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 June 30, 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 August 7, 1996, 9,980,587 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 Nine Months Ended
June 30, June 30,
-------------------- --------------------
1996 1995 1996 1995
---- ---- ---- ----
Revenues
Products $ 97,080 $ 68,614 $ 228,558 $ 192,919
Services 33,374 30,232 86,887 89,261
------ ------ ------ ------
Total revenues 130,454 98,846 315,445 282,180
------ ------ ------ ------
Cost of revenues
Products 69,517 50,715 165,604 145,754
Services 21,191 20,713 59,194 61,421
------ ------ ------ ------
Total cost of revenues 90,708 71,428 224,798 207,175
------ ------ ------ ------
Gross profit 39,746 27,418 90,647 75,005
Selling, general and administrative expense 29,716 17,194 68,198 51,269
Research and development expense 3,895 2,397 8,981 7,386
Acquisition and restructuring expense 3,000 -- 14,621 6,200
----- ----- ----- -----
Income (loss) from operations 3,135 7,827 (1,153) 10,150
Interest expense 7,129 1,373 16,061 3,915
Interest income (134) (131) (345) (359)
Other (income) expense (105) 170 80 (568)
--- ---- --- ----
Income (loss) before income taxes (3,755) 6,415 (16,949) 7,162
Provision (benefit) for income taxes (1,062) 2,322 (5,678) 3,394
Minority interest in joint ventures 285 -- 285 --
----- ----- ----- -----
Net income (loss) $ (2,978) $ 4,093 $ (11,556) $ 3,768
========= ========= ========= =========
Preferred stock dividends and accretion 342 197 409 592
--- --- --- ---
Net income (loss) applicable to common shareholders $ (3,320) $ 3,896 $ (11,965) $ 3,176
========= ========= ========= =========
Per Share Amounts
Primary
Net income (loss) $ (0.33) $ 0.49 $ (1.26) $ 0.40
========= ========= ========= =========
Weighted average number of common and equivalent
shares outstanding 9,978 7,903 9,461 7,845
===== ===== ===== =====
Fully diluted
Net income (loss) $ (0.33) $ 0.44 $ (1.26) $ 0.40
========= ========= ========= =========
Weighted average number of common and equivalent
shares outstanding 9,980 9,768 9,461 7,986
===== ===== ===== =====
The accompanying notes are an integral part of these financial statements.
2
EXIDE ELECTRONICS GROUP, INC.
CONSOLIDATED BALANCE SHEET
(unaudited; dollars in thousands)
June 30, September 30, June 30,
1996 1995 1995
---- ---- ----
Assets
Current assets
Cash and cash equivalents $ 9,727 $ 2,787 $ 2,019
Accounts receivable 127,363 105,524 94,072
Inventories 96,522 72,890 74,611
Other current assets 19,873 13,377 12,826
------ ------ ------
Total current assets 253,485 194,578 183,528
------- ------- -------
Property, plant, and equipment
Land, buildings, and leasehold improvements 13,434 9,931 8,960
Machinery and equipment 78,098 61,519 59,958
------ ------ ------
91,532 71,450 68,918
Accumulated depreciation 41,946 36,393 36,136
------ ------ ------
49,586 35,057 32,782
Goodwill 157,287 18,738 8,940
Other intangible assets 27,637 2,213 1,839
Other assets 14,146 5,865 8,103
------ ------ ------
$ 502,141 $ 256,451 $ 233,353
========= ========= =========
Liabilities, Redeemable Preferred Stock, & Common Shareholders' Equity
Current liabilities
Short-term debt $ 12,047 $ 7,655 $ 5,649
Accounts payable 65,432 46,041 48,024
Deferred revenues 22,996 15,602 15,242
Other accrued liabilities 31,501 19,737 19,104
------ ------ ------
Total current liabilities 131,976 89,035 88,019
------ ------ ------
Long-term debt 128,343 65,258 47,300
------ ------ ------
Subordinated notes 121,838 15,000 15,000
------ ------ ------
Deferred liabilities 6,454 3,391 2,926
----- ----- -----
Redeemable preferred stock 18,170 - 10,000
------ ------ ------
Common shareholders' equity
Common stock, $0.01 par value, 30,000,000
shares authorized; shares issued - 10,367,255
at June 30, 1996, 8,376,341 at September 30,
1995, and 7,776,692 at June 30, 1995 104 84 78
Additional paid-in capital 87,406 58,190 48,274
Retained earnings 20,762 32,437 28,818
Cumulative translation adjustments (1,330) (1,404) (1,496)
------ ------ ------
106,942 89,307 75,674
Less: Notes receivable from shareholders (5,233) (5,520) (5,444)
Treasury stock, 386,668 shares at June
30, 1996, 926 shares at September
30, 1995 and 5,684 shares
at June 30, 1995 (6,349) (20) (122)
---- ---- ----
95,360 83,767 70,108
------ ------ ------
$ 502,141 $ 256,451 $ 233,353
========= ========= =========
<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)
Nine Months Ended
June 30,
-------------------
1996 1995
---- ----
Cash flows from operating activities
Net income (loss) $(11,556) $ 3,768
Adjustments to reconcile net income (loss) to
cash provided by (used in) operating activities:
Depreciation expense 6,317 4,684
Amortization expense 7,413 1,896
Non-cash acquisition and restructuring provisions 13,025 2,200
(Increase) decrease in accounts receivable (348) 11,614
Increase in inventories (700) (21,829)
(Increase) decrease in other current assets 196 (218)
Increase (decrease) in accounts payable (3,952) 3,066
Increase (decrease) in other current liabilities 2,288 (1,266)
Other, net (9,261) 58
---- ------
Net cash provided by operating activities 3,422 3,973
----- -----
Cash flows from investing activities
Acquisitions of property, plant, and equipment (9,496) (9,428)
Acquisitions, net of cash received (162,976) -
Other, net (304) (503)
---- ------
Net cash used in investing activities (172,776) (9,931)
------ ------
Cash flows from financing activities
Proceeds from bank credit facilities, net of fees 224,640 93,334
Payments of bank credit facilities (162,210) (85,200)
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 187 1,159
Purchases of treasury stock (6,926) (625)
Preferred stock dividends of Exide Electronics - (789)
Preferred stock dividends of IPM - (1,232)
Payments of notes receivable from shareholders 215 112
Other, net 456 (68)
---- ----
Net cash provided by financing activities 176,294 2,091
----- ------
Net increase (decrease) in cash and cash equivalents 6,940 (3,867)
Cash and cash equivalents, beginning of period 2,787 5,886
----- -----
Cash and cash equivalents, end of period $ 9,727 $ 2,019
======== ========
Supplemental cash flow disclosures
Interest paid, net of amounts capitalized $ 11,036 $ 3,758
Income taxes paid $ 2,157 $ 1,855
<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 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 networking,
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 June 30, 1996 and 1995. The results
of operations for the three and nine month periods ended June 30, 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 $4.5 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
substantially completed by the end of fiscal 1996.
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 currently completing its purchase
price allocation and does not expect the final amounts to be materially
different from those presented above.
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 related to the acquisition, primarily reserves for severance and
asset valuations.
As a result of continuing efforts to integrate the manufacturing and logistical
activities of Exide Electronics and Deltec, the Company recorded additional
non-recurring expenses of $3.0 million in June 1996, which consisted of
restructuring costs related to the closing of the Company's Dallas manufacturing
facility and the relocation of production to Raleigh, North Carolina.
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) Nine Months ended June 30,
1996 1995
------- --------
Revenues $386,344 $368,218
Net loss $(14,792) $(14,968)
Fully diluted loss per share $(1.58) $(1.64)
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. The pro forma results are based upon a preliminary allocation of
the purchase price, as discussed above.
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):
June 30, Sept. 30, June 30,
1996 1995 1995
---- ---- ----
Raw materials and supplies $37,135 $27,989 $26,654
Work in process 6,989 6,064 7,840
Finished goods 33,905 24,054 25,976
Service parts 18,493 14,783 14,141
------ ------ ------
$ 96,522 $72,890 $74,611
======= ======= =======
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 subsidiaries and 66% of its foreign subsidiaries. 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. The Company and its lending group modified certain financial
covenants as of June 30, 1996, which enabled the Company to be in compliance
with the New Credit Facility as of that date. At June 30, 1996, The Company had
borrowings of $126.8 million outstanding under the New Credit Facility,
including $78.0 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 June 30, 1996. In the future, such amounts, if any,
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, which is being amortized over the term of the Notes.
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 relating to the guarantor and non-guarantor subsidiaries.
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 connection with the Deltec acquisition, the Company issued 1 million shares
of the Company's Series G Convertible Preferred Stock valued at approximately
$18 million in March 1996. 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, is subject to
redemption at the option of the holder at $24 per share at any time after
September 30, 2006, and have a liquidation preference of $20 per share, plus all
accrued and unpaid dividends. Under the terms of the Notes, the Company is
prohibited from paying dividends under certain circumstances. Under these
provisions, the Company was not permitted to pay dividends on the the Series G
Preferred Stock as of June 30, 1996. Dividends in arrears have been accrued and
will be paid as the indenture agreement permits.
NOTE 7 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The Company's payment obligations under the Notes (see Note 4 of the notes to
consolidated financial statements) 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 statement of 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. Certain reclassifications have been made to
provide for uniform disclosure of all periods presented. These reclassifications
are not material.
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 JUNE 30, 1996
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
Product revenues....................... $ -- $ 89,524 $29,533 $(21,977) $ 97,080
Service revenues....................... -- 26,482 6,687 205 33,374
------- ------------ ------------- ------------ ------------
Total revenues............... -- 116,006 36,220 (21,772) 130,454
------- ------------ ------------- ------------ ------------
Product cost of revenues............... -- 69,852 21,838 (22,173) 69,517
Service cost of revenues............... -- 17,705 3,281 205 21,191
------- ------------ ------------- ------------ ------------
Total cost of revenues....... -- 87,557 25,119 (21,968) 90,708
------- ------------ ------------- ------------ ------------
Gross profit...................... -- 28,449 11,101 196 39,746
Selling, general and administrative
expense.............................. 119 20,619 8,978 -- 29,716
Research and development expense....... -- 3,510 385 -- 3,895
Acquisition and restructuring expense.. -- 3,000 -- -- 3,000
------- ------------ ------------- ------------ ------------
Income (loss) from
operations................. (119) 1,320 1,738 196 3,135
Interest expense....................... 6,921 (35) 243 -- 7,129
Interest income........................ (70) 27 (91) -- (134)
Other (income) expense................. -- 218 (323) -- (105)
------- ------------ ------------- ------------ ------------
Income (loss) before income taxes...... (6,970) 1,110 1,909 196 (3,755)
Provision for (benefit from) income
taxes................................ (2,296) (141) 1,375 -- (1,062)
Minority interest in joint ventures.... -- -- 285 -- 285
------- ------------ ------------- ------------ ------------
Income (Loss) before equity in income
of consolidated subsidiaries......... (4,674) 1,251 249 196 (2,978)
Equity in income of consolidated
subsidiaries......................... 1,696 249 -- (1,945) --
------- ------------ ------------- ------------ ------------
Net income (loss)...................... $(2,978) $ 1,500 $ 249 $ (1,749) $ (2,978)
======= ========= =========== ========= =========
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 JUNE 30, 1995
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
Product revenues....................... $ -- $ 68,167 $13,907 $(13,460) $ 68,614
Service revenues....................... -- 26,786 3,446 -- 30,232
------- ------------ ------------- ------------ ------------
Total revenues............... -- 94,953 17,353 (13,460) 98,846
------- ------------ ------------- ------------ ------------
Product cost of revenues............... -- 52,891 11,194 (13,370) 50,715
Service cost of revenues............... -- 18,606 2,107 -- 20,713
------- ------------ ------------- ------------ ------------
Total cost of revenues....... -- 71,497 13,301 (13,370) 71,428
------- ------------ ------------- ------------ ------------
Gross profit...................... -- 23,456 4,052 (90) 27,418
Selling, general and administrative
expense.............................. 136 13,850 3,208 -- 17,194
Research and development expense....... -- 2,397 -- -- 2,397
------- ------------ ------------- ------------ ------------
Income (loss) from
operations................. (136) 7,209 844 (90) 7,827
Interest expense....................... 328 900 145 -- 1,373
Interest income........................ (82) (1) (48) -- (131)
Other (income) expense................. -- 19 153 (2) 170
------- ------------ ------------- ------------ ------------
Income (loss) before income taxes...... (382) 6,291 594 (88) 6,415
Provision for (benefit from) income
taxes................................ (158) 2,297 183 -- 2,322
------- ------------ ------------- ------------ ------------
Income (loss) before equity in income
of consolidated subsidiaries......... (224) 3,994 411 (88) 4,093
Equity in income of consolidated
subsidiaries......................... 4,317 411 -- (4,728) --
------- ------------ ------------- ------------ ------------
Net income ............................ $ 4,093 $ 4,405 $ 411 $ (4,816) $ 4,093
======= ========= =========== ========= =========
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
NINE MONTHS ENDED JUNE 30, 1996
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
Product revenues....................... $ -- $225,118 $66,913 $(63,473) $228,558
Service revenues....................... -- 73,081 13,806 -- 86,887
------- ------------ ------------- ------------ ------------
Total revenues............... -- 298,199 80,719 (63,473) 315,445
------- ------------ ------------- ------------ ------------
Product cost of revenues............... -- 178,813 50,672 (63,881) 165,604
Service cost of revenues............... -- 51,318 7,876 -- 59,194
------- ------------ ------------- ------------ ------------
Total cost of revenues....... -- 230,131 58,548 (63,881) 224,798
------- ------------ ------------- ------------ ------------
Gross profit...................... -- 68,068 22,171 408 90,647
Selling, general and administrative
expense.............................. 304 51,233 16,661 -- 68,198
Research and development expense....... -- 8,496 485 -- 8,981
Acquisition and restructuring expense.. 1,055 11,866 1,700 -- 14,621
------- ------------ ------------- ------------ ------------
Income (loss) from
operations................. (1,359) (3,527) 3,325 408 (1,153)
Interest expense....................... 12,335 3,192 534 -- 16,061
Interest income........................ (188) (13) (144) -- (345)
Other expense.......................... -- 74 6 -- 80
------- ------------ ------------- ------------ ------------
Income (loss) before income taxes...... (13,506) (6,780) 2,929 408 (16,949)
Provision for (benefit from) income
taxes................................ (4,866) (2,509) 1,697 -- (5,678)
Minority interest in joint ventures.... -- -- 285 -- 285
------- ------------ ------------- ------------ ------------
Income (loss) before equity in income
(loss) of consolidated subsidiaries.. (8,640) (4,271) 947 408 (11,556)
Equity in income (loss) of consolidated
subsidiaries......................... (2,916) 947 -- 1,969 --
------- ------------ ------------- ------------ ------------
Net income (loss)......................$(11,556) $ (3,324) $ 947 $ 2,377 $(11,556)
======= ========= =========== ========= =========
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
NINE MONTHS ENDED JUNE 30, 1995
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
Product revenues....................... $ -- $186,597 $39,772 $(33,450) $192,919
Service revenues....................... -- 78,808 10,453 -- 89,261
------- ------------ ------------- ------------ ------------
Total revenues............... -- 265,405 50,225 (33,450) 282,180
------- ------------ ------------- ------------ ------------
Product cost of revenues............... -- 147,222 31,435 (32,903) 145,754
Service cost of revenues............... -- 54,939 6,482 -- 61,421
------- ------------ ------------- ------------ ------------
Total cost of revenues....... -- 202,161 37,917 (32,903) 207,175
------- ------------ ------------- ------------ ------------
Gross profit...................... -- 63,244 12,308 (547) 75,005
Selling, general and administrative
expense.............................. 294 41,718 9,257 -- 51,269
Research and development expense....... -- 7,386 -- -- 7,386
Acquisition and restructuring expense.. 3,700 2,500 -- -- 6,200
------- ------------ ------------- ------------ ------------
Income (loss) from
operations................. (3,994) 11,640 3,051 (547) 10,150
Interest expense....................... 984 2,560 371 -- 3,915
Interest income........................ (236) (19) (104) -- (359)
Other (income) expense................. -- (833) 267 (2) (568)
------- ------------ ------------- ------------ ------------
Income (loss) before income taxes...... (4,742) 9,932 2,517 (545) 7,162
Provision for (benefit from) income
taxes................................ (776) 3,567 603 -- 3,394
------- ------------ ------------- ------------ ------------
Income (loss) before equity in income
of consolidated subsidiaries......... (3,966) 6,365 1,914 (545) 3,768
Equity in income of consolidated
subsidiaries......................... 7,734 1,914 -- (9,648) --
------- ------------ ------------- ------------ ------------
Net income ............................ $ 3,768 $ 8,279 $ 1,914 $(10,193) $ 3,768
======= ========= =========== ========= =========
12
EXIDE ELECTRONICS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 30, 1996
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
ASSETS
Current assets
Cash and cash equivalents............ $ -- $ 3,443 $ 6,284 $ -- $ 9,727
Accounts receivable.................. -- 91,907 35,456 -- 127,363
Intercompany accounts receivable..... 1,262 33,302 4,706 (39,270) --
Inventories.......................... -- 76,819 19,799 (96) 96,522
Other current assets................. 226 15,632 4,015 -- 19,873
------- ------------ ------------- ------------ ------------
Total current assets......... 1,488 221,103 70,260 (39,366) 253,485
Property, plant, and equipment, net.... -- 43,691 5,895 -- 49,586
Goodwill............................... -- 92,985 64,302 -- 157,287
Noncurrent intercompany receivables.... 75,462 94,566 -- (170,028) --
Investment in affiliates............... 284,929 100,879 -- (384,887) 921
Other assets........................... 9,426 20,983 10,453 -- 40,862
------- ------------ ------------- ------------ ------------
$371,305 $574,207 $150,910 $ (594,281) $502,141
======= ========= =========== ========= =========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND COMMON SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt...................... $ 450 $ -- $11,597 $ -- $ 12,047
Accounts payable..................... -- 50,261 15,171 -- 65,432
Intercompany accounts payable........ 3,041 24,977 11,252 (39,270) --
Deferred revenues.................... -- 18,842 4,154 -- 22,996
Other accrued liabilities............ 5,696 20,867 4,938 -- 31,501
------- ------------ ------------- ------------ ------------
Total current liabilities.... 9,187 114,947 47,112 (39,270) 131,976
Long-term debt......................... 126,750 271 1,322 -- 128,343
Subordinated notes..................... 121,838 -- -- -- 121,838
Noncurrent intercompany payables....... -- 170,028 -- (170,028) --
Deferred liabilities................... -- 4,032 2,422 -- 6,454
Redeemable preferred stock............. 18,170 -- -- -- 18,170
Common shareholders' equity............ 95,360 284,929 100,054 (384,983) 95,360
------- ------------ ------------- ------------ ------------
$371,305 $574,207 $150,910 $ (594,281) $502,141
======= ========= =========== ========= =========
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
NINE MONTHS ENDED JUNE 30, 1996
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ -------------- ------------ ------------
(DOLLARS IN THOUSANDS)
Cash flows from operating activities
Net income (loss)........................ $(11,556) $ (3,324) $ 947 $ 2,377 $(11,556)
Adjustments to reconcile net income to
cash provided by (used in) operating
activities:
Depreciation expense.................... -- 5,561 756 -- 6,317
Amortization expense.................... -- 6,020 1,393 -- 7,413
Non-cash acquisition and restructuring..
provisions............................ -- 12,950 75 -- 13,025
Equity in (income) loss of consolidated.
subsidiaries.......................... 2,916 (947) -- (1,969) --
(Increase) decrease in accounts
receivable............................ (1,056) 4,855 (11,584) 7,437 (348)
(Increase) decrease in inventories...... -- 233 (523) (410) (700)
Increase in other current assets........ (169) 1,206 (841) -- 196
Increase (decrease) in accounts
payable............................... 3,041 (1,621) 2,065 (7,437) (3,952)
Increase (decrease) in other current
liabilities........................... 5,341 (3,932) 878 1 2,288
Other, net.............................. (6) (9,814) 559 -- (9,261)
--------- ------------ ------- ------------ ------------
Net cash provided by (used in)
operating activities............... (1,489) 11,187 (6,275) (1) 3,422
--------- ------------ ------- ------------ ------------
Cash flows from investing activities
Acquisitions of property, plant,
and equipment........................... -- (8,606) (890) -- (9,496)
Acquisitions, net of cash received........ (162,976) -- -- -- (162,976)
Other, net................................ (108,093) (259,621) (73,284) 440,694 (304)
--------- ------------ ------- ------------ ------------
Net cash provided by (used in)
investing activities............... (271,069) (268,227) (74,174) 440,694 (172,776)
--------- ------------ ------- ------------ ------------
Cash flows from financing activities
Proceeds from bank credit facilities...... 159,874 57,878 6,888 -- 224,640
Payments of bank credit facilities........ (33,250) (127,108) (1,852) -- (162,210)
Issuance of senior subordinated debt, net
of fees................................. 116,673 -- -- -- 116,673
Issuance of common stock warrants......... 3,259 -- -- -- 3,259
Issuance of common stock.................. 187 -- -- -- 187
Purchases of treasury stock............... (6,926) -- -- -- (6,926)
Payments of notes receivable from
shareholders............................ 215 -- -- -- 215
Other, net................................ 32,526 329,120 79,503 (440,693) 456
--------- ------------ ------- ------------ ------------
Net cash provided by (used in)
financing activities............... 272,558 259,890 84,539 (440,693) 176,294
--------- ------------ ------- ------------ ------------
Net increase in cash and cash equivalents... -- 2,850 4,090 -- 6,940
Cash and cash equivalents, beginning of
period.................................... -- 593 2,194 -- 2,787
--------- ------------ ------- ------------ ------------
Cash and cash equivalents, end of period.... $ -- $ 3,443 $6,284 $ -- $ 9,727
========= =========== ============== =========== ===========
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
NINE MONTHS ENDED JUNE 30, 1995
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ -------------- ------------ ------------
(DOLLARS IN THOUSANDS)
Cash flows from operating activities
Net income (loss)........................ $ 3,768 $ 8,279 $ 1,914 $(10,193) $ 3,768
Adjustments to reconcile net income to
cash provided by (used in) operating
activities:
Depreciation expense................... -- 4,295 389 -- 4,684
Amortization expense................... -- 1,503 393 -- 1,896
Equity in (income) loss of consolidated
subsidiaries......................... (7,734) (1,914) -- 9,648 --
Merger and litigation provisions -- 2,200 -- -- 2,200
(Increase) decrease in accounts
receivable........................... -- 10,769 (2,948) 3,793 11,614
(Increase) decrease in inventories..... -- (17,873) (4,498) 542 (21,829)
(Increase) decrease in other current
assets............................... 5 318 (541) -- (218)
Increase (decrease) in accounts
payable.............................. -- 4,514 2,345 (3,793) 3,066
Increase (decrease) in other current
liabilities.......................... (397) (1,811) 942 -- (1,266)
Other, net............................. -- 58 -- -- 58
--------- ------------ -------------- ------------ ------------
Net cash provided by (used in)
operating activities.............. (4,358) 10,338 (2,004) (3) 3,973
--------- ------------ -------------- ------------ ------------
Cash flows from investing activities
Acquisitions of property, plant, and
equipment.............................. -- (8,899) (529) -- (9,428)
Other, net............................... 903 (2,218) 53 759 (503)
--------- ------------ -------------- ------------ ------------
Net cash provided by (used in)
investing activities.............. 903 (11,117) (476) 759 (9,931)
--------- ------------ -------------- ------------ ------------
Cash flows from financing activities
Proceeds from bank credit facilities..... -- 92,167 1,167 -- 93,334
Payments of bank credit facilities....... -- (84,567) (633) (85,200)
Payments of industrial revenue bonds..... -- (4,600) -- -- (4,600)
Issuance of common stock................. 1,159 -- -- -- 1,159
Purchases of treasury stock.............. (625) -- -- -- (625)
Preferred stock dividends of Exide
Electronics............................ (789) -- -- -- (789)
Preferred stock dividends of IPM......... -- (1,232) -- -- (1,232)
Payments of notes receivable from
shareholders........................... 112 -- -- -- 112
Other, net............................... 3,598 (4,141) 1,231 (756) (68)
--------- ------------ -------------- ------------ ------------
Net cash provided by (used in)
financing activities.............. 3,455 (2,373) 1,765 (756) 2,091
--------- ------------ -------------- ------------ ------------
Net decrease in cash and cash
equivalents.............................. -- (3,152) (715) -- (3,867)
Cash and cash equivalents, beginning of
period................................... -- 3,754 2,132 -- 5,886
--------- ------------ -------------- ------------ ------------
Cash and cash equivalents, end of period... $ -- $ 602 $ 1,417 $ -- $ 2,019
========= =========== ============== =========== ===========
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 networking, 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 nine months of fiscal
1996 compared to the first nine 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 and third quarters of fiscal 1996 to
integrate recent acquisitions; the growth in revenues of small uninterruptible
power supply ("UPS") products; the 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 in San Diego, California and has a manufacturing facility in
Tijuana, Mexico, and Fiskars Power Systems, which is based and has a
manufacturing facility in Helsinki, Finland. Deltec's accounts and results of
operations were included in the Company's financial statements from March 13,
1996 forward. During the quarter ended June 30, 1996, the Company recorded
revenues of approximately $32 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 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 specified in the acquisition agreement. Such determination is expected to
be substantially completed by the end of fiscal 1996. Transaction costs of
approximately $4.5 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.
17
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 single phase products; the Large Systems
Group ("LSG") for all three-phase products; 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 nine months ended June 30, 1996.
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.
18
Results of Operations
The following table presents, in millions of dollars, for the periods shown,
statement of operations data, revenue growth for the third quarter and nine
months year-to-date of fiscal 1996 as compared to the same periods of fiscal
1995, and selected operating statement items as a percentage of revenues.
Three Months Ended Nine Months Ended
June 30, June 30,
-------------------------------------------------------
1996 1995 1996 1995
-------------------------------------------------------
Revenues
Small Systems Products(1) $61.7 $32.6 $131.4 $ 90.4
Large Systems Products(1) 35.4 36.0 97.2 102.5
-------------------------------------------------------
Total Products 97.1 68.6 228.6 192.9
Worldwide Services Group 33.4 30.2 86.9 89.3
-------------------------------------------------------
Total Revenues 130.5 98.8 315.5 282.2
-------------------------------------------------------
Gross Profit
Products 27.6 17.9 62.9 47.2
Services 12.2 9.5 27.7 27.8
-------------------------------------------------------
Total Gross Profit 39.7 27.4 90.6 75.0
-------------------------------------------------------
Selling, general and administrative expense 29.7 17.2 68.2 51.3
Research and development expense 3.9 2.4 9.0 7.4
Acquisition and restructuring expense 3.0 .0 14.6 6.2
-------------------------------------------------------
Income (loss) from operations 3.1 7.8 (1.2) 10.2
Interest expense 7.1 1.4 16.1 3.9
Interest income (.1) (.1) (.3) (.4)
Other (income) expense (.1) .1 .1 (.6)
Provision (benefit) for income taxes (1.1) 2.3 (5.7) 3.4
Minority interest in joint ventures .3 .0 .3 .0
-------------------------------------------------------
Net income (loss) $(3.0) $ 4.1 $(11.6) $3.8
-------------------------------------------------------
Revenue Growth:
Small Systems Products(1) 89.2% 45.4%
Large Systems Products(1) (1.7)% (5.2)%
Total Products 41.5% 18.5%
Worldwide Services Group 10.4% (2.7)%
Total Revenues 32.0% 11.8%
19
Margin Data (as a percent of revenues):
Gross Profit
Products 28.4% 26.1% 27.5% 24.4%
Services 36.5% 31.5% 31.9% 31.2%
Total Gross Profit 30.5% 27.7% 28.7% 26.6%
Selling, general and administrative expense 22.8% 17.4% 21.6% 18.2%
Research and development expense 3.0% 2.4% 2.8% 2.6%
Acquisition and restructuring expense 2.3% .0% 4.6% 2.2%
Income (loss) from operations 2.4% 7.9% (.4)% 3.6%
- -----------------
(1) Certain Powerware(R) Plus product lines (18-36 kVA) have been reclassified
from SSG to LSG. All periods have been restated.
20
Three months ended June 30, 1996 versus June 30, 1995
Total revenues increased by 32.0% to $130.5 million in the third quarter of
fiscal 1996 from $98.8 million in the third quarter of fiscal 1995, due to a
41.5% increase in product revenues and a 10.4% increase in service revenues.
SSG revenues for the quarter ended June 30, 1996 increased by $29.1 million or
89.2% over the same period of the prior year. Approximately $22.7 million of
this increase was due to revenues generated by the recent acquisition of Deltec.
Excluding revenues from this acquisition, revenues increased by 19.4%, primarily
from the acquisition of Lectro Products, Inc.("Lectro") in August 1995.
Including the results of Deltec, SSG's international sales increased over 50%,
reflecting a strong performance in Europe, which was partially offset by
declines in Latin America. Domestic SSG revenues, excluding Deltec, continued to
be affected by the moderation of sales to certain OEM customers who have been
restructuring their businesses. Sales of the Prestige product family increased
approximately 18% over the same period last year. Over 60% of Prestige sales
were made in international markets, consistent with the prior year. Sales of
line-interactive and off-line products grew significantly year over year, due to
sales of new products acquired in the Deltec acquisition. Increased revenues
were generally due to a higher number of units sold, as opposed to increased
unit prices.
LSG revenues for the third quarter of fiscal 1996 were 1.7% 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"), offset by increased commercial revenues and revenues related to the
Deltec acquisition. 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 10-15% due to the completion of the FAA
shipments. Excluding the effect of this scheduled decline, LSG revenues
increased $3.7 million or 12.7% for the quarter ended June 30, 1996 versus the
21
same period in the prior year, reflecting increased sales of its Powerware Plus
products both domestically and internationally, and revenues from the Deltec
acquisition ($3.6 million) offset by lower sales of certain older product lines
and IPM products. 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 third quarter of fiscal 1996 increased by $3.1 million or
10.4% over the same period of the prior fiscal year. This increase was primarily
attributable to revenues of $6.1 million from the Deltec acquisition and an
increase of $1.5 million in other domestic commercial revenues, offset by a
decline of $5.4 million in Federal service revenues. Deltec's revenues were
split almost equally between commercial and international channels. Federal
service revenues decreased over the prior year by approximately 40%, mainly
attributable to a decline in FAA site service revenues. At June 30, 1996, the
Company was installing systems at five FAA sites as compared to thirteen FAA
sites in the prior year. The Company was also providing design services at one
site at June 30, 1996 as compared to five sites at June 30, 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. Excluding the effect of the Deltec
acquisition, WSG revenues are expected to decline in the range of 10-15% for
fiscal 1996, due to the completion of the original FAA program.
Gross Profit
Gross profit increased by $12.3 million in the third quarter of fiscal 1996 over
the third quarter of fiscal 1995 to $39.7 million. Gross profit as a percentage
of total revenues increased to 30.5% in the third quarter of fiscal 1996 from
27.7% in the same period of fiscal 1995. Product gross profit margins rose to
28.4% in the third quarter of fiscal 1996 from 26.1% in the same period of
fiscal 1995, while service margins increased to 36.5% from 31.5% 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
and Powerware Plus product lines, 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 increased for the quarter
primarily due to a higher proportion of high margin commercial services versus
Federal service revenues, and higher margins on revenues generated by Deltec.
Selling, General and Administrative Expense
Selling, general and administrative expense increased $12.5 million to $29.7
million in the third quarter of fiscal 1996 (22.8% of revenues) from $17.2
million in the same period of fiscal 1995 (17.4% of revenues). Selling and
marketing expenses increased due to incremental costs related to the operations
of Deltec and ETG, and higher commissions and incentives. Total commissions and
incentives spending, and such costs as a percentage of sales, rose in the third
quarter of fiscal 1996 versus 1995 due to a higher mix of commercial revenues to
total revenues in the third 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 increased amortization of purchase accounting adjustments,
goodwill and other intangible assets ($3.5 million) generated by the
acquisitions of Deltec and Lectro and to the incremental administrative costs of
Deltec.
22
Research and Development Expense
Research and development expense increased $1.5 million to $3.9 million in the
third quarter of fiscal 1996 (3.0% of revenues) compared to $2.4 million in the
same period of fiscal 1995 (2.4% of revenues). The increase in research and
development expense was attributable to the investment in ETG, incremental costs
from the acquisition of Deltec, and expenses associated with customizing
products for certain OEM customers.
Acquisition and Restructuring Expense
During the quarter ended June 30, 1996, the Company recorded approximately $3.0
million of pretax non-recurring restructuring expenses primarily related to the
closing of its Dallas manufacturing facility and the relocation of manufacturing
to Raleigh, North Carolina. Restructuring costs consisted primarily of reserves
for severance, facilities shut-down costs and asset valuations.
Income from Operations
As a result of the restructuring charges and higher operating expenses in the
quarter ended June 30, 1996, including amortization of purchase accounting
adjustments, goodwill and other intangible assets from the acquisitions of
Deltec and Lectro of $4.5 million, the Company's income from operations declined
$4.7 million to $3.1 million versus $7.8 million in the same period of fiscal
1995. Excluding the non-recurring item discussed under "Acquisition and
Restructuring Expense" and $2.3 million of purchase accounting adjustments in
the third quarter of fiscal 1996, pro forma operating income increased 7.6% to
$8.4 million for the current quarter, compared to $7.8 million in the same
quarter of fiscal 1995. This increase was due primarily to higher revenues,
improved profit margins, and expense controls.
Interest Expense
Interest expense increased to $7.1 million in the third quarter of fiscal 1996
from $1.4 million in the same period of fiscal 1995. The Company incurred
approximately $5.6 million in interest expense related to increased borrowings
used to finance the acquisition of Deltec, including interest on $125 million of
senior subordinated notes issued in March 1996. The remaining increase is due to
increased borrowings used to finance working capital, and higher interest rates
on the Company's new credit facilities.
Benefit/Provision for Income Taxes
The fiscal 1996 provision for third quarter income taxes reflects a consolidated
effective tax benefit of approximately 28.3% as compared to a provision of
approximately 36% for the same period of fiscal 1995. The difference is due to
the effect of losses during the fiscal 1996 quarter, the non-deductibility of
certain acquisition-related expenses, and a different proportion of income
(loss) in certain tax jurisdictions.
Net Loss/Pro Forma Net Income
Net loss for the third quarter of fiscal 1996 was $3.0 million, or $.33 per
fully diluted share, as compared to net income of $4.1 million, or $.44 per
fully diluted share, for the same period of fiscal 1995. Excluding the
non-recurring items in fiscal 1996 discussed above under "Acquisition and
Restructuring Expense" and the effect of one-time purchase accounting
adjustments affecting the quarter, pro forma net income decreased 87% to $.5
million for the current quarter, compared to $4.1 million in the same quarter of
fiscal 1995.
23
Nine months ended June 30, 1996 versus June 30, 1995
Total revenues increased by 11.8% to $315.5 million in the nine months ended
June 30, 1996 from $282.2 million in the nine months ended June 30, 1995, due to
an 18.5% increase in product sales and a 2.7% decrease in service revenues.
SSG revenues for the nine months ended June 30, 1996 increased by $41.0 million
or 45.4% over the same period of the prior year. Approximately $27.1 million was
due to revenues generated by the recent acquisition of Deltec. Excluding the
effect of Deltec, revenues grew by 15.3% and benefitted from the acquisition of
Lectro in August 1995. International sales for the nine months were
approximately $66.8 million, an increase of approximately 21% over fiscal 1995.
Deltec contributed $13.9 million in international revenues, primarily in Europe.
SSG revenues in traditional international channels decreased slightly, as
increased revenues in Europe and the Far East were offset by declines in Latin
America. Sales to Latin America have been affected by the economic situation in
that region. Domestic SSG revenues, exclusive of Deltec, were flat as sales were
affected by an overall slowdown in the demand for personal computers,
workstations and servers, and restructuring among some of the Company's OEM
customers. Sales of the Prestige product family increased approximately 28% for
the first nine 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 nine months ended June 30, 1996 were 5.2% 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 $16.2 million or 22.8%,
reflecting strong commercial sales of Powerware Plus products in both domestic
and international markets, and $4.7 million of incremental revenues generated
by Deltec.
WSG revenues for the first nine months of fiscal 1996 decreased by $2.4 million
or 2.7% over the same period of fiscal 1995. The decrease was attributable to
incremental revenues of $7.2 million from the Deltec acquisition and an increase
in commercial services of $2.7 million, offset by a $12.3 million decrease in
Federal service revenues. WSG's commercial domestic revenues grew by about 12.9%
in the current period, due primarily to $3.4 million of revenues generated by
Deltec and increased field service revenues of $1.7 million, mostly from battery
service sales. International service revenues increased 72.7%, due to higher
sales in Europe, including $3.5 million of incremental revenues generated by
Deltec. As expected, Federal service revenues decreased over the prior year by
approximately 31.2%, mainly attributable to the decline in FAA site service
revenues.
Gross Profit
Gross profit increased by $15.6 million in the first nine months of fiscal 1996
over the same period of fiscal 1995 to $90.6 million. Gross profit as a
percentage of total revenues increased to 28.7% for the first nine months of
fiscal 1996 from 26.6% in the same period of fiscal 1995. Product gross profit
margins rose to 27.5% in the first nine months of fiscal 1996 from 24.4% in the
same period of fiscal 1995, while service margins increased to 31.9% from 31.2%
during that same period. Product gross profit margins rose due to a higher
proportion of sales in the new, higher margin Powerware Prestige and Powerware
Plus product lines, and the effect of higher margins on 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 increased for the nine months primarily
due to a higher proportion of commercial revenues at higher margins, and higher
margins on revenues from the Deltec acquisition.
24
Selling, General and Administrative Expense
Selling, general and administrative expense increased $16.9 million to $68.2
million in the first nine months of fiscal 1996 (21.6% of revenues) from $51.3
million in the same period of fiscal 1995 (18.2% of revenues). Selling and
marketing expenses increased due to incremental costs related to the
consolidation of Deltec and ETG, 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 nine months of fiscal 1996 versus 1995 due to a higher mix of commercial
revenues to total revenues in the first nine 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 $4.5 million of amortization of purchase accounting
adjustments, goodwill and other intangible assets generated by the acquisitions
of Deltec and Lectro.
Research and Development Expense
Research and development expense increased $1.6 million to $9.0 million in the
first nine months of fiscal 1996 (2.8% of revenues) compared to $7.4 million in
the same period of fiscal 1995 (2.6% of revenues). The increase in research and
development expense was attributable to the investment in ETG, incremental costs
from the acquisition of Deltec, and expenses associated with customizing
products for certain OEM customers.
Acquisition and Restructuring Expense
During the third quarter of fiscal 1996, the Company recorded approximately $3.0
million of non-recurring restructuring expenses related to the closing of its
Dallas manufacturing facility and the relocation of manufacturing to Raleigh,
North Carolina. Restructuring cost consisted primarily of reserves for
severance, facilities shut-down costs, and asset valuations.
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.
25
Income (loss) from Operations
As a result of the acquisition and restructuring charges discussed above, the
Company generated a loss from operations of $1.2 million for the first nine
months of fiscal 1996, versus income from operations of $10.2 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 $2.8
million of purchase accounting adjustments in fiscal 1996, pro forma operating
income was $16.2 million for the first nine months of fiscal 1996, comparable to
$16.3 million in the same period of fiscal 1995.
Interest/Other Expense
Interest expense increased $12.2 million to $16.1 million in the first nine
months of fiscal 1996 from $3.9 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 $6.7
million in interest expense during the first nine months of fiscal 1996 related
to increased borrowings used to finance the acquisition of Deltec, including
interest on $125 million of senior subordinated notes issued in March 1996. 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 expense of $0.1 million for the first
nine months of fiscal 1996 versus other income of $0.6 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.
Benefit/Provision for Income Taxes
The benefit from income taxes for the first nine months of fiscal 1996 reflects
a consolidated effective tax rate of approximately 33.5% as compared to a
provision of approximately 47.4% 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/Pro Forma Net Income
Net loss for the first nine months of fiscal 1996 was $11.6 million, or $1.26
per fully diluted share, as compared to a net income of $3.8 million, or $.40
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 $2.8 million of purchase accounting
adjustments, net income would have been $2.6 million or $.23 per fully diluted
share, compared to $8.5 million or $.93 per fully diluted share in the prior
comparable period.
26
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.
Liquidity and Financial Condition
At June 30, 1996, the Company had $121.5 million of working capital, as compared
to $105.5 million at September 30, 1995 and $95.5 million at June 30, 1995. The
increase of approximately $26.0 million in working capital from June 30, 1995 is
primarily a result of the acquisition of Deltec, coupled with lower inventory
and higher accounts receivable balances as a result of increased sales volume
and longer payment terms on certain international revenues. The increase of
$16.0 million in working capital from September 30, 1995 was primarily the
result of the Deltec acquisition, offset by lower accounts receivable and
inventory balances, higher liabilities due to restructuring accruals, and higher
short-term debt levels used to support growing international operations. The
increased levels of working capital have been financed primarily by use of the
Company's revolving credit facility. Cash provided by operations was $10.6
million in the third quarter of fiscal 1996, as compared to cash used in
operations of $3.6 million in the third quarter of fiscal 1995, primarily due to
reductions in inventory during the third quarter of 1996. For the nine months
ended June 30, 1996, the Company generated $3.4 million of cash from operations
compared to $4.0 million in the same period of fiscal 1995.
During the first nine months of fiscal 1996, the Company invested approximately
$9.5 million in capital expenditures, approximately the same as the first nine
months of fiscal 1995. Capital expenditures for fiscal 1996 are expected to
approximate $13-14 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. The Company and its lending group modified certain
financial covenants as of June 30, 1996, which enabled the Company to be in
compliance with the New Credit Facility as of that date. See Note 4 of the notes
to consolidated financial statements for further discussion of the terms and
conditions of the New Credit Facility.
27
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 June 30, 1996. In the future, such amounts, if any,
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, which will be amortized over the term of the Notes.
See Notes 4 and 5 of the notes to consolidated financial statements.
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.
28
Contingencies
Government Contract Matters
Sales to the Federal government accounted for approximately 14% and 28% for the
nine months ended June 30, 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 June
30, 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
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. The Company submitted a revised proposal in
accordance with the amendment. A determination is expected later this year.
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 37% and 32% of total revenues
for the nine months ended June 30, 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 June 30, 1996, approximately 30% of the
Company's total assets and 25% 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
29
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 June 30, 1996, the Company had accounts receivable and accounts
payable totaling approximately $7.4 million that were exposed to fluctuations in
exchange rates. These balances are spread among various currencies, primarily
the French franc. The Company entered into a forward currency contract on July
31, 1996 to hedge a portion of its receivables denominated in French francs. The
contract covers the purchase of 10 million francs on September 3, 1996.
During the third quarter of fiscal 1996, the Company had foreign exchange
transaction losses of approximately $126,000, and the change in the cumulative
translation adjustments account increased the recorded value of common
shareholders' equity by $.2 million from March 31, 1996 to June 30, 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.
30
PART II - OTHER INFORMATION
JUNE 30, 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.
31
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
There were no reports on Form 8-K filed during the third quarter.
32
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: August 14, 1996 By: /s/Marty R. Kittrell
Marty R. Kittrell
Vice President and
Chief Financial Officer
33
EXIDE ELECTRONICS GROUP, INC.
EXHIBIT INDEX - FORM 10-Q
JUNE 30, 1996
Exhibit
Number Description
11 Statement of Computation of Per Share Earnings.
27 Financial Data Schedule.