UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): October 20, 1995
(February 8, 1995)
EXIDE ELECTRONICS GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 0-18106 23-2231834
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification
incorporation) No.)
8521 Six Forks Road
Raleigh, North Carolina 27615
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (919) 872-3020
ITEM 5. OTHER EVENTS
On February 8, 1995, Exide Electronics Group, Inc., a Delaware corporation
(Exide or the company), completed the acquisition of International Power
Machines Corporation, a Delaware corporation (IPM), through the merger (the
Merger) of Exide Electronics Acquisition, Inc., a Delaware corporation and a
wholly-owned subsidiary of Exide (Merger Sub), with and into IPM, pursuant to
an 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 (the
Merger Agreement), among Exide, Merger Sub and IPM. On February 22, 1995,
Exide filed a description of the acquisition required under Item 2 of Form 8-K,
and on April 24, 1995, Exide filed the financial information required under
Item 7 of Form 8-K/A, which are incorporated herein by reference.
The merger was consummated on the terms previously reported in the Joint Proxy
Statement/Prospectus constituting a part of the Registration Statement on Form
S-4 filed by Exide with the Securities and Exchange Commission (Registration No.
33-88324)(the Joint Proxy Statement/Prospectus). The Merger Agreement and the
Merger are more fully described in the Joint Proxy Statement/Prospectus, and is
incorporated herein by reference.
The combination was accounted for as a pooling-of-interests. Accordingly, the
accompanying management's discussion and analysis, the company's consolidated
financial statements, and the related notes as of and for the three year period
ended September 30, 1994 have been restated to include the results of IPM.
ITEM 5. OTHER EVENTS
On October 20, 1995, Massachusetts Mutual Life Insurance Co.(MMLI), MassMutual
Corporate Investors(MCI), and MassMutual Participation Investors(MPI)
(collectively MassMutual), the holders of the company's 8.375% Guaranteed
Convertible Subordinated Notes due June 30, 2000, in aggregate principal amount
of $15,000,000 (the Notes), gave notice of their intent to convert the Notes
into 1,146,789 shares of the company's common stock(the MassMutual Shares) on
October 23, 1995. MMLI, which holds $10,500,000 in aggregate principal amount
of the Notes, will receive 802,752 shares of common stock; MCI, which holds
$3,000,000 in aggregate principal amount will receive 229,358 shares of common
stock; and MPI, which holds $1,500,000 in aggregate principal amount of the
Notes, will receive 114,679 shares of common stock. As a result of the
conversion of the Notes, the company's outstanding indebtedness will be reduced
by $15,000,000 and the company will no longer be subject to the related interest
expense. The MassMutual Shares will constitute, in the aggregate,
approximately 12% of the outstanding stock upon conversion.
In connection with MassMutual's purchase of the Notes, it was granted certain
registration rights with respect to the common stock into which the Notes were
convertible. Pursuant to these rights, on July 23, 1993, the company
registered, at the company's expense, the MassMutual Shares for resale upon the
conversion of the Notes, pursuant to a Registration statement on Form S-3
(File Number 33-64818). As a result of such registration, all of the MassMutual
Shares will be available for resale upon issuance.
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: October 20, 1995 By:
Marty R. Kittrell
Marty R. Kittrell
Vice President and
Chief Financial Officer
Exide Electronics Group, Inc.
Management's Discussion and Analysis
of Results of Operations and Financial Condition
Introduction
Management's Discussion and Analysis of Financial Condition and Results of
Operations is presented on the following pages. All appropriate financial data
has been restated to include the February 8, 1995 acquisition of International
Power Machines Corporation(IPM), a combination accounted for as a pooling-of-
interests(see Note 2 of the notes to consolidated financial statements).
The principal purpose of this review is to provide the user of the consolidated
financial statements and accompanying footnotes with a more detailed analysis of
the financial results of the combined entity. For a comparison of the company's
financial results for the same periods without giving effect to the IPM
consolidation, see the company's Annual Report on Form 10-K(including the
company's Annual Report to Shareholders for the fiscal year ended September 30,
1994), the company's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1994, and Note 2 to the company's consolidated financial
statements included elsewhere in this Current Report on Form 8-K.
Overview
Exide Electronics (the company) provides strategic power management solutions to
a broad range of businesses and institutions worldwide. The company's products
are used for financial, medical, industrial, telecommunications, military, and
aerospace applications - wherever continuous power is essential to daily
operations. The company has designed and sold large customized uninterruptible
power systems (UPS) products for use in data centers since the early 1960s.
During the 1980s, Exide Electronics broadened its product offerings by
introducing its Powerware(R) Systems line of standardized UPS products to
support mainframe and large minicomputer installations. Personal computers
proliferated in the late 1980s, and at the beginning of 1990, Exide Electronics
introduced initial models of its Powerware(R) Personal and Powerware(R) Plus
lines to serve personal computers, workstations and local area networks (LANs).
Additional models and product lines for this market have been introduced each
year since 1990, including the Prestige line which was introduced in the fourth
quarter of 1993, with new models added during 1994 to expand the product line.
Over the last two years, several factors have had a significant impact on the
company's results of operations. These factors include the impact of Federal
government product and service revenues, the growth in revenues of small UPS
products, the development of international markets, the final settlement of the
Hendry litigation, and the adoption of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (FAS 109) in fiscal 1993.
Factors affecting the company's results of operations for fiscal year 1995 are
discussed more fully in Management's Discussion and Analysis of Results of
Operations and Financial Condition presented in the company's Form 10-Q for the
nine months ended June 30, 1995.
Sales to the Federal government accounted for approximately 33% and 35% of total
revenues for the years ended September 30, 1994 and 1993, respectively, and
accounted for a significant portion of the company's growth in product and
service revenues during this period. The increase in Federal government sales
has been mainly attributable to the company's participation in the Federal
Aviation Administration (FAA) Air Route Traffic Control Center Modernization
Program, under which the company has received over $350 million in orders to
provide large UPS products, ancillary power equipment, and design and
implementation services. The work yet to be performed under this contract is
scheduled through fiscal 1997.
Over the last two years, commercial sales of certain larger product lines have
declined while others have experienced modest growth, and the company's product
mix has shifted toward its smaller product lines such as the Powerware Prestige
and Powerware Plus. These changes reflect the general downsizing trend in the
computer industry, resulting in declines in the commercial mainframe computer
and data center market segments. At the same time, the proliferation of personal
computers, workstations, client/server platforms and networks has increased
demand for small UPS products. Exide Electronics is taking steps to increase its
small systems business, including continually introducing products that
incorporate new technologies with improved price/performance characteristics,
developing new distribution channels and marketing programs, and providing new
support services.
Small UPS products are characterized generally by higher unit volumes, lower
average prices, and higher unit margins than large UPS products, and are sold
through different distribution channels. The majority of the company's UPS
products are sold to customers to support computers or similar electronics
products. The electronics market, and particularly the networking,
client/server, workstation, and personal computer markets supported by small UPS
products, is increasingly characterized by intense competition, rapidly changing
technology, and evolving industry standards, frequently resulting in shorter
product life cycles and declines in selling prices. The company has responded
with cost reductions in manufacturing processes and component parts, and has
aggressively introduced new hardware and software products with lower costs and
higher performance levels. In addition, distribution channels for personal
computers, workstations, local area networks, and ancillary equipment,
including UPS products, have been characterized by rapid change. These changes
include the emergence of new distribution channels, such as telemarketing, mass
merchandisers, and new types of resellers and distributors. To date, the
company has depended on original equipment manufacturers, distributors, and
value-added resellers for sales of its smaller UPS products. The company
believes that its ability to compete depends on both internal and external
factors, including the success and timing of new product introductions by the
company and its competitors, product performance and price, distribution, and
customer service.
Exide Electronics has placed greater emphasis on international markets by
developing versions of its products to meet international voltage and frequency
requirements. To build its international presence, over the last several years
Exide Electronics has established subsidiaries in Canada and in selected
European countries, added distributors in other international regions, and
entered into strategic relationships for distribution in Japan. The company has
also expanded its international sales support through increased marketing and
advertising, establishing an international customer support hotline, and making
other infrastructure enhancements. International sales accounted for
approximately 25% and 22% of the company's total revenues for fiscal years 1994
and 1993, respectively, and accounted for approximately 37% and 33% of total
commercial revenues for these fiscal years.
To further advance its international presence, Exide Electronics acquired two
companies in Canada and one in the United Kingdom at the end of fiscal 1994.
These companies are involved in the sales and service of UPS products and
enhance the company's ability to expand its product and service offerings in
these key markets.
During the second quarter of fiscal 1995, the company completed its acquisition
of International Power Machines Corporation(IPM), a manufacturer of UPS
products similar to those of the company, headquartered in Dallas, Texas. The
anticipated benefits of the acquisition of IPM will not be achieved unless
Exide Electronics and IPM are combined in a smooth, timely, and efficient
manner. The combination will require integration of each company's development,
administrative, finance, purchasing, manufacturing, sales, and marketing
organizations, as well as the integration of each company's product offerings
and the coordination of their sales efforts. The transition to a combined
company will require substantial attention from a newly integrated management
team, which has not worked together previously and has limited experience in
integrating companies. Further, both companies' customers will need to be
reassured that product support will continue uninterrupted. The diversion of
management attention and any difficulties encountered in the transition process
could have an adverse impact on the revenue and operating results of the
combined company. Additionally, attempts to achieve economies of scale through
cost reduction efforts may, at least in part in the short term, have an adverse
impact on the combined company's operations.
The company's products and services 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)(1);
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.
The following table summarizes the contribution of each business unit to total
revenues of the company for the two years ended September 30, 1994 and 1993:
Year Ended September 30,
---------------------------------------
1994 1993
---------------------------------------
Small Systems Group $115.2 31.7% $89.1 28.0%
Large Systems Group 144.2 39.6 131.0 41.2
Worldwide Services Group 104.6 28.7 97.8 30.8
---------------------------------------
$364.0 100.0% $317.9 100.0%
=======================================
- --------
(1) A kilovolt ampere is a commonly-used unit of measure for electricity
supplied using alternating current.
Results of Operations
The following table presents, for the two years ended September 30, 1994 and
1993, the percentage relationship which certain items in the company's
consolidated statement of operations bear to total revenues and the percentage
increase (decrease) in the dollar amount of such items:
Percentage
Year Ended September 30, Change From
-----------------------------------------
1994 1993 1993 to 1994
-----------------------------------------
Revenues
Products 71.3% 69.2% 17.8%
Services 28.7 30.8 6.9
-----------------------------------------
Total revenues 100.0 100.0 14.5
-----------------------------------------
Cost of revenues
Products 53.2 52.1 16.8
Services 19.7 21.0 7.4
-----------------------------------------
Total cost of revenues 72.9 73.1 14.1
-----------------------------------------
Gross profit 27.1 26.9 15.4
Selling, general and
administrative expense 17.8 17.5 17.3
Research and development expense 2.8 3.0 5.8
Litigation expense 1.4 - NM
-----------------------------------------
Income from operations 5.0 6.4 (9.5)
Interest expense 1.5 1.4 22.5
Interest income (0.1) (0.1) 4.7
Other (income) expense 0.0 0.1 (81.3)
-----------------------------------------
Income before income taxes
and the cumulative effect
of accounting change 3.7 5.0 (16.1)
Provision for income taxes 1.2 1.9 (31.1)
-----------------------------------------
Income before the cumulative
effect of accounting change 2.5% 3.1% (6.7)%
-----------------------------------------
NM - Not meaningful.
Fiscal Year 1994 versus 1993
Revenues
Total revenues increased nearly 15% to $364 million in 1994 from $317.9 million
in 1993. Product sales grew by 18% to $259 million in 1994, including increases
of $26.1 million (29.3%) for the company's SSG products and $13.2 million (10%)
for the company's LSG products. Service revenues increased by $6.8 million or 7%
over this period.
The revenue growth in SSG products occurred primarily in the company's
international distribution channels, with particularly strong growth in export
sales to Latin America. In the United States, most of the sales growth was
experienced through the manufacturer's representatives channel. The majority of
the growth in SSG revenue was attributable to sales of its newer products such
as the Powerware Prestige and ONE-UPS(TM) lines, and to increased sales of the
Powerware Plus product line as new applications and methods of distribution were
established. The growth in international export sales is primarily from the
success of product models designed for the international markets and from
expanded international marketing efforts. SSG revenue included approximately $16
million in sales of new products, which were partially offset by declines of
$7.8 million in sales of discontinued products. For the year ended September 30,
1994, total unit sales for SSG were approximately 50% higher than the prior
year, resulting mainly from higher unit sales of lower kVA models. Higher unit
sales were partially offset by a decrease in the average selling price per unit,
as the lower kVA models are generally lower-priced than the larger UPS products,
and also by price reductions in the approximate range of 5% to 10% from the
prior year.
The $13.2 million increase in LSG revenues was due to sales growth in both the
commercial and government markets. Commercial growth occurred primarily in the
manufacturer's representatives channel and from increased sales of facilities
monitoring software. Federal government sales growth came from an increase in
product engineering for the FAA and sales under the company's multi-year
contracts with the U.S. Navy. The commercial and government revenue increases
were partially offset by declines in the international channels. The reduction
in international sales was due to the non-recurrence of certain large sales in
the prior year and to increased competition in certain regions. The total number
of LSG modules sold decreased moderately from fiscal 1993, but the average sales
price per system increased in 1994, primarily due to favorable model mix and
increased sales of custom engineering, ancillary equipment, and spare parts.
Over the last two years, a significant portion of LSG's sales have been to the
FAA. As of September 30, 1994, most of the LSG products under this program have
been shipped; consequently, total LSG sales in fiscal 1995 are expected to be
approximately 15% lower than fiscal 1994 levels. See the Government Contract
Matters section which follows for additional discussion.
The $6.8 million increase in WSG revenues for 1994 occurred primarily from
increases in maintenance contract and other field service revenues. This growth
resulted from increased marketing of battery services and from increased product
sales with accompanying services. This growth occurred both domestically and
internationally. Federal service revenues remained relatively constant with 1993
levels, although 1993 service revenues were 62% higher than in 1992, primarily
because of the significant increase in 1993 of FAA site services. As of
September 30, 1994, the company was installing systems at ten FAA sites and had
thirteen sites in the engineering design stage, as compared to ten sites in
construction and six sites in engineering design at September 30, 1993. Three
FAA sites were completed in fiscal 1994. As described further in the Government
Contract Matters section which follows, delivery on the remainder of the FAA
orders is currently scheduled through fiscal 1997. While the level of FAA site
service revenues will vary depending on site construction schedules and the type
of services required, these service revenues are not expected to decline
significantly until fiscal 1996. WSG revenue increases resulted principally from
a higher quantity of services provided as opposed to increases in pricing.
Gross Profit
Gross profit increased by 15.4% over 1993 to $98.7 million. Gross profit as a
percentage of total revenues increased slightly to 27.1% in 1994 from 26.9% in
1993. Gross profits from product sales were higher by $11.4 million, or 20.9%,
as a result of higher revenues and improved gross profit margins for product
sales, which increased to 25.4% in fiscal 1994 as compared to 24.7% in 1993.
This improvement occurred primarily from increased sales of SSG products, which
generally have higher gross profit margins than LSG products, and continued cost
reduction efforts. These increases were partially offset by higher LSG ancillary
equipment sales, which generally have lower margins than UPS equipment, sales of
certain discontinued SSG product lines at lower than normal margins, and
start-up costs for the new Powerware Prestige product line. The company
continues its efforts toward cost reductions and operational efficiencies to
maintain competitiveness and improve margins in response to the industry trend
of declining UPS prices. Prices for all power ranges of UPS equipment have
generally declined from the prior year in the approximate range of 5% to 10%,
and this trend is expected to continue. Service margins decreased to 31.4% in
1994 from 31.8% in fiscal 1993, due principally to increased battery services, a
decrease in margins on systems implementation services for the FAA, and a
decrease in international service margins due to changes in the mix of services
provided.
Selling, General and Administrative
Selling, general and administrative expense for fiscal 1994 increased $9.6
million or 17.3% over the prior year, with most of the increase in selling and
marketing expenses. The higher level of spending reflects the company's growth
strategy of investing in its distribution channels and promotional activities to
improve its market position on a worldwide basis. The increase in selling and
marketing expense supports a higher level of sales volume and the continued
investment in market support and distribution development programs, particularly
for the company's SSG products. These programs include the launch of new
promotional campaigns, primarily in the United States, Latin America, China and
Europe; expanded customer support capabilities; participation in several major
trade shows; and the introduction of several new products such as the Powerware
Prestige. The company also improved its distribution capacity worldwide, mainly
through the addition of several leading distributors in various geographic
markets.
Research and Development
Research and development expense increased approximately $558,000 or 5.8% as
compared to fiscal 1993. The increase is due primarily to the ongoing
development of facilities monitoring software as a result of the acquisition of
DataTrax in fiscal 1993, and to the introduction of several models of the new
Powerware Prestige and BPII product lines. Consistent with the company's
strategy to expand its worldwide market position, many of the Prestige products
are developed for international voltages and frequencies prior to their
introduction in the United States. Other research and development activities in
fiscal 1994 included the development of the new Powerware Plus 80 and the Series
3000M for LSG, both of which have improved performance at a lower cost than
previous models, and to the ongoing development of other products and models, as
well as additional product software and other product enhancements.
Litigation Expense
On March 1, 1994, the trial jury awarded damages of $3.75 million to the
plaintiff in the re-trial of the Hendry litigation. 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, or $2,936,000 net of tax, for the jury verdict and
the costs of the trial. On July 20, 1994, the company announced that a
settlement agreement had been reached between the parties. Following agreement
among the parties to settle, the District Court vacated the jury award of $3.75
million. To avoid further litigation, including anticipated post-trial motions
and appeals, the company settled the case by making payments to the plaintiff
and his attorneys. Since the total value of the settlement payments was less
than the one-time charge for the jury verdict, no further charges were
necessary in this matter. The Hendry litigation is discussed in more detail
in the Litigation section which follows and in Note 15 of the notes to
consolidated financial statements.
Interest/Other
Interest expense increased by approximately $996,000 or 23% from the prior year,
of which approximately $700,000 is due to higher average debt balances used to
finance increased levels of working capital. The remainder of the rise in
interest expense is related to an increase in the average interest rate and to
the write-off of certain deferred financing costs associated with the
refinancing of the company's credit facility and the partial prepayment of the
company's industrial revenue bonds. Other expense improved by approximately
$322,000 or 81% during fiscal 1994, primarily as a result of favorable changes
in foreign exchange rates and the loss on disposal of certain fixed assets in
1993.
Income Before Taxes
Higher revenues and gross profits in fiscal 1994 were offset by the $5 million
charge for the Hendry litigation, resulting in income before income taxes and
the cumulative effect of an accounting change of $13.5 million in 1994, $2.6
million or 16% lower than in fiscal 1993. Excluding the litigation charge,
fiscal 1994 income before income taxes and the cumulative effect of accounting
change would have been $18.5 million, $2.4 million or 15% higher than in fiscal
1993.
Provision for Income Taxes
The 1994 provision for income taxes reflects a consolidated effective tax rate
of approximately 32% as compared to 39% in fiscal 1993. The decrease in the
effective rate is due primarily to the higher recognition of tax benefits for
net operating losses in 1994 than in 1993 as certain of the company's
subsidiaries became profitable, and the utilization of certain state tax credits
in fiscal 1994. The company expects its effective tax rate for fiscal 1995 to be
approximately 39%.
Net Income
For fiscal 1994, income before the cumulative effect of an accounting change was
$9,175,000, including the one-time charge in the second quarter of $4,997,000
($2,936,000 after tax) for the previously discussed settlement of the Hendry
litigation, as compared to income before the cumulative effect of an accounting
change of $9,832,000 in fiscal 1993. The company recorded a cumulative effect
adjustment of $1.0 million for a change in its method of accounting for income
taxes in fiscal 1993, which had no impact on operating results or cash flows.
Primary earnings per share before the cumulative effect of the accounting change
for fiscal 1994 were $1.07, as compared to $1.21 in 1993, and fully diluted
earnings per share were $1.03 for fiscal 1994 versus $1.10 in 1993.
Excluding the one-time charge for litigation in 1994 and the cumulative effect
of the accounting change in fiscal 1993, net income for fiscal 1994 would have
been $12.1 million, up $2.3 million or 23.5% from the prior year. Primary
earnings per share would have been $1.45 in fiscal 1994 versus $1.21 for 1993,
an increase of 20%, and fully diluted earnings per share would have been $1.34
versus $1.10 a year ago, up 22%.
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
which are beyond the company's control. This is particularly true 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 sales and 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. See Note 16 of the notes to consolidated financial statements.
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 September 30, 1994, the company had $93.3 million of working capital, as
compared to $87.0 million at September 30, 1993. The $6.3 million increase in
working capital over the prior year is primarily attributable to increased
accounts receivable balances related to higher fourth quarter revenues.
Inventories increased about 6% over 1993 levels to support the increased levels
of revenues and the introduction of several new SSG products. The increased
levels of working capital have been financed using cash generated from
operations, which was a positive $8.5 million in fiscal 1994 as compared to
operating activities consuming cash of $3.3 million in fiscal 1993.
On September 30, 1994, the company refinanced its $75 million domestic secured
bank credit facility with a $145 million package of domestic unsecured bank
credit facilities comprised of a $95 million three-year revolving credit
facility for working capital and general corporate purposes, including a
sublimit of $30 million to be used in support of its international subsidiaries,
and a $50 million two-year revolving credit facility to be used for financing
certain acquisitions and refinancing specified existing obligations. For further
information about this credit facility, see Note 6 of the notes to consolidated
financial statements.
In fiscal 1990, Industrial Revenue Bonds (the IRBs) in the amount of $9 million
were issued to finance a portion of the cost of constructing a manufacturing
facility near Wilmington, North Carolina. On June 1, 1994, the company executed
a partial redemption in the amount of $2.6 million using the excess project
funds held in trust for future construction. The company used its new revolving
credit facility to finance the early redemption of the remainder of the IRBs in
December 1994.
In addition to the facility described above, a subsidiary of the company had a
$5,000,000 revolving credit line from a bank. In April 1995, all outstanding
amounts under this line were repaid with funds from the $95 million three-year
revolving credit facility described above, and the line was terminated.
During fiscal 1994, the company invested approximately $8.7 million in capital
expenditures, as compared to approximately $8.3 million in the same period of
fiscal 1993. Capital expenditures for fiscal 1995 are expected to be
approximately $11 to $12 million. As of September 30, 1994, commitments
outstanding for capital expenditures were not material. The company believes
that its cash flow from operations and its new revolving credit facilities will
be sufficient to meet its short-term requirements for working capital and
capital expenditures.
During the second quarter of fiscal 1995, the company completed an acquisition
of International Power Machines Corporation (IPM), a manufacturer of UPS
products. 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. 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. 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. This merger is discussed more fully
in Note 2 of the notes to consolidated financial statements.
On July 1, 1995, the company signed an agreement with Japan Storage Battery Co.,
Ltd. (JSB), whereby JSB converted its shares of the company's Series D and
Series E Convertible Preferred Stock into 595,273 shares of the company's common
stock. This conversion increased the company's common equity by approximately
$10 million and reduced its annual cash dividend payments by approximately
$790,000. See Note 8 of the notes to consolidated financial statements for
further information.
In August 1995, the company completed the acquisition of Lectro Products, Inc.
(Lectro), a broadband industry leader specializing in power protection and other
transmission enhancement devices for converging cable television and
telecommunications networks. The company acquired Lectro for approximately $12.4
million in a transaction that was accounted for as a purchase. Goodwill of
approximately $10 million was recorded and is being amortized over twenty years.
The results of operations of this company will be included in the company's
consolidated financial statements beginning in August 1995. If Lectro had been
consolidated at the beginning of the fiscal year, the effect on the company's
operations or financial condition would not have been significant.
In October 1995, the holder of the company's $15,000,000 subordinated
convertible notes informed the company of its intention to convert the notes
to shares of the company's common stock under the terms of the note agreement.
Such conversion would save approximately $1.26 million per year in interest
expense. These notes are discussed further in Note 6 of the notes to
consolidated financial statements.
In September 1995, the company wrote off approximately $1.5 million of costs
related to a proposed acquisition that was not consummated. Such costs were
incurred during fiscal 1995, and consisted primarily of legal, accounting, and
other financial advisory services.
In November 1994, the Board of Directors authorized the repurchase of up to 5%
of the company's outstanding common stock. Purchases may be made from time to
time as management considers appropriate.
Contingencies
Litigation
In May 1990, Exide Electronics was served with a complaint entitled Branson v.
Exide Electronics et al. in the Delaware Court of Chancery (Branson-Delaware),
and in May 1991, a related case was filed in the United States District Court
for the southern district of New York (Branson-New York). These complaints
alleged, among other things, that Exide Electronics' description of a lawsuit
entitled James Hendry d.b.a. Synergy Sales Engineering v. Exide Electronics
Corporation (Hendry) in its prospectus dated December 21, 1989 was false and
misleading. Exide Electronics recorded a charge in connection with Hendry of
$4,997,000 ($2,936,000 after tax) in its operating results for the second
quarter of fiscal 1994. In July 1994, the company reached a settlement in the
Hendry suit. See the discussion of Litigation Expense above and Note 15 of the
notes to consolidated financial statements for additional information.
In April 1995, Exide Electronics announced that it had settled the Branson
suits. The Delaware Branson 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. Court approval of the settlement agreement, after notice to affected
shareholders, was granted in August 1995. 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 33%
and 35% of total revenues for the years ended September 30, 1994 and 1993,
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 September 30, 1994, a significant portion of the company's
backlog related to orders received under this contract for the 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.
During fiscal 1995, the company was awarded a large contract with the Air Force
Air Logistics command, which had an evaluated value of more than $600 million
over a five year period. Actual revenues under this contract will depend on the
specific purchases, if any, of the Air Force and other governmental agencies
which can use the contract during the contract period. The company is currently
awaiting the completion of the post-award process, including the resolution of
protests of the award by competitors. There can be no guarantee that the company
will prevail in defending the award. 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. 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 were adequate as of September 30, 1994.
The company's Federal government business is currently performed under firm
fixed-price type contracts and time-and-materials type contracts, and at times a
combination of both contract types. During fiscal 1993, the company engaged in
discussions with the Federal government regarding contract interpretation
matters relating to certain time-and-materials charges by the company under its
principal government contract. In August 1993, the company reached an agreement
with the Federal government under which these matters were resolved to the
satisfaction of the company. Under this agreement, there were no adjustments
relating to the company's past time-and-materials charges, and accordingly there
was no effect on the company's financial statements for prior periods relating
to this matter. The agreement provided for adjustments to certain hourly labor
rates and limited the recovery of certain general and administrative costs
prospectively from August 10, 1993.
Foreign Currency Exposures
International sales accounted for approximately 25% and 22% of total revenues
for the years ended September 30, 1994 and 1993, respectively. A significant
portion of these revenues are denominated in foreign currencies. As of September
30, 1994, approximately 15% 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 manages these risks using a combination of
natural hedges to reduce translation risk and, from time to time, foreign
currency hedges to reduce risks on accounts receivable or payable. European and
Canadian currencies have been especially volatile in the last two years. 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. At September 30, 1994, the company had accounts
receivable and accounts payable totaling approximately $5.3 million that were
exposed to fluctuations in exchange rates, and had no significant foreign
currency hedges covering these amounts. These balances were spread among various
currencies, primarily the Canadian dollar, the French franc, the Japanese yen,
the English pound, and the German mark.
EXIDE ELECTRONICS GROUP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
Year Ended September 30,
------------------------------
1994 1993 1992
---- ---- ----
Revenues
Products $ 259,403 $ 220,143 $ 186,579
Services 104,580 97,799 60,524
------- ------ ------
Total revenues 363,983 317,942 247,103
------- ------- -------
Cost of revenues
Products 193,572 165,700 142,896
Services 71,716 66,747 35,512
------ ------ ------
Total cost of revenues 265,288 232,447 178,408
------- ------- -------
Gross profit 98,695 85,495 68,695
Selling, general and administrative expense 65,086 55,506 47,066
Research and development expense 10,150 9,592 8,785
Litigation expense 4,997 - -
Income from operations 18,462 20,397 12,844
------ ------ ------
Interest expense 5,417 4,421 5,090
Interest income (488) (466) (559)
Other (income) expense 74 396 (846)
Income before income taxes and the cumulative
effect of accounting change 13,459 16,046 9,159
Provision for income taxes 4,284 6,214 3,103
----- ----- -----
Income before the cumulative effect
of accounting change 9,175 9,832 6,056
Cumulative effect of accounting change - 1,000 -
----- ----- -----
Net income $ 9,175 $ 10,832 $ 6,056
========= ========= =========
Preferred stock dividends (790) (1,071) (484)
---- ------ ----
Net income applicable to common shareholders $ 8,385 $ 9,761 $ 5,572
========= ========= =========
Primary earnings per share
Income before the cumulative effect of
accounting change $ 1.07 $ 1.21 $ 0.79
Cumulative effect of accounting change - 0.13 -
---- ---- ----
Net income $ 1.07 $ 1.34 $ 0.79
========= ========= =========
Weighted average number of common and equivalent
shares outstanding 7,814 7,270 7,039
===== ===== =====
Fully diluted earnings per share
Income before the cumulative effect of
accounting change $ 1.03 $ 1.10 $ 0.79
Cumulative effect of accounting change - 0.11 -
---- ---- ----
Net income $ 1.03 $ 1.21 $ 0.79
========= ========= =========
Weighted average number of common and equivalent
shares outstanding 9,393 9,316 7,651
===== ===== =====
<FN>
The accompanying notes are an integral part of these financial statements, which
have been restated to reflect the merger with International Power Machines on a
pooling-of-interests basis.
</FN>
EXIDE ELECTRONICS GROUP, INC.
CONSOLIDATED BALANCE SHEET
(dollars in thousands)
September 30,
1994 1993
---- ----
Assets
Current assets
Cash and cash equivalents $ 5,886 $ 4,465
Accounts receivable 105,712 97,832
Inventories 55,529 52,258
Other current assets 12,081 7,794
------ -----
Total current assets 179,208 162,349
------- -------
Property, plant, and equipment
Land, buildings, and leasehold improvements 8,809 8,655
Machinery and equipment 51,653 43,735
------ ------
60,462 52,390
Accumulated depreciation 32,250 26,633
------ ------
28,212 25,757
Other assets 17,256 15,127
------ ------
$ 224,676 $ 203,233
========= =========
Liabilities, Redeemable Preferred Stock, & Common Shareholders' Equity
Current liabilities
Short-term debt $ 5,802 $ 2,654
Accounts payable 44,958 40,983
Deferred revenues 16,577 11,542
Accrued compensation 8,153 7,166
Accrued income taxes payable 39 4,563
Other accrued liabilities 10,342 8,412
----- ------
Total current liabilities 85,871 75,320
------ ------
Long-term debt 43,400 41,805
------ ------
Convertible subordinated notes 15,000 15,000
------ ------
Deferred liabilities 2,943 3,091
----- -----
Redeemable preferred stock 10,000 10,000
------ ------
Commitments and contingencies
(Notes 6,7, and 15)
Common shareholders' equity
Common stock, $0.01 par value,
30,000,000 shares authorized;
shares issued - 7,735,165 in
1994 and 7,620,008 in 1993 77 76
Additional paid-in capital 48,223 46,225
Retained earnings 26,870 19,576
Cumulative translation adjustments (1,757) (1,911)
------ ------
73,413 63,966
Less: Notes receivable from shareholders (5,951) (5,949)
------ ------
67,462 58,017
------ ------
$ 224,676 $ 203,233
========= =========
<FN>
The accompanying notes are an integral part of these financial statements, which
have been restated to reflect the merger with International Power Machines on a
pooling-of-interests basis.
</FN>
EXIDE ELECTRONICS GROUP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN COMMON SHAREHOLDERS' EQUITY
(in thousands)
Notes
Additional Cumulative Receivable
Common Paid-in Retained Translation Treasury From
Stock Capital Earnings Adjustments Stock Shareholders Total
------- -------- -------- ------- ------ --------- --------
Balance at September 30, 1991
As previously reported $55 $ 29,214 $ 9,884 $ 98 $(377) $(5,733) $ 33,141
Adjustment for pooling of interests
with IPM 15 11,530 (4,941) - - - 6,604
---- ------ ------ ---- ---- ---- -----
Balance as restated for merger 70 40,744 4,943 98 (377) (5,733) 39,745
---- ------ ----- ---- ---- ------ ------
IPM preferred stock dividends - - (300) - - - (300)
Exide Electronics preferred stock
dividends - - (484) - - - (484)
Accrued interest income on notes
receivable from shareholders - - - - - (252) (252)
Other, net - (166) - (613) 377 138 (264)
Net income - - 6,056 - - - 6,056
---- ---- ----- ---- ---- ---- -----
Balance at September 30, 1992 70 40,578 10,215 (515) - (5,847) 44,501
---- ------ ------ ---- ---- ------ ------
Issuance of common stock 1 597 - - - - 598
Conversion of Series C
preferred stock 5 4,995 - - - - 5,000
IPM preferred stock dividends - - (400) - - - (400)
Exide Electronics preferred stock
dividends - - (1,071) - - - (1,071)
Accrued interest income on notes
receivable from shareholders - - - - - (262) (262)
Other, net - 55 - (1,396) - 160 (1,181)
Net income - - 10,832 - - - 10,832
---- ---- ------ ---- ---- ---- ------
Balance at September 30, 1993 $76 46,225 19,576 (1,911) - (5,949) 58,017
---- ------ ------ ------ ---- ------ ------
Adjustment to conform fiscal year
of IPM - - (591) - - - (591)
Issuance of common stock 1 1,998 - - - - 1,999
IPM preferred stock dividends - - (500) - - - (500)
Exide Electronics preferred stock
dividends - - (790) - - - (790)
Accrued interest income on notes
receivable from shareholders - - - - - (278) (278)
Other, net - - - 154 - 276 430
Net income - - 9,175 - - - 9,175
---- ---- ----- ---- ---- ---- -----
Balance at September 30, 1994 $77 $ 48,223 $ 26,870 $(1,757) $ - $(5,951) $ 67,462
==== ======== ======== ======= ==== ======= ========
<FN>
The accompanying notes are an integral part of these financial statements, which
have been restated to reflect the merger with International Power Machines on a
pooling-of-interests basis.
</FN>
EXIDE ELECTRONICS GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(dollars in thousands)
Year Ended September 30,
--------------------------------
1994 1993 1992
---- ---- ----
Cash flows from operating activities
Net income $ 9,175 $ 10,832 $ 6,056
Adjustment to conform fiscal year of IPM 49 - -
Adjustments to reconcile net income to cash provided by (used in) operating
activities:
Depreciation expense 6,105 5,304 4,633
Amortization expense 2,325 1,646 2,165
Increase in accounts receivable (7,351) (25,867) (12,669)
(Increase) decrease in inventories (4,943) (14,795) 2,109
(Increase) decrease in other current assets (2,549) 437 (120)
Increase (decrease) in accounts payable 2,657 14,935 (7,164)
Increase in other current liabilities 1,946 5,869 1,901
Cumulative effect of accounting change - (1,000) -
Other, net 1,064 (682) 415
----- ---- ---
Net cash provided by (used in) operating
activities 8,478 (3,321) (2,674)
----- ------ ------
Cash flows from investing activities
Acquisitions of property, plant, and equipment (8,735) (8,255) (5,828)
Acquisitions, net of cash acquired (3,580) (1,983) (953)
Other, net (1,576) (1,282) (512)
------ ------ ----
Net cash used in investing activities (13,891) (11,520) (7,293)
------- ------- ------
Cash flows from financing activities
Proceeds from bank credit facilities 91,938 78,527 42,166
Payments of bank credit facilities (83,629) (63,703) (52,569)
Issuance of convertible subordinated notes - - 15,000
Payments on industrial revenue bonds (3,500) (900) -
(Increase) decrease in funds held in trust
for future construction 2,600 (64) 264
Issuance of common stock 1,055 598 32
Issuance of redeemable preferred stock - 4,900 5,100
Preferred stock dividends of Exide Electronics (839) (1,006) (341)
Preferred stock dividends of IPM (500) (400) (300)
Payments of notes receivable from shareholders 276 160 138
Other, net (567) (879) (217)
---- ---- ----
Net cash provided by financing activities 6,834 17,233 9,273
----- ------ -----
Net increase (decrease) in cash and cash equivalents 1,421 2,392 (694)
Cash and cash equivalents, beginning of period 4,465 2,073 2,767
----- ----- -----
Cash and cash equivalents, end of period $ 5,886 $ 4,465 $ 2,073
======== ======== ========
<FN>
The accompanying notes are an integral part of these financial statements,
which have been restated to reflect the merger with International Power
Machines on a pooling-of-interests basis.
</FN>
EXIDE ELECTRONICS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of Exide Electronics
Group, Inc. (the company) and its wholly-owned subsidiaries. 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. The
company's investments in joint ventures are accounted for using the equity
method. All significant intercompany accounts and transactions have been
eliminated in consolidation.
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. The merger was structured as a tax-free exchange and was accounted for
as a pooling-of-interests. Accordingly, the accompanying consolidated financial
statements and related notes have been restated to include the accounts and
results of operations of IPM for all periods presented (see Note 2).
Revenues
Revenues from product sales are recognized at the time of shipment to customers.
Service revenues are recognized as services are performed. Maintenance contract
revenues, net of directly associated costs, are deferred and recognized on a
straight-line basis over the terms of the contracts. All revenues are shown
net of provisions for customer returns and allowances.
Per Share Data
Primary net income per common and equivalent share is computed using net income
after preferred stock dividends and the weighted average number of shares of
common stock and dilutive common stock equivalents. Fully diluted net income per
share is similarly computed but includes the effect, when dilutive, of assumed
conversion of the company's convertible subordinated notes and redeemable
preferred stock.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined by the
last-in, first-out (LIFO) method for certain domestic inventories and by the
first-in, first-out (FIFO) method for the remaining inventories.
Property, Plant, and Equipment
Property, plant, and equipment is stated at original cost. Depreciation and
amortization is calculated using primarily the straight-line method for
financial reporting purposes and primarily accelerated methods for tax purposes.
For financial reporting purposes, equipment is depreciated over three to ten
years and buildings are depreciated over thirty years. Leasehold improvements
are amortized over the shorter of the useful life of the asset or the term of
the lease.
Software Development Costs
Costs of developing new software products and enhancements to existing software
products are capitalized after technological feasibility is established. The
costs of capitalized software are amortized over one to five years or the
estimated useful lives of the related products, if less. The company capitalized
software development costs of $1,072,000 in 1994, $854,000 in 1993, and $595,000
in 1992. Related amortization expense was $683,000 in 1994, $277,000 in 1993,
and $172,000 in 1992.
Other Assets
Other assets include goodwill, which is being amortized over periods ranging
from five to forty years.
Translation of Foreign Currencies
Certain of the company's non-U.S. subsidiaries use their local currency as their
functional currency. Their asset and liability accounts are translated into U.S.
dollars at the exchange rates in effect at the balance sheet date, while
revenues and expenses are translated using average exchange rates during the
period. Resulting translation adjustments are recorded directly to the
cumulative translation adjustments component of common shareholders' equity and
do not affect the results of operations. Gains (losses) on foreign currency
transactions were $(257,000) in 1994, $(221,000) in 1993, and $813,000 in 1992.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the reported amounts
of revenues and expenses. Actual results may differ from those estimates.
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. Under the terms of the
agreement, the company issued approximately 1,510,000 newly registered shares of
Exide Electronics' common stock for all of the outstanding shares of IPM's
common and preferred stock. The merger was structured as a tax-free exchange and
was accounted for as a pooling-of-interests. Accordingly, the accompanying
consolidated financial statements and related notes have been restated to
include the accounts and results of operations of IPM for all periods presented.
Historically, IPM prepared its financial statements using a December 31 fiscal
year end. As of September 30, 1994, IPM's fiscal year end has been changed to
conform to Exide Electronics' September 30 year end. The consolidated statement
of operations for the year ended September 30, 1994 combines Exide Electronics'
historical consolidated statement of operations for the fiscal year ended
September 30, 1994 with IPM's consolidated statement of operations for the year
ended September 30, 1994. In accordance with the accounting rules prescribed or
permitted for pooling-of-interests, the restated financial statements for the
fiscal years ended September 30, 1993 and 1992 combine the historical
consolidated results of operations of Exide Electronics for the years then ended
with IPM's historical consolidated results of operations for the calendar years
ended December 31, 1993 and 1992, respectively. The restated balance sheet as of
September 30, 1994 combines Exide Electronics' historical consolidated balance
sheet as of September 30, 1994 with IPM's consolidated balance sheet as of that
date. 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. As a
result, IPM's operations for the quarter ended December 31, 1993 are included in
the consolidated statements of income, changes in shareholders' equity, and cash
flows for both of the fiscal years ended September 30, 1994 and 1993. IPM's
results of operations for the quarter ended December 31, 1993 are summarized as
follows (in thousands):
Revenues $ 9,486
Net income $ 688
An adjustment to conform IPM's fiscal year is shown in the accompanying
consolidated statement of changes in shareholders' equity. An adjustment to
conform IPM's fiscal year end is also shown in the accompanying consolidated
statement of cash flows for the year ended September 30, 1994 to account for
IPM's change in cash for the quarter ended December 31, 1993. Combined and
separate results of Exide Electronics and IPM during the periods preceding the
merger were as follows (in thousands):
Year ended September 30, Exide
1994 Electronics IPM Adjustments Combined
----------- ---------- ----------- ----------
Revenues $ 326,583 $ 37,400 - $ 363,983
Net income $ 7,731 $ 1,566 $ (122) $ 9,175
Year ended September 30,
1993
Revenues $ 281,949 $ 35,993 - $ 317,942
Net income $ 9,251 $ 1,814 $ (233) $ 10,832
Year ended September 30,
1992
Revenues $ 213,364 $ 33,739 - $ 247,103
Net income $ 5,035 $ 1,200 $ (179) $ 6,056
<FN>
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.
</FN>
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: Accounts Receivable
Accounts receivable consisted of the following (in thousands):
September 30,
1994 1993
---- ----
Accounts receivable:
Commercial $ 73,913 $ 54,080
United States government 33,947 46,612
------ ------
107,860 100,692
------- -------
Less: Allowance for doubtful
accounts, customer returns
and adjustments 2,148 2,860
----- -----
$105,712 $ 97,832
======== ========
Accounts receivable at September 30, 1994 and 1993 included unbilled receivables
of $12,808,000 and $15,086,000, and retainage receivables of $755,500 and
$723,000, respectively. Unbilled receivables relate primarily to one United
States government contract with multiple installation sites and are generally
billable in the month following contract performance. Retainage receivables
generally relate to larger customer contracts and become payable at specified
dates after installation and customer acceptance.
Commercial accounts receivable are generally not concentrated in any geographic
region or industry. Collateral is usually not required except for certain
international transactions for which the company requires letters of credit to
secure payment.
Note 4: Inventories
Inventories, which include materials, labor, and manufacturing overhead
consisted of the following (in thousands):
September 30,
1994 1993
---- ----
Raw materials and supplies $20,149 $19,820
Work in process 7,288 7,094
Finished goods 14,805 15,234
Service parts 13,287 10,110
------ ------
$55,529 $52,258
======= =======
Domestic inventories of approximately $37,900,000 and $38,600,000 were valued
using the LIFO method at September 30, 1994 and 1993, respectively. The LIFO
value exceeded the FIFO value (which approximated replacement cost) of these
inventories by approximately $693,000 at September 30, 1994 and $760,000 at
September 30, 1993. The effect on net income of liquidation of prior years' LIFO
layers in 1994 was not significant.
Note 5: Short-Term Debt
Certain of the company's subsidiaries maintain various lines of credit. These
lines, which had interest rates ranging from 6.75% to 8.9% at September 30,
1994, are primarily due on demand and are generally secured by accounts
receivable, inventories, guaranties of payment by the company, or a combination
thereof. At September 30, 1994, the maximum amount available under these
facilities was approximately $7.1 million, subject to the sufficiency of the
underlying collateral, and approximately $4,902,000 and $1,754,000, was
outstanding at September 30, 1994 and 1993, respectively. The balance
outstanding at September 30, 1994 approximated fair value for loans with similar
terms.
Note 6: Long-Term Debt and Convertible Subordinated Notes
Long-term debt consisted of the following (in thousands):
September 30,
1994 1993
---- ----
Domestic bank credit facilities $39,700 $34,605
Industrial revenue bonds 4,600 8,100
----- -----
44,300 42,705
Less current portion 900 900
--- ---
$43,400 $41,805
======= =======
Convertible subordinated notes $15,000 $15,000
======= =======
On September 30, 1994, the company refinanced its former $75 million domestic
secured bank credit facility with a $145 million package comprised of a $95
million unsecured three-year revolving credit facility (Facility A) for working
capital and general corporate purposes, which may include letters of credit, and
a $50 million unsecured two-year revolving credit facility (Facility B) for
financing certain acquisitions and refinancing specified existing obligations.
Facility A includes a sublimit of $30 million to be used in support of the
company's international subsidiaries.
Amounts outstanding at September 30, 1994 under both facilities accrued interest
at either the agent bank's base rate or, at the company's option, the LIBOR
rate plus .60%. At September 30, 1994, the interest rate on these facilities was
7.75% and the balance outstanding approximated its fair value. The average daily
unutilized commitment incurs a commitment fee of .20% per annum, and letters of
credit bear a fee of .60% per annum. These rates and fees may be adjusted based
on a senior debt to cash flow ratio, as defined in the credit agreement. Amounts
outstanding under Facility A are due and payable on September 30, 1997. Amounts
outstanding under Facility B will convert to a term loan on September 30, 1996,
with quarterly principal payments thereafter of 5% of the amount outstanding on
conversion, with the remaining balance due September 30, 1999.
The credit agreement contains certain financial covenants, including a senior
debt to cash flow ratio, a fixed charge coverage ratio, a leverage ratio, and a
minimum net worth requirement. As of September 30, 1994, the company was in
compliance with all financial covenants. The credit agreement also imposes
certain restrictions on mergers, acquisitions, investments in other companies
and liquidations; additional senior indebtedness; disposition of assets; related
party transactions; and prohibits payments of dividends on common stock if the
company would be in default before or after such dividend payment.
In addition to the facility described above, a subsidiary of the company had a
$5,000,000 revolving credit facility from a bank. Borrowings under this facility
were secured by substantially all of the assets of the subsidiary, and were due
July 1, 1996. In April 1995, all outstanding amounts under this facility were
repaid with funds from Facility A and the facility was terminated.
In fiscal 1990, Industrial Revenue Bonds (the IRBs) in the aggregate amount of
$9 million were issued to finance a portion of the cost of constructing a
manufacturing facility near Wilmington, North Carolina. The average interest
rate on the IRBs was 7.24%. The bonds were secured by a standby letter of credit
(the IRB letter of credit), and at September 30, 1994, the outstanding balance
on the IRB letter of credit was $4.9 million. The market value of these bonds at
September 30, 1994 was approximately $4.8 million, based on values of bonds
with similar terms. On June 1, 1994, the company executed a partial redemption
in the amount of $2.6 million using the excess project funds held in trust for
future construction. On December 1, 1994, the company exercised its option to
redeem the remaining bonds outstanding at a redemption price of 102%.
In September 1992, the company sold $15 million of convertible subordinated
notes (the Notes). Interest was payable semi-annually at 8.375%, and the
principal was payable in semi-annual installments of $3 million each, commencing
June 30, 1998, with the final payment on June 30, 2000. Under the terms of the
Notes, the company agreed to maintain a stipulated amount of minimum
consolidated net worth and agreed not to incur new debt obligations unless it
met certain tests. As of September 30, 1994, the company was in compliance with
these financial covenants and was not restricted on new borrowings under its
revolving credit facility. The agreement also imposed certain restrictions on
the discount or sale of receivables, on leasebacks, liens, transfers of assets,
and payment of dividends if such payment would cause an event of default. The
market value of the Notes if they had been converted into the company's common
stock at September 30, 1994 was approximately $24.9 million.
The Notes were convertible into common stock of the company at any time for an
initial conversion price of $13.08 per share, subject to adjustment for certain
events. In October 1995, the holder of the Notes informed the company of its
intention to convert the Notes to shares of the company's common stock under
the terms of the note agreement. Such conversion would save approximately
$1.26 million per year in interest expense.
Future maturities on long-term debt and the Notes at September 30, 1994, based
upon the redemption in December 1994 of the IRBs using Facility B and payoff of
the subsidiary's debt facility using Facility A, were (in thousands):
1995 -
1996 -
1997 40,620
1998 3,920
1999 8,760
Thereafter 6,000
-------
$59,300
=======
Note 7: Lease Commitments
The company leases buildings, equipment, and machinery under various operating
leases. Future minimum payments at September 30, 1994 under noncancellable
operating leases were (in thousands):
1995 $ 5,712
1996 5,012
1997 3,565
1998 2,780
1999 2,515
Thereafter 4,205
-------
Total $23,789
=======
<FN>
Rental expense related to operating leases was $7,780,000 in 1994, $7,165,000 in
1993, and $6,556,000 in 1992.
</FN>
Note 8: Redeemable Preferred Stock
Authorized preferred stock consists of 2,000,000 shares of $0.01 par value
preferred stock, of which 6,000 shares have been designated as Series D
Preferred Stock, 6,000 shares as Series E Preferred Stock, and 200,000 shares as
Series F Junior Participating Preferred Stock. As of September 30, 1994, 5,100
shares of Series D Preferred Stock and 4,900 shares of Series E Preferred Stock
were issued and outstanding. By shareholder vote in February 1995,
authorization for the Series A, Series B, and Series C Preferred Stock was
removed from the company's articles of incorporation. No shares of Series A,
Series B, or Series C Preferred Stock were outstanding at September 30, 1994.
In August 1991, the company issued 5,000 shares of Series C Convertible
Preferred Stock (the Series C shares) at a purchase price of $1,000 per share.
The Series C shares were convertible at the option of the holder into the
company's common stock at a conversion price per share of $9.5062. The holder
exercised this option in August 1993 and converted the Series C shares into
525,972 shares of the company's common stock.
In July 1992, the company issued to Japan Storage Battery Co., Ltd. (JSB) 5,100
shares of the company's Series D Convertible Preferred Stock (the Series D
shares) at a purchase price of $1,000 per share. JSB had the right to convert
some or all of the Series D shares into the company's common stock at a
conversion price per share of $13.08, subject to adjustment upon the occurrence
of certain events. In December 1992, JSB exercised an option to purchase 4,900
shares of Series E Convertible Preferred Stock (the Series E shares) at a
purchase price of $1,000 per share. The Series E shares were convertible at the
option of JSB into the company's common stock at a conversion price per share of
$23.86, subject to adjustment upon the occurrence of certain events.
The holder of the Series D and Series E shares was entitled to receive
cumulative cash dividends per share at the rate of $80.00 and $77.83 per annum,
respectively, payable semi-annually. In the event the company was unable to pay
such dividends in cash, the company would be required to pay such dividends in
the form of additional preferred shares. The company had the right to redeem
some or all of the outstanding shares at prices and terms set forth in the
respective agreements. The holder of these shares also had optional redemption
rights in accordance with the agreements upon the occurrence of certain events.
In the event of liquidation of the company, these shares would have had
preference equal to $1,000 per share plus all accrued and unpaid dividends. JSB
had a right of first refusal to purchase, on a pro rata basis (based on the
percentage ownership of company stock), new securities which the company may
sell in the future. For any vote of the company's shareholders, the holder of
the Series D and Series E shares was entitled to one vote for each whole share
of the company's common stock into which the preferred shares were convertible.
Additionally, as long as JSB held more than 80% of the Series D and Series E
shares, it had the right to elect one director to the company's Board of
Directors.
The market values of the Series D and Series E shares if they had been converted
into the company's common stock at September 30, 1994 were approximately $8.5
million and $4.5 million, respectively.
On July 1, 1995, JSB converted its Series D and Series E shares into 595,273
shares of common stock. As a result of the conversion, there is no Series D
or Series E preferred stock outstanding.
The company owns 50% of a joint venture with JSB for distribution of products in
Japan. The carrying value of the company's investment in the joint venture at
September 30, 1994 was $131,000. Total sales to the joint venture by the company
were approximately $4.1 million in 1994, $3.6 million in 1993, and $3.1 million
in 1992. Accounts receivable from the joint venture were approximately $938,000
and $405,000 at September 30, 1994 and 1993, respectively.
Note 9: Common Shareholders' Equity
As of September 30, 1994, the company had notes receivable of $5,951,000
(including accrued interest of $1,864,000) related to the sale of 593,340 shares
of common stock to certain employees. The notes generally bear simple interest
at prime and are payable ten years from the date of issuance or earlier upon
sales of the shares or upon termination of employment. The market value of these
notes receivable at September 30, 1994 was approximately $5,120,000, based upon
the value of notes with similar terms.
In November 1992, the Board of Directors adopted a shareholders' rights plan to
deter coercive takeover tactics and to prevent a potential acquirer from gaining
control of the company without offering a fair price to all of the company's
shareholders. The Board declared a dividend distribution of one Right for each
share of common stock outstanding on or issued after December 7, 1992 (the Right
or Rights). Each Right, when exercisable, entitles the registered holder to
purchase from the company one one-hundredth of a share of Series F Junior
Participating Preferred Stock at a purchase price of $80 per one one-hundredth
share, subject to certain adjustments. The Rights will become exercisable only
upon the occurrence of a person or group acquiring beneficial ownership of 15%
or more of the company's then outstanding common stock, and will expire in
December 2002 unless previously redeemed or exchanged by the company.
In the event that a person becomes the beneficial owner of 15% or more of the
company's then outstanding shares of common stock, except pursuant to an offer
for all outstanding shares of common stock which the outside directors determine
to be fair to and otherwise in the best interests of the company and its
shareholders, each holder of a Right, other than the person triggering the
Rights, will have the right to receive common stock (or in certain
circumstances, cash, property or other securities of the company) having a value
equal to two times the exercise price of the Right. Similarly, if the company is
acquired in a merger or other similar business combination without the consent
of the company's Board of Directors, each holder of a Right, except the person
triggering the Rights, will have the right to receive common stock of the
acquiring company having a value equal to two times the exercise price of the
Right.
In November 1994, the Board of Directors authorized the repurchase of up to 5%
of the company's outstanding common stock. Purchases may be made from time to
time as management considers appropriate.
Note 10: Stock and Benefit Plans
1989 Stock Option Plan
This plan provides for the grant to selected employees of options for up to
550,000 shares of the company's common stock. The purchase price for stock
options under this plan shall be no less than fair market value of the common
stock at the date of grant.
Non-Employee Directors Stock Option Plan
This plan provides for the grant of up to 87,500 shares of the company's common
stock. Each non-employee director of the company receives an option to purchase
2,500 shares of common stock on the date of commencement of service as a
director and annually thereafter. The purchase price for stock options under
this plan shall be no less than fair market value of the common stock at the
date of grant. The following table summarizes the activity under these plans:
Shares Exercise
Available Options Price
for Grant Outstanding Range
--------- ------------ -----------
Balances at September 30, 1991 393,963 243,537 $2.99-$27.32
1992 Activity:
Granted (203,705) 203,705 6.88-18.00
Exercised - (1,250) 6.50
Forfeited 11,012 (11,012) 6.50-27.32
------ ------- ----------
Balances at September 30, 1992 201,270 434,980 2.99-18.00
1993 Activity:
Granted (48,000) 48,000 15.00-20.13
Exercised - (23,375) 6.50-15.00
Forfeited 17,250 (17,250) 6.50-15.00
------ ------- ----------
Balances at September 30, 1993 170,520 442,355 2.99-20.13
1994 Activity:
Granted (64,000) 64,000 16.13-23.50
Exercised - (49,059) 2.99-17.38
Forfeited 26,285 (26,285) 6.50-15.00
------ ------- ----------
Balances at September 30, 1994 132,805 431,011 $6.50-$23.50
======= ======= ============
<FN>
As of September 30, 1994, outstanding options to purchase 290,202 common shares
were exercisable. Most of these options expire ten years after the grant date if
not exercised.
</FN>
In February 1995, the company's stockholders approved the 1995 Employee Stock
Option and Restricted Stock Plan and the 1995 Directors Plan. These plans
provide for the grant of up to 750,000 and 150,000 shares of the company's
common stock, respectively.
Employee Stock Purchase Plan
This plan provides for the grant to employees of rights to purchase shares
of the company's common stock. Shares are purchased at the end of an offering
period, with a purchase price for the shares equal to the lower of 85% of the
fair market value of the common stock at the beginning or the end of the
offering period. A maximum of 600,000 shares have been authorized under this
plan, and through September 30, 1994, 179,070 shares have been issued. For the
offering period that expired on December 31, 1994, 54,934 shares were issued at
a price of $14.10.
Benefit Plans
The company and its subsidiaries have defined contribution plans that cover
substantially all employees. The plans allow for the matching of voluntary
employee contributions and the company may elect to make additional
contributions at the discretion of the Board of Directors. Total expenses
related to these plans were $2,303,000 in 1994, $2,097,000 in 1993, and
$1,565,000 in 1992.
NOTE 11: Geographic Operations
1994 1993 1992
---- ---- ----
Revenues (in thousands)
United States -
Unaffiliated customers
United States $ 273,087 $ 248,452 $ 171,874
Latin America 31,392 19,962 14,922
Middle & Far East 16,671 16,454 20,751
Other 5,136 2,490 2,100
Intercompany 22,030 18,171 18,725
Outside the United States -
Unaffiliated customers
Canada 14,779 13,768 17,959
Europe 19,193 13,538 16,568
Other 3,725 3,278 2,929
Intercompany 3,360 2,341 2,587
Intercompany eliminations (25,390) (20,512) (21,312)
------- ------- -------
Total revenues $ 363,983 $ 317,942 $ 247,103
========= ========= =========
Income (Loss) Before Income Taxes and the Cumulative
Effect of Accounting Change
United States $ 13,333 $ 17,560 $ 7,387
Canada 120 1,068 2,731
Europe (218) (2,630) (959)
Other 224 48 -
--- --- ---
Total income before income taxes and the
cumulative effect of accounting change $ 13,459 $ 16,046 $ 9,159
========= ========= ==========
Identifiable Assets
United States $ 190,515 $ 179,482 $ 124,376
Canada 14,019 11,767 11,926
Europe 18,842 11,011 13,594
Other 1,300 973 1,282
----- --- ----
Total assets $ 224,676 $ 203,233 $ 151,178
========= ========= =========
<FN>
Revenues include sales to unaffiliated customers and the company's joint venture
(see Note 8). Intercompany sales are made at transfer prices intended to provide
a profit for the purchasing entities after coverage of their selling, general
and administrative expenses. Identifiable assets are those assets identified
with operations in each geographic area.
</FN>
Note 12: Income Taxes
As of the beginning of fiscal 1993, the company adopted Financial Accounting
Standards Board Statement No. 109, "Accounting for Income Taxes," which
superseded Statement No. 96, the method of accounting for income taxes
previously used by the company. Statement No. 109 requires recognition of future
tax benefits, to the extent that realization of such benefits is more likely
than not, attributable to deductible temporary differences between the financial
statement and income tax basis of assets and liabilities and to tax net
operating loss carryforwards (NOLs). The company elected to adopt Statement No.
109 using the prospective adoption method. Under this method, the company
recognized an increase in net income of $1.0 million in fiscal year 1993 for the
cumulative effect of the change in accounting principle. The increase resulted
from recording the net benefit of approximately $850,000 in net deferred tax
assets for temporary differences and state income tax NOLs which could not
previously be recognized under Statement No. 96, and approximately $150,000 for
the net benefit of NOLs for certain of the company's foreign subsidiaries.
Components of the tax provision are shown below (in thousands):
1994 1993 1992
---- ---- ----
Provision for (benefit from) income taxes:
Federal
Current $ 4,784 $ 6,770 $ 1,690
Deferred (1,020) (1,736) (21)
------ ------ ---
Total federal 3,764 5,034 1,669
----- ----- -----
State
Current 619 1,328 219
Deferred (275) (363) 60
---- ---- --
Total state 344 965 279
--- --- ---
Foreign
Current 228 420 1,123
Deferred (52) (205) 32
--- ---- ---
Total foreign 176 215 1,155
--- --- -----
Total $ 4,284 $ 6,214 $ 3,103
======= ======= =======
Deferred income taxes (benefits) have been provided for temporary differences in
the recognition of taxable income for tax and financial statement purposes. The
net tax effects of the significant differences consisted of the following (in
thousands):
1994 1993 1992
---- ---- ----
Deferred income $(775) $(427) $ 304
Provisions for uncollectible accounts 365 (406) (47)
Inventory provisions (208) (616) (273)
Foreign currency gains and losses 5 (231) 242
The income tax provision differs from the amount computed by applying the
federal statutory rate (35% in 1994 and 1993, and 34% in 1992) to income before
income taxes due to the following (in thousands):
1994 1993 1992
---- ---- ----
Income tax expense computed at the federal
statutory rate $ 4,710 $ 5,616 $ 3,114
State taxes, net of federal tax benefit 253 648 189
Taxes on foreign income at rates different
than the U.S. statutory rate (44) 2 226
Operating losses by foreign subsidiaries
with no tax benefit 100 692 326
Research and development tax credits - - (670)
Alternative minimum tax, net of credits - 61 (215)
Change in valuation allowance (534) (603) -
Utilization of NOL carryforwards - - (369)
Other (201) (202) 502
---- ---- ----
$ 4,284 $ 6,214 $ 3,103
======= ======= =======
As of September 30, 1994 and 1993, and October 1, 1992 (the date Statement No.
109 was adopted), the components of the company's net deferred tax assets were
as follows (in thousands):
September 30, September 30, October 1,
1994 1993 1992
---- ---- ----
Current:
Service revenue deferred for
financial reporting purposes $ 4,189 $ 3,534 $ 2,899
Non-deductible accruals 4,569 4,612 3,030
Accelerated expenses recognized for tax purposes (1,366) (1,356) (1,578)
Other 842 801 641
Valuation allowance (702) (1,529) (1,225)
---- ------ ------
7,532 6,062 3,767
----- ----- -----
Noncurrent:
NOLs of foreign subsidiaries 2,215 2,048 2,218
Accelerated depreciation for tax purposes (1,464) (1,337) (1,383)
Accelerated expenses for tax purposes (932) (807) (588)
Other 223 224 246
Valuation allowance (1,731) (1,516) (1,890)
------ ------ ------
(1,689) (1,388) (1,397)
------ ------ ------
Net deferred tax assets $ 5,843 $ 4,674 $ 2,370
======= ======= =======
The company's European subsidiaries have tax NOLs of approximately $5.7 million,
of which approximately $1 million expires in fiscal 1995, $0.5 million in 1996,
$0.2 million in 1997, and $1.3 million in 1998, and approximately $2.7 million
has no expiration date. Approximately $0.6 million of these tax loss
carryforwards and approximately $0.2 million of the valuation allowance at
September 30, 1994 relate to preacquisition losses and will reduce goodwill if
utilized. If the NOLs are fully utilized at current statutory tax rates of the
respective countries, the benefit is estimated to be approximately $2.2 million.
Although the company anticipates future operating income in these subsidiaries,
because of prior operating losses in these subsidiaries, as well as general
economic conditions, competition, and other factors beyond the company's
control, there can be no guarantee that these NOLs will be utilized. A valuation
reserve has been established which reduces the net deferred tax benefit of the
NOLs to $0.5 million, which is lower than the tax benefit of the NOLs that have
no expiration date, and represents an amount which the company believes is more
likely than not to be realized.
The company has not provided for potential U.S. taxes on undistributed earnings
of its foreign subsidiaries of approximately $6.3 million at September 30, 1994,
as it does not currently intend to repatriate such earnings. Calculation of the
potential unrecognized deferred tax liability related to these earnings is not
practicable; however, credits for foreign income taxes already paid may
partially offset potential U.S. income taxes.
Note 13: Supplemental Cash Flow Information
Cash and cash equivalents consist of cash and short-term investments with
original maturities of three months or less. Cash equivalents are carried at
cost, which approximates market.
Cash flow disclosures including non-cash investing and financing activities for
the years ended September 30, 1994, 1993, and 1992 are as follows (in
thousands):
1994 1993 1992
---- ---- ----
Income taxes paid $9,616 $5,048 $2,151
Interest paid, net of amount capitalized of $144 in 1992 4,990 4,718 4,668
Liabilities assumed in exchange for certain assets in
acquisitions of subsidiaries (see Note 14) 2,505 758 3,085
Conversion of preferred stock to common stock (see Note 8) - 5,000 -
Issuance of common stock in the acquisition of a
subsidiary(see Note 14) 944 - -
Note 14: Acquisitions
During the fourth quarter of fiscal 1994, the company acquired two companies in
Canada and one in the United Kingdom. These companies are involved in the sales
and service of UPS products. The acquisitions were accounted for using the
purchase method of accounting. Goodwill totaling approximately $4.0 million was
recorded and is being amortized over periods ranging from five to fifteen years.
The results of operations of these companies were included in the company's
consolidated financial statements at various dates beginning in the fourth
quarter of fiscal 1994. If these companies had been consolidated at the
beginning of the fiscal year, the effect on the company's operations or
financial condition would not have been significant.
During fiscal years ended 1993 and 1992, the company completed the acquisitions
of DataTrax Systems Corporation (DataTrax) and MPL Powerware Systems, Ltd.
(MPL), respectively. DataTrax is a developer of power, environmental, and
security monitoring systems for computer rooms and other mission-critical
applications, and is based in Colorado. MPL is a distributor of UPS products and
services in the United Kingdom. Both acquisitions were accounted for as a
purchase, and goodwill totaling approximately $2.6 million was recorded and is
being amortized over periods ranging from fifteen to twenty years. The results
of operations of MPL were included in the company's consolidated financial
statements beginning in December 1991, and the results of DataTrax's operations
were included in the company's consolidated financial statements beginning in
September 1993. If these companies had been consolidated at the beginning of the
fiscal year in which they were acquired, the effect on the company's operations
or financial condition would not have been significant.
Note 15: Contingencies
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 District 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 were 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.
Court approval of the settlement agreement, after notice to affected
shareholders, was granted in August 1995. 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.
The company is involved in various litigation proceedings incidental to its
business. The defense of most of these matters is handled by the company's
insurance carriers. The company believes that the outcome of such other pending
litigation in the aggregate will not have a material adverse effect on its
financial statements.
Government Contract Matters
Sales to the United States Federal government accounted for approximately 33%,
35%, and 19% of total revenues for the years ended September 30, 1994, 1993, and
1992, respectively. 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. Government
auditors may recommend that certain charges be treated as unallowable and
request reimbursement to the government. The company provides for estimated
unallowable charges in its financial statements, and believes that its
provisions were adequate as of September 30, 1994.
The company's Federal government business is currently performed under firm
fixed-price type contracts and time-and-materials type contracts, and at times a
combination of both contract types. During fiscal 1993, the company engaged in
discussions with the Federal government regarding contract interpretation
matters relating to certain time-and-materials charges by the company under its
principal government contract. In August 1993, the company reached an agreement
with the Federal government under which these matters were resolved to the
satisfaction of the company. Under this agreement, there were no adjustments
relating to the company's past time-and-materials charges, and accordingly there
was no effect on the company's financial statements for prior periods relating
to this matter. The agreement provided for adjustments to certain hourly labor
rates and limited the recovery of certain general and administrative costs
prospectively from August 10, 1993.
Note 16: Summarized Quarterly Financial Data
(unaudited; in thousands except per share data)
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -------
1994
Total revenues $79,675 $ 88,013 $ 91,764 $104,531 $363,983
Gross profit 22,241 25,359 24,804 26,291 98,965
Net income 1,887 522 3,176 3,590 9,175
Per share amounts
Primary $ 0.22 $ 0.04 $ 0.38 $ 0.43 $ 1.07
Fully diluted $ 0.21 $ 0.04 $ 0.35 $ 0.40 $ 1.03
1993
Total revenues $59,274 $ 77,267 $ 84,408 $ 96,993 $317,942
Gross profit 16,713 20,199 21,970 26,612 85,494
Income before the cumulative effect of
accounting change 759 1,957 2,812 4,303 9,831
Net income 1,759 1,957 2,812 4,303 10,831
Per share amounts
Primary
Income before the cumulative effect of
accounting change $ 0.07 $ 0.23 $ 0.35 $ 0.54 $ 1.21
Cumulative effect of accounting change 0.14 - - - 0.13
---- ---- ---- ---- ----
Net income $ 0.21 $ 0.23 $ 0.35 $ 0.54 $ 1.34
====== ======== ======== ======== ======
Fully diluted
Income before the cumulative effect of
accounting change $ 0.09 $ 0.22 $ 0.31 $ 0.47 $ 1.10
Cumulative effect of accounting change 0.12 - - - 0.11
---- ---- ---- ---- ----
Net income $ 0.21 $ 0.22 $ 0.31 $ 0.47 $ 1.21
====== ======== ======== ======== ======
Exide Electronics completed its merger with IPM during the second quarter of
1995. This merger has been accounted for as a pooling-of-interests, which is
discussed in Note 2. Accordingly, the previously reported results for all
quarterly periods have been restated to combine the results of Exide Electronics
and IPM. Per share amounts have been recalculated after adding the shares of
Exide Electronics common stock issued to effect the merger to weighted average
share amounts.
The sum of quarterly per share amounts does not necessarily equal the annual net
income per share due to the rounding effect of the weighted average common
shares outstanding for the individual periods, and for the fully diluted
calculation, to the inclusion of the dilutive effect of convertible securities.
The company recorded a one-time litigation charge in the second quarter of
fiscal 1994 of $4,997,000 ($2,936,000 after tax), which is described in Note 15.
The effective tax rate for the fourth quarter of fiscal 1994 was lower than the
rate for the previous quarters in fiscal 1994. The lower rate reflected the
cumulative effect of a change in the estimated annual effective tax rate used in
previous quarters due to a change in the mix of foreign versus domestic taxable
earnings expected for the full year, utilization of more foreign NOLs than
anticipated, and recognition of certain state income tax benefits.
Report of Independent Public Accountants
To Exide Electronics Group, Inc.:
We have audited the accompanying consolidated balance sheet of Exide Electronics
Group, Inc. (a Delaware corporation) and subsidiaries as of September 30, 1994
and 1993, and the related consolidated statements of operations, changes in
common shareholders' equity and cash flows (restated for the pooling-of-interest
transaction as discussed in Note 2) for each of the three years in the period
ended September 30, 1994. These financial statements are the responsibility of
the company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Exide Electronics Group, Inc.
and subsidiaries as of September 30, 1994 and 1993 and the results of their
operations and their cash flows (restated for the pooling-of-interest
transaction as discussed in Note 2)for each of the three years in the period
ended September 30, 1994 in conformity with generally accepted accounting
principles.
As explained in Note 12, in 1993 the company changed its method of accounting
for income taxes.
Arthur Andersen LLP
Arthur Andersen LLP
Raleigh, North Carolina
October 18, 1995