SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 1995 Commission File No. 0-18106
EXIDE ELECTRONICS GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 23-2231834
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
8521 Six Forks Road, Raleigh, North Carolina 27615
(Address of principal executive offices and zip code)
(919) 872-3020
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ x ] No [ ]
As of May 10, 1995, 7,770,873 shares of the Registrant's $0.01 par value common
stock were outstanding.
Exhibit Index on sequential page number: 23
EXIDE ELECTRONICS GROUP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited; in thousands, except per share amounts)
Three Months Ended Six Months Ended
March 31, March 31,
------------------- ---------------------
1995 1994 1995 1994
---- ---- ---- ----
Revenues
Products $60,409 $62,073 $124,305 $114,532
Services 30,859 25,940 59,029 53,156
------ ------ ------ ------
Total revenues 91,268 88,013 183,334 167,688
------ ------ ------- -------
Cost of revenues
Products 45,979 44,372 95,039 83,157
Services 21,386 18,282 40,708 36,931
------ ------ ------ ------
Total cost of revenues 67,365 62,654 135,747 120,088
------ ------ ------- -------
Gross profit 23,903 25,359 47,587 47,600
Selling, general and administrative expense 17,518 15,980 34,075 31,825
Research and development expense 2,442 2,602 4,989 4,887
Litigation expense 700 4,997 700 4,997
Merger expense 5,500 - 5,500 -
----- ----- ----- -----
Income (loss) from operations (2,257) 1,780 2,323 5,891
Interest expense 1,118 1,244 2,542 2,515
Interest income (89) (112) (228) (241)
Other (income) expense (577) (69) (738) 93
---- --- ---- --
Income (loss) before income taxes (2,709) 717 747 3,524
Provision (benefit) for income taxes (135) 195 1,072 1,115
---- --- ----- -----
Net income (loss) $(2,574) $ 522 $ (325) $ 2,409
======= ======= ======== ========
Preferred stock dividends 197 198 395 396
Net income (loss) applicable to common shareholders $(2,771) $ 324 $ (720) $ 2,013
======= ======= ======== ========
Per Share Amounts
Primary
Net income (loss) $ (0.36) $ 0.04 $ (0.09) $ 0.26
======= ======= ======== ========
Weighted average number of common and equivalent
shares outstanding 7,758 7,800 7,726 7,778
===== ===== ===== =====
Fully Diluted
Net income (loss) $ (0.36) $ 0.04 $ (0.09) $ 0.26
======= ======= ======== ========
Weighted average number of common and equivalent
shares outstanding 7,765 7,806 7,770 7,806
===== ===== ===== =====
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
EXIDE ELECTRONICS GROUP, INC.
CONSOLIDATED BALANCE SHEET
(unaudited; dollars in thousands)
March 31, September 30, March 31,
1995 1994 1994
--------- ------------- ---------
Assets
Current assets
Cash and cash equivalents $ 2,032 $ 5,886 $ 3,309
Accounts receivable 83,740 105,712 78,419
Inventories 66,495 55,529 61,860
Deferred tax assets 7,448 7,532 6,072
Other current assets 5,208 4,549 4,450
----- ----- -----
Total current assets 164,923 179,208 154,110
------- ------- -------
Property, plant, and equipment
Land, buildings, and leasehold improvements 8,819 8,714 8,622
Machinery and equipment 55,814 51,748 46,829
------ ------ ------
64,633 60,462 55,451
Accumulated depreciation 34,383 32,250 29,281
------ ------ ------
30,250 28,212 26,170
Other assets 16,473 17,256 15,130
------ ------ ------
$211,646 $224,676 $195,410
======== ======== ========
Liabilities, Redeemable Preferred Stock, & Common Shareholders' Equity
Current liabilities
Short-term debt $ 6,158 $ 5,802 $ 2,801
Accounts payable 41,231 44,958 32,223
Deferred revenues 14,369 16,577 12,652
Accrued compensation 7,127 8,153 5,811
Other accrued liabilities 9,991 10,381 12,211
----- ------ ------
Total current liabilities 78,876 85,871 65,698
------ ------ ------
Long-term debt 38,700 43,400 41,850
------ ------ ------
Convertible subordinated notes 15,000 15,000 15,000
------ ------ ------
Deferred liabilities 2,947 2,943 3,109
----- ----- -----
Redeemable preferred stock 10,000 10,000 10,000
------ ------ ------
Common shareholders' equity
Common stock, $0.01 par value, 30,000,000
shares authorized; shares issued - 7,776,057
at March 31, 1995, 7,735,165 at September
30, 1994, and 7,682,839 at March 31, 1994 78 77 77
Additional paid-in capital 48,210 48,223 47,041
Retained earnings 24,918 26,870 20,820
Cumulative translation adjustments (1,594) (1,757) (2,264)
------ ------ ------
71,612 73,413 65,674
Less: Notes receivable from shareholders (5,362) (5,951) (5,921)
Treasury Stock (127) - -
----
66,123 67,462 59,753
------ ------ ------
$211,646 $224,676 $195,410
======== ======== ========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
EXIDE ELECTRONICS GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited; in thousands)
Six Months Ended
March 31,
-------------------------
1995 1994
---- ----
Cash flows from operating activities
Net income (loss) $ (325) $ 2,409
Adjustment to conform fiscal year of IPM - 49
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation expense 3,155 2,984
Amortization expense 1,173 939
Litigation and merger provisions 2,200 3,750
Decrease in accounts receivable 21,836 18,018
Increase in inventories (13,350) (10,482)
Increase in other current assets (906) (2,607)
Decrease in accounts payable (3,727) (8,642)
Decrease in other current liabilities (3,304) (4,829)
Other, net 824 919
--- ---
Net cash provided by operating activities 7,576 2,508
----- -----
Cash flows from investing activities
Acquisitions of property, plant, and equipment (5,359) (3,534)
Other, net (367) (676)
---- ----
Net cash used in investing activities (5,726) (4,210)
------ ------
Cash flows from financing activities
Proceeds from bank credit facilities 62,296 41,377
Payments of bank credit facilities (62,313) (39,997)
Payments of industrial revenue bonds (4,600) (900)
Issuances of common stock 1,089 818
Purchases of treasury stock (625) -
Preferred stock dividends of Exide Electronics (395) (445)
Preferred stock dividends of IPM (1,232) (200)
Payments of notes receivable from shareholders 138 155
Other, net (62) (262)
--- ----
Net cash provided by (used in) financing activities (5,704) 546
------ ---
Net decrease in cash and cash equivalents (3,854) (1,156)
Cash and cash equivalents, beginning of period 5,886 4,465
----- -----
Cash and cash equivalents, end of period $ 2,032 $ 3,309
======= =======
Supplemental cash flow disclosures
Interest paid, net of amounts capitalized $ 2,134 $ 2,756
Income taxes paid $ 2,043 $ 7,487
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
Exide Electronics Group, Inc.
Notes to Consolidated Financial Statements
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles and the rules and
regulations of the Securities and Exchange Commission for interim financial
statements. Certain information and footnote disclosures required for complete
financial statements have been condensed or omitted. These financial statements
should be read in conjunction with the financial statements presented in the
company's 1994 Annual Report to Shareholders.
In the opinion of management, the accompanying consolidated financial statements
include all adjustments (which consist of normal recurring adjustments)
necessary to present fairly the financial position, results of operations and
cash flows at March 31, 1995. The results of operations for the quarter and six
months ended March 31, 1995 are not necessarily indicative of the results to be
expected for the full year.
Certain amounts in the consolidated financial statements presented herein for
prior periods have been reclassified to conform to the method of presentation
used in fiscal 1995. These reclassifications are not material.
Note 2 - Merger with IPM
On February 8, 1995, the company completed the merger of International Power
Machines Corporation (IPM) with and into a newly-formed subsidiary of the
company. IPM develops, manufactures, sells, and services uninterruptible power
systems, and is very similar to Exide Electronics in terms of products and
services provided and its channels of distribution. The company exchanged
approximately 1,510,000 newly registered shares of Exide Electronics' common
stock for all of the outstanding shares of IPM's common stock, Series A
preferred stock, and Series B convertible preferred stock. The merger was
structured as a tax-free exchange and was accounted for as pooling-of-interests.
Accordingly, the accompanying unaudited consolidated financial statements have
been restated to include the accounts and results of operations of IPM for all
periods presented.
Historically, IPM prepared its financial statements on a December 31 fiscal
year end. As of September 30, 1994, IPM's fiscal year has been changed to
September 30 to conform to Exide Electronics' September 30 year end. In
accordance with the accounting rules prescribed or permitted for
pooling-of-interests, the restated financial statements for the fiscal year
ended September 30, 1993 (which are not presented herein) combines the
historical consolidated results of operations of Exide Electronics for the year
then ended with IPM's historical consolidated results of operations for the
calendar year ended December 31, 1993. The restated balance sheet as of
September 30, 1993 combines Exide Electronics' historical consolidated balance
sheet as of September 30, 1993 with IPM's historical consolidated balance sheet
as of December 31, 1993. Therefore, an adjustment to conform IPM's fiscal year
end is shown in the accompanying statement of cash flows for the six months
ended March 31, 1994 to account for IPM's change in cash for the three months
ended December 31, 1993.
Combined and separate results of Exide Electronics and IPM during the periods
preceding the merger were as follows (in thousands):
Exide
Electronics IPM Adjustments Combined
------------ -------- ----------- --------
Three months ended
December 31, 1994
Net sales $81,264 $10,802 $92,066
Net earnings $1,746 $537 $(35) $2,248
Three months ended
March 31, 1994
Net sales $79,715 $8,298 $88,013
Net earnings $336 $217 $(31) $522
Six months ended
March 31, 1994
Net sales $149,901 $17,787 $167,688
Net earnings $1,562 $909 $(62) $2,409
The combined financial results presented above and the accompanying consolidated
financial statements include adjustments to conform the accounting methodology
of IPM for reserving for excess and obsolete service inventories to the
accounting methodology used by Exide Electronics. There were no intercompany
transactions during the period.
In connection with the merger, the company recorded a nonrecurring pretax charge
of $5.5 million in the quarter ended March 31, 1995. This charge included
approximately $3 million for legal, accounting, financial advisory, and other
costs. The company also expensed approximately $2.5 million for the estimated
costs of closing a duplicate operating facility and discontinuing certain
duplicate product lines manufactured at that facility.
Note 3 - Inventories
Inventories, which include materials, labor, and manufacturing overhead, are
stated at the lower of cost or market, and consist of the following (in
thousands):
March 31, Sept. 30, March 31,
1995 1994 1994
---- ---- ----
Raw materials and supplies $21,487 $20,149 $22,039
Work in process 7,709 7,288 6,782
Finished goods 22,652 14,805 21,619
Service parts 14,647 13,287 11,420
------ ------ ------
$66,495 $55,529 $61,860
======= ======= =======
Note 4 - Litigation
In January 1989, a case was filed by a former manufacturer's representative of
the company, alleging that the company failed to pay commissions owed to him on
certain sales. In April 1990, a jury awarded the plaintiff damages of
approximately $14.9 million. The company appealed the decision, and in
September 1992, the appellate court reversed the judgment against the company.
In response to various motions filed by the plaintiff, a new trial was granted,
and in March 1994, the jury in the new trial awarded damages of $3.75 million to
the plaintiff. While the company continued to believe that it should have no
liability in this matter and announced its intention to appeal, it recorded a
one-time charge in the second quarter of fiscal 1994 of $4,997,000 ($2,936,000
after tax) for the jury verdict and for the costs of the trial.
On July 20, 1994, the company announced that this litigation had been settled.
Following agreement among the parties to settle, the court vacated the
jury award of $3.75 million previously entered and determined that the vacated
judgment cannot be used against the company in the future. To avoid further
litigation including post-trial motions and appeals, the company settled the
case by making payments to the plaintiff and his attorneys. The parties
thereafter stipulated that the entire action was dismissed with prejudice. Since
the total value of the settlement payments was less than the one-time charge for
the jury verdict recorded by the company in the second quarter of fiscal 1994,
no further charges will be necessary in this matter. By agreement with the
plaintiff, the terms of the confidential settlement were not disclosed.
In May 1990, Exide Electronics was served with a complaint in the Delaware Court
of Chancery and in May 1991, a related case was filed in Federal Court in New
York. These complaints alleged, among other things, that Exide Electronics'
description of the case involving the manufacturer's representative in its
prospectus dated December 21, 1989 was false and misleading. In April 1995,
Exide Electronics announced that it had settled both the Delaware and New York
suits. The Delaware action had been dismissed once for failure to state a claim,
but was reinstated following an appeal and was in the discovery process prior to
the settlement. The company recorded a pretax charge of $700,000 for the
settlement of the two related lawsuits in the quarter ended March 31, 1995. The
settlement agreements are subject to court approval, after notice to affected
shareholders. While the company believed that neither suit had merit, it
decided to settle as the suits were taking valuable corporate time and attention
and would have involved significant legal costs to pursue further.
Exide Electronics Group, Inc.
Management's Discussion and Analysis
Of Results of Operations and Financial Condition
Overview
Exide Electronics (the company) designs, manufactures, markets, and services a
broad line of uninterruptible power systems (UPS) products that protect
computers and other sensitive electronic equipment against electrical power
distortions and interruptions. Several factors had a significant impact on the
company's results of operations during the first six months of fiscal 1995
compared to the first six months of fiscal 1994. These factors include the
acquisition of International Power Machines Corporation (IPM), accounting for
the acquisition as a pooling-of-interests, and expensing certain costs
associated with the acquisition; the settlement of litigation; the continued
success of the company's Powerware (R) Prestige family of products, particularly
in European markets; and the decline of Federal government product sales as the
company completes shipments under its program with the Federal Aviation
Administration (FAA). The impact of these and other factors on fiscal 1994 is
discussed in more depth in "Management's Discussion and Analysis of Results of
Operations and Financial Condition" presented in the company's 1994 Annual
Report to Shareholders.
During the second quarter of fiscal 1995, the company completed its acquisition
of IPM, a manufacturer of UPS products headquartered in Dallas, Texas. IPM is
very similar to Exide Electronics in terms of products and services provided and
its channels of distribution. In accordance with the merger agreement, the
company acquired all of the capital stock of IPM for approximately 1,510,000
newly registered shares of the company's common stock. The acquisition was
accounted for as a pooling-of-interests. Accordingly, the financial statements
and related information for all periods presented have been restated to reflect
the merger with IPM. This merger is discussed more fully in Note 2 of the notes
to consolidated financial statements.
The company's product and service offerings and its marketing, manufacturing,
and research and development functions are organized into three business units:
the Small Systems Group (SSG) for all products below 50 kilovolt amperes (kVA);
the Large Systems Group (LSG) for products of 50 kVA and above; and the
Worldwide Services Group (WSG) for all services provided by the company. (A
kilovolt ampere is a commonly-used unit of measure for electricity supplied
using alternating current.)
The following table summarizes the contribution to total revenues of the company
by business unit for the quarter and six months ended March 31, 1995 and 1994
(in millions):
Three Months Six Months
Ended March 31, Ended March 31,
----------------- ------------------
1995 1994 1995 1994
---- ---- ---- ----
Small Systems Group $33.2 $28.2 $66.3 $ 55.2
Large Systems Group 27.2 33.9 58.0 59.3
Worldwide Services Group 30.9 25.9 59.0 53.2
---- ---- ---- ----
Results of Operations $91.3 $88.0 $183.3 $167.7
===== ===== ====== ======
The following table presents, for the periods ended March 31, 1995 and 1994, the
percentage relationship which certain items in the company's unaudited
consolidated statement of operations bear to total revenues:
Three Months Ended Six Months Ended
March 31, March 31,
-------------------- -------------------
1995 1994 1995 1994
---- ---- ---- ----
Revenues
Products 66.2% 70.5% 67.8% 68.3%
Services 33.8 29.5 32.2 31.7
---- ---- ---- ----
Total revenues 100.0 100.0 100.0 100.0
----- ----- ----- -----
Cost of revenues
Products 50.4 50.4 51.8 49.6
Services 23.4 20.8 22.2 22.0
---- ---- ---- ----
Total cost of revenues 73.8 71.2 74.0 71.6
---- ---- ---- ----
Gross profit (1)
Products 23.9 28.5 23.5 27.4
Services 30.7 29.5 31.0 30.5
---- ---- ---- ----
Total gross profit 26.2 28.8 26.0 28.4
Selling, general and administrative expense 19.2 18.1 18.6 19.0
Research and development expense 2.7 3.0 2.7 2.9
Litigation expense 0.8 5.7 0.4 3.0
Merger expense 6.0 - - -
---
Income (loss) from operations (2.5) 2.0 1.3 3.5
---- --- --- ---
Interest expense 1.2 1.4 1.4 1.4
Interest income (0.1) (0.1) (0.1) (0.1)
Other (income) expense (0.6) (0.1) (0.4) 0.1
---- ---- ---- ---
Income (loss) before income taxes (3.0) 0.8 0.4 2.1
Provision (benefit) for income taxes (0.2) 0.2 0.6 0.7
---- --- --- ---
Net income (loss) (2.8)% 0.6% (0.2)% 1.4%
==== === ==== ===
<FN>
(1) Product and service gross profit margins are expressed as a percentage of
their respective revenues, not a percentage of total revenues.
</FN>
Three months ended March 31, 1995 versus March 31, 1994
Revenues
For the fiscal quarter ended March 31, 1995, total revenues were $91.3 million,
an increase of approximately 4% compared to the same period in the prior year.
Product sales declined by about 3% to $60.4 million. SSG product sales increased
by approximately $5.0 million or 18%, while LSG product sales experienced a
decline of approximately $6.7 million or 20% as compared to the second quarter
of fiscal 1994. WSG revenues increased by approximately $5.0 million or 19% as
compared to the same period last year.
Growth in SSG product revenues resulted primarily from continuing strong sales
of the new Powerware Prestige product line, which were approximately $8.5
million higher than in the prior year, while products being phased out with the
introduction of these new products declined by about $4.4 million, for a net
increase of approximately $4.1 million. The increase in revenues was primarily
in the company's international channels as a result of the company's expansion
efforts in international markets. While total SSG international sales were up by
45%, sales to Latin America were approximately even with the prior year as a
result of the devaluation of the Mexican peso, which, in effect, increased the
cost of the company's products sold in that region. The majority of the increase
in international sales were attributable to sales by the company's European
affiliates, which increased by more than 85% over the prior year. Domestic
revenues declined by approximately 8% during the quarter, mostly attributable to
a decline in sales to certain OEM customers. The number of SSG units sold
during the second quarter of 1995 increased by approximately 25% as compared to
the second quarter of 1994. Higher unit sales were partially offset by a lower
average selling price per unit. The lower average selling prices are
attributable to a higher proportion of sales of the smaller kVA models, which
are generally lower-priced than the larger UPS products, and also to price
reductions, reflecting the industry trend of declining UPS prices.
The $6.7 million revenue decrease for LSG resulted primarily from declining
Federal product revenues and decreased international sales to Latin America.
Federal product revenues declined by approximately $3.3 million dollars as the
company has completed the shipment of most of the systems and related ancillary
products under the five-year contract awarded to the company by the Air Force
Logistics Command (ALC) in May 1988 (which includes the FAA program), and also
because of lower sales to the U.S. Navy. The company has previously disclosed
that LSG sales would decline by 15% to 20% from fiscal 1994 levels due to the
completion of the ALC contract shipments. International sales to Latin America
were down by about $1.2 million. The regional economic crisis related to the
devaluation of the Mexican peso dramatically slowed sales to this region. The
remaining decline in sales of approximately $2.2 million occurred primarily
in the company's domestic commercial sales channels, which declined by
approximately 21%, partially offset by an increase of about 16% in sales through
international channels other than Latin America. The number of LSG UPS systems
sold decreased by approximately 26%, while the average sales price per system
increased, as sales of ancillary equipment and spare parts represented a greater
percentage of total LSG revenues than in the prior year.
WSG's total revenues increased by more than 19% in the second quarter of 1995 as
compared to the second quarter of 1994. Commercial revenues were up by about
20%, with strong growth occurring in most channels and service categories.
Service revenue growth was especially strong in Canada and Europe as a result of
the company's three sales and service acquisitions in the fourth quarter of
fiscal 1994. Federal service revenues were up by approximately 19% due to strong
sales in the company's Federal government systems implementation business. The
company was installing and testing equipment and providing systems
implementation services at thirteen FAA sites at March 31, 1995 versus six in
1994, and was developing the engineering design for eight locations at March 31,
1995 versus fourteen locations in the prior year. Federal service revenues will
begin to decline in fiscal 1996 as the FAA site services are completed; see the
Government Contract Matters section which follows for additional information.
WSG revenue increases were a result of a greater amount of services provided
rather than an increase in the price of the services.
Gross Profit
Gross profit decreased by $1.5 million in the second quarter of fiscal 1995, a
6% decrease over the prior year. Despite the increased proportion of SSG sales
in this quarter, which generally have higher gross margins than LSG sales,
overall product margins declined to 23.9% in fiscal 1995 from 28.5% in 1994. The
decline in product gross profit margins occurred largely in LSG, which had a
higher proportion of low-margin ancillary products sales in 1995, as compared to
higher margin UPS module sales in 1994. In addition, SSG margins decreased as a
result of lower margins on products being phased out, a higher proportion of
sales in channels with lower profit margins, and decreased sales in the higher
kVA models which generally have better margins than the lower kVA models. The
company also incurred higher than normal costs related to increased production
volumes for its new Powerware Prestige product lines. Service margins increased
slightly to 30.7% from 29.5%, principally due to changes in the mix of services
provided.
Selling, General and Administrative Expense
Selling, general and administrative expense increased by approximately
$1,538,000 over the prior year. Over half of the increase was incurred for
international selling and marketing expenses, as the company continued to expand
its worldwide marketing, distribution and support capabilities, particularly in
Europe, the Far East, and Latin America. The remainder of the increase in
expenses was invested primarily to improve the company's domestic customer
support and telemarketing infrastructure for small systems products, and for
costs for the company's recently submitted proposal for a new five year contract
with the Air Force. General and administrative expense declined slightly from
the prior year, mostly due to lower legal expenses as a result of the settlement
of certain litigation.
Research and Development Expense
Research and development expense declined by approximately $160,000 versus the
second quarter of the prior year, and decreased as a percentage of revenue to
2.7% from 3.0% in 1994. The decrease was related to a variety of factors,
including the ability of the company to charge certain custom engineering costs
to specific customer job orders in the Small Systems Group, the purchase and
capitalization of some SSG equipment leased in the prior year, cost control
efforts by the company, and lower research and development expenses at IPM, as
significant expenses were incurred in fiscal 1994 in the development of a new
product that were not required in fiscal 1995. The company expects research and
development expenditures to remain constant or decline slightly as a percentage
of revenues as the company takes advantages of synergies between Exide
Electronics and IPM in the development of new products.
Litigation Expense
Litigation expense decreased by $4,297,000 in the second quarter of 1995 as
compared to the prior year. The company recorded a $700,000 pretax charge for
the settlement of two related lawsuits in 1995. Although the company believed
that neither suit had merit, they were consuming valuable corporate time and
attention and would have involved significant legal costs to pursue further.
Last year, the company recorded a charge of $4,997,000 in the second quarter for
the settlement of litigation. These lawsuits are discussed in more detail in
Note 4 of the notes to consolidated financial statements and in the Litigation
section below.
Merger Expense
During the quarter, the company completed its acquisition of IPM, a manufacturer
of UPS products headquartered in Dallas, Texas. With the consummation of the
acquisition, which was accounted for as a pooling-of-interests, the company
recorded a nonrecurring pretax charge of $5.5 million in the quarter. This
charge included approximately $3 million for legal, accounting, financial
advisory, and other costs related to the merger. The company also expensed
approximately $2.5 million for the estimated costs of closing a duplicate
operating facility and discontinuing certain duplicate product lines
manufactured at that facility.
Interest/Other
Interest expense decreased by about $126,000 from the second quarter of fiscal
1994, and decreased as a percentage of sales from 1.4% to 1.2% in fiscal 1995.
This decrease was due to lower average debt balances, partially offset by higher
interest rates. Other (income) expense increased by approximately $508,000.
About $400,000 of this increase was due to favorable changes in foreign currency
exchange rates. The remaining increase was primarily due to improved results for
the company's Japanese joint venture.
Net Income (Loss)
Net loss for the second quarter of fiscal 1995 was $2,574,000, or $.36 per
primary share, as compared to net income of $522,000, or $.04 per primary share,
for the second quarter of fiscal 1994. Excluding the litigation and merger
charges in the quarter for 1995 and 1994, net income would have been $2,210,000
or $.26 per primary share for the second quarter of fiscal 1995, and $3,458,000
or $.42 per primary share in 1994.
Six months ended March 31, 1995 versus March 31, 1994
Revenues
For the six months ended March 31, 1995, total revenues were $183.3 million, an
increase of 9.3% compared to the same period in the prior year. Product sales
grew by 8.5% to $124.3 million. SSG product sales experienced an increase of
more $11.1 million or 20%, while LSG product sales declined by $1.3 million or
2% as compared to the first six months of fiscal 1994. WSG revenues increased by
approximately $5.9 million or 11% as compared to the same period last year.
SSG revenues for the first six months of fiscal 1995 increased by approximately
$11.1 million or 20% over the prior year. The majority of this increase was in
international sales, with sales to Latin America increasing approximately 26%,
and sales by the remaining international channels increasing by about 46%,
primarily as a result of strong sales growth in exports and sales by the
company's affiliates in Europe and Japan. Domestic revenues were approximately
even with the prior year, with sales increases by manufacturers' representatives
and national accounts channels being offset by sales declines to certain OEM
customers and value-added reseller channels. Growth in SSG product revenues
resulted primarily from continuing strong sales of the new Powerware Prestige
product line, which were approximately $20 million higher than in the prior
year, while products being phased out with the introduction of these new
products declined by about $10 million, for a net increase of approximately $10
million. In the first six months of fiscal 1995, the Prestige product line was
expanded with the addition of 650VA and 2000VA models, additional accessories
for the Prestige 3000 and 6000 models were introduced, and new versions of
software and network communications products were incorporated. The number of
SSG units sold increased by about 40% as compared to the first six months
of fiscal 1994. Higher unit sales were partially offset by a lower average
selling price per unit. The lower average selling prices are attributable to a
higher proportion of sales of the smaller kVA models, which are generally lower-
priced than the larger UPS products, and also to price reductions, reflecting
the industry trend of declining UPS prices.
LSG revenues were 2% lower than revenues in the first six months of fiscal 1994.
The decrease was primarily due to a 32% decrease in sales to Latin America.
Federal product sales were about the same level as in the prior year. Product
revenues under the ALC contract began to decline as the company has completed
the shipment of most of the systems and related ancillary products to the
various FAA sites. Domestic commercial revenues declined by approximately 5%
during the first six months, with an increase in the national accounts channel
being offset by declines in all other channels. International revenues,
excluding sales to Latin America, were up by about 1.9% for the first six months
of the fiscal year, with an increase in sales by the European affiliates being
partially offset by a decline in sales by the company's Canadian affiliate. The
number of LSG UPS systems sold decreased by about 16% from the same period from
the prior year, while the average sales price per system increased, as sales of
ancillary equipment and spare parts represented a greater percentage of total
LSG revenues than in the prior year.
WSG revenues grew by approximately $5.9 million or 11% over the same period in
the prior year. WSG's commercial domestic revenues grew by about 11%, with
strong growth occurring in most service categories. International revenues were
up by about 55%, which was primarily attributable to the three sales and service
acquisitions in the fourth quarter of fiscal 1994 in Canada and Europe. Federal
service revenues were up by approximately 3%. WSG revenue increases were a
result of a greater amount of services provided rather than an increase in the
price of the services.
Gross Profit
Gross profit remained at about the same level of approximately $47.6 million for
the first six months of fiscal 1995 and 1994. Product gross profit margins fell
from 27.4% in 1994 to 23.5% in 1995 while service revenues increased from 30.5%
to 31.0% during that same time period. The decline in product gross profit
margins occurred largely in LSG, which had a higher proportion of low-margin
ancillary product sales in 1995, as compared to higher margin UPS module sales
in 1994. SSG margins were also lower than in the prior year, as a result of
lower margins on products being phased out, a higher proportion of sales in
channels with lower profit margins, and decreased sales in the higher kVA
models, which generally have better margins than the lower kVA models. The
company also incurred higher than normal costs related to increased production
volumes for its new Powerware Prestige product lines. Service margins increased
principally due to changes in the mix of services provided.
Selling, General and Administrative
Selling, general and administrative expense increased by approximately
$2,250,000 over the prior year, but decreased as a percentage of revenues to
18.6% in fiscal 1995 from 19.0% in fiscal 1994. General and administrative
expense declined from the prior year due primarily to lower legal expenses as a
result of the settlement of certain litigation. Selling and marketing expenses
rose primarily as a result of the company's continued efforts to expand its
worldwide marketing, distribution, and support capabilities, particularly in
Europe, the Far East, and Latin America. The remainder of the increase was
invested primarily to improve the company's domestic customer support and
telemarketing infrastructure for small systems products, and for costs for the
company's recently submitted proposal for a new five year contract with the Air
Force.
Research and Development Expense
Research and development expense increased by approximately $102,000 over the
prior year, but decreased as a percentage of revenue to 2.7% in fiscal 1995 from
2.9% in fiscal 1994. Contributing to the decrease as a percentage of revenue
were lower research and development expenses at IPM, as significant expenses
were incurred in fiscal 1994 in the development of a new product that were not
required in fiscal 1995. The company expects research and development
expenditures to remain constant or decline slightly as a percentage of revenues
as the company takes advantages of synergies between Exide Electronics and IPM
in the development of new products.
Litigation Expense
Litigation expense decreased by $4,297,000 in the second quarter of 1995 as
compared to the prior year. The company recorded a $700,000 pretax charge for
the settlement of two related lawsuits in 1995. Although the company believed
that neither suit had merit, they were consuming valuable corporate time and
attention and would have involved significant legal costs to pursue further.
Last year, the company recorded a charge of $4,997,000 in the second quarter for
the settlement of litigation. These lawsuits are discussed in more detail in
Note 4 of the notes to consolidated financial statements and in the Litigation
section below.
Merger Expense
During the quarter, the company completed its acquisition of IPM, a manufacturer
of UPS products headquartered in Dallas, Texas. With the consummation of the
acquisition, which was accounted for as a pooling-of-interests, the company
recorded a nonrecurring pretax charge of $5.5 million in the quarter. This
charge included approximately $3 million for legal, accounting, financial
advisory, and other costs related to the merger. The company also expensed
approximately $2.5 million for the estimated costs of closing a duplicate
operating facility and discontinuing certain duplicate product lines
manufactured at that facility.
Interest/Other
Interest expense increased by about $27,000 over the first six months of fiscal
1994, but remained at 1.4% of revenues. The company incurred $233,000 in the
write-off of remaining debt issuance costs and a redemption premium related to
the payoff of its Industrial Revenue Bonds (IRBs) in the first quarter of fiscal
1995. Without this one-time charge, interest expense would have been 8% less
than fiscal 1994. Other (income) expense improved by approximately $831,000. The
increase is primarily due to foreign exchange gains of $354,000 versus losses of
$75,000 in the prior year, and to improved results for the company's Japanese
joint venture. The company's foreign currency exposures are discussed in more
detail below.
Net Income (Loss)
Net loss for the first six months of fiscal 1995 was $325,000, or $.09 per
primary share, as compared to net income of $2,409,000, or $.26 per primary
share, for the first six months of fiscal 1994. Excluding the litigation and
merger charges in the second quarter of fiscal 1995 and 1994, net income would
have been $4,359,000 or $.51 per primary share for the first six months of
fiscal 1995, and $5,345,000 or $.64 per primary share in 1994.
Quarterly Operating Results
The company's quarterly operating results have fluctuated significantly.
Quarterly results depend upon the timing of product shipments and major systems
implementation services, which can be influenced by a number of factors. Some of
these factors are beyond the company's control, particularly for large,
customized systems. The company has experienced seasonal fluctuations in
revenues and operating results on a quarter-to-quarter basis. The fourth quarter
typically has produced the largest portion of the company's revenues and income.
The company believes that the fourth quarter results reflect increased shipments
resulting from management incentives which are tied to annual sales performance,
and increased sales prompted by weather-related power disturbances during the
spring and summer months. The first quarter has typically produced the smallest
portion of the company's revenues and income, so that there has been a
historical reduction in the company's first quarter results as compared to the
previous fiscal year's fourth quarter. During fiscal years 1994 and 1993,
revenues increased for each quarter within the applicable year, but revenues for
the first quarter were lower than revenues for the fourth quarter of the prior
year.
Selling, general and administrative, and research and development expenditures
are incurred to support projected annual sales. These expenses do not
necessarily vary proportionately with revenues on a quarterly basis. As a
result, variations in quarterly revenues may not be accompanied by an equivalent
change in expenses; therefore, operating margins can vary significantly between
quarters.
Liquidity and Financial Condition
As of March 31, 1995, the company had $86.0 million of working capital, as
compared to $93.3 million at September 30, 1994, and $88.4 million at March 31,
1994. The $2.4 million decrease in working capital as compared to March 31, 1994
is a result of increased accounts receivables and inventories needed to support
the higher sales levels, offset by related increases in accounts payable and
deferred revenues. The $7.3 million decrease in working capital between
September 30, 1994 and March 31, 1995 is primarily the result of a decline in
accounts receivable due to increased collections on receivable balances,
partially offset by higher inventory balances. Receivable balances are typically
at their highest level at fiscal year-end, due to the higher level of fourth
quarter sales. The reduction in working capital resulted in net cash provided
by operations of $7.6 million for the six months ended March 31, 1995, which
was used primarily to redeem the company's IRBs of $4.6 million and to fund
capital expenditures.
During the first six months of 1995, the company invested approximately $5.4
million in capital expenditures. Capital expenditures for fiscal 1995 are
expected to approximate $10 to $11 million. The company believes that its cash
flow from operations and its existing bank facilities will be sufficient to meet
its short-term requirements for working capital and capital expenditures.
In November 1994, the Board of Directors authorized the repurchase of up to 5%
of the company's outstanding stock. The company plans to continue repurchasing
its outstanding stock, depending on current market conditions and other factors.
Contingencies
Litigation
In May 1990, Exide Electronics was served with a complaint in Delaware, and in
May 1991, a related case was filed in Federal Court in New York. These
complaints alleged, among other things, that Exide Electronics' description of a
lawsuit in its prospectus dated December 21, 1989 was false and misleading.
Exide Electronics recorded a charge in connection with that lawsuit of
$4,997,000 ($2,936,000 after tax) in its operating results for the second
quarter of fiscal 1994, and reached a settlement in July 1994. See Note 4
of the notes to consolidated financial statements for additional information.
In April 1995, Exide Electronics announced that it had settled the suits in
Delaware and New York. The Delaware action had been dismissed once for failure
to state a claim, but was reinstated following an appeal and was in the
discovery process prior to the settlement. The company recorded a pre-tax charge
of $700,000 for the settlement of these two related lawsuits in the quarter
ended March 31, 1995. The settlement agreements are subject to court approval,
after notice to affected shareholders. While the company believed that neither
suit had merit, it decided to settle as the suits were consuming valuable
corporate time and attention and would have involved significant legal costs to
pursue further.
Government Contract Matters
Sales to the United States Federal government accounted for approximately 29%
and 31% of total revenues for the six months ended March 31, 1995 and 1994,
respectively, and approximately 33%, 35% and 19% of total revenues for the years
ended September 30, 1994, 1993 and 1992, respectively. A significant portion of
the company's sales to the Federal government in recent years have been under a
five-year contract awarded to the company by the Air Force Logistics Command in
May 1988 following a competitive procurement. As of March 31, 1995, a
significant portion of the company's backlog relates to orders received under
this contract from the Federal Aviation Administration (FAA). The period during
which orders could be placed under this contract expired in May 1993. Expiration
of this contract does not affect orders received prior to expiration, and
delivery on the remainder of such orders, which consists primarily of site
implementation services for the FAA, is currently planned through fiscal 1997.
A competitive procurement process for a new five-year contract is currently
underway. The company submitted its final proposal in April 1995. The
government's current schedule indicates that an award should be announced by the
end of June 1995. The company is likely to face vigorous competition in the new
procurement, and there can be no assurance that the company will be successful
in obtaining the new contract. However, the company can sell its products and
services to the Federal government through its four existing Navy contracts,
through its General Services Administration Schedule, and potentially in a
subcontractor capacity or through the award of other new contracts.
Nevertheless, failure to win the new contract would adversely affect the
company's ability to sell to the Federal government in the future. The company's
contracts with the Federal government have no significant minimum purchase
commitments, and the government may cease purchases under these contracts at any
time for any reason. These contracts are subject to termination for the
convenience of the government pursuant to the terms of the contracts.
The company's compliance with government contract regulations is audited or
reviewed from time to time by government auditors, who have the right to audit
the company's records and the records of its subcontractors during and after
completion of contract performance. Under Federal government regulations,
certain costs are not allowable as costs for which the government will reimburse
the company. Government auditors may recommend that certain charges be treated
as unallowable and reimbursement be made to the government. In addition, as part
of the company's internal control practices, the company performs regular
internal reviews of its charges to the government. In connection with such
reviews, the company may make voluntary refunds to the government for certain
unallowable or inadvertent charges, which are brought to the government's
attention by the company. The company provides for estimated unallowable charges
and voluntary refunds in its financial statements, and believes that its
provisions are adequate as of March 31, 1995.
Foreign Currency Exposures
International sales accounted for approximately 31% and 26% of total revenues
for the six months ended March 31, 1995 and 1994, respectively, and
approximately 25%, 22% and 30% of total revenues for the years ended September
30, 1994, 1993 and 1992, respectively. A significant portion of these sales are
denominated in foreign currencies. As of March 31, 1995, approximately 20% of
the company's total assets were located outside the United States, primarily in
Canada and Europe. Significant fluctuations in foreign currency exchange rates
can result in gains or losses on foreign currency transactions, which are
recorded in the consolidated statement of operations. Fluctuations in the
recorded value of the company's net investment in its international subsidiaries
resulting from changes in foreign exchange rates are recorded in the cumulative
translation adjustments component of common shareholders' equity. The company
hedges these risks using a combination of natural hedges such as foreign
currency denominated borrowings and, from time to time, foreign currency
financial instruments. European and Canadian currencies have been especially
volatile over the last two years. As of March 31, 1995, the company had accounts
receivable and accounts payable totaling approximately $10 million that were
exposed to fluctuations in exchange rates, and had foreign currency financial
instruments covering approximately 60% of these balances. These balances are
spread among various currencies, primarily the French franc.
As of March 31, 1995, the company had entered into three foreign currency
options which give the company the right to sell at predetermined exchange rates
approximately 29 million French francs. These contracts mature at various dates
from May through June 1995. These contracts were entered into to reduce the
potential loss from a significant decline in the value of the French franc.
Potential gains on these contracts would be recognized in income and offset the
foreign currency exchange losses on the related transactions. The aggregate fair
value of these contracts at March 31, 1995 was approximately $20,000. The
company does not have any speculative financial instruments.
For the first six months of fiscal 1995, the company had foreign exchange
transaction gains of approximately $354,000, as compared to losses of
approximately $75,000 in the same period of fiscal 1994, and the change in the
cumulative translation adjustments account increased the recorded value of
common shareholders' equity by $163,000 from September 30, 1994 to March 31,
1995. For fiscal 1994, the company had foreign exchange transaction losses of
approximately $257,000, as compared to losses of approximately $221,000 in 1993,
and the change in the cumulative translation adjustments account increased the
recorded value of common shareholders' equity by $154,000 from September 30,
1993 to September 30, 1994.
PART II - OTHER INFORMATION
March 31, 1995
ITEM 1. Legal Proceedings
See Note 4 of the Notes to Consolidated Financial Statements.
ITEM 4. Submission of Matters to a Vote of Security Holders
At a Special Meeting of the Shareholders held on February 7, 1995, the
company's shareholders voted as follows:
A. To approve the merger of International Power Machines Corporation with
and into Exide Electronics Group, Inc. The results of the vote were
4,750,652 votes for, 17,785 votes against, and 10,001 votes abstained.
This matter is discussed in additional detail in Note 2 of the Notes to
Consolidated Financial Statements.
B. To amend Exide Electronics Group, Inc.'s Certificate of Incorporation
to increase the authorized number of shares of Common Stock from fifteen
million shares to thirty million shares, and to remove references to the
Exide Electronics Series A, B, and C Preferred Stock, which are no longer
outstanding. The results of the vote were 5,212,958 votes for, 500,987
votes against, and 21,329 votes abstained.
At the Annual Meeting of the Shareholders held on February 23, 1995, the
company's shareholders voted as follows:
A. The following directors were elected for three year terms expiring
in 1998:
Conrad Plimpton 5,592,247 votes for, 33,913 votes abstained James Fowler
5,591,373 votes for, 34,787 votes abstained David McLaughlin 5,590,613
votes for, 35,547 votes abstained
All other directors continued in office.
B. The 1995 Employee Stock Option and Restricted Stock Plan was approved,
with 4,105,321 votes for, 522,269 votes against, and 35,323 votes
abstained.
C. The 1995 Directors Stock Option Plan was approved, with 4,437,752 votes
for, 208,963 votes against, and 16,228 votes abstained.
D. The firm of Arthur Andersen LLP was approved as independent public
accountants for the fiscal year ending September 30, 1995, with 5,590,613
votes for, 1,428 votes against, and 3,186 votes abstained.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit
Number Description
2 Agreement and Plan of Reorganization dated as of August 25, 1994,
as amended by amendments dated as of December 14, 1994 and as of
January 5, 1995, among Exide Electronics Group, Inc., Exide
Electronics Acquisition, Inc., and International Power Machines
Corporation, incorporated herein by reference from Exhibit 2.1 to
Exide Electronic Group Inc.'s Registration Statement on Form S-4
(Registration No. 33-88324).
3 Certificate of Incorporation of Exide Electronics Group, Inc.,
as amended on February 24, 1995.
11 Statement of Computation of Per Share Earnings.
27 Financial Data Schedule.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K, for the event dated
February 8, 1995, reporting the consummation of the merger of
International Power Machines Corporation (IPM) with and into Exide
Electronics Group, Inc. The financial statements required under Item 7 for
this acquisition were filed under Form 8-K/A on April 24, 1995. The merger
with IPM is discussed in more detail in Note 2 of the Notes to
Consolidated Financial Statements in this Quarterly Report on Form 10-Q.
EXIDE ELECTRONICS GROUP, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EXIDE ELECTRONICS GROUP, INC.
(Registrant)
Date: May 15, 1995 By: Marty R. Kittrell
Marty R. Kittrell
Vice President and
Chief Financial Officer
Exide Electronics Group, Inc.
Exhibit Index
Exhibit
Number Description Page
3 Certificate of Incorporation of Exide Electronics 24
Group, Inc., as amended on February 24, 1995.
11 Statement of Computation of Per Share Earnings 96
27 Financial Data Schedule 98