UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q/A (Amendment No. 2) Mark One [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended November 30, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 1-15851 APW Ltd. (Exact name of registrant as specified in its charter) Bermuda 04-2576375 ------- ---------- (State or other jurisdiction of (I.R.S. Employer Id. No.) incorporation or organization) N22 W23685 Ridgeview Parkway West Waukesha, Wisconsin 53188-1013 (Address of principal executive offices) (Zip code) (262) 523-7600 -------------- (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 ------- ------- The number of shares outstanding of the registrant's Common Stock (including related Preferred Stock purchase rights) as of January 2, 2002 was 40,813,086. APW Ltd. INDEX This amendment on Form 10-Q/A #2 amends Items 1 and 2 of the Quarterly Report of APW Ltd. (the "Company") on Form 10-Q previously filed for the three months ended November 30, 2001 and 2000. This Quarterly Report on Form 10-Q/A #2 is filed in connection with the Company's restatement of its financial statements as of August 31, 2001 and 2000 and for the years ended August 31, 2001, 2000 and 1999 and for the quarters ended November 30, 2001 and November 30, 2000. Financial statement information and related disclosures included in this amended filing reflect, where appropriate, changes as a result of the restatements as described in Notes 1 and 9. All other information contained in this Quarterly Report on Form 10-Q/A #2 is as of the date referenced for such information in the original filing or, if no date is referenced for information in the original filing, as of the date of such filing. PART I - FINANCIAL INFORMATION Page No. - ------------------------------ -------- Item 1 - Financial Statements Condensed Consolidated Statements of Operations - Three Months Ended November 30, 2001 and 2000............ 3 Condensed Consolidated Balance Sheets - November 30, 2001 and August 31, 2001.................... 4 Condensed Consolidated Statements of Cash Flows - Three Months Ended November 30, 2001 and 2000............ 5 Notes to Condensed Consolidated Financial Statements........ 6 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 18 Item 3 - Quantitative and Qualitative Disclosures About Market Risk...... 26 PART II - OTHER INFORMATION - --------------------------- Item 1 - Legal Proceedings............................................... 27 Item 6 - Exhibits and Reports on Form 8-K................................ 27 SIGNATURE................................................................ 27 - --------- 2 PART I - FINANCIAL INFORMATION Item 1 - Financial Statements - ----------------------------- APW Ltd. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited) Three Months Ended November 30, ------------------------------- As Restated ------------------------------- 2001 2000 -------------- -------------- Net sales $ 219,829 $ 359,723 Cost of products sold 198,944 270,631 --------- --------- Gross profit 20,885 89,092 Engineering, selling and administrative expenses 40,136 56,005 Amortization of intangibles assets 6,302 6,025 Restructuring charges 10,011 - Loss on sale of subsidiary - 2,667 --------- ---------- Operating earnings (loss) (35,564) 24,395 Net financing costs 14,500 6,464 Other expense (income), net (362) 317 --------- ---------- Earnings (loss) before income tax expense (benefit) (49,702) 17,614 Income tax expense (benefit) (12,464) 5,935 --------- ---------- Net earnings (loss) $ (37,238) $ 11,679 ========= ========= Basic earnings (loss) per share: Earnings (loss) per share $ (0.93) $ 0.30 ========= ========== Weighted average common shares outstanding 40,046 39,213 ========= ========== Diluted earnings (loss) per share: Earnings (loss) per share $ (0.93) $ 0.28 ========= ========== Weighted average common and potential dilutive common shares outstanding 40,046 41,381 ========= ========== See accompanying Notes to Condensed Consolidated Financial Statements 3 APW Ltd. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data) As Restated -------------------------------- November 30, August 31, 2001 2001 ------------ ------------ (Unaudited) ASSETS ------ Current assets Cash and cash equivalents $ 5,571 $ 6,190 Accounts receivable, net 100,591 112,948 Inventories 113,354 130,937 Prepaid expenses 15,188 14,213 Deferred income taxes 16,031 16,650 ----------- ----------- Total current assets 250,735 280,938 Property, plant and equipment 461,615 477,915 Less: Accumulated depreciation (224,381) (222,886) ----------- ----------- Net property, plant and equipment 237,234 255,029 Goodwill, net 674,407 679,225 Other intangible assets, net 26,730 27,616 Other assets 69,966 58,524 ----------- ----------- Total assets $ 1,259,072 $ 1,301,332 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Current liabilities Short-term borrowings $ 625,835 $ 603,353 Trade accounts payable 89,599 119,904 Accrued compensation and benefits 26,206 30,126 Income taxes payable 38,157 33,859 Other current liabilities 45,620 40,701 ----------- ----------- Total current liabilities 825,417 827,943 Long-term debt 20,754 18,096 Other long-term liabilities 41,824 45,375 Shareholders' equity (deficit) Common Stock--$0.01 par value per share; authorized 250,000,000 shares; issued and outstanding, less contingent shares, 40,055,453 and 40,042,207 shares, respectively 400 400 Share premium 669,772 669,772 Accumulated deficit (271,044) (233,765) Accumulated other comprehensive loss (28,051) (26,489) ----------- ------------ Total shareholders' equity 371,077 409,918 ----------- ------------ Total liabilities and shareholders' equity $ 1,259,072 $ 1,301,332 =========== ============ See accompanying Notes to Condensed Consolidated Financial Statements 4 APW Ltd. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Three Months Ended November 30, ------------------------------------- As Restated ------------------------------------- 2001 2000 --------------- ---------------- Operating activities - -------------------- Net earnings (loss) $ (37,238) $ 11,679 Adjustments to reconcile net earnings (loss) to net cash used in operating activities: Depreciation and amortization 25,121 15,525 Amortization of financing fees 1,605 - Gain from sale of assets (153) - Loss on sale of subsidiary - 2,667 Benefit for deferred income taxes (11,138) (338) Restructuring charges 10,011 - Changes in operating assets and liabilities: Accounts receivable 24,622 (14,693) Inventories 16,761 (17,200) Prepaid expenses and other assets (2,270) (5,089) Trade accounts payable (29,442) 3,275 Income taxes 4,883 (22,974) Other liabilities (11,707) (1,987) --------------- ---------------- Net cash used in operating activities (8,945) (29,135) Investing activities - -------------------- Proceeds on the sale of property, plant and equipment 2,689 - Additions to property, plant and equipment (5,932) (30,840) Net proceeds on sale of subsidiary, net of cash sold - 1,782 Other investing activities (366) (600) --------------- ---------------- Net cash used in investing activities (3,609) (29,658) Financing activities - -------------------- Net short term borrowings (5,667) 3,314 Principal repayments on long-term debt (67,507) (58,536) Principal borrowings on long-term debt 99,023 90,332 Net commercial paper borrowings - 25,062 Net receivables financed (13,402) - Stock option exercises - 704 Other financing activities (42) 168 --------------- ---------------- Net cash provided by financing activities 12,405 61,044 Effect of exchange rate changes on cash (470) (23) --------------- ---------------- Net increase (decrease) in cash and cash equivalents (619) 2,228 Cash and cash equivalents - beginning of period 6,190 712 --------------- ---------------- Cash and cash equivalents - end of period $ 5,571 $ 2,940 =============== ================ See accompanying Notes to Condensed Consolidated Financial Statements 5 APW Ltd. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Restatements - -------------------------------- APW Ltd. (hereinafter referred to as "APW Ltd.", "APW" or "the Company") has determined that accounting improprieties occurred in fiscal 2002, 2001, 2000 and 1999 at one U.S. subsidiary and in fiscal 2001 at one U.K. subsidiary. These accounting improprieties resulted in the overstatement of assets (primarily cash and inventory) and income and the understatement of liabilities (primarily trade accounts payable and accrued compensation and benefits) and expense. As a result, the consolidated financial statements as of August 31, 2001 and 2000 and for the years ended August 31, 2001, 2000 and 1999 as well as the interim results for these periods and the results for the interim periods ended November 30, 2001 have been restated. The restated consolidated financial statements as of August 31, 2001 and 2000 and for the years ended August 31, 2001, 2000 and 1999 have been included in a Form 10-K/A. Restated condensed financial statement information for the interim periods in the years ended August 31, 2001 and 2000 have been included in Item 8 of the Form 10-K/A. Restated condensed financial statement information for the interim periods ended November 30, 2001 and 2000 are included herein. A summary of the effects of the restatements are set forth in Note 9. As a result of the restatement for the year ended August 31, 2001, the Company believes that it would have been in default of certain debt covenants as of August 31, 2001, unless the Company had obtained waivers or the Company's lenders had amended the debt covenants. Accordingly, the Company has classified borrowings under the Revolving Multi-Currency Credit Agreement and the U.K. Facility Agreement as a current liability as of November 30, 2001 and August 31, 2001 in the restated consolidated financial statements. Note 2 - Summary of Significant Accounting Policies - --------------------------------------------------- Description of Business: APW Ltd. is a leading global provider of ------------------------ Technically Enabled Manufacturing Services ("TEMS"), focused on designing and integrating large electronic products. APW has the capabilities to design and manufacture various subsystems for electronic products, including enclosures, thermal management systems, backplanes, power supplies, printed circuit board assemblies, and cabling, either as integrated custom systems or as individual subsystems. In addition, APW provides a wide range of integration services to its customers, including product design, supply chain management, manufacturing, assembly, testing and drop-ship services. APW's focus is large infrastructure solutions, such as wireless base stations and switches, enterprise hardware and internet server enclosures. APW is not targeting high volume markets, such as personal computers or cell phone handsets. These offerings provide APW's customers with accelerated time-to-market and decreased time-to-volume production, while reducing their production costs and allowing them to focus on the design and marketing of their products. APW believes the Company's emphasis on technical innovation and vertically integrated engineering and manufacturing expertise, coupled with its total solution approach, which can be delivered on a worldwide basis, differentiates the Company in the marketplace. Basis of Presentation: The accompanying unaudited condensed consolidated ---------------------- financial statements of APW Ltd. and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial reporting and with the instructions of Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, the financial statements include all adjustments which are normal and recurring in nature necessary to present fairly the financial position of the Company at November 30, 2001 and the results of operations and cash flows for the three months ended November 30, 2001 (fiscal 2002 first quarter) and 2000 (fiscal 2001 first quarter). These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto in the Company's fiscal 2001 Annual Report on Form 10-K. Earnings (Loss) Per Share: Basic earnings per share is calculated by -------------------------- dividing net earnings (loss) by the weighted average common shares outstanding during the period. Diluted earnings per share is calculated by using the weighted average common shares outstanding adjusted to include the potentially dilutive effect of outstanding stock options and warrants. Earnings per share for the fiscal 2002 and fiscal 2001 first quarter is based on the following (in thousands, except earnings per share amounts): Three Months Ended November 30, ------------------------------ As Restated ------------------------------ Numerator: 2001 2000 ------------- -------------- Net earnings (loss) for basic and diluted earnings per share $ (37,238) $ 11,679 ============= ============== Denominator: Weighted average common shares outstanding for basic earnings (loss) per share 40,046 39,213 Net effect of dilutive stock options based on the treasury stock method - 2,168 ------------- -------------- Weighted average common and potential common shares outstanding for diluted earnings (loss) per share 40,046 41,381 ============= ============== Basic earnings (loss) per share: $ (0.93) $ 0.30 ============= ============== Diluted earnings (loss) per share: $ (0.93) $ 0.28 ============= ============== 6 When the Company reports positive net earnings, the diluted earnings per share calculation will include the impact of dilutive securities issued under the existing stock option plans and issued warrants. Fiscal 2002 diluted earnings per share exclude the effect of options to purchase approximately 7.0 million shares of common stock because they would be anti-dilutive due to the net loss during the fiscal 2002 first quarter. Warrants to purchase approximately 2.1 million shares of common stock were outstanding as of November 30, 2001, but were not included in the computation of diluted earnings (loss) per share because they would be anti-dilutive due to the net loss for the quarter ending November 30, 2001. New Accounting Pronouncements: In June 2001, SFAS No. 141, "Business ------------------------------ Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets" were issued. The statements eliminate the pooling-of-interests method of accounting for business combinations and require that goodwill and certain intangible assets not be amortized. Instead, these assets will be reviewed for impairment annually with any related losses recognized in earnings when incurred. SFAS No. 141 was effective for APW Ltd. as of July 31, 2001. SFAS No. 142 will be effective for the Company on September 1, 2002 for existing goodwill and intangible assets. The Company is currently evaluating the impact of SFAS No. 142. In June 2001, SFAS No. 143, "Accounting for Asset Retirement Obligations" was issued. SFAS No. 143 sets forth the financial accounting and reporting to be followed for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are to be capitalized as part of the carrying amount of the long-lived asset. Subsequently, the recorded liability will be accreted to its present value and the capitalized costs will be depreciated. The Company is required to adopt SFAS No. 143 on September 1, 2002. The Company is currently evaluating the impact of SFAS No. 143. In August 2001, SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" was issued. SFAS No. 144 modifies and expands the financial accounting and reporting for the impairment or disposal of long-lived assets other than goodwill, which is specifically addressed by SFAS No. 142. SFAS No. 144 maintains the requirement that an impairment loss be recognized for a long-lived asset to be held and used if its carrying value is not recoverable from its undiscounted cash flows, with the recognized impairment being the difference between the carrying amount and fair value of the asset. With respect to long-lived assets to be disposed of other than by sale, SFAS No. 144 requires that the asset be considered held and used until it is actually disposed of but requires that its depreciable life be revised in accordance with APB Opinion No. 20, "Accounting Changes." SFAS No. 144 also requires that an impairment loss be recognized at the date a long-lived asset is exchanged for a similar productive asset. The Company will be required to adopt SFAS No. 144 on September 1, 2002. The Company is currently evaluating the impact of SFAS No. 144. Reclassifications: Certain prior quarter amounts have been reclassified to ------------------ conform with the fiscal 2002 first quarter presentations. Such reclassifications had no impact on previously reported net earnings. Note 3 - Restructuring and Other Charges - ---------------------------------------- During the fiscal 2002 first quarter, APW Ltd. recognized pre-tax restructuring and other charges totaling $19.6 million. The components of the charges recorded are as follows (dollars in millions): Charges ------------- Facility closure costs: Severance $ 6.4 Lease exit costs 3.6 Equipment impairment 7.9 Other costs 1.7 ------------- Total facility closure costs $ 19.6 ============= 7 Facility closure costs relate to the rationalization of seven facilities and impact both salaried and hourly employees. The costs are recorded in the Condensed Consolidated Statement of Operations for the fiscal 2002 first quarter as follows: 1) severance and lease exit costs totaling $10.0 million are recorded as restructuring charges; and 2) equipment impairment charges, resulting from facility closures, of $7.9 million and other facility closure costs totaling $1.7 million are recorded as cost of products sold. Restructuring Beginning in fiscal 2001 and continuing in the fiscal 2002 first quarter, management developed formal plans to exit certain facilities and involuntarily terminate employees. Management's plans to exit certain facilities included the identification of duplicate manufacturing and sales facilities for closure and the transfer of the related operations to other facilities. Management currently anticipates that the facility closures and all related activities will be substantially complete within one year of the commitment dates of the respective exit plans. The following table summarizes the activity with respect to fiscal 2002 first quarter restructuring charges (in millions, except employee data): Severance Facilities Total Number of Employees Reserve Reserve Reserve ------------- ------------ ------------- -------------- Total reserve balance at August 31, 2001 287 $ 2.1 $ 5.2 $ 7.3 Add: Fiscal 2002 first quarter charges 461 6.4 3.6 10.0 Less: Fiscal 2002 first quarter utilization (443) (3.4) (2.1) (5.5) ------------- ------------ ------------- -------------- Ending balance at November 30, 2001 305 $ 5.1 $ 6.7 $ 11.8 ============= ============ ============= ============== Note 4 - Comprehensive Income (Loss) - ------------------------------------ The components of comprehensive income (loss) are as follows (in thousands): Three Months Ended November 30, ------------------------------ As Restated ------------------------------ 2001 2000 ------------- ------------- Net earnings (loss) $ (37,238) $ 11,679 Cumulative effect of change in accounting principle for derivatives and hedging activities, net of tax - 168 Derivative instrument fair market value adjustment (655) - Reclassification of derivative losses to earnings 196 - Foreign currency translation adjustments (1,103) (2,095) ------------- ------------- Comprehensive income (loss) $ (38,800) $ 9,752 ============= ============= Note 5 - Inventories - -------------------- Inventories consisted of (in thousands): As Restated ----------------------------------- November 30, August 31, 2001 2001 --------------- ---------------- Raw material $ 66,741 $ 73,427 Work-in-progress 29,112 31,945 Finished goods 29,705 39,591 -------------- ---------------- Total inventories, gross 125,558 144,963 Less: inventory reserves (12,204) (14,026) -------------- ---------------- Total inventories $ 113,354 $ 130,937 ============== ================ 8 Note 6 - Accounts Receivable Facility - ------------------------------------- At November 30, 2001 and August 31, 2001, accounts receivable were reduced by $44.6 million and $58.0 million, respectively, representing receivable interests sold under the accounts receivable facility. Note 7 - Contingencies and Litigation - ------------------------------------- APW Ltd. is a party to various legal proceedings which have arisen in the normal course of its business. These legal proceedings typically include product liability, environmental, labor, patent and contract claims, and commission disputes. APW Ltd. has recorded reserves for loss contingencies based on the specific circumstances of each case. Such reserves are recorded when it is probable that a loss has been incurred as of the balance sheet date and such loss can be reasonably estimated. In the opinion of management, the resolution of these contingencies will not have a material adverse effect on APW Ltd.'s financial condition, results of operations or cash flows. APW Ltd. has facilities at numerous geographic locations, which are subject to a range of environmental laws and regulations. Compliance with these laws has and will require expenditures on a continuing basis. Predecessors to APW Ltd. have been identified by the United States Environmental Protection Agency ("EPA") as "Potentially Responsible Parties" regarding various multi-party Superfund sites. Potentially Responsible Parties are jointly and severally liable with respect to Superfund remediation liabilities. Any liability in connection with these sites has been assumed by APW Ltd. Based on the Company's investigations, management believes that the Company is a de minimis participant in certain of these sites. As to one other site, the Company is a minor participant, and the Company's share of estimated cleanup costs is not likely to exceed $1.1 million. As to another EPA site where the Company is not a de minimis participant, the state has required additional ground water testing at a former APW Ltd. manufacturing facility, and the Company cannot reasonably estimate the amount of the Company's liability, if any. In addition, the Company is also involved in other state cleanup actions for which management believes the aggregate costs of remediation are adequately reserved for. APW Ltd. anticipates that environmental costs will be expensed or capitalized depending on their future economic benefits. Expenditures that have no future economic value are expensed. Liabilities will be recorded when environmental remediation is probable and the costs can be reasonably estimated. Although the level of future expenditures for environmental remediation is impossible to determine with any degree of certainty, management does not believe these costs are likely to have a material adverse effect on APW Ltd.'s financial position, results of operations or cash flows. Note 8 - Subsequent Events, Liquidity and Management's Plans - ------------------------------------------------------------ On September 27, 2001, the Company's lenders amended certain debt covenants associated with APW Ltd.'s Multi-Currency Credit Agreement, UK Revolving Credit Agreement and the Accounts Receivable Facility (collectively,"credit facilities"). These revised covenants were established based upon APW Ltd. management's financial forecasts prior to the events of September 11, 2001. Throughout the fiscal 2002 first quarter, APW Ltd. experienced a significant decline in net sales compared to prior periods and compared to management's financial forecasts that were the basis for the financial covenants set forth in the September 27, 2001 amendment. Such declines are related to a number of factors, certain of which were impacted by the terrorist attacks that took place in the United States on September 11, 2001. Those terrorist attacks were unprecedented events that have created many economic and political uncertainties. On December 13, 2001, the Company's lenders again amended certain debt covenants associated with the Company's credit facilities to reflect the Company's revised financial forecasts as of that point in time. The revisions in the covenants were considered necessary due to the magnitude of the decline in the fiscal 2002 first quarter actual results compared to prior periods and management's forecasts. In addition, the amendment repriced the outstanding warrants issued in conjunction with the May 15, 2001 amendment to the closing price of APW Ltd.'s common stock on December 10, 2001 of $1.98 and eliminates the previous reduction provision if the Company met repayment targets by August 31, 2002. The Company also issued warrants for 9.9% of the common stock outstanding on December 13, 2001 (approximately 4.1 million shares) at a price of $0.01. These $0.01 warrants are cancelled if the credit facilities are repaid by July 31, 2002 (entirely cancelled) or September 30, 2002 (49.5% cancelled). 9 If the decline in net sales continues or APW Ltd. experiences a significant change in its cost structure, APW Ltd. may not be able to comply with the covenants which were agreed to with the Company's lenders as of December 13, 2001. Further, such covenants contemplate the sale of one of the Company's divisions during the three months ending February 28, 2002 (fiscal 2002 second quarter). The Company is in negotiations with another independent party concerning the sale of one of the Company's divisions and is still negotiating some key material terms, including price, and those negotiations are ongoing. Nonetheless, there can be no assurances that the transaction will be consummated. If the transaction is not consummated with any party, the Company may violate a financial covenant and will have to consider a number of measures available to the Company in the event of a covenant violation, which are discussed below. APW Ltd.'s management plans to continue to aggressively pursue additional revenue opportunities within its core customer markets. APW Ltd. adopted several restructuring plans during fiscal 2001 and the fiscal 2002 first quarter in an effort to reduce costs in the wake of declining net sales experienced during fiscal 2001 and the fiscal 2002 first quarter. These programs resulted in restructuring charges during fiscal 2001 and the fiscal 2002 first quarter and have provided cost savings that are expected to continue into the future. Management plans to consider additional cost-reduction programs, as necessary, to further align the Company's cost base with net sales. While the Company's revised financial forecasts reflect management's best estimates, there can be no assurances that the Company's fiscal 2002 financial forecasts, which are the basis of the current financial covenants, will be achieved. If the Company's actual operating performance does not substantially meet the fiscal 2002 financial forecasts associated with the amended covenants, the Company may have difficulty achieving compliance with certain debt covenants in APW Ltd.'s amended credit facilities. The Company's actual sales for the month of December 2001 were less than the December 2001 forecasted sales that are the basis of the Company's most recent financial covenants, but still in compliance with the sales covenant. If APW Ltd. fails to comply with debt covenants for any reason, the Company may have to consider a number of the following measures: (a) obtain a waiver of default for the violated covenant(s); (b) obtain an amendment of the covenants in the existing credit facilities; (c) seek additional sources of debt financing, which likely would be subject to obtaining necessary lender consents; (d) seek additional equity financing or other strategic alternatives; (e) restructure its obligations and/or the business; or (f) consider a combination of the foregoing. Given the circumstances, the Company is evaluating its alternatives. There can be no assurances that the aforementioned alternatives would be available to the Company in the future. If this were the case, a future violation of debt covenants would cause a material adverse effect on the Company's ability to continue in its present form and to achieve its intended business objectives. As a result of the restatement for the year ended August 31, 2001, the Company believes that it would have been in default of certain debt covenants as of August 31, 2001, unless the Company had obtained waivers or the Company's lenders had amended the debt covenants. Accordingly, the Company has classified borrowings under the Revolving Multi-Currency Credit Agreement and the U.K. Facility Agreement as a current liability as of November 30, 2001 and August 31, 2001 in the restated consolidated financial statements. In December 2001, the Company received notification from the lessor of two of its aircraft that the lease contracts ("contracts") for the two aircraft will be terminated effective March 4, 2002. In conjunction with the termination, the lease terms of the contracts would require the Company to pay the lessor approximately $12.3 million for the two aircraft, as defined by the contracts, and, in exchange, the lessor would convey all of its rights, title and interest in the two aircraft to the Company. The Company is actively working with the lessor to identify a third party which would purchase and/or lease the two aircraft, thereby eliminating the Company's $12.3 million payment obligation. The Company has obtained an estimate of the fair market value of the two aircraft. Based on the estimated fair market value of the two aircraft and the Company's ongoing discussions with the lessor, the Company does not believe that it will incur a loss in connection with the termination of the contracts, and therefore no such loss provision has been recorded by the Company. If the estimated fair market value of the two aircraft changes or the Company and the lessor are unable to identify a third party purchaser or lessee of the two aircraft, the Company may incur a loss in connection with the termination of the contracts. If the Company were to incur a loss in conjunction with the termination of the contracts, the Company, under the current terms of the Company's credit facilities, may fail to be in compliance with a debt covenant. If the Company were to fail to comply with this debt covenant, the Company would then have to consider the aforementioned measures available to the Company in the event of the Company's failure to comply with a debt covenant. At November 30, 2001 and December 31, 2001, the Company had $24.0 million and $10.3 million, respectively, of borrowings available under its two credit facilities and $5.6 million in cash at November 30, 2001. To provide additional liquidity, the Company has been extending payables beyond their normal payment terms. At November 30, 2001 and December 31, 2001, although the Company sold all eligible accounts receivable under its accounts receivable facility, the Company had the availability to sell an incremental $35.4 million and $32.3 million, respectively. The Company understands that it, and two of its senior executives have been sued in connection with alleged violations of Federal securities laws which preceded a drop in the price of its common stock ending on March 20, 2001. The complaint, which is captioned Stewart Norman Hicks v. APW Ltd., et al., was filed on December 10, 2001. The complaint alleges violations of the Federal securities laws and seeks certification of a plaintiff class consisting of all purchasers of the Company's common stock between September 26, 2000 and March 20, 2001, inclusive. The complaint does not quantify the damages. The Company also understands that two additional suits containing similar allegations have been filed. The Company has not yet been served with the complaints and, therefore, cannot evaluate the merits of the claims. 10 Note 9--Restated Financials - --------------------------- As described in Note 1, the consolidated financial statements as of November 30, 2001 and 2000 and for the three months ended November 30, 2001 and 2000 have been restated. These quarterly statements are unaudited. A review of the consolidated financial statements for the three months ended November 30, 2001 has not been performed by the Company's independent accountants. A summary of the effects of the restatements follows: APW Ltd. Consolidated Statement of Operations (Dollars in millions, except per share data) For the 3 Months Ended November 30, 2001 (Unaudited) ---------------------------------------------------- Previously Reported Adjustments As Restated ---------- ----------- ----------- Net sales $ 219.8 $ -- $ 219.8 Costs of products sold 197.9 1.0 198.9 ------- ------- ------- Gross profit 21.9 (1.0) 20.9 Engineering, selling and administrative expenses 40.4 (.2) 40.2 Amortization of intangible assets 6.3 -- 6.3 Restructuring charges 10.0 -- 10.0 ------- ------- ------- Operating loss (34.8) (.8) (35.6) Net financing costs 14.5 -- 14.5 Other income, net (.4) -- (.4) ------- ------- ------- Loss before income tax benefit (48.9) (.8) (49.7) Income tax benefit (12.2) (.3) (12.5) ------- ------- ------- Net loss $ (36.7) $ (.5) $ (37.2) ======= ======= ======= Basic and diluted loss per share: Loss per share $ (.92) $ (.01) $ (.93) Weighted average common shares outstanding 40,046 40,046 11 APW Ltd. Consolidated Balance Sheet (Dollars in millions) November 30, 2001 (Unaudited) -------------------------------------------- Previously Adjustments As Restated Reported ASSETS - ------ Current assets Cash and cash equivalents $ 7.8 $ (2.2) $ 5.6 Accounts receivable, net 100.6 -- 100.6 Inventories 118.5 (5.2) 113.3 Prepaid expenses 15.4 (.2) 15.2 Deferred income taxes 16.0 -- 16.0 -------- ------- -------- Total current assets 258.3 (7.6) 250.7 Property, plant and equipment 461.6 -- 461.6 Less: Accumulated depreciation (224.4) -- (224.4) -------- ------- -------- Net property, plant and equipment 237.2 -- 237.2 Goodwill, net 674.4 -- 674.4 Other intangibles, net 26.7 -- 26.7 Other assets 70.0 -- 70.0 -------- ------- -------- Total assets $1,266.6 $ (7.6) $1,259.0 ======== ======= ======== LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ Current liabilities Short-term borrowings $ -- $ 625.8 $ 625.8 Trade accounts payable 88.2 1.4 89.6 Accrued compensation and benefits 25.6 .6 26.2 Income taxes payable 42.0 (3.9) 38.1 Other current liabilities 45.0 .6 45.6 -------- ------- -------- Total current liabilities 200.8 624.5 825.3 Long-term debt 646.5 (625.8) 20.7 Other long-term liabilities 41.8 -- 41.8 Shareholders' equity Common stock .4 -- .4 Share premium 669.8 -- 669.8 Accumulated deficit (264.7) (6.3) (271.0) Accumulated other comprehensive loss (28.0) -- (28.0) -------- ------- -------- Total shareholders' equity 377.5 (6.3) 371.2 -------- ------- -------- Total liabilities and shareholders' equity $1,266.6 $ (7.6) $1,259.0 ======== ======= ======== 12 APW Ltd. Consolidated Condensed Statement of Cash Flows (Dollars in millions) For the 3 Months Ended November 30, 2001 (Unaudited) ---------------------------------------------------- Previously Reported Adjustments As Restated ---------- ----------- ----------- Net loss $(36.7) $ (.5) $(37.2) Net cash used in operating activities (9.0) .1 (8.9) Net cash used in investing activities (3.6) -- (3.6) Net cash provided by financing activities 12.4 -- 12.4 Effect of exchange rate changes on cash (.5) -- (.5) Net decrease in cash and cash equivalents (.7) .1 (.6) Cash and cash equivalents-beginning of year 8.5 (2.3) 6.2 Cash and cash equivalents-end of year $ 7.8 $(2.2) $ 5.6 13 APW Ltd. Consolidated Statement of Operations (Dollars in millions, except per share data) For the 3 Months Ended November 30, 2000 (Unaudited) ---------------------------------------------------- Previously Reported Adjustments As Restated ---------- ----------- ----------- Net sales $359.7 $ -- $359.7 Costs of products sold 268.9 1.7 270.6 ------- ------- ------- Gross profit 90.8 (1.7) 89.1 Engineering, selling and administrative expenses 56.0 -- 56.0 Amortization of intangible assets 6.0 -- 6.0 Loss on sale of subsidiary 2.7 -- 2.7 ------- ------- ------- Operating earnings 26.1 (1.7) 24.4 Net financing costs 6.5 -- 6.5 Other expense, net .3 -- .3 ------- ------- ------- Earnings before income tax expense 19.3 (1.7) 17.6 Income tax expense 6.5 (.6) 5.9 ------- ------- ------- Net earnings $ 12.8 $(1.1) $ 11.7 ======= ======= ======= Basic earnings per share: Earnings per share $.33 $(.03) $.30 Weighted average common shares outstanding 39,213 39,213 Diluted earnings per share: Earnings per share $.31 $(.03) $.28 Weighted average common shares outstanding 41,381 41,381 14 APW Ltd. Consolidated Condensed Statement of Cash Flows (Dollars in millions) For the 3 Months Ended November 30, 2000 (Unaudited) ------------------------------------------------------ Previously Reported Adjustments As Restated -------- ----------- ----------- Net earnings $ 12.8 $(1.1) $ 11.7 Net cash used in operating activities (28.5) (.6) (29.1) Net cash used in investing activities (29.7) -- (29.7) Net cash provided by financing activities 61.0 -- 61.0 Effect of exchange rate changes on cash -- -- -- Net increase in cash and cash equivalents 2.8 (.6) 2.2 Cash and cash equivalents-beginning of year .6 .1 .7 Cash and cash equivalents-end of year $ 3.4 $ (.5) $ 2.9 15 Note 10 - Reorganization Under Chapter 11 On May 16, 2002, APW Ltd. (in provisional liquidation), a Bermuda company, filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code ("Bankruptcy Code") in the United States Bankruptcy Court for the Southern District of New York ("Bankruptcy Court") (Case No. 02-12335). The proceeding involved only APW Ltd., the Bermuda company, and Vero Electronics, Inc., a non-operating entity and subsidiary of APW Ltd. (Case No. 02-12334). All other subsidiaries of the Company were excluded from the proceeding and continue to conduct business with customers and suppliers in the ordinary course. The Company will continue to operate its business as a debtor-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code. The bankruptcy proceedings are being jointly administered under Case No. 02-12334 (PCB). On May 30, 2002, a proceeding (the "Bermuda Proceeding") was commenced pursuant to the Companies Act 1981 with respect to APW Ltd. in the Bermuda Supreme Court in connection with a winding-up petition. One of the purposes of the filing was the imposition of a statutory stay preventing third parties from continuing or taking actions against APW in Bermuda. On May 30, 2002, the Bermuda court appointed Malcolm L. Butterfield of KPMG Bermuda and Philip W. Wallace of KPMG London, England as joint provisional liquidators of APW Ltd. (or, as referred to herein, the JPLs) with limited supervisory powers. The appointment of the JPL's and statutory stay enabled the JPL's to perform supervisory and oversight of the management of APW while reviewing the Plan of reorganization with a view to its treatment of creditors. On July 22, 2002, the JPLs were granted various powers, including the power to authorize the sale of any business, operation, subsidiary, division or other significant asset of APW Ltd. APW Ltd. decided to pursue reorganization under Chapter 11 of the Bankruptcy Code based upon the certainty of the elimination of pre-petition indebtedness and as a consequence the ability of the Company to emerge from bankruptcy significantly deleveraged. As a debtor-in-possession, APW Ltd. is authorized to continue to operate as an ongoing business, but may not engage in transactions outside the ordinary course of business without the approval of the Bankruptcy Court, after notice and an opportunity for a hearing. Confirmation of Plan of Reorganization On July 24, 2002, the Bankruptcy Court entered an order confirming APW Ltd.'s and Vero's Amended and Restated Plan of Reorganization dated June 19, 2002 (as modified, amended or supplemented, the "Plan"). APW Ltd. emerged on July 31, 2002. Pursuant to the terms of the Plan, subject to the approval of the joint provisional liquidators (the "JPLs") appointed in the Bermuda Proceeding and, if required, the approval of the Bermuda Supreme Court, all of the assets and liabilities which were to be retained by APW Ltd. under the original Plan will be transferred to AWP Ltd. ("AWP"), a newly formed Bermuda company, including the right to use the name "APW Ltd.," which became the successor-in-interest to APW Ltd. After the consummation of the Plan, APW Ltd. changed its name to BQX Ltd. and AWP Ltd. changed its name to APW Ltd. The above name changes became effective on July 31, 2002. In addition, as of July 31, 2002, the effective date of the Plan, AWP (the successor in interest to APW Ltd.) issued under the Plan the following: . New Secured Notes in the aggregate principal amount of $100 million issued to its senior secured lenders, . 1,000,000 common shares of AWP (the successor in interest to APW Ltd.) (the "APW Common Shares") issued to its senior secured lenders which represents 100% of the outstanding common shares of AWP after the consummation of the Plan, 16 . Warrants to purchase up to 60,606 APW Common Shares at an exercise price of $448.95 per share issued to the current equity holders of APW Ltd., and . Warrants to purchase up to 303,030 APW Common Shares at an exercise price of $0.02 per share issued to lenders under the Credit Facility (defined below). As of July 31, 2002, there were approximately 40.8 million common shares of APW Ltd. outstanding. Under the Plan, holders of APW Ltd. common shares as of the July 31, 2002 record date received (a) warrants representing the right to purchase 60,606 APW Common Shares as stated above and (b) retain existing common shares in APW Ltd. (which as a practical matter will be liquidated and no distribution is expected to shareholders). Subsequent to the effective date of the Plan, APW Ltd. will be dissolved, liquidated or wound-up by joint provisional liquidators in connection with a proceeding in Bermuda or otherwise pursuant to applicable Bermuda law, and no assets are expected to be distributed to current shareholders. After the consummation of the Plan, AWP Ltd. (as successor to APW Ltd.) is expected to have approximately 1.8 million authorized common shares, par value $0.02 per share, of which 1,000,000 common shares will be outstanding. All such 1,000,000 shares will be issued as of the consummation of the Plan. The board of directors of AWP Ltd. (as successor to APW Ltd.) after consummation of the Plan are to consist of: Richard G. Sim, W. Peter Douglas, Christopher S. Brothers, Stephen A. Kaplan, Michael P. Harmon, J. Richard Budd and Toni J. Smith. In addition, the Plan provides for a new management incentive plan for issuance of options to purchase to key employees or the opportunity for such key employees to purchase 10% of the APW Common Shares on a fully diluted basis (or 151,515 shares). The Credit Facility Concurrent with the Chapter 11 filing, the Company entered into a new $110.0 million debtor-in-possession credit facility ("Credit Facility") to provide for the payment of permitted pre-petition claims, working capital needs, letters of credit and other general corporate purposes. The Credit Facility requires that we maintain certain financial covenants and restrict liens, indebtedness, capital expenditures, dividend payments and sale of assets. Upon emergence from the Chapter 11 proceeding, the Credit Facility was extended until November 15, 2003 with respect to $90.0 million of the Credit Facility and May 15, 2004 with respect to $20.0 million of the Credit Facility. Fresh Start Accounting As a result of the bankruptcy, the Company will adopt fresh start accounting pursuant to guidance provided by the American Institute of Certified Public Accountant's Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code", as of July 31, 2002. In accordance with the principles of fresh start accounting, the Company will adjust the carrying values of its assets and liabilities to their fair values as of July 31, 2002. The application of fresh start accounting will result in material changes to the carrying values of the Company's assets and liabilities. Going Concern Following its emergence from the Chapter 11 proceeding, the ability of APW Ltd., the successor company, to continue as a going concern is predicated upon, among other things, compliance with the provisions of the Credit Facility and the term loan agreement related to the $100 million in new secured notes issued under the Plan and the ability to generate cash flows from operations and obtain financing sources sufficient to satisfy future obligations. 17 Item 2 - Management's Discussion and Analysis of Financial Condition and Results - -------------------------------------------------------------------------------- of Operations - ------------- This amendment on Form 10-Q/A #2 amends Items 1 and 2 of the Quarterly Report of APW Ltd. (the "Company") on Form 10-Q previously filed for the three months ended November 30, 2002 and 2001. This Quarterly Report on Form 10-Q/A #2 is filed in connection with the Company's restatement of its financial statements as of August 31, 2001 and 2000 and for the years ended August 31, 2001, 2000 and 1999 and for the quarters ended November 30, 2001 and November 30, 2000. Financial statement information and related disclosures included in this amended filing reflect, where appropriate, changes as a result of the restatements. All other information contained in this Quarterly Report on Form 10-Q/A #2 is as of the date referenced for such information in the original filing or, if no date is referenced for information in the original filing, as of the date of such filing. The following discussion of our financial condition and our results of operations should be read in conjunction with our accompanying unaudited condensed consolidated financial statements and related notes thereto. Overview APW Ltd. is a leading global technically enabled manufacturing services provider, focused on designing and integrating large electronic enclosure products. We have the capabilities to design and manufacture various subsystems for electronic products, including enclosures, power supplies, thermal management systems, printed circuit board assemblies, and cabling, either as individual subsystems or as integrated custom systems. We provide a wide range of integrated design, manufacturing and logistics services to customers, including product design, supply chain management, manufacturing, assembly, testing and drop-ship services. Operating in over 30 locations throughout North America, South America, Europe and Asia, we provide our solutions and services to original equipment manufacturers, primarily in the communications (datacom and telecom), computing (enterprise hardware - large servers, large data storage, networking) and Internet (application service providers, Internet service providers and web hosting) markets. Our customers include industry leaders such as Applied Materials, Cisco, Compaq, Cymer, EMC, Ericsson, Fujitsu, Hewlett-Packard, IBM, Lucent, Marconi, Motorola, NCR, Nortel Networks and Sun Microsystems. Reorganization Under Chapter 11 On May 16, 2002, APW Ltd., (in provisional liquidation) (herinafter referred to as "APW Ltd.", "APW" or "the Company"), a Bermuda company, filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code ("Bankruptcy Code") in the United States Bankruptcy Court for the Southern District of New York ("Bankruptcy Court") (Case No. 02-12335). The proceeding involved only APW Ltd., the Bermuda company, and Vero Electronics, Inc., a non-operating entity and subsidiary of APW Ltd. (Case No. 02-12334). All other subsidiaries of the Company were excluded from the proceeding and continue to conduct business with customers and suppliers in the ordinary course. The Company will continue to operate its business as a debtor-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code. The bankruptcy proceedings are being jointly administered under Case No. 02-12334 (PCB). On May 30, 2002, a proceeding (the "Bermuda Proceeding") was commenced pursuant to the Companies Act 1981 with respect to APW Ltd. in the Bermuda Supreme Court in connection with a winding-up petition. One of the purposes of the filing was the imposition of a statutory stay preventing third parties from continuing or taking actions against APW in Bermuda. On May 30, 2002, the Bermuda court appointed Malcolm L. Butterfield of KPMG Bermuda and Philip W. Wallace of KPMG, London, England as joint provisional liquidators of APW Ltd. (or, as referred to herein, the JPLs) with limited supervisory powers. The appointment of the JPL's and statutory stay enabled the JPL's to perform supervisory and oversight of the management of APW while reviewing the Plan of reorganization with a view to its treatment of creditors. On July 22, 2002, the JPLs were granted various powers, including the power to authorize the sale of any business, operation, subsidiary, division or other significant asset of APW Ltd. APW Ltd. decided to pursue reorganization under Chapter 11 of the Bankruptcy Code based upon the certainty of the elimination of pre-petition indebtedness and as a consequence the ability of the Company to emerge from bankruptcy significantly deleveraged. As a debtor-in-possession, APW Ltd. is authorized to continue to operate as an ongoing business, but may not engage in transactions outside the ordinary course of business without the approval of the Bankruptcy Court, after notice and an opportunity for a hearing. Confirmation of Plan of Reorganization On July 24, 2002 the Bankruptcy Court entered an order confirming APW Ltd.'s and Vero's Amended and Restated Plan of Reorganization dated June 19, 2002 (as modified, amended or supplemented, the "Plan"). APW Ltd. emerged on July 31, 2002. 18 Pursuant to the terms of the Plan, subject to the approval of the joint provisional liquidators (the "JPLs") appointed in the Bermuda Proceeding and, if required, the approval of the Bermuda Supreme Court, all of the assets and liabilities which were to be retained by APW Ltd. under the original Plan will be transferred to AWP Ltd. ("AWP"), a newly formed Bermuda company, including the right to use the name "APW Ltd.," which became the successor-in-interest to APW Ltd. After the consummation of the Plan, APW Ltd. changed its name to BQX Ltd. and AWP Ltd. changed its name to APW Ltd. The above name changes became effective on July 31, 2002. In addition, as of July 31, 2002 the effective date of the Plan, AWP (the successor in interest to APW Ltd.) issued under the Plan the following: . New Secured Notes in the aggregate principal amount of $100 million issued to its senior secured lenders, . 1,000,000 common shares of AWP (the successor in interest to APW Ltd.) (the "APW Common Shares") issued to its senior secured lenders which represents 100% of the outstanding common shares of AWP after the consummation of the Plan, . Warrants to purchase up to 60,606 APW Common Shares at an exercise price of $448.95 per share issued to the current equity holders of APW Ltd., and . Warrants to purchase up to 303,030 APW Common Shares at an exercise price of $0.02 per share issued to lenders under the Credit Facility (defined below). As of July 31, 2002, there were approximately 40.8 million common shares of APW Ltd. outstanding. Under the Plan, holders of APW Ltd. common shares received (a) warrants representing the right to purchase 60,606 APW Common Shares as stated above and (b) retain existing common shares in APW Ltd. (which as a practical matter will be liquidated and no distribution is expected to shareholders). Subsequent to the effective date of the Plan, APW Ltd. will be dissolved, liquidated or wound-up by joint provisional liquidators in connection with a proceeding in Bermuda or otherwise pursuant to applicable Bermuda law, and no assets are expected to be distributed to current shareholders. After the consummation of the Plan, AWP Ltd. (as successor to APW Ltd.) is expected to have approximately 1.8 million authorized common shares, par value $0.02 per share, of which 1,000,000 common shares will be outstanding. All such 1,000,000 shares will be issued as of the consummation of the Plan. The board of directors of AWP Ltd. (as successor to APW Ltd.) after consummation of the Plan are to consist of: Richard G. Sim, W. Peter Douglas, Christopher S. Brothers, Stephen A. Kaplan, Michael P. Harmon, J. Richard Budd and Toni J. Smith. In addition, the Plan provides for a new management incentive plan for issuance of options to purchase to key employees or the opportunity for such key employees to purchase 10% of the APW Common Shares on a fully diluted basis (or 151,515 shares). The Credit Facility Concurrent with the Chapter 11 filing, the Company entered into a new $110 million debtor-in-possession credit facility ("Credit Facility") to provide for the payment of permitted pre-petition claims, working capital needs, letters of credit and other general corporate purposes. The Credit Facility requires that we maintain certain financial covenants and restrict liens, indebtedness, capital expenditures, dividend payments and sale of assets. Upon emergence from the Chapter 11 proceeding, the Credit Facility will be extended until November 15, 2003 with respect to $90.0 million of the Credit Facility and May 15, 2004 with respect to $20.0 million of the Credit Facility. Fresh Start Accounting As a result of the bankruptcy, the Company will adopt fresh start accounting pursuant to guidance provided by the American Institute of Certified Public Accountant's Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code", as of July 31, 2002. In accordance with the principles of fresh start accounting, the Company will adjust the carrying values of its assets and liabilities to their fair values as of July 31, 2002. The application of fresh start accounting will result in material changes to the carrying values of the Company's assets and liabilities. Going Concern Following its emergence from the Chapter 11 proceeding, the ability of APW Ltd., the successor company, to continue as a going concern is predicated upon, among other things, compliance with the provisions of the Credit Facility and the term loan agreement related to the $100 million in new secured notes issued under the Plan and the ability to generate cash flows from operations and obtain 19 financing sources sufficient to satisfy our future obligations. Significant Accounting Policies Financial Reporting Release No. 60, which was recently released by the Securities and Exchange Commission, requires all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. These policies and methods are the most important to the portrayal of the Company's financial condition and results, and require management's most difficult, subjective and complex judgments. The following is a brief discussion of the more significant accounting policies and methods used by APW Ltd. General The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The most significant estimates and assumptions relate to the recoverability of long-lived assets including goodwill and other intangibles, the realization of deferred income taxes and the adequacy of restructuring reserves. Actual amounts could differ significantly from these estimates. Recoverability of long-lived assets, goodwill and other intangible assets We periodically assess the impairment of long-lived assets, goodwill and other identifiable intangible assets under SFAS No. 121 and Accounting Principles Board Opinion No. 17 whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important which could trigger an impairment review include the following: .. significant underperformance relative to expected historical or forecasted future operating results; .. significant changes in the manner of our use of the acquired assets or the strategy for our overall business; .. commitments by management to close certain facilities that are made as part of a company-wide restructuring initiative; .. significant negative industry or economic trends; .. significant decline in our stock price for a sustained period; and .. our market capitalization relative to net book value. Upon the existence of one or more of the above indicators of impairment, we estimate the future undiscounted cash flows and compare such estimates to the related asset book value. If it is determined that these estimated future undiscounted cash flows will not be sufficient to enable the recovery of the related asset book value, we measure any impairment based on a projected discounted cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in our current business model. Prospectively, we must continue to assess the recoverability of the Company's long-lived assets, goodwill and other intangibles. In so doing, we will be required to make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. While we believe our estimates are reasonable, if our estimates or their related assumptions change in the future, we may be required to record additional impairment charges. Assumptions we make regarding estimated future cash flow include: (i) future revenue growth (and mix); (ii) future composition of cost of products sold and operating expenses; and (iii) future capital expenditure requirements. Accounting for income taxes As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the tax jurisdictions in which we operate. This process involves us estimating our current tax liability together with assessing temporary differences resulting from differing treatment of items for tax and book purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. Significant management judgment is required in determining our provision for income taxes, deferred tax assets and liabilities and any related valuation allowance recorded against our net deferred tax assets. Generally accepted accounting principles require that we record a valuation allowance against our deferred tax assets if it is "more likely than not" that we will not be able to utilize them to offset future taxes. Restructuring Reserves Restructuring charges as presented in our Condensed Consolidated Statement of Operations are comprised of severance and lease exit costs. These charges are recognized in accordance with Emerging Issues Task Force ("EITF") 94-3 and Staff Accounting Bulleting ("SAB") 100. Our accruals for lease exit obligations stemming from closed facilities are based on management's best estimate of the total future cash flows required to exit such facilities. Actual costs could differ materially due to factors such as our ability to secure subleases, the creditworthiness of sub-lessees and our success at negotiating early termination agreements with our lessors. These factors are significantly dependent on the general health of the economy and the resultant demand for commercial property. 20 Net Sales Net sales for the fiscal 2002 first quarter were $219.8 million compared to $359.7 million in the fiscal 2001 first quarter, a decrease of 38.9%. Net sales in the fiscal 2002 first quarter were negatively impacted by the broad based slow down in the technology sector which has resulted in reduced demand for some of our customers products and in turn has negatively impacted the demand those customers have for our products and services. In addition to the broad based slow down in the technology sector, the terrorist attacks that took place on September 11, 2001, which were unprecedented events creating many economic and political uncertainties, have had an immediate adverse impact on our business. Our fiscal 2002 first quarter sales were influenced by the inclusion of acquisitions completed in the second quarter of fiscal 2001. Excluding these acquisitions, net sales decreased 44.4% in the fiscal 2002 first quarter when compared to sales in the fiscal 2001 first quarter. Geographic Sales Three Months Ended November 30, ------------------------- 2001 2000 Change ------------------------------------ (In millions) Americas $ 132.7 $ 223.6 (40.7%) Europe and Asia 87.1 136.1 (36.0%) ------------------------------------ Total $ 219.8 $ 359.7 (38.9%) ==================================== Net sales in the Americas for the fiscal 2002 first quarter were $132.7 million compared to $223.6 million in the fiscal 2001 first quarter, a decrease of 40.7%. Our fiscal 2002 first quarter sales were influenced by the inclusion of acquisitions completed in the second quarter of fiscal 2001. Excluding these acquisitions, net sales decreased 50% in the fiscal 2002 first quarter when compared to net sales in the fiscal 2001 first quarter. Net sales in Europe and Asia for the fiscal 2002 first quarter were $87.1 million compared to $136.1 million in the fiscal 2001 first quarter, a decrease of 36.0%. Gross Profit Gross profit for the fiscal 2002 first quarter was $20.9 million compared to $89.1 million in the fiscal 2001 first quarter, a decrease of 76.5%. As a percentage of net sales, the fiscal 2002 first quarter gross profit was 9.5% compared to 24.8% in the fiscal 2001 first quarter. The decrease in gross profit as a percentage of net sales is primarily a result of a combination of factors: 1) $9.6 million of costs related to facility closures (primarily equipment write-offs); 2) under-absorption of costs resulting from the broad based slow down in the technology sector which significantly reduced sales volumes; and 3) a shift in sales mix to programs with increased levels of systems integration, which typically have lower margins. Operating Expenses Operating expenses in the fiscal 2002 first quarter were $40.1 million compared to $56.0 million in the fiscal 2001 first quarter. As a percentage of net sales, operating expenses were 18.3% for the fiscal 2002 first quarter, compared to 15.6% for the fiscal 2001 first quarter. Our operating expenses consist primarily of engineering, selling, marketing, finance, information technology and general administrative expenses. Operating expenses have been reduced by $15.9 million from the fiscal 2001 first quarter. The reduction in operating expenses is primarily due to the restructuring and cost reduction efforts we have made. Although operating expenses have been reduced from the 21 fiscal 2001 first quarter, operating expenses as a percentage of net sales increased due to the under-absorption of costs resulting from the broad based slow down in the technology sector which significantly reduced sales volumes. Amortization of Intangible Assets Amortization of intangible assets (amortization) in the fiscal 2002 first quarter was $6.3 million compared to $6.0 million in the fiscal 2001 first quarter, an increase of 5%. Amortization as a percentage of net sales increased to 2.9% in the fiscal 2002 first quarter compared to 1.7% in the fiscal 2001 first quarter. Restructuring and Other Charges A restructuring charge totaling $10.0 million was recorded during the fiscal 2002 first quarter. The restructuring charge relates to the rationalization of seven facilities and the involuntary termination of both salaried and hourly employees. Severance costs associated with the involuntary termination of employees totaled $6.4 million. Lease exit costs resulting from facility closures totaled $3.6 million. In addition to the restructuring charge totaling $10.0 million, we incurred $9.6 million of other costs related to facility closures. Of the $19.6 million in restructuring and facility closure costs, only $1.9 million of costs that relate to employee retention and facility closures, other than lease exit, are incremental cash costs that would not have been incurred in the next 12 months without undertaking the restructuring actions. Beginning in fiscal 2001 and continuing in the fiscal 2002 first quarter, management developed formal plans to exit certain facilities and involuntarily terminate employees. Management's plans to exit certain facilities included the identification of duplicate manufacturing and sales facilities for closure and the transfer of the related operations to other facilities. Management currently anticipates that the facility closures and all related activities will be substantially complete within one year of the commitment dates of the respective exit plans. Operating Earnings (Loss) We incurred an operating loss of $35.6 million in the fiscal 2002 first quarter compared to operating earnings of $24.4 million in the fiscal 2001 first quarter. The operating loss was primarily due to: 1) $10.0 million restructuring charge; 2) $9.6 million of costs related to facility closures (primarily equipment write-offs); and 3) reduced sales volumes, driven by the broad based slow down in the technology sector, which resulted in the under-absorption of costs during the fiscal 2002 first quarter. Net Financing Costs Net financing costs in the fiscal 2002 first quarter were $14.5 million compared to $6.5 million in the fiscal 2001 first quarter. Included in the fiscal 2002 first quarter net financing costs is $1.4 million of amortization related to capitalized fees associated with amending the credit facilities during fiscal 2001. The increase in our net financing costs, excluding the $1.4 million in amortized fees, is a result of the increase in our outstanding indebtedness to fund acquisitions in the second quarter of fiscal 2001, capital expenditures, restructuring activities and operations. Income Tax Expense (Benefit) We recorded an income tax benefit in the fiscal 2002 first quarter of $12.5 million compared to income tax expense of $5.9 million in the fiscal 2001 first quarter. Our effective income tax rate was 25.1% for the fiscal 2002 first quarter compared to 33.7% for the fiscal 2001 first quarter. The decrease in the effective tax rate in the fiscal 2002 first quarter compared to the fiscal 2001 first quarter is a result of only recognizing the benefit from a portion of the net operating loss we incurred in the fiscal 2002 first quarter. 22 Liquidity and Capital Resources Cash Flows Cash and cash equivalents totaled $5.6 million at November 30, 2001 and $6.2 million at August 31, 2001. Net cash used in operating activities in the fiscal 2002 first quarter was $8.9 million compared to $29.1 million used in the fiscal 2001 first quarter. The net use of cash in the fiscal 2002 first quarter was primarily due to restructuring related payments totaling $7.4 million. Net cash used in investing activities for the fiscal 2002 first quarter was $3.6 million compared to $29.7 million for the fiscal 2001 first quarter. The net use of cash for the fiscal 2002 first quarter was primarily due to capital expenditures of $5.9 million offset by $2.7 million in proceeds on the sale of equipment. Net cash provided by financing activities for the fiscal 2002 first quarter was $12.4 million compared to $61.0 million provided in the fiscal 2001 first quarter. The net cash provided by financing activities for the fiscal 2002 first quarter primarily came from net borrowings on our long-term debt facility of $31.5 million, which was offset by $5.7 in payments on short-term borrowings and a reduction in sold receivables of $13.4 million. Capitalization Debt at November 30, 2001 totaled $646.5 million, an increase of approximately $25.1 million from August 31, 2001. The increase in debt was primarily due to restructuring costs, capital expenditures and the $13.4 million decrease in receivables sold under the accounts receivable facility. To reduce the risk of interest rate increases, we may periodically enter into interest rate swap agreements. Our current interest rate swap activity is limited to one agreement and is not significant. Liquidity On September 27, 2001, our lenders amended certain debt covenants associated with our Multi-Currency Credit Agreement, UK Revolving Credit Agreement and the Accounts Receivable Facility (collectively,"credit facilities"). These revised covenants were established based upon our financial forecasts prior to the events of September 11, 2001. Throughout the fiscal 2002 first quarter, we experienced a significant decline in net sales compared to prior periods and compared to our financial forecasts that were the basis for the financial covenants set forth in the September 27, 2001 amendment. Such declines are related to a number of factors, certain of which were impacted by the terrorist attacks that took place in the United States on September 11, 2001. Those terrorist attacks were unprecedented events that have created many economic and political uncertainties. On December 13, 2001, our lenders again amended certain debt covenants associated with our credit facilities to reflect our revised financial forecasts as of that point in time. The revisions in the covenants were considered necessary due to the magnitude of the decline in the fiscal 2002 first quarter actual results compared to prior periods and our forecasts. In addition, the amendment repriced the outstanding warrants issued in conjunction with the May 15, 2001 amendment to the closing price of our common stock on December 10, 2001 of $1.98 and eliminates the previous reduction provision if we met repayment targets by August 31, 2002. We also issued warrants for 9.9% of the common stock outstanding on December 13, 2001 (approximately 4.1 million shares) at a price of $0.01. These $0.01 warrants are cancelled if the credit facilities are repaid by July 31, 2002 (entirely cancelled) or September 30, 2002 (49.5% cancelled). If the decline in net sales continues or we experience a significant change in our cost structure, we may not be able to comply with the covenants which were agreed to with our lenders as of December 13, 2001. Further, such covenants contemplate the sale of one of our divisions during the three months ending February 28, 2002 (fiscal 2002 second quarter). We are in negotiations with another independent party concerning the sale of one of our divisions and are still negotiating some key material terms, including price, and those negotiations are ongoing. Nonetheless, there can be no assurances that the transaction will be consummated. If the transaction is not consummated with any party, we may violate a financial covenant and will have to consider a number of measures available to us in the event of a covenant violation, which are discussed below. 23 Our management plans to continue to aggressively pursue additional revenue opportunities within our core customer markets. We adopted several restructuring plans during fiscal 2001 and the fiscal 2002 first quarter in an effort to reduce costs in the wake of declining net sales experienced during fiscal 2001 and the fiscal 2002 first quarter. These programs resulted in restructuring charges during fiscal 2001 and the fiscal 2002 first quarter and have provided cost savings that are expected to continue into the future. Management plans to consider additional cost-reduction programs, as necessary, to further align our cost base with net sales. While our revised financial forecasts reflect management's best estimates, there can be no assurances that our fiscal 2002 financial forecasts, which are the basis of the current financial covenants, will be achieved. If our actual operating performance does not substantially meet the fiscal 2002 financial forecasts associated with the amended covenants, we may have difficulty achieving compliance with certain debt covenants in our amended credit facilities. Our actual sales for the month of December 2001 were less than the December 2001 forecasted sales that are the basis of our most recent financial covenants, but still in compliance with the sales covenant. If we fail to comply with debt covenants for any reason, we may have to consider a number of the following measures: (a) obtain a waiver of default for the violated covenant(s); (b) obtain an amendment of the covenants in the existing credit facilities; (c) seek additional sources of debt financing, which likely would be subject to obtaining necessary lender consents; (d) seek additional equity financing or other strategic alternatives; (e) restructure our obligations and/or the business; or (f) consider a combination of the foregoing. Given the circumstances, we are evaluating our alternatives. There can be no assurances that the aforementioned alternatives would be available to us in the future. If this were the case, a future violation of debt covenants would cause a material adverse effect on our ability to continue in our present form and to achieve our intended business objectives. As a result of the restatement for the year ended August 31, 2001, the Company believes that it would have been in default of certain debt covenants as of August 31, 2001, unless the Company had obtained waivers or the Company's lenders had amended the debt covenants. Accordingly, the Company has classified borrowings under the Revolving Multi-Currency Credit Agreement and the U.K. Facility Agreement as a current liability as of November 30, 2001 in the restated consolidated financial statements. In December 2001, we received notification from the lessor of two of our aircraft that the lease contracts ("contracts") for the two aircraft will be terminated effective March 4, 2002. In conjunction with the termination, the lease terms of the contracts would require us to pay the lessor approximately $12.3 million for the two aircraft, as defined by the contracts, and, in exchange, the lessor would convey all of its rights, title and interest in the two aircraft to us. We are actively working with the lessor to identify a third party which would purchase and/or lease the two aircraft, thereby eliminating our $12.3 million payment obligation. We have obtained an estimate of the fair market value of the two aircraft. Based on the estimated fair market value of the two aircraft and our ongoing discussions with the lessor, we do not believe that we will incur a loss in connection with the termination of the contracts, and therefore no such loss provision has been recorded by us. If the estimated fair market value of the two aircraft changes or we and the lessor are unable to identify a third party purchaser or lessee of the two aircraft, we may incur a loss in connection with the termination of the contracts. If we were to incur a loss in conjunction with the termination of the contracts, we, under the current terms of our credit facilities, may fail to be in compliance with a debt covenant. If we were to fail to comply with this debt covenant, we would then have to consider the aforementioned measures available to us in the event of our failure to comply with a debt covenant. At November 30, 2001 and December 31, 2001, we had $24.0 million and $10.3 million, respectively, of borrowings available under our two credit facilities and $5.6 million in cash at November 30, 2001. To provide additional liquidity, we have been extending payables beyond their normal payment terms. At November 30, 2001 and December 31, 2001, although we sold all eligible accounts receivable under our accounts receivable facility, we had the availability to sell an incremental $35.4 million and $32.3 million, respectively. New Accounting Pronouncements In June 2001, SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets" were issued. The statements eliminate the pooling-of-interests method of accounting for business combinations and require that goodwill and certain intangible assets not be amortized. Instead, these assets will be reviewed for impairment annually with any related losses recognized in earnings when incurred. SFAS No. 141 was effective for us as of July 31, 2001. SFAS No. 142 will be effective for us on September 1, 2002 for existing goodwill and intangible assets. We are currently evaluating the impact of SFAS No. 142. In June 2001, SFAS No. 143, "Accounting for Asset Retirement Obligations" was issued. SFAS No. 143 sets forth the financial accounting and reporting to be followed for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are to be capitalized as part of the carrying amount of the long-lived asset. Subsequently, the recorded liability will be accreted to its present value and the capitalized costs will be depreciated. We are required to adopt SFAS No. 143 on September 1, 2002. We are currently evaluating the impact of SFAS No. 143. In August 2001, SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" was issued. SFAS No. 144 modifies and expands the financial accounting and reporting for the impairment or disposal of long-lived assets other than goodwill, which is specifically addressed by SFAS No. 142. SFAS No. 144 maintains the requirement that an impairment loss be recognized for a long-lived asset to be held and used if its carrying value is not recoverable from its undiscounted cash flows, with the recognized impairment being the difference between the carrying amount and fair value of the asset. With respect to long-lived assets to be disposed of other than by sale, SFAS No. 144 requires that the asset be considered held and used until it is actually disposed of but requires that its depreciable life be revised in accordance with APB Opinion No. 20, "Accounting Changes." SFAS No. 144 also requires that an impairment loss be recognized at the date a long-lived asset is exchanged for a similar productive asset. We will be required to adopt SFAS No. 144 on September 1, 2002. We are currently evaluating the impact of SFAS No. 144. 24 Seasonality Due to the shortened number of business days in the second quarter of our fiscal year (from December 1 to February 28), we typically experience lower sales volumes in the second quarter of each fiscal year as compared to the other quarters in the fiscal year. 25 Forward-looking Statements and Cautionary Factors - ------------------------------------------------- Certain statements contained in this document, as well as statements in other Company communications, which are not historical facts, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. The terms "anticipate", "believe", "estimate", "expect", "objective", "plan", "project" and similar expressions are intended to identify forward-looking statements. Such forward-looking statements are subject to inherent risks and uncertainties that may cause actual results or events to differ materially from those contemplated by such forward-looking statements. In addition to the assumptions and other factors referred to specifically in connection with such statements, factors that may cause actual results or events to differ materially from those contemplated by such forward-looking statements include, without limitation, general economic conditions, market conditions in the computer, semiconductor, telecommunication, and electronic industries in North America, South America, Europe and Asia, market acceptance of existing and new products, successful integration of acquisitions, competitive product and pricing pressures, foreign currency risk, interest rate risk, the Company's ability to access capital markets and other factors that may be referred to in APW Ltd.'s reports filed with the Securities and Exchange Commission from time to time. Item 3 - Quantitative and Qualitative Disclosures About Market Risk - ------------------------------------------------------------------- We are exposed to market risk from changes in foreign exchange and interest rates and, to a lesser extent, commodities. To reduce such risks, we selectively use financial instruments. Currency Risk - We have significant international operations. In most ------------- instances, our products are produced at manufacturing facilities located near the customer. As a result, significant volumes of finished goods are manufactured in countries for sale into those markets. For goods purchased from our affiliates, we denominate the transaction in the functional currency of the producing operation. We have adopted the following guidelines to manage our foreign exchange exposures: (i) increase the predictability of costs associated with goods whose purchase price is not denominated in the functional currency of the buyer; (ii) minimize the cost of hedging through the use of naturally offsetting positions (borrowing in local currency), netting, pooling; and (iii) where possible, sell product in the functional currency of the producing operation. Our identifiable foreign exchange exposures result primarily from the anticipated purchase of product from affiliates and third-party suppliers along with the repayment of intercompany loans with foreign subsidiaries denominated in foreign currencies. We periodically identify naturally occurring offsetting positions and then purchase hedging instruments to protect against anticipated exposures. Based on our overall currency rate exposure, including derivative financial instruments and nonfunctional currency denominated receivables and payables, a near-term 10% appreciation or depreciation of the U.S. dollar would not have a significant effect on our financial position, results of operations and cashflows over the next fiscal year. Interest Rate Risk - We periodically enter into interest rate swaps to ------------------ stabilize financing costs by minimizing the effect of potential interest rate increases on floating-rate debt in a rising interest rate environment. Under these agreements, we contract with a counter party to exchange the difference between a fixed rate and a floating rate applied to the notional amount of the swap. The effective portion of any gain or loss due to a change in the fair value is initially recorded as a component of other comprehensive income (loss) and subsequently reclassified into earnings when the hedged exposure affects earnings. The fair value of our interest rate swap agreements was a liability of $2.9 million and $2.4 million at November 30, 2001 and August 31, 2001, respectively. A seventy-two (10% of our weighted average interest rate) basis-point change in interest rates on average long-term borrowings would have impacted net interest expense by approximately $1.2 million for the three months ended November 30,2001. Commodity Prices - We are exposed to fluctuation in market prices for ---------------- steel. Therefore, we have established a program for centralized negotiation of steel prices. This program allows APW Ltd. to take advantage of economies of scale as well as to cap pricing. All business units are able to purchase steel under this arrangement. In general, the contracts lock steel pricing for 18 months and enable APW Ltd. to pay less if market prices fall. 26 PART II - OTHER INFORMATION Item 1 - Legal Proceedings - -------------------------- The Company understands that it, and two of its senior executives have been sued in connection with alleged violations of Federal securities laws which preceded a drop in the price of its common stock ending on March 20, 2001. The complaint, which is captioned Stewart Norman Hicks v. APW Ltd., et al., was filed on December 10, 2001. The complaint alleges violations of the Federal securities laws and seeks certification of a plaintiff class consisting of all purchasers of the Company's common stock between September 26, 2000 and March 20, 2001, inclusive. The complaint does not quantify the damages. The Company also understands that two additional suits containing similar allegations have been filed. The Company has not yet been served with the complaints and, therefore, cannot evaluate the merits of the claims. Item 6 - Exhibits and Reports on Form 8-K - ----------------------------------------- (a) Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002. (b) Exhibit 99.2 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002. (c) Reports on Form 8-K On December 21, 2001, the Company filed a Current Report on Form 8-K dated December 13, 2001, reporting under Item 5 the Company's renegotiations of its Multi-Currency Credit Agreement, Facility Agreement with the Royal Bank of Scotland and Receivables Purchasing Agreement. SIGNATURE --------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused Amendment No. 2 to this report to be signed on its behalf by the undersigned thereunto duly authorized. APW Ltd. n/k/a BQX Ltd. (in provisional liquidation) --------------------------------------------------- (Registrant) Date: November 12, 2002 By: /s/ Richard D. Carroll ------------------------------------ Richard D. Carroll Vice President and Chief Financial Officer (Principal Financial Officer and duly authorized to sign on behalf of the Registrant) 27 CERTIFICATIONS Chief Executive Officer I, Richard G. Sim Certify that: 1. I have reviewed this quarterly report on Form 10-Q/A (Amendment No. 2) of APW Ltd. (n/k/a BQX Ltd.); 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. Date: November 12, 2002 /s/ Richard G. Sim - -------------------- Richard G. Sim President and Chief Executive Officer 28 Chief Financial Officer I, Richard D. Carroll Certify that: 1. I have reviewed this quarterly report on Form 10-Q/A (Amendment No. 2) of APW Ltd. (n/k/a BQX Ltd.); 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. Date: November 12, 2002 /s/ Richard D. Carroll - ------------------------ Richard D. Carroll Vice President and Chief Financial Officer 29