NON-GUARANTORS EAGLE-PICHER SUBSIDIARY FOREIGN ISSUER HOLDINGS, INC. GUARANTORS SUBSIDIARIES ELIMINATIONS TOTAL --------- --------- --------- --------- --------- ---------Net Sales: Customers $ 36,320 $ -- $ 414,713 $ 66,643 $ -- $ 517,676 Intercompany 11,892 -- 10,620 1 (22,513) -- Operating Costs and Expenses: Cost of products sold (exclusive of depreciation) 28,453 -- 357,427 53,933 (22,513) 417,300 Selling and administrative 16,021 4 16,051 6,113 (264) 37,925 Intercompany charges (4,963) -- 4,861 (162) 264 -- Depreciation 3,105 -- 27,120 2,657 -- 32,882 Amortization of intangibles 2,800 -- 8,372 1,068 -- 12,240 Other 2,867 -- 12 (43) -- 2,836 --------- --------- --------- --------- --------- --------- Total 48,283 4 413,843 63,566 (22,513) 503,183 --------- --------- --------- --------- --------- --------- Operating Income (Loss) (71) (4) 11,490 3,078 -- 14,493 Other Income (Expense): Interest expense (7,442) -- (27,104) (1,375) 5,751 (30,170) Other income (expense) 1,343 -- 5,835 1,012 (5,751) 2,439 Equity in earnings (loss) of consolidated subsidiaries (9,322) (34,291) 311 -- 43,302 -- --------- --------- --------- --------- --------- --------- Income (Loss) from Continuting (15,492) (34,295) (9,468) 2,715 43,302 (13,238) Operations Before Taxes Income Taxes (Benefit) (6,558) -- (8) 2,266 -- (4,300) --------- --------- --------- --------- --------- --------- Income (Loss) from Continuing Operations (8,934) (34,295) (9,460) 449 43,302 (8,938) Discontinued Operations (25,357) -- -- 67 (67) (25,357) --------- --------- --------- --------- --------- --------- Net Income (Loss) $ (34,291) $ (34,295) $ (9,460) $ 516 $ 43,235 $ (34,295) ========= ========= ========= ========= ========= =========18EAGLE-PICHEREAGLEPICHER HOLDINGS, INC.
SUPPLEMENTAL CONDENSED COMBINING BALANCE SHEETS AS OF AUGUST 31, 2002 (IN THOUSANDS)
GUARANTORS ----------------------- NON-GUARANTORS EAGLE-PICHER SUBSIDIARY FOREIGN ISSUER HOLDINGS, INC. GUARANTORS SUBSIDIARIES ELIMINATIONS TOTAL --------- --------- --------- --------- --------- ---------ASSETS Cash and cash equivalents $ 7,898 $ 1 $ 606 $ 4,070 $ -- $ 12,575 Receivables, net 3,731 -- 36,273 20,230 -- 60,234 Intercompany accounts receivable 2,514 -- 5,224 123 (7,861) -- Inventories 1,788 -- 52,495 13,598 -- 67,881 Net assets held for sale 1,753 -- -- -- -- 1,753 Prepaid expenses (193) -- 7,929 4,335 -- 12,071 Deferred income taxes 24,287 -- -- -- -- 24,287 --------- --------- --------- --------- --------- --------- Total current assets 41,778 1 102,527 42,356 (7,861) 178,801 PROPERTY, PLANT AND EQUIPMENT, net 25,653 -- 137,261 30,368 -- 193,282 Investment in Subsidiaries 48,636 63,326 17,662 -- (129,624) -- GOODWILL, net 35,998 -- 111,720 20,176 -- 167,894 OTHER ASSETS 72,093 -- 22,052 11,757 (18,879) 87,023 --------- --------- --------- --------- --------- --------- Total Assets $ 224,158 $ 63,327 $ 391,222 $ 104,657 $(156,364) $ 627,000 ========= ========= ========= ========= ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Accounts payable $ 12,474 $ -- $ 53,909 $ 5,201 $ -- $ 71,584 Intercompany accounts payable -- -- -- 8,027 (8,027) -- Long-term debt - current portion 16,523 -- -- 4,443 -- 20,966 Other accrued liabilities 51,021 -- 23,409 6,576 -- 81,006 --------- --------- --------- --------- --------- --------- Total current liabilities 80,018 -- 77,318 24,247 (8,027) 173,556 LONG-TERM DEBT - less current portion 358,831 -- -- 9,389 (9,389) 358,831 DEFERRED INCOME TAXES 7,088 -- -- -- -- 7,088 OTHER LONG-TERM LIABILITIES 27,116 22 107 1,308 -- 28,553 --------- --------- --------- --------- --------- --------- Total Liabilities 473,053 22 77,425 34,944 (17,416) 568,028 Intercompany Accounts (297,274) -- 264,566 34,585 (1,877) -- Preferred Stock -- 134,035 -- -- -- 134,035 Shareholders' Equity (Deficit) 48,379 (70,730) 49,231 35,128 (137,071) (75,063) --------- --------- --------- --------- --------- --------- Total Liabilities and Shareholders' Equity (Deficit) $ 224,158 $ 63,327 $ 391,222 $ 104,657 $(156,364) $ 627,000 ========= ========= ========= ========= ========= =========19EAGLE-PICHER HOLDINGS, INC. SUPPLEMENTAL CONDENSED COMBINING BALANCE SHEETS AS OF NOVEMBER 30, 2001 (IN THOUSANDS)
GUARANTORS -------------------------- NON-GUARANTORS EAGLE-PICHER SUBSIDIARY FOREIGN ISSUER HOLDINGS, INC. GUARANTORS SUBSIDIARIES ELIMINATIONS TOTAL --------- --------- --------- --------- --------- ---------ASSETS Cash and cash equivalents $ 17,145 $ 1 $ 471 $ 6,936 $ 67 $ 24,620 Receivables, net (18,238) -- 103,168 15,122 -- 100,052 Intercompany accounts receivable 46,674 -- 3,559 65 (50,298) -- Inventories 4,129 -- 59,704 12,882 (1,371) 75,344 Net assets held for sale 3,610 -- -- 5,954 (6,306) 3,258 Prepaid expenses 6,948 -- 6,152 2,887 (865) 15,122 Deferred income taxes 24,287 -- -- -- -- 24,287 --------- --------- --------- --------- --------- --------- Total current assets 84,555 1 173,054 43,846 (58,773) 242,683 Property, Plant & Equipment, net 28,733 -- 157,653 30,401 (32) 216,755 Investment in Subsidiaries 83,571 95,169 16,058 -- (194,798) -- Goodwill, net 41,939 -- 120,969 19,994 (3,140) 179,762 Other Assets 73,049 -- 13,789 10,719 (10,846) 86,711 --------- --------- --------- --------- --------- --------- Total Assets $ 311,847 $ 95,170 $ 481,523 $ 104,960 $(267,589) $ 725,911 ========= ========= ========= ========= ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Accounts payable $ 16,156 $ -- $ 62,171 $ 7,970 $ -- $ 86,297 Intercompany accounts payable 76 -- 48 7,404 (7,528) -- Long-term debt - current portion 25,569 -- 14,250 9,430 (7,292) 41,957 Other accrued liabilities 42,059 -- 26,363 4,602 1 73,025 --------- --------- --------- --------- --------- --------- Total current liabilities 83,860 -- 102,832 29,406 (14,819) 201,279 Long-term Debt - less current portion 401,169 -- 42,452 -- (42,452) 401,169 Deferred Income Taxes 9,362 -- -- -- (3,085) 6,277 Other Long-Term Liabilities 25,911 19 1,000 825 -- 27,755 --------- --------- --------- --------- --------- --------- Total Liabilities 520,302 19 146,284 30,231 (60,356) 636,480 Intercompany Accounts (288,578) -- 262,878 35,782 (10,082) -- Preferred Stock -- 123,086 -- -- -- 123,086 Shareholders' Equity (Deficit) 80,123 (27,935) 72,361 38,947 (197,151) (33,655) --------- --------- --------- --------- --------- --------- Total Liabilities and Shareholders' Equity (Deficit) $ 311,847 $ 95,170 $ 481,523 $ 104,960 $(267,589) $ 725,911 ========= ========= ========= ========= ========= =========20EAGLE-PICHER HOLDINGS, INC.
SUPPLEMENTAL CONDENSED COMBINING STATEMENTS OF CASH FLOWSFOR THE NINE
THREE MONTHS ENDEDAUGUST 31,FEBRUARY 28, 2002(in thousands)
GUARANTORS ----------------------- NON-GUARANTORS EAGLE-PICHER SUBSIDIARY FOREIGN ISSUER HOLDINGS, INC. GUARANTORS SUBSIDIARIES ELIMINATIONS TOTAL ------ ------------------------- ------------- ---------- -----CASH FLOWS FROM OPERATING ACTIVITIES: Net Income (Loss) $(31,744) $(31,746) $(23,130) $ (3,819) $ 58,693 $(31,746) Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities: Equity in earnings (loss) of consolidated subsidiaries 28,553 31,744 (1,604) -- (58,693) -- Depreciation and amortization 8,660 -- 36,983 3,701 -- 49,344 Divestitures 3,325 -- 2,806 -- -- 6,131 Deferred income taxes 811 -- -- -- -- 811 Changes in assets and liabilities, net of effect of non cash loss on divestitures 23,119 161 57,765 (8,414) (44,119) 28,512 -------- -------- -------- -------- -------- -------- Net cash provided by (used in) operating activities 32,724 159 72,820 (8,532) (44,119) 53,052 -------- -------- -------- -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of divisions 6,100 -- 2,817 -- -- 8,917 Capital expenditures (894) -- (10,029) (1,688) -- (12,611) Proceeds from sale of property and equipment and other 639 -- -- -- -- 639 -------- -------- -------- -------- -------- -------- Net cash provided by (used in) investing activities 5,845 -- (7,212) (1,688) -- (3,055) -------- -------- -------- -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Reduction of long-term debt (22,770) -- -- 191 -- (22,579) Net borrowings(repayments)under revolving credit agreements (40,750) -- -- -- -- (40,750) Acquisition of treasury stock -- (159) -- -- -- (159) Other -- -- -- -- -- -- -------- -------- -------- -------- -------- -------- Net cash provided by (used in) financing activities (63,520) (159) -- 191 -- (63,488) -------- -------- -------- -------- -------- -------- Effect of exchange rates on cash -- -- -- 1,446 -- 1,446 -------- -------- -------- -------- -------- -------- Net increase (decrease) in cash and cash equivalents (24,951) -- 65,608 (8,583) (44,119) (12,045) -------- -------- -------- -------- -------- -------- Intercompany accounts 15,704 -- (65,473) 5,717 44,052 -- Cash and cash equivalents, beginning of period 17,145 1 471 6,936 67 24,620 -------- -------- -------- -------- -------- -------- Cash and cash equivalents, end of period $ 7,898 $ 1 $ 606 $ 4,070 $ -- $ 12,575 ======== ======== ======== ======== ======== ========21EAGLE-PICHER
(in thousands of dollars)
Guarantors Non-Guarantors EaglePicher Subsidiary Foreign Issuer Holdings, Inc. Guarantors Subsidiaries Eliminations Total CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (5,628 ) $ (6,207 ) $ (3,538 ) $ (532 ) $ 9,698 $ (6,207 ) Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities: Equity in (earnings) loss of consolidated subsidiaries 4,070 6,207 (579 ) — (9,698 ) — Depreciation and amortization 2,891 — 11,745 1,013 — 15,649 Loss from Divestitures 125 — — — — 125 Changes in assets and liabilities, net of effect of non-cash items 36,959 312 59,229 (2,990 ) (52,796 ) 40,714 38,417 312 66,857 (2,509 ) (52,796 ) 50,281 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of divisions 6,300 — — — — 6,300 Capital expenditures (232 ) — (4,608 ) (266 ) — (5,106 ) Other 5 — 1,401 (1,284 ) — 122 6,073 — (3,207 ) (1,550 ) — 1,316 CASH FLOWS FROM FINANCING ACTIVITIES: Reduction of long-term debt (12,800 ) — (42,452 ) — 42,452 (12,800 ) Net borrowings (repayments) under revolving credit agreements (22,000 ) — (14,246 ) 158 — (36,088 ) Other — (312 ) 483 (15 ) — 156 (34,800 ) (312 ) (56,215 ) 143 42,452 (48,732 ) Effect of exchange rates on cash — — — 151 — 151 Net increase (decrease) in cash and cash equivalents 9,690 — 7,435 (3,765 ) (10,344 ) 3,016 Intercompany accounts (6,113 ) — (6,452 ) 2,288 10,277 — Cash and cash equivalents, beginning of period 17,145 1 471 6,936 67 24,620 Cash and cash equivalents, end of period $ 20,722 $ 1 $ 1,454 $ 5,459 $ — $ 27,636 17
EAGLEPICHER HOLDINGS, INC.
SUPPLEMENTAL CONDENSED COMBINING STATEMENTS OF CASH FLOWSNINE
THREE MONTHSAUGUST 31, 2001 (in thousands)
GUARANTORS ----------------------- NON-GUARANTORS EAGLE-PICHER SUBSIDIARY FOREIGN ISSUER HOLDINGS, INC. GUARANTORS SUBSIDIARIES ELIMINATIONS TOTAL -------- -------- -------- -------- -------- --------Cash Flows From Operating Activities: Net Income (Loss) $(34,291) $(34,295) $ (9,460) $ 516 $ 43,235 $(34,295) Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities: Equity (loss) in earnings of consolidated subsidiaries 9,342 34,291 (311) -- (43,322) -- Depreciation and amortization 8,070 -- 35,816 3,725 -- 47,611 Provision for discontinued operations 23,700 -- -- -- -- 23,700 Divestitures 500 -- -- -- -- 500 Changes in assets and liabilities, net of effect of non cash loss on divestitures (1,595) 4 (13,789) 4,608 5,648 (5,124) -------- -------- -------- -------- -------- -------- Net cash provided by (used in) operating activities 5,726 -- 12,256 8,849 5,561 32,392 -------- -------- -------- -------- -------- -------- Cash Flows From Investing Activities: Capital expenditures (7,013) -- (16,602) (11,259) -- (34,874) Proceeds from sale of property and equipment and other 1,578 -- -- (2,544) -- (966) -------- -------- -------- -------- -------- -------- Net cash provided by (used in) investing activities (5,435) -- (16,602) (13,803) -- (35,840) -------- -------- -------- -------- -------- -------- Cash Flows From Financing Activities: Reduction of long-term debt (14,322) -- -- -- -- (14,322) Borrowings (repayments) on revolving credit agreement 30,340 -- (2,000) (1,575) -- 26,765 Acquisition of treasury stock -- (1,692) -- -- -- (1,692) Other 1,625 -- -- (193) -- 1,432 -------- -------- -------- -------- -------- -------- Net cash provided by (used in) financing activities 17,643 (1,692) (2,000) (1,768) -- 12,183 -------- -------- -------- -------- -------- -------- Net cash provided by discontinued operations 1,027 -- -- -- -- 1,027 -------- -------- -------- -------- -------- -------- Effect on exchange rates on cash -- -- -- (2,474) -- (2,474) -------- -------- -------- -------- -------- -------- Net increase (decrease) in cash and cash equivalents 18,961 (1,692) (6,346) (9,196) 5,561 7,288 Intercompany accounts (10,506) -- 6,347 10,986 (6,827) -- Cash and cash equivalents, beginning of period 1,297 1 539 4,313 1,317 7,467 -------- -------- -------- -------- -------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 9,752 $ (1,691) $ 540 $ 6,103 $ 51 $ 14,755 ======== ======== ======== ======== ======== ========22ITEMENDED FEBRUARY 28, 2003
(in thousands of dollars)
Guarantors Non-Guarantors EaglePicher Subsidiary Foreign Issuer Holdings, Inc. Guarantors Subsidiaries Eliminations Total CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 1,604 $ 1,168 $ (2,847 ) $ 744 $ 499 $ 1,168 Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities: Equity in (earnings) loss of consolidated subsidiaries 2,179 (1,169 ) (510 ) — (500 ) — Depreciation and amortization 1,730 — 9,260 1,400 12,390 Changes in assets and liabilities, net of effect of non-cash items (30,577 ) 24 (393 ) (1,133 ) 10,936 (21,143 ) (25,064 ) 23 5,510 1,011 10,935 (7,585 ) CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (422 ) — (2,437 ) (1,044 ) — (3,903 ) Proceeds from sale of property and equipment, and other, net — — 329 — — 329 (422 ) — (2,108 ) (1,044 ) — (3,574 ) CASH FLOWS FROM FINANCING ACTIVITIES: Reduction of long-term debt (4,232 ) — — — — (4,232 ) Net borrowings (repayments) under revolving credit agreements 14,500 — — — — 14,500 10,268 — — — — 10,268 Effect of exchange rates on cash — — — 1,659 — 1,659 Net increase (decrease) in cash and cash equivalents (15,218 ) 23 3,402 1,626 10,935 768 Intercompany accounts 7,238 (23 ) 3,671 869 (11,755 ) — Cash and cash equivalents, beginning of period 27,694 1 (4,895 ) 7,902 820 31,522 Cash and cash equivalents, end of period $ 19,714 $ 1 $ 2,178 $ 10,397 $ — $ 32,290 18
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. CRITICAL ACCOUNTING POLICIES The condensed consolidatedManagement’s Discussion and Analysis of Financial Condition and Results of Operations.Critical Accounting Policies
Our financial statements
of Eagle-Picher Holdings, Inc.are prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the use of estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented.The Company believesWe believe thatitsour critical accounting policies, which involve a higher degree of judgments, estimates and complexity, are as follows:Environmental Reserves
The Company isWe are subject to extensive and evolving
federal,Federal, state and local environmental laws and regulations. Compliance with such laws and regulations can be costly. Governmental authorities may enforce these laws and regulations with a variety of enforcement measures, including monetary penalties and remediation requirements.The Company isWe have policies and procedures in place to ensure that our operations are conducted in compliance with such laws and regulations and with a commitment to the protection of the environment.We are involved in various stages of investigation and remediation related to environmental remediation projects at a number of sites as a result of past and present operations, including currently-owned and formerly-owned plants. Also,
the Company haswe have received notice thatitwe may have liability under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 as aPotentially Responsible Partypotentially responsible party at a number of sites("(“SuperfundSites"Sites”).The ultimate cost of site remediation is difficult to predict given the uncertainties regarding the extent of the required remediation, the interpretation of applicable laws and regulations and alternative remediation methods.
There can be no assurancesBased on our experience with environmental remediation matters, we have accrued reserves for our best estimate of remediation costs, and we do not believe thatenvironmental laws and regulationsremediation activities willnot become more stringenthave a material adverse impact on our financial condition, results of operations or cash flows. In addition, in thefuturecourse of our bankruptcy described in Item 3 of our Form 10-K for the year ended November 30, 2002, filed on March 3, 2003, we obtained an agreement with the U.S. Environmental Protection Agency and the states of Arizona, Michigan and Oklahoma whereby we are limited in our responsibility for environmental sites not owned by us that allegedly arise from pre-bankruptcy activities. We retain all of our defenses, legal orthat the Company will not incur significant costs in the future to comply withfactual, at suchlaws and regulations. Accordingly, future information and developments will require the Company to continually reassess the expected impactsites. However, if we are found liable at any of these sites, we would only be required to pay as if such claims had been resolved in our bankruptcy and therefore our liability is paid at approximately 37%.As of November 30, 2002, we had $17.7 million accrued for sold divisions or businesses related to legal and environmental
matters.matters, and $2.4 million recorded in other accrued liabilities related to environmental liabilities for our on-going businesses. As of February 28, 2003, we had $15.2 million accrued for sold divisions or businesses related to legal and environmental matters, and $2.2 million recorded in other accrued liabilities related to environmental liabilities for our on-going businesses. We believe such reserves to be adequate under the current circumstances.Impairment of Long-Lived Assets,
The Company periodically reviewsincluding GoodwillWe review for impairment the carrying value of
itsour long-lived assets held for use and assets to be disposedof, includingof. For all assets excluding goodwill,when circumstances warrant such a review. Ifthe carrying value of a long-lived asset is considered impaired if the sum of the undiscounted cash flows is greater than the carrying value of the asset. If this occurs, an impairment charge is recorded for the amount by which the carrying value of the long-lived assets exceeds its fair value.The Company believes its estimates of fair value are reasonable considering currently applicable accounting guidance. However, changes in the fair values and circumstances and the implementation of Statement of Financial Accounting Standards (SFAS)Effective December 1, 2002, we adopted SFAS No. 142,"Goodwill“Goodwill and Other IntangibleAssets",Assets.” Under this new accounting standard, we no longer amortize our goodwill and will be required to complete an annual impairment test. We have determined that we have six reporting units, as defined in SFAS No. 142, within our three reportable business segments. We have completed our initial impairment test required by this accounting standard and have determined there was no impairment charge related to the adoption of this accounting standard on December 1, 2002. These impairment tests require us to forecast our future cash flows, whichis discussed in the Company's Form 10-K for the Year Endedrequires significant judgment. As of November 30,2001,2002 andis effective for the first quarterFebruary 28, 2003, we had recorded $163.9 million offiscal yeargoodwill. In addition as of November 30, 2002, we had recorded $183.4 million of property, plant, and equipment, net (our primary long-lived asset), and as of February 28, 2003could affect the evaluations.we had recorded $176.5 million of property, plant, and equipment, net.19
Revenue Recognition
A portionWe recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the
Company's revenuesfee isderived fromfixed and determinable, and collectibility is reasonably assured. Generally, all of these conditions are met at the time we ship our products to our customers. Net Sales and Cost of Products Sold include transportation costs. For certain products sold under fixed-price contractswhich are accounted for underand subcontracts with various United States Government agencies and aerospace and defense contractors, we utilize thepercentage of completionpercentage-of-completion method of accounting.ThisWhen we use the percentage-of-completion method, we measure our percent complete based on total costs incurred to date as compared to our best estimate of total costs to be incurred.Under the percentage-of-completion method, contract costs include direct material, labor costs, and those indirect costs related to contract performance, such as indirect labor, supplies, tools and repairs. Selling and administrative expenses are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes to job performance, job conditions, and estimated profitability may result in revisions to contract revenue and costs and are recognized in the period in which the revisions are made. We provided for estimated losses on uncompleted contracts of $0.5 million at November 30, 2002 and February 28, 2003. The percentage of completion method requires a higher degree of judgment and use of estimates than other revenue recognition methods. The primary judgments and estimates involved include
the Company'sour ability to accurately estimate thecontracts'contracts’ percent complete and the reasonableness of the estimated costs to completeamong other factors,as of each financial reporting period.Pension and Postretirement Benefit Plan Assumptions
We sponsor pension plans covering substantially all employees who meet certain eligibility requirements. We also sponsor postretirement benefit plans that make health care and life insurance benefits available for certain employees. Several statistical and other factors that attempt to anticipate future events are used in calculating the expense and liability related to these plans. These factors include key assumptions, such as discount rate, expected return on plan assets, rate of increase of health care costs and rate of future compensation increases. In addition, our actuarial consultants also use subjective factors such as withdrawal and mortality rates to estimate these factors. The actuarial assumptions we use may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates or longer or shorter life spans of participants. These differences may result in a significant impact to the amount of pension or postretirement benefits expenses we have recorded or may record in the future. Assuming a constant employee base, the most important estimate associated with our post retirement plan is the assumed health care cost trend rate. As of November 30, 2002, a 100 basis point increase in this estimate would increase the expense by approximately $0.2 million. A similar analysis for the expense associated with our pension plans is more difficult due to the variety of assumptions; plan types and regulatory requirements for these plans around the world. However, for example, our U.S. plans, which represent approximately 90% of the consolidated projected benefit obligation at November 30, 2002, a 25 basis point change in the discount rate, would change the annual pension expense by approximately $0.8 million, and the annual post-retirement expense by approximately $0.1 million. Additionally, a 25 basis point change in the expected return on plan assets would change the pension expense by approximately $0.6 million.
Legal Contingencies
We are a defendant in numerous litigation and regulatory matters including those involving environmental law, employment law and patent law, as discussed in Note G to the condensed consolidated financial statements. As required by SFAS No. 5, we determine whether an estimated loss from a loss contingency should be accrued by assessing whether a loss is deemed probable and can be reasonably estimated. We analyze our litigation and regulatory matters based on available information to assess potential liability. We develop our views on estimated losses in consultation with outside counsel and environmental experts handling our defense in these matters, which involves an analysis of potential results, assuming a combination of litigation and settlement strategies. Should these matters result in an adverse judgment or be settled for significant amounts, they could have a material adverse effect on our results of operations, cash flows and financial position in the period or periods in which such judgment or settlement occurs.
Estimates Used Relating to Restructuring, Divestitures and Asset Impairments
Over the last several years we have engaged in significant restructuring actions and divestitures, which have required us to develop formalized plans as they relate to exit activities. These plans have required us to utilize significant estimates related to
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salvage values of assets that were made redundant or obsolete. In addition, we have had to record estimated expenses for severance and other employee separation costs, lease cancellation and other exit costs. Given the significance of, and the timing of the execution of such actions, this process is complex and involves periodic reassessments of estimates made at the time the original decisions were made. Our policies, as supported by current authoritative guidance, require us to continually evaluate the adequacy of the remaining liabilities under our restructuring initiatives. As we continue to evaluate the business, there may be supplemental charges for new plan initiatives as well as changes in estimates to amounts previously recorded as payments are made or actions are completed.
Income Taxes and Tax Valuation Allowances
We record the estimated future tax effects of temporary differences between the tax bases of assets and liabilities and amounts reported in our balance sheets, as well as operating loss and tax credit carryforwards. We follow very specific and detailed guidelines in each tax jurisdiction regarding the recoverability of any tax assets recorded on the balance sheet and provide necessary valuation allowances as required. We regularly review our deferred tax assets for recoverability based on historical taxable income, projected future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. If we continue to operate at a loss in certain jurisdictions, as we have in the United States, or are unable to generate sufficient future taxable income, or if there is a material change in the actual effective tax rates or time period within which the underlying temporary differences become taxable or deductible, we could be required to increase the valuation allowance against all or a significant portion of our deferred tax assets resulting in a substantial increase in our effective tax rate and a material adverse impact on our operating results.
Risk Management Activities
The Company isWe are exposed to market risk including changes in interest rates, currency exchange rates and commodity prices.
The Company usesWe use derivative instruments to manageitsour interest rate and foreign currency exposures.The Company doesWe do not use derivative instruments for speculative or trading purposes. Generally,the Company enterswe enter into hedging relationships such that changes in the fair values or cash flows of items and transactions being hedged are expected to be offset by corresponding changes in the values of the derivatives.The Company accountsAccounting forits derivatives in accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". Such accountingderivative instruments is complex, as evidenced by the significant interpretations of the primary accounting standard,whichand continues to evolve.RESULTS OF OPERATIONS Please referAs of November 30, 2002 we had $13.5 million and at February 28, 2003 we had $12.9 million of foreign forward exchange contracts. In addition, at November 30, 2002 and February 28, 2003, we had $90.0 million of interest rate swap contracts to hedge our interest rate risks.Other Significant Accounting Policies
Other significant accounting policies, not involving the same level of uncertainties as those discussed above, are nevertheless important to an understanding of our financial statements. See Note B to the consolidated financial statements, Summary of Significant Accounting Policies, included in our Form 10-K for the year ended November 30, 2002, filed on March 3, 2003, which discusses accounting policies that must be selected by us when there are acceptable alternatives.
Results of Operations
The following summary financial information about our industry segment data is presented to gain a better understanding of the narrative discussion below about our business segments. See Note O in our Form 10-K for the year ended November 30, 2002, filed on March 3, 2003, for additional financial information by segment. All references herein to years are to the three-months ended February 28 unless otherwise indicated (in thousands of dollars).
As discussed in Note Q to our financial statements for the year ended November 30, 2002, the accompanying 2002 financial statements have been restated to reflect the appropriate adoption of EITF 00-10 which resulted in an increase to Net Sales and Cost of Products Sold for transportation costs billed to our customers. This restatement had no impact on operating income, net income or cash flows. The following discussion and analysis gives effect to the restatement.
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2002 2003 Variance % Hillsdale Division $ 85,834 $ 83,282 $ (2,552 ) (3.0 ) Wolverine Division 17,648 20,718 3,070 17.4 Automotive 103,482 104,000 518 0.5 Power Group 22,870 32,283 9,413 41.2 Precision Products- divested July 17, 2002 1,215 — (1,215 ) (100.0 ) Specialty Materials Group 13,031 13,219 188 1.4 Pharmaceutical Services (formerly ChemSyn) 3,405 1,902 (1,503 ) (44.1 ) Technologies 40,521 47,404 6,883 17.0 Filtration and Minerals 19,226 18,906 (320 ) (1.7 ) $ 163,229 $ 170,310 $ 7,081 4.3 Automotive $ 3,516 $ 5,141 $ 1,625 46.2 Technologies 668 8,046 7,378 1,104.5 Filtration and Minerals 1,306 (111 ) (1,417 ) (108.5 ) Divested Divisions (125 ) — 125 100.0 Corporate/ Intersegment (509 ) (2,036 ) (1,527 ) (300.0 ) $ 4,856 $ 11,040 $ 6,184 127.3 Automotive Segment
Sales in our Automotive Segment increased $0.5 million, or 0.5%, to $104.0 million in 2003 from $103.5 million in 2002. The Wolverine division sales increased $3.1 million, or 17.4%, due primarily to an 11% volume increase as a result of increased penetration of the aftermarket and small engine markets, and favorable foreign currency as a result of the strengthening of the Euro. Approximately 38.8% of the Wolverine division’s sales are from Europe. Partially offsetting the Wolverine division’s sales increase was a $2.6 million, or 3.0%, decline in our Hillsdale division’s sales due to (a) a $2.8 million decline in transmission pump sales related to a program phase-out, and (b) a $1.3 million decline in sales of our Hillsdale U.K. Automotive operation, which is in the process of being sold. These decreases are partially offset by a modest increase in North American sales due to the increase in automotive builds in 2003 compared to 2002. The pending sale of the Hillsdale U.K. Automotive operation is discussed in Note I
regarding Segment Reporting contained inof Item 1 of this report.The Automotive Segment Sales forWe anticipate that theAutomotive Segment of $105.9net charge to our earnings related to this divestiture will be approximately $3.5 million to $5.0 million inthe third quarter2003, with net cash proceeds of2002approximately $1.5 million to $2.0 million.Operating income increased
$1.4$1.6 million, or1.3%46.2%, to $5.1 million in 2003 from $3.5 million in 2002. This improved performance was primarily due to a $0.9 million reduction in depreciation and amortization expense due to the elimination of $2.0 million of goodwill amortization expense in 2003 compared to$104.5 million in2002 (due to thethird quarteradoption of2001. SalesSFAS No. 142, Goodwill and Other Intangible Assets, which no longer requires the amortization of$326.1 million in the first nine months of 2002 increased $6.1 million or 1.9% compared to $320.0 million in the first nine months of 2001. The modest recovery in the United States automotive industry is the primary reason for improved sales,goodwill), which was partially offset by adecline during the third quarter$1.1 million increase in tooling amortization expenses. The remaining $0.7 million of2002 in the Company's precision machined components business. North American sales of precision machined components were consistent in the third quarter of 2002 comparedoperating income improvement was primarily due tothe 23third quarter of 2001,favorable foreign currency exchange rates. Productivity improvements andincreased $7.1 million or 2.8% in the first nine months of 2002 compared to the first nine months of 2001. The Company's precision machined components European sales deceased $1.6 million or 40% in the third quarter of 2002 compared to the third quarter of 2001, and $3.8 million or 26.6% in the first nine months of 2002 compared to the first nine months of 2001. The decrease in European sales is primarily attributed to market share and volume losses experienced by a significant customer of the Company's Hillsdale U.K. precision machined components business. The loss from continuing operations before income taxes of ($4.6) million in the third quarter of 2002 improved $1.3 million or 21.5% compared to ($5.9) million in the third quarter of 2001. The loss from continuing operations before income taxes of ($9.1) million in the first nine months of 2002 improved $0.2 million or 2.1% compared to ($9.3) million in the first nine months of 2001. The improved profitability during the third quarter of 2002 and the first nine months of 2002 resulted primarily from the slightly higher sales compared to the respective periods in 2001,improved sales mix were largely offset by price decreases ($0.9 million) andproductivity improvements. Unusual expenses, totaling $0.6higher wage and benefit costs in unionized facilities ($0.8 million).Technologies Segment
Sales in our Technologies Segment increased $6.9 million,
for the third quarter of 2002 and $1.4 million for the first nine months of 2002 were incurred in recruiting and relocation relatedor 17.0%, torestructuring the segment's management team, and workforce-related consulting fees that further dampened the segment's profitability. An additional $1.1$47.4 million indepreciation expense was recorded2003 from $40.5 million in 2002. Excluding sales from our Precision Products business, which we divested in July 2002, this segment’s sales increased $8.1 million, or 20.6%. Sales in thesecond quarter of 2002 related to adjustments to bring the estimated useful lives of certain equipment within the Automotive Segment in line with estimated periods of active production. EBITDA for the Automotive Segment of $11.1Power Group increased $9.4 million,in the third quarter of 2002 increased $1.9or21.2%41.2%, during 2003 compared to$9.2 million in the third quarter of 2001. EBITDA of $37.5 million for the first nine months of2002,increased $1.9 million or 5.3% compared to the first nine months of 2001. These increases occurred as a result of the items discussed above. Automotive Segment Outlook Projected sales for the fourth quarter of 2002 of approximately $108 million are consistent with the fourth quarter of 2001, which will result in total projected 2002 sales for the Automotive Segment of approximately $433 million to $435 million, an increase of approximately 1.5% compared to fiscal 2001. The relatively flat projected sales during the fourth quarter of 2002 compared to the prior year will be primarily the result of increased sales volume of rubber coated metal products, offset by decreases attributable to a model phase-out of a transmission pump program within the Company's precision machined components business, and the continued decreased volume in the Company's Hillsdale U.K. precision machined components business. The phase-out of the pump program is expected to decrease fiscal 2003 revenues by approximately $20 million, which the Company expects will be partially offset by new business. Additionally, the Company is considering the closure or sale of its Hillsdale U.K. precision machined components business which could lower 2003 sales by approximately $13 million, depending on the timing of the action. The Technologies Segment Sales of the Technologies Segment of $45.8 million in the third quarter of 2002 decreased $2.9 million or 5.9% compared to sales of $48.7 million for the third quarter of 2001. Sales of $134.2 million in the first nine months of 2002 decreased $14.8 million or 10.0% compared to sales of $149.0 million for the first nine months of 2001. Sales of special purpose batteries increased $2.1 million or 8.2% during the third quarter of 2002 compared to the third quarter of 2001,which wasmore thanpartially offset by a decrease of$4.8$1.5 million in our Pharmaceutical Services businesses. The increase in our Power Group sales is primarily related to new programs, improved pricing, and increased spending in our defense power business, as well as a $1.0 million, or25.3%43%, increase in our commercial power sales, as a result of new initiatives in thespecialty materials business. Also contributingcommercial market. Decreased sales in our Pharmaceutical Services business is the result of lower sales tothe sales decrease was the sale of the Company's Precision Products business that occurred on July 17, 2002. Precision Products sales decreased $1.4our larger customers and short-term operational issues. Sales increased $0.2 million inthe third quarter of 2002 comparedour Specialty Materials Group due primarily tothe third quarter of 2001 and $5.0 million in the first nine months of 2002 compared to the same period in 2001 due partially to the sale of Precision Products. Within the specialty materials business, thecontinued strong demand for enriched Boron related22
products which increased $2.2 million, or 50.7%, partially offset by the continued decline of Germanium and the exiting of our Gallium-based products
which aresold to the telecommunications, fiber optics, and semiconductormarkets, was significantly impacted by the extremely weak demand in thesemarkets.Germanium and Gallium sales decreased $5.1Operating income increased $7.4 million
or 61.5% during the third quarter of 2002 comparedtothe third quarter of 2001, which were partiality offset in the quarter by a $1.1 million or 26.2% increase in sales of enriched boric acid products sold to nuclear power reactor facilities. Sales of special purpose batteries increased $3.0 million or 4.1% during the first nine months of 2002 compared to the first nine months of 2001, which was offset by a decrease of $13.8 million or 23.9% in the specialty materials business. Within the specialty materials business, sales of Germanium and Gallium-based products decreased $14.2 million or 55.6% in the first nine months of 2002 compared to the first nine months of 2001, which were partially offset by a $5.0 million or 43.8% increase in sales of enriched boric acid products sold to nuclear power reactor facilities. Income from continuing operations before income taxes of $1.4$8.0 million inthe third quarter of 2002 increased $3.2 million or 175% compared to a loss of ($1.8)2003 from $0.6 million inthe third quarter2002. This improved performance resulted primarily from operational improvements of2001. The loss from continuing operations before income taxes of ($14.6)$5.5 millionin the first nine months of 2002, increased $11.9 million or 440% comparedrelated toa loss of ($2.7) million during the 24first nine months of 2001. Thehigher sales volumes, productivity initiatives, improvedthird quarter profitability in 2002 compared to 2001 is due to improved operating margins resulting from productivitysales mix andrestructuring efforts that commenced in the fourth quarter of 2001,pricing, as well asimproved sales mix. Partially offsetting this was an expense$1.2 million of$0.7 million in the third quarter of 2002 for consulting fees to develop a strategy for the special purpose batteries business. The ($14.6) million loss from continuing operations before income taxes for the first nine months of 2002 was primarily due to the following expenses and charges, which were primarily recorded in the second quarter of 2002: a. $5.7 million oflower legal expenses and settlement chargesrecordedinselling2003 compared to 2002. In addition, the elimination of $1.9 million of goodwill amortization expense during 2003 compared to 2002 due to our adoption of SFAS No. 142, Goodwill andadministrative expenses duringOther Intangible Assets, contributed to thefirst half of 2002 as discussedimproved performance.Filtration and Minerals Segment
Sales in
Note H regarding Legal Matters contained in Item 1 of this report; b. $3.1our Filtration and Minerals Segment decreased $0.3 million,charge in insurance related losses recorded in the second quarter of 2002 for a potential shortfall in insurance proceeds as described in Note G regarding Insurance Related Losses contained in Item 1 of this report; c. $1.4or 1.7%, to $18.9 million inexpense for business consulting fees to develop a strategy for the special purpose batteries business ($0.7 million was recorded in the second quarter and in the third quarter of 2002); and d. $5.5 million charge in restructuring expense in the second quarter of 2002 associated with the decision to exit the Company's Gallium-based specialty material business due to continued soft demand2003 fromcustomers in the telecommunications and semi-conductor markets. The $5.5 million restructuring charge during the second quarter of 2002 consisted of an inventory write-down of $2.9 million, representing the loss incurred from the liquidation of current inventory. An additional $2.4 million was recorded in other accrued liabilities representing the loss to be incurred from the liquidation of inventory to be purchased under a firm purchase commitment, lease impairments and severance. Finally, a $0.2 million asset impairment charge was recorded against property, plant and equipment. Excluding the above expenses and charges, the Technologies Segment would have reported income from continuing operations of $1.1 million for the first nine months of 2002, a $3.8 million improvement compared to the reported loss of ($2.7) million in 2001. This increase is primarily attributed to increased gross margins from improved sales mix and the productivity and restructuring efforts that commenced in the fourth quarter of 2001. EBITDA for the Technologies Segment of $8.0 million in the third quarter of 2002 increased $2.4 million or 43.7% compared to $5.6 million in the third quarter of 2001. EBITDA of $6.4 million in the first nine months of 2002 decreased $12.8 million or 66.9% compared to$19.2 million in 2002.Operating results decreased $1.4 million to a loss of $0.1 million in 2003 from income of $1.3 million in 2002. The decreased earnings were due to severance and recruiting costs of $0.5 million related to restructuring the
first nine monthssegment’s management team and additional freight costs of2001.$0.8 million largely related to the resolution of disputed freight claims with a former carrier.Company Discussion
Net Sales.Net sales increased $7.1 million, or 4.3%, to $170.3 million in 2003 from $163.2 million in 2002. Excluding the
$15.7 millionsale incharges described above, EBITDA for the first nine monthsJuly 2002 of2002 would have been $22.1 million, an increase of $2.8our Precision Products business included in our Technologies Segment, our net sales increased $8.3 million, or15.0% as5.1%, in 2003 compared tothe prior year. Technologies Segment Outlook Projected sales for the fourth quarter of 2002 of approximately $512002. This increase was primarily driven by a $9.4 millionwill be consistent with the fourth quarter of 2001, which will result in total projected 2002 sales of approximately $183 million to $185 million, a decrease of approximately 8% compared to fiscal 2001. This expectedincrease insales during the fourth quarter of 2002 is the result ofour Technologies Segment’s Power Group due primarily to new programs, improved pricing, and increasedsales of special purpose batteriesspending inthe military and space markets, offset by continued reduced demand within specialty material productsour defense power business, as well as a $1.0 million, or 43%, increase in our commercial power sales, as a result ofthe expected continuing lower demandnew initiatives in thetelecommunicationscommercial market, andsemi-conductor markets, as well as reduced revenue associated witha $3.1 million increase in our Automotive Segment’s Wolverine division due primarily to thesalepenetration of theCompany's Precision Products business. For the full yearaftermarket and small engine markets. These increases were partially offset by reduced sales of2002 the projected decrease$2.6 million insales isour Automotive Segment’s Hillsdale division due to thesame factors described abovecontinued phase out of an automotive transmission pump program and lower sales at our Hillsdale U.K. Automotive operation, which is in thefirst nine monthsprocess of2002, primarily the substantially lower Gallium and Germanium-based sales and the sale of the Precision Products business, partially offset by increased sales of special purpose batteries and enriched boric acid products. Minerals Segment Sales for the Minerals Segment of $17.3 million in the third quarter of 2002 increased $1.0 million or 6.1% compared to $16.3 million for the third quarter of 2001. Sales of $49.4 million in the first nine months of 2002 increased $0.8 million or 1.6% from $48.6 million for the first nine months of 2001. The sales increase during the third quarter of 2002 was primarily the result of the strong recovery in sales volumes within the European markets, which were significantly lower during the first half of 2002, together with improved pricing and sales mix throughout the first nine months of 2002. Income from continuing operations before income taxes of $0.9 in the third quarter of 2002 increased $1.0 million or 1,928% compared to the loss of ($0.1) million in the third quarter of 2001. Income from continuing operations before income taxes of $3.9 million in the first nine months of 2002 increased $4.2 million or 1,210% compared to a loss of ($0.3) million in the first 25nine months of 2001. Improved profitability was primarily attributable to lower energy costs, favorable product mix and pricing, improved production efficiencies and lower foreign currency transaction costs, primarily due to the strengthening of the Euro. EBITDA for the Minerals Segment of $3.0 million in the third quarter of 2002 increased $0.9 million or 40.0% compared to the third quarter of 2001. EBITDA of $10.2 million in the first nine months of 2002 increased $4.0 million or 64.8% compared to the first nine months of 2001. These increases occurred as a result of the items discussed above. Minerals Segment Outlook Sales for the fourth quarter of 2002 are expected to increase approximately 3% compared to the fourth quarter of 2001 to approximately $17.5 million, which will result in total projected 2002 sales for the Minerals Segment of approximately $67.0 million, an increase of 2% compared to fiscal 2001. Summary of the Company Net Sales. Net sales in the third quarter of 2002 were consistent compared to 2001. Net sales of $509.7 million in the first nine months of 2002 decreased $8.0 million or 1.6% when compared to sales of $517.7 million in the first nine months of 2001. For both the third quarter and the first nine months of 2002, sales increases in the North American automotive business and the Minerals Segment were offset by declines in the Technologies Segment and the Hillsdale U.K. precision machined components automotive business. The Technology Segment's sales decreased $2.9 million or 5.9% in the third quarter of 2002 and $14.8 million or 10% in the first nine months of 2002 compared to 2001, where sales were negatively impacted primarily by soft markets in telecommunications and semi-conductors markets.being sold.Cost of Products Sold (exclusive of depreciation).
Gross margins, exclusive of depreciation expense, increased 4.5% to 22.1% in the third quarter of 2002 compared to 17.6% for the third quarter of 2001. GrossOur gross margins increased2.6%by $3.7 million from $33.5 million in 2002 to22.0%$37.2 million inthe first nine months2003 as a result of2002 compared to 19.4% for the first nine months of 2001. Improvedhigher volumes, improved sales mix, and productivity improvements. Our gross margin increased 1.3 points to 21.8% in 2003 from 20.5% in 2002, despite a negative impact of $0.5 million (0.3 points) in pension costs. The margin rate improvement was primarily a result of productivity improvementscontributed to the increased gross marginsineach of the business segments during the third quarterour Automotive andfirst nine months of 2002 compared to 2001. TheTechnologiesSegment was also favorably impacted by the restructuring actions initiated in the fourth quarter of 2001, while the Minerals Segment benefited from improved pricing and significantly lower energy costs, which were usually high in 2001 when the Western United States experienced an energy crisis.Segments.Selling and Administrative.Selling and administrative expenses
of $14.3increased $1.1 million, or 7.9%, to $14.6 million inthe third quarter of 2002 increased $1.2 million or 9.5 % compared to expenses of $13.1 million for the prior year. Selling and administrative expenses of $49.22003 from $13.5 million inthe first nine months of 2002 increased $11.3 million or 29.8% compared to expenses of $37.9 million for the first nine months of 2001. The increased costs for the third quarter of 2002 were primarily attributable to $0.3 million expense for a recently adopted long-term bonus plan for certain corporate and divisional management executives, $0.7 million expense in the Technologies Segment for business consulting fees to develop a strategy for the special purpose batteries business, and approximately $0.6 million in management recruiting and relocation costs. For the first nine months of fiscal 2002, the significant increase is primarily related to: a. $6.3 million in accruals relating to various legal matters discussed in Note H regarding Legal Matters contained in Item 1 of this report; b. $1.4 million in the Technologies Segment for business consulting fees to develop a strategy for the special purpose batteries business; c. $2.3 million in severance (excluding management compensation - special), recruiting and relocation costs as the Company has continued its investment in strengthening its leadership team, and d. $0.8 million in increased compensation costs related to a recently adopted long-term bonus plan for certain corporate and divisional management executives. Depreciation and Amortization. Depreciation and amortization expenses of $16.1 million in the third quarter of 2002 increased $0.7 million or 4.8% compared to $15.4 million in the prior year. Depreciation and amortization expenses of $47.0 million in the first nine months of 2002 increased $1.9 million or 4.1% compared to $45.1 million in the first nine months of 2001.2002. The increase is primarily attributable to $0.7 million for increased compensation costs related to our long-term and annual management bonus plans, higherdepreciationinsurance costs,as a result of capital expenditures in 2001 primarily for new automotive programswage increases, andan adjustment to bring the estimated useful lives of certain equipment in the Automotive Segment in line with estimated periods of active production on existing automotive programs. 26Restructuring. On May 31, 2002 the Company announced it would exit the Gallium business in its Technologies Segmentincreased selling costs due to higher sales volumes.Goodwill Amortization.Due to the
downturn inadoption of SFAS No. 142, Goodwill and Other Intangible Assets, no goodwill amortization expense was recorded 2003 while 2002 included $3.9 million of goodwill amortization expense. This new accounting standard required that we cease thefiber-optic, telecommunicationamortization of goodwill, effective December 1, 2002, andsemiconductor markets. This resulted in a $5.5 millioncomplete an annual impairment test to determine if an impairment chargerecorded to restructuringhas occurred. We have completed our initial impairment test as required by this accounting standard and have determined that our goodwill was not impaired at the time of we adopted this accounting standard.Interest Expense.Interest expense
during the second quarter of 2002. Also during the second quarter of 2002, the Company reduced the amounts accrued for restructuring that were recorded in 2001 by $2.7 million, primarily to reflect severance payments made to eligible employees from the Company's pension plan whichwasoverfunded at November 30, 2001 as detailed in Note D regarding Restructuring contained in Item 1 of this report. Divestitures. All amounts recorded in divestures expense relate to operations that are sold or that were divested prior to November 30, 2001. During the third quarter of 2002, the Company recorded $0.2 million primarily related to costs associated with estimated increases in workmen's compensation claims for employees of these divested businesses. During the second quarter of 2002, the Company recorded approximately $3.2$11.1 million inadditional accruals related to costs for certain litigation issues2002 andenvironmental remediation costs. In addition, in July 2002, the Company completed the sale of its Precision Products business in its Technologies Segment to a group of employees and divisional management personnel. The Company recorded in the second quarter of 2002 a $2.8 million loss on this sale. Management Compensation - Special. Management compensation - special expenses primarily relate to the separation of officer employment with the Company. During 2002, the Company separated three officers of the Company (one in the Automotive Segment, one in the Corporate Segment and the other in the Technologies Segment) that aggregated $2.9 million. During 2001, the Company separated three of officers of the Company in the Corporate Segment that aggregated $2.5 million. Insurance Related Losses. During the second quarter 2002, the Company recorded $3.1$9.4 million incharges for an insurance receivable related to its third quarter 2001 fire at its Harrisonville, Missouri bulk pharmaceutical manufacturing plant. The Company has recorded this charge because the insurance underwriter is contesting the coverage. The Company is disputing the insurance carrier's position and is vigorously pursuing efforts to collect on its claims, but the full realization of the receivable is uncertain at this time. Interest Expense. Interest expense of $9.6 million decreased $0.3 million or 2.9% in the third quarter of 2002 compared to $9.9 million in the third quarter of 2001, primarily due to lower average borrowing levels and lower rates during the quarter. In the quarter ended August 31, 2001, approximately $0.8 million in interest expense was included in discontinued operations. Interest expense of $31.9 million increased $1.8 million or 5.9% in the first nine months of 2002 compared to $30.2 million in the first nine months of 2001. In the nine months ended August 31, 2001, approximately $2.5 million in interest expense was included in discontinued operations, which impacts the comparability with 2002. Also included2003. Included in interest expense inthe first half of2002 areapproximately$1.5 million in fees and other costs, primarily related totheour accounts receivableasset backedasset-backed securitizationas discussed in Note F regarding(see Accounts ReceivableAsset BackedAsset-Backed Securitizationcontainedunder Liquidity and Capital Resources). Excluding these $1.5 million inItem 1 of this report. Adjusting for these two items,fees and other costs in 2002, our 2002 interest expensedecreased $2.2was $9.6 million. This represents a decrease of 2.1%, or $0.2 million,or 6.8%inthe first nine months of 20022003 compared tothe first nine months of 2001. These decreases reflect actual2002. The decrease in interest expense is due to lower interest rates and lower debtlevels throughout the nine months and interest rates slightly lower in 2002 compared to 2001 on variable rate debt. Loss from Continuing Operationslevels.23
Income (Loss) Before
Taxes. Loss from continuing operations before taxes of ($2.8) million decreased $4.8 million or 63.1% in the third quarter of 2002 compared to the loss of ($7.6) million for the third quarter of 2001. The loss from continuing operations before taxes of ($29.8) million increased $16.6 million or 125% in the first nine months of 2002 compared to the loss of ($13.2) million for the first nine months of 2001. The following items represent special charges (and reversals) by segment for the first nine months of 2002.
2002 2001 ---- ---- Amounts (in millions)a. Management compensation- special $2.3 $2.5 Corporate b. Management compensation- special 0.4 Technologies c. Management compensation- special 0.2 - Automotive d. Divestitures 6.1 0.5 Divested Divisions e. Restructuring- exiting of the Gallium business 5.5 - Technologies f. Restructuring- reversal of the fourth quarter 2001 expense related to severance payments made by the pension plan (1.2) - Technologies g. Restructuring- reversal of the fourth quarter 2001 expense related to severance payments to be paid by the pension plan (1.5) - Corporate h. Selling and administrative- legal and settlement costs 5.7 - Technologies i. Selling and administrative - legal and settlement costs 0.6 - Corporate j. Insurance related losses 3.1 - Technologies k. Depreciation adjustment related to equipment useful lives 1.1 - Automotive ------------- --------- Total $ 22.3 $ 3.0 ============= =========27. Income (Loss) Before Taxes improved $7.9 million in Excluding the above, the Company's loss from continuing operations was ($7.5)Taxesthe first nine months2003 to income of2002$2.1 million in 2003 compared to a loss of($10.2)$5.8 millionfor the first nine months of 2001.in 2002. Thisimproved loss from continuing operations, despite lower sales for the first nine months of 2002,improvement is primarilyattributable to an improvement in gross margins resulting from improved sales mix and productivity improvements across the Company, and lower energy costs in the Minerals Segment. In addition, during 2002, the Company incurred $1.4 million of expenses in the Technologies Segment for business consulting fees to develop a strategy for the special purpose batteries business, and $2.3related to:
a. $3.7 million of higher gross margin due to increased sales volume and a 1.3 point gross margin rate improvement for the reasons discussed above, b. $3.9 million of goodwill amortization expense in 2002 which we are no longer required to expense with the adoption of SFAS No. 142, Goodwill and Other Intangible Assets, on December 1, 2002, c. $1.5 million of additional interest expense in 2002 related to our accounts receivable asset-backed securitization (see Accounts Receivable Asset-Backed Securitization under Liquidity and Capital Resources), and d. $1.1 million increase in Selling and Administrative expense, as discussed above. Income Taxes.Income tax provision was $0.9 million in
severance, recruiting, relocation and workforce-related consulting projects as the Company has continued its investment in strengthening its leadership team. Income Taxes (Benefit). Income tax expense was $.8 million for the third quarter of 20022003 compared toan income tax benefit of ($2.5)$0.4 million inthe third quarter of 2001. Income tax expense was $2.0 million in the first nine months of 2002 compared to a benefit of ($4.3) million in the first nine months of 2001. Differences in the income taxes recorded primarily relate to the Company recording a tax benefit during 2001 on losses to the extent those losses could be carried back to prior fiscal years and a refund could be obtained from the taxing authority. The Company has exhausted its ability to carry-back any losses to obtain a refund. Therefore, the Company has elected to provide a valuation allowance on all current tax losses. Accordingly, there is no tax benefit recorded during2002. The provision in 2003 and 2002 relates to the allocation of income and loss between the United States and foreign jurisdictions and represents the estimated tax that will be due in certain jurisdictions where no tax benefit can be assured from utilizingthe Company'sprevious losses.Discontinued Operations. Throughout 2001, the Company accounted for its former Machinery Segment as a discontinued operation. This business was sold in December 2001, effective November 30, 2001.There is noeffect on the operationsU.S. Federal or state net tax benefit or provision recorded during 2002 and 2003.Net Income (Loss).The net income (loss) improved $7.4 million to net income of $1.2 million in
2002. Net Loss. The2003 from a net loss of($3.6)$6.2 million inthe third quarter of 2002 decreased 66.3 % compared to the loss of ($10.6) million in the third quarter of 2001.2002. The improved netloss of ($31.7) million in the first nine months of 2002 decreased 7.5% from the net loss of ($34.3) million in the first nine months of 2001. The decrease in net lossincome (loss) is the result of the items discussed above.DividendPreferred stock dividend accretion
on the 11 3/4% Cumulative Redeemable Exchangeable Preferred Stock ("Preferred Stock")of$3.7 million increased 12.1% during the third quarter of 2002 from the $3.3$3.9 million inthe third quarter2003 decreased our net income of2001, attributable$1.2 million to ahigher liquidation preference balance resulting from the ongoing accretion. This dividend accretion increased thenet loss applicable to common shareholdersduringof $2.8 million. In 2002, preferred stock dividend accretion of $3.5 million increased thethird quarternet loss of2002$6.2 million to($7.3) million and increased thea net loss applicable to common shareholdersduring the third quarterof2001 to ($13.9)$9.7 million.Dividend accretion was $10.9 million in the first nine months of 2002 compared to $9.8 million in first nine months of 2001. This dividend accretion increased the net loss applicable to common shareholders in the first nine months of 2002 to ($42.7) million and increased the net loss applicable to common shareholders during the nine months of 2001 to ($44.1) million.Company
Outlook The Company'sOutlook.Projected sales forfiscal year 20022003 areexpectedestimated to be in the range of$683$670.0 million to$687$700.0 million compared to $696.8 million in 2002. The 2003 sales range is primarily attributed to the current uncertainty regarding industry forecasted automotive builds for 2003. Also, the sales estimate for 2003 reflects the anticipated decrease in sales of approximately $15.0 million related to the phase-out of an automotive transmission pump program in our Hillsdale Division, as well as our decision to sell our Hillsdale U.K. Automotive operation, which will have approximately $10.0 million less sales in 2003 compared to 2002.We are projecting 2003 Operating Income to be in the range of $53.5 million to $57.5 million. This amount includes $45.0 million of depreciation and amortization of intangibles, and excludes $0.5 million of non-operating income. These Operating Income estimates also include $3.0 million of expense related to non-cash provisions for our long-term bonus program, which are added back to Operating Income for purposes of determining our debt covenant calculations. In 2002, our Operating Income was $5.3 million, which
is down from the $700included $64.0 millionoutlook set forthinits fiscal year 2001 Annual Report on Form 10-K.depreciation and amortization of intangibles expense, and excluded $1.6 million of non-operating income. Thisreduced forecast is primarily related to significantlyprojected improved Operating Income, despite lower sales, primarily reflects:
a. the adoption of SFAS No. 142, Goodwill and Other Intangible Assets, which eliminated the amortization of goodwill, effective December 1, 2002 (approximately $16.0 million) b. a reduction of special charges of approximately $26.0 million in 2002 related to legal expenses and legal settlements, divestitures, restructuring expenses and other unusual charges, c. improved sales mix in our Technologies and Automotive Segments, and improved pricing in our Technologies Segment, d. cost reductions and productivity initiatives across all businesses, e. an approximate $4.8 million increase in our pension expense, from $3.8 million of income in 2002 (excluding special termination benefits incurred in 2002) to an estimated $1.0 million of expense in 2003, and f. approximately $2.0 million in increased compensation costs related to our long-term and annual management bonus plans. On the basis of these projections, we believe we will be in compliance with all covenants under our various credit facilities during 2003.
Liquidity and Capital Resources
Our cash flows from operations and availability under our credit facilities are considered adequate to fund our short-term
24
capital needs. As of February 28, 2003, we had $43.8 million unused under our senior credit agreement. However, due to various financial covenant limitations under our senior credit agreement measured at the end of each quarter, on February 28, 2003, we could only incur an additional $39.9 million of indebtedness.
At February 28, 2003, we were in compliance with all our debt covenants. Also, based on our projections for 2003, we expect to remain in compliance with all covenants. Our senior secured credit agreement expires in February 2004. We will need to replace or extend this facility before that date. Although there are no guarantees this can be accomplished, based on the projections described in the
Technologies Segment's specialty materials products,Company Outlook section under the Results of Operations above and discussion with potential lenders, we believe we can obtain a new credit facility sufficient to meet our long-term capital requirements. As described below under Accounts Receivable Asset-Backed Securitization, our qualifying special purpose entity, which is an important element of our liquidity and capital resources will terminate upon thesaleexpiration ofPrecision Products, partially offset by higher salesour senior credit agreement unless the senior credit agreement is refinanced.All references herein to years are to the three-months ended February 28 unless otherwise indicated.
Cash Flows
Operating Activities.Net cash used in
the Automotive and Minerals Segments. The Company expects Credit Agreement EBITDA (as defined under Financial Condition, below) for fiscal year 2002operating activities during 2003 was $7.6 million compared tobe approximately $95 million. This estimate remains consistent with the outlook for the Company set forth in its fiscal year 2001 Annual Report on Form 10K. FINANCIAL CONDITION Operating Activities Netnet cash provided by operating activitiesfor the nine months ended August 31,of $50.3 million in 2002,was $53.1which includes $43.8 millioncompared to $32.4 million for the comparable 2001 period. The majority of the increase in net inflow of cash from operating activities was $40.1 million, which occurredas a result ofthe Companyselling certain ofitsour receivables to an unconsolidated qualifying special purpose entity,(see note Fas discussed below in Accounts Receivable Asset-Backed Securitization. The remaining difference between 2003 and 2002 operating activities is primarily the use of cash for our accrued liabilities of $4.7 million in 2003, compared to28condensed consolidated financial statement). A decrease in the Company's inventory provided $2.3a source of cash of $6.3 milliona decrease in accounts payable used $13.3 million and an increasein accrued liabilitiesprovided $3.8 million. Other assetsin 2002. This change is primarily related to 2003 spending on restructuring andliabilities, net, used $5.3 million. The Company received "quick refunds" inlegal settlement matters which were expensed during 2002. Approximately $8.0 million of 2002and 2001 of income taxeslitigation settlements were paidforin theprior fiscal years.first quarter of 2003.Investing
ActivitiesActivities.Investing activities used$3.1$3.6 million in cash duringthe nine months ended August 31, 20022003 compared to$35.8providing $1.3 millionusedinthe nine months ended August 31, 2001.2002. Duringthe nine months ended August 31,2002,$6.1$6.3 million was providedfromby proceeds from the sale ofCED and $2.8our Construction Equipment Division, which represented our former Machinery Segment, which was offset by capital expenditures of $5.1 million in 2002. During 2003, our net cash used in investing activities was primarily for capital expenditures. We expect our capital expenditures during 2003 will be approximately $22.0 million to $25.0 million, with the largest increase in our Technologies Segment.Financing Activities.Financing activities provided
from proceeds from the sale of Precision Products. Capital expenditures amounted to $12.6$10.3 millionfor the nine months ended August 31, 2002during 2003 compared to$34.9using $48.7 millionfor the nine months ended August 31, 2001. Financing Activities Financing activitiesduring 2002. During 2002, we used$63.5 million for the nine months ended August 31, 2002 compared to the nine months ended August 31, 2001 where $12.2 million was provided. During the nine months ended August 31, 2002, the Company used $40.8$36.1 million to reduceitsour revolving credit facility, primarily from proceeds associated with the sale ofthe Company'sour receivables to an unconsolidated qualifying special purposeentity.entity, as discussed below under Accounts Receivable Asset-Backed Securitization. Both regularly scheduled debt payments and the proceeds from the sale of CED resulted in a $12.8 million decline in our long-term debt during 2002. During 2003, we used $14.5 million under our revolving credit facility to pay off $4.2 million of long-term debt, and to fund our capital expenditures and reductions in accounts payable and accrued liabilities.Accounts Receivable Asset-Backed Securitization (Qualifying Special Purpose Entity)
During the first quarter of 2002, we entered into an agreement with a major U.S. financial institution to sell an interest in certain receivables through an unconsolidated qualifying special purpose entity, EaglePicher Funding Corporation (“EPFC”). Initially $47.0 million of proceeds from this new facility were used primarily to payoff amounts outstanding under our existing Receivables Loan Agreement with our wholly owned subsidiary, EaglePicher Acceptance Corporation. This agreement provides for the sale of
CED and Precision Products resultedcertain receivables to EPFC, which in turn sells an interest in a$22.6revolving pool of receivables to the financial institution. EPFC has no recourse against us for failure of the debtors to pay when due. The agreement provides for the continuation of the program on a revolving basis until the earlier of a) the maturity of our senior credit facility, or b) assuming we are able to refinance our senior credit facility, the fourth quarter of 2004.We account for the securitization of these sold receivables in accordance with SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities—a Replacement of FASB Statement No. 125.” Under this guidance, at the time the receivables are sold, the balances are removed from our financial statements. For purposes of calculating our debt covenant compliance under our Credit Agreement, we include the debt outstanding on EPFC.
25
In conjunction with the initial transaction during 2002, we sold $82.5 million
declineof receivables to EPFC, and we incurred charges of $1.5 million, which are included in Interest Expense in theCompany's term debt duringaccompanying condensed consolidated statements of income (loss) for thenine monthsthree-months endedAugust 31,February 28, 2002.EarningsWe continue toFixed Chargesservice sold receivables andPreferred Stock Dividends Forreceive a monthly servicing fee from EPFC of approximately 1% per annum of thenine months ended August 31,receivable pool’s average balance. As this servicing fee approximates our cost to service, no servicing asset or liability has been recorded at November 30, 2002 or February 28, 2003. We retain an interest in a portion of the receivables transferred, representing an over collateralization on the securitization. Our involvement with both this over collateralization interest and2001, earnings were insufficientthe transferred receivables is generally limited tocover fixed chargesthe servicing performed. The carrying value of our interest in the receivables is carried at fair value, which is estimated as its net realizable value due to the short duration of the receivables transferred. The net realizable value considers the collection period andpreferred stock dividends by $40.7includes an estimated provision for credit losses and returns and allowances, which is based on our historical results and probable future losses.At November 30, 2002, our interest in EPFC, including a service fee receivable, was $29.4 million and
$23.0 million respectively. Inthe revolving pool of receivables that we serviced totaled $77.5 million. At November 30, 2002,the ability to cover fixed charges and preferred stock dividends was significantly impacted by $6.1 million in divestiture related expenses, $3.0 million of restructuring charges and $3.1 million in insurance related losses. If these items were excluded from the calculation in 2002, earnings would not have been sufficient to cover fixed charges and preferred stock dividends by $28.5 million. On that basis, 2002 and 2001 are more comparable. Credit Agreement EBITDA The Company's senior secured credit facility has several financial covenants which are based on EBITDA as defined in the credit agreement for such credit facility. EBITDA is defined in the credit agreement ("Credit Agreement EBITDA") as earnings before interest expense, income taxes, depreciation and amortization, determined (A) without giving effect to (i) any extraordinary gains or losses but with giving effect to gains or losses from sales of assets sold in the ordinary course of business, (ii) any impact from the LIFO method of inventory accounting, (iii) any non-cash charge other than routine recurring non-cash charges that result in an accrual of a reserve for cash charges in any future period deducted in determining consolidated net income for such period, (iv) amounts paid to present or future officers or employees in connection with their separation from employment, up to a limit (together with any compensation expense incurred in connection with the acquisition of the Company by Granaria) of $43.2 million (of which $5.8 million remained unused as of August 31, 2002), (v) a $16.0 million gain from the receipt of insurance proceeds in 2000, (vi) the loss from the sale of the Company's former Machinery Segment and the loss from operations of the Machinery Segment in 2001, and (B) with giving effect to proforma pre-acquisition consolidated EBITDA attributable to businesses acquired during the year. The Company's earnings from continuing operations before interest, income taxes, depreciation and amortization was $23.0 million and $49.1 million for the three and nine months ended August 31, 2002. The following adjustments have been made to the Company's earnings before interest, income taxes, depreciation and amortization to arrive at Credit Agreement EBITDA: 29
Three months ended Nine months ended August 31, 2002 August 31,2002 ------------------ -----------------Earnings from continuing operations before income taxes, interest, depreciation, and amortization: $23.0 $49.1 Restructuring charges - 3.0 Losses from sale of divisions - Divestitures .2 6.1 Management compensation - special .5 2.9 Insurance related losses - 3.1 LIFO provision .1 .3 Other non-cash, non-recurring items - 6.7 ----- ----- Credit Agreement EBITDA $23.8 $71.2 ===== =====Credit Agreement EBITDA, as defined herein, may not be comparable to similarly titled measures reported by other companies and should not be construed as an alternative to operating income or cash flows from operating activities, as determined by accounting principles generally accepted in the United States of America, as a measure of the Company's operating performance or liquidity, respectively. Funds depicted by Credit Agreement EBITDA are not available for management's discretionary use to the extent they are required for debt service and other commitments. The three financial covenants contained in the Company's senior secured credit agreement are a leverage ratio (the ratio of total debt plusthe outstanding balance of theundividedinterest sold to the financial institution recorded on EPFC’s financial statements was $46.5 million. At February 28, 2003, our interest in EPFC, including a service fee receivable, was $29.4 million and the revolving pool of receivables that we serviced totaled $75.0 million. At February 28, 2003, the outstanding balance of the interest sold to the financial institution recorded on EPFC’s financial statements was $43.8 million. The effective interest rate asstatedof February 28, 203 inNote Fthe securitization was approximately 2.5%.We believe that EPFC is an important element of our ability to manage our liquidity, capital resources and credit risk with certain major customers.
Accounts Receivable Asset-Backed Securitization (Qualifying Special Purpose Entity) Financial Covenants
EPFC has two financial covenants contained in
Item 1, less cash on the balance sheet to Credit Agreement EBITDA), an interest coverage ratio (the ratio of Credit Agreement EBITDA to interest expense) andits asset-backed securitization agreement. They are a minimum fixed charge coverage ratio (the ratio ofCredit Agreementtotal EBITDA (earnings before interest, taxes, depreciation and amortization) minus capital expenditures to the sum of interest expense,plus requiredscheduled payments of principalpayments pluson debt, cash income taxes, and cash dividends,paid plus income taxes paid) (allall as defined in theCredit Agreement). The following table presentsagreement), and a minimum EBITDA (as defined in the agreement) amount. These ratios and amounts are calculated based on the financial statement amounts of EaglePicher Holdings, Inc. and EPFC, which is not consolidated in our financial statements as EPFC is an off balance sheet qualifying special purpose entity.As of February 28, 2003, we were in compliance with the covenant calculations described above. Additionally, based on the required
ratioscalculations, we could have had $30.6 million less in EBITDA (as calculated above) minus actual capital expenditures, or $22.5 million more of interest expense, scheduled payments of principal on debt, cash income taxes, and cash dividends, and continued to remain in compliance with EPFC’s financial covenants.In the
actual ratios at August 31, 2002.
Financial Covenant August 31, 2002 ------------------ ---------------Leverage Ratio - Required equal or less than 5.00 Leverage Ratio - Actual 4.41 Interest Coverage Ratio - Required equal to or greater than 2.00 Interest Coverage Ratio - Actual 2.46 Fixed Charges Coverage Ratio - Required equal to or greater than 1.25 Fixed Charges Coverage Ratio - Actual 1.57Liquidity and Capital Resources The Company's cash flow from operations and available credit facilities are considered adequateevent that EPFC failed tofund both the short-term and long-term capital needsmeet one of theCompany. Asfinancial covenants listed above, we would not be required to buy back any receivables from EPFC that had not been collected; however, we would no longer be able to sell any future receivables to EPFC. In addition, if EPFC fails to meet one ofAugust 31, 2002,these financial covenants, we would be in default under our senior credit facility. This could have a significant impact on our liquidity and capital resources. We believe that based on our projected 2003 results, EPFC will remain in compliance with its financial debt covenants; however, there is no assurance this will occur.26
Capitalization
Our capitalization, which excludes the
Company had $66.3debt of our off-balance sheet qualifying special purpose entity, consisted of the following at (in thousands of dollars):
November 30, February 28, 2002 2003 Credit Agreement: Revolving credit facility, due February 27, 2004 $ 121,500 $ 136,000 Term loan, due 2003 16,925 12,693 Senior Subordinated Notes, 9.375% interest, due 2008 220,000 220,000 Industrial Revenue Bonds, 1.8% to 2.2% interest, due 2005 15,300 15,300 373,725 383,993 Preferred Stock 137,973 141,910 Shareholders’ Deficit (87,578 ) (88,790 ) $ 424,120 $ 437,113 Credit Agreement.We have a syndicated senior secured loan facility (“Credit Agreement”) providing an original term loan (“Term Loan”) of $75.0 million,
unused under its senior securedas amended, and a $220.0 million revolving credit facility (“Facility”). The Facility and$1.5the Term Loan bear interest, at our option, at LIBOR rate plus 2.75%, or the bank’s prime rate plus 1.5%. Interest is generally payable quarterly on the Facility and Term Loan. We have entered into interest rate swap agreements to manage our variable interest rate exposure.At February 28, 2003, we had $40.2 million
unusedin outstanding letters of credit underits European unsecured linesthe Facility, which together with borrowings ofcredit.$136.0 million, made our available borrowing capacity $43.8 million. However, due to various financial covenant limitations under theCompany's senior securedCredit Agreement, we could only incur an additional $39.9 million of indebtedness at February 28, 2003. The Credit Agreement also contains certain fees. There are fees for letters of creditagreement (the "Credit Agreement") measuredequal to 2.75% per annum for all issued letters of credit, and there is a commitment fee on thelast dayFacility equal to 0.5% per annum ofeach quarter,the unused portion of the Facility. If we meet or fail to meet certain financial benchmarks, the interest rate spreads onAugust 31, 2002,theCompany couldborrowing, the commitment fees and the fees for letters of credit may be reduced or increased.The Credit Agreement is secured by our capital stock, the capital stock of our domestic United States subsidiaries, a certain portion of the capital stock of our foreign subsidiaries, and substantially all other property of our United States subsidiaries. Additionally, the Credit Agreement is guaranteed by us and certain of our subsidiaries.
The Credit Agreement contains covenants that restrict our ability to declare dividends or redeem capital stock, incur
only anadditional$42.5 milliondebt or liens, alter existing debt agreements, make loans or investments, form joint ventures, undergo a change in control or engage in mergers, acquisitions or asset sales. These covenants also limit the annual amount ofindebtedness. At August 31, 2002,capital expenditures and require us to meet certain minimum financial ratios. For purposes of calculating our debt compliance under our Credit Agreement, we include theCompany wasdebt outstanding on EPFC, our off-balance sheet qualifying special purpose entity. See Accounts Receivable Asset-Backed Securitization above for a detailed discussion of EPFC. Also, see Credit Agreement Financial Covenants below for a summary of the debt covenant requirements. We were in compliance with all covenants at February 28, 2003.Senior Subordinated Notes.Our Senior Subordinated Notes, due in 2008, require semi-annual interest payments on September 1 and March 1. The Senior Subordinated Notes, which are unsecured, are redeemable at our option, in whole or in part, any time after February 28, 2003 at set redemption prices. We are required to offer to purchase the Senior Subordinated Notes at a set redemption price should there be a change in control. The Senior Subordinated Notes contain covenants which restrict or limit our ability to declare or pay dividends, incur additional debt or liens, issue stock, engage in affiliate transactions, undergo a change in control or sell assets. We are in compliance with these covenants at February 28, 2003. The Senior Subordinated Notes are guaranteed by us and certain of
its seniorour subsidiaries.Industrial Revenue Bonds.Our industrial revenue bonds require monthly interest payments at variable interest rates based on the market for similar issues and are secured by letters of credit
agreement and senior subordinated notes. As noted in Note F in Item 1 above, the Company has adopted Financial Accounting Standards Board SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" in conjunction with the Asset Backed Securitization. However,issued under thedefinitions contained in the Credit Agreement, the aggregate amountFacility described above.27
Preferred Stock.Our preferred stock increased $3.9 million during 2003 as a result of
capital investment by the conduit, $41.0 million as of August 31, 2002, is treated as indebtedness for purposes of various financial covenants in the Credit Agreement. The Company has entered into various interest rate swap agreements to manage its variable interest rate exposure. Per the terms of the swap agreements, the Company exchanges, at specified intervals, the difference between fixed and variable interest amounts based on a notional amount of $90.0 million of the debt under the Credit Agreement at a weighted average interest rate of 5.678% plus the applicable spread beginning March 5, 2001 and maturing December 15, 2003.mandatory dividend accretion. Commencing March 1, 2003, dividends onthe Company's Convertibleour Cumulative Redeemable Exchangeable Preferred Stockbecomebecame cash payable at11-3/4%11.75% per annum; the firstsemi-annualsemiannual dividend payment of $8.3 million is due September 1, 2003. Ifthe Company doeswe do not pay cash dividends on the preferred stock, then holders of the preferred stock become entitled to elect a majority oftheour Board ofDirectors of Eagle-Picher Holdings.Directors. Dakruiter S.A., a company controlled by Granaria Holdings B.V., our controlling common shareholder, holdsapproximately 51.8%a majority oftheour preferred stock, and therefore Granaria Holdings B.V. would continue to be able to electtheour entire Board ofDirectorsDirectors.Granaria Holdings B.V. and certain executive officers have agreed to buy the 69,500 shares of
Eagle-Picher Holdings. 30The Company's $220.0 million revolving credit facilityour Common Stock held inits seniorour Treasury for $13.00 per share, or a total price of $0.9 million. This transaction is expected to be completed in the second quarter of 2003. In addition, Granaria Holdings B.V. and certain executive officers have agreed to purchase for $13.00 per share any future common stock re-purchases by us.Shareholders’ Deficit.Our shareholders’ deficit increased in 2003 primarily due to the required accretion of our preferred stock discussed above, which was partially offset by our comprehensive income of $2.7 million.
Credit Agreement
expiresFinancial CovenantsThere are three financial covenants contained in our senior secured credit agreement. They are a leverage ratio (the ratio of total debt less cash on the balance sheet to EBITDA, as defined in the agreement), an interest coverage ratio (the ratio of EBITDA, as defined in the agreement, to interest expense) and a fixed charge coverage ratio (the ratio of EBITDA, as defined in the agreement, to the sum of interest expense plus required principal payments plus cash dividends paid plus income taxes paid). For purposes of determining outstanding debt under our Credit Agreement, we include the debt outstanding on EPFC, our off-balance sheet qualifying special purpose entity. See Accounts Receivable Asset-Backed Securitization above for a detailed discussion of EPFC.
As of February 28,
2004.2003, we were in compliance with the covenant calculations described above. Additionally, for purposes of the leverage ratio defined above, we could have had $15.2 million less in EBITDA, or $72.2 million more in total debt less cash on the balance sheet and continued to remain in compliance with the Credit Agreement’s financial covenants.As discussed above under Accounts Receivable Asset-Backed Securitization (Qualifying Special Purpose Entity) Financial Covenants, as of February 28, 2003, we were in compliance with the covenants in our securitization Additionally, based on the required calculations of the securitization, we could have had $30.6 million less in EBITDA (as calculated above in accordance with the securitization) minus actual capital expenditures, or $22.5 million more of interest expense, scheduled payments of principal on debt, cash income taxes, and cash dividends, and continued to remain in compliance with the securitization’s financial covenants.
The
Company will befollowing table presents the requiredto extend or replace this facility before that date. As of August 31, 2002,ratios and the actual ratios.
Minimum Minimum Fixed Charge Maximum Interest Coverage Leverage Ratio Coverage Ratio Ratio (not more than) (not less than) (not less than) November 30, 2002 Required 4.75 2.00 1.25 Actual 4.02 2.63 1.65 February 28, 2003 Required 4.75 2.25 1.35 Actual 4.02 2.75 1.74 May 31, 2003 Required 4.50 2.25 1.35 August 31, 2003 Required 4.25 2.25 1.40 November 30, 2003 Required 4.25 2.50 1.40 28
Based on our projections for 2003, which are described under the Company
had borrowed approximately $115.5 million and had approximately $38.2 millionOutlook section under the Results oflettersOperations above, we expect to remain in compliance with all covenants. However, any adverse changes in actual results from projections, along with the contractual tightening ofcredit issuedthe covenants underthis facility. Restrictions on Payment of Dividends EPI and the Subsidiary Guarantors are subject to restrictions on the payment of dividends and other forms of payment in boththe Credit Agreement, would place us at risk of not being able to comply with all of the covenants of the Credit Agreement. In the event we cannot comply with the terms of the Credit Agreement as currently written, it would be necessary for us to obtain a waiver or renegotiate our loan covenants, and there can be no assurance that such negotiations will be successful. In addition, EPFC would be in default under our accounts receivable asset-backed securitization, described above, and we would need to obtain a waiver. Any agreements to amend the covenants and/or obtain waivers would likely require us to pay a fee and increase the interest rate payable under the Credit Agreement. The amount of such fee and increase in interest rate would be determined in the negotiations of the amendment.Contractual Obligations and Other Commercial Commitments
We have included a summary of our Contractual Obligations and Other Commercial Commitments in our annual report on Form 10-K for the year ended November 30, 2002, filed on March 3, 2003. There have been no material changes to the summary provided in that report.
Earnings to Fixed Charges and Preferred Stock Dividends
During 2003, our earnings were insufficient to cover fixed charges and preferred stock dividends by $1.9 million, and in 2002, our earnings were insufficient to cover fixed charges and preferred stock dividends by $9.3 million. This improvement is primarily related to our improved operating performance, and our adoption of SFAS No. 142 on December 1, 2002, which no longer requires us to recognize goodwill amortization expense.
Recently Released or Adopted Accounting Standards
In June 2001, the FASB issued SFAS No. 142, “Goodwill and Intangible Assets” and effective December 1, 2002, we adopted this standard. This standard addresses goodwill and other intangible assets that have indefinite useful lives and, as such, prescribes that these assets will not be amortized, but rather tested, at least annually, for impairment. This standard also provides specific guidance on performing the annual impairment test for goodwill and intangibles with indefinite lives. Under this new accounting standard, we no longer amortize our goodwill and are required to complete an annual impairment test. We have had approximately $16.0 million of goodwill amortization per year that is no longer recognized as expense. We have determined that we have six reporting units, as defined in SFAS No. 142, within our three reportable business segments. We have completed our initial impairment test as of December 1, 2002 and determined that no impairment charge exists.
In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations,” which requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived assets and depreciated over their estimated useful life while the liability is accreted to its expected obligation amount upon retirement. We adopted SFAS No. 143 on December 1, 2002. The adoption did not have a material impact on our financial condition or results of operations.
In September 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which superceded SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of.” The primary difference is that goodwill and certain intangibles with indefinite lives have been removed from the scope of SFAS No. 144, as they are covered by SFAS No. 142, as described above. It also broadens the presentation of discontinued operations to include a component of an entity rather than a segment of a business. A component of an entity comprises operations and cash flows that can clearly be distinguished operationally and for financial accounting purposes from the rest of the entity. We adopted SFAS No. 144 on December 1, 2002. The adoption did not have a material impact on our financial condition or results of operations.
In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or disposal Activities,” which is effective for exit or disposal activities initiated after December 31, 2002. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” The adoption of this statement did not have a material impact on our financial condition or results of
29
operations.
In November 2002, the FASB issued Interpretation No. 45 (“FIN 45”) “Guarantor’s Accounting and Disclosure requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45 elaborates on the existing disclosure requirements for most guarantees, including loan guarantees. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value, or market value, of the obligations it assumes under that guarantee. However, the provisions related to recognizing a liability at inception of the guarantee for the fair value of the guarantor’s obligations does not apply to product warranties or to guarantees accounted for as derivatives. The initial recognition and initial measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements of FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. FIN 45 does not affect the accounting for guarantees issued prior to the effective date, unless the guarantee is modified subsequent to December 31, 2002. We adopted the disclosure requirements on December 1, 2002, and the
Indentureinitial recognition and measurement provisions in our February 28, 2003 financial statements. The adoption of FIN 45 did not have a material impact on our financial condition or results of operations.In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”) “Consolidation of Variable Interest Entities.” Until this interpretation, a company generally included another entity in its consolidated financial statements only if it controlled the entity through voting interests. FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns. FIN 46 applies to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest in after that date. A public entity with a variable interest in a variable interest entity created before February 1, 2003, shall apply the provisions of this interpretation (other than the transition disclosure provisions in paragraph 26) to that entity no later than the beginning of the first interim or annual reporting period beginning after June 15, 2003. The related disclosure requirements are effective immediately. The impact of this interpretation is not expected to have a material impact on our financial condition or results of operations.
In November 2002, the EITF issued EITF 00-21, “Revenue Arrangements with Multiple Deliverables.” EITF 00-21 prescribes a method to account for contracts that have multiple elements or deliverables. It provides guidance on how to allocate the
Subordinated Notes. Those restrictions generally prohibit the paymentvalue ofdividendsa contract tothe Company either directly by EPI or indirectly through any Subsidiary Guarantor. Certain limited exceptionsits different deliverables, as well as guidance on when to recognize revenue allocated to each deliverable over its performance period. We areprovided allowing for payments to the Company. Specifically, EPI is authorized to make payments to the Company in amounts not in excess of any amounts the Company isrequired topayadopt EITF 00-21 on December 1, 2003. We are evaluating the impact EITF 00-21 will have on us, but do not expect it tomeet its consolidated income tax obligations. Additional payments from EPI to the Company are permitted commencing September 1, 2003 in amounts not in excesshave a material impact on our financial condition or results ofthe Company's obligations to make any cash dividend payments required to be paid under the Company's Preferred Stock and to make any cash interest payments required to be paid under any debentures issued by the Company in exchange for the Company's Preferred Stock ("Exchange Debentures"). Forward-Lookingoperations.Forward Looking Statements
This report contains statements which, to the extent that they are not statements of historical fact, constitute
"forward“forward lookingstatements"statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 21E of the Securities Exchange Act of 1934. The words"estimate," "anticipate," "project," "intend," "believe," "expect,"“estimate,” “anticipate,” “project,” “intend,” “believe,” “expect,” and similar expressions are intended to identify forward-looking statements.Forward-lookingForward looking statements in this report include, but are not limited to, any statements under theheadings "Automotive Segment Outlook," "Technologies Segment Outlook," "Minerals Segment Outlook," and "Company Outlook."“Company Outlook” heading. Such forward-looking information involves risks and uncertainties that could cause actual results to differ materially from those expressed in any such forward-looking statements. These risks and uncertainties include, but are not limited to,theour abilityof the Companyto maintain existing relationships with customers, demand forthe Company'sour products,theour abilityof the Companyto successfully implement productivity improvements and/or cost reduction initiatives,theour abilityof the Companyto develop, market and sell new products,theour abilityof the Companyto obtain raw materials, increased government regulation or changing regulatory policies resulting inhigher costs and/or restricting output, increased price competition, currency fluctuations, general economicconditions, acquisitions and divestitures, technological developments and changes in the competitive environment in whichthe Company operates.we operate. Persons reading this report are cautioned that such forward-looking statements are only predictions and that actual events or results may differ materially.ITEMItem 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company enters into interest rate swap agreementsQuantitative and Qualitative Disclosures About Market RiskWe have included a summary of our Quantitative and Qualitative Disclosure About Market Risk in our annual report on Form 10-K for the year ended November 30, 2002, filed on March 3, 2003. There have been no material changes to
manage interest rate coststhe summary provided in that report.30
Item 4.Controls and
risks associated with changing interest rates. The differential to be paid or received under these agreements is accrued and recognized as adjustments to interest expense. During the first quarter ended February 28, 2001, the Company had entered into various interest rate swap agreements with a commercial bank having a total notional amount of $90.0 million. The effective dates of these agreements are March 5, 2001 and March 15, 2001 and they mature December 5, 2003 and December 15, 2003, respectively. These agreements effectively change the interest rate exposure on $90.0 million of the Company's floating debt to a fixed rate of 5.678% plus the applicable spread. The Company may enter into additional interest rate swap agreements through the maturity date of the Credit Agreement as market conditions warrant. Based on the fair value of the interest rate swap agreements being held as of August 31, 2002, the Company has recorded a net loss of $5.1 million in accumulated other comprehensive loss in the accompanying condensed consolidated balance sheets. The remaining amount of loans outstanding under the Credit Agreement bear interest at floating rates. The Company's industrial revenue bonds ("IRB's") bear interest at variable rates based on the market for similar issues. Loans under the IRB's are not covered by the Swap Agreements. As of August 31, 2002, $140.5 million of revolving and term loans were outstanding under the Credit Agreement, of which, interest on $90.0 million is essentially fixed by the Swap Agreements discussed above. The interest rate risk on the remaining debt outstanding under the foreign lines of credit, the IRB's, and the $50.5 million remaining under the Credit Agreement totaling $69.8 million, has not been hedged. Accordingly, a 1% increase in the applicable index rates would result in additional interest expense of $.7 million per year, assuming no change in the current level of borrowing. 31The Company also enters into various foreign currency forward contracts to hedge a portion of its forecasted sales, generally within the next 12 months. The Company manages most of these exposures on a consolidated basis, which allows for netting certain exposures to take advantage of any natural offsets. The Company's principal areas of exposure are related to sales denominated in the currencies of Europe, Mexico and Canada with the majority of this exposure in European currencies. As of August 31, 2002, the Company had outstanding foreign exchange forward contracts with aggregate notional amounts of $7.1 million. Based on the fair value of the futures contracts being held as of August 31, 2002, the Company has recorded a net loss of $.6 million in accumulated other comprehensive loss in the accompanying condensed consolidated balance sheets. ITEM 4. CONTROLS AND PROCEDURES Based on their evaluation (the "Evaluation"), the Company'sProceduresOur management, including our Chief Executive Officer
John Weber,and our Chief Financial Officer,Thomas Pilholski,conducted an evaluation of our disclosure controls and procedures within 90 days of the filing of this report as required by the rules of the Securities and Exchange Commission. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded thatthe Company'sour disclosure controls and procedures aregenerallyeffectivebut also concludedin ensuring thatthere are several weaknesses in the Company's Information Technology area (IT), including access security, network monitoring, IT procurement and IT inventory management. The Company has dedicated resources to correcting these issues, and the corrections are expectedall material information required to becompleted by the end of the next quarter. These weaknesses did not have a material impact on the accuracy of the Company's financial statements. As of the date offiled in this reporttherehas been made known to them in a timely manner. There havenotbeenanyno significant changes inthe Company'sour internal controls or in other factors that could significantly affect these controls subsequent to the dateof the Evaluation. 32our Chief Executive Officer and our Chief Financial Officer completed their evaluation. PART II. OTHER INFORMATION
ITEMItem 1.
LEGAL PROCEEDINGSLegal ProceedingsPlease refer to Note
HG regarding Legal Matters contained in Part I, Item 1 of this report, which is incorporated by reference in this Part II, as its Item 1.33Item 6.Exhibits and Reports on Form 8-K
(a) Exhibits:
10.66 — EaglePicher Incorporated (formerly Eagle-Picher Industries, Inc.)2002 Long-term Bonus Program 10.67 — Amended and Restated Executive Employment Agreement dated December 1, 2002 between EaglePicher Incorporated and John W. Weber 12.1 — Ratios of Earnings to Fixed Charges and Preferred Stock Dividends (b) Reports on Form 8-K
• Form 8-K, filed January 16, 2003, concerning our press release dated January 16, 2003 • Form 8-K, filed January 31, 2003, concerning our press release dated January 31, 2003 • Form 8-K, filed March 4, 2003, concerning our press release dated March 3, 2003 31
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.
EAGLE-PICHER HOLDINGS, INC. /s/ Thomas R. Pilholski ------------------------------ Thomas R. Pilholski Senior Vice President and Chief Financial Officer (Principal Financial Officer) DATE October 15, 2002 ------------------------ 34
EAGLEPICHER HOLDINGS, INC. /s/ Thomas R. Pilholski Thomas R. Pilholski
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)DATE: April 14, 2003
32
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.
EAGLE-PICHER INDUSTRIES, INC. /s/ Thomas R. Pilholski -------------------------------- Thomas R. Pilholski Senior Vice President and Chief Financial Officer (Principal Financial Officer) DATE October 15, 2002 ----------------------- 35
EAGLEPICHER INCORPORATED /s/ Thomas R. Pilholski Thomas R. Pilholski
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)DATE: April 14, 2003
33
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.
DAISY PARTS, INC. /s/ Ken Higgins --------------- Ken Higgins Chief Financial Officer (Principal Financial Officer) DATE October 15, 2002 ----------------------- 36
DAISY PARTS, INC. /s/ Thomas R. Pilholski Thomas R. Pilholski
Vice President
(Principal Financial Officer)DATE: April 14, 2003
34
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.
EAGLE-PICHER DEVELOPMENT COMPANY, INC. /s/ Thomas R. Pilholski -------------------------------------- Thomas R. Pilholski Senior Vice President (Principal Financial Officer) DATE October 15, 2002 ----------------------- 37
EAGLEPICHER DEVELOPMENT CO., INC. /s/ Thomas R. Pilholski Thomas R. Pilholski
Vice President
(Principal Financial Officer)DATE: April 14, 2003
35
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.
EAGLE-PICHER FAR EAST, INC. /s/ Thomas R. Pilholski ----------------------------- Thomas R. Pilholski Senior Vice President (Principal Financial Officer) DATE October 15, 2002 ----------------------- 38
EAGLEPICHER FAR EAST, INC. /s/ Thomas R. Pilholski Thomas R. Pilholski
Vice President
(Principal Financial Officer)DATE: April 14, 2003
36
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.
EAGLE-PICHER MINERALS, INC. /s/ Paul Wonder --------------- Paul Wonder Vice President (Principal Financial Officer) DATE October 15, 2002 ----------------------- 39
EAGLEPICHER FILTRATION AND MINERALS, INC. /s/ Thomas R. Pilholski Thomas R. Pilholski
Vice President
(Principal Financial Officer)DATE: April 14, 2003
37
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.
EAGLE-PICHER TECHNOLOGIES, LLC /s/ Bradley J. Waters --------------------------------- Bradley J. Waters Vice President, and Chief Financial Officer
EAGLEPICHER TECHNOLOGIES, LLC /s/ Bradley J. Waters Bradley J. Waters
Vice President and Chief Financial Officer
(Principal Financial Officer)DATE
October 15, 2002 ----------------------- 40April 14, 2003 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.
HILLSDALE TOOL & MANUFACTURING CO. /s/ Ken Higgins --------------- Ken Higgins Chief Financial Officer (Principal Financial Officer) DATE October 15, 2002 ----------------------- 41
HILLSDALE TOOL & MANUFACTURING CO. /s/ Thomas R. Pilholski Thomas R. Pilholski
Vice President
(Principal Financial Officer)DATE: April 14, 2003
39
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.
EPMR CORPORATION (F/K/A MICHIGAN AUTOMOTIVE RESEARCH CORPORATION) /s/ Thomas R. Pilholski ---------------------------------- Thomas R. Pilholski Senior vice
EPMR CORPORATION /s/ Thomas R. Pilholski Thomas R. Pilholski
Vice President
(Principal Financial Officer)DATE: April 14, 2003
40
CERTIFICATIONS
I, John H. Weber, President
(Principal Financial Officer) DATE October 15, 2002 ----------------------- 42CERTIFICATIONS I, JOHN H. WEBER, PRESIDENT AND CHIEF EXECUTIVE OFFICER,and Chief Executive Officer, certify that:1. I have reviewed this quarterly report on Form
10-K10-Q ofEagle-PicherEaglePicher Holdings, Inc. ,Eagle-Picher Industries, Inc.,EaglePicher Incorporated, Daisy Parts, Inc.,Eagle-PicherEaglePicher Development Co., Inc.,Eagle-PicherEaglePicher Far East, Inc.,Eagle-PicherEaglePicher Filtration and Minerals, Inc.,Eagle-PicherEaglePicher Technologies, LLC, Hillsdale Tool & Manufacturing Co. and EPMR Corporation;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'sregistrant’s other certifying officers 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;
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'sregistrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to theregistrant'sregistrant’s auditors and the audit committee ofregistrant'sregistrant’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
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 report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; andb) 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'sregistrant’s other certifying officers 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./s/ JOHN H. WEBER Date: October 15, 2002 - ---------------------------------------------
/s/ JOHN H. WEBER Date: April 14, 2003 John H. Weber, President and Chief Executive Officer I, Thomas R. Pilholski, Senior Vice President and Chief
ExecutiveFinancial Officer,43I, THOMAS R. PILHOLSKI, SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER,certify that:1. I have reviewed this quarterly report on Form
10-K10-Q ofEagle-PicherEaglePicher Holdings, Inc. ,Eagle-Picher Industries, Inc.,EaglePicher Incorporated, Daisy Parts, Inc.,Eagle-PicherEaglePicher Development Co., Inc.,Eagle-PicherEaglePicher Far East, Inc.,Eagle-PicherEaglePicher Filtration and Minerals, Inc.,Eagle-PicherEaglePicher Technologies, LLC, Hillsdale Tool & Manufacturing Co. and EPMR Corporation;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'sregistrant’s other certifying officers 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;
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'sregistrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to theregistrant'sregistrant’s auditors and the audit committee ofregistrant'sregistrant’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
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 report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; andb) 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'sregistrant’s other certifying officers 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./s/ THOMAS R. PILHOLSKI Date: October 15, 2002 - --------------------------------------------- Thomas R. Pilholski, Senior Vice President and Chief Financial Officer 44
| /s/ THOMAS R. PILHOLSKI | Date: April 14, 2003 | |
| Thomas R. Pilholski, Senior Vice President and Chief Financial Officer |
EXHIBIT INDEX
| Exhibit | ||||
| Number | ||||
| 10.66 | — | EaglePicher Incorporated (formerly Eagle-Picher Industries, Inc.) 2002 Long-term Bonus Program | ||
| 10.67 | — | Amended and Restated Executive Employment Agreement dated December 1, 2002 between EaglePicher Incorporated and John W. Weber | ||
| 12.1 | — | Ratios of Earnings to Fixed Charges and Preferred Stock Dividends |