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 March 31, 1996 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 May 8, 1996, 9,976,087 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 Six Months Ended
March 31, March 31,
-------------------- --------------------
1996 1995 1996 1995
---- ---- ---- ----
Revenues
Products $ 73,819 $ 60,409 $ 131,478 $ 124,305
Services 27,869 30,859 53,513 59,029
------ ------ ------ ------
Total revenues 101,688 91,268 184,991 183,334
------ ------ ------ ------
Cost of revenues
Products 53,579 45,979 96,087 95,039
Services 19,423 21,386 38,003 40,708
------ ------ ------ ------
Total cost of revenues 73,002 67,365 134,090 135,747
------ ------ ------ ------
Gross profit 28,686 23,903 50,901 47,587
Selling, general and administrative expense 21,025 17,518 38,482 34,075
Research and development expense 2,577 2,442 5,086 4,989
Acquisition and restructuring expense 11,621 6,200 11,621 6,200
----- ----- ----- -----
Income (loss) from operations (6,537) (2,257) (4,288) 2,323
Interest expense 7,435 1,118 8,932 2,542
Interest income (180) (89) (211) (228)
Other (income) expense 68 (577) 185 (738)
--- ---- --- ----
Income (loss) before income taxes (13,860) (2,709) (13,194) 747
Provision (benefit) for income taxes (4,869) (135) (4,616) 1,072
----- ----- ----- -----
Net income (loss) $ (8,991) $ (2,574) $ (8,578) $ (325)
========= ========= ========= =========
Preferred stock dividends and accretion 67 197 67 395
--- --- --- ---
Net income (loss) applicable to common shareholders $ (9,058) $ (2,771) $ (8,645) $ (720)
========= ========= ========= =========
Per Share Amounts
Primary
Net income (loss) $ (0.97) $ (0.36) $ (0.93) $ (0.09)
========= ========= ========= =========
Weighted average number of common and equivalent
shares outstanding 9,313 7,758 9,272 7,726
===== ===== ===== =====
Fully diluted
Net income (loss) $ (0.97) $ (0.36) $ (0.93) $ (0.09)
========= ========= ========= =========
Weighted average number of common and equivalent
shares outstanding 9,313 7,765 9,423 7,770
===== ===== ===== =====
The accompanying notes are an integral part of these financial statements.
2
EXIDE ELECTRONICS GROUP, INC.
CONSOLIDATED BALANCE SHEET
(unaudited; dollars in thousands)
March 31, September 30, March 31,
1996 1995 1995
---- ---- ----
Assets
Current assets
Cash and cash equivalents $ 5,882 $ 2,787 $ 2,032
Accounts receivable 123,580 105,524 83,740
Inventories 107,770 72,890 66,495
Other current assets 24,029 13,377 12,656
------ ------ ------
Total current assets 261,261 194,578 164,923
------- ------- -------
Property, plant, and equipment
Land, buildings, and leasehold improvements 13,607 9,931 8,819
Machinery and equipment 76,417 61,519 55,814
------ ------ ------
90,024 71,450 64,633
Accumulated depreciation 39,651 36,393 34,383
------ ------ ------
50,373 35,057 30,250
Goodwill 157,852 18,738 9,140
Other assets 38,664 8,078 7,333
------ ------ ------
$ 508,150 $ 256,451 $ 211,646
========= ========= =========
Liabilities, Redeemable Preferred Stock, & Common Shareholders' Equity
Current liabilities
Short-term debt $ 7,978 $ 7,655 $ 6,158
Accounts payable 69,030 46,041 41,231
Deferred revenues 21,966 15,602 14,369
Other accrued liabilities 26,812 19,737 17,118
------ ------ ------
Total current liabilities 125,786 89,035 78,876
------ ------ ------
Long-term debt 137,655 65,258 38,700
------ ------ ------
Subordinated notes 121,756 15,000 15,000
------ ------ ------
Deferred liabilities 6,760 3,391 2,947
----- ----- -----
Redeemable preferred stock 18,028 - 10,000
------ ------ ------
Common shareholders' equity
Common stock, $0.01 par value, 30,000,000
shares authorized; shares issued - 10,362,130
at March 31, 1996, 8,376,341 at September 30,
1995, and 7,776,057 at March 31, 1995 104 84 78
Additional paid-in capital 87,362 58,190 48,210
Retained earnings 23,803 32,437 24,918
Cumulative translation adjustments (1,592) (1,404) (1,594)
------ ------ ------
109,677 89,307 71,612
Less: Notes receivable from shareholders (5,163) (5,520) (5,362)
Treasury stock, 386,668 shares at March
31, 1996, 926 shares at September
30, 1995, and 5,684 shares at
March 31, 1995 (6,349) (20) (127)
---- ---- ----
98,165 83,767 66,123
------ ------ ------
$ 508,150 $ 256,451 $ 211,646
========= ========= =========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
3
EXIDE ELECTRONICS GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited; in thousands)
Six Months Ended
March 31,
-------------------
1996 1995
---- ----
Cash flows from operating activities
Net income (loss) $ (8,578) $ (325)
Adjustments to reconcile net income (loss) to
cash provided by (used in) operating activities:
Depreciation expense 3,642 3,155
Amortization expense 2,009 1,173
Acquisition and restructuring provisions 10,566 2,200
Decrease in accounts receivable 3,435 21,836
Increase in inventories (8,485) (13,350)
Increase in other current assets (2,648) (906)
Decrease in accounts payable (354) (3,727)
Decrease in other current liabilities (431) (3,304)
Other, net (6,343) 824
---- ------
Net cash provided by (used in) operating activities (7,187) 7,576
----- -----
Cash flows from investing activities
Acquisitions of property, plant, and equipment (7,386) (5,359)
Acquisitions, net of cash received (162,976) -
Other, net (526) (367)
---- ------
Net cash used in investing activities (170,888) (5,726)
------ ------
Cash flows from financing activities
Proceeds from bank credit facilities, net of fees 200,588 62,296
Payments of bank credit facilities (132,956) (62,313)
Payment on industrial revenue bonds - (4,600)
Issuance of senior subordinated debt, net of fees 116,673 -
Issuance of common stock warrants 3,259 -
Issuances of common stock 142 1,089
Purchases of treasury stock (6,926) (625)
Preferred stock dividends of Exide Electronics (67) (395)
Preferred stock dividends of IPM - (1,232)
Payments of notes receivable from shareholders 215 138
Other, net 242 (62)
---- ----
Net cash provided by (used in) financing activities 181,170 (5,704)
----- ------
Net increase (decrease) in cash and cash equivalents 3,095 (3,854)
Cash and cash equivalents, beginning of period 2,787 5,886
----- -----
Cash and cash equivalents, end of period $ 5,882 $ 2,032
======== ========
Supplemental cash flow disclosures
Interest paid, net of amounts capitalized $ 8,247 $ 2,134
Income taxes paid $ 4,308 $ 2,043
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
4
EXIDE ELECTRONICS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited 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 products are used principally for financial,
medical, industrial, telecommunications, military, and aerospace applications
throughout the world.
The 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 March 31, 1996 and 1995. The results
of operations for the three and six month periods ended March 31, 1996 are not
necessarily indicative of the results to be expected for the full year.
NOTE 2 - ACQUISITION OF DELTEC
On March 13, 1996, the Company completed its acquisition of Deltec Power
Systems, Inc., ("Deltec"), one of the world's largest manufacturers and
marketers of off-line and line-interactive small UPS systems, from Fiskars Oy Ab
("Fiskars") and an affiliated company. The purchase price of approximately
$194.8 million (excluding transaction costs of approximately $4.0 million) was
comprised of $165.2 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
redeemable convertible preferred stock (the "Series G Preferred Stock") valued
at $18 per share. See Note 6 for a description of the Series G Preferred Stock.
The cash purchase price included a $158.5 million fixed amount as stated in the
acquisition agreement; $3.7 million representing a portion of the excess cash
that remained in Deltec following the closing; and a prepayment of $3.0 million
related to a variable purchase price adjustment. 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 an amount
stated in the acquisition agreement. Such determination is expected to be made
within 90 days of the closing date, as provided in the acquisition agreement.
The Company financed the cash portion of the purchase price from the net
proceeds of the sale of $125 million of ten-year senior subordinated notes and
borrowings under a new $175 million senior credit facility (see Note 4). In
addition, under the terms of the acquisition agreement, the Company paid $4.0
million to Fiskars in payment of certain interest carrying costs associated with
Fiskars' agreement to extend the time for closing the Deltec acquisition.
5
EXIDE ELECTRONICS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The acquisition was accounted for using the purchase method of accounting.
Accordingly, the purchase price has been allocated on a preliminary basis to the
net assets acquired based on their estimated fair values. This preliminary
allocation resulted in the recording of a write-up of property, plant and
equipment of approximately $4 million; identifiable intangible assets of
approximately $21 million, consisting primarily of trademarks, patents and other
non-current assets; inventory and other current assets of approximately $5.5
million; in-process research and development costs of $5.0 million; and deferred
income taxes and other accrued liabilities of approximately $10.2 million. These
assets are being amortized over 1-10 years, except for in-process research and
development costs which were expensed immediately. The excess of the purchase
price over the estimated fair value of net assets acquired amounted to
approximately $140 million, which has been accounted for as goodwill and is
being amortized over 40 years. The Company is evaluating the final purchase
price allocation, which may impact amounts recorded as of March 31, 1996.
In connection with the acquisition, the Company recorded approximately $11.6
million of non-recurring expenses, including $5.0 million to write-off purchased
in-process research and development costs and $6.6 million for restructuring and
other costs primarily related to the acquisition. Restructuring costs consisted
primarily of reserves for severance and asset valuations.
Deltec's accounts and results of operations are included in the Company's
financial statements from March 13, 1996 forward. The following summary,
prepared on a pro forma basis, combines the consolidated results of operations
as if Deltec had been acquired as of the beginning of each of the periods
presented:
(In thousands, except per share data) Six Months ended March 31,
1996 1995
------- --------
Revenues $255,890 $241,683
Net loss $(13,092) $(15,274)
Fully diluted loss per share $(1.60) $(1.58)
The pro forma results are not necessarily indicative of what actually would have
occurred if the acquisition had been consummated on the first day of each period
presented. In addition, they are not intended to be a projection of future
results and do not reflect any cost savings that may be achieved from combined
operations or any future non-recurring costs which may be incurred to implement
cost savings.
6
EXIDE ELECTRONICS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 - INVENTORIES
Inventories, which include materials, labor, and manufacturing overhead, are
stated at the lower of cost or market, and consist of the following (in
thousands):
March 31, Sept. 30, March 31,
1996 1995 1995
---- ---- ----
Raw materials and supplies $44,675 $27,989 $21,487
Work in process 6,584 6,064 7,709
Finished goods 37,389 24,054 22,652
Service parts 19,122 14,783 14,647
------ ------ ------
$107,770 $72,890 $66,495
======= ======= =======
NOTE 4 - LONG-TERM DEBT
In March 1996, the Company refinanced its domestic bank credit facilities with a
$175 million senior secured bank package (the "New Credit Facility") comprised
of a $125 million revolving credit facility and a $50 million term loan.
Borrowings under the revolving credit facility are limited to specified amounts
of eligible accounts receivable and inventories. Outstanding borrowings are
secured by substantially all the inventories and accounts receivable of the
Company, and the pledge of all of the capital stock of all of the Company's
material domestic and foreign subsidiaries. The pledge of the capital stock of
each foreign subsidiary is limited to 66% of the capital stock of such foreign
subsidiary. Amounts outstanding under the New Credit Facility bear interest at
LIBOR plus 250 basis points, or the bank's base rate plus 150 points, as
defined. The average unutilized daily commitment incurs a commitment fee of .50%
per annum, and letters of credit bear a fee of 2.50% per annum.
Both the term portion and the revolver portion of the New Credit Facility
require periodic (not more than quarterly) payments of accrued and unpaid
interest. The Company is permitted to prepay the principal amount of the New
Credit Facility. The Company is obligated to repay during each fiscal year an
aggregate principal amount of the term loan equal to the amount set forth below
opposite each fiscal year (in thousands):
Fiscal year Annual Amount
1996........................................$2,500
1997.........................................6,667
1998.........................................8,333
1999........................................10,833
2000........................................14,167
2001.........................................7,500
Any principal amount of the term loan and any amounts due under the revolver
that remain unpaid on the fifth anniversary of the closing of the New Credit
Facility (the "Maturity Date") are required to be repaid in full on the Maturity
Date.
7
EXIDE ELECTRONICS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company is subject to certain financial covenants, including maintaining
specified fixed charge coverage and leverage ratios, and minimum net worth and
EBITDA. The New Credit Facility also contains restrictive covenants which, among
other things, limit the Company's ability to incur additional debt, pay
dividends, consummate certain acquisitions, make certain asset sales, and permit
certain liens. At March 31, 1996, the Company was in compliance with all
applicable covenants and had borrowings of $136.3 million outstanding under the
New Credit Facility, including $86.3 million outstanding under the revolving
credit facility.
Under the terms of the New Credit Facility, the Company is required to hedge its
interest rate risk. As of April 30, 1996, the Company had entered into several
two-year interest rate cap agreements for a combined notional principal amount
of $65 million, which capped the Company's floating rate LIBOR index to a
weighted average rate of 6.5%. Premiums paid for the interest rate cap
agreements have been capitalized and will be amortized and shown as interest
expense over the terms of the caps. Unamortized premiums are included with other
assets in the accompanying consolidated balance sheet. There are no receivables
under the cap agreements at March 31, 1996. In the future, such amounts will be
accrued as a reduction of interest expense.
In March 1996, the Company issued 125,000 units (the "Units") comprised of $125
million of 11.5% senior subordinated notes (the "Notes") and warrants (the
"Warrants") to purchase 643,750 shares of the Company's common stock. Each Unit
consists of one $1,000 note and one detachable Warrant to acquire 5.15 shares of
the Company's common stock at an exercise price of $13.475 per share, subject to
adjustment in certain events. The Notes were recorded net of a discount equal to
the value of the Warrants. See Note 5 of the notes to consolidated financial
statements. Interest on the Notes is payable semi-annually on March 15 and
September 15, commencing on September 15, 1996. The Notes are callable at the
option of the Company, in whole or in part, on or after March 15, 2001, at
predetermined redemption prices. The Notes are due and the Warrants expire on
March 15, 2006.
The Notes are general unsecured obligations of the Company, subordinated in
right of payment to all existing and future senior debt, and rank senior in
right of payment to all future subordinated indebtedness of the Company. The
Notes are jointly and severally guaranteed on a senior subordinated basis by
each of the Company's existing and future domestic subsidiaries. Certain of the
Company's subsidiaries are foreign subsidiaries and will not, therefore, be
guarantors. See Note 7 for supplemental condensed consolidating financial
information.
The holders of the Warrants have no voting rights and no right to receive
dividends. The holders of the Warrants have no liquidation rights in the event
of a liquidation, dissolution, or winding-up of the Company.
NOTE 5 - COMMON SHAREHOLDERS' EQUITY
In September 1992, the Company sold $15 million of convertible subordinated
notes (the "Convertible Notes"). In October 1995, the holder of the Convertible
Notes exercised its option to convert the Convertible Notes into 1,146,789
shares of the Company's common stock.
During the first quarter of fiscal 1996, the Company's treasury stock
transactions included: (1) the repurchase of approximately 444,000 shares of its
common stock for approximately $7.4 million, and (2) the issuance of
approximately 59,000 shares of its common stock for approximately $.8 million
under its Employee Stock Purchase Plan, which included $1.1 million credited to
treasury stock and $.3 million charged to additional paid-in capital.
In March 1996, the Company issued 825,000 shares of its common stock in
connection with the acquisition of Deltec. See Note 2 of the notes to
consolidated financial statements. In addition, the Company issued warrants to
purchase 643,750 shares of its common stock in connection with the issuance of
$125 million of senior subordinated notes in March 1996. The fair value of the
Warrants ($3.3 million) is included in additional paid-in capital in the
accompanying consolidated financial statements. See Note 4 of the notes to
consolidated financial statements.
8
EXIDE ELECTRONICS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 - PREFERRED STOCK
In March 1996, the Company issued 1 million shares of the Company's Series G
Convertible Preferred Stock valued at approximately $18 million. The Series G
Preferred Stock is convertible into shares of the Company's common stock on a
one-for-one basis (subject to adjustment under certain circumstances), 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.
NOTE 7 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The Company's payment obligations under the Notes are guaranteed by certain of
the Company's wholly-owned subsidiaries (the "Guarantor Subsidiaries"). Such
guarantees are full, unconditional and joint and several. Separate financial
statements of the Guarantor Subsidiaries are not presented because the Company's
management has determined that they would not be material to investors. The
following supplemental financial information sets forth, on an unconsolidated
basis, statement of operations, balance sheet, and cash flow information for the
Company ("Parent Company Only"), for the Guarantor Subsidiaries and for the
Company's other subsidiaries (the "Non-Guarantor Subsidiaries"). The
supplemental financial information reflects the investments of the Company and
the Guarantor Subsidiaries in the Guarantor and Non-Guarantor subsidiaries using
the equity method of accounting.
As indicated in Note 2, the allocation of the Deltec purchase price is
preliminary. Accordingly, the amounts allocated to the Deltec Guarantor and
Non-Guarantor Subsidiaries are also preliminary.
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
Product revenues....................... $ -- $ 76,961 $21,936 $(25,078) $ 73,819
Service revenues....................... -- 23,904 3,965 -- 27,869
------- ------------ ------------- ------------ ------------
Total revenues............... -- 100,865 25,901 (25,078) 101,688
------- ------------ ------------- ------------ ------------
Product cost of revenues............... -- 61,713 17,072 (25,206) 53,579
Service cost of revenues............... -- 16,996 2,427 -- 19,423
------- ------------ ------------- ------------ ------------
Total cost of revenues....... -- 78,709 19,499 (25,206) 73,002
------- ------------ ------------- ------------ ------------
Gross profit...................... -- 22,156 6,402 128 28,686
Selling, general and administrative
expense.............................. 1,923 14,585 4,517 -- 21,025
Research and development expense....... -- 2,477 100 -- 2,577
Acquisition and restructuring expense.. -- 9,921 1,700 -- 11,621
------- ------------ ------------- ------------ ------------
Income (loss) from
operations................. (1,923) (4,827) 85 128 (6,537)
Interest expense....................... 5,380 1,884 171 -- 7,435
Interest income........................ (87) (40) (53) -- (180)
Other (income) expense................. -- 93 (25) -- 68
------- ------------ ------------- ------------ ------------
Income (loss) before income taxes...... (7,216) (6,764) (8) 128 (13,860)
Provision for (benefit from) income
taxes................................ (2,526) (2,416) 73 -- (4,869)
------- ------------ ------------- ------------ ------------
Loss before equity in loss
of consolidated subsidiaries......... (4,690) (4,348) (81) 128 (8,991)
Equity in loss of consolidated
subsidiaries......................... (4,301) (81) -- 4,382 --
------- ------------ ------------- ------------ ------------
Net income (loss)...................... $(8,991) $ (4,429) $ (81) $ 4,510 $ (8,991)
======= ========= =========== ========= =========
9
EXIDE ELECTRONICS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1995
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
Product revenues....................... $ -- $ 56,115 $13,981 $ (9,687) $ 60,409
Service revenues....................... -- 27,210 3,649 -- 30,859
------- ------------ ------------- ------------ ------------
Total revenues............... -- 83,325 17,630 (9,687) 91,268
------- ------------ ------------- ------------ ------------
Product cost of revenues............... -- 44,708 10,734 (9,463) 45,979
Service cost of revenues............... -- 19,108 2,278 -- 21,386
------- ------------ ------------- ------------ ------------
Total cost of revenues....... -- 63,816 13,012 (9,463) 67,365
------- ------------ ------------- ------------ ------------
Gross profit...................... -- 19,509 4,618 (224) 23,903
Selling, general and administrative
expense.............................. 76 14,286 3,156 -- 17,518
Research and development expense....... -- 2,442 -- -- 2,442
Acquisition and restructuring expense.. 3,700 2,500 -- -- 6,200
------- ------------ ------------- ------------ ------------
Income (loss) from
operations................. (3,776) 281 1,462 (224) (2,257)
Interest expense....................... 328 673 117 -- 1,118
Interest income........................ (77) 9 (21) -- (89)
Other (income) expense................. -- (689) 105 7 (577)
------- ------------ ------------- ------------ ------------
Income (loss) before income taxes...... (4,027) 288 1,261 (231) (2,709)
Provision for (benefit from) income
taxes................................ (502) 139 228 -- (135)
------- ------------ ------------- ------------ ------------
Income (loss) before equity in income
of consolidated subsidiaries......... (3,525) 149 1,033 (231) (2,574)
Equity in income of consolidated
subsidiaries......................... 951 1,033 -- (1,984) --
------- ------------ ------------- ------------ ------------
Net income (loss)...................... $(2,574) $ 1,182 $ 1,033 $ (2,215) $ (2,574)
======= ========= =========== ========= =========
10
EXIDE ELECTRONICS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1996
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
Product revenues....................... $ -- $135,594 $37,380 $(41,496) $131,478
Service revenues....................... -- 46,599 7,119 (205) 53,513
------- ------------ ------------- ------------ ------------
Total revenues............... -- 182,193 44,499 (41,701) 184,991
------- ------------ ------------- ------------ ------------
Product cost of revenues............... -- 108,961 28,834 (41,708) 96,087
Service cost of revenues............... -- 33,613 4,595 (205) 38,003
------- ------------ ------------- ------------ ------------
Total cost of revenues....... -- 142,574 33,429 (41,913) 134,090
------- ------------ ------------- ------------ ------------
Gross profit...................... -- 39,619 11,070 212 50,901
Selling, general and administrative
expense.............................. 2,044 28,755 7,683 -- 38,482
Research and development expense....... -- 4,986 100 -- 5,086
Acquisition and restructuring expense.. -- 9,921 1,700 -- 11,621
------- ------------ ------------- ------------ ------------
Income (loss) from
operations................. (2,044) (4,043) 1,587 212 (4,288)
Interest expense....................... 5,414 3,227 291 -- 8,932
Interest income........................ (118) (40) (53) -- (211)
Other (income) expense................. -- (144) 329 -- 185
------- ------------ ------------- ------------ ------------
Income (loss) before income taxes...... (7,340) (7,086) 1,020 212 (13,194)
Provision for (benefit from) income
taxes................................ (2,570) (2,368) 322 -- (4,616)
------- ------------ ------------- ------------ ------------
Income (loss) before equity in income
(loss) of consolidated subsidiaries.. (4,770) (4,718) 698 212 (8,578)
Equity in income (loss) of consolidated
subsidiaries......................... (3,808) 698 -- 3,110 --
------- ------------ ------------- ------------ ------------
Net income (loss)...................... $(8,578) $ (4,020) $ 698 $ 3,322 $ (8,578)
======= ========= =========== ========= =========
11
EXIDE ELECTRONICS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1995
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
Product revenues....................... $ -- $118,430 $25,865 $(19,990) $124,305
Service revenues....................... -- 52,022 7,007 -- 59,029
------- ------------ ------------- ------------ ------------
Total revenues............... -- 170,452 32,872 (19,990) 183,334
------- ------------ ------------- ------------ ------------
Product cost of revenues............... -- 94,331 20,241 (19,533) 95,039
Service cost of revenues............... -- 36,333 4,375 -- 40,708
------- ------------ ------------- ------------ ------------
Total cost of revenues....... -- 130,664 24,616 (19,533) 135,747
------- ------------ ------------- ------------ ------------
Gross profit...................... -- 39,788 8,256 (457) 47,587
Selling, general and administrative
expense.............................. 158 27,868 6,049 -- 34,075
Research and development expense....... -- 4,989 -- -- 4,989
Acquisition and restructuring expense.. 3,700 2,500 -- -- 6,200
------- ------------ ------------- ------------ ------------
Income (loss) from
operations................. (3,858) 4,431 2,207 (457) 2,323
Interest expense....................... 656 1,660 226 -- 2,542
Interest income........................ (154) (18) (56) -- (228)
Other (income) expense................. -- (852) 114 -- (738)
------- ------------ ------------- ------------ ------------
Income (loss) before income taxes...... (4,360) 3,641 1,923 (457) 747
Provision for (benefit from) income
taxes................................ (618) 1,270 420 -- 1,072
------- ------------ ------------- ------------ ------------
Income (loss) before equity in income
of consolidated subsidiaries......... (3,742) 2,371 1,503 (457) (325)
Equity in income of consolidated
subsidiaries......................... 3,417 1,503 -- (4,920) --
------- ------------ ------------- ------------ ------------
Net income (loss)...................... $ (325) $ 3,874 $ 1,503 $ (5,377) $ (325)
======= ========= =========== ========= =========
12
EXIDE ELECTRONICS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
MARCH 31, 1996
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
ASSETS
Current assets
Cash and cash equivalents............ $ -- $ 498 $ 5,384 $ -- $ 5,882
Accounts receivable.................. -- 91,465 32,115 -- 123,580
Intercompany accounts receivable..... -- 32,733 4,979 (37,712) --
Inventories.......................... -- 87,685 20,378 (293) 107,770
Other current assets................. 44 19,417 4,568 -- 24,029
------- ------------ ------------- ------------ ------------
Total current assets......... 44 231,798 67,424 (38,005) 261,261
Property, plant, and equipment, net.... -- 44,623 5,750 -- 50,373
Goodwill............................... -- 93,139 64,713 -- 157,852
Noncurrent intercompany receivables.... 91,862 65,541 -- (157,403) --
Investment in affiliates............... 289,453 98,275 -- (387,080) 648
Other assets........................... 10,688 16,531 10,797 -- 38,016
------- ------------ ------------- ------------ ------------
$392,047 $549,907 $148,684 $ (582,488) $508,150
======= ========= =========== ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt...................... $ 458 $ -- $ 7,520 $ -- $ 7,978
Accounts payable..................... 11,217 44,015 13,798 -- 69,030
Intercompany accounts payable........ 5,406 17,433 14,873 (37,712) --
Deferred revenues.................... -- 17,614 4,352 -- 21,966
Other accrued liabilities............ 1,017 20,769 5,026 -- 26,812
------- ------------ ------------- ------------ ------------
Total current liabilities.... 18,098 99,831 45,569 (37,712) 125,786
Long-term debt......................... 136,000 316 1,339 -- 137,655
Subordinated notes..................... 121,756 -- -- -- 121,756
Noncurrent intercompany payables....... -- 155,652 1,751 (157,403) --
Deferred liabilities................... -- 4,655 2,105 -- 6,760
Redeemable preferred stock............. 18,028 -- -- -- 18,028
Shareholders' equity................... 98,165 289,453 97,920 (387,373) 98,165
------- ------------ ------------- ------------ ------------
$392,047 $549,907 $148,684 $ (582,488) $508,150
======= ========= =========== ========= =========
13
EXIDE ELECTRONICS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 1995
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
ASSETS
Current assets
Cash and cash equivalents............ $ -- $ 593 $ 2,194 $ -- $ 2,787
Accounts receivable.................. -- 85,512 20,012 -- 105,524
Intercompany accounts receivable..... 206 39,843 791 (40,840) --
Inventories.......................... -- 62,923 10,473 (506) 72,890
Other current assets................. 57 12,124 1,196 -- 13,377
------- ------------ ------------- ------------ ------------
Total current assets......... 263 200,995 34,666 (41,346) 194,578
Property, plant, and equipment, net.... -- 32,901 2,156 -- 35,057
Goodwill............................... -- 12,224 6,514 -- 18,738
Noncurrent intercompany receivables.... 26,969 21,972 -- (48,941) --
Investment in affiliates............... 85,766 18,927 -- (104,295) 398
Other assets........................... 425 6,381 874 -- 7,680
------- ------------ ------------- ------------ ------------
$113,423 $293,400 $44,210 $ (194,582) $256,451
======= ========= =========== ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt...................... $ 456 $ 68 $ 7,131 $ -- $ 7,655
Accounts payable..................... -- 41,100 4,941 -- 46,041
Intercompany accounts payable........ 9,007 23,599 8,234 (40,840) --
Deferred revenues.................... -- 13,021 2,581 -- 15,602
Other accrued liabilities............ 355 17,153 2,230 (1) 19,737
------- ------------ ------------- ------------ ------------
Total current liabilities.... 9,818 94,941 25,117 (40,841) 89,035
Long-term debt......................... -- 65,258 -- -- 65,258
Convertible subordinated notes......... 15,000 -- -- -- 15,000
Noncurrent intercompany payables....... 4,838 44,103 -- (48,941) --
Deferred liabilities................... -- 3,332 59 -- 3,391
Shareholders' equity................... 83,767 85,766 19,034 (104,800) 83,767
------- ------------ ------------- ------------ ------------
$113,423 $293,400 $44,210 $ (194,582) $256,451
======= ========= =========== ========= =========
14
EXIDE ELECTRONICS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED MARCH 31, 1996
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ -------------- ------------ ------------
(DOLLARS IN THOUSANDS)
Cash flows from operating activities
Net income (loss)........................ $(8,578) $ (4,020) $ 698 $ 3,322 $ (8,578)
Adjustments to reconcile net income to
cash provided by (used in) operating
activities:
Depreciation expense.................... -- 3,299 343 -- 3,642
Amortization expense.................... -- 1,781 228 -- 2,009
Acquisition and restructuring provisions -- 8,866 1,700 -- 10,566
Equity in (income) loss of consolidated.
subsidiaries.......................... 3,808 (698) -- (3,110) --
(Increase) decrease in accounts
receivable............................ 206 14,873 (8,516) (3,128) 3,435
(Increase) decrease in inventories...... -- (7,170) (1,102) (213) (8,485)
Increase in other current assets........ 13 (1,908) (753) -- (2,648)
Increase (decrease) in accounts
payable............................... 7,616 (15,411) 4,313 3,128 (354)
Increase (decrease) in other current
liabilities........................... 662 (2,258) 1,164 1 (431)
Other, net.............................. (736) (3,662) (1,945) -- (6,343)
--------- ------------ ------- ------------ ------------
Net cash provided by (used in)
operating activities............... 2,991 (6,308) (3,870) -- (7,187)
--------- ------------ ------- ------------ ------------
Cash flows from investing activities
Acquisitions of property, plant,
and equipment........................... -- (6,883) (503) -- (7,386)
Acquisitions, net of cash received........ (162,976) -- -- -- (162,976)
Other, net................................ (132,945) (184,526) (61,998) 378,943 (526)
--------- ------------ ------- ------------ ------------
Net cash provided by (used in)
investing activities............... (295,921) (191,409) (62,501) 378,943 (170,888)
--------- ------------ ------- ------------ ------------
Cash flows from financing activities
Proceeds from bank credit facilities...... 140,000 57,878 2,710 -- 200,588
Payments of bank credit facilities........ (4,000) (127,108) (1,848) -- (132,956)
Issuance of subordinated debt, net
of fees................................. 116,673 -- -- -- 116,673
Issuance of common stock warrants......... 3,259 -- -- -- 3,259
Issuance of common stock.................. 142 -- -- -- 142
Purchases of treasury stock............... (6,926) -- -- -- (6,926)
Preferred stock dividends and accretion... (67) -- -- -- (67)
Payments of notes receivable from
shareholders............................ 215 -- -- -- 215
Other, net................................ 43,634 266,743 68,808 (378,943) 242
--------- ------------ ------- ------------ ------------
Net cash provided by (used in)
financing activities............... 292,930 197,513 69,670 (378,943) 181,170
--------- ------------ ------- ------------ ------------
Net increase (decrease) in cash and cash
equivalents............................... -- (204) 3,299 -- 3,095
Cash and cash equivalents, beginning of
period.................................... -- 702 2,085 -- 2,787
--------- ------------ ------- ------------ ------------
Cash and cash equivalents, end of period.... $ -- $ 498 $5,384 $ -- $ 5,882
========= =========== ============== =========== ===========
15
EXIDE ELECTRONICS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED MARCH 31, 1995
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ -------------- ------------ ------------
(DOLLARS IN THOUSANDS)
Cash flows from operating activities
Net income (loss)........................ $ (325) $ 3,874 $ 1,503 $ (5,377) $ (325)
Adjustments to reconcile net income to
cash provided by (used in) operating
activities:
Depreciation expense................... -- 2,885 270 -- 3,155
Amortization expense................... -- 915 258 -- 1,173
Equity in (income) loss of consolidated
subsidiaries......................... (3,417) (1,503) -- 4,920 --
Merger and litigation provisions -- 2,200 -- -- 2,200
(Increase) decrease in accounts
receivable........................... -- 22,114 (2,511) 2,233 21,836
(Increase) decrease in inventories..... -- (8,929) (4,875) 454 (13,350)
(Increase) decrease in other current
assets............................... 4 (580) (330) -- (906)
Increase (decrease) in accounts
payable.............................. (756) (2,600) 1,862 (2,233) (3,727)
Increase (decrease) in other current
liabilities.......................... (17) (4,670) 1,381 2 (3,304)
Other, net............................. -- 824 -- -- 824
--------- ------------ -------------- ------------ ------------
Net cash provided by (used in)
operating activities.............. (4,511) 14,530 (2,442) (1) 7,576
--------- ------------ -------------- ------------ ------------
Cash flows from investing activities
Acquisitions of property, plant, and
equipment.............................. -- (4,986) (373) -- (5,359)
Other, net............................... 1,629 (3,881) (36) 1,921 (367)
--------- ------------ -------------- ------------ ------------
Net cash provided by (used in)
investing activities.............. 1,629 (8,867) (409) 1,921 (5,726)
--------- ------------ -------------- ------------ ------------
Cash flows from financing activities
Proceeds from bank credit facilities..... -- 60,801 1,495 -- 62,296
Payments of bank credit facilities....... -- (61,800) (513) (62,313)
Payments of industrial revenue bonds..... -- (4,600) -- -- (4,600)
Issuance of common stock................. 1,089 -- -- -- 1,089
Purchases of treasury stock.............. (625) -- -- -- (625)
Preferred stock dividends of Exide
Electronics............................ (395) -- -- -- (395)
Preferred stock dividends of IPM......... -- (1,232) -- -- (1,232)
Payments of notes receivable from
shareholders........................... 138 -- -- -- 138
Other, net............................... 2,675 (2,275) 1,458 (1,920) (62)
--------- ------------ -------------- ------------ ------------
Net cash provided by (used in)
financing activities.............. 2,882 (9,106) 2,440 (1,920) (5,704)
--------- ------------ -------------- ------------ ------------
Net decrease in cash and cash
equivalents.............................. -- (3,443) (411) -- (3,854)
Cash and cash equivalents, beginning of
period................................... -- 3,754 2,132 -- 5,886
--------- ------------ -------------- ------------ ------------
Cash and cash equivalents, end of period... $ -- $ 311 $ 1,721 $ -- $ 2,032
========= =========== ============== =========== ===========
16
Exide Electronics Group, Inc.
Management's Discussion and Analysis
of Results of Operations and Financial Condition
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. Several factors had a significant impact on the Company's
results of operations during the first six months of fiscal 1996 compared to the
first six months of fiscal 1995. These factors include the acquisition of Deltec
Power Systems, Inc. ("Deltec") in March 1996 and the expensing of certain costs
associated with the acquisition; the impact of certain charges recorded in the
second quarter of fiscal 1996 to integrate recent acquisitions; the growth in
revenues of small uninterruptible power supply ("UPS") products; the overall
strong growth in international sales; and the effect of declining Federal
government product and service revenues. The impact of certain of these and
other factors on fiscal 1995 is discussed in more depth in "Management's
Discussion and Analysis of Results of Operations and Financial Condition"
presented in the Company's 1995 Annual Report to Shareholders.
The Company acquired Deltec from Fiskars Oy Ab ("Fiskars") and an affiliated
company on March 13, 1996. Deltec designs, manufactures, markets, sells and
services a broad line of UPS products and power management software worldwide
through its principal operating subsidiaries, Deltec Electronics, which is
headquartered and has a plant in San Diego, California and a plant in Tijuana,
Mexico, and Fiskars Power Systems, which is based and has a manufacturing
facility in Espoo, Finland. Deltec's accounts and results of operations were
included in the Company's financial statements from the closing date forward.
During the quarter ended March 31, 1996, the Company recorded revenues of $6.6
million from the consolidation of Deltec.
The purchase price of approximately $194.8 million was comprised of
approximately $165.2 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 $18.00 per share (the "Series G Preferred
Stock"). The cash purchase price included a $158.5 million fixed amount as
stated in the acquisition agreement; $3.7 million represents a portion of the
excess cash that remained in Deltec following the closing; and a prepayment of
$3.0 million related to a variable purchase adjustment. 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 an amount
specified in the acquisition agreement. Such determination is expected to be
made within 90 days of the closing date, as provided in the acquisition
agreement. Transaction costs of approximately $4.0 million were incurred to
close the acquisition. See Note 2 of Notes to consolidated financial statements,
and discussion regarding financing in the "Liquidity and Financial Condition"
section of this Management's Discussion and Analysis of Results of Operations
and Financial Condition.
The Company's product and service offerings and its marketing, manufacturing,
and research and development functions are organized into three business units:
the Small Systems Group ("SSG") for all products below 50 kilovolt amperes
("kVA")(1); the Large Systems Group ("LSG") for all 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. ETG results are included in SSG results for the three and
six months ended March 31, 1996.
- --------
1 A kilovolt ampere is a commonly-used unit of measure for electricity supplied
using alternating current.
17
Except for the historical information contained herein, the matters discussed in
this Form 10-Q are forward-looking statements that involve risks and
uncertainties. Potential risks and uncertainties include, without limitation,
quarterly fluctuations in results; the management of growth and integration of
acquisitions; the Company's ability to generate future cash flow from
operations; continued competitive pressures in the marketplace and the effect
they may have on current and future inventory valuations; the effect of business
restructuring on the future performance of the Company, especially the
performance of the Company's employees; and other matters detailed from time to
time in the company's Securities and Exchange Commission filings, including the
Company's Forms 10-Q and 10-K.
Results of Operations
The following table presents, for the periods shown, statement of operations
data, in millions of dollars, revenue growth for the second quarter and six
months year-to-date of fiscal 1996 as compared to the same period of fiscal
1995, and selected operating statement items as a percentage of revenues.
Three Months Ended Six Months Ended
March 31, March 31,
-------------------------------------------------------
1996 1995 1996 1995
-------------------------------------------------------
Revenues
Small Systems Products $47.8 $33.2 $85.7 66.3
Large Systems Products 26.1 27.2 45.8 58.0
-------------------------------------------------------
Total Products 73.9 60.4 131.5 124.3
Worldwide Services Group 27.8 30.9 53.5 59.0
-------------------------------------------------------
Total Revenues 101.7 91.3 185.0 183.3
-------------------------------------------------------
Gross Profit
Products 20.2 14.4 35.4 29.3
Services 8.5 9.5 15.5 18.3
-------------------------------------------------------
Total Gross Profit 28.7 23.9 50.9 47.6
-------------------------------------------------------
Selling, general and administrative expense 21.0 17.5 38.5 34.1
Research and development expense 2.6 2.4 5.1 5.0
Acquisition and restructuring expense
11.6 6.2 11.6 6.2
-------------------------------------------------------
Income (loss) from operations (6.5) (2.3) (4.3) 2.3
Interest/other 7.3 .4 8.9 1.6
Provision (benefit) for income taxes (4.9) (.1) (4.6) 1.1
-------------------------------------------------------
Net loss $(9.0) $(2.6) (8.6) (.3)
-------------------------------------------------------
Revenue Growth:
Small Systems Products 44.0% 29.3%
Large Systems Products (4.0) (21.0)
-------------------------------------------------------
Total Products 22.4 5.8
Worldwide Services Group (10.0) (9.3)
-------------------------------------------------------
Total Revenues 11.4% 0.9%
-------------------------------------------------------
Margin Data (as a percent of revenues):
Gross Profit
Products 27.4 23.9 26.9 23.5
Services 30.3 30.7 29.0 31.0
-------------------------------------------------------
Total Gross Profit 28.2 26.2 27.5 26.0
-------------------------------------------------------
Selling, general and administrative expense 20.7 19.2 20.8 18.6
Research and development expense 2.5 2.7 2.7 2.7
Acquisition and restructuring expense 11.4 6.8 6.3 3.4
-------------------------------------------------------
Income (loss) from operations (6.4) (2.5) (2.3) 1.3
-------------------------------------------------------
18
Three months ended March 31, 1996 versus March 31, 1995
Total revenues increased by 11.4% to $101.7 million in the second quarter of
fiscal 1996 from $91.3 million in the second quarter of fiscal 1995, due to a
22.4% increase in product sales and a 10.0% decrease in service revenues.
SSG revenues for the quarter ended March 31, 1996 increased by $14.6 million or
44.0% over the same period of the prior year. Approximately $4.3 million of this
increase was due to revenues generated by the recent acquisition of Deltec.
Excluding revenues from this acquisition, revenues increased by 30.8%, primarily
due to increased sales in international markets, and from the acquisition of
Lectro Products, Inc.("Lectro") in August 1995. SSG's international sales
increased 26%, reflecting strong performance in Europe, the Middle East and
Africa. Sales to Latin America remained at the same level as the prior fiscal
year, due to continued economic weakness in that region. Sales to the Far East
increased approximately 12% year over year. Domestic sales were affected by poor
performance in the Partner Marketing channel, which sells to certain OEMs which
have been restructuring their operations in the current year. Sales of the
Prestige product family were especially strong, growing in excess of 50% over
the same period last year. Over 60% of Prestige sales were made in international
markets, consistent with the prior year. Increased revenues were generally due
to a higher number of units sold, as opposed to increased unit prices.
LSG revenues for the second quarter of fiscal 1996 were 4% lower than in the
same period of fiscal 1995, due primarily to the scheduled decline in sales
under the Company's program with the Federal Aviation Administration (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. Excluding the effect of the Deltec
acquisition, LSG revenues are expected to decline in fiscal 1996 from fiscal
1995 levels in the range of 15-20% due to the completion of the FAA shipments.
Excluding the effect of this scheduled decline, LSG revenues increased over 30%
for the quarter ended March 31, 1996 versus the same period in the prior year,
reflecting increased sales of its Powerware Plus products both domestically and
internationally. LSG revenues related to the acquisition of Deltec were $1.2
million for the three months ended March 31, 1996. Overall, the number of units
shipped increased while the average selling price decreased, reflecting higher
unit sales of lower kVA products. This trend is consistent with the Company's
focus on commercial markets, and the growth in the mid-range market segment.
WSG revenues for the second quarter of fiscal 1996 decreased by $3.1 million or
10.0% over the same period of the prior fiscal year. WSG's commercial domestic
revenues grew approximately 9.7%, due primarily to increased sales of spare
parts and depot repairs, increased battery monitoring service sales, and
incremental revenues generated by Deltec. Federal service revenues decreased
over the prior year by approximately 33%, mainly attributable to a decline in
FAA site service revenues. Excluding the effect of the Deltec acquisition, WSG
revenues are expected to decline in the range of 10-15% for fiscal 1996, due to
an anticipated decline in FAA site service revenues. At March 31, 1996, the
Company was installing systems at eight FAA sites versus thirteen FAA sites in
the prior year. The Company was also providing design services at two sites at
March 31, 1996 versus eight sites at March 31, 1995. 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.
19
Gross Profit
Gross profit increased by $4.8 million in the second quarter of fiscal 1996 over
the second quarter of fiscal 1995 to $28.7 million. Gross profit as a percentage
of total revenues increased to 28.2% in the second quarter of fiscal 1996 from
26.2% in the same period of fiscal 1995. Product gross profit margins rose to
27.4% in the second quarter of fiscal 1996 from 23.9% in the same period of
fiscal 1995, while service margins declined slightly to 30.3% from 30.7% during
that same period in fiscal 1995. The increase in product gross profit margins
was due to a higher proportion of sales in the newer, higher margin Powerware
Prestige product line and Powerware Plus products, and to sales of higher margin
Deltec products. The Company continued to implement cost reductions and
operational efficiencies to maintain competitiveness and improve margins in
response to the industry trend of declining UPS prices. Service margins
decreased for the quarter primarily due to higher fixed costs related to
expanded facilities and depreciation on new information systems. In addition,
service revenues included a higher mix of lower margin commercial services
during the quarter.
Selling, General and Administrative Expense
Selling, general and administrative expense increased $3.5 million to $21.0
million in the second quarter of fiscal 1996 (20.7% percent of revenues) from
$17.5 million in the same period of fiscal 1995 (19.2% of revenues). Selling and
marketing expenses increased due to incremental costs related to the operations
of Deltec and the Emerging Technology Group, 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 second quarter of fiscal 1996 versus 1995 due to a higher mix of
commercial revenues to total revenues in the second quarter of 1996 over the
same period in 1995. Variable selling expenses are generally higher for
commercial revenues than for Federal revenues. General and administrative
expenses rose from the prior year due primarily to the amortization of
intangible assets generated by recent acquisitions and to increased spending for
improved administrative and communication systems as the Company continues to
invest in infrastructure improvements.
Research and Development Expense
Research and development expense increased slightly in the second quarter of
fiscal 1996 compared to the same period of fiscal 1995, but decreased as a
percentage of revenue to 2.5% in fiscal 1996 from 2.7% in fiscal 1995. The
increase in research and development expense occurred as the Company invested in
its newly formed Emerging Technologies Group, and due to incremental costs from
the acquisition of Deltec.
Acquisition and Restructuring Expense
On March 13, 1996, the Company completed its acquisition of Deltec. In
connection with the acquisition, the Company recorded approximately $11.6
million of non-recurring expenses, including a $5.0 million charge for purchased
in-process research and development and $6.6 million for restructuring and other
costs primarily related to the acquisition. Restructuring costs consisted
primarily of reserves for severance and asset valuations.
20
During the second quarter of fiscal 1995, the Company completed its acquisition
of International Power Machines, Inc. ("IPM"). With the consummation of the
acquisition, which was accounted for as a pooling-of-interests, the Company
recorded a non-recurring pretax charge of $3.0 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. In addition, the Company recorded a $.7 million
pretax charge for the settlement of two lawsuits in the second quarter of fiscal
1995.
Income from Operations
As a result of the acquisition and restructuring charges in fiscal years 1996
and 1995 as discussed above, the Company generated a loss from operations of
$6.5 million for the second quarter of fiscal 1996, versus a loss from
operations of $2.3 million in the same period of fiscal 1995. Excluding the
non-recurring items in both fiscal 1996 and 1995 discussed under "Acquisition
and Restructuring Expense" and $.5 million of purchase accounting adjustments in
fiscal 1996, pro forma operating income increased 41% to $5.6 million for the
current quarter, compared to $3.9 million in the same quarter of fiscal 1995.
This increase was due primarily to higher revenues, improved profit margins,
expense controls, and cost savings resulting from the Company's recent
acquisitions.
Interest/Other
Interest expense increased to $7.4 million in the second quarter of fiscal 1996
from $1.1 million in the same period of fiscal 1995. The Company recorded a
one-time non-recurring charge of $4.4 million for interest paid to Fiskars Oy
Ab, the former parent of Deltec, and for the write-off of remaining debt
issuance costs on the Company's previous credit facility. See discussion under
"Liquidity and Financial Condition." In addition, the Company incurred
approximately $1.1 million in interest expense related to increased borrowings
used to finance the acquisition of Deltec, including interest on $125 million of
newly-issued senior subordinated notes. The remaining increase is due to
increased borrowings used to finance working capital, and higher interest rates
on the Company's new credit facilities.
The Company recorded other non-operating expense of $0.1 million for the second
quarter of fiscal 1996 versus other income of $.6 million for the same period in
the prior fiscal year. This change was primarily due to less favorable foreign
currency exchange rates in fiscal 1996 than in fiscal 1995.
Provision for Income Taxes
The fiscal 1996 provision for second quarter income taxes reflects a
consolidated effective tax benefit of approximately 35% as compared to a benefit
of approximately 5% for the same period of fiscal 1995. The fiscal 1995 rate for
the second quarter was lower due to the non-deductibility of certain merger
costs recorded during that period.
Net Loss
Net loss for the second quarter of fiscal 1996 was $9.0 million, or $.97 per
fully diluted share, as compared to a net loss of $2.6 million, or $.36 per
fully diluted share, for the same period of fiscal 1995. Excluding the
non-recurring items in both fiscal 1996 and 1995 discussed above under
"Acquisition and Restructuring Expense" and "Interest/Other," pro forma net
income decreased 25% to $1.7 million for the current quarter, compared to $2.2
million in the same quarter of fiscal 1995.
21
Six months ended March 31, 1996 versus March 31, 1995
Total revenues increased by 0.9% to $185.0 million in the six months ended March
31, 1996 from $183.3 million in the six months ended March 31, 1995, due to a
5.8% increase in product sales and a 9.3% decrease in service revenues.
SSG revenues for the six months ended March 31, 1996 increased by $19.4 million
or 29.3% over the same period of the prior year. Approximately $4.3 million was
due to revenues generated by the recent acquisition of Deltec. Excluding
revenues from this acquisition, revenues grew by 22.4% and benefitted from the
acquisition of Lectro in August 1995. International sales for the six months
were approximately $43.4 million, an increase of approximately 15% that
reflected strong growth in Europe, the Middle East and Africa. Increased
revenues in these markets were offset by a decline in sales to Latin America,
which has been affected by the economic situation in that region. Sales of the
Prestige product family increased over 40% for the first six months of fiscal
1996 compared to the same period in fiscal 1995. Increased revenues were
generally due to higher unit sales as opposed to increased unit prices.
LSG revenues for the six months ended March 31, 1996 were 21.0% 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. Excluding the effect of
this scheduled decline, LSG revenues increased $4.9 million or 14.6%, reflecting
strong commercial sales of Powerware Plus products in both domestic and
international markets.
WSG revenues for the first six months of fiscal 1996 decreased by $5.5 million
or 9.3% over the same period of fiscal 1995. WSG's commercial domestic revenues
grew by about 3.8% due to increased battery service sales. International service
sales increased 22.0%, due to higher sales in Europe, including incremental
revenues generated by the Deltec acquisition. As expected, Federal service
revenues decreased over the prior year by approximately 27%, mainly attributable
to the decline in FAA site service revenues.
Gross Profit
Gross profit increased by $3.3 million in the first six months of fiscal 1996
over the same period of fiscal 1995 to $50.9 million. Gross profit as a
percentage of total revenues increased to 27.5% for the first six months of
fiscal 1996 from 26.0% in the same period of fiscal 1995. Product gross profit
margins rose to 26.9% in the first six months of fiscal 1996 from 23.5% in the
same period of fiscal 1995, while service margins declined to 29.0% from 31.0%
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 products. The Company continued to implement cost reductions
and operational efficiencies to maintain competitiveness and improve margins in
response to the industry trend of declining UPS prices. Service margins
decreased for the six months primarily due to higher fixed costs on expanded
facilities and depreciation of new information systems, the effect of a decrease
in higher-margin federal services relating to training, documentation and
start-up services, and a higher mix of commercial service revenues at lower
margins.
22
Selling, General and Administrative Expense
Selling, general and administrative expense increased $4.4 million to $38.5
million in the first six months of fiscal 1996 (20.8% percent of revenues) from
$34.1 million in the same period of fiscal 1995 (18.6% of revenues). Selling and
marketing expenses increased due to incremental costs related to the
consolidation of Deltec, and the Emerging Technology Group, 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 six months of fiscal 1996 versus 1995 due to a higher
mix of commercial revenues to total revenues in the first six months of 1996
over the same period in 1995. Variable selling expenses are generally higher for
commercial revenues than for Federal revenues. General and administrative
expenses rose from the prior year due primarily to the amortization of
intangible assets generated by recent acquisitions.
Research and Development Expense
Research and development expense increased slightly in the first two quarters of
fiscal 1996 compared to the same period of fiscal 1995, but remained constant as
a percentage of revenue at 2.7%. Increased research and development expenses
related to the Company's newly formed Emerging Technologies Group and
incremental costs for the consolidation of Deltec were offset by synergies
achieved as the Company leveraged the technology of the companies it has
recently acquired.
Acquisition and Restructuring Expense
During the second quarter of fiscal 1996, the Company completed its acquisition
of Deltec. In connection with the acquisition, the Company recorded
approximately $11.6 million of non-recurring expenses, including a $5.0 million
charge for purchased in-process research and development and $6.6 million for
restructuring and other costs primarily related to the acquisition.
Restructuring costs consist primarily of reserves for severance and asset
valuations.
During the second quarter of fiscal 1995, the Company completed its acquisition
of International Power Machines, Inc. ("IPM"). With the consummation of the
acquisition, which was accounted for as a pooling-of-interests, the Company
recorded a non-recurring pretax charge of $3.0 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. In addition, the Company recorded a $.7 million
pretax charge for the settlement of two lawsuits.
Income from Operations
As a result of the acquisition and restructuring charges discussed above, the
Company generated a loss from operations of $4.3 million for the first six
months of fiscal 1996, versus income from operations of $2.2 million in the same
period of fiscal 1995. Excluding the non-recurring items in both fiscal 1996 and
1995 discussed under "Acquisition and Restructuring Expense" and $.5 million of
purchase accounting adjustments in fiscal 1996, pro forma operating income
decreased 8.3% to $7.8 million for the first six months of fiscal 1996, compared
to $8.5 million in the same period of fiscal 1995. This decrease was due
primarily to higher selling and marketing costs offset by improved gross margins
in 1996.
23
Interest/Other
Interest expense increased to $8.9 million in the first six months of fiscal
1996 from $2.5 million in the same period of fiscal 1995. During the second
quarter of fiscal 1996, the Company recorded a one-time non-recurring charge of
$4.4 million for interest paid to Fiskars, the former parent of Deltec, and for
the write-off of remaining debt issuance costs on the Company's previous credit
facility. See discussion under "Liquidity and Financial Condition." In addition,
the Company incurred approximately $1.1 million in interest expense during the
second quarter related to increased borrowings used to finance the acquisition
of Deltec, including interest on $125 million of newly-issued senior
subordinated notes. The remaining increase is due to increased borrowings used
to finance working capital, and higher interest rates on the Company's new
credit facility.
The Company recorded other non-operating expense of $0.2 million for the second
quarter of fiscal 1996 versus other income of $.7 million for the same period in
the prior fiscal year. This change was primarily due to less favorable foreign
currency exchange rates in fiscal 1996 than in fiscal 1995.
Provision for Income Taxes
The provision for income taxes for the first six months of fiscal 1996 reflects
a consolidated effective tax benefit of approximately 35% as compared to a
provision of approximately 144% for the same period of fiscal 1995. The fiscal
1995 rate was affected by the non-deductibility of certain merger costs recorded
during that period.
Net Loss
Net loss for the first two quarters of fiscal 1996 was $8.6 million, or $.93 per
fully diluted share, as compared to a net loss of $.3 million, or $.09 per fully
diluted share, for the same period of fiscal 1995. Excluding the non-recurring
charges discussed above under "Acquisition and Restructuring Expense" and
"Interest/Other" and $.5 million of purchase accounting adjustments, net income
would have been $2.1 million or $.21 per fully diluted share, compared to $4.4
million or $.48 per fully diluted share in the prior comparable period.
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.
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.
24
Liquidity and Financial Condition
At March 31, 1996, the Company had $135.5 million of working capital, as
compared to $105.5 million at September 30, 1995 and $86.0 million at March 31,
1995. The increase of approximately $49.5 million in working capital from March
31, 1995 is primarily the result of an increase in accounts receivable and
inventory balances, offset by increased accounts payable and accrued liabilities
balances. The increase in accounts receivable balances since March 31, 1995 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. In addition, the
acquisition of Deltec accounted for a net increase in working capital of $25.1
million. The increase of $30.0 million in working capital from September 30,
1995 was primarily the result of higher inventory, accounts receivable and
current liabilities balances, primarily as a result of the Deltec acquisition.
The increased levels of working capital have been financed primarily by use of
the Company's revolving credit facility. Cash used in operations was $7.2
million in the second quarter of fiscal 1996, as compared to cash provided by
operations of $7.6 million in the second quarter of fiscal 1995, primarily due
to higher collections of accounts receivable in the fiscal 1995 period.
During the first six months of fiscal 1996, the Company invested approximately
$7.4 million in capital expenditures, as compared to approximately $5.4 million
in the same period of fiscal 1995. Capital expenditures for fiscal 1996 are
expected to approximate $15-16 million, including $2-3 million relating to the
fit-up of the Company's headquarters and for consolidation and integration of
IPM, Lectro, and Deltec. In addition, during the second quarter of fiscal 1996,
the Company invested $163.0 million of cash for the acquisition of Deltec.
In March 1996, the Company refinanced its domestic bank credit facilities with a
$175 million senior secured bank package (the "New Credit Facility") comprised
of a $125 million revolving credit facility and a $50 million term loan. Under
the New Credit Facility, the Company is subject to certain financial covenants,
including maintaining specified fixed charge coverage and leverage ratios, and
minimum net worth and EBITDA. At March 31, 1996, the Company was in compliance
with all applicable covenants. See Note 4 of Notes to consolidated financial
statements for further discussion of the terms and conditions of the New Credit
Facility.
Under the terms of the New Credit Facility, the Company is required to hedge its
interest rate risk. As of April 30, 1996, the Company had entered into several
two-year interest rate cap agreements for a combined notional principal amount
of $65 million, which capped the Company's floating rate LIBOR index to a
weighted average rate of 6.5%. Premiums paid for the interest rate cap
agreements have been capitalized and will be amortized and shown as interest
expense over the terms of the caps. Unamortized premiums are included with other
assets in the accompanying consolidated balance sheet. There are no receivables
under the cap agreements at March 31, 1996. In the future, such amounts will be
accrued as a reduction of interest expense.
In March 1996, the Company issued 125,000 units (the "Units") comprised of $125
million of 11.5% senior subordinated notes (the "Notes") and warrants (the
"Warrants") to purchase 643,750 shares of the Company's common stock. Each Unit
consists of one $1,000 note and one detachable Warrant to acquire 5.15 shares of
the Company's common stock at an exercise price of $13.475 per share, subject to
adjustment in certain events. The Notes were recorded net of a discount equal to
the value of the Warrants. See Notes 4 and 5 of the notes to consolidated
financial statements.
25
The Company expects to finance its capital requirements in the future through
existing cash balances, cash generated from operations, and borrowings under its
existing 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. There can be no assurance,
however, 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.
Litigation
During fiscal year 1995, the Company settled certain litigation. The settlement
of this litigation and its effect on the Company's results of operations is
described in more detail the Company's 1995 Annual Report to Shareholders and
Form 10-K for the year ended September 30, 1995.
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. See Item 1, "Legal Proceedings" elsewhere in this Form
10-Q.
Contingencies
Government Contract Matters
Sales to the Federal government accounted for approximately 16.3% and 29.6% for
the six months ended March 31, 1996 and 1995, respectively, and approximately
27% and 33% of total revenues for fiscal years 1995 and 1994, 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 March
31, 1996.
During fiscal 1995, the Company was awarded a follow-on contract with the Air
Force Air Logistics Command. This is a three-year requirements contract which
permits extension of the ordering period for up to two additional one-year
periods at the Government's option. Following the award of the contract, certain
competitors filed protests with the General Accounting Office ("GAO"). As
previously reported, the GAO sustained the contract protests. The GAO did not
recommend termination of the contract, but did recommend that the Air Force
revise its request for proposal, solicit new bids and then re-evaluate the award
of the contract based upon these new proposals. The Company and the Air Force
filed separate requests that the GAO reconsider its decision. The motions were
26
denied, which concluded the protests. The contract award to the Company remains
in effect for the present, while the Air Force acts on the GAO recommendations.
In that regard, the Air Force has issued an amendment modifying certain parts of
the original request for proposal that led to the contract award. That amendment
solicits a responsive best and final offer from interested bidders for
evaluation and contract award in August 1996. Actual revenues under the contract
in effect and any potential contract resulting from the amended Air Force
solicitation will depend on the specific purchases, if any, of the Air Force and
other agencies which can use the contract. There have been no material purchases
to date under the current contract. There can be no assurances that the current
contract will remain in effect for any definite period, no assurances that the
Air Force will place any orders with the Company against such contract or any
assurances as to the outcome of any re-evaluation by the Air Force of the
competitive bids submitted in response to the amended solicitation.
Foreign Currency Exposures
International sales accounted for approximately 34.4% and 30.0% of total
revenues for the six months ended March 31, 1996 and 1995, respectively, and
approximately 31% and 25% of total revenues for fiscal years 1995, and 1994,
respectively. A significant portion of the Company's international sales are
denominated in foreign currencies. As of March 31, 1996, approximately 29% of
the Company's total assets and 15% of the Company's tangible 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 March 31, 1996, the Company had accounts receivable and
accounts payable totaling approximately $11.1 million that were exposed to
fluctuations in exchange rates. These balances are spread among various
currencies, primarily the French franc. No foreign currency hedge instruments
were outstanding to cover these balances.
During the second quarter of fiscal 1996, the Company had foreign exchange
transaction losses of approximately $37,000, and the change in the cumulative
translation adjustments account decreased the recorded value of common
shareholders' equity by $.1 million from December 31, 1995 to March 31, 1996.
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. In the last three fiscal years, the Company's capital
expenditures for environmental compliance have not been significant. To the best
of the Company's knowledge, there are no 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.
27
PART II - OTHER INFORMATION
MARCH 31, 1996
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 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Shareholders held on February 27, 1996, the Company's
shareholders voted as follows:
A. The following directors were elected to three year terms expiring in 1999:
Mr. Lance L. Knox - 6,873,951 votes for, 1,269,995 votes abstained
Mr. Wayne L. Clevenger - 6,913,051 votes for, 1,230,895 votes abstained
All other directors continued in office.
B. The firm of Arthur Andersen LLP was approved as independent public
accountants for the fiscal year ending September 30, 1996, with 6,945,194 votes
for, 49,916 votes against, and 1,148,836 votes abstained.
There were no other matters to be voted upon.
28
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit
Number Description
2 Stock Purchase Agreement by and between Exide Electronics
Group, Inc. and Fiskars Oy Ab, Fiskars Holding, Inc. and Deltec
Power Systems, Inc, dated November 16, 1995 (filed as Exhibit to
the Company's Current Report on Form 8-K dated November 17, 1995
(File No. 0-18106), and incorporated by reference herein).
2.1 Letter Agreement to Amend Stock Purchase Agreement by and
between Exide and Deltec Power Systems, Inc., dated February 9,
1996 (filed as Exhibit 10.2 to the Company's Current Report on
Form 8-K/A dated February 21, 1996 (File No. 0-18106), and
incorporated by reference herein).
4.1 Form of Certificate of Designation of the Series G Preferred
Stock of Exide Electronics Group, Inc. (filed as Exhibit 4.1 to
the Company's Current Report on Form 8-K/A dated February 21,
1996 (File No. 0-18106), and incorporated by reference herein).
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 dated February 21, 1996 under Item 5,
Other Events, to insure that public markets had equal access to certain
projections and pro-forma financial information distributed in connection with
the Company's private placement of senior subordinated notes under Rule 144A.
The proceeds of the offering were used to partially finance the purchase of
Deltec Power Systems, Inc. from Fiskars OY AB.
The Company subsequently filed a report on Form 8-K/A dated February 21,
1996, for the purpose of amending the previous Form 8-K discussed above.
The Form 8-K/A amends Footnote 18 to the Company's Annual Consolidated
Financial Statements and Footnote 6 to the Company's Interim Consolidated
Financial Statements; added certain pages to the Interim Consolidated
Financial Statements of Deltec Power Systems, Inc.; and amended Section D.5
of the Certificate of Designation of the Series G Preferred Stock of Exide
Electronics Group, Inc.
The Company filed a Current Report on Form 8-K under Item 2 to report the
consummation of the purchase of Deltec Power Systems, Inc. on March 13,
1996. The financial statements required by Item 7 were also filed under the
cover of this Form 8-K.
29
EXIDE ELECTRONICS GROUP, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EXIDE ELECTRONICS GROUP, INC.
(Registrant)
Date: May 15, 1996 By: /s/Marty R. Kittrell
Marty R. Kittrell
Vice President and
Chief Financial Officer
30
EXIDE ELECTRONICS GROUP, INC.
EXHIBIT INDEX - FORM 10-Q
MARCH 31, 1996
Exhibit
Number Description
2 Stock Purchase Agreement by and between Exide Electronics
Group, Inc. and Fiskars Oy Ab, Fiskars Holding, Inc. and Deltec
Power Systems, Inc, dated November 16, 1995 (filed as Exhibit to
the Company's Current Report on Form 8-K dated November 17, 1995
(File No. 0-18106), and incorporated by reference herein).
2.1 Letter Agreement to Amend Stock Purchase Agreement by and
between Exide and Deltec Power Systems, Inc., dated February 9,
1996 (filed as Exhibit 10.2 to the Company's Current Report on
Form 8-K/A dated February 21, 1996 (File No. 0-18106), and
incorporated by reference herein).
4.1 Form of Certificate of Designation of the Series G Preferred
Stock of Exide Electronics Group, Inc. (filed as Exhibit 4.1 to
the Company's Current Report on Form 8-K/A dated February 21,
1996 (File No. 0-18106), and incorporated by reference herein).
11 Statement of Computation of Per Share Earnings.
27 Financial Data Schedule.