UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended December 31, 1995 Commission File No. 0-18106
EXIDE ELECTRONICS GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 23-2231834
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
8609 Six Forks Road, Raleigh, North Carolina 27615
(Address of principal executive offices and zip code)
(919) 872-3020
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ x ] No [ ]
As of February 9, 1996, 9,151,002 shares of the Registrant's $0.01 par value
common stock were outstanding.
EXIDE ELECTRONICS GROUP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)
Three Months Ended
December 31,
--------------------
1995 1994
---- ----
Revenues
Products $ 57,659 $ 63,896
Services 25,644 28,170
------ ------
Total revenues 83,303 92,066
------ ------
Cost of revenues
Products 42,508 49,060
Services 18,580 19,322
------ ------
Total cost of revenues 61,088 68,382
------ ------
Gross profit 22,215 23,684
Selling, general and administrative expense 17,457 16,557
Research and development expense 2,509 2,547
----- -----
Income from operations 2,249 4,580
Interest expense 1,497 1,424
Interest income (31) (139)
Other (income) expense 117 (161)
--- ----
Income before income taxes 666 3,456
Provision for income taxes 253 1,207
----- -----
Net income $ 413 $ 2,249
========= =========
Preferred stock dividends - 198
--- ---
Net income applicable to common shareholders $ 413 $ 2,051
========= =========
Per Share Amounts
Primary
Net income $ 0.04 $ 0.26
========= =========
Weighted average number of common and equivalent
shares outstanding 9,211 7,782
===== =====
Fully diluted
Net income $ 0.04 $ 0.25
========= =========
Weighted average number of common and equivalent
shares outstanding 9,500 9,005
===== =====
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
EXIDE ELECTRONICS GROUP, INC.
CONSOLIDATED BALANCE SHEET
(unaudited; dollars in thousands)
December 31, September 30, December 31,
1995 1995 1994
---- ---- ----
Assets
Current assets
Cash and cash equivalents $ 2,001 $ 2,787 $ 1,355
Accounts receivable 95,436 105,524 90,519
Inventories 76,753 72,890 59,533
Other current assets 15,357 13,377 12,201
------ ------ ------
Total current assets 189,547 194,578 163,608
------- ------- -------
Property, plant, and equipment
Land, buildings, and leasehold improvements 10,248 9,931 8,701
Machinery and equipment 64,564 61,519 53,917
------ ------ ------
74,812 71,450 62,618
Accumulated depreciation 37,561 36,393 33,693
------ ------ ------
37,251 35,057 28,925
Goodwill 18,318 18,738 9,165
Other assets 8,823 8,078 8,273
------ ------ ------
$ 253,939 $ 256,451 $ 209,971
========= ========= =========
Liabilities, Redeemable Preferred Stock, & Common Shareholders' Equity
Current liabilities
Short-term debt $ 6,747 $ 7,655 $ 5,901
Accounts payable 43,220 46,041 53,476
Deferred revenues 15,840 15,602 14,712
Other accrued liabilities 15,707 19,737 13,969
------ ------ ------
Total current liabilities 81,514 89,035 88,058
------ ------ ------
Long-term debt 76,416 65,258 24,700
------ ------ ------
Convertible subordinated notes - 15,000 15,000
------ ------ ------
Deferred liabilities 3,421 3,391 2,997
----- ----- -----
Redeemable preferred stock - - 10,000
------ ------ ------
Common shareholders' equity
Common stock, $0.01 par value, 30,000,000
shares authorized; shares issued - 9,537,130
at December 31, 1995, 8,376,341 at September 30,
1995, and 7,740,476 at December 31, 1994 95 84 77
Additional paid-in capital 72,556 58,190 47,899
Retained earnings 32,850 32,437 28,821
Cumulative translation adjustments (1,456) (1,404) (2,159)
------ ------ ------
104,045 89,307 74,638
Less: Notes receivable from shareholders (5,122) (5,520) (5,295)
Treasury stock, 926 shares at September
30, 1995 and 385,899 shares at December
31, 1995 (6,335) (20) (127)
---- ---- ----
92,588 83,767 69,216
------ ------ ------
$ 253,939 $ 256,451 $ 209,971
========= ========= =========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
EXIDE ELECTRONICS GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited; in thousands)
Three Months Ended
December 31,
-------------------
1995 1994
---- ----
Cash flows from operating activities
Net income $ 413 $ 2,249
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation expense 1,841 1,562
Amortization expense 612 653
Decrease in accounts receivable 10,088 15,940
Increase in inventories (3,863) (4,317)
Increase in other current assets (1,714) -
Increase (decrease) in accounts payable (2,821) 8,518
Decrease in other current liabilities (3,792) (6,150)
Other, net (1,276) (138)
---- ------
Net cash provided by (used in) operating activities (512) 18,317
----- -----
Cash flows from investing activities
Acquisitions of property, plant, and equipment (3,938) (2,332)
Other, net (165) (783)
---- ------
Net cash used in investing activities (4,103) (3,115)
------ ------
Cash flows from financing activities
Proceeds from bank credit facilities 36,925 18,130
Payments of bank credit facilities (26,504) (32,196)
Payment on industrial revenue bonds - (4,600)
Issuances of common stock 142 2
Purchases of treasury stock (6,926) (625)
Preferred stock dividends of Exide Electronics - (395)
Preferred stock dividends of IPM - (100)
Payments of notes receivable from shareholders 215 104
Other, net (23) (53)
---- ----
Net cash provided by (used in) financing activities 3,829 (19,733)
----- ------
Net decrease in cash and cash equivalents (786) (4,531)
Cash and cash equivalents, beginning of period 2,787 5,886
----- -----
Cash and cash equivalents, end of period $ 2,001 $ 1,355
======== ========
Supplemental cash flow disclosures
Interest paid, net of amounts capitalized $ 1,920 $ 1,368
Income taxes paid $ 1,548 $ 221
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
EXIDE ELECTRONICS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles and the rules and
regulations of the Securities and Exchange Commission for interim financial
statements. Certain information and footnote disclosures required for complete
financial statements have been condensed or omitted. These financial statements
should be read in conjunction with the financial statements presented in the
Company's 1995 Annual Report to Shareholders.
In the opinion of management, the accompanying consolidated financial statements
include all adjustments (which consist of normal recurring adjustments)
necessary to present fairly the financial position, results of operations and
cash flows as of and for the periods ended December 31, 1995 and 1994. The
results of operations for the quarter ended December 31, 1995 are not
necessarily indicative of the results to be expected for the full year.
Note 2 - Inventories
Inventories, which include materials, labor, and manufacturing overhead, are
stated at the lower of cost or market, and consist of the following (in
thousands):
Dec. 31, Sept. 30, Dec. 31,
1995 1995 1994
---- ---- ----
Raw materials and supplies $31,153 $27,989 $22,577
Work in process 7,259 6,064 6,128
Finished goods 23,318 24,054 17,303
Service parts 15,023 14,783 13,525
------ ------ ------
$76,753 $72,890 $59,533
======= ======= =======
Note 3 - Long-Term Debt
At December 31, 1995, the Company had borrowings of $76.1 million outstanding
under its $145 million package of committed domestic unsecured bank credit
facilities comprised of a $95 million revolving credit facility for working
capital and general corporate purposes, including a sublimit of $30 million
which may be used in support of its international subsidiaries, and a $50
million revolving credit facility to be used for financing certain acquisitions
and refinancing specified existing obligations. The credit agreement contains
certain financial covenants, including a senior debt to cash flow ratio, a fixed
charge ratio, a leverage ratio and a minimum net worth requirement. At December
31, 1995, the Company was in compliance with all financial covenants, except
that its senior debt to cash flow ratio exceeded the prescribed ratio; however,
the lenders have waived the applicability of this covenant from December 31,
1995 through March 30, 1996.
Note 4 - Common Shareholders' Equity
In September 1992, the Company sold $15 million of convertible subordinated
notes (the "Notes"). The Notes bore interest at 8.375% per annum, payable
semi-annually. 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. On October 23, 1995, the holder of the Notes
exercised its option to convert the Notes into 1,146,789 shares of the Company's
common stock.
During the three months ended December 31, 1995, the Company's treasury stock
transactions included: (1) the repurchase of approximately 444,000 shares of its
common stock for approximately $7.4 million under a program to repurchase up to
5% of the Company's outstanding common stock as originally authorized by the
Board of Directors in November 1994 and reaffirmed in September 1995 and (2) the
re-issuance of approximately 59,000 shares of its common stock for approximately
$800,000 under its Employee Stock Purchase Plan, which included $1.1 million
credited to treasury stock and $300,000 charged to additional paid-in capital.
Note 5 - Subsequent Events
Pursuant to a Stock Purchase Agreement dated November 17, 1995, as amended on
February 9, 1996, the Company intends to acquire Deltec Power Systems, Inc.
("Deltec") from Fiskars Oy Ab and Fiskars Holdings, Inc. ("Fiskars")
simultaneously with the closing of the offering of $100 million of Senior
Subordinated Notes and an unspecified number of Warrants to purchase shares of
the Company's common stock (the "Offering") and a new credit facility. The
purchase price of approximately $188.1 million will be comprised of
approximately $158.5 million in cash, 825,000 shares of the Company's common
stock, valued at $14 per share, and 1,000,000 shares of the Company's Series G
Convertible Preferred Stock, valued at $18 per share (the "Series G Preferred
Stock"). The purchase price was determined based on an assumption that the net
book value of Deltec on the closing would be approximately $28.7 million. The
purchase price will be adjusted upward or downward to the extent the closing
date net book value (as adjusted for certain excluded assets and liabilities)
differs from this amount. The Series G Preferred Stock will be convertible into
shares of the Company's common stock on a one-for-one basis (subject to
adjustment under certain circumstances), will have a per annum dividend rate of
$0.80 per share through March 31, 2001, and $1.20 per share thereafter, will be
subject to redemption at the option of the holder at $24 per share at any time
after September 30, 2006 and will have a liquidation preference of $20 per
share, plus all accrued and unpaid dividends.
The Company expects to finance the cash portion of the purchase price, excluding
transaction costs, with (i) the net proceeds of the Offering (excluding
transaction costs), estimated to be $97 million, (ii) an estimated $61 million
of borrowings under a new credit facility (the "New Credit Facility"), for which
the Company has obtained a commitment and (iii) $500,000 payable to Fiskars on
January 8, 1997.
The New Credit Facility will provide for term and revolving credit facilities in
the aggregate amount of up to $225 million, which will be automatically reduced
to $200 million upon completion of the Offering. Consummation of the Offering
and the Deltec acquisition and the effectiveness of the New Credit Facility are
each contingent upon the consummation or effectiveness, as applicable, of each
other. In the event that the Deltec acquisition is not consummated by March 15,
1996, the Company will be required to pay Fiskars a $5 million break-up fee. In
addition, the Company has agreed to make certain interest payments to Fiskars
through March 15, 1996. Such interest payments will be made regardless of
whether the Deltec acquisition is consummated and are estimated to be
approximately $4.1 million.
EXIDE ELECTRONICS GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following discussion provides an assessment of the consolidated results of
operations and liquidity and capital resources of the Company and should be read
in conjunction with the consolidated financial statements of the Company and the
notes thereto.
Overview
Exide Electronics (the "Company") provides Strategic Power Management(TM)
solutions to a broad range of businesses and institutions worldwide. The
Company's products are primarily used for financial, medical, industrial,
telecommunications, military, and aerospace applications -- wherever continuous
power is essential to daily 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"), which the Company defines as all products below 50
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.
In the fourth quarter of fiscal 1995, the Company announced the formation of the
Emerging Technologies Group ("ETG"). The Company formed this group to more
aggressively position itself in newly emerging high-growth technology markets.
Initially, ETG will focus primarily on the converging interactive communications
markets, such as cable television. The ETG results have been included in the SSG
results for the first quarter of fiscal 1996 and 1995.
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 reductions in manufacturing costs and purchased components, and has
aggressively introduced new hardware and software products with lower costs and
higher performance levels. 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.
International sales accounted for approximately 31%, 25%, and 22% of the
Company's total revenues for fiscal 1995, 1994, and 1993, respectively. The
Company has focused on these expanding markets by developing versions of its
products to meet international voltage and frequency requirements; by
establishing subsidiaries in selected European countries and in Hong Kong; by
adding distributors and making small acquisitions in other international
regions; and by creating joint ventures with strategic partners for distribution
in Japan, Brazil, and India.
Sales to the Federal government accounted for approximately 27%, 33%, and 35% of
total revenues for fiscal 1995, 1994, and 1993, respectively. 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 at the
convenience of the Government pursuant to the terms of the contracts.
In October 1995, the holder of the Company's $15.0 million convertible
subordinated notes converted the notes into 1,146,789 shares of the Company's
common stock under the terms thereof. Such conversion will save approximately
$1.26 million per year in interest expense.
During the fourth quarter of fiscal 1995, the Company signed a definitive
agreement with Fiskars Oy Ab ("Fiskars") related to the purchase of Deltec Power
Systems, Inc. ("Deltec"). See the "Pending Acquisition" section below for more
information.
_______
(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 periods shown, statement of operations
data, in millions of dollars for the comparative periods of first quarter of
fiscal 1996 versus first quarter of fiscal 1995, and selected operating
statement items as a percentage of revenues:
---------------------
Quarter Ended
December 31,
---------------------
1994 1995
---------------------
Revenues
Small Systems Products $ 33.1 $ 37.9
Large Systems Products 30.8 19.7
---------------------
Total Products 63.9 57.6
Worldwide Services Group 28.2 25.7
---------------------
Total Revenues 92.1 83.3
---------------------
Gross Profit
Products 14.8 15.2
Services 8.9 7.0
---------------------
Total Gross Profit 23.7 22.2
---------------------
Selling, general and administrative expense 16.6 17.5
Research and development expense 2.5 2.5
---------------------
Income from operations 4.6 2.2
---------------------
Interest/other 1.1 1.6
---------------------
Provision for income taxes 1.2 0.2
---------------------
Net income $ 2.3 $ 0.4
---------------------
Revenue Growth:
Small Systems Products - 14.5%
Large Systems Products - (36.0)
---------------------
Total Products - (9.8)
Worldwide Services Group - (9.0)
---------------------
Total Revenues - (9.5)
---------------------
Margin Data (as a percent of revenues):
Gross Profit
Products 23.2% 26.3%
Services 31.4 27.5
---------------------
Total Gross Profit 25.7 26.7
---------------------
Selling, general and administrative expense 18.0 21.0
Research and development expense 2.8 3.0
---------------------
Income from operations 5.0 2.7
---------------------
Three months ended December 31, 1995 versus December 31, 1994
Several factors had an impact on the Company's results of operations during the
first quarter of fiscal 1996 compared to the first quarter of fiscal 1995,
including the growth in revenues of small UPS products; the overall strong
growth in international sales; the effect of scheduled declines in Federal
government product and service revenues; and the Lectro Acquisition.
Revenues
Total revenues decreased by 9.5% to $83.3 million in the first quarter of fiscal
1996 from $92.1 million in the first quarter of fiscal 1995, due to a 9.8%
decrease in product sales and a 9.0% decrease in service revenues.
SSG revenues for the quarter ending December 31, 1995 increased by $4.8 million
or 14.5% over the same period of the prior year. The majority of this increase
was in domestic sales channels, which experienced growth of about 36%, a portion
of which was attributable to the Lectro acquisition. Excluding sales related
to this acquisition, domestic sales increased by approximately 15% over the
prior year. International sales for the quarter were down by about 2% over the
same period of the prior year, reflecting a decline in sales in the Latin
America sales channel of about 41% versus the prior year, offset by strong sales
by the Company's affiliates in Europe. Sales to Latin America were affected by
the devaluation of the Mexican peso in 1995, as well as general economic
instability in that region. Excluding sales to Latin America, international
sales increased by approximately 17% in the first quarter of fiscal 1996 versus
the same quarter in fiscal 1995. Average selling prices for SSG products were
higher than in the prior year, as sales of the larger kVA models, which are
generally higher priced than the small UPS models, represented a larger share
of total SSG revenues.
LSG revenues for the first quarter of fiscal 1996 were 36% lower than in the
same period of fiscal 1995, due primarily to the scheduled decline in sales
under the FAA program. Product revenues under the FAA program have been
declining because the Company has completed the shipment of most of the systems
and related ancillary products to the various FAA sites. The Company expects LSG
revenues to decline in fiscal 1996 from fiscal 1995 levels due to the completion
of the FAA shipments. Excluding the effect of this scheduled decline, LSG
revenues decreased approximately 7% for the first three months of fiscal 1996
versus the same period a year ago. The number of LSG UPS systems sold increased
by about 4% compared to the same period in the prior quarter. The average sales
price per system decreased, as sales of the smaller kVA models continue to
represent a larger percentage of total LSG revenues. International revenues were
down by 3%, primarily due to a decline in sales in the Far East sales channels
and the IPM international channels, partially offset by an increase in sales by
the Company's European subsidiaries. The increase in sales in the European
subsidiaries is partially attributable to the success of the Powerware Plus 80,
which is suitable for international use because of its voltage range.
WSG revenues for the first quarter of fiscal 1996 decreased by $2.5 million or
9.0% over the same period of the prior fiscal year. WSG's commercial domestic
revenues fell by about 4%, attributable in part to reduced productivity within
the International Parts and Repair Center due to its relocation to a new
facility. International revenues were up about 6%, with growth occurring in most
categories. Federal service revenues decreased over the prior year by
approximately 19%, mainly attributable to a decline in FAA site service
revenues. Federal service revenues were further impacted by government budget
problems and inclement weather that affected the timing of installation
services. The Company expects WSG revenues to decline in the overall range of
10% for fiscal 1996, due to an anticipated decrease in FAA site service
revenues. At December 31, 1995, the Company was installing systems at eight FAA
sites, versus ten sites in the prior year, and was providing design services at
an additional four sites at December 31, 1995 versus twelve sites at December
31, 1994. As described below under "Government Contract Matters," delivery on
the remainder of the FAA orders is currently scheduled through fiscal 1997. The
level of FAA site service revenues will vary depending on site construction
schedules and the types of services required.
Gross Profit
Gross profit decreased by $1.5 million as compared to the first quarter of
fiscal 1995 to $22.2 million. Gross profit as a percentage of total revenues
increased to 26.7% in the first three months of fiscal 1996 from 25.7% in the
same period of fiscal 1995. Product gross profit margins rose to 26.3% in the
first quarter of fiscal 1996 from 23.2% in the same period of fiscal 1995, while
service margins declined to 27.5% from 31.4% during that same period. Product
gross profit margins rose due to a higher proportion of sales in the newer,
higher margin Powerware Prestige product line and Powerware Plus 80-225 kVA
products. A higher proportion of SSG sales in its higher kVA models, which
generally have better margins than the lower kVA models, also contributed to the
increase in product gross profit margins. Service margins decreased for the
quarter primarily due to a decrease in Federal margins as higher-margin Federal
services relating to training, documentation and start-up services represented a
lower proportion of total Federal revenues. Commercial service margins declined
slightly, primarily due to a change in the mix of services provided.
Selling, General and Administrative Expense
Selling, general and administrative expense increased $0.9 million to $17.5
million in the first quarter of fiscal 1996 (21.0% of revenues) from $16.6
million in the same period of fiscal 1995 (18.0% of revenues). Selling and
marketing expenses increased due to investment in the Company's Emerging
Technology Group, which was established after the Lectro Acquisition, in the
fourth quarter of fiscal 1995, the launching of a new international advertising
campaign, and higher commissions and incentives. Total commissions and
incentives spending, and such costs as a percentage of sales, rose in the first
quarter of fiscal 1996 versus 1995 due to a higher mix of commercial revenues to
total revenues in the first quarter of 1996 over the same period in 1995.
General and administrative expenses rose from the prior year due primarily to
the amortization of goodwill generated by the Lectro acquisition and to
increased spending for improved financial systems as the Company continues to
invest in infrastructure improvements. These expenses are expected to continue
at this higher level (as a percent of revenues) in 1996 due to the newly-formed
ETG and continued sales and marketing initiatives.
Research and Development Expense
Research and development expense decreased slightly in the first quarter of
fiscal 1996 compared to the same period of fiscal 1995, but increased slightly
as a percentage of revenue to 3.0% in fiscal 1996 from 2.8% in fiscal 1995. The
increase in research and development expense as a percentage of sales occurred
as the Company invested in its newly formed Emerging Technologies Group. In
addition, the level of LSG research and development expenditures increased
slightly while the level of sales declined for the first quarter of fiscal 1996
as compared to the same period of the prior year. Research and development
expenses are incurred to support projected annual sales and do not necessarily
vary proportionately with revenues on a quarterly basis. The Company expects
research and development expenditures for the remainder of the year to decline
slightly as a percentage of sales.
Income from Operations
For the reasons discussed above, income from operations declined $2.4 million to
$2.2 million for the first quarter of fiscal 1996 from $4.6 in the same period
of fiscal 1995. As a percentage of revenues, income from operations declined to
2.7% in the first three months of fiscal 1996 from 5.0% in the same period of
fiscal 1995.
Interest/Other
Interest expense increased slightly to $1.5 million in the first quarter of
fiscal 1996 from $1.4 million in the same period of fiscal 1995. This was
primarily attributable to increased debt levels used to fund inventory levels.
Provision for Income Taxes
The fiscal 1996 provision for first quarter income taxes reflects a consolidated
effective rate of approximately 38% as compared to approximately 35% for the
same period of fiscal 1995. The fiscal 1995 rate for the first quarter was lower
due to a lower effective tax rate for the Company's IPM subsidiary. The Company
anticipates that its effective tax rate for the fiscal year 1996 will be in the
range of 38-40%.
Net Income
Net income for the first quarter of fiscal 1996 was $0.4 million, or $0.04 per
fully diluted share, as compared to net income of $2.2 million, or $0.25 per
fully diluted share, for the same period of fiscal 1995.
Quarterly Operating Results
The Company's quarterly operating results have fluctuated significantly.
Quarterly results depend upon the timing of product shipments and major systems
implementation services, which can be influenced by a number of factors. Some of
these factors are beyond the Company's control, particularly for large,
customized systems. The fourth quarter typically has produced the largest
portion of the Company's revenues and income. The Company believes that the
fourth quarter results reflect increased shipments resulting from management
incentives that 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 1995, 1994, and 1993, revenues generally
increased for each quarter within the applicable year, but revenues for the
first quarter were lower than revenues for the fourth quarter of the prior year.
Selling, general and administrative, and research and development expenditures
are incurred to support projected annual sales. These expenses do not
necessarily vary proportionately with revenues on a quarterly basis. As a
result, variations in quarterly revenues may not be accompanied by an equivalent
change in expenses. Operating margins, therefore, may vary significantly between
quarters.
Liquidity and Financial Condition
At December 31, 1995, the Company had $108.8 million of working capital, as
compared to $105.5 million at September 30, 1995 and $75.6 million at December
31, 1994. The increase of approximately $33.2 million in working capital from
December 31, 1994 is primarily the result of an increase in the level of
accounts receivable and inventory balances. The increase in accounts receivable
balances since December 31, 1994 is primarily attributable to the increase in
international revenues, which are generally outstanding for a longer period than
domestic receivable balances, and a decline in receivables from the United
States government, which generally turn over more quickly than commercial
receivable balances. The increase of $3.3 million in working capital from
September 30, 1995 was primarily the result of higher levels of inventory and
other current assets, partially offset by lower accounts receivable balances,
due to collections of receivable balances generated by sales in the fourth
quarter of fiscal 1995. The increased levels of working capital have been
financed primarily by use of the Company's revolving credit facilities. Cash
used in operations was $0.5 million in the first quarter of fiscal 1996, as
compared to cash provided by operations of $18.3 million in the first quarter of
fiscal 1995.
During the first quarter of fiscal 1996, the Company invested approximately $3.9
million in capital expenditures, as compared to approximately $2.3 million in
the same period of fiscal 1995. Capital expenditures for fiscal 1996 are
expected to approximate $13-14 million, including $2-3 million relating to the
consolidation of the Company's headquarters and for integration of acquired
companies.
At December 31, 1995, the Company had a $145 million package of committed
domestic unsecured bank credit facilities comprised of a $95 million revolving
credit facility for working capital and general corporate purposes, including a
sublimit of $30 million which may be used in support of its international
subsidiaries, and a $50 million revolving credit facility to be used for
financing certain acquisitions and refinancing specified existing obligations.
The credit agreement contains certain financial covenants, including a senior
debt to cash flow ratio, a fixed charge ratio, a leverage ratio and a minimum
net worth requirement. At December 31, 1995, the Company was in compliance with
all financial covenants, except that its senior debt to cash flow ratio exceeded
the prescribed ratio; however, the lenders have waived the applicability of
this covenant from December 31, 1995 through March 30, 1996.
In anticipation of the Deltec acquisition, the Company has received a commitment
to refinance its existing bank credit facilities. The new credit facility (the
"New Credit Facility") will consist of a five-year senior bank package of up to
$225 million, comprised of a $150 million revolving credit facility and a $75
million term loan. Upon closing of the Offering, the $75 million term loan will
automatically reduce to $50 million. Amounts outstanding under the New Credit
Facility will be secured by substantially all the inventory and accounts
receivable of the Company and would initially bear interest at LIBOR plus 250
basis points, or the bank's base rate plus 150 basis points, as defined. Under
the terms of the New Credit Facility, the Company will be subject to certain
customary financial covenants and other restrictions. The closing of the New
Credit Facility, which is expected to occur during the first calender quarter of
1996, is subject to completion of due diligence by the lenders, preparation of
definitive loan agreements and the closing of the Deltec acquisition. See the
"Pending Acquisition" section below for more information.
The Company expects to finance its capital requirements in the future through
existing cash balances, cash generated from operations, and borrowings under its
credit facilities. Based on the current level of operations and anticipated
growth, management believes that cash flow from operations, together with
available borrowings under its credit facilities and other sources of liquidity,
will be adequate to meet the Company's anticipated future requirements for
working capital, capital expenditures, and scheduled payments of principal of
and interest on its indebtedness. The Company believes that its cash flow from
operations and its bank facilities will be sufficient to meet its short-term
requirements for working capital and capital expenditures, however, no
assurances can be given that the Company's business will generate sufficient
cash flow from operations or that future working capital borrowings will be
available in an amount sufficient to enable the Company to service its
indebtedness, or make necessary capital expenditures.
In September 1995, the Board of Directors reaffirmed the authorized repurchase
program which permits the Company to repurchase up to 5% of the Company's
outstanding stock. As of December 22, 1995, the Company had repurchased
approximately 4.7% of its common stock. The Company has no current plans to
repurchase additional shares of its common stock.
In October 1995, the holder of the Company's $15.0 million convertible
subordinated notes converted the notes into 1,146,789 shares of the Company's
common stock under the terms thereof. Such conversion will save approximately
$1.26 million per year in interest expense.
Pending Acquisition
Pursuant to a Stock Purchase Agreement dated November 17, 1995, as amended on
February 9, 1996, the Company intends to acquire Deltec from Fiskars
simultaneously with the closing of the Offering of Units consisting of $100
million of Senior Subordinated Notes and an unspecified number of Warrants to
purchase shares of the Company's common stock (the "Offering"). The purchase
price of approximately $188.1 million will be comprised of approximately $158.5
million in cash, 825,000 shares of the Company's common stock, valued at $14 per
share, and 1,000,000 shares of the Company's Series G Convertible Preferred
Stock, valued at $18 per share (the "Series G Preferred Stock"). The purchase
price was determined based on an assumption that the net book value of Deltec on
the closing would be approximately $28.7 million. The purchase price will be
adjusted upward or downward to the extent the closing date net book value (as
adjusted for certain excluded assets and liabilities) differs from this amount.
The Series G Preferred Stock will be convertible into shares of the Company's
common stock on a one-for-one basis (subject to adjustment under certain
circumstances), will have a per annum dividend rate of $0.80 per share through
March 31, 2001, and $1.20 per share thereafter, will be subject to redemption at
the option of the holder at $24 per share at any time after September 30, 2006
and will have a liquidation preference of $20 per share, plus all accrued and
unpaid dividends.
The Company expects to finance the cash portion of the purchase price, excluding
transaction costs, with (i) the net proceeds of the Offering (before payment of
transaction costs), estimated to be $97 million, (ii) an estimated $61 million
of borrowings under the New Credit Facility (as defined above), for which the
Company has obtained a commitment and (iii) $500,000 payable to Fiskars on
January 8, 1997. The New Credit Facility will provide for term and revolving
credit facilities in the aggregate amount of up to $225 million, which will be
automatically reduced to $200 million upon completion of the Offering.
Consummation of the Offering and the Deltec acquisition and the effectiveness of
the New Credit Facility are each contingent upon the consummation or
effectiveness, as applicable, of each other. In the event that the Deltec
acquisition is not consummated by March 15, 1996, the Company will be required
to pay Fiskars a $5 million break-up fee. In addition, the Company has agreed to
make certain interest payments to Fiskars through March 15, 1996. Such interest
payments will be made regardless of whether the Deltec acquisition is
consummated and are estimated to be approximately $4.1 million.
Litigation
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.
Contingencies
Government Contract Matters
Sales to the United States Federal government accounted for approximately 19%
and 31% of total revenues for the first three months ended December 31, 1995 and
1994, respectively, and approximately 27%, 33% and 35% of total revenues for
fiscal years 1995, 1994 and 1993, respectively. 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 at 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, and may
recommend that certain charges be treated as unallowable and reimbursement be
made to the government. The Company provides for estimated unallowable charges
and voluntary refunds in its financial statements, and believes that its
provisions are adequate as of December 31, 1995.
During fiscal 1995, the Company was awarded a follow-on to the ALC Program, with
up to two additional one-year periods at the option of the Government. Actual
revenues under the follow-on ALC Program will depend on the specific purchases,
if any, by the Air Force and other governmental agencies that may use the
contract during the contract period. Following the award of the contract,
certain competitors filed protests with the General Accounting Office ("GAO").
In December 1995, the GAO notified the Company that all of the protests had been
dismissed, except the protest of the Air Force's evaluation of certain discounts
offered by the Company in the contract. The GAO has however recommended that the
Air Force amend a portion of the request for proposal that led to the contract
award. The GAO further recommended that the Air Force allow the protesting
companies and the Company to submit new proposals regarding such portion, and
that the Air Force re-evaluate the award to the Company based upon these new
proposals. In response to the notification, the Company has filed a motion for
reconsideration of the GAO's ruling. In response to the GAO's ruling, the Air
Force has notified the Company that it is in the process of re-evaluating the
contract and that it will not issue orders under the contract pending its
re-evaluation process. The Company is unable to predict at this time what the
resolution of the contract protest will be and no assurances can be given that
the Company ultimately will retain the contract.
Foreign Currency Exposures
International sales accounted for approximately 33% and 30% of total revenues
for the three months ended December 31, 1995 and 1994, respectively, and
approximately 31%, 25%, and 22% of total revenues for fiscal years 1995, 1994
and 1993, respectively. A significant portion of the Company's international
sales are denominated in foreign currencies. As of December 31, 1995,
approximately 17% of the Company's total assets were located outside the United
States, primarily in Canada and Europe. Significant fluctuations in foreign
currency exchange rates can result in gains or losses on foreign currency
transactions, which are recorded in the consolidated statement of operations.
Fluctuations in the recorded value of the Company's net investment in its
international subsidiaries resulting from changes in foreign exchange rates are
recorded in the cumulative translation adjustments component of common
shareholders' equity. The Company hedges these risks using a combination of
natural hedges such as foreign currency denominated borrowings and, from time to
time, foreign currency financial instruments. European, Canadian, and Japanese
currencies have been especially volatile over the last two years. As of December
31, 1995, the Company had accounts receivable and accounts payable totaling
approximately $8.2 million that were exposed to fluctuations in exchange rates.
These balances are spread among various currencies, primarily the French franc.
No foreign currency instruments were outstanding to cover these balances.
During the first quarter of fiscal 1996, the Company had foreign exchange
transaction losses of approximately $64,000, and the change in the cumulative
translation adjustments account decreased the recorded value of common
shareholders' equity by $52,000 from September 30, 1995 to December 31, 1995.
For fiscal 1995, the Company had foreign exchange transaction losses of
approximately $218,000, as compared to losses of approximately $257,000 in
fiscal 1994, and the change in the cumulative translation adjustments account
increased the recorded value of common shareholders' equity by $353,000 from
September 30, 1994 to September 30, 1995.
Environmental Matters
The Company's operations are subject to Federal, state, local, and foreign
environmental laws and regulations relating to the storage, handling, and
disposal of hazardous or toxic materials and discharge into the environment of
regulated pollutants. To the best of the Company's knowledge, its operations are
in material compliance with the terms of all applicable environmental laws and
regulations as currently interpreted. Additionally, there are no known existing
or potential environmental claims against the Company that are likely to have a
material adverse effect on the Company's business or financial condition or its
financial statements taken as a whole. However, the Company cannot predict with
any certainty that such expenditures will not be required because of changing
compliance standards and techniques. Furthermore, actions by Federal, state,
local and foreign governments concerning environmental matters could result in
laws or regulations that could increase the cost of products manufactured by the
Company or otherwise adversely affect the demand for its products.
PART II - OTHER INFORMATION
December 31, 1995
ITEM 1. Legal Proceedings
On August 21, 1995, a case entitled National Broadcasting Company, Inc. and
CNBC, Inc. vs. International Power Machines/Lortec Systems Inc. et al, was filed
against IPM in the Supreme Court of New York, New York County. The plaintiffs
allege that IPM negligently manufactured and installed a UPS product that caused
them property and compensatory damages when the equipment malfunctioned during
the installation of the product by third-party contractors. The plaintiffs have
filed seven causes of action, each of which seeks damages in the amount of $1.1
million. Three of those causes of action also seek $3 million in punitive
damages. Claims of this nature are generally covered by the Company's insurance
and its insurer has accepted general defense of the matter. The insurer has
notified the Company that while claims based on IPM's negligent manufacture or
design are covered by the insurance policy, damages, if any, caused by IPM's
intentional or careless decision to install a known defective and dangerous
product would be subject to certain exclusions under the policy. While discovery
is at an early stage, the Company believes at this time, based on the advice of
of its defense counsel, that no evidence has yet been presented that supports
any allegation of intentional or careless conduct. IPM also believes that it has
meritorious defenses and counter-claims against the third-party co-defendants
who the Company alleges defectively installed the UPS product. The Company
believes that the final outcome of this matter will not have a material, adverse
effect on the business or the financial position of the Company and its
subsidiaries taken as a whole.
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.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit
Number Description
11 Statement of Computation of Per Share Earnings.
27 Financial Data Schedule.
(b) Reports on Form 8-K
The Company filed a report on Form 8-K, for the event dated November 17,
1995, reporting Item 5, Other Events, relating to the filing of a press
release announcing the signing of a definitive agreement to acquire all of
the outstanding common and preferred stock of Deltec Power Systems, Inc.
from Fiskars Oy Ab and a related company.
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: February 14, 1996 By: /s/Marty R. Kittrell
Marty R. Kittrell
Vice President and
Chief Financial Officer
EXIDE ELECTRONICS GROUP, INC.
EXHIBIT INDEX - FORM 10-Q
DECEMBER 31, 1995
Exhibit
Number Description
11 Statement of Computation of Per Share Earnings.
27 Financial Data Schedule.