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The following 10-K is subject to a Form 12b-25.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended August 31, 2002
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 98-0377209
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Clarendon House
2 Church Street
Hamilton HM DX, Bermuda
N22 W23685 Ridgeview Parkway West
Waukesha, Wisconsin 53188-1013
(Address of principal executive offices)
(262) 523-7600
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Warrants to purchase common shares with an exercise price of $1,795.80
(Title of Class)
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, and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
[X] Yes [_] No
There is no market for our common shares, therefore, we are unable to
calculate the market value of our shares.
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APW Ltd.
INDEX
Page
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PART I
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Item 1. Business ........................................................................... 3
Item 2. Properties ......................................................................... 8
Item 3. Legal Proceedings .................................................................. 9
Item 4. Submission of Matters to a Vote of Security Holders ................................ 9
PART II
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Item 5. Market for Registrant's Common Equity and Related Stockholders Matters ............. 9
Item 6. Selected Financial Data ............................................................ 10
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations ....................................................................... 12
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ......................... 27
Item 8. Financial Statements and Supplementary Data ........................................ 28
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure ....................................................................... 28
PART III
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Item 10. Directors and Executive Officers of the Registrant ................................. 28
Item 11. Executive Compensation ............................................................. 31
Item 12. Security Ownership of Certain Beneficial Owners and Management ..................... 34
Item 13. Certain Relationships and Related Transactions ..................................... 35
Item 14. Controls and Procedures ............................................................ 37
PART IV
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Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ................... 38
Certifications ................................................................................ 70
2
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, implementation of restructuring plans, 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.
When used herein, the terms "APW Ltd.," "APW," and the "Company" refer to
APW Ltd. and its subsidiaries and other entities, unless the context requires
otherwise. The terms "Predecessor Company" refer to APW Ltd., or the Company
prior to the confirmed amended plan of reorganization dated July 31, 2002 and
"Successor Company" refer to APW Ltd. or the Company from August 1, 2002 and
prospectively. When used herein, the terms "Applied Power Inc.," "Applied
Power," and "Actuant" refer to Actuant Corporation (Predecessor Company's former
parent company) and its subsidiaries and other entities, unless the context
requires otherwise. On August 20, 2002, our Board of Directors adopted a
resolution to amend our capital structure to effect a four-for-one reverse share
split of our common shares. By unanimous written consent dated September 11,
2002, our shareholders approved the reverse share split. The amendment was
effective on December 18, 2002. Unless otherwise indicated, all references
herein to the average number of common shares and related per share amounts have
been restated to reflect the reverse share split.
PART I
Item 1. Business
Description of the Business
APW Ltd. is a leading global provider of Technically Enabled Manufacturing
Services ("TEMS"), focused on designing and integrating large electronic
products. APW Ltd. has the capabilities to design and manufacture various
subsystems for electronic products, including enclosures, thermal management
systems, backplane assemblies, power supplies, printed circuit board assemblies
(PCBAs), and cabling, either as integrated custom systems or as individual
subsystems. In addition, we provide a wide range of integration services to our
customers, including product design, supply chain management, manufacturing,
assembly, testing and drop-ship services. Our focus is large infrastructure
solutions, such as wireless base stations and switches, enterprise hardware and
internet server enclosures. We are not targeting high volume markets, such as
personal computers or cell phone handsets. These offerings provide our 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. We believe our emphasis on technical innovation and
selected vertically integrated engineering and manufacturing expertise, coupled
with our total solution approach, which can be delivered on a worldwide basis,
differentiates us in the marketplace.
APW Ltd. is organized as one reportable segment operating in approximately
25 locations throughout North America, South America, Europe and Asia. We
provide our solutions and services to original equipment manufacturers ("OEMs"),
primarily in the communications (datacom and telecom), computing (enterprise
hardware--large servers, large data storage, networking),Internet (application
service providers and Internet service providers), medical, semiconductor
equipment, financial services and other specialty markets. We believe that our
size, global reach, product breadth, depth of engineering experience, scope of
services, and demonstrated expertise uniquely position us to win large
manufacturing contracts from leading global OEMs in our target markets. Our
customers include industry leaders such as Applied Materials, Cymer, Ericsson,
Fujitsu, Hewlett-Packard, IBM, LAM Research, Lucent, Motorola, NCR, Nortel
Networks and Sun Microsystems. We believe that these customers will provide us
with growth opportunities due to their desire to migrate from a fragmented
regional supply base to an integrated global supply capability, such as we
offer.
Holding Company Structure:
APW Ltd. the holding company, has no significant assets other than
investments in the stock of its wholly owned subsidiaries, intellectual property
and intercompany receivables. Its indebtedness, is collateralized by
substantially all of the assets, including the capital stock, of its
subsidiaries. The holding company relies on dividends and distributions from its
subsidiaries as its primary source of cash, primarily to service its
indebtedness.
Our Recent Bankruptcy Filing
On May 16, 2002, APW Ltd., our Predecessor 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
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York ("Bankruptcy Court") (Case No. 02-12335). The proceeding involved only APW
Ltd. (the holding company) and Vero Electronics, Inc. ("Vero"), a non-operating
entity and subsidiary of APW Ltd. (Case No. 02-12334). All of our other
subsidiaries were excluded from the proceeding and continued to conduct business
with customers and suppliers in the ordinary course.
On May 30, 2002, a proceeding (the "Bermuda Proceeding") was commenced
pursuant to the Companies Act 1981 with respect to our Predecessor Company in
the Bermuda Supreme Court in connection with a winding-up petition. 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
Predecessor Company (or, as referred to herein, the "JPLs") with limited
supervisory powers. The appointment of the JPLs and statutory stay enabled the
JPLs 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.
Confirmation of Plan of Reorganization and Emergence
On July 24, 2002, the Bankruptcy Court, following a hearing on July 23,
2002, entered an order confirming APW's and Vero's Amended and Restated Plan of
Reorganization dated June 19, 2002 (as modified, amended or supplemented, the
"Amended POR"). APW emerged from bankruptcy on July 31, 2002.
Pursuant to the terms of the Amended POR approved by the Bermuda Supreme
Court, all of the assets and liabilities which were to be retained by APW under
the original Plan were transferred to AWP Ltd. ("AWP"), a newly formed Bermuda
company. One of the assets transferred was the right to use the name "APW Ltd.,"
and the newly formed entity became the successor-in-interest to APW. After
consummation of the Amended POR, APW changed its name to BQX Ltd. and AWP Ltd.
changed its name to APW Ltd. These changes became effective on July 31, 2002.
BQX Ltd. (our predecessor) is in liquidation.
Pursuant to the Amended POR, on July 29, 2002, 460,227 new common shares of
APW Ltd., $.08 par value, were authorized and 250,000 common shares were
designated for distribution to holders of allowed claims against our Predecessor
Company.
APW Background
In the mid-1990's, the Electronics business (the "Electronics business") of
Applied Power Inc. ("Applied Power" and "APW Ltd.'s former parent company")
experienced rapid growth based, in part, on providing technical furniture and
enclosures to house servers for local area networks. Based on its exposure to
the electronic enclosure market, Applied Power began dedicating significant
resources in late 1996 to exploit the identified potential in this market.
Through a series of acquisitions in North America and Europe and internal
growth, the Electronics business of Applied Power established a leading global
position in the integrated enclosure systems sector of the Electronic
Manufacturing Services ("EMS") industry.
On January 26, 2000, Applied Power's board of directors authorized
management to pursue a spin-off of the Electronics business (the "Distribution")
to more effectively capitalize on the opportunities in this market. Prior to the
Distribution, Predecessor Company APW Ltd. (now BQX Ltd.) was reorganized as a
Bermuda company. Effective July 31, 2000, Predecessor Company APW was spun-off
with shareholders of Applied Power common stock as of the July 21, 2000 record
date receiving one share of Predecessor Company APW Ltd. common stock for every
Applied Power share owned. Predecessor Company's common stock currently still
exists, but there is no public trading market for the stock and it is believed
to be worthless.
Since September 1996, we completed approximately 20 acquisitions of
enclosures and other companies. These acquisitions allowed us to strengthen our
product and service offering, establish leading global capabilities and
diversify our customer base. The acquisition of Vero Group plc ("Vero") in June
1998 provided us with a strong base of operations in the European enclosures
market and significant engineering and test capabilities, as well as entry into
the power supply market. Our July 1998 merger with ZERO Corporation ("ZERO")
enabled us to increase the scale of our North American enclosure operations,
while also providing a leading position in the thermal management market. The
acquisition of Rubicon plc ("Rubicon") in September 1998 expanded our presence
in Ireland and Scotland for integrated custom enclosures. The acquisition of
Mayville Metal Products ("Mayville") in February 2001 increased our ability to
design, manufacture and integrate large outdoor enclosures, primarily for the
telecom industry. In addition, we have completed niche acquisitions that have
provided access to new customers and additional geographic coverage. Our product
scope is targeted at large products that are key to the global infrastructure
supporting the information age. Our strategy is to avoid high volume consumer
products, such as personal computers and cell phone handsets.
The accompanying consolidated financial statements have been prepared on
two different basis; (1) for the fiscal year ended August 31, 2002 and the one
month of cash flows and operations ending August 31, 2002, Successor Company has
prepared its financial statements according to the American Institute of
Certified Public Accountant's Statement of Position 90-7, "Financial Reporting
by Entities in Reorganization under the Bankruptcy Code" ("SOP 90-7"). In
accordance with the principles of this statements and upon the adoption of fresh
start accounting, Successor Company has adjusted its assets and liabilities to
their "fair values" as of July 31, 2002 (the "Effective Date"), with the excess
of the Successor Company's reorganization value over the fair value of its
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tangible and identifiable intangible assets and liabilities reported as goodwill
in the Consolidated Balance Sheet, (2) for all other periods presented, the
financial statement presentation assumes that the electronics business that was
contributed to APW Ltd. in connection with its spin-off was organized as a
separate legal entity.
Services and Products
We offer a broad range of value-added services to provide our OEM customers
with a vertically integrated solution for the development, manufacture and
distribution of a product.
New Product Design. New Product Introduction Centers ("NPICs") provide
services to help the customer achieve production designs that are cost effective
and that enable customers to produce commercial volumes within a short period of
time. The New Product Introduction ("NPI") process is most effective when a
customer uses it at the concept phase of the product's development cycle. NPI
can include technology selection; design, test and material strategies; best
practices design and development engineering services; and rapid circuit board
and system prototype build services. NPICs in the United Kingdom, Southern
California and China provide customers with comprehensive and rapid turnaround
prototype design for integrated solutions. We have also established NPICs at
several other facilities for specific product applications. We work closely with
our OEM customers' development teams from the early stages of product
development. Our development teams design all the electro-mechanical aspects of
our customers' products with a focus on reducing costs and increasing ease of
manufacturing. We can design everything that goes into large electronic
products. In addition to fast prototype capability, our NPICs provide complete
in-house testing, airflow analysis, safety agency approvals, Electro-Magnetic
Interference/Radio Frequency Interference emission compliance, and testing for
shock, vibration, FCC and environmental compliance.
Manufacturing. Our manufacturing operations include hard and soft metal
tooling, plastic injection molded and structural foam parts, tool and die design
and manufacturing, thermal management componentry, power supplies, backplane
assemblies, cable assembly and printed circuit board population in Europe and
North America. We manufacture components, subassemblies and systems both for
sale as standard products and for incorporation into our custom integrated
electronics enclosure systems. We employ just-in-time, single piece flow
manufacturing and continuous improvement processes to reduce costs and shorten
lead times. We are committed to maintaining World Class practices in our
manufacturing operations and employ numerous techniques, including Kaizen events
and global standardization, to continuously identify areas of improvement in our
processes. We believe that our ability to achieve high levels of quality and
delivery for highly customized products that have low, uneven demand is a
competitive advantage.
Supply Chain Management. APW has developed a qualified supplier base that
is integrated using a private trading network called the APW Supply Alliance
(the "Alliance"). The Alliance provides for easy communication and helps assure
that products are designed using approved components. Increasingly, our
suppliers stock their products in APW administered hubs from which the product
is delivered to APW's integration sites using a kanban system on a just-in-time
basis. This supply base is an important part of APW's capabilities that provides
high quality and reliable delivery for products that are highly customized and
suffer from low, uneven demand.
Integration and Testing. We provide a wide range of services, from
component assembly (Level 0 Services) to full system integration services (Level
5 Services) for enclosures with power supplies, thermal management assemblies
and active boards completely assembled, wired and fully functionally tested. Our
assembly services allow our customers to rapidly bring their products to market
at reduced costs, utilizing advanced manufacturing and testing technology. Our
engineers continuously evaluate our ongoing manufacturing and assembly processes
and recommend improvements to reduce costs, improve quality and shorten lead
times. We offer comprehensive in-house testing, airflow analysis, safety agency
approvals, and EMI/RFI compliance, as well as shock, vibration, FCC and
environmental compliance. Each product is subjected to a battery of tests that
verify the performance of every component.
Electro-Mechanical Products
We manufacture a wide range of electro-mechanical subsystems, which are
either combined to produce large electronic products or sold separately. Our
products include enclosures, racks, thermal management systems, power supplies,
PCBAs and cabling. We believe that the combination of our extensive
manufacturing services capabilities, coupled with our ability to provide a wide
range of high quality electro-mechanical subsystems provides us a competitive
advantage in the EMS industry.
Enclosures. We are a leading global manufacturer of enclosures and racks
for the electronics industry. We have an integrated global network of
approximately 15 enclosure manufacturing and integration facilities with
operations in the Americas, Europe and Asia. We believe this manufacturing
infrastructure for integrated enclosure solutions is unequaled in the industry
and allows us to better serve the international needs of our global electronics
OEM customers.
Electronic enclosures are steel, aluminum or plastic cabinets that organize
and configure individual electronic components and house, protect and insulate
the entire electronics system. We manufacture a complete range of standard and
custom enclosure
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products including subracks, racks, indoor and outdoor cabinets and cases. Our
custom enclosure products are developed in coordination with our customers and
typically are incorporated into an integrated manufacturing solution that
includes our and third party components and a range of value-added design,
manufacturing, assembly and test services. Products are marketed, when
appropriate, under the APW brand name.
Backplane Assemblies. We can integrate a wide range of standard and custom
backplanes into our electronics enclosure systems. Backplanes are complex,
multi-layered printed circuit boards (a circuit for an electronic apparatus made
by depositing conductive material in continuous paths from terminal to terminal
on an insulating surface) that are used in an electronic system to interconnect
various components.
Thermal Management. We manufacture and market thermal management products
under the APW and McLean brand names. Thermal management products cool and
protect vital electronic components housed within an electronic system. These
products are of particular importance in highly complex communications and
networking systems, which generate a high level of heat, require exacting heat
dissipation capabilities, and are located in a wide range of physical
environments. Products include air conditioners, heat exchangers, filter fan
packages, AC and DC motorized impellers, fan assemblies, centrifugal blowers and
packaged blowers.
Power Supplies. We manufacture a complete range of fault-tolerant power
supplies for electronics systems. Our power supply products are designed either
AC or DC input and single or multiple output. The majority of our power supplies
are developed in cooperation with our customers to meet their power supply
requirements.
Printed Circuit Board Assemblies. As a complement to our vertically
integrated manufacturing strategy, we manufacture complete PCBAs. Generally, we
do not produce PCBAs separately, but rather integrate them with other components
to provide finished products or subsystems.
Markets and Customers
APW believes that it provides a more comprehensive range of integrated
enclosure solutions on a global basis than its competitors. More importantly,
APW offers broad design and engineering expertise to integrate these products
into customized, cost-effective enclosure systems for APW customers worldwide.
We sell our products under the APW brand name, while continuing to
co-brand APW with McLean in the thermal management market. We serve a wide range
of principal markets including the datacom, networking, communication,
enterprise hardware, data storage, semiconductor equipment, automatic teller
machine, medical, electronic and manufacturing industries.
Our ten largest customers comprised 48% of our net sales in fiscal 2002,
with one customer, Ericsson, accounting for 10% of sales. We believe that the
loss of any one major customer would not create an adverse affect on our results
of operations, cash flows or financial position.
Sources and Availability of Raw Materials
APW has strong relationships with a broad range of suppliers. We view the
volume of our procurement as an important competitive advantage as it enhances
our ability to obtain favorable pricing for raw materials using long-term
purchasing contracts. We generally order materials and components only to the
extent necessary to satisfy existing customer orders, and we work with our
suppliers to develop just-in-time supply systems, which reduce inventory
carrying costs (see "Supply Chain Management" above). The materials and
components that we use are readily available in the open market from a number of
local and national suppliers, in North America, South America, Europe and Asia.
To date, we have not experienced any significant shortages of materials or
components.
Patents, Tradenames, Trademarks and Other Intellectual Property
APW owns over 250 United States and foreign patents and trademarks,
including pending applications. No individual patent or trademark is believed to
be of sufficient importance that its termination would have a material adverse
effect on our business.
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.
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Backlog
Although APW Ltd. obtains firm purchase orders from its customers, OEM
customers typically do not make firm orders for delivery of products more than
30 to 90 days in advance. APW Ltd. does not believe that the backlog of expected
product sales covered by firm purchase orders is a meaningful measure of future
sales, since orders may be rescheduled or canceled.
Competition
Our industry is a highly competitive industry and we believe our market is
highly fragmented. We face competition from numerous local, regional and a
number of large traditional EMS manufacturers. While price is always important,
APW Ltd. believes that other parameters such as new product design, technical
innovation, quality, global operations and delivery are equally or more
important. APW Ltd. believes that its array of global capabilities will continue
to serve as a competitive advantage and would be difficult to replicate.
Research and Development
APW Ltd. employs over 250 engineers who primarily design new products.
Expenditures for APW Ltd. research and development were $0.2 million, $2.0
million, $5.1 million and $6.1 million for the one month ended August 31, 2002,
eleven months ended July 31, 2002, fiscal years 2001 and 2000, respectively.
Costs for such research and development are either paid for by the customer or
amortized in the product cost. Included in the above amounts are $0.1 million,
$0.6 million, $0.8 million and $0.9 million of customer sponsored research
and development for the one month ended August 31, 2002, eleven months ended
July 31, 2002, fiscal years 2001 and 2000, respectively. Generally, we do
not design products without an opportunity for production. The larger, more
complicated products that APW Ltd. competes for often involve lengthy
development programs before they go into production. Complex integrated systems
are typically developed at one of our two NPICs which operate as profit centers.
Specific custom products may be developed elsewhere.
Environmental Compliance
The Company has facilities in a number of geographic locations that are
subject to a wide 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 site remediation liabilities. Based
on our investigations, we believe that we are a de minimis participant in
certain of these sites. As to two sites, we are a minor participant, and our
share of estimated cleanup costs is not expected to exceed $1.1 million and $2.3
million , respectively. In addition, we are also involved in other state clean
up actions for which we believe the aggregate costs of remediation are
adequately reserved.
We anticipate that environmental costs will be expensed or capitalized
depending on their future economic benefits. Expenditures that have no future
economic value are expensed. Liabilities are recorded when environmental
remediation is probable and the costs can be reasonably estimated. Environmental
expenditures over the last three years for APW Ltd. have not been significant.
Although the level of future expenditures for environmental remediation is
impossible to determine with any degree of certainty, in our opinion these costs
are not likely to have a material adverse effect on our financial position,
results of operations or cash flows. Environmental remediation accruals of $5.6
million and $4.4 million were included in the Consolidated Balance Sheets for
APW Ltd. and its subsidiaries at August 31, 2002 and 2001, respectively.
Employees and Labor Relations
As of August 31, 2002, the Company employed approximately 5,600 people.
Generally, our European employees are represented by local workforce agreements.
In North America, approximately 280 employees are represented by collective
bargaining agreements. APW Ltd. believes that its relationship with its
employees is good.
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Item 2. Properties
APW Ltd. operates in approximately 25 locations, strategically located
around the world to service its international customer base. APW believes the
breadth of its geographic coverage is a key competitive advantage. Our principal
manufacturing facilities are listed below. Our corporate activities are located
in offices in Waukesha, Wisconsin USA, and Chandlers Ford, United Kingdom.
Location Size (sq. feet) Owned/Leased
-------- --------------- ------------
Americas
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Anaheim, California (2) 376,000 Leased
Irvine, California 35,000 Leased
Poway, California 142,000 Leased
Worcester, Massachusetts 246,000 Leased
Champlin, Minnesota 184,000 Leased
Mount Olive, New Jersey 45,000 Leased
Creedmoor, North Carolina 160,000 Owned
Erie, Pennsylvania 213,000 Leased
Garland, Texas (1) 182,000 Leased
Radford, Virginia 65,000 Leased
Mayville, Wisconsin 500,000 Owned
Oak Creek, Wisconsin 75,000 Leased
Campinas, Brazil 200,000 Owned
Europe and Asia
---------------
Eastleigh, England (1) 129,000 Leased
Middlesex, England 155,000 Leased
Sheffield, England 107,000 Owned
Smethwick, England 29,000 Leased
Southampton, England (2) 188,000 Leased
Hamilton, Scotland (1) 107,000 Owned
Dublin, Ireland 110,000 Leased
Galway, Ireland 117,000 Leased
Cork, Ireland 46,000 Owned/Leased
Beauvais, France 40,000 Owned/Leased
Aarup, Denmark 58,000 Owned
Torinese, Italy 45,000 Owned
Shanghai, China (2) 220,000 Leased
Plonsk, Poland 210,000 Leased
(1) Subsequent to August 31, 2002, APW Ltd. management has approved and
announced a formal plan to close or downsize this facility. Management
currently anticipates that facility closure and all related activities
will be substantially complete within one year of the commitment dates of
the respective exit plans, except for certain lease exit costs that will
extend through the remaining lease term.
(2) More than one facility at this location.
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Item 3. Legal Proceedings
APW Ltd. and its subsidiaries are parties to various legal proceedings
that have arisen in the normal course of business. These legal proceedings
typically include product liability, warranty, environmental, labor, patent and
contract claims, and commission disputes. The Company has recorded reserves for
estimated losses based on the specific circumstances of each matter. Such
reserves are recorded when it is probable that a loss has been incurred as of
the balance sheet date and the amount of such loss can be reasonably estimated.
In our opinion, based on the facts known today, the resolution of these
contingencies is not expected to have a material adverse effect on our financial
condition, results of operations or cash flows. For further information, refer
to Note 18 "Contingencies and Litigation" in the Notes to the Consolidated
Financial Statements.
The Predecessor Company, as well as one current and one former executive,
have been sued in three now-consolidated actions in the United States District
Court for the Eastern district of Wisconsin 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 first of these suits, captioned
Stewart Norman Hicks v. APW Ltd. et al, was filed on December 10, 2001. The
subsequently filed suits are captioned Robert Betz v. APW Ltd. et al, and Market
Street Securities v. APW Ltd. et al. The consolidated complaint alleges
violations of Federal securities laws and seeks certification of a plaintiff
class consisting of all purchasers of the Predecessor Company's common stock
between September 26, 2000 and March 20, 2001, inclusive. The Complaint does not
quantify the damages sought. The Company, as successor defendant pursuant to the
Amended POR, and the individual defendants have moved to dismiss the
consolidated complaint, and briefing is anticipated to conclude by January 10,
2003. Under the provisions of the Amended POR confirmed by the Bankruptcy Court
on July 24, 2002, the Company's financial exposure to an adverse judgment in
this consolidated action is limited to $250,000.
The predecessor to the Company, a Bermuda company previously called APW
Ltd. and now called BQX Ltd., filed a winding up petition on May 30, 2002 with a
Bermuda court. BQX Ltd. continues to affect its liquidation plan. As a result of
the emergence of APW Ltd. from bankruptcy, BQX Ltd. holds no substantial assets.
The liquidation is expected to result in no distribution of assets to
shareholders of BQX Ltd. APW Ltd. has agreed to pay certain of the reasonable
costs associated with the liquidation of BQX Ltd.
Item 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter, no items were submitted to a vote of security
holders. On August 28, 2002, we solicited written consents (in lieu of holding a
special meeting of shareholders) from our shareholders for the following
matters:
. authorize a four-for-one reverse share split; and
. authorize a payment of up to US$25,000 to the APW Ltd. 401(k) Plan
(the "401(k) Plan") in lieu of issuing to the 401(k) Plan
approximately 5,640 warrants to purchase common shares pursuant to the
Company's recently confirmed Amended POR.
On September 11, 2002, we received the unanimous written consent on all of
these matters from our shareholders. This represented 100% of our authorized,
issued and outstanding common shares.
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
There is no established public trading market for any class of equity
securities of Successor Company. The Predecessor Company's common stock still
exists at the Effective Date but is believed to be worthless.
Securities Issued without Registration under the Securities Act:
Pursuant to the Amended POR, practically all the assets of Predecessor
Company were transferred to a new entity. Predecessor Company then changed its
name from APW Ltd. to BQX Ltd. In connection with Successor Company's emergence,
460,227 common shares of Successor Company APW Ltd., $0.08 par value, were
authorized and 250,000 common shares were designated for distribution to holders
of allowed claims against the Predecessor Company.
As provided in the Amended POR, the Company adopted a new management
incentive stock option plan which authorizes the grant of up to 37,879 options
to purchase Successor Company common shares. Additionally, the Amended POR
granted certain lenders of the Company warrants to purchase 75,758 common
shares of Successor Company. The warrants were granted with a $0.08 exercise
price, consistent with the Amended POR. All of these $0.08 warrants were
exercised in August 2002.
9
Pursuant to the Amended POR, Successor Company also granted up to 15,151
warrants to purchase common shares to shareholders of the Predecessor Company in
accordance with the terms of the Amended POR. These warrants were granted with a
$1,795.80 exercise price, consistent with the Amended POR, and are exercisable
through July 31, 2009.
The Company relied on Section 1145 of the United States Bankruptcy Code
for an exemption from registration under the Securities Act of 1933, as amended,
with respect to the securities issued under the Amended POR (the 250,000 common
shares, the 75,758 warrants and the 15,151 shareholder warrants). Section 1145
permits a company engaged in a reorganization under Chapter 11 to issue
securities, without registration under the Securities Act, if the plan of
reorganization provides for the issuance of such securities and if the
securities are issued in exchange (or at least principally in exchange) for the
debtor's existing debts or securities. The Company relied on such exemptions
since the Amended POR provided for the issuance of these securities in exchange
for the debtor's existing debts or securities.
Item 6. Selected Financial Data
The following selected financial data has been derived from the
Consolidated Financial Statements and financial information of APW Ltd. and its
subsidiaries. The data should be read in conjunction with the Consolidated
Financial Statements of APW Ltd. and notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in Item 7 of this Form 10-K. The consolidated statement of operations
data for the one month ended August 31, 2002, eleven months ended July 31, 2002,
fiscal years ended August 31, 2001, 1999 and 1998 and the balance sheet data as
of August 31, 2002, 2001, 2000, 1999 and 1998 have been derived from audited
consolidated financial statements of APW Ltd.
(In millions, except per share data) Successor Predecessor Company
Company --------------------------------------------------------
------- Years Ended August 31
1 Month 11 Months ---------------------------------------------
2002(1) 2002(1) 2001(1) 2000(1) 1999 1998(1)
------- ------- ------- ------- ---- -------
Consolidated statement of operations data:
Net sales ............................................... $ 73.4 $ 780.7 $ 1,267.7 $ 1,239.5 $ 1,055.3 $ 593.2
Gross profit ............................................ 4.5 57.1 224.6 322.2 290.5 194.1
Operating expenses (2) .................................. 12.1 160.1 226.7 208.4 188.0 142.8
Amortization expense .................................... -- 409.4 194.3 23.9 20.9 7.8
Restructuring expense ................................... 0.6 28.4 17.0 -- -- --
(Gain) loss on sale of subsidiary ....................... -- (8.2) 2.7 -- -- --
Operating earnings (loss) ............................... (8.2) (532.6) (216.1) 89.9 81.6 43.5
Reorganization items .................................... -- (477.2) -- -- -- --
Fresh start accounting adjustments ...................... -- 298.2 -- -- -- --
Net financing costs (3) ................................. 1.0 55.5 43.8 52.7 52.9 16.6
Net other (income) expense .............................. 0.5 (2.0) 2.3 8.3 (1.8) (8.6)
Earnings (loss) before income taxes ..................... (9.7) (407.1) (262.2) 28.9 30.5 35.5
Income tax expense (benefit) ............................ -- 26.4 (25.7) 52.3 10.8 17.2
--------- -------- --------- --------- --------- --------
Net earnings (loss) ..................................... $ (9.7) $ (433.5) $ (236.5) $ (23.4) $ 19.7 $ 18.3
========= ======== ========= ========= ========= ========
Basic and diluted earnings per share: (4)
Earnings (loss) per share ............................... $ (29.65) $ (10.82) $ (5.96) $ (0.60) $ 0.51 $ 0.48
========= ======== ========= ========= ========= ========
Weighted average common shares outstanding .............. .3 40.1 39.7 39.1 38.8 38.4
========= ======== ========= ========= ========= ========
Consolidated balance sheet data (at end of period):
Working capital ......................................... $ 83.1 N/A $ (542.9) $ 3.9 $ 5.9 $ 9.9
Total assets ............................................ 523.7 N/A 1,301.3 1,214.0 1,179.3 719.2
Total debt (3) .......................................... 177.0 N/A 614.6 236.4 728.8 367.8
Total equity ............................................ 89.2 N/A 409.9 624.9 172.1 172.7
Other data:
Cash flows - operating activities ....................... $ 0.5 $ (43.8) $ (19.7) $ 36.1 $ 75.5 $ 56.7
Cash flows - investing activities ....................... (0.5) 9.1 (329.2) (60.1) (435.3) (314.0)
Cash flows - financing activities ....................... (0.1) 58.6 360.1 9.3 373.7 249.3
Depreciation and amortization ........................... 3.5 473.6 248.0 58.9 50.9 23.0
Capital expenditures .................................... 0.5 18.2 88.5 45.9 43.0 31.6
10
(1) Results of operations in fiscal 2002 include the following items: (i)
$29.0 million restructuring charge for severance and lease exit costs;
(ii) $8.4 million of other items related to restructuring costs; (iii)
$24.6 million of equipment impairment costs; (iv) $392.6 million charge to
reduce the carrying value of goodwill; (v) $8.2 million gain on sale of
subsidiary, (vi) $477.2 million gain for reorganization items and (vii)
$298.2 charge for fresh start accounting. See Note 5 -"Goodwill
Impairment, Restructuring, Reorganization, Fresh Start Accounting and
Other Charges" for further discussion.
Results of operations in fiscal 2001 include the following items: (i)
$17.0 million restructuring charge for severance and lease exit costs;
(ii) $23.5 million of other items related to the restructuring and
amending the credit facilities; (iii) $17.6 million in asset write-downs
of inventory, accounts receivable and equipment; (iv) $166.9 million
write-down of goodwill; and (v) $2.7 million loss on the sale of a
subsidiary.
Results of operations in fiscal 2000 include the following items: (i) $3.3
million make-whole premium paid in connection with the early retirement of
debt which is recorded as an extraordinary charge, net of tax; (ii) $6.5
million allocated charge for corporate reorganization costs associated
with the Distribution of the Electronics business from Applied Power and
organizing APW Ltd. in Bermuda; (iii) foreign currency loss of $3.3
million associated with Euro forward contracts; and (iv) $40.0 million
charge to income tax expense associated with organizing APW Ltd. as a
Bermuda company. See Note 5--"Goodwill Impairment, Restructuring,
Reorganization, Fresh Start Accounting and Other Charges" in the Notes to
Consolidated Financial Statements for further discussion.
Operating results in fiscal 1998 include allocated charges related to the
ZERO merger, plant consolidation and product rationalization costs of
$27.9 million before tax. Fiscal 1998 results also include an allocated
net gain of $6.5 million before tax for gains recognized by ZERO for life
insurance proceeds and the sale of property.
(2) Through July 31, 2000, historical operating expenses include APW Ltd.'s
allocated share of Applied Power's corporate general and administrative
expenses. The allocation of Applied Power's corporate general and
administrative expenses is based on estimated levels of effort devoted to
APW Ltd. and the relative size of APW Ltd. compared to Applied Power's
total revenues, operating profit, assets and employee headcount.
(3) Applied Power's historical practice had been to incur indebtedness for its
consolidated businesses at the parent company level or at a limited number
of subsidiaries, rather than at the operating company level, and to
centrally manage various cash functions. Accordingly, through July 31,
2000, historical amounts include debt and related interest expense
allocated to APW Ltd. from Applied Power based on the portion of Applied
Power's investment in the Electronics business which was deemed to be
debt. This allocation was generally based upon a cash flow model which
details the historical uses of debt proceeds by the Electronics business
and the deemed debt repayments by the Electronics business based on free
cash flow. Management believes that the allocation of corporate debt and
related interest expense for the historical periods prior to July 31, 2000
is reasonable. This historical allocation, however, is not indicative of
the total amount of debt that APW Ltd. incurred upon completion of Applied
Power's realignment of its consolidated debt as part of the Distribution.
The outstanding debt amount for the year ended August 31, 2000 is the
actual amount of debt that APW Ltd. assumed as part of the Distribution.
See the "Consolidated Financial Statements and Notes" thereto for further
discussion of APW Ltd. debt levels subsequent to the Distribution.
(4) Basic and diluted shares used to calculate earnings per share are the same
as the historical Applied Power basic shares outstanding for the fiscal
years ended August 31, 1999 and 1998. We have used Applied Power basic
shares outstanding for the following reasons: (i) upon the Distribution,
each shareholder of Applied Power common stock received an equivalent
number of APW shares and; (ii) there was no potentially issuable common
stock of APW during the periods presented prior to the Distribution. For
the fiscal years ended August 31, 2001 and 2000, APW Ltd. was able to
calculate the potentially issuable common stock and subsequently would
have disclosed diluted earnings per share separately if there had been
positive net earnings, respectively. For fiscal 2002, for the eleven
months ended July 31, 2002 we have used the common stock and common stock
equivalents of the Predecessor Company to calculate earnings per share and
have used the common shares outstanding of the Successor Company to
calculate earnings per share for the one month of August 2002. Due to the
net loss incurred in the eleven months ended July 31, 2002 and the one
month ended August 31, 2002, the effect of any potentially dilutive
securities on earnings per share has been ignored as its effect would be
anti-dilutive.
11
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion of our financial condition and our results of
operations should be read in conjunction with our accompanying Consolidated
Financial Statements and related notes thereto. Consolidated Financial
Statements for fiscal 2000 generally reflect the results of operations and cash
flows of the Electronic business operations transferred to us from Applied Power
in connection with the Distribution. Accordingly, for all periods presented
prior to July 31, 2000, our Consolidated Financial Statements have been
established from the consolidated financial statements of Applied Power using
the historical results of our operations and the allocation methodology
described under "Historical Allocations from Applied Power" below. We believe
the assumptions underlying our financial statements are reasonable.
Overview
We are 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, backplane
assemblies, 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 approximately 25
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), Internet (application service
providers, Internet service providers and web hosting), medical, semiconductor
equipment, financial services and other specialty markets. Our customers include
industry leaders such as Applied Materials, Cymer, Ericsson, Fujitsu,
Hewlett-Packard, IBM, LAM Research, Lucent, Marconi, Motorola, NCR, Nokia,
Nortel Networks and Sun Microsystems. Our ten largest customers comprised 48% of
our net sales for fiscal 2002, with one customer, Ericsson, comprising 10% of
sales.
The Distribution
During 1999, Applied Power's management began to consider the separation
of the Electronics business from the Industrial business as a way to more
effectively pursue strategic opportunities in the electronics market. On January
26, 2000, Applied Power's board of directors authorized various actions intended
to position Applied Power to distribute the Electronics business to its
shareholders (the "Distribution") in the form of a special dividend.
On July 7, 2000, Applied Power's board of directors approved the
Distribution. The Distribution occurred on July 31, 2000, with shareholders of
Applied Power common stock as of the July 21, 2000 record date receiving one
share of APW Ltd. common stock for every Applied Power share owned. The
Company's common stock was listed on The New York Stock Exchange under the
symbol "APW" from July 24, 2000 through April 1, 2002, when the Company's common
stock failed to meet continued listing criteria and was subsequently de-listed.
Since April 1, 2002, the Company's stock has traded on the Over the Counter
("OTC") exchange under the symbols APWLF, APWLF.OB, APWLQ and APWLQ.OB. The
common stock currently still exists, but there is no public trading market for
the stock and it is believed to be worthless. Applied Power continues to trade
on The NYSE, but has changed its ticker symbol to "ATU" and has subsequently
changed its name to Actuant Corporation ("Actuant"). Prior to the Distribution,
APW was reorganized as a Bermuda company.
Historical Allocations from Applied Power
Through July 31, 2000, Applied Power provided certain general and
administrative services to us including administration, finance, legal, tax,
treasury, information systems, corporate communications and human resources. The
cost for these services was allocated to us by Applied Power based upon a
formula that considered sales, operating profit, assets and headcount.
Management believes that the allocation of cost for these services was
reasonable. Since August 1, 2000, we have performed these general and
administrative services using internal resources or purchased services.
Applied Power's historical practice was to incur indebtedness for its
consolidated businesses at the parent company level or at a limited number of
subsidiaries, rather than at the operating company level, and to centrally
manage various cash functions. Accordingly, through July 31, 2000, our
historical amounts include interest expense allocated from Applied Power based
on the portion of Applied Power's investment in us which was deemed to be debt.
This allocation was based on a cash flow model which details the historical uses
of debt proceeds by us and the deemed debt repayments by us based on free cash
flow. Management believes that the allocation of interest expense for all
periods prior to July 31, 2000 was reasonable. In conjunction with the
Distribution, the consolidated debt of Applied Power was realigned between us
and Applied Power. Through an additional investment by Applied Power on July 31,
2000, a certain portion of our allocated outstanding debt was retained by
Applied Power.
The above allocation methodologies followed in preparing the accompanying
Consolidated Financial Statements prior to July 31, 2000 may not necessarily
reflect our results of operations or cash flows in the future, or what the
results would have been had we been a separate, independent entity for all
periods presented.
12
Reorganization and Emergence from Chapter 11
On May 16, 2002, our Predecessor Company (APW Ltd), a Bermuda holding
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 Predecessor Company APW Ltd. (now called BQX Ltd.),
the Bermuda holding company, and Vero Electronics, Inc., a non-operating entity
and subsidiary of Predecessor Company APW Ltd. (Case No. 02-12334). All other
subsidiaries of the Company were excluded from the proceeding and continued to
conduct business with customers and suppliers in the ordinary course. On July
24, 2002, the Bankruptcy Court entered an order confirming Predecessor Company's
and Vero's Amended and Restated Plan of Reorganization dated June 19, 2002.
Successor Company successfully emerged on July 31, 2002. The Predecessor Company
is currently in the process of liquidation.
On May 30, 2002, a separate proceeding (the "Bermuda Proceeding") was
commenced pursuant to the Companies Act 1981 with respect to the Predecessor
Company 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 Predecessor
Company 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 JPLs and statutory stay
enabled the JPLs to perform supervisory and oversight of the management of
Predecessor Company 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 Predecessor Company.
Pursuant to the terms of the Amended POR, subject to the approval of 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 were 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. Effective July
31, 2002, APW Ltd. changed its name to BQX Ltd. and AWP Ltd. changed its name to
APW Ltd.
As a result of the confirmed Amended POR, the following liabilities were
deemed subject to compromise and were discharged by the Bankruptcy Court:
July 31,
2002
----
Unsecured debt $664,935
Accrued interest 22,440
Interest rate swap liabilities 2,310
--------
Total liabilities subject to compromise $689,685
========
The gain on discharge was recorded net of the issuance of the new term
note and equity issued to the senior lenders upon emergence. The gain was
recorded as a reorganization item (see below).
In addition, as of July 31, 2002, pursuant to the Amended POR, Successor
Company issued the following:
New Subordinated Secured Notes in the aggregate principal amount of $100
million issued to its senior secured lenders, 250,000 shares of Successor
Company (the "APW Common Shares") issued to its senior secured lenders which
represents 100% of the outstanding common shares of Successor Company after the
consummation of the Amended POR, Warrants to purchase up to 15,151 Successor
Company APW Common Shares at an exercise price of $1,795.80 per share issued to
the current equity holders of Predecessor Company, and Warrants to purchase up
to 75,758 Successor Company APW Common Shares at an exercise price of $.08 per
share issued to lenders under the Credit Facility (defined below), that were all
subsequently exercised by the lenders prior to August 31, 2002.
As of July 31, 2002, there were approximately 40.8 million common shares
of Predecessor Company outstanding. Under the Amended POR, holders of
Predecessor Company common shares as of the July 31, 2002 record date will
receive (a) warrants representing the right to purchase 15,151 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 asset distribution is expected to
shareholders). Subsequent to the effective date of the Amended POR, Predecessor
Company 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
Predecessor Company shareholders.
13
Change to APW's Capital Structure - The Reverse Share Split
On August 20, 2002, our Board of Directors adopted a resolution to amend
our capital structure to effect a four-for-one reverse share split of our common
shares. By unanimous written consent dated September 11, 2002, our shareholders
approved the reverse share split. The amendment was effective on December 18,
2002. Prior to the reverse share split, Successor Company had 1,303,030 shares
outstanding and 1,515,151 authorized common shares. It also had an option plan
that may issue options covering up to 151,515 shares (up to 37,878 shares after
the reverse share split) and common shares of 60,606 have been reserved for any
exercise of the warrants issued to shareholders of Predecessor Company.
Successor Company also has the ability to issue up to 325,758 shares and
designate the terms. After the reverse share split, the number of shares
reserved for exercise of the warrants and available for issuance and designation
was 15,151 shares and 81,439.5 shares, respectively.
After the reverse share split was affected, approximately 357 of the 440
registered warrant holders who owned warrants to acquire three or fewer common
shares ceased to be holders of APW warrants, thus permitting us to deregister
the warrants under the Exchange Act because we had fewer than 300 registered
holders of the warrants.
The text of the shareholder resolution effecting the reverse share split
is as follows:
"that the Company shall effect the four-for-one reverse share split
such that each four Common Shares of the Company shall become one Common
Share and the Company will issue fractional shares (but not fractional
warrants) in accordance with such formula and the authorised share capital
of the Company comprising 1,515,151 Common Shares of par value US$0.02
each and 325,758 Undesignated Shares of par value US$0.02 each be and is
hereby consolidated into 378,787.75 Common Shares of par value US$0.08
each and 81,439.5 Undesignated Shares of par value US$0.08 each."
Conduct of APW's Business After the Reverse Share Split
After the reverse share split, the number of issued common shares decreased
from 1,303,030 to 325,757.5. Because we do not have information on Cede & Co.
nominee (or "street name") holders, we are unable to determine the number of
warrants that remain outstanding after the reverse share split. The terms and
relative rights of our outstanding equity remain the same after the reverse
share split.
On December 19, 2002, the Successor Company filed a Form 15 to terminate
the registration of the warrants under the Exchange Act. Effective immediately
upon filing the Form 15, our duty to file periodic and current reports with the
SEC will terminate. Ninety days after filing the Form 15, we will no longer have
to comply with the proxy and information statement rules under the Exchange Act
and our officers, directors and shareholders owning more than 10% of the common
shares will no longer have to file reports of their purchases and sales pursuant
to the provisions of the Exchange Act.
Par Value
As a result of the reverse share split, the par value of our common shares
increased from US$0.02 to US$0.08 per share.
Debt Financing
Concurrent with the Chapter 11 petition on May 16, 2002, the Bankruptcy
Court approved and, the Company entered into a $110 million debtor-in-possession
financing ("DIP financing facility") agreement with certain members of its
lender group. Under the terms of the DIP financing facility, upon emergence from
bankruptcy, the DIP financing facility converted to the Successor Company's
Post-petition Multicurrency Superpriority Credit Facility ("exit facility"). The
facility contains three tranches: (i) tranche A ($70 million) is collateralized
by US receivables and inventory at an interest rate of LIBOR plus 3.50%; (ii)
tranche B ($20 million) is collateralized by UK and Ireland property, plant and
equipment, receivables and inventory at an interest rate of LIBOR plus 4.25%;
and (iii) tranche C ($20 million) is collateralized by all other Company assets
at an interest rate of LIBOR plus 5.00%. The DIP financing facility had a stated
termination date of 180 days from May 16, 2002, and upon its conversion to the
exit facility, the termination date for tranches A and B were automatically
extended to November 15, 2003, and the termination date for tranche C was
automatically extended to May 15, 2004. At August 31, 2002, the outstanding
borrowings under tranche A were $70.0 million and the outstanding borrowings
under tranche B were $7.0 million. The LIBOR rate at August 31, 2002 was 1.82%.
Going Private Transaction
As previously discussed, on August 20, 2002, the Board of Directors of the
Company approved a four-for-one reverse share split and the authorization of a
payment of up to US$25,000 to the APW Ltd. 401(k) Plan (the "401(k) Plan") in
lieu of issuing to the 401(k) Plan approximately 5,640 warrants to purchase
common shares. On September 11, 2002, we received unanimous written consent from
our shareholders approving both of these matters. The purpose of these
transactions is to take the Company private by reducing the number of holders of
our warrants to purchase common shares to fewer than 300. On September 12, 2002,
we filed
14
a Schedule 13e-3 with the Securities and Exchange Commission (subsequently
amended on November 2, 2002, November 6, 2002 and November 26, 2002) to
effectuate this transaction. The Schedule 13e-3 describes the reverse split and
its effect in detail. The reverse split was effective on December 18, 2002
and the Company plans to deregister its warrants to purchase common stock at
such time. Following such deregistration, the Company will cease to file reports
with the Securities and Exchange Commission. For a complete description of these
transactions and their anticipated effects on the Company and its share and
warrant holders, please see the Schedule 13e-3 and related information
statement.
Significant Accounting Policies
Financial Reporting Release No. 60 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, goodwill and other intangibles, the
realization of deferred income tax assets and the timing and amounts of expected
payments associated with restructuring activities. 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 other than
goodwill under SFAS No. 144 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;
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. 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.
Effective August 1, 2002, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets", and began assessing the recoverability of all of its
intangible assets in accordance with this standard. This statement requires that
goodwill and certain intangible assets not be amortized if defined as an
indefinite lived intangible asset. For the purposes of SFAS No. 142, the Company
has deemed its other intangible assets to possess indefinite lives. As such, the
Company will review both its goodwill and other intangible assets for impairment
annually with any related losses recognized in earnings when incurred.
15
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. In the event we were to determine that we
would be able to more likely than not realize deferred tax assets for which
valuation allowances had previously been provided as of July 31, 2002, an
adjustment to the deferred tax asset valuation allowance would be required,
first reducing goodwill and other intangibles recorded in connection with fresh
start accounting until exhausted and thereafter reported as a direct addition to
paid-in capital.
Restructuring Reserves
Restructuring charges as presented in our Consolidated Statement of
Operations are comprised of severance and lease exit costs. Restructuring
charges recorded prior to our emergence from bankruptcy were recognized in
accordance with ETIF 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit and Activity (Including Certain
Costs Incurred in a Restructuring)", and Staff Accounting Bulleting ("SAB") 100,
"Restructuring and Impairment Charges". Restructuring charges recorded in
subsequent periods were and will be recognized in accordance with SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities", and 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 net of a reasonable sublet. 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.
Fiscal 2002 Compared to Fiscal 2001
As is more fully discussed in Note 2--"Fresh Start Accounting" to the
consolidated financial statements, the Company adopted fresh start accounting
pursuant to the American Institute of Certified Public Accountant's Statement of
Position 90-7, "Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code", during the third quarter of fiscal 2002 resulting in a change
in the basis of accounting in the underlying assets and liabilities of the
Company as of July 31, 2002. Accordingly, the financial statements of the
Successor Company and the Predecessor Company are not comparable. For purposes
of this Management's Discussion and Analysis, the Company has combined actual
results of operations for the Successor Company 2002 one month and the
Predecessor Company 2002 eleven months as pro forma combined fiscal 2002
operating results in order to present a meaningful comparative analysis to prior
fiscal year operating results.
Net Sales
Net sales for fiscal 2002 decreased to $854.1 million from $1.27 billion
in fiscal 2001, a decrease of 32.6%. Fiscal 2002 net sales were negatively
impacted by the continued 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 our customers have for our products and
services. In fiscal 2002, while the overall sales levels did decrease from
fiscal 2001, the reduction in year over year sales was not do to the loss of any
significant customers, customer programs or we believe, loss of any market
share. The impact of exchange rates on net sales was less than one half of one
percent.
Geographic Sales
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
Predecessor
Successor Company Pro forma
Company 2002 2002 (11) Combined
(Dollars in millions) (1) Month Months Fiscal 2002 Fiscal 2001 Change
----------------------------------------------------------------------------------------------------
Americas.................. $46.0 $441.1 $487.1 $ 780.3 (37.6%)
----------------------------------------------------------------------------------------------------
Europe and Asia........... 27.4 339.6 367.0 487.4 (24.7%)
----------------------------------------------------------------------------------------------------
Total................... $73.4 $780.7 $854.1 $1,267.7 (32.6%)
====================================================================================================
----------------------------------------------------------------------------------------------------
Net sales in the Americas for fiscal 2002 decreased to $487.1 million from
$780.3 million in fiscal 2001, a decrease of 37.6%. The decrease was primarily
due to the weak demand our customers have experienced in their end markets due
to the lack of spending in the technology infrastructure products we provide our
customers.
Net sales in Europe and Asia for fiscal 2002 decreased to $367.0 million
from $487.4 million in fiscal 2001, a decrease of 24.7%. The decrease year over
year, as in the Americas, was due to the weak demand our customers experienced
in their end markets due to the lack of spending in the technology
infrastructure products we provide our customers. The reduction in Europe and
Asia was less than in the Americas due to increased volumes on specific European
based customer programs we supply and the incremental sales achieved as a result
of the growth derived from the expansion to our new facility in China.
16
Gross Profit
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
Predecessor
Successor Company Pro forma
Company 2002 2002 (11) Combined
(Dollars in millions) (1) Month Months Fiscal 2002 Fiscal 2001 Change
----------------------------------------------------------------------------------------------
Gross Profit............ $4.5 $57.1 $61.6 $224.6 (72.6%)
==============================================================================================
Fiscal 2002 gross profit decreased to $61.6 million from $224.6 million in
fiscal 2001, a decrease of 72.6%. As a percentage of net sales, fiscal 2002
gross profit was 7.2% compared to 17.7% in fiscal 2001. The decrease in gross
profit dollars is primarily due to the reduced sales volumes discussed above as
well as the inclusion of $30.2 million in costs associated with our facility
rationalization and restructuring plans recorded in fiscal 2002 versus the $26.8
million recorded in fiscal 2001, which in both years relate primarily to
equipment write-downs and other facility closure related expenses. Additional
factors attributing to the reduction in gross profit dollars and margin are: 1)
under-absorption of costs resulting from the broad based slow down in the
technology sector which significantly reduced sales volumes; and 2) a shift in
sales mix to programs with increased levels of systems integration, which
typically have lower margins. In both fiscal 2002 and fiscal 2001, there were
inventory write-down charges totaling $4.6 million and $13.0 million,
respectively.
Operating Expenses
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
Predecessor
Successor Company Pro forma
Company 2002 2002 (11) Combined
(Dollars in millions) (1) Month Months Fiscal 2002 Fiscal 2001 Change
----------------------------------------------------------------------------------------------
Operating expenses..... $12.1 $160.1 $172.2 $226.7 (24.0%)
==============================================================================================
Fiscal 2002 operating expenses were $172.2 million compared to $226.7
million in fiscal 2001, a decrease of 24.0%. As a percentage of net sales,
fiscal 2002 operating expenses were 20.2% compared to 17.9% for fiscal 2001. Our
operating expenses consist primarily of engineering, selling, marketing,
finance, information technology and general administrative expenses. The
increase in operating expenses as a percentage of net sales is the result of a
combination of two factors: 1) the inclusion of approximately $10.0 million in
expenses incurred to effect the re-capitalization of the company which relate
primarily to professional fees; and 2) expenses incurred as part of our overall
facility rationalization and restructuring plans.
Amortization of Intangible Assets
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
Predecessor
Successor Company Pro forma
Company 2002 2002 (11) Combined
(Dollars in millions) (1) Month Months Fiscal 2002 Fiscal 2001 Change
----------------------------------------------------------------------------------------------
Amortization $0.0 $409.4 $409.4 $194.3 110.7%
==============================================================================================
Fiscal 2002 amortization of intangible assets was $409.4 million compared
to $194.3 million in fiscal 2001. The increase in amortization was primarily due
to the $392.6 million write-down of goodwill in fiscal 2002 versus a $166.9
million write-down of goodwill in fiscal 2001. The write-down of goodwill in
both years is a result of the closing of certain facilities and the long-lived
asset impairment assessment we performed due to a deterioration of our operating
results during both fiscal 2002 and 2001.
Divestiture
On February 13, 2002, we completed the sale of our Zero Cases division.
The net consideration from the transaction was $19.2 million, which resulted in
a net book gain of $8.2 million.
17
Goodwill Impairment, Restructuring, Reorganization, Fresh Start Accounting and
Other Charges
During fiscal 2002 we recognized pre-tax goodwill impairment,
restructuring, reorganization, fresh start accounting and other charges totaling
$275.6 million. The components of the charges recorded during fiscal 2002 are as
follows (dollars in millions):
Pro forma
Combined
Fiscal Nature of
1 Month 11 Months 2002 Charges
------- --------- ------ -------
Facility closure costs:
Severance .......................................................... $0.6 $ 9.9 $ 10.5 Cash
Lease exit costs ................................................... -- 18.5 18.5 Cash
Equipment and software impairment .................................. -- 24.6 24.6 Non-cash
Other costs ........................................................ 0.8 7.6 8.4 Cash
---- ------- -------
Total facility closure costs .................................... 1.4 60.6 62.0
Goodwill impairment ................................................... -- 392.6 392.6 Non-cash
Reorganization items .................................................. -- (477.2) (477.2) Non-cash
Fresh start accounting adjustments .................................... -- 298.2 298.2 Non-cash
---- ------- -------
Total pre-tax goodwill impairment, restructuring and other charges .... $1.4 $ 274.2 $ 275.6
==== ======= =======
Facility closure costs are recorded in the fiscal 2002 Consolidated
Statement of Operations as follows: 1) severance and lease exit costs totaling
$29.0 million are recorded as restructuring charges; 2) equipment impairment
charges of $22.5 million and other facility closure costs totaling $7.7 million
are recorded as cost of products sold; and 3) $2.1 million write-off of
capitalized software costs and $0.7 million of other facility closure costs are
recorded as engineering, selling, and administrative costs.
Restructuring
During fiscal 2001 and 2002, APW initiated plans to close approximately 20
facilities. 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, except for certain lease exit costs that will extend through the
remaining lease term.
Of the $62.0 million in facility closure costs recorded on a combined basis
in fiscal 2002, $37.4 million are cash costs and $24.6 million are non-cash
costs. Of the $37.4 million in cash costs, $8.7 million are incremental cash
costs that would not have been incurred in the next 12 months without
undertaking these restructuring actions. These incremental cash costs are
comprised primarily of lease dilapidation payments made to various landlords,
employee retention payments, as well as moving and integration costs incurred as
a direct result of the decision to rationalize certain sites.
The following table summarizes the activity with respect to fiscal 2002
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 charges ............................... 1,038 10.5 18.5 29.0
Less: fiscal 2002 utilization .......................... (1,286) (11.7) (9.0) (20.7)
----- ------ ------ ------
Ending balance at August 31, 2002 ...................... 39 $ 0.9 $ 14.7 $ 15.6
===== ====== ====== ======
Goodwill and Equipment Impairment
In fiscal 2002, we performed an impairment assessment of our long-lived
assets, which include property, plant and equipment, goodwill and other
intangible assets. The assessment was performed primarily due to a deterioration
of our operating results during fiscal 2002 and the decision during fiscal 2002
to close certain facilities. As a result of the assessment, we recorded a $392.6
million impairment charge to reduce the carrying value of goodwill and a $24.6
million impairment charge to reduce the carrying value of equipment and software
associated with closed facilities in the second quarter of fiscal 2002. The
goodwill impairment charge is recorded as a component of amortization of
intangible assets in the fiscal 2002 Consolidated Statement of Operations. The
equipment impairment charge of $22.5 million is recorded as cost of products
sold and the $2.1 million write-off of capitalized software costs is recorded as
engineering, selling and administrative costs in the fiscal 2002 Consolidated
Statement of Operations. Each charge was measured, in accordance with the
provisions of SFAS No. 121, based upon our estimated discounted cash flows. The
assumptions supporting these cash flows were determined using our best
estimates.
18
Reorganization Items
As previously discussed, we filed for a voluntary pre-packaged bankruptcy
on May 16, 2002 and emerged on July 31, 2002. As part of the Chapter 11 process,
we were required to follow the AICPA's Statement of Position 90-7, "Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7").
The aggregate net costs (income) resulting from reorganization of the
business have been reported in the Consolidated Statements of Operations
separately as reorganization items. For the eleven months ended July 31, 2002,
the following have been recorded (in thousands):
Eleven
Months Ended
July 31, 2002
-------------
Loss on deferred financing costs related to liabilities subject to $ 17,818
compromise (non-cash)
Professional and other fees directly related to Chapter 11 filing 8,400
Loss on discontinuance of derivative instruments (non-cash) 2,310
Gain on debt discharge (505,685)
---------
Total $(477,157)
=========
Fresh Start Accounting Adjustments
As we emerged from Chapter 11, in accordance with SOP 90-7, we recorded
$298.2 million of fresh start accounting adjustments to "fair value" the assets
and liabilities of Successor Company. The largest of these items was a non-cash
write-down of our pre-bankruptcy goodwill of $288.0 million. See further details
in Note 2 --"Fresh Start Accounting" in our notes to the consolidated financial
statements.
Operating Loss
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
Predecessor
Successor Company Pro forma
Company 2002 2002 (11) Combined
(Dollars in millions) (1) Month Months Fiscal 2002 Fiscal 2001 Change
------------------------------------------------------------------------------------------------------------------
Operating Loss ($8.2) ($532.6) ($540.8) ($216.1) 150.3%
==================================================================================================================
We incurred an operating loss of $540.8 million in fiscal 2002 compared to
an operating loss of $216.1 million in fiscal 2001. The fiscal 2002 operating
loss was due to $392.6 million of goodwill impairment and $62.0 million of
restructuring and other costs incurred during fiscal 2002 as well as reduced
sales volumes, driven by the broad based slow down in the technology sector,
which resulted in the under-absorption of costs during fiscal 2002.
Net Financing Costs
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
Predecessor
Successor Company Pro forma
Company 2002 2002 (11) Combined
(Dollars in millions) (1) Month Months Fiscal 2002 Fiscal 2001 Change
------------------------------------------------------------------------------------------------------------------
Net financing costs........ $1.0 $55.5 $56.5 $43.8 29.0%
==================================================================================================================
Fiscal 2002 net financing costs were $56.5 million compared to $43.8
million in fiscal 2001, an increase of 29.0%. The primary reason for the
increase in our net financing costs is due to the additional indebtedness of the
company as a result of acquisitions that took place in the second quarter of
fiscal 2001 and almost three full quarters of financing expense on the
Predecessor Company's increased outstanding indebtedness in fiscal 2002 (up
until May 16, 2002 (the Chapter 11 petition date)). Offsetting net financing
costs in fiscal 2002 was the fact that no interest expense was incurred on the
Predecessor Company's outstanding indebtedness for the period from May 16, 2002
through July 31, 2002 while the Company was in Chapter 11 reorganization. During
this time period, the Company was only required to accrue interest on its
debtor-in-possession financing facility. Also included in fiscal 2002 net
financing costs is $18.9 million of non-cash amortization of capitalized fees
and warrants issued as a result of amending our credit facilities during fiscal
2002. As a result of the Company's Chapter 11 proceedings, the majority of the
Company's debt was extinguished and as such, prospective financing costs are
expected to be significantly less.
19
Other Expense, net
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
Predecessor
Successor Company Pro forma
Company 2002 2002 (11) Combined
(Dollars in millions) (1) Month Months Fiscal 2002 Fiscal 2001 Change
------------------------------------------------------------------------------------------------------------------
Other expense (income) $0.5 $(2.1) $(1.6) $ 2.4 N/A
==================================================================================================================
Other expense (income), net was income of $1.6 million in fiscal 2002
versus expense of $2.4 million in fiscal 2001. Other expense, net includes
foreign currency exchange gains and losses, as well as other miscellaneous,
non-operating income and expenses. The favorable year over year change of $4.0
million is primarily driven by a decrease in foreign exchange losses combined
with an increase in miscellaneous non-operating income at various locations.
Income Tax Expense (Benefit)
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
Predecessor
Successor Company Pro forma
Company 2002 2002 (11) Combined
(Dollars in millions) (1) Month Months Fiscal 2002 Fiscal 2001 Change
------------------------------------------------------------------------------------------------------------------
Income tax expense (benefit) $0.0 $26.4 $26.4 $(25.7) N/A
==================================================================================================================
We recorded an income tax expense of $26.4 million in fiscal 2002 compared
to an income tax benefit of $25.7 million in fiscal 2001. The income tax expense
recognized in fiscal 2002 included a $27.4 million charge to reserve against the
majority of the net deferred tax assets which were recorded in prior years. Due
to the size of our net operating loss carry-forwards in relation to our recent
history of unprofitable operations and to the continuing uncertainties
surrounding recoverability of these losses and other net deferred tax assets, as
of August 31, 2002, we have recorded a valuation allowance of $204.4 million,
resulting in a net deferred tax liability of $12.7 million. We currently provide
for income taxes only to the extent that we expect to pay taxes for current
income, as well as for deferred taxes for those tax jurisdictions in which we
continue to be profitable.
Fiscal 2001 Compared to Fiscal 2000
Net Sales
Net sales for fiscal 2001 increased to $1.27 billion from $1.24 billion in
fiscal 2000, an increase of 2.3% (6.1% excluding the negative impact of foreign
currency translation). Fiscal 2001 net sales 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. This negative
impact on sales is partially offset by: 1) the Company's diverse customer base
as evidenced by the fact that net sales to the Company's top 10 customers only
account for 42% of the Company's total net sales for fiscal 2001; and 2) the
inclusion of net sales generated by the second quarter fiscal 2001 acquisitions
of IMB and Mayville.
Geographic Sales
(Dollars in millions) Years Ended August 31,
----------------------
2001 2000 Change
---- ---- ------
Americas .................... $ 780.3 $ 734.3 6.3%
Europe and Asia ............. 487.4 505.2 (3.5%)
-------- -------- -----
Total ................. $1,267.7 $1,239.5 2.3%
======== ======== =====
Net sales in the Americas for fiscal 2001 increased to $780.3 million from
$734.3 million in fiscal 2000, an increase of 6.3%. The increase was due to the
inclusion of the acquisitions of IMB (completed in early second quarter of
fiscal 2001) and Mayville (completed late in the second quarter of fiscal 2001)
as well as a complete year of net sales related to the acquisition of Metalade
in the second quarter of fiscal 2000. The increase in fiscal 2001 net sales
resulting from the aforementioned acquisitions was offset by the broad based
slow down in the technology sector.
Net sales in Europe and Asia for fiscal 2001 decreased to $487.4 million
from $505.2 million in fiscal 2000, a decrease of 3.5%. Foreign currency
translation and our exit of the high-volume personal computer business adversely
impacted fiscal 2001 Europe and Asia net sales compared to fiscal 2000. The
appreciation of the U.S. dollar against the British Pound Sterling, Euro, and
Danish Krone currencies adversely impacted translation of these currencies into
U.S. dollars by $48 million. Our decision to exit the high-volume personal
computer related business adversely impacted Europe and Asia net sales by
approximately $38.6
20
million in fiscal 2001. Excluding both the adverse impact of foreign currency
translation and the exit of the high-volume personal computer business, Europe
and Asia net sales grew 16.3% in fiscal 2001.
Gross Profit
Fiscal 2001 gross profit decreased to $224.6 million from $322.2 million in
fiscal 2000, a decrease of 30.3%. As a percentage of net sales, fiscal 2001
gross profit was 17.7% compared to 26.0% in fiscal 2000. The decrease in gross
profit as a percentage of net sales is primarily a result of a combination of
factors: 1) $13.0 million of inventory write-offs primarily related to customer
program modifications resulting in excess components; 2) $13.8 million of costs
related to the restructuring (primarily equipment write-offs); 3)
under-absorption of costs resulting from the broad based slow down in the
technology sector which significantly reduced sales volumes; 4) start-up costs
associated with new programs; and 5) a shift in sales mix to programs with
increased levels of systems integration, which typically have lower margins.
Operating Expenses
Fiscal 2001 operating expenses were $226.7 million compared to $201.8
million in fiscal 2000, an increase of 12.3%. As a percentage of net sales,
fiscal 2001 operating expenses were 17.9% compared to 16.3% for fiscal 2000. Our
operating expenses consist primarily of engineering, selling, marketing,
finance, information technology and general administrative expenses. The
increase in operating expenses as a percentage of net sales is primarily a
result of a combination of factors: 1) $2.5 million of accounts receivable
write-offs deemed uncollectable in the fiscal 2001 third quarter; 2) $9.8
million write-off of an investment assumed through a prior acquisition; 3) $0.7
million of charges related to the amendment of the credit facilities completed
on May 15, 2001; 4) $0.5 million of costs associated with the restructuring
plans; and 5) under-absorption of costs resulting from the broad based slow down
in the technology sector which significantly reduced sales volumes.
Fiscal 2000 operating expenses include an allocation of Applied Power's
corporate general and administrative expenses based on estimated levels of
effort devoted to APW and APW's relative size compared to Applied Power's total
revenues, operating profit, assets and employee headcount. Management believes
that the allocation of Applied Power's corporate general and administrative
expense for the historical periods is reasonable. See "Historical Allocations
from Applied Power" above for further discussion of operating expenses allocated
to APW from Applied Power.
Amortization of Intangible Assets
Fiscal 2001 amortization of intangible assets (amortization) was $194.3
million compared to $23.9 million in fiscal 2000. Fiscal 2001 amortization as a
percentage of net sales increased to 15.3% compared to 1.9% in fiscal 2000. The
increase in amortization was primarily due to the $166.9 million write-down of
goodwill in fiscal 2001 resulting from the closing of certain facilities and the
long-lived asset impairment assessment we performed due to a deterioration of
our operating results during fiscal 2001.
Divestiture
On November 20, 2000, we completed the sale of a subsidiary for a net $1.7
million, which resulted in a net loss of $2.7 million.
Goodwill Impairment, Restructuring and Other Charges
During fiscal 2001, we recognized pre-tax goodwill impairment,
restructuring and other charges totaling $225.0 million. The components of the
charges recorded during fiscal 2001 are as follows (dollars in millions):
Nature of
Charges Charges
------- -------
Facility closure costs:
Severance ............................................................. $ 10.2 Cash
Lease exit costs ...................................................... 6.8 Cash
Equipment impairment .................................................. 12.6 Non-cash
Other costs ........................................................... 1.7 Cash
------
Total facility closure costs ....................................... 31.3
Goodwill impairment ...................................................... 166.9 Non-cash
Inventory and accounts receivable write-downs ............................ 15.5 Non-cash
Investment write-off ..................................................... 9.8 Non-cash
Credit facility amendment fees ........................................... 1.5 Cash
------
Total pre-tax goodwill impairment, restructuring and other charges ....... $225.0
======
Facility closure costs are recorded in the fiscal 2001 Consolidated
Statement of Operations as follows: 1) severance and lease exit costs totaling
$17.0 million are recorded as restructuring charges; 2) equipment impairment
charges of $12.6 million
21
and other facility closure costs totaling $1.2 million are recorded as cost of
products sold; and 3) $0.5 million of other facility closure costs are recorded
as engineering, selling, and administrative costs.
Restructuring
In connection with the facility closure costs, our management developed
formal plans to exit eight facilities and involuntarily terminate employees in
fiscal 2001. 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.
Of the $31.3 million in facility closure costs, $18.7 million are cash
costs and $12.6 million are non-cash costs. Of the $18.7 million in cash costs,
only $2.0 million are incremental cash costs that would not have been incurred
in the next 12 months without undertaking these restructuring actions.
The following table summarizes the activity with respect to fiscal 2001
restructuring charges (in millions, except employee data):
Severance Facilities Total
--------- ---------- -----
Number of
Employees Reserve Reserve Reserve
--------- ------- ------- -------
Total reserve balance at August 31, 2000 ............. -- $ -- $ -- $ --
Add: fiscal 2001 charges ............................. 2,602 10.2 6.8 17.0
Less: fiscal 2001 utilization ........................ (2,315) (8.1) (1.6) (9.7)
------ ----- ----- -----
Ending balance at August 31, 2001 .................... 287 $ 2.1 $ 5.2 $ 7.3
====== ===== ===== =====
Goodwill and Equipment Impairment
In fiscal 2001, we performed an impairment assessment of our long-lived
assets, which include property, plant and equipment, goodwill and other
intangible assets. The assessment was performed primarily due to a deterioration
of our operating results during fiscal 2001 and the decision during fiscal 2001
to close certain facilities. As a result of the assessment, we recorded a $166.9
million impairment charge to reduce the carrying value of goodwill and a $12.6
million impairment charge to reduce the carrying value of equipment associated
with closed facilities. The goodwill impairment charge is recorded as a
component of amortization of intangible assets in the fiscal 2001 Consolidated
Statement of Operations. The equipment impairment charge is recorded as cost of
products sold in the fiscal 2001 Consolidated Statement of Operations. Each
charge was measured, in accordance with the provisions of SFAS No. 121, based
upon our estimated discounted cash flows. The assumptions supporting these cash
flows were determined using our best estimates. The remaining long-lived assets
will continue to be depreciated and amortized over their remaining useful lives,
which management considers appropriate.
Other Charges
During fiscal 2001, we recorded write-downs of inventory and accounts
receivable of $13.0 million and $2.5 million, respectively, primarily as a
result of the broad based slow down in the technology sector. Inventory
write-downs are recorded as cost of products sold in the Consolidated Statement
of Operations and primarily relate to customer program modifications resulting
in excess components. Accounts receivable write-downs are recorded as an
engineering, selling and administrative expense in the Consolidated Statement
of Operations and relate to accounts receivables that were deemed uncollectable.
During fiscal 2001, we wrote-off a $9.8 million investment we assumed
through a prior acquisition that became impaired. The write-off is recorded as a
component of engineering, selling and administrative expense in the fiscal 2001
Consolidated Statement of Operations.
On May 15, 2001, we amended our credit facilities, including our
Multi-Currency Credit Agreement and U.K Facility Agreement. We incurred $1.5
million in fees associated with the amendment of which $0.7 million is recorded
as engineering, selling and administrative expense and $0.8 million is recorded
as net financing costs in the fiscal 2001 Consolidated Statement of Operations.
Operating Earnings (Loss)
We incurred an operating loss of $216.1 million in fiscal 2001 compared to
operating earnings of $89.9 million in fiscal 2000. The fiscal 2001 operating
loss was due to $224.2 million of goodwill impairment, restructuring and other
costs incurred during fiscal 2001 as well as reduced sales volumes, driven by
the broad based slow down in the technology sector, which resulted in the
under-absorption of costs during fiscal 2001.
Net Financing Costs
22
Fiscal 2001 net financing costs were $43.8 million compared to $52.7
million in fiscal 2000, a decrease of 16.9%. Included in fiscal 2001 net
financing costs is $1.5 million of amortization related to capitalized fees
associated with amending the financing facilities and $0.8 million in fees
associated with amending the financing facilities. Fiscal 2000 net financing
costs are net of an allocated $5.5 million pre-tax gain related to the unwinding
of interest rate swap agreements in conjunction with obtaining a new credit
facility in the fourth quarter of fiscal 2000. The decrease in net financing
costs is due to lower levels of debt in fiscal 2001 as compared to the debt
allocated to us in fiscal 2000 by Applied Power as described above in
"Historical Allocations from Applied Power" as well as lower interest rates
during fiscal 2001.
Other Expense, net
Other expense, net was $2.4 million and $8.3 million in fiscal 2001 and
2000, respectively. Other expense, net includes foreign currency exchange gains
and losses, as well as other miscellaneous, non-operating income and expenses.
Fiscal 2000 other expense, net includes a pre-tax loss of $3.3 million
associated with the termination of Euro forward contracts.
In fiscal 2000, we also recorded a charge of $3.3 million related to a
make-whole premium paid in connection with the early retirement of $50.0 million
of senior promissory notes of a ZERO subsidiary due March 8, 2011.
Income Tax Expense (Benefit)
We recorded an income tax benefit of $25.7 million in fiscal 2001 compared
to income tax expense of $52.3 million in fiscal 2000. Our effective income tax
rate was 9.8% for fiscal 2001, compared to 180.7% for fiscal 2000. The fiscal
2000 effective tax rate was significantly greater due to the $40 million income
tax provision we recorded when we reorganized as a Bermuda company. Excluding
this item, the fiscal 2000 effective income tax rate would have been 42.6%. The
decrease in the fiscal 2001 effective tax rate is primarily a result of the
impact of the goodwill impairment charge and the Company's reorganization as a
Bermuda company. See "Goodwill Impairment, Restructuring and Other Charges"
above for further discussion of the goodwill impairment charge. See "The
Distribution" above for further discussion of the reorganization as a Bermuda
based company.
Liquidity and Capital Resources
Cash Flows
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
Successor Predecessor
Company Company Pro forma
2002 (1) 2002 (11) Combined
(Dollars in millions) Month Months Fiscal 2002 Fiscal 2001 Fiscal 2000
------------------------------------------------------------------------------------------------------------------
Cash provided by (used in)
------------------------------------------------------------------------------------------------------------------
Operating activities ..... $ 0.5 ($43.8) ($43.3) ($19.7) $ 36.1
------------------------------------------------------------------------------------------------------------------
Investing activities ..... (0.5) 9.1 8.6 (329.2) (60.1)
------------------------------------------------------------------------------------------------------------------
Financing activities ..... (0.1) 58.6 58.5 360.1 9.3
==================================================================================================================
Cash and cash equivalents totaled $29.9 million at August 31, 2002 and $6.2
million at August 31, 2001.
Net cash used in operating activities was $43.3 million in fiscal 2002
compared to $19.7 million used in operating activities in fiscal 2001. The
decrease in cash flow from operations was primarily due to the continued
negative impact of the broad based slow down in the technology sector on fiscal
2002 earnings versus fiscal 2001, and $26.3 million in cash paid for
restructuring initiatives as well as $13.6 million of cash paid for
reorganization and related activities.
The decrease in fiscal 2001 cash flow from operations when compared to
fiscal 2000 is primarily due to the negative impact of the reduction in the
second half of fiscal 2001 earnings related to the overall weakened economic
environment beginning in mid-fiscal 2001 versus fiscal 2000.
Net cash in investing activities was a source of $8.6 million in fiscal
2002 compared to a use of $329.2 million in fiscal 2001 and $60.1 million in
fiscal 2000. The source of cash in fiscal 2002 consisted of $19.2 million in net
proceeds from the sale of a division in the second quarter of fiscal 2002, $8.7
million of proceeds from the sale of various equipment throughout the year,
offset by $18.7 million of cash spent on capital expenditures and various other
investing activities. In fiscal 2001, $241.5 million of cash was used for
business acquisitions and capital expenditures were $88.5 million.
23
Net cash provided by financing activities was $58.5 million, $360.1 million
and $9.3 million in fiscal 2002, 2001 and 2000, respectively. Fiscal 2002
financing activities consisted of short-term debt repayments of $4.7 million,
net borrowings of long-term debt of $48.3 million, net borrowings on the
DIP/exit facility of $77.0 million, cash paid to our arrange our DIP/exit
facility of $3.7 million, $58.0 million to repurchase the outstanding amounts
sold under our accounts receivable facility, and $2.1 million of other debt
financing costs. Fiscal 2001 financing activities consisted of net revolver
borrowings of $434.4 million, commercial paper repayments of $51.2 million, a
reduction in the accounts receivable facility of $20.9 million and the payment
of $7.7 million in debt financing costs. Fiscal 2000 financing activities
include $33.0 million of net cash investments by and advances from Applied
Power, net proceeds of $26.1 million from a sale-leaseback transaction related
to five properties located in the United States and $53.4 million of net
principal payments on long-term debt.
Off-Balance Sheet Arrangements, Contractual Obligations and Commercial
Commitments
On January 22, 2002, the SEC issued FR-61, "Commission Statement about
Management's Discussion and Analysis of Financial Condition and Results of
Operations." FR-61 indicates that registrants should consider the need to
provide disclosures concerning transactions, arrangements and other
relationships with unconsolidated entities or other persons that are reasonably
likely to affect materially liquidity or the availability of, or requirements
for capital resources as well as disclosures concerning a registrant's
obligations and commitments to make future payments under contracts, such as
debt, leases, and contingent commitments. In response to this release, we have
outlined our off-balance sheet arrangement as well as our contractual
obligations and commercial commitments as they relate to the Company.
Accounts Receivable Facility
APW North America Inc., a wholly owned subsidiary of APW Ltd., and certain
domestic subsidiaries (collectively, "Originators") previously sold trade
accounts receivable to Applied Power Credit Corporation ("APCC"), a
wholly-owned, limited purpose, consolidated subsidiary of the Company. APCC is a
separate corporate entity that would sell participating interests in its pool of
accounts receivable to financial institutions ("Purchasers"). The Purchasers, in
turn, received an ownership and security interest in the pool of receivables.
Participation interests in new receivables generated by the Originators were
purchased by APCC and resold to the Purchasers on a revolving basis as
collections reduced previously sold participation interests. The accounts
receivable sold to Purchasers were reflected as a reduction of receivables in
the Condensed Consolidated Balance Sheets. APCC had no risk of credit loss on
such receivables as they were sold without recourse. APW North America Inc.
retained collection and administrative responsibilities on the participation
interests sold as servicer for APCC and the Purchasers. Further, APCC is a
bankruptcy remote corporation, and as such, the assets held by APCC were not
available to satisfy the claims of APW Ltd.'s creditors until all of the amounts
owed to the Purchasers had been paid in full.
The Accounts Receivable Facility described above represented "off-balance
sheet financing." This resulted in assets being removed from our balance sheet,
rather than incurring a liability similar to that of traditional financing. The
receivables were sold on a revolving basis where new eligible receivables
replaced collected receivables on a daily basis. On May 17, 2002, this facility
was terminated in conjunction with the Chapter 11 petition filing. On that date,
$34.5 million of accounts receivable previously sold under the Facility were
repurchased by the Company. As of August 31, 2001, $58.0 million of this
facility was utilized and those receivables were excluded from the balance sheet
at that date.
Contractual Obligations and Commercial Commitments
We lease, through various subsidiaries, certain facilities and equipment
under various lease agreements generally over periods of one to twenty years.
Under most arrangements, we also pay the property taxes, insurance, maintenance
and expenses related to the leased properties. None of the leases have been
impaired as a result of the Chapter 11 filing. Future obligations on
non-cancelable operating leases in effect at August 31, 2002 are: $23.9 million
in fiscal 2003; $20.5 million in fiscal 2004; $17.3 million in fiscal 2005;
$14.6 million in fiscal 2006; $13.4 million in fiscal 2007; and $130.1 million
thereafter. Included in the August 31, 2002 Consolidated Balance Sheet are $14.7
million of lease exit reserves related to our future obligations listed above.
Total rental expense under operating leases for the one month ending August 31,
2002, eleven months ending July 31, 2002, fiscal 2001 and 2000 were $2.0
million, $24.1 million, $27.3 million and $17.4 million.
To secure a policy related to our fiscal 2002 and 2001 workers compensation
programs, the Company was required to obtain a letter of credit in the amount of
$0.9 million for the benefit of the insurance carrier. Subsequent to August 31,
2002, the Company also obtained another letter of credit for the benefit of
another carrier in the amount of $3.0 million to cover our fiscal 2003 workers
compensation program. The $3.0 million letter of credit effectively reduces our
borrowing capacity under our $110.0 million exit facility.
Below is a summary of Successor Company's contractual obligations and
commitments as of August 31, 2002 (all numbers are in millions):
24
- --------------------------------------------------------------------------------
Payments Due by Period
----------------------------------------------
Contractual Obligations Total Less than 1 4 - 5 After 5
year 1-3 years years years
- --------------------------------------------------------------------------------
Long-Term Debt $177.0 $ 0.0 $107.0 $70.0 $ 0.0
- --------------------------------------------------------------------------------
Capital Lease Obligations $ 3.3 $ 1.3 $ 1.9 $ 0.1 $ 0.0
- --------------------------------------------------------------------------------
Operating Leases $219.8 $23.9 $ 37.8 $28.0 $130.1
- --------------------------------------------------------------------------------
Other Long-Term Obligations $ 2.5 $ 2.5 $ 0.0 $ 0.0 $ 0.0
- --------------------------------------------------------------------------------
Total Contractual Cash
Obligations $402.6 $27.7 $146.7 $98.1 $130.1
- --------------------------------------------------------------------------------
Other long-term obligations of $2.5 million relates to final consideration due
to the sellers of Industria Metalurgica Bagarolli Ltda discussed in Note 8
"Acquistions and Divestitures."
- --------------------------------------------------------------------------------
Total Amount of Commitment Expiration Per Period
-----------------------------------------------
Other Commercial Amounts Less than 1 Over 5
Commitments Committed year 1 - 3 years 4 - 5 years years
- --------------------------------------------------------------------------------
Letters of Credit $ 3.9 $ 0.0 $ 0.9 $ 3.0 $ 0.0
- --------------------------------------------------------------------------------
Capitalization
Total debt at August 31, 2002 totaled $177.0 million, a reduction of $437.6
million from the $614.6 million at August 31, 2001. The overall reduction in
debt was a result of the reorganization of our debt as part of the Chapter 11
Amended POR.
Liquidity
The exit facility contains three tranches: (i) tranche A ($70 million) is
collateralized by US receivables and inventory at an interest rate of LIBOR plus
3.50%; (ii) tranche B ($20 million) is collateralized by UK and Ireland
property, plant and equipment, receivables and inventory at an interest rate of
LIBOR plus 4.25%; and (iii) tranche C ($20 million) is collateralized by all
other Company assets at an interest rate of LIBOR plus 5.00%. The DIP financing
facility had a stated termination date of 180 days from May 16, 2002, and upon
its conversion to the exit facility, the termination date for tranches A and B
were automatically extended to November 15, 2003, and the termination date for
tranche C was automatically extended to May 15, 2004. At August 31, 2002, the
outstanding borrowings under tranche A were $70.0 million and the outstanding
borrowings under tranche B were $7.0 million. The LIBOR rate at August 31, 2002
was 1.82%.
At August 31, 2002, we had $33.0 million of borrowings available under our
financing facility and $29.9 million in cash, with total liquidity of $62.9
million.
In the first fiscal 2003 quarter, the Company was not in compliance with
certain financial covenants. The Company's majority lenders subsequently waived
these financial covenant violations. On December 23, 2002, the Company's lenders
amended certain covenants associated with the exit facility and the term notes,
including the financial covenants for which the Company obtained a waiver. These
revised covenants were established based upon actual operating results in the
first fiscal 2003 quarter and management's revised financial and operating
forecasts as of the amendment date. In addition, the December 23, 2002 amendment
to the exit facility extended the termination date for tranches A and B to March
1, 2004. Certain fees are or may be payable by the Company to its lenders in
connection with the foregoing amendments.
APW Ltd.'s management plans to continue to aggressively pursue additional
revenue opportunities within its core customer markets. APW Ltd. took various
restructuring actions in fiscal 2002 and the first fiscal 2003 quarter in an
effort to reduce costs in the wake of declining net sales experienced during
those periods. These programs resulted in restructuring charges during fiscal
2002 and will result in additional restructuring charges in fiscal 2003.
Management plans to consider additional cost-reduction programs, as necessary,
to further align the Company's cost base with net sales.
We expect that our liquidity levels will be adequate to fund our future
working capital requirements, service our indebtedness, invest in capital
expenditures, fund any operating losses and fund current and prospective
restructuring initiatives for at least the next twelve months.
While the Company's revised financial forecasts reflect management's best
estimates, there can be no assurances that the Company's fiscal 2003 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 2003 financial forecasts associated with the amended covenants,
the Company may have difficulty achieving compliance with certain debt
covenants. If APW Ltd. fails to comply with debt covenants for any reason, the
Company may have to consider one or more 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. There can be no assurances that the aforementioned
alternatives would be available to the Company in the future. A future violation
of debt covenants could cause a material adverse effect on the Company's ability
to continue in its present form and to achieve its intended business objectives.
25
Environmental Compliance
The Company has facilities in a number of geographic locations that 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 site remediation liabilities. Any
liability in connection with these sites has been assumed by APW Ltd. Based on
our investigations, we believe that we are a de minimis participant in certain
of these sites. As to two sites, we are a minor participant, and our share of
estimated cleanup costs is not likely to exceed $1.1 million and $2.3 million,
respectively. In addition, we are also involved in other state clean up actions
for which we believe the aggregate costs of remediation are adequately reserved
for.
We anticipate that environmental costs will be expensed or capitalized
depending on their future economic benefits. Expenditures that have no future
economic value are expensed. Liabilities are recorded when environmental
remediation is probable and the costs can be reasonably estimated. Environmental
expenditures over the last three years for us have not been significant.
Although the level of future expenditures for environmental remediation is
impossible to determine with any degree of certainty, in our opinion these costs
are not likely to have a material adverse effect on our financial position,
results of operations or cash flows. Environmental remediation accruals of $5.6
million and $4.4 million were included in our Consolidated Balance Sheets at
August 31, 2002 and 2001, respectively.
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.
Inflation
No meaningful measures of inflation are available because we have a
significant number of operations in countries with diverse rates of inflation
and currency rate movements.
New Accounting Pronouncements
In June 2001, Statement of Financial Accounting Standards ("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 was effective for the Company August 1, 2002 upon emergence from the Chapter
11 reorganization. See Note 5--"Goodwill and Other Intangible Assets" for
discussion of impact on adopting SFAS No. 141 and 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 was required to adopt SFAS No. 143 on August 1, 2002,
upon emergence from the Chapter 11 reorganization. The Company has determined
that there is no current impact of adopting 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 and other intangible assets, which are 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
26
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 was required to
adopt SFAS No. 144 on August 1, 2002 upon emergence from the Chapter 11
reorganization. The Company has determined that there is no current impact of
adopting SFAS No. 144. However, SFAS No. 144 will impact the accounting for
long-lived asset impairments related to future facility closures.
In April 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and
64, Amendment of FASB Statement No. 13, and Technical Corrections," was issued.
SFAS No. 145 rescinds the indicated statements and amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. SFAS 145
eliminates the requirement that gains or losses on extinguishment of debt be
classified as extraordinary items. The Company was required to adopt SFAS No.
145 on August 1, 2002 upon emergence from the Chapter 11 reorganization. As a
result, the gain on debt discharge related to the Chapter 11 reorganization has
been classified as a reorganization item in the Consolidated Statement of
Operations for the eleven months ended July 31, 2002. In addition, the
consolidated financial statements for the year ended August 31, 2000 have been
revised to reclassify the previously reported extraordinary loss on early
retirement of debt of $2,083,000, net of income tax benefit of $1,250,000, to
other expense (income), net.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or
Disposal Activities". SFAS No. 146 addresses significant issues regarding the
recognition, measurement, and reporting of costs that are associated with exit
and disposal activities, including restructuring activities that are currently
accounted for pursuant to the guidance that the Emerging Issues Task Force
("EITF") has set forth in EITF Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)". The scope of SFAS No.
146 also includes (1) costs related to terminating a contract that is not a
capital lease and (2) termination benefits that employees who are involuntarily
terminated receive under the terms of a one-time benefit arrangement that is not
an ongoing benefit arrangement or an individual deferred-compensation contract.
The Company was required to adopt SFAS No. 146 for exit or disposal activities
initiated after August 1, 2002, after the emergence from the Chapter 11
reorganization. The Company has determined that there is no current impact of
adopting SFAS No. 146. However, SFAS No. 146 will impact the accounting for
future restructuring activities.
Item 7A. 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.
As discussed in Note 4--"Summary of Significant Accounting Policies" in the
accompanying notes to consolidated financial statements, we adopted Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires that an entity
recognize derivative instruments, including certain derivative instruments
embedded in other contracts, as either assets or liabilities and measure those
instruments at fair value. Gains or losses resulting from changes in the values
of those derivatives would be accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting. We adopted SFAS No.
133, as amended by SFAS No. 137 and SFAS No. 138, on September 1, 2000.
Currency Risk--APW has invested in its international operations. In most
instances, APW 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
APW affiliates, APW denominates the transaction in the functional currency of
the producing operation.
APW 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.
APW's 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. APW periodically identifies naturally occurring
offsetting positions and then purchases hedging instruments to protect against
anticipated exposures. Based on APW's overall currency rate exposure, including
derivative financial instruments and nonfunctional currency denominated
receivables and payables, we do not believe a near-term 10% appreciation or
depreciation of
27
the U.S. dollar would have a significant effect on APW's financial position,
results of operations and cash flows over the next fiscal year. There were no
outstanding hedging instruments as of August 31, 2002.
Interest Rate Risk--APW periodically enters 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, APW contracts with a counter-party to exchange the difference
between a fixed rate of interest and a floating rate of interest applied to the
notional amount of the swap. The effective portion of the derivative gain or
loss due to a change in 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 the Company's interest rate
swap agreements was a liability of $2.4 million at August 31, 2001. As a result
of the Chapter 11 proceedings, all of the Company's interest rate swaps were
terminated. There were no outstanding interest rate swaps as of August 31, 2002.
At August 31, 2002, the interest rate charged on our debt financing floats
relative to LIBOR. A one percentage point increase or decrease in LIBOR will
change our annual interest expense by approximately $2.0 million.
Commodity Prices--APW is exposed to fluctuation in market prices for steel.
Therefore, APW has established a program for centralized negotiation of steel
prices. This program allows APW to take advantage of economies of scale as well
as to cap pricing. All business units are able to purchase steel under this
arrangement.
Item 8. Financial Statements and Supplementary Data
2002 (Unaudited)
----------------
Predecessor Successor
Company Company
-------------------------------------------- -----------
FIRST SECOND THIRD 2 Months 1 Month
QUARTER QUARTER QUARTER Ended Ended(1)
------- ------- ------- ----- --------
Net sales .............................................. $219.8 $ 200.9 $ 221.9 $138.1 $ 73.4
Gross profit ........................................... $ 20.9 $ 14.6 $ 11.6 $ 10.0 $ 4.5
====== ======= ======= ====== =======
Net earnings (loss) .................................... $(37.2) $(493.5) $ (74.5) $171.7 $ (9.7)
====== ======= ======= ====== =======
Basic and diluted earnings (loss) per share ....... $(0.93) $(12.32) $ (1.86) $ 4.29 $(29.65)
====== ======= ======= ====== =======
(1) During the one month ended August 31, 2002, the $2.8 million write-up to
value finished goods and work-in-progress inventories as of July 31, 2002 at
their estimated selling prices less cost to complete, costs of disposal and a
reasonable profit allowance for completing the selling effort was recognized in
cost of products sold.
Predecessor Company
------------------------------------------
2001 (Unaudited)
----------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
Net sales .............................................. $359.7 $ 317.6 $300.2 $ 290.2
Gross profit ........................................... $ 89.1 $ 61.7 $ 30.1 $ 43.7
====== ======= ====== =======
Net earnings (loss) .................................... $ 11.7 $ (7.0) $(55.8) $(185.4)
====== ======= ====== =======
Basic earnings (loss) per share ................... $ 0.30 $ (0.18) $(1.39) $ (4.64)
====== ======= ====== =======
Diluted earnings (loss) per share ................. $ 0.28 $ (0.18) $(1.39) $ (4.64)
====== ======= ====== =======
A review of the unaudited quarterly financial data for the one month ended
August 31, 2002, two months ended July 31, 2002 and for the quarters in fiscal
2001 has not been performed by the Company's independent accountants.
The Consolidated Financial Statements are included on pages 31 to 60 and
are incorporated by reference herein.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The name, ages and positions of all of the directors and executive officers
of the Company are listed below.
Name Age Position
- ---- --- --------
Richard G. Sim 58 Chairman, President and Chief Executive Officer; Director
Christopher S. Brothers 37 Deputy Chairman and Director
Richard D. Carroll 39 Vice President and Chief Financial Officer
Susan M. Hrobar 47 Vice President; President of North America
28
Thomas F. Giordano 51 Vice President, Global Supply Chain
Kash Pandya 39 Vice President; President of Europe, Asia and South America
Todd A. Adams 31 Controller
Michael F. Gasick 37 Treasurer
Anthony W. Asmuth III 60 Assistant Secretary
W. Peter A. Douglas 47 Director
Michael P. Harmon 33 Director
Stephen A. Kaplan 43 Director
J. Richard Budd 50 Director
Toni J. Smith 43 Director
All of our directors serve as such pursuant to the Investor Rights
Agreement among shareholders, dated July 31, 2002.
There an no family relationships among directors or executive officers of
the Company. Set forth below are the name, office and position held with the
Company and principal occupations and employment during the past 5 years of each
of the directors and executive officers of the Company.
Richard G. Sim--Chairman, President and Chief Executive Officer; Director
since 1985. Mr. Sim was elected President and Chief Operating Officer of APW
Ltd.'s predecessor, Applied Power Inc., in 1985, Chief Executive Officer in 1986
and Chairman of the Board in 1988. From 1982 through 1985, Mr. Sim was a General
Manager in the General Electric Medical Systems Business Group. He is also a
director of IPSCO Inc. and Oshkosh Truck Corporation.
Christopher Brothers--Deputy Chairman, Director, since 2002. Mr. Brothers
is currently a Managing Director of Oaktree Capital Management, LLC and has been
a senior member of its principal investments group since joining the
organization in 1996. Prior to joining Oaktree, Mr. Brothers worked at the New
York headquarters of Salmon Brothers Inc., where he served as a Vice President
in the Mergers and Acquisitions group. Prior to 1992, Mr. Brothers was a Manager
in the Valuation Services group of Price Waterhouse. Mr. Brothers received his
MBA in Finance and a BA in Accounting from Michigan State University. Mr.
Brothers currently serves on the board of directors of National Mobile
Television, Inc.; Caminus Corporation; Power Measurement, Inc.; Cherokee
International, LLC; and Xantrex Technology, Inc.
Richard D. Carroll--Vice President and Chief Financial Officer. Mr. Carroll
was named Vice President and Chief Financial Officer in April of 2001. Most
recently, he served as President of the Company's thermal management product
line from November of 2000 to April 2001. Mr. Carroll was appointed Vice
President--Finance of Applied Power in January 2000. Previously, he served as
Financial Leader--Electronics during all of 1999. During 1998, Mr. Carroll was
appointed Treasurer and Controller of Applied Power Inc. From 1996 to 1997 he
was the Corporate Controller of Applied Power Inc. Mr. Carroll is a Certified
Public Accountant.
Susan M. Hrobar--Vice President, President of North America. Ms. Hrobar was
named Vice President; President of North America in August 2002. Prior to that
Ms. Hrobar was VP, Human Resources. Previously she was named Vice
President--Communications of Applied Power Inc. in January of 2000 and had
continued in that capacity with APW Ltd. Ms. Hrobar joined Applied Power in 1994
and was the finance leader for the APITECH division until 1996 and from 1996 to
1998 the finance leader for the Enerpac division. From 1998 to 2000, Ms. Hrobar
was the finance leader for the Industrial business segment. Ms. Hrobar is a
Certified Public Accountant.
Thomas F. Giordano--Vice President, Global Supply Chain. Mr. Giordano was
named VP, Global Supply Chain in August of 2001. Prior to that, from 1999 to
2001 he was the APW Global Supply Chain Leader. From 1996 to 1999 he was the
leader for Global Sourcing--Tools and Supplies of Applied Power.
Kash Pandya--Vice President, President of Europe, Asia and South America.
Mr. Pandya was named Vice President, President of Europe, Asia and South America
in August 2002. Mr. Pandya was named VP, Europe & Asia Operations in August of
2001. Prior to that, he was the Operations Leader, Europe & Asia since joining
Applied Power in 1998. From 1996 to 1998 he was at Caradon Plc in various
operational roles, most recently as the Director of European Operations.
Todd A. Adams--Controller. Mr. Adams was named Controller of Applied Power
Inc. in May 2000 and has continued as Controller with APW Ltd. Mr. Adams joined
Applied Power Inc. in 1998 as Manager of Financial Planning & Analysis. Mr.
Adams was previously employed with IDEX Corporation, from 1996-1998 in
accounting and financial roles. Mr. Adams is a Certified Public Accountant.
29
Michael F. Gasick--Treasurer. Mr. Gasick joined APW Ltd. in July of 2001 as
Treasurer. Mr. Gasick was previously employed with Rockwell International as
Director of International Finance from 1999 to July 2001 and with Ralston Purina
Company as Director of Corporate Finance from 1994 to 1999. Mr. Gasick is a
Chartered Financial Analyst.
Anthony W. Asmuth III--Assistant Secretary. Mr. Asmuth is a partner in the
law firm of Quarles & Brady LLP, Milwaukee, Wisconsin, having joined that firm
in 1989. Quarles & Brady LLP performs legal services for the Company and certain
of its subsidiaries.
W. Peter Douglas--Director, since 2000. Mr. Douglas is General Manager of
ATI International SRL (Barbados subsidiary of supplier of 3D graphics and
multimedia technology for personal computers and consumer electronics). Mr.
Douglas is a director of Bico, Limited.
Michael P. Harmon--Director, since 2002. Mr. Harmon is currently a Senior
Vice President of Oaktree Capital Management, LLC and has been a member of its
principal investments group since joining Oaktree in 1997 following graduation
from Harvard Business School. From 1992 through 1995, Mr. Harmon served as a
senior consultant in the Corporate Recovery Consulting Group of Price
Waterhouse. Prior to that, he was an analyst in the distressed credits group at
Society Corporation. Mr. Harmon holds B.A. in Economics from McGill University
and an M.B.A. from Harvard Business School. Mr. Harmon currently serves on the
board of directors of Cherokee Investor Partners, LLC; Millennium Rail Holdings,
LLC; and Universal Preservation Technologies.
Stephen A. Kaplan--Director, since 2002. Mr. Kaplan is the leader of
Oaktree Capital Management, LLC's principal investments group and the
co-portfolio manager of the Principal Opportunities Fund II. Mr. Kaplan joined
Oaktree in 1995, having previously served as Managing Director of TCW and
portfolio manager of The Principal Fund. Prior to joining TCW in 1993, Mr.
Kaplan was a partner with the law firm of Gibson, Dunn & Crutcher and
responsible for that firm's East Cost bankruptcy and workout practice. During
his career as an attorney, Mr. Kaplan specialized in transactions involving the
purchase and sale of companies undergoing financial restructurings. Mr. Kaplan
holds a B.S. in Political Science from the State University of New York at Stony
Brook and a J.D. from the New York University School of Law, where he was a
member of the Annual Survey of American Law. Mr. Kaplan currently serves on the
board of directors of Cherokee Investor Partners, LLC; CollaGenex
Pharmaceuticals; Forest Oil Corporation; General Maritime Corporation;
Millennium Rail Holdings, LLC; National Mobile Television; New Bristol Farms,
Inc; Regal Entertainment Group; and Stratagene Holding Corporation.
J. Richard Budd, III--Director, since 2002. Mr. Budd joined the Board of
Directors in July 2002. Since January 2001, Mr. Budd has been a partner in the
consulting firm Marotta Gund Budd & Dzera, LLC. From October 1998 to January
2001, Mr. Budd served as a consultant to troubled companies and to creditors of
troubled companies. Mr. Budd served as Senior Vice President of Metallurg, Inc.,
an internal specialty metals producer, from January 1996 to October 1998.
Toni J. Smith--Director, since 2002. Mr. Smith has been a Corporate
Director, Corporate Restructuring Unit, Specialised Lending Services of The
Royal Bank of Scotland since April 1991 and Head of Asset Purchasing,
Specialised Lending Services, since October 1997.
Messrs. Sim, Carroll, Giordano, Pandya, Adams, Gasick, Asmuth, Douglas and
Ms. Hrobar were all officers and/or directors of Predecessor Company APW Ltd.
(now called BQX Ltd.), which entered voluntary bankruptcy in May 2002 and
emerged in July 2002. See disclosure in Item 1.
Mr. Sim is a party to a lawsuit alleging various violations of securities
law. See description in "Litigation."
Section 16(a) Beneficial Ownership Reporting Compliance
Pursuant to Section 16(a) of the Securities Exchange Act of 1934, the
Company's directors, executive officers and persons who beneficially own 10% or
more of the common stock are required to report their initial ownership of
common stock and subsequent changes in that ownership to the Securities and
Exchange Commission and the New York Stock Exchange. Specific due dates for
those reports have been established and the Company is required to disclose in
this Proxy Statement any failure to file by those due dates during fiscal 2002.
Based upon a review of such reports furnished to the Company, or written
representations that no reports were required, the Company believes that all of
those filing requirements were satisfied with respect to fiscal 2002.
Employment Agreement and Change-In-Control Arrangements
The Company assumed the change in control agreements entered into by its
Predecessor Company with 6 officers, Sim, Carroll, Pandya, Adams, Giordano, and
Ms. Hrobar. The change in control agreements provide that upon a change in
control and
30
triggering event, the officer can terminate his services and the Company shall
pay to the officer cash in a lump sum equal to two and one-half times (one times
for Mr. Adams) the sum of the highest per annum base rate of salary in effect
during the one-year period immediately prior to the termination of employment
plus the highest annual bonus or incentive compensation earned by the officer
under any cash bonus or executive compensation plan of the Company during the
three completed fiscal years of the Company immediately preceding the
termination date. For purposes of the agreements, a change in control means:
. sale of over 50% of stock of APW; or
. sale by APW of over 50% of its business or assets; or
. a merger or consolidation of APW with another corporation such that
the shareholders of APW prior to the transaction do not own at least
50% of the surviving entity; or
. the acquisition by means of more than 25% of the voting power or
common stock of APW by any person or group; or
. the election of directors constituting a majority of APW's board of
directors pursuant to a proxy solicitation not recommended by the APW
board.
For purposes of the agreements, a triggering event means:
. reducing the base salary paid to the officer, the officer's bonus
opportunity or the total aggregate value of the fringe benefits
received by the officer; or
. a material change in the officer's position or duties or the officer's
reporting responsibilities; or
. a change in the location or headquarters where the officer is normally
expected to provide services to a location of 40 or more miles from
the previous location.
In the event that certain severance benefits may be subject to an excise
tax imposed by Section 4999 of the Code, then the officer will be entitled to an
additional payment to make the officer whole for the amount that would have been
received before the application of such excise tax and any income taxes.
Directors Compensation
The current board of directors has only been in existence since the
confirmation of the Amended POR on July 31, 2002 and met only once as
a board in fiscal 2002 following our July 31, 2002 emergence from bankruptcy.
The current non-employee directors of the Company will be paid an annual
retainer of $25,000, plus $1,000 per board and/or committee meeting attended.
Item 11. Executive Compensation
Summary Compensation Table
The following table sets forth compensation awarded to, earned by or paid
to the Company's Chief Executive Officer and each of the Company's other four
most highly compensated executive officers who were serving as executive
officers during fiscal 2002 for services rendered to the Company and its
subsidiaries ("named executive officers"). The annual compensation amounts
include the compensation paid in fiscal 2000 while the officers were employed by
Applied Power. The amount of option grants reported for fiscal 2000 include
options granted by Applied Power, with the amounts adjusted for the conversion
from Applied Power options to APW options as a result of the spin-off.
Long-Term
Compensation
Annual Compensation Awards
------------------------------------------ ------
Other Annual Securities All Other
Underlying
Name and Principal Compensation Options/ Compensation
------------------ ------------ -------- ------------
Position Year Salary Bonus ($)/(1)(2)(3)/ SARs (#)/(4)/ ($)/(5)(6)(7)/
-------- ---- ------ ----- --------------- ------------- ------------------
Richard G. Sim 2002 $812,500/(13)/ $675,000 $261,809 846,000 $31,351
Chairman, President and Chief
Executive Officer 2001 714,999 -0- 410,149 -0- 14,020
31
Long-Term
Compensation
Annual Compensation Awards
-------------------------------------- ------
Other Annual Securities All Other
Underlying
Name and Principal Compensation Options/ Compensation
------------------ ------------ -------- ------------
Position Year Salary Bonus ($)/(1)(2)(3)/ SARs (#)/(4)/ ($)/(5)(6)(7)/
-------- ---- ------ ----- -------------- ------------- --------------
Richard D. Carroll/(9)/ 2000 716,535 1,500,000 66,148 912,500 20,668
Vice President and Chief 2002 292,764/(13)/ 206,250 -0- 288,800 31,738
Financial Officer
2001 221,111 83,333 17,301 120,000 21,082
2000 186,925/(8)/ 207,900/(8)/ 11,953 45,166 11,379
Kash Pandya/(10)/
Vice President; President of 2002 297,414 68,389 -0- 210,800 20,575
Europe, Asia and South
America
2001 202,762 -0- -0- 118,000 21,629
2000 176,874 68,641 -0- 48,958 43,533
Susan M. Hrobar/(11)/
Vice President; President of 2002 220,039 63,250 -0- 288,800 32,489
North America
2001 197,577 -0- -0- 70,000 12,602
2000 155,000 150,226 -0- 45,166 13,703
Thomas F. Giordano/(12)/
Vice President, Global
Supply Chain 2002 200,000 55,000 -0- 207,200 21,489
2001 157,073 34,099 -0- 60,000 7,845
2000 118,404 66,577 -0- 45,166 15,472
(1) The 2002 amount is comprised of payments made to Mr. Sim in connection with
the following: (a) $6,875 of interest paid on a deferred compensation plan
of the Predecessor Company; (b) a loan from the company for his London,
32
England residence (with a net financing amount of $137,565 and the
remainder consisting of tax gross-up payments). This loan has been
refinanced since previously reported for the fiscal year ended August 31,
2001, and has a current face amount of approximately $500,000. This loan is
for a residence located in London, England because his responsibilities
require him to divide his time between the United States and Europe.
(2) The 2001 amounts consist entirely of interest paid on a deferred
compensation plan of the Predecessor Company, except for the following: Mr.
Sim received $410,149 in connection with the above loan from the Company
(with a net financing amount totaling $222,899 and the remainder of the
amount consisting of tax gross-up payments).
(3) The 2000 amounts consist entirely of interest paid on the Deferred Plan
except for Mr. Sim who in fiscal 2000 received $66,148 in connection with
the above loan.
(4) This figures consist entirely of stock options. Fiscal 2002 awards consist
of the options exercisable for the common shares of Predecessor Company as
well as Successor Company. The number of options awarded in fiscal 2002 to
purchase common shares of Successor Company as follows: Mr. Sim - 46,000,
Mr. Carroll - 10,800, Mr. Pandya - 10,800, Ms. Hrobar -10,800 and Mr.
Giordano - 7,200. The number of options awarded in fiscal 2002 to purchase
common shares of Predecessor Company as follows: Mr. Sim - 800,000, Mr.
Carroll - 278,000, Mr. Pandya - 200,000, Ms. Hrobar - 278,000 and Mr.
Giordano - 200,000. The fiscal 2001 and 2000 grants represent options that
were exercisable solely for Predecessor Company common shares.
(5) The 2002 amount represents: (a) the Company's 401(k) Plan matching
contributions as follows: Ms. Hrobar - $2,775 and Mr. Giordano - $2,775;
(b) Company allocations under the 401(k) Plan as follows: Mr. Carroll -
$5,100, Ms. Hrobar - $5,100 and Mr. Giordano - $5,100; (c) Company
contributions under a UK pension plan in the amount of $20,575 for Mr.
Pandya; (d) auto payments as follows: Mr. Sim -$31,351, Mr. Carroll -
$14,400, Ms. Hrobar - $14,400 and Mr. Giordano - $13,200; (e) imputed
income: Mr. Carroll - $228, Ms. Hrobar - $300 and Mr. Giordano - $414; (f)
spousal travel expenses as follows: Mr. Carroll - $12,010 and Ms. Hrobar -
$9,914.
(6) The 2001 amount represents: (a) the Company's 401(k) Plan matching
contributions as follows: Mr. Carroll - $2,775, Ms. Hrobar - $2,410 and Mr.
Giordano - $2,528; (b) Company allocations under the 401(k) Plan as
follows: Mr. Carroll - $5,100, Ms. Hrobar - $5,100 and Mr. Giordano -
$5,100; (c) Company contributions under a UK pension plan in the amount of
$21,629 for Mr. Pandya; (d) auto payments as follows: Mr. Sim - $13,212,
Mr. Carroll - $5,107, Ms. Hrobar - $5,092; (e) imputed income for: Mr. Sim
in the amount of $808; (f) relocation or moving expenses as follows: Mr.
Carroll - $8,100.
(7) The 2000 amount represents: (a) the Company's 401(k) Plan matching
contributions as follows: Mr. Sim - $2,625, Mr. Carroll - $2,625, Ms.
Hrobar - $2,625 and Mr. Giordano - $2,625; (b) Company allocations under
the 401(k) Plan as follows: Mr. Sim - $4,800, Mr. Carroll - $4,800, Ms.
Hrobar - $6,400 and Mr. Giordano - $6,400; (c) Company contributions under
a UK pension plan in the amount of $20,505 for Mr. Pandya; (d) auto
payments as follows: Mr. Sim - $13,243, Mr. Carroll - $3,900, Mr. Pandya -
$23,028, Ms. Hrobar - $4,678 and Mr. Giordano - $6,364; and (e) imputed
income: Mr. Carroll - $54 and Mr. Giordano - $83.
(8) Includes amounts deferred pursuant to the APW Executive Deferral
Compensation Plan, Mr. Carroll's salary $9,000, bonus $23,850.
(9) Effective April 2001, Mr. Carroll was named Vice President and Chief
Financial Officer. Prior to that time, he served as President of the
Company's thermal management product line from November 2000 to April 2001.
Prior to November 2000, Mr. Carroll served as the Company's Vice
President--Finance since January 2000.
(10) Effective August 2002, Mr. Pandya was named Vice President; President of
Europe Asia and South America. Prior to that time, he served as Vice
President, Europe & Asia Operations from August 2001 to August 2002. Prior
to that, he was Operations Leader, Europe & Asia since joining Applied
Power in 1998.
(11) Effective August 2002, Ms. Hrobar was named Vice President; President of
North America. Prior to that time, she served as Vice President, Human
Resources from November 2000 to August 2002. Prior to November 2002, Ms.
Hrobar served as Vice President--Communications of Applied Power Inc. since
January 2000 and continued in that capacity with APW Ltd.
(12) Mr. Giordano was named Vice President, Global Supply Chain in August 2001.
Prior to that from 1999 to 2001 he was the APW Global Supply Chain Leader.
From 1996 to 1999 he was leader for Global Sourcing--Tools and Supplies of
Applied Power.
33
(13) Mr. Sim's and Mr. Carroll's fiscal 2002 salary includes $62,500 and
$17,764, respectively, of salary reinstatement related to fiscal 2001. Both
officers had previously agreed to forgo these amounts as part of a
company-wide salary reduction in fiscal 2001.
Item 12. Security Ownership of Certain Beneficial Owners and Management
As of November 1, 2002, the following hold our common shares.
Number of
Common
Name Shares Percentage
- ---- ------ ----------
Investor
O'Connor Distressed Trading Master Limited 5,395 1.7%
JPMorgan Chase Bank 26,330 8.1% (5)
BNP Paribas 7,046 2.2%
Societe Generale 7,046 2.2%
West Register (Investments) Limited 75,322 23.1% (6)
Bank of America NA 21,139 6.5% (7)
US Bank National Association 5,801 1.8%
GSC Partners and Affiliates 26,132 8.0% (8)
William E. Simon & Sons Special Situation Partners 4,193 1.2%
Perry Principals LLC 6,536 2.0%
Oaktree Funds and Affiliates 140,818 43.2% (9)
----------- -------------------
Subtotal 325,758 100.0%
Officers and Directors
Richard G. Sim (1) 251 *
Christopher S. Brothers (2) 0 *
Richard D. Carroll (1) 1 *
Susan M. Hrobar 0 *
Thomas F. Giordano 0 *
Kash Pandya 0 *
Todd A. Adams 0 *
Michael F. Gasick 0 *
Anthony W. Asmuth III 0 *
W. Peter A. Douglas 0 *
Michael P. Harmon (2) 0 *
Stephen A. Kaplan (2) 0 *
J. Richard Budd 0 *
Toni J. Smith (3) 0 *
----------- -------------------
All directors and executive officers as a group (14 persons) 326,009 (4) 100.0%
*Less than 1%
(1) Assumes exercise of warrants held by such officer. All warrants are
exercisable.
(2) Director nominated by Oaktree Funds and Affiliates. The shares held by
Oaktree Funds and Affiliates are listed above and not repeated herein.
(3) Director nominated by West Register (Investments) Limited. The shares held
by West Register (Investments) Limited are listed above and not repeated herein.
(4) Assumes exercise of warrants. (5) 380 Madison Avenue, 9th floor, New York,
NY 10017
(6) 42 St. Andrew Square, Edinburgh, DH2 2YE Scotland, UK (7) 555 S. Flower St.,
11th floor, Los Angeles, CA 90071 (8) 500 Campus Drive, Suite 220, Florham Park,
NJ 07932 (9) 333 S. Grand Avenue, 28th Floor, Los Angeles, CA 90071
34
Equity Compensation Plan Information
August 31, 2002
-----------------------------------------------------------------------------
(a) (b) (c)
---------------------- --------------------------- -----------------------
Number of securities
remaining available
for future issuance
Number of securities under equity
to be issued upon Weighted-average exercise compensation plans
exercise of price of outstanding (excluding securities
outstanding options, options, warrants and reflected in
Plan Category warrants and rights rights column(a))
- ------------------------------------------------- ---------------------- --------------------------- -----------------------
Equity compensation plans approved by security
holders 31,230 $330.00 6,558
Equity compensation plans not approved by
security holders 0 0 0
---------------------- -----------------------
Total 31,230 $330.00 6,558
====================== =======================
Item 13. Certain Relationships and Related Transactions
Investor Rights Agreement
We and our shareholders have entered into an Investor Rights Agreement,
dated July 31, 2002. We have filed that document as an exhibit in our filings
with the SEC. The agreement among other things:
.. restricts the transfer of shares and provides certain rights of first offer to
purchase shares, co-sale rights and drag along rights,
.. provides limited pre-emptive rights for shareholders,
.. specifies votes for an initial public offering and parameters for selling
shares in the offering,
.. provides demand and piggyback registration rights to certain shareholders and
specifies terms applicable to holdbacks, registration procedures, expenses and
participation,
.. provides that certain actions or steps require supermajority shareholders
and/or Board of Director approval, and
.. specifies certain provisions for shareholders to vote and nominate all
directors.
With regard to director nominees, Oaktree currently has the right to
nominate or remove three directors (out of the seven directors serving on the
Board of Directors). West Register, an affiliate of The Royal Bank of Scotland,
has the right to nominate one director and, if its holdings increase to between
30% to 35%, it would have the right to nominate two directors, and if its
holdings increase to over 35% it could nominate three directors. In addition,
the other shareholders, exclusive of Oaktree and West Register, currently have
the right to nominate one director. Mr. Sim, the Company's Chairman, CEO and
President, and Mr. Peter Douglas, a Barbadian director, also continue as
directors absent removal by a supermajority shareholder vote. The shareholders
have agreed to vote their shares to effect these nominee rights. The Company and
the shareholders listed above are parties to the Investor Rights Agreement.
Holders of warrants are not subject to the terms or conditions of the Investor
Rights Agreement.
35
Other Transactions
There have been no transactions that have occurred within the past two
years between the Company, its executive officers or directors or any person
controlling the Company on one hand and the affiliates of the Company on the
other hand. Except for a loan to Richard G. Sim to partially finance a residence
in London, United Kingdom, and interest paid on debt owned by certain
shareholders and the bankruptcy and effecting the bankruptcy plan upon the
shareholders and creditors, there have been no transactions within the past two
years between APW, its executive officers or directors or any person controlling
APW. The balance on the loan from the Company to Mr. Sim is approximately
$500,000 and bears interest at 6.81%. It is due the earlier of July 15, 2031 or
upon the sale, transfer or conveyance of the property. Interest accrued to the
following shareholders on the note issued by us and a loan made to us as of our
July 31, 2002 emergence from bankruptcy through our fiscal 2002 year-end. These
shareholders were lenders to us prior to our emergence. Prior to the July 31,
2002 bankruptcy emergence the lenders were not affiliates and interest accrued
prior to the bankruptcy was in most part discharged in the bankruptcy action
and, therefore, is not shown in the table.
$100 Million Note:
Principal Interest
Shareholder Allocation Accrued
- ----------- ------------ --------
UBS O'Connor LLC $ 2,073,679 $ 10,652
JPMorgan Chase 11,325,479 58,179
BNP Paribas 3,030,762 15,569
Societe Generale 3,030,762 15,569
Royal Bank of Scotland 15,138,664 77,767
Bank of America 9,092,286 46,707
US Bank 2,495,298 12,818
GSC Recovery LP 4,282,945 22,001
William E. Simon & Sons 1,384,050 7,110
Perry Principals 2,273,072 11,677
Oaktree 45,873,003 235,649
------------ --------
TOTAL $100,000,000 $513,699
Up to $110 Million Credit Facility ($90 million Initial Borrowings):
Principal Interest
Shareholder Allocation Accrued
------------ --------
UBS O'Connor LLC $ 681,872 $ 2,908
Royal Bank of Scotland 24,000,000 102,359
GSC Recovery LP 20,129,254 85,850
William E. Simon & Sons 1,159,182 4,944
Perry Principals 1,511,482 6,446
Oaktree 42,518,210 181,338
------------ --------
TOTAL $ 90,000,000 $383,844
The above interest covers July 31, 2002 through August 31, 2002.
36
Item 14. Controls and Procedures
Recent Events
The Company determined in October 2002, that accounting improprieties had
occurred in fiscal 2002, 2001, 2000 and 1999 at one US subsidiary and in fiscal
2001 at one UK 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. Upon a detailed investigation of both
events it was determined that no assets had been misappropriated from the
Company. 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 the years ended August 31, 2001 and 2000 have been
restated. The restated consolidated financial statements as of August 31, 2002,
2001 and 2000 and for the years ended August 31, 2002, 2001 and 2000 are
included herein. The impact of the restatement was to increase the net loss by
$4.4 million and $0.7 million in fiscal years 2001 and 2000, respectively, and
to decrease net income by $0.8 million in fiscal year 1999. Management has taken
appropriate remedial actions with respect to the matters described above.
Disclosure Controls and Procedures
As a result of the above, the Company has undertaken a thorough review of
its internal controls and has performed a detailed review of all issues
surrounding the aforementioned events to ensure required adjustments are
accurate and complete. Among other things the Audit Committee is currently
requesting alternatives for expanding the Company's outsourced Internal Audit
services. Also, in order to ensure that the information the Company must
disclose in its filings with the Securities and Exchange Commission is recorded,
processed, summarized and reported on a timely basis, the Company has formalized
its disclosure controls and procedures. The Company's principal executive
officer and principal financial officer have reviewed and evaluated the
Company's disclosure controls and procedures as defined in Rules 13a-14(c) and
15d-14(c) under the Securities Exchange Act of 1934, as amended (the "Exchange
Act") as of a date within 90 days prior to the filing date of this report (the
"Evaluation Date"). Based on such evaluation, such officers have concluded that,
as of the Evaluation Date, the Company's disclosure controls and procedures are
effective in bringing to their attention on a timely basis material information
relating to the Company required to be included in the Company's periodic
filings under the Exchange Act.
Since the Evaluation Date, there have not been any significant changes in
the internal controls of the Company, or in other factors that could
significantly affect these controls subsequent to the Evaluation Date.
37
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Documents filed as part of this report:
1. Consolidated Financial Statements
See "Index to Consolidated Financial Statements and
Financial Statement Schedule" on page 39, the Report of
Independent Accountants on page 40 and the Consolidated
Financial Statements on pages 41 to 66, all of which are
incorporated herein by reference
2. Financial Statement Schedules
See "Index to Consolidated Financial Statements and
Financial Statement Schedules" on page 39, the Report of
Independent Accountants on Financial Statement Schedule on
page 67, all of which are incorporated herein by reference.
3. Exhibits
See "Index to Exhibits" on pages 72 to 75, which is
incorporated herein by reference.
(b) Reports on Form 8-K:
The following reports on Form 8-K were filed during the last quarter
of fiscal 2002:
On June 5, 2002, the Company filed Amendment No. 1 to
Current Report on Form 8-K dated May 1, 2002, reporting
under Item 9 updated and amended matters related to the
Company's Disclosure Statement.
On July 9, 2002, the Company filed a Current Report on Form
8-K dated June 19, 2002, reporting under Item 5 that the
Company filed an Amended and Restated Joint Plan of
Reorganization of Vero Electronics and the Company and a
Supplement to the Disclosure Statement.
On August 2, 2002, the Company filed a Current Report on
Form 8-K dated July 23, 2002, reporting:
. A change in control of the Company under Item 1;
. The confirmation of the Amended POR in connection with
the Chapter 11 reorganization under Item 2; and
. The transfer of all of the assets and selected
liabilities not discharged to the successor company and
information relating to the credit facility under Item 3.
On August 5, 2002, the Company filed Amendment No. 1 to
Current Report on Form 8-K dated July 23, 2002, reporting:
. A change in control of the Company under Item 1;
. The confirmation of the Amended POR in connection with
the Chapter 11 reorganization under Item 2; and
. The transfer of all of the assets and selected
liabilities not discharged to the successor company and
information relating to the credit facility under Item 3.
38
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page
- ------------------------------------------ ----
Report of Independent Accountants ...................................................................................... 40
Consolidated Statements of Operations
For the one month ended August 31, 2002 (Successor Company), eleven months ended July 31, 2002, and years ended
August 31, 2001 and 2000 (Predecessor Company)................................................................ 41
Consolidated Balance Sheets
As of August 31, 2002 (Successor Company) and 2001 (Predecessor Company).......................................... 42
Consolidated Statements of Shareholders' Equity
and Comprehensive Income (Loss)
For the one month ended August 31, 2002 (Successor Company), eleven months ended July 31, 2002, and years ended
August 31, 2001 and 2000 (Predecessor Company)................................................................ 43
Consolidated Statements of Cash Flows
For the one month ended August 31, 2002 (Successor Company), eleven months ended July 31, 2002, and years ended
August 31, 2001 and 2000 (Predecessor Company)................................................................ 44
Notes to Consolidated Financial Statements ............................................................................. 45-66
INDEX TO FINANCIAL STATEMENT SCHEDULE (1)
- -----------------------------------------
Report of Independent Accountants on Financial Statement Schedule ...................................................... 67
Schedule II--Valuation and Qualifying Accounts ......................................................................... 68
(1) All other schedules are omitted because they are not applicable, not
required or because the required information is included in the
Consolidated Financial Statements or notes thereto.
39
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of APW Ltd.:
In our opinion, the consolidated financial statements listed in the index
incorporated by reference under Item 15(a)(1) on page 38 present fairly, in all
material respects, the financial position of APW Ltd. and its subsidiaries at
August 31, 2002 (Successor Company) and August 31, 2001 (Predecessor Company),
and the results of their operations and their cash flows for the period from
August 1, 2002 to August 31, 2002 (Successor Company), the period from September
1, 2001 to July 31, 2002 (Predecessor Company) and each of the two years in the
period ended August 31, 2001 (Predecessor Company) in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Notes 1 and 2 to the consolidated financial statements, the
Company emerged from Chapter 11 bankruptcy on July 31, 2002. Upon emergence from
bankruptcy, the Company changed its basis of financial statement presentation to
reflect the adoption of fresh start accounting in accordance with AICPA
Statement of Position 90-7, Financial Reporting by Entities in Reorganization
under the Bankruptcy Code. Accordingly, the consolidated financial statements
for the periods subsequent to the reorganization (Successor Company financial
statements) are not comparable to the consolidated financial statements
presented for the prior periods (Predecessor Company financial statements).
As discussed in Note 3, the Company also changed its methods of accounting
for goodwill and intangible assets, its method of accounting for the impairment
or disposal of long-lived assets and its method of accounting for exit or
disposal activities.
PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
November 4, 2002, except for Note 10 and Note 14 as to the reverse share split
which are as of December 23, 2002
40
APW LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Successor Predecessor
Company Company
----------- ------------------------------------------------
1 Month 11 Months Fiscal Year Fiscal Year
Ended Ended Ended Ended
August 31, July 31, August 31, August 31,
2002 2002 2001 2000
---- ---- ---- ----
Net sales ....................................................... $ 73,388 $ 780,687 $ 1,267,684 $ 1,239,542
Cost of products sold ........................................... 68,846 723,617 1,043,036 917,321
----------- ----------- ----------- -----------
Gross profit .............................................. 4,542 57,070 224,648 322,221
Engineering, selling and administrative expenses ................ 12,122 160,079 226,709 201,829
Amortization of intangible assets ............................... -- 409,373 194,342 23,918
Corporate reorganization expenses ............................... -- -- -- 6,541
Restructuring charges ........................................... 589 28,436 16,981 --
(Gain) loss on sale of subsidiary ............................... -- (8,210) 2,667 --
----------- ----------- ----------- -----------
Operating earnings (loss) ................................. (8,169) (532,608) (216,051) 89,933
Reorganization items ............................................ -- (477,157) -- --
Fresh start accounting adjustments .............................. -- 298,213 -- --
Net financing costs ............................................. 954 55,531 43,762 52,657
Other expense (income), net ..................................... 542 (2,085) 2,418 8,300
----------- ----------- ----------- -----------
Earnings (loss) before income tax expense ....................... (9,665) (407,110) (262,231) 28,976
Income tax expense (benefit) .................................... -- 26,443 (25,704) 52,345
----------- ----------- ----------- -----------
Net earnings (loss).............................................. $ (9,665) $ (433,553) $ (236,527) $ (23,369)
=========== =========== =========== ===========
Basic and diluted loss per share:
Loss per share ................................. $ (29.65) $ (10.82) $ (5.96) $ (0.60)
=========== =========== =========== ===========
Weighted average common shares outstanding ................ 326 40,052 39,664 39,077
=========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements
41
APW LTD.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
Successor Predecessor
Company Company
August 31, August 31,
ASSETS 2002 2001
- ------ ---- ----
Current assets
Cash and cash equivalents ............................................................... $ 29,889 $ 6,190
Accounts receivable, net ................................................................ 127,070 112,948
Inventories ............................................................................. 94,768 130,937
Prepaid expenses ........................................................................ 10,073 14,213
Deferred income taxes ................................................................... 53 16,650
----------- -----------
Total current assets .............................................................. 261,853 280,938
Property, plant and equipment ................................................................. 192,946 477,915
Less: Accumulated depreciation .......................................................... (3,390) (222,886)
----------- -----------
Net property, plant and equipment ................................................. 189,556 255,029
Goodwill, net ................................................................................. 17,484 679,225
Other intangibles, net ........................................................................ -- 27,616
Tradenames .................................................................................... 28,340 --
Other assets .................................................................................. 26,438 58,524
----------- -----------
Total assets ...................................................................... $ 523,671 $ 1,301,332
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities
Short-term borrowings ................................................................... $ 34 $ 593,453
Trade accounts payable .................................................................. 82,648 119,904
Accrued compensation and benefits ....................................................... 24,896 30,126
Income taxes payable .................................................................... 19,508 33,859
Other current liabilities ............................................................... 51,755 46,446
----------- -----------
Total current liabilities ......................................................... 178,841 823,788
Long-term debt ................................................................................ 177,000 21,196
Deferred income taxes ......................................................................... 12,706 --
Other long-term liabilities ................................................................... 65,907 46,430
Contingencies (note 18) ....................................................................... -- --
Shareholders' equity
Successor common shares--$0.08 par value per share; authorized 460,227
shares; issued and outstanding, 325,758 shares ....................................... 26 --
Predecessor Class A common stock--$0.01 par value per share; authorized 250,000,000
shares; issued and outstanding, less contingent shares, 40,042,207 shares ............ -- 400
Share premium ........................................................................... 97,980 669,772
Accumulated deficit ..................................................................... (9,665) (233,765)
Accumulated other comprehensive income (loss) ........................................... 876 (26,489)
----------- -----------
Total shareholders' equity ........................................................ 89,217 409,918
----------- -----------
Total liabilities and shareholders' equity ........................................ $ 523,671 $ 1,301,332
=========== ===========
The accompanying notes are an integral part of these financial statements
42
APW LTD.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
(In thousands)
Years Ended August 31, 2002, 2001 and 2000
------------------------------------------
Common
------ Retained Accumulated
Stock/Shares Earnings Other Total
------------ Share (Accumulated Comprehensive Combined Shareholders'
Shares Amount Premium Deficit) (Loss) Income Equity Equity
------ ------ ------- -------- ------------- ------ ------
Predecessor Company
-------------------
Balances at August 31, 1999 ..................... -- $ -- $ -- $ -- $ (10,492) $ 182,568 $ 172,076
Net loss for the year ......................... 2,806 (26,175) (23,369)
Currency translation adjustments .............. -- -- -- -- (6,243) -- (6,243)
---------
Total comprehensive loss ................. (29,612)
---------
Reclassification of Applied
Power Inc.'s net investment ................. 39,197 392 156,001 -- -- (156,393) --
Retention of APW Ltd. allocated debt by
Applied Power Inc. .......................... -- -- 482,350 -- -- -- 482,350
Exercise of stock options ..................... 7 -- 58 -- -- 58
------- ------- --------- ----------- ------------- --------- ---------
Balances at August 31, 2000 ..................... 39,204 392 638,409 2,806 (16,735) -- 624,872
Net loss for the year ......................... -- -- -- (236,527) -- -- (236,527)
Currency translation adjustments .............. -- -- -- -- (8,031) -- (8,031)
Derivative instrument fair market value
adjustment .................................. -- -- -- -- (1,935) -- (1,935)
Reclassification of derivative losses to
earnings .................................... -- -- -- -- 44 -- 44
Cumulative effect of change in accounting
principle for derivatives and hedging
activities, net of tax ...................... -- -- -- -- 168 -- 168
---------
Total comprehensive loss ................. (246,281)
---------
Issuance of shares for acquisition ............ 755 7 24,993 -- -- -- 25,000
Issuance of warrants .......................... -- -- 4,800 -- -- -- 4,800
Dividends on preferred stock of a
subsidiary .................................. -- -- -- (44) -- -- (44)
Exercise of stock options ..................... 83 1 1,570 -- -- -- 1,571
------- ------- --------- ----------- ------------- --------- ---------
Balances at August 31, 2001 ..................... 40,042 400 669,772 (233,765) (26,489) -- 409,918
======= ======= ========= =========== ============= ========= =========
Net loss for the eleven months ended July
31, 2002 .................................... -- -- -- (433,553) -- -- (433,553)
Currency translation adjustments .............. -- -- -- -- (642) -- (642)
Derivative instrument fair market value
adjustment .................................. -- -- -- -- (1,503) -- (1,503)
Reclassification of loss on discontinuance
of derivative instruments to earnings as
a reorganization item ....................... -- -- -- -- 2,310 -- 2,310
Reclassification of derivative losses to
earnings .................................... -- -- -- -- 916 -- 916
---------
Total comprehensive loss ................. (432,472)
---------
Issuance of warrants .......................... -- -- 9,658 -- -- -- 9,658
Dividends on preferred stock of a
subsidiary .................................. -- -- -- (42) -- -- (42)
Fresh start adjustments ....................... (40,042) (400) (679,430) 667,360 25,408 -- 12,938
------- ------- --------- ----------- ------------- --------- ---------
Balances at July 31, 2002 ....................... -- $ -- $ -- $ -- $ -- $ -- $ --
======= ======= ========= =========== ============= ========= =========
Successor Company
-----------------
Balances at August 1, 2002 ...................... -- $ -- $ -- $ -- $ -- $ -- $ --
Net loss for the one month ended August
31, 2002 .................................... -- -- -- (9,665) -- -- (9,665)
Currency translation adjustments .............. -- -- -- -- 876 -- 876
---------
Total comprehensive loss ................. (8,789)
---------
Distribution of new common shares ............. 250 20 72,529 -- -- -- 72,549
Exercise of warrants .......................... 76 6 25,451 -- -- -- 25,457
------- ------- --------- ----------- ------------- --------- ---------
Balances at August 31, 2002 ..................... 326 $ 26 $ 97,980 $ (9,665) $ 876 $ -- $ 89,217
======= ======= ========= =========== ============= ========= =========
The accompanying notes are an integral part of these financial statements
43
APW LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Successor Predecessor
Company Company
-------------- ------------------------------------------
1 Month 11 Months Fiscal Year Fiscal Year
Ended Ended Ended Ended
August 31, July 31, August 31, August 31,
2002 2002 2001 2000
---- ---- ---- ----
Operating activities
Net loss .............................................................. $ (9,665) $ (433,553) $ (236,527) $ (23,369)
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:
Depreciation and amortization ...................................... 3,475 473,589 247,975 58,866
Amortization of financing fees ..................................... 13 18,933 2,294 620
Loss (gain) from sale of assets .................................... 81 (2,035) (161) 708
(Gain) loss on sale of subsidiary .................................. -- (8,210) 2,667 --
Deferred income taxes .............................................. 263 29,207 (22,599) (3,083)
Restructuring charges .............................................. 589 28,437 16,981 --
Investment write-off ............................................... -- -- 9,800 --
Reorganization items ............................................... -- (477,157) -- --
Fresh start accounting adjustments ................................. -- 298,213 -- --
Loss on early retirement of debt ................................... -- -- -- 3,333
Changes in operating assets and liabilities, excluding the
effects of business acquisitions and disposals:
Accounts receivable ..................................... 639 42,626 44,824 (21,156)
Inventories ............................................. 3,163 34,821 39,893 (49,442)
Prepaid expenses and other assets ....................... 2,875 (4,046) (5,496) (4,116)
Trade accounts payable .................................. 2,633 (41,080) (40,946) 49,266
Income taxes ............................................ 1,943 5,795 (42,886) 40,308
Other liabilities ....................................... (5,462) (6,564) (35,478) (15,874)
----------- ---------- ------------ ----------
Net cash provided by (used in) operating activities before
reorganization items .................................................. 547 (41,024) (19,659) 36,061
Cash used for reorganization items ................................. -- (2,775) -- --
----------- ---------- ------------ ----------
Net cash provided by (used in) operating activities ...................... 547 (43,799) (19,659) 36,061
Investing activities
Proceeds on sale of property, plant and equipment .................. -- 8,769 3,287 2,579
Proceeds on the sale of subsidiary, net of cash sold ............... -- 19,241 1,782 --
Additions to property, plant and equipment ......................... (484) (18,195) (88,521) (45,924)
Investments and acquisitions of businesses, net of cash acquired ... -- -- (241,546) (13,304)
Other investing activities ......................................... -- (688) (4,231) (3,411)
----------- ---------- ------------ ----------
Net cash (used in) provided by investing activities ...................... (484) 9,127 (329,229) (60,060)
Financing activities
Investments by Applied Power Inc., net, including debt
allocations ..................................................... -- -- -- 32,988
Net short term (repayments) borrowings ............................. -- (4,675) 4,620 --
Principal repayments on long-term debt ............................. -- (183,224) (148,245) (53,387)
Principal borrowings on long-term debt ............................. -- 233,418 582,647 --
Borrowings on DIP/exit facility .................................... -- 77,000 -- --
DIP/exit facility financing costs .................................. -- (3,734) -- --
Exercise of warrants ............................................... 6 -- -- --
Net repayments of commercial paper ................................. -- -- (51,152) --
Net receivables financed ........................................... -- (58,019) (20,908) 3,459
Debt financing costs ............................................... -- (2,100) (7,700) --
Proceeds from sale leaseback financing ............................. -- -- -- 26,144
Other financing activities ......................................... (130) (42) 801 57
----------- ---------- ------------ ----------
Net cash (used in) provided by financing activities ...................... (124) 58,624 360,063 9,261
Effect of exchange rate changes on cash .................................. 938 (1,130) (5,697) 849
----------- ---------- ------------ ----------
Net increase (decrease) in cash and cash equivalents ..................... 877 22,822 5,478 (13,889)
Cash and cash equivalents--beginning of period ........................... 29,012 6,190 712 14,601
----------- ---------- ------------ ----------
Cash and cash equivalents--end of period ................................. $ 29,889 $ 29,012 $ 6,190 $ 712
=========== ========== ============ ==========
The accompanying notes are an integral part of these financial statements
44
APW LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Reorganization and Emergence From Chapter 11
On May 16, 2002, Predecessor Company APW Ltd. (hereinafter referred to as
"Predecessor Company"), a Bermuda holding 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 above proceeding involved
only Predecessor Company APW Ltd., the Bermuda company, and Vero Electronics,
Inc., a non-operating entity and subsidiary of Predecessor Company (Case No.
02-12334). All other subsidiaries of the Company were excluded from the
proceeding and continued to conduct business with customers and suppliers in the
ordinary course. On July 24, 2002, the Bankruptcy Court entered an order
confirming Predecessor Company's and Vero's Amended and Restated Plan of
Reorganization dated June 19, 2002 (as modified, amended or supplemented, the
"Amended POR"). Successor Company successfully emerged on July 31, 2002. The
Predecessor Company (BQX Ltd.) is currently in liquidation. APW Ltd., the
Bermuda holding company, had and continues to have no significant assets other
than investments in the stock of its wholly owned subsidiaries, intellectual
property and intercompany receivables. Its indebtedness (both pre-emergence and
post-emergence), is collateralized by substantially all of the assets, including
the stock, of its subsidiaries. The holding company relies on dividends and
distributions from its subsidiaries as its primary source of cash, primarily to
service its indebtedness.
Pursuant to the terms of the Amended POR, 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
were 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 Amended POR, 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 ("Effective Date").
As a result of the confirmed Amended POR, the following liabilities that
were deemed subject to compromise were discharged by the Bankruptcy Court:
July 31,
2002
----
Unsecured debt $664,935
Accrued interest 22,440
Interest rate swap liabilities 2,310
--------
Total liabilities subject to compromise $689,685
========
The gain on discharge was recorded net of the issuance of the new
Subordinated Secured Term Notes and equity issued to the senior lenders upon
emergence. The gain was recorded as a reorganization item (see below).
The aggregate net costs (income) resulting from reorganization of the
business have been reported in the Consolidated Statements of Operations
separately as reorganization items. For the eleven months ended July 31, 2002,
the following have been recorded (in thousands):
Eleven
Months Ended
July 31, 2002
-------------
Loss on deferred financing costs related to liabilities subject to
compromise (non-cash) $ 17,818
Professional and other fees directly related to Chapter 11 filing 8,400
Loss on discontinuance of derivative instruments (non-cash) 2,310
Gain on debt discharge (505,685)
--------
Total $(477,157)
=========
In addition, as of July 31, 2002, pursuant to the Amended POR, Successor
Company issued the following:
(a) New Subordinated Secured Notes in the aggregate principal amount of
$100 million issued to the senior secured lenders of Predecessor Company; (b)
250,000 common shares of Successor Company (the "APW Common Shares") issued to
the senior secured lenders of Predecessor Company which represents 100% of the
outstanding common shares of Successor Company immediately after the
consummation of the Amended POR; (c) Warrants to purchase up to 15,151 Successor
Company APW Common Shares at an exercise price of $1,795.80 per share issued to
the current equity holders of Predecessor Company; and (d) Warrants to purchase
45
up to 75,758 Successor Company APW Common Shares at an exercise price of $0.08
per share issued to lenders under the debtor-in-possession financing facility
(defined below), which were all subsequently exercised by the lenders prior to
August 31, 2002.
As of July 31, 2002, there were approximately 40.8 million common shares
of the Predecessor Company outstanding. Under the Amended POR, holders of
Predecessor Company common shares as of the July 31, 2002 record date received
(a) warrants representing the right to purchase 15,151 APW Common Shares as
stated above and (b) retained 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 Amended POR, the
Predecessor Company will be dissolved, liquidated or wound-up by the JPLs in
connection with a proceeding in Bermuda or otherwise pursuant to applicable
Bermuda law, and no assets are expected to be distributed to Predecessor Company
shareholders.
Concurrent with the Chapter 11 petition on May 16, 2002, the Bankruptcy
Court approved and, the Successor Company entered into a $110 million
debtor-in-possession financing ("DIP financing facility") agreement with certain
members of its lender group. Under the terms of the DIP financing facility, upon
emergence from bankruptcy, the DIP financing facility converted to the Successor
Company's Post-petition Multicurrency Superpriority Credit Facility ("exit
facility"). See Note -10 "Debt Financing" for a more detailed discussion of the
exit facility.
Note 2--Fresh Start Accounting
The Company adopted fresh start accounting pursuant to the 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" ("SOP 90-7"). In accordance with the principles of fresh start
accounting, Successor Company has adjusted its assets and liabilities to their
"fair values" as of July 31, 2002 with the excess of the Successor Company's
reorganization value over the fair value of its tangible and identifiable
intangible assets and liabilities reported as goodwill in the Consolidated
Balance Sheet. The net effect of all fresh start accounting adjustments resulted
in a loss of $298.2 million, which is reflected in the Predecessor Company's
results from September 1, 2001 through July 31, 2002.
In accordance with its adoption of SOP 90-7, Predecessor Company engaged
a third party financial advisor to determine the overall business enterprise
value ("BEV") of the reorganized, Successor Company. For the purposes of its
application, the BEV can be defined as the total value of APW and its
subsidiaries as a going concern, excluding any non-operating financial assets.
The third party determined that the BEV was within a range of $225.0 million and
$325.0 million, and for the purposes of applying SOP 90-7, the Company used the
mid-point or $275.0 million representing management's best estimate of Successor
Company's reorganized BEV. The BEV was based on the consideration of many
factors and various valuation methods, including a discounted cash flow analysis
using projected financial information, selected publicly traded company market
multiples of certain companies operating businesses similar to that of the
Successor Company, and other applicable ratios and valuation techniques believed
by the Successor Company and its financial advisor, to be representative of the
Successor Company's business and industry. The valuation was based on a number
of estimates and assumptions, which are inherently subject to significant
uncertainties and contingencies beyond the control of the Successor Company.
Once the BEV was determined, it was used to calculate Successor Company's
reorganization value. Reorganization value, as defined by SOP 90-7 is "the fair
value of the entity before considering liabilities and approximates the amount a
willing buyer would pay for the assets of the entity immediately after the
restructuring." This value was derived by adding the fair value of all
liabilities ($257.4 million) not included in the calculation of the BEV(all
liabilities except long-term debt and the fair value of the warrants issued in
conjunction with our DIP financing facility) to the BEV ($275.0 million, which
includes the base capital structure (debt and equity) of Successor Company) to
arrive at the $532.4 million reorganization value (total assets) of the
reorganized entity. Once this value was determined, two other independent
valuation firms were engaged to determine the fair value of certain of the
Company's assets and liabilities. One firm was engaged to determine the fair
value of tangible fixed assets and specifically identifiable intangible assets
and another was engaged to determine the fair value of the Company's UK pension
obligation. Once these valuations were completed, the Company allocated the
reorganization value to the fair value of its assets and liabilities. As stated
above, the excess of the Successor Company's reorganization value over the fair
value of its tangible and intangible assets and liabilities has been recorded as
goodwill. The equity value of the Successor Company was determined by
subtracting from the BEV; total indebtedness as of July 31, 2002, of $177.0
million and the fair value of the warrants issued to the lenders of the exit
credit facility, of $25.5 million, leaving $72.5 million as the total equity
value of the reorganized, Successor Company as of July 31, 2002. In August 2002,
all of the warrants issued to the lenders of the credit facility were exercised
and recorded as common shares outstanding, with the difference from par value of
$0.08, recorded as share premium.
The effects of the application of fresh start accounting on the
Predecessor Company's pre-confirmation Condensed Consolidated Balance Sheet are
as follows:
46
APW Ltd.
Reorganized Condensed Consolidated Balance Sheet
As of July 31, 2002
Predecessor Successor
Company Company
------------- -----------
July 31, Debt Fresh Start Exit July 31,
(In Thousands) 2002 Discharge Adjustments Financing 2002
---- --------- ----------- --------- ----
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 29,012 $ - $ - $ - $ 29,012
Accounts receivable, net 127,735 - - - 127,735
Inventories, net 95,236 - 2,763 b) - 97,999
Prepaid expenses and other assets 13,557 - - - 13,557
---------- --------- --------- --------- ---------
Total current assets 265,540 - 2,763 - 268,303
Net property, plant & equipment 199,303 - (7,260) c) - 192,043
Goodwill, net 288,026 - (270,542) d) 17,484
e)
Other intangible assets, net 3,408 - 24,932 d) - 28,340
Other assets 43,618 - (17,348) f) - 26,270
---------- --------- --------- --------- ---------
Total assets $ 799,895 $ - $(267,455) $ - $ 532,440
========== ========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Short-term borrowings $ 77,957 $ - $ - $ (77,000) l) $ 957
Trade accounts payable 80,061 - - - 80,061
Accrued compensation and benefits 24,287 - - - 24,287
Income taxes payable 29,304 - (11,304) g) - 18,000
Other current liabilities 47,779 - 6,139 h) - 53,918
---------- --------- --------- --------- ---------
Total current liabilities 259,388 - (5,165) (77,000) 177,223
Long-term debt - 100,000 a) - 77,000 l) 177,000
Deferred income taxes 1,424 - 11,053 i) - 12,477
Deferred compensation 22,147 - 29,000 j) - 51,147
Warrants 25,451 - - - 25,451
Other non-current liabilities 20,723 - (4,130) k) - 16,593
Liabilities subject to compromise 689,685 (689,685) a) - - -
---------- --------- --------- --------- ---------
Total liabilities 1,018,818 (589,685) 30,758 - 459,891
Shareholders' equity (218,923) 589,685 (298,213) - 72,549
---------- --------- --------- --------- ---------
Total liabilities and shareholders'
equity $ 799,895 $ - $(267,455) $ - $ 532,440
========== ========= ========= ========= =========
Adjustments reflected in the Reorganized Condensed Consolidated Balance Sheet
are as follows:
a) Exchange of pre-petition unsecured debt and accrued interest for an $100.0
million Subordinated Secured Term Note and APW Common Shares. A gain on the
extingishment of debt of $505.7 million was recorded through reorganization
items in Predecessor Company's Consolidated Statement of Operations for the
eleven months ended July 31, 2002.
47
b) Finished goods and work-in-progress inventories have been valued based on
their estimated net selling prices less cost to complete, costs of disposal and
a reasonable profit allowance for completing the selling effort.
c) Property, plant and equipment have been adjusted to reflect the fair value of
the assets based on an independent appraisal.
d) Eliminate Predecessor Company's historical goodwill and other intangible
assets in the amount of $(288.0) million. Record Successor Company's intangible
assets (tradenames) at fair value based on an independent appraisal.
e) Record excess of reorganization value (goodwill) of $17.5 million over the
fair value of Successor Company's tangible assets and specifically identified
intangible assets.
f) Adjustment to state other non-current assets at fair value. This adjustment
is comprised of the following: the write-down of deferred financing costs
related to the DIP financing facility (-$17.0 million), the write-up of a
deferred compensation trust to fair value ($0.7 million) and the write-down of
certain equity method investments to fair value (-$1.0 million).
g) Adjustment of current income taxes payable primarily resulting from the
rejection of the tax sharing agreement with Applied Power (pursuant to the
Amended POR).
h) Adjustment to increase other current liabilities for certain adverse purchase
commitments, an unfavorable lease commitment and the estimated future earn-out
payments as stipulated by the purchase agreement of a previous acquisition.
i) Adjustment to record a deferred tax liability on Successor Company's
indefinite lived other intangible assets (tradenames).
j) Adjustment to record the excess of the projected benefit obligation over the
fair value of the plan assets of a defined benefit pension plan.
k) Adjustment to eliminate Predecessor Company's long-term portion of deferred
gain on sale-leaseback.
l) Record the reclassification (from short-term to long-term) and conversion of
Predecessor Company's debtor-in-possession financing facility to Successor
Company's Post-petition Multicurrency Superpriority Credit Facility (exit
facility).
Note 3--Goodwill and Other Intangible Assets
Upon emergence from bankruptcy, the Successor Company immediately adopted
Statement of Financial Accounting Standards ("SFAS") No. 142 Goodwill and Other
Intangible Assets. The allocation of the Successor Company's reorganization
value to its tangible assets and specifically identified intangible assets
resulted in the recording of $17.5 million in excess reorganization value. The
Company's excess reorganization value will be treated effectively as goodwill
for purposes of applying SFAS No. 142 and has been recorded as such in the
Consolidated Balance Sheet of Successor Company. It will not be amortized going
forward as it is deemed to have an indefinite life. As the allocation of
reorganization value was undertaken, the Company performed a thorough analysis
in accordance with SFAS No. 141, "Business Combinations", to identify other
intangibles apart from goodwill. This analysis was based on an independent
appraisal and resulted in the identification of two domestic tradenames with a
combined fair value of $28.3 million. The Company has also assigned an
indefinite life to these tradenames.
Under SFAS No. 142 goodwill and other indefinite lived intangible assets
will not be amortized, but will be reviewed for impairment on an annual basis on
a reporting unit level.
The impact of Statement No. 142 on previously reported results follows (in
thousands, except per share data):
Predecessor Company
-----------------------------------
11 Months Fiscal Year Fiscal Year
Ended Ended Ended
July 31, August 31, August 31,
2002 2001 2000
--------- ----------- -----------
Reported net earnings (loss) $(433,553) $(236,527) $(23,369)
Add back: Goodwill amortization expense, net 14,971 21,861 19,444
--------- --------- --------
Adjusted net earnings (loss) $(418,582) $(214,666) $ (3,925)
========= ========= ========
Earnings per share -- basic and diluted:
Reported earnings (loss) per share $ (10.82) $ (5.96) $ (0.60)
Goodwill amortization, net 0.37 0.55 0.50
--------- --------- --------
Adjusted earnings (loss) per share $ (10.45) $ (5.41) $ (0.10)
========= ========= ========
No adjustment has been made to the previously reported results related to
the goodwill impairment charges recorded in fiscal 2002 and fiscal 2001.
Note 4--Summary of Significant Accounting Policies
Description of Business and Distribution Transaction: APW Ltd. is a leading
global provider of Technically Enabled Manufacturing Services ("TEMS"), focused
on designing and integrating large electronic products. APW Ltd. has the
capabilities to design and manufacture various subsystems for electronic
products, including enclosures, thermal management systems, power supplies,
backplane assemblies, printed circuit board assemblies (PCBAs), 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.
On January 26, 2000, Applied Power Inc.'s ("Applied Power", APW Ltd.'s
former parent company and now named Actuant Corporation, "Actuant") board of
directors authorized management to pursue a spin-off of the Electronics business
(the "Distribution") to more effectively capitalize on the opportunities in the
electronics market. On July 7, 2000, Applied Power's board of directors approved
the Distribution, which became effective on July 31, 2000, with shareholders of
Applied Power common stock as of the July 21, 2000 record date receiving one
share of Predecessor Company APW Ltd. common stock for every Applied Power share
owned. Prior to the Distribution, APW Ltd. was reorganized as a Bermuda company.
48
Basis of Presentation: The consolidated financial statements have been
prepared in United States ("U.S.") Dollars in accordance with accounting
principles generally accepted in the United States of America. The consolidated
financial statements have been prepared on two different basis; (1) as of August
31, 2002 and the one month of cash flows and operations ending August 31, 2002,
Successor Company has prepared its financial statements according to SOP 90-7.
In accordance with the principles of this statement and upon the adoption of
fresh start accounting, Successor Company has adjusted its assets and
liabilities to their "fair values" as of the Effective Date with the excess of
the Successor Company's reorganization value over the fair value of its tangible
and identifiable intangible assets and liabilities reported as goodwill in the
Consolidated Balance Sheet, (2) for all other periods presented, the financial
statement presentation assumes that the electronics business that was
contributed to APW Ltd. in connection with its spin-off was organized as a
separate legal entity. In addition, the fiscal 2000 consolidated financial
statements of APW Ltd. include allocations of certain Applied Power corporate
expenses as discussed below.
Prior to the spin-off, Applied Power provided certain general and
administrative services to APW Ltd. including administration, finance, legal,
tax, treasury, information systems, corporate communications and human
resources. The cost for these services has been allocated to APW Ltd. by Applied
Power based upon a formula that includes sales, operating profit, assets and
headcount. Management of APW Ltd. believes that the allocation of cost for these
services is reasonable. These allocations totaled $9.0 million in 2000. Since
the Distribution, APW Ltd. has performed these general and administrative
services using its own resources or purchased services and is responsible for
the costs and associated expenses.
Applied Power's historical practice had been to incur indebtedness for its
consolidated businesses at the parent company level or at a limited number of
subsidiaries, rather than at the operating company level, and then to centrally
manage various cash functions. Accordingly, through July 31, 2000, historical
amounts include interest expense allocated to APW Ltd. from Applied Power based
on the portion of Applied Power's investment in APW Ltd., which is deemed to be
debt. This allocation has generally been based upon a cash flow model which
details the historical uses of debt proceeds by APW Ltd. and the deemed debt
repayments by APW Ltd. based on free cash flow. Management believes that the
allocation of interest expense for the historical periods is reasonable. In
conjunction with the Distribution, the consolidated debt of Applied Power was
realigned between APW Ltd. and Applied Power. Through an additional investment
by Applied Power on July 31, 2000, a certain portion of APW Ltd.'s outstanding
debt was assumed by Applied Power.
The allocation methodologies followed in preparing the fiscal 2000
consolidated financial statements may not necessarily reflect what the results
would have been had APW Ltd. been a separate, independent public entity for
periods prior to the Distribution.
Principles of Consolidation: APW Ltd. consolidates companies in which it
owns or controls more than fifty percent of the voting shares. Investments in
partially owned affiliates are accounted for by the equity method when APW
Ltd.'s interest exceeds twenty percent. The results of companies acquired or
disposed of during the fiscal year are included in the consolidated statements
from the effective date of acquisition or until the date of disposal. All
significant interdivisional balances, transactions and profits have been
eliminated in consolidation. The consolidated fiscal 2000 financial statements
of Predecessor Company APW Ltd. include the accounts of the related Electronics
businesses of Applied Power prior to the Distribution and of APW Ltd. and its
subsidiaries subsequent to the Distribution.
Cash Equivalents: APW Ltd. considers all highly liquid investments with
original maturities of 90 days or less to be cash equivalents.
Investments: In accordance with SFAS No. 115 "Accounting for Certain
Investments in Debt and Equity Securities," and based on the Company's
intentions regarding these instruments, the Company has classified certain
investments related to deferred compensation arrangements as held-to-maturity
and has accounted for these investments at amortized cost. These investments
have varying maturities ranging from less than a year to the year 2027.
Inventories: Inventories are comprised of material, direct labor and
manufacturing overhead, and except as described in Note 1--"Reorganization and
Emergence from Chapter 11," are stated at the lower of cost or market. Cost is
determined using the first-in, first-out method for substantially all
inventories.
Property, Plant and Equipment: Property, plant and equipment are stated at
cost. For these purposes, the carrying amounts assigned to property, plant and
equipment upon emergence from bankruptcy are considered to be cost. Plant and
equipment are depreciated over the estimated useful lives of the assets, ranging
from two to thirty years, under the straight-line method for financial reporting
purposes and either the straight-line or regulatory methods for income tax
purposes. Capital leases and leasehold improvements are amortized over the life
of the related asset or the life of the lease, whichever is shorter.
Expenditures for maintenance and repairs not expected to extend the useful life
of an asset beyond its normal useful life are expensed as incurred.
Goodwill and Other Intangible Assets: Successor Company's goodwill balance
at August 31, 2002 represents the excess of
49
the Successor Company's reorganization value ($532.4 million) over the aggregate
fair value of the Company's tangible and identifiable intangible assets upon
emergence from bankruptcy. After confirmation of the Amended POR, the Company
adopted SFAS No. 142, "Goodwill and Other Intangible Assets". See Note 3 -
"Goodwill and Other Intangible Assets" for further explanation.
In accordance with SFAS No. 142, goodwill will not be amortized, however,
under SFAS No. 142, goodwill will be tested for impairment at least annually and
more frequently if an event occurs which indicates the goodwill may be impaired.
Impairment of goodwill is measured according to a two-step approach. In the
first step, the fair value of a reporting unit, as defined by the statement, is
compared to the carrying value of the reporting unit, including goodwill. If the
carrying amount exceeds the fair value, the second step of the goodwill
impairment test is performed to measure the amount of the impairment loss, if
any. In the second step the implied value of the goodwill is estimated as the
fair value of the reporting unit less the fair value of all other tangible and
intangible assets of the reporting unit. If the carrying amount of the goodwill
exceeds the implied fair value of the goodwill, an impairment loss is recognized
in an amount equal to that excess, not to exceed the carrying amount of the
goodwill.
Additionally, under SFAS No. 142, intangible assets not subject to
amortization (indefinite lived intangible assets) shall be tested for impairment
at least annually and more frequently if an event occurs which indicates the
intangible asset may be impaired. The impairment test consists of a comparison
of the fair value of the intangible asset with its carrying amount. If the
carrying amount of an intangible asset exceeds its fair value, an impairment
loss shall be recognized in an amount equal to that excess. Successor Company's
other intangible assets consist of two domestic tradenames which have been
deemed to have an indefinite life.
Predecessor Company's goodwill was amortized on a straight-line basis over
periods of fifteen to forty years. Predecessor Company's other intangible assets
consisted primarily of purchased patents, trademarks, non-compete agreements and
customer lists, and were amortized over periods from two to forty years.
Long-Lived Assets: Effective August 1, 2002, APW Ltd. adopted SFAS No. 144,
"Accounting for the Impairment and Disposal of Long-Lived Assets". An impairment
review is performed whenever events or changes in circumstances indicate that
the carrying value of long-lived assets (other than goodwill and other
intangible assets) may not be recoverable. Factors APW Ltd. considers important
which could trigger an impairment review include, but are not limited to,
significant underperformance relative to expected historical or projected future
operating results, significant changes in the manner of use of the acquired
assets or the strategy for APW Ltd.'s overall business, or significant negative
industry or economic trends. In determining whether an impairment of long-lived
assets (other than goodwill and other intangible assets) has occurred, APW Ltd.
compares estimated undiscounted cash flows to the related asset book value. When
APW Ltd. determines that the carrying value of long-lived assets exceeds
estimated undiscounted cash flows, APW Ltd. measures any impairment based on a
projected discounted cash flow method using a discount rate commensurate with
the risk inherent in APW Ltd.'s current business model.
Prior to August 1, 2002, the Predecessor Company applied SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed Of."
Revenue Recognition: Revenue is recognized by the Company when all of the
following criteria are met: persuasive evidence of an arrangement exists;
delivery has occurred and ownership has transferred to the customer; the price
to the customer is fixed or determinable; and collectability is reasonably
assured.
Research and Development Costs: Research and development costs are expensed
as incurred. Such costs incurred in the development of new products or
significant improvements to existing products totaled approximately $0.2
million, $2.0 million, $5.1 million and $6.1 million for the one month ended
August 31, 2002, eleven months ended July 31, 2002, and fiscal years 2001 and
2000, respectively.
Financing Costs: Prior to the Distribution, net financing costs represent
APW Ltd.'s allocated portion of amounts incurred by Applied Power for interest
expense, financing fees, amortization of debt financing costs and accounts
receivable facility costs, net of interest and investment income earned. See
"Basis of Presentation" above for discussion of debt and interest allocation.
Subsequent to the Distribution, net financing costs represent APW Ltd.'s actual
amounts for interest expense, financing fees, amortization of debt financing
costs and accounts receivable facility costs, net of interest and investment
income earned.
Income Taxes: APW Ltd. uses the asset and liability method to record
deferred income tax assets and liabilities relating to the expected future
income tax consequences of transactions that have been recognized in APW Ltd.'s
financial statements. Under this method, deferred tax assets and liabilities are
determined based on the temporary differences between financial statement
carrying amounts and income tax bases of assets and liabilities using enacted
tax rates in effect in the years in which temporary differences are expected to
reverse. Valuation allowances are provided for deferred tax assets where it is
considered more likely than not that the Company will not realize the benefit of
such assets. Certain tax benefits existed as of the July 31, 2002 (the
50
Effective Date of our emergence from Chapter 11) but were offset by valuation
allowances. The utilization of these benefits to reduce income taxes paid to
federal, state, and foreign jurisdictions does not reduce the Company's income
tax expense. Realization of net operating loss and tax credit benefits first
reduce excess reorganization value until exhausted, then other intangibles
until exhausted, and thereafter is reported as share premium.
APW Ltd. is included in the consolidated U.S. income tax return of Applied
Power prior to the Distribution. Therefore, the provision for income taxes of
APW Ltd., through July 31, 2000, has been calculated as if APW Ltd. was a
stand-alone corporation filing a separate tax return.
Foreign Currency Translation: A significant portion of APW Ltd.'s sales,
income and cash flow is derived from its international operations. The financial
position and the results of operations of APW Ltd.'s foreign operations are
measured using the local or regional currency of the countries in which they
operate and are translated into U.S. dollars. Revenues and expenses of foreign
subsidiaries are translated into U.S. dollars at the average exchange rate
effective during the fiscal year. Although the effects of foreign currency
fluctuations are mitigated by the fact that expenses of foreign subsidiaries are
generally incurred in the same currencies in which the sales are generated, the
reported results of operations of APW Ltd.'s foreign subsidiaries are affected
by changes in foreign currency exchange rates and, as compared to prior periods,
will be higher or lower depending on the weakening or strengthening of the U.S.
dollar. In addition, a portion of APW Ltd.'s net assets are based in its foreign
subsidiaries and are translated into U.S. dollars at the foreign currency rate
in effect at the end of each period. Accordingly, APW Ltd.'s equity and
comprehensive income (loss) will fluctuate depending upon the strengthening or
weakening of the U.S. dollar versus other currencies. Such currency translation
amounts are included as part of the balance of accumulated other comprehensive
income (loss) in the accompanying Consolidated Balance Sheets. Net gains
(losses) resulting from foreign currency transactions, included in "Other
expense (income), net" in the Consolidated Statements of Operations, amounted to
($0.4) million, ($0.3) million, ($2.1) million and ($3.4) million for the one
month ended August 31, 2002, eleven months ended July 31, 2002, and years ended
August 31, 2001 and 2000, respectively.
Foreign Currency Hedging and Derivative Financial Instruments: In June
1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued which requires that an entity recognize derivative
instruments, including certain derivative instruments embedded in other
contracts, as either assets or liabilities and measure those instruments at fair
value. Gains or losses resulting from changes in the values of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. APW Ltd. adopted SFAS No. 133, as amended, on
September 1, 2000. The adoption of SFAS No. 133 resulted in recording the
cumulative effect of the change in accounting principle for derivative and
hedging activity in other comprehensive income of $0.2 million.
The Company enters into derivative contracts, primarily interest rate swap
contracts, to protect the Company from the effect of an increase in interest
rates. The Company designates its derivatives based upon the criteria
established by SFAS No. 133. For a derivative designated as a fair value hedge,
the derivative gain or loss is recognized in earnings in the period of change
together with the offsetting loss or gain on the hedged item. For a derivative
designated as a cash flow hedge, the effective portion of the derivative's gain
or loss due to a change in fair value is initially recorded as a component of
other comprehensive income (loss) and subsequently reclassified into earnings
when the hedged exposure affects earnings. For a derivative designated as a
hedge of a net investment in a foreign operation, the gain or loss is recorded
as a component of other comprehensive income (loss) as part of the cumulative
translation adjustment. For a derivative not designated as a hedging instrument,
the derivative gain or loss is recognized in earnings in the period of change.
Fair Value of Financial Instruments: The fair value of APW Ltd.'s cash and
cash equivalents, accounts receivable, accounts payable, short-term borrowings
and long-term debt approximated book value as of August 31, 2002 and 2001 due to
their short-term nature or, in the instance of long-term debt, the fact that the
interest rates approximated year-end market rates of interest. The fair value of
debt instruments is calculated by discounting the cash flow of such obligations
using the market interest rates for similar instruments.
Earnings (Loss) Per Share: Subsequent to the Distribution, basic earnings
per share is calculated by dividing the net loss by the weighted average common
shares outstanding. Fiscal 2001 and 2000 diluted earnings per share exclude the
effect of options to purchase approximately 1.3 million and 1.7 million shares
of common stock, respectively, because they would be anti-dilutive due to the
net loss in the respective fiscal years. For fiscal 2002, for the eleven months
ended July 31, 2002, the common stock and common stock equivalents of
Predecessor Company were used to calculate earnings per share and the common
shares outstanding of Successor Company was used to calculate earnings per share
for the one month of August 2002. For fiscal 2002, for the eleven months ended
July 31, 2002 and the one month ended August 31, 2002 diluted earnings per share
exclude the effect of options to purchase approximately 0.6 million shares of
Predecessor Company common stock and 0.3 thousand common shares of Successor
Company, respectively, because they would be anti-dilutive due to the net loss
in the respective periods.
Warrants to purchase approximately 0.1 million shares of Successor Company
common shares were outstanding as of July 31, 2002, but were not included in the
computation of diluted earnings (loss) per share because they would be
anti-dilutive due to
51
the net loss for the eleven months ended July 31, 2002. Warrants to purchase
approximately 2.1 million shares of the common stock of Predecessor Company were
outstanding as of August 31, 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 year ended August 31, 2001.
Basic and diluted shares used to calculate earnings per share are the same
as the historical Applied Power basic shares outstanding for the period prior to
the Distribution. APW Ltd. used Applied Power basic shares outstanding for the
following reasons: i) upon the Distribution, each shareholder of Applied Power
common stock received an equivalent number of APW shares and; ii) there was no
potentially issuable common stock of APW Ltd. for the periods presented prior to
the Distribution.
The following table sets forth the computation of basic and diluted
earnings (loss) per share (results include goodwill impairment, restructuring
and other charges, see Note 5--" Goodwill Impairment, Restructuring,
Reorganization, Fresh Start Accounting and Other Charges");
(Dollars in thousands, except per share amounts):
Successor
Company Predecessor Company
-------- ------------------------------------
1 month 11 months
Numerator: 2002 2002 2001 2000
---- ---- ---- ----
Net earnings (loss) for basic and diluted earnings per share ....... $ (9,665) $ (433,553) $ (236,527) $ (23,369)
========= ========== ========== =========
Denominator:
Weighted average common shares outstanding for basic and diluted
earnings per share .............................................. 326 40,052 39,664 39,077
--------- ---------- ---------- ---------
Basic and Diluted Earnings (Loss) Per Share:
Earnings (loss) per share .......................................... $ (29.65) $ (10.82) $ (5.96) $ (0.60)
========= ========== ========== =========
Use of Estimates: The financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America, which require management to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues and expenses for the years
presented. They also affect the disclosure of contingencies. Actual results
could differ from those estimates and assumptions.
New Accounting Pronouncements: In June 2001, Statement of Financial
Accounting Standards ("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 was effective for the Company on August 1, 2002
upon emergence from the Chapter 11 reorganization. See Note 3--"Goodwill and
Other Intangible Assets" for discussion of the impact of adopting SFAS No. 141
and 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 was required to adopt SFAS No. 143 on August 1, 2002,
upon emergence from the Chapter 11 reorganization. The Company has determined
that there is no current impact of adopting 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 and other intangible assets, which are 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 was required to
adopt SFAS No. 144 on August 1, 2002 upon emergence from the Chapter 11
reorganization. The Company has determined that there is no current impact of
52
adopting SFAS No. 144. However, SFAS No. 144 will impact the accounting for
long-lived asset impairments related to future facility closures.
In April 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and
64, Amendment of FASB Statement No. 13, and Technical Corrections," was issued.
SFAS No. 145 rescinds the indicated statements and amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. SFAS 145
eliminates the requirement that gains or losses on extinguishment of debt be
classified as extraordinary items. The Company was required to adopt SFAS No.
145 on August 1, 2002 upon emergence from the Chapter 11 reorganization. As a
result, the gain on debt discharge related to the Chapter 11 reorganization has
been classified as a reorganization item in the Consolidated Statement of
Operations for the eleven months ended July 31, 2002. In addition, the
consolidated financial statements for the year ended August 31, 2000 have been
revised to reclassify the previously reported extraordinary loss on early
retirement of debt of $2,083,000, net of income tax benefit of $1,250,000, to
other expense (income), net.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or
Disposal Activities". SFAS No. 146 addresses significant issues regarding the
recognition, measurement, and reporting of costs that are associated with exit
and disposal activities, including restructuring activities that are currently
accounted for pursuant to the guidance that the Emerging Issues Task Force
("EITF") has set forth in EITF Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)". The scope of SFAS No.
146 also includes (1) costs related to terminating a contract that is not a
capital lease and (2) termination benefits that employees who are involuntarily
terminated receive under the terms of a one-time benefit arrangement that is not
an ongoing benefit arrangement or an individual deferred-compensation contract.
The Company will be required to adopt SFAS No, 146 for exit or disposal
activities initiated after August 1, 2002, after the emergence from the Chapter
11 reorganization. The Company has determined that there is no current impact of
adopting SFAS No. 146. However, SFAS No. 146 will impact the accounting for
future restructuring activities.
Reclassifications: Certain prior year amounts have been reclassified to
conform with the fiscal 2001 presentation. Such reclassifications had no impact
on previously reported net earnings (loss).
Note 5--Goodwill Impairment, Restructuring, Reorganization, Fresh Start
- -----------------------------------------------------------------------
Accounting and Other Charges
- ----------------------------
Fiscal 2002-
During fiscal 2002 APW recognized pre-tax goodwill impairment,
restructuring, reorganization, fresh start accounting and other charges totaling
$275.6 million. The components of the charges recorded during fiscal 2002 are as
follows (dollars in millions):
Successor Predecessor Pro forma
Company Company Combined
--------- ----------- Fiscal
1 Month 11 Months 2002
--------- ----------- ---------
Facility closure costs:
Severance ............................ $ 0.6 $ 9.9 $ 10.5
Lease exit costs ..................... -- 18.5 18.5
Equipment and software impairment .... -- 24.6 24.6
Other costs .......................... 0.8 7.6 8.4
------- ------- -------
Total facility closure costs ...... 1.4 60.6 62.0
Goodwill impairment ..................... -- 392.6 392.6
Reorganization items .................... -- (477.2) (477.2)
Fresh start accounting adjustments ...... -- 298.2 298.2
------- ------- -------
Total pre-tax goodwill impairment,
restructuring, reorganization, fresh
start accounting and other charges...... $ 1.4 $ 274.2 $ 275.6
======= ======= =======
Facility closure costs are recorded in the fiscal 2002 Consolidated
Statement of Operations as follows: 1) severance and lease exit costs totaling
$29.0 million are recorded as restructuring charges; 2) equipment impairment
charges of $22.5 million and other facility closure costs totaling $7.7 million
are recorded as cost of products sold; and 3) $2.1 million write-off of
capitalized software costs and $0.7 million of other facility closure costs are
recorded as engineering, selling, and administrative costs.
Restructuring
During fiscal 2001 and 2002, APW initiated plans to close approximately 20
facilities. 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, except for certain lease exit costs that will extend through the
remaining lease term.
Of the $62.0 million in facility closure costs recorded on a combined basis
in fiscal 2002, $37.4 million are cash costs and $24.6 million are non-cash
costs. Of the $37.4 million in cash costs, $8.7 million are incremental cash
costs that would not have been incurred in the
53
next 12 months without undertaking these restructuring actions. These
incremental cash costs are comprised primarily of lease dilapidation payments
made to various landlords, employee retention payments, as well as moving and
integration costs incurred as a direct result of the decision to rationalize
certain sites.
The following table summarizes the activity with respect to fiscal 2002
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 charges ................................... 1,038 10.5 18.5 29.0
Less: fiscal 2002 utilization .............................. (1,286) (11.7) (9.0) (20.7)
------ ------ ------ ------
Ending balance at August 31, 2002 .......................... 39 $ 0.9 $ 14.7 $ 15.6
====== ====== ====== ======
Goodwill and Equipment Impairment
In the second quarter of fiscal 2002, the Company performed an impairment
assessment of our long-lived assets, which include property, plant and
equipment, goodwill and other intangible assets. The assessment was performed
primarily due to a deterioration of the operating results and the decision
during fiscal 2002 to close certain facilities. As a result of the assessment,
the Company recorded a $392.6 million impairment charge to reduce the carrying
value of goodwill and a $24.6 million impairment charge to reduce the carrying
value of equipment and software associated with closed facilities in the second
quarter of fiscal 2002. The goodwill impairment charge is recorded as a
component of amortization of intangible assets in the Consolidated Statement of
Operations for the eleven months ended July 31, 2002. The equipment impairment
charge of $22.5 million is recorded as cost of products sold and the $2.1
million write-off of capitalized software costs is recorded as engineering,
selling, and administrative costs in the Consolidated Statement of Operations
for the eleven months ended July 31, 2002. Each charge was measured, in
accordance with the provisions of SFAS No. 121, based upon the Company's
estimated discounted cash flows. The assumptions supporting these cash flows
were determined using management's best estimates.
Reorganization Items and Fresh Start Accounting Adjustments
As previously discussed, the Company filed for a voluntary pre-packaged
bankruptcy on May 16, 2002, and emerged on July 31, 2002. As part of the Chapter
11 process, the Company was required to adopt SOP 90-7. As a result, the Company
recorded income related to reorganization items totaling $477.2 million which
included expenses of $28.5 million. These expenses were made up of professional
fees directly related to the reorganization of $8.4 million, $17.8 million of a
non-cash write-off of deferred financing costs related to our pre-bankruptcy
indebtedness, and the recognition of a $2.3 million loss previously recorded as
a component of other comprehensive income related to the termination of the
interest rate swaps. Those expenses were offset by a gain of $505.7 million on
the discharge of debt as part of the Chapter 11 process. As the Company emerged
from Chapter 11, in accordance with SOP 90-7, $298.2 million of fresh start
accounting adjustments were recorded to "fair value" the assets and liabilities
of the Successor Company. The largest of these items was a non-cash write-down
of pre-bankruptcy goodwill of $288.0 million. Further details are found in Note
2--"Fresh Start Accounting".
Fiscal 2001-
During fiscal 2001, APW Ltd. recognized pre-tax goodwill impairment,
restructuring and other charges totaling $225.0 million. The components of the
charges recorded during fiscal 2001 are as follows (dollars in millions):
Charges
-------
Facility closure costs:
Severance ............................................................. $ 10.2
Lease exit costs ...................................................... 6.8
Equipment impairment .................................................. 12.6
Other costs ........................................................... 1.7
------
Total facility closure costs ....................................... 31.3
Goodwill impairment ...................................................... 166.9
Inventory and accounts receivable write-downs ............................ 15.5
Investment write-off ..................................................... 9.8
Credit facility amendment fees ........................................... 1.5
------
Total pre-tax goodwill impairment, restructuring and other charges ....... $225.0
======
Facility closure costs are recorded in the fiscal 2001 Consolidated
Statement of Operations as follows: 1) severance and lease exit costs totaling
$17.0 million are recorded as restructuring charges; 2) equipment impairment
charges of $12.6 million
54
and other facility closure costs totaling $1.2 million are recorded as cost of
products sold; and 3) $0.5 million of other facility closure costs are recorded
as engineering, selling, and administrative costs.
Restructuring
In connection with the facility closure costs, management developed formal
plans to exit eight facilities and involuntarily terminate employees in fiscal
2001. 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.
The following table summarizes the activity with respect to fiscal 2001
restructuring charges during fiscal 2001 (in millions, except employee data):
Severance Facilities Total
--------- ---------- -----
Number
of
Employees Reserve Reserve Reserve
--------- ------- ------- -------
Total reserve balance at August 31, 2000 ................................. -- $ -- $ -- $ --
Add: fiscal 2001charges .................................................. 2,602 10.2 6.8 17.0
Less: fiscal 2001 utilization ............................................ (2,315) (8.1) (1.6) (9.7)
------ ------ ------ -----
Ending balance at August 31, 2001 ........................................ 287 $ 2.1 $ 5.2 $ 7.3
====== ====== ====== =====
Goodwill and Equipment Impairment
In fiscal 2001, APW Ltd. performed an impairment assessment of long-lived
assets, which include property, plant and equipment, goodwill and other
intangible assets. The assessment was performed primarily due to a deterioration
of APW Ltd.'s operating results during fiscal 2001 and the decision during
fiscal 2001 to close certain facilities. As a result of the assessment, APW Ltd.
recorded a $166.9 million impairment charge to reduce the carrying value of the
goodwill and a $12.6 million impairment charge to reduce the carrying value of
equipment associated with closed facilities. The goodwill impairment charge is
recorded as a component of amortization of intangible assets in the fiscal 2001
Consolidated Statement of Operations. The equipment impairment charge is
recorded as cost of products sold in the fiscal 2001 Consolidated Statement of
Operations. Each charge was measured, in accordance with the provisions of SFAS
No. 121, based upon APW Ltd.'s estimated discounted cash flows. The assumptions
supporting these cash flows were determined using APW Ltd.'s best estimates. The
remaining long-lived assets will continue to be depreciated and amortized over
their remaining useful lives, which management considers appropriate.
Other charges
During fiscal 2001, APW recorded write-downs of inventory and accounts
receivable of $13.0 million and $2.5 million, respectively, primarily as a
result of the broad based slow down in the technology sector. Inventory
write-downs are recorded as cost of products sold in the Consolidated Statement
of Operations and primarily relate to customer program modifications resulting
in excess components. Accounts receivable writedowns are recorded as an
engineering, selling and administrative expense in the Consolidated Statement of
Operations and relate to accounts receivables that were deemed uncollectable.
During fiscal 2001, APW Ltd. wrote-off a $9.8 million investment assumed
through a prior acquisition that became impaired. The write-off is recorded as a
component of engineering, selling and administrative expense in the fiscal 2001
Consolidated Statement of Operations.
In connection with the amendment of the Company's credit facilities, the
Company incurred $1.5 million of fees, of which $0.7 million was recorded as an
operating expense and $0.8 million was recorded as a financing cost.
Fiscal 2000-
During fiscal 2000, Applied Power allocated to APW Ltd. a total of $6.5
million of fees and expenses associated with the Distribution transaction and
organizing APW Ltd. into a Bermuda company. Those fees and expenses were for
legal, accounting, tax and investment banking services incurred and are
classified under the caption "Corporate Reorganization Expenses" in the fiscal
2000 Consolidated Statement of Operations. In fiscal 2000, APW Ltd. incurred a
foreign currency loss of $3.3 million associated with Euro forward contracts as
well as a loss of $3.3 million related to a make-whole premium paid in
connection with the early retirement of $50.0 million of senior promissory notes
of a ZERO subsidiary due March 8, 2011. These losses are recorded in the fiscal
2000 Consolidated Statement of Operations, under the caption "Other expense
(income) - net". Also, in fiscal 2000, a $40.0 million income tax provision was
recorded as a result of APW Ltd. reorganizing as a Bermuda company. This charge
is recorded in the fiscal 2000 Consolidated Statement of Operations, under the
caption "Income tax expense".
55
Note 6--Acquisitions and Divestiture
- ------------------------------------
Fiscal 2002-
Divestitures
On February 13, 2002, we completed the sale of our Zero Cases division. Net
total consideration from the transaction was $19.2 million, which resulted in a
net book gain of $8.2 million.
Fiscal 2001-
Acquisitions
On December 15, 2000, APW Ltd., through a wholly owned subsidiary, acquired
certain assets and assumed certain liabilities of Industria Metalurgica
Bagarolli Ltda. ("IMB") located in Campinas, Brazil. IMB specializes in the
design and manufacture of large indoor and outdoor enclosure systems, as well as
sub-assemblies and integration services, to the telecom and financial services
industries in South America. The purchase price totaled $19.0 million, including
fees and expenses, with future consideration becoming payable during fiscal 2002
of $2.5 million to $5.5 million, depending on the attainment of targeted revenue
and earnings before interest, taxes, depreciation and amortization levels.
During fiscal 2002, $2.5 million was paid to satisfy this requirement. This
acquisition was funded by borrowings under APW Ltd.'s revolving credit facility.
This acquisition was accounted for using the purchase method and the results of
operations of the acquired company are included in the Consolidated Statement of
Operations from the acquisition date. Due to the immaterial impact of the
transaction, pro forma financial information has not been presented. Allocations
of the purchase price resulted in approximately $12.1 million of goodwill, to be
amortized over 20 years (consistent with APW Ltd. acquisitions of this size and
nature), and is subject to adjustment for any future consideration in excess of
the minimum $2.5 million earn-out. As a result of the long-lived asset
impairment assessment APW Ltd. performed (see Note 5- "Goodwill Impairment,
Restructuring, Reorganization, Fresh Start Accounting and Other Charges"), the
goodwill associated with the acquisition of IMB was fully amortized during
fiscal 2001.
On February 16, 2001, APW Ltd., through a wholly owned subsidiary, acquired
the majority of the assets and assumed certain liabilities of the Mayville Metal
Products Division ("Mayville") of Connell Limited Partnership. Mayville
specializes in the design, manufacture and integration of large outdoor
enclosures, primarily for the telecom industry. The purchase price consisted of:
1) $225.0 million in cash (funded by borrowings under APW Ltd.'s revolving
credit facility); 2) 754,717 shares of APW Ltd. common stock, valued at
approximately $25.0 million, subject to adjustment depending on Mayville's 2001
calendar year net sales; and 3) assumed liabilities of $17.1 million. With this
acquisition, APW issued an aggregate of 1,509,434 shares of common stock of
which 754,717 were contingently returnable in the event Mayville's 2001 calendar
year net sales did not attain targeted sales. The contingently returnable shares
were not included in the aforementioned purchase price as of August 31, 2001,
nor were those shares used to calculate loss per share for fiscal 2001. As the
aforementioned sales targets where not reached, these contingent shares will not
be retained by Connell Limited Partnership and are in the process of being
returned to Predecessor Company. This acquisition was accounted for using the
purchase method of accounting and the results of operations of the acquired
company are included in the Consolidated Statement of Operations from the
acquisition date. Allocations of the purchase price resulted in approximately
$208.6 million of goodwill and other intangibles, to be amortized over periods
not to exceed 40 years (consistent with APW Ltd. acquisitions of this size and
nature), and are subject to adjustment for any earn-out. As a result of the
long-lived asset impairment assessment APW Ltd. performed (see Note 5 -
"Goodwill Impairment, Restructuring, Reorganization, Fresh Start Accounting and
Other Charges"), the goodwill associated with the acquisition of Mayville was
written-off in its entirety during fiscal 2002.
56
Divestiture
On November 20, 2000, APW Ltd. completed the sale of a subsidiary for a net
$1.7 million, which resulted in a net loss of $2.7 million.
Fiscal 2000-
Acquisitions
On January 28, 2000, the Company, through a wholly owned subsidiary,
acquired all of the outstanding stock of Metalade of Pennsylvania Inc.
("Metalade"). Metalade specializes in metal fabrication relating to electronics
enclosures. The initial purchase price totaled $8.7 million, including fees and
expenses. APW Ltd. paid the seller $0.6 million and $1.4 million during fiscal
2002 and 2001, respectively, based on the attainment of targeted sales levels.
Future consideration, not to exceed $3.0 million, is payable based on the
attainment of targeted sales levels. The acquisition was funded by borrowings
under Applied Power credit facilities. The acquisition has been accounted for
using the purchase method and the results of operations of the acquired company
are included in the Consolidated Statements of Operations from the acquisition
date. Due to the immaterial impact of the transaction, pro forma financial
information has not been presented. Allocations of the purchase price resulted
in approximately $8.1 million in goodwill, which is being amortized over 20
years (consistent with APW Ltd. acquisitions of this size and nature). As a
result of the long-lived asset impairment assessment APW Ltd. performed (see
Note 5 - "Goodwill Impairment, Restructuring, Reorganization, Fresh Start
Accounting and Other Charges"), the goodwill associated with the acquisition of
Metalade was fully amortized during fiscal 2001.
On April 1, 2000, the Company, through a wholly owned subsidiary, acquired
all of the outstanding stock of Malcoe Enclosures Limited ("Malcoe"). Malcoe
specializes in the design and manufacture of shelters, large walk-in enclosures
generally used to house telecom equipment. The purchase price totaled $1.6
million, including fees and expenses. The acquisition was funded by borrowings
under Applied Power credit facilities. The acquisition has been accounted for
using the purchase method and the results of operations of the acquired company
are included in the Consolidated Statements of Operations from the acquisition
date. Due to the immaterial impact of the transaction, pro forma financial
information has not been presented. Allocations of the purchase price resulted
in approximately $1.4 million in goodwill, which is being amortized over 20
years (consistent with APW Ltd. acquisitions of this size and nature). As a
result of the long-lived asset impairment assessment APW Ltd. performed (see
Note 5--" Goodwill Impairment, Restructuring, Reorganization, Fresh Start
Accounting and Other Charges"), the goodwill associated with the acquisition of
Malcoe was fully amortized during fiscal 2001.
Note 7--Inventories
- -------------------
Inventories consisted of (dollars in thousands):
August 31,
---------
Successor Predecessor
Company Company
2002 2001
---- ----
Raw material ............................................ $ 54,183 $ 59,401
Work-in-progress ........................................ 22,211 31,945
Finished goods .......................................... 18,374 39,591
-------- --------
Total inventories ................................. $ 94,768 $ 130,937
======== ========
During the one month ended August 31, 2002, the $2.8 million write-up to
value finished goods and work-in-progress inventories as of July 31, 2002 at
their estimated selling prices less cost to complete, costs of disposal and a
reasonable profit allowance for completing the selling effort was recognized in
cost of products sold.
Note 8--Accounts Receivable Facility
- ------------------------------------
APW North America Inc., a wholly owned subsidiary of APW Ltd., and certain
domestic subsidiaries (collectively, "Originators") previously sold trade
accounts receivable to Applied Power Credit Corporation ("APCC"), a
wholly-owned, limited purpose, consolidated subsidiary of the Company. APCC is a
separate corporate entity that would sell participating interests in its pool of
accounts receivable to financial institutions ("Purchasers"). The Purchasers, in
turn, received an ownership and security interest in the pool of receivables.
Participation interests in new receivables generated by the Originators were
purchased by APCC and resold to the Purchasers on a revolving basis as
collections reduced previously sold participation interests. The accounts
receivable sold to Purchasers were reflected as a reduction of receivables in
the Consolidated Balance Sheets. APCC had no risk of credit loss on such
receivables as they were sold without recourse. APW North America Inc. retained
collection and administrative responsibilities on the participation interests
sold as servicer for APCC and the Purchasers. Further, APCC is a bankruptcy
remote corporation, and as such, the assets held by APCC were not available to
satisfy the claims of APW Ltd.'s creditors until all of the amounts owed to the
Purchasers had been paid in full.
The Accounts Receivable Facility described above represented "off-balance
sheet financing." This resulted in assets being removed from our balance sheet,
rather than incurring a liability similar to that of traditional financing. The
receivables were sold on a revolving basis where new eligible receivables
replaced collected receivables on a daily basis. On May 17, 2002, this facility
57
was terminated in conjunction with the Chapter 11 filing. On that date, $34.5
million of accounts receivable previously sold under the Facility were
repurchased by the Company.
At August 31, 2001, APW Ltd. accounts receivable were reduced by $58.0
million, representing receivable interests sold under this program. Sales of
trade receivables are reflected as a reduction of accounts receivable in the
accompanying Consolidated Balance Sheets and the proceeds received, which are
used to reduce debt, are included in cash flows from financing activities in the
accompanying Consolidated Statements of Cash Flows.
APW Ltd. recorded discounts on the accounts receivable sold totaling $2.0
million, $5.6 million and $7.6 million for the eleven months ended July 31, 2002
and the fiscal years ended August 31, 2001 and 2000, respectively, which are
included in net financing costs in the accompanying Consolidated Statements of
Operations.
Note 9--Leases
- --------------
APW Ltd. leases certain facilities, computers, equipment and vehicles under
various lease agreements generally over periods of one to twenty years. Under
most arrangements, APW Ltd. pays the property taxes, insurance, maintenance and
expenses related to the leased property. Many of the leases include provisions
that enable APW Ltd. to renew the lease based upon the fair values on the date
of expiration of the initial lease.
Future obligations on non-cancelable operating leases in effect at August
31, 2002 are: $23.9 million in fiscal 2003; $20.5 million in fiscal 2004; $17.3
million in fiscal 2005; $14.6 million in fiscal 2006; $13.4 million in fiscal
2007; and $130.1 million thereafter.
Total rental expense under operating leases was $2.0 million, $24.1
million, $27.3 million and $17.4 million for the one month ended August 31,
2002, eleven months ended July 31, 2002, and fiscal years ended 2001 and 2000,
respectively.
Note 10--Debt Financing
- -----------------------
Concurrent with the Chapter 11 petition on May 16, 2002, the Bankruptcy
Court approved and, the Successor Company entered into a $110 million
debtor-in-possession financing agreement with certain members of its lender
group. Under the terms of the DIP financing facility, upon emergence from
bankruptcy, the DIP financing facility converted to the Successor Company's
Post-petition Multicurrency Superpriority Credit Facility ("exit facility"). The
exit facility contains three tranches: (i) tranche A ($70 million) is
collateralized by US receivables and inventory at an interest rate of LIBOR plus
3.50%; (ii) tranche B ($20 million) is collateralized by UK and Ireland
property, plant and equipment, receivables and inventory at an interest rate of
LIBOR plus 4.25%; and (iii) tranche C ($20 million) is collateralized by all
other Company assets at an interest rate of LIBOR plus 5.00%. The DIP financing
facility had a stated termination date of 180 days from May 16, 2002, and upon
its conversion to the exit facility, the termination date for tranches A and B
were automatically extended to November 15, 2003, and the termination date for
tranche C was automatically extended to May 15, 2004. At August 31, 2002, the
outstanding borrowings under tranche A were $70.0 million and the outstanding
borrowings under tranche B were $7.0 million. The LIBOR rate at August 31, 2002
was 1.82%.
Upon the filing of our petition with the Bankruptcy Court on May 16, 2002,
the outstanding balances of the Revolving Multicurrency Credit Agreement, the
floating rate unsecured loan notes and the UK revolving credit agreement were
deemed subject to compromise (see Note 1 - "Reorganization and Emergence from
Chapter 11"). The Bankruptcy Court subsequently discharged these debts on July
31, 2002, upon the effective confirmation of the Amended POR and the Company's
emergence from bankruptcy. Also upon the effective confirmation of the Amended
POR, APW Ltd. (Successor Company) issued $100.0 million of Subordinated Secured
Term Notes to its senior secured lenders. These term notes are collateralized by
a second priority lien (to the exit facility) on substantially all of Successor
Company's assets. The interest rate on the term notes is LIBOR plus 3.50% and
Successor Company has options to capitalize up to two non-sequential quarters of
cash interest. The term notes mature on July 31, 2007 and begins amortizing in
September 2004 at a rate of $2.5 million per quarter through August 2005 and at
a rate of $5.0 million per quarter from September 2005 through maturity on July
31, 2007 with a final lump sum payment of $50.0 million due on July 31, 2007.
58
Both the term notes and exit facility are subject to the same financial
covenants including minimum EBITDA, revenue and fixed charge coverage ratios and
maximum capital expenditures, leverage ratios and cash restructuring charges.
(Dollars in thousands):
August 31,
---------------------------
2002 2001
------------- ---------
Borrowings under:
DIP financing facility/exit facility .................. $ 77,000 $ --
Subordinated Secured Term Notes ....................... 100,000 --
Revolving Multicurrency Credit Agreement .............. -- 535,467
Floating rate unsecured loan notes .................... -- 21,196
U.K. revolving credit agreement ....................... -- 57,986
Other ................................................. 34 --
------------- ---------
177,034 614,649
Less short-term borrowings ............................ 34 593,453
------------- ---------
Long-term borrowings ............................... $ 177,000 $ 21,196
============= =========
Cash paid for interest was $12.9 million in fiscal 2002 and $42.3 million
during fiscal 2001. No interest expense was incurred on the Predecessor
Company's pre-petition outstanding indebtedness for the period from May 16, 2002
through July 31, 2002 while the Company was in Chapter 11 reorganization. Prior
to the Distribution, all interest payments were made by Applied Power.
In the first fiscal 2003 quarter, the Company was not in compliance with
certain financial covenants. The Company's majority lenders subsequently waived
these financial covenant violations. On December 23, 2002, the Company's lenders
amended certain debt covenants associated with the exit facility and the term
notes, including the financial covenants for which the Company obtained a
waiver. These revised covenants were established based upon actual operating
results in the first fiscal 2003 quarter and management's revised financial
forecasts as of the amendment date. The revisions in the covenants were
considered necessary due to the magnitude of the decline in the first fiscal
2003 quarter actual results compared to prior periods and management's
forecasts. In addition, the amendment extended the termination date for the
tranches A and B of the exit facility to March 1, 2004.
APW Ltd.'s management plans to continue to aggressively pursue additional
revenue opportunities within its core customer markets. APW Ltd. took various
restructuring actions in fiscal 2002 and the first fiscal 2003 quarter in an
effort to reduce costs in the wake of declining net sales experienced during
those periods. These programs resulted in restructuring charges during fiscal
2002 and will result in additional restructuring charges in fiscal 2003.
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 2003 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 2003 financial forecasts associated with the amended covenants,
the Company may have difficulty achieving compliance with certain debt
covenants. If APW Ltd. fails to comply with debt covenants for any reason, the
Company may have to consider one or more 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. There can be no assurances that the aforementioned
alternatives would be available to the Company in the future. A future violation
of debt covenants could cause a material adverse effect on the Company's ability
to continue in its present form and to achieve its intended business objectives.
Aggregate Maturities: Long-term debt principal outstanding at August 31,
2002, is payable as follows: none in fiscal 2003; $77.0 million in fiscal 2004;
$10.0 million in fiscal 2005; $20.0 million in fiscal 2006; $70.0 million in
fiscal 2007 and none thereafter.
Derivative Financial Instruments: As part of its interest rate management
program, the Company periodically enters into interest rate swap agreements with
respect to portions of its outstanding debt. The purpose of these swaps is to
protect the Company from the effect of an increase in interest rates. There were
no interest rate swap agreements in place as of August 31, 2002, as all existing
swaps outstanding at May 16, 2002, were discharged in bankruptcy. The interest
rate swap agreements in place at August 31, 2001 effectively converted $66.5
million of the Company's variable rate debt to a weighted average fixed rate of
8.8%. The fair value of the Company's interest rate swap agreements was a
liability of $2.4 million at August 31, 2001.
Note 11--Stock Option Plans
Predecessor Company APW Ltd. had various stock option plans for both
employees and directors that were terminated as a result of the Chapter 11
proceeding and confirmation of the Amended POR. As part of the Amended POR, a
new management incentive option plan was adopted by Successor Company and allows
for the issuance of options to key employees which allow key employees to
purchase 10% of the Successor Company's common shares on a fully diluted bases
or 37,879 shares as of August 31, 2002. Approximately 31,230 of these options
have been granted to 65 employees as of August 31, 2002.
APW Ltd. applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations in accounting for
its employee stock option plans. Accordingly, no compensation expense has been
recognized by APW Ltd. for its stock-based compensation plan. If APW Ltd. had
accounted for these stock options issued to APW Ltd. employees in accordance
with SFAS No. 123, "Accounting for Stock-Based Compensation," APW Ltd.'s net
earnings and basic and diluted earnings per share would have been as follows (in
thousands, except per share data):
Successor
Company 2002
One Month
Net loss
As reported $ (9,665)
SFAS No. 123 pro forma $ (9,699)
Loss per share
Basic and diluted as reported $ (29.65)
Basic and diluted SFAS No. 123 pro forma $ (29.75)
The pro forma effects of applying SFAS No. 123 may not be representative of
the effects on reported net income for future years since options vest over
several years and additional awards may be made each year. The SFAS No. 123 pro
forma compensation expense for the one month ended August 31, 2002 was
calculated from the grant date on August 20, 2002 through August 31, 2002,
Successor Company's fiscal year-end.
59
The fair value of APW Ltd. employee stock options used to compute pro forma
net earnings disclosures is the estimated present value at grant date using the
minimum value method as permitted in SFAS No. 123. This method is often used by
private companies that do not have an active market for their common shares and
as such, do not have the ability to calculate an expected volatility percentage
for use in the widely used Black-Scholes option pricing model. Additionally, all
of the above options have were granted on the same day and have the same terms.
Given these facts, all of the above options were valued as group which yielded a
fair value of $125.66 per option. The following assumptions were used in
completing the valuation:
Successor
Company
2002 One
Month
---------
Dividend yield 0.00%
Expected volatility 0.00%
Risk-free rate of return 4.91%
Expected life (in years) 10
Annual forfeiture rate 5.00%
Note 12--Employee Benefit Plans
Defined Benefit Pension Plan: APW Ltd. provides defined benefit pension
benefits to certain United Kingdom employees. The following tables provide a
reconciliation of benefit obligations, plan assets, funded status and net
periodic benefit cost for those plans (dollars in thousands):
Pension Benefits
-------------------------
2002 2001
----------- -----------
Change in benefit obligation--
Benefit obligation at beginning of year ........................ $ 67,978 $ 59,359
Service cost ................................................... 3,217 1,937
Interest cost .................................................. 4,471 4,092
Translation difference ......................................... 5,012 236
Employee contributions ......................................... 967 1,140
Actuarial (gain) loss .......................................... 1,993 3,145
Benefits paid .................................................. (1,655) (1,931)
----------- -----------
Benefit obligation at end of year .................................... $ 81,983 $67,978
=========== ===========
Change in plan assets--
Fair value of plan assets at beginning of year ................. $ 43,421 $ 49,214
Actual return on plan assets ................................... (5,315) (7,450)
APW Ltd. contributions ......................................... 3,137 2,358
Employee contributions ......................................... 967 1,140
Translation difference ......................................... 2,697 90
Benefits paid from plan assets ................................. (1,655) (1,931)
----------- -----------
Fair value of plan assets at end of year ............................. $ 43,252 $ 43,421
=========== ===========
Funded status of the plans ........................................... $ (38,731) $ (24,557)
Unrecognized net (gain) loss ......................................... (1,959) 14,736
----------- -----------
Accrued benefit cost ................................................. $ (40,690) $ (9,821)
=========== ===========
Weighted-average assumptions as of August 31--
Discount rate ........................................................ 6.00% 6.00%
Expected return on plan assets ....................................... 7.50% 7.50%
Rate of compensation increase ........................................ 4.00% 4.00%
Successor
Company Predecessor Company
--------- ---------------------------------
1 month 11 months
2002 2002 2001 2000
-------- --------- --------- --------
Components of net periodic benefit cost--
Service cost ............................................... $ 388 $ 3,797 $ 3,008 $ 3,962
Employee contributions ..................................... (115) (852) (1,070) (1,144)
Interest cost .............................................. 439 4,032 4,092 3,756
Expected return on assets .................................. (268) (3,207) (4,112) (3,814)
Amortization of unrecognized net loss (gain) ............... -- 364 (44) --
----- -------- --------- --------
Benefit cost ............................................... $ 444 $ 4,134 $ 1,874 $ 2,760
===== ======== ========= ========
60
The above pension benefits consist of two plans. The assets of the plans
are held in a separately administered trust and contributions are determined
based on triennial actuarial valuations using the projected unit credit funding
method. The plan primarily invests in growth oriented UK equities and UK
government bonds with maturities commensurate with the Company's long-term
investment objectives. In accordance with SOP 90-7, the excess of the projected
benefit obligation over the fair value of the plan assets of the defined benefit
pension plan as of July 31, 2002 was recorded as a fresh start adjustment.
Defined Contribution Benefit Plans: Substantially all of APW Ltd.'s
full-time U.S. employees have been eligible to participate in the APW Ltd.
401(k) Plan. Participants generally may contribute up to 75% of their pre-tax
compensation to the plan, subject to IRS limits. APW Ltd. makes a core
contribution to the plan that is generally equal to 3% of each participant's
compensation, subject to IRS limitations. APW Ltd. also makes a matching
contribution that generally is equal to 25% of the first 6% of compensation
contributed by the participant. In the past, participants received the core and
matching contributions in the form of Predecessor Company APW Ltd. common stock.
Predecessor Company then contributed cash to the plan to fund its obligation and
the cash was used to acquire stock in the open market for allocation to plan
participants. Effective May 2002, all employer contributions are allocated to
participants in cash and are entirely participant directed.
During the years ended August 31, 2002, 2001 and 2000, expenses related to
the above defined contribution plan were approximately $0.4 million, $8.5
million, $6.6 million and $7.9 million for the one month ended August 31, 2002,
eleven months ended July 31, 2002, fiscal years 2001 and 2000, respectively.
Non-U.S. Benefit Plans: APW Ltd. contributes to a number of retirement
programs for employees outside the U.S. and the U.K. Pension expense under these
programs amounted to approximately $0.2 million, $1.6 million, $1.3 million and
$1.8 million for the one month ended August 31, 2002, eleven months ended July
31, 2002, fiscal years 2001 and 2000, respectively. As these plans are not
significant, APW Ltd. does not determine the actuarial value of accumulated plan
benefits or net assets available for benefits.
Note 13--Income Taxes
Income tax expense (benefit) consists of the following (dollars in
thousands):
Successor
Company Predecessor Company
---------- ------------------------------------
1 Month 11 Months
2002 2002 2001 2000
---------- ---------- ----------- ----------
Current:
Federal .................................. $ (63) $ 1,231 $ (3,618) $ 46,460
Foreign .................................. (710) (3,991) 769 4,969
State .................................... -- 453 (256) 3,999
---------- ---------- ----------- ----------
Subtotals ..................................... (773) (2,307) (3,105) 55,428
---------- ---------- ----------- ----------
Deferred:
Federal .................................. -- 17,146 (13,502) (2,475)
Foreign .................................. 773 7,601 (8,321) (215)
State .................................... -- 4,003 (776) (393)
---------- ---------- ----------- ----------
Subtotals ..................................... 773 28,750 (22,599) (3,083)
---------- ---------- ---------- ----------
Totals ........................................ $ -- $ 26,443 $ (25,704) $ 52,345
========== ========== ========== ==========
Income tax expense differs from the amounts computed by applying the U.S.
federal income tax rate to earnings before income tax expense. A reconciliation
of income taxes at the U.S. statutory rate to the effective tax rate follows:
% of Pre-tax Earnings
--------------------------------
Successor
Company Predecessor Company
---------- --------------------------------
1 Month 11 Months
2002 2002 2001 2000
---------- --------- --------- --------
United States federal statutory rate .............................. 35.0% 35.0% 35.0% 35.0%
State income taxes, net of United States federal effect ........... -- -- 0.3 3.0
Non-deductible amortization and other expenses .................... 2.4 (33.0) (20.4) 18.8
Cost of reorganization as a Bermuda company ....................... -- -- -- 137.9
Net effects of foreign tax rates and credits ...................... 4.0 45.3 (3.9) (10.1)
Valuation allowance ............................................... (42.6) (54.0) -- --
Other items ....................................................... 1.2 0.2 (1.2) (3.9)
---------- --------- --------- --------
Effective tax rate ................................................ 0.0% (6.5)% 9.8% 180.7%
========== ========= ========= ========
61
As reflected in the above table, the effective tax rate for fiscal 2002 and
2001 was significantly impacted by the goodwill impairment charge recorded in
the second fiscal quarter. Most of the goodwill which was written-down was not
deductible for tax purposes. In addition, for fiscal 2002, Predecessor Company
was significantly impacted by the minimal foreign tax rate applicable to the
gain on debt discharge recorded as a reorganization item in our Consolidated
Statement of Operations.
Temporary differences and carryforwards/carrybacks which gave rise to the
deferred tax assets and liabilities included the following items (dollars in
thousands):
August 31,
----------
Successor Predecessor
Company Company
2002 2001
---- ----
Deferred income tax assets:
Operating loss and state tax credit carryforwards/carrybacks....... $ 44,303 $ 33,021
Compensation and other employee benefits .......................... 19,595 8,980
Inventory items ................................................... 4,804 2,333
Depreciation and amortization ..................................... 96,604 --
Restructuring expenses ............................................ 5,967 4,506
Deferred income ................................................... 739 2,828
Deferred interest ................................................. 25,911 --
Book reserves and other items ..................................... 9,103 6,384
--------- ---------
Total deferred assets ....................................... 207,026 58,052
Valuation allowance ............................................... (204,449) (9,784)
--------- ---------
Net deferred income tax assets .............................. 2,577 48,268
--------- ---------
Depreciation and amortization ..................................... 11,053 20,177
Inventory items ................................................... -- 168
Other items ....................................................... 4,177 --
--------- ---------
Net deferred income tax liabilities ......................... 15,230 20,345
--------- ---------
Net deferred income taxes ............................................... $ (12,653) $ 27,923
========= =========
Due to the size of the Company's operating loss carryforwards/carrybacks in
relation to the Company's recent history of unprofitable operations and to the
continuing uncertainties surrounding recoverability of these losses and other
net deferred tax assets, a valuation allowance was established to reduce the
Company's net deferred tax asset. The increase in the valuation allowance
represents the current year increase in both U.S. and non-U.S. loss
carryforwards as well as reserving for the Company's other deferred tax assets.
The majority of the non-U.S. losses may be carried forward indefinitely. The
U.S. federal and state loss carryforwards expire in various years through 2022.
The Company's reorganization has resulted in a significantly modified capital
structure by which SOP 90-7 requires the Company to apply fresh start
accounting. Under fresh start accounting, reversals of valuation reserves
recorded against deferred tax assets that existed as of the emergence date will
first reduce any excess reorganization value until exhausted, then other
intangibles until exhausted and thereafter are reported as additional paid in
capital. Consequently, the Company will recognize cash tax savings in the year
of asset recognition without the corresponding benefit to income tax expense.
APW Ltd. had agreed to indemnify Applied Power against certain tax
liabilities arising from the reorganization leading up to the Distribution. The
reorganization, including the merger and APW Ltd.'s continuation as a Bermuda
company, involved taxable transactions. APW Ltd. recorded a $40.0 million income
tax provision in fiscal 2000 as a result of the reorganizing as a Bermuda
company. Under a tax sharing agreement the Company entered into with Applied
Power, the Company was to be responsible for federal and state income taxes
resulting from the reorganization transactions. However, the tax sharing
agreement was subsequently rejected pursuant to the Amended POR and a new
agreement was entered into with Applied Power. Based upon the current agreement,
the Company is no longer responsible for any federal and state income taxes
reported on Applied Power's income tax returns that may result from audit
adjustments by the IRS or other taxing authorities challenging the reporting of
the reorganization or any other transactions.
Earnings (losses) from continuing operations before income taxes from
non-U.S. operations were ($7.8) million, ($27.5) million, ($176.8) million and
$8.1 million for the one month ended August 31, 2002, eleven months ended July
31, 2002, fiscal 2001 and fiscal 2000, respectively. Net income taxes refunded
during fiscal 2002 were $8.9 million. Income taxes paid during fiscal 2001 were
$44.5 million, which includes a $30.0 million payment to Actuant under the Tax
Sharing Agreement. APW Ltd. did not pay any income taxes from the Distribution
date through August 31, 2000. Prior to the Distribution, Applied Power paid all
income taxes on behalf of the businesses that comprise APW Ltd. and its
subsidiaries.
62
Note 14--Equity
Successor Company:
Pursuant to the terms of the confirmed Amended POR and upon emergence from
bankruptcy on July 31, 2002, a new investor rights agreement was enacted and the
Successor Company was approved for 460,227 authorized shares with a par value of
$0.08 per share. These authorized shares are comprised of 378,788 common shares
and 81,439 undesignated shares. After consummation of the plan, Successor
Company issued 250,000 common shares to the Predecessor Company's former senior
secured lenders which represented 100% of the outstanding common shares of the
newly emerged APW Ltd. Concurrent with the issuance of the above common shares,
Successor Company also issued the following:
. Warrants to purchase up to 75,758 of Sucessor Company common shares
at an exercise price of $0.08 per share. These warrants were issued to
the lenders under the debtor-in-possession financing facility.
. Warrants to purchase up to 15,151 Successor Company common shares at
an exercise price of $1,795.80 per share. These warrants were issued to
Predecessor Company's former equity holders.
As of August 31, 2002, all of the above warrants issued to the
debtor-in-possession lenders were exercised thereby increasing the outstanding
shares of APW Ltd. to 325,758.
In addition to the issuance of shares, the Plan also provided 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 37,879 shares). See Note 11 - "Stock
Options" for more discussion.
As a result of the confirmation of the Company's Amended POR on July 31,
2002 and upon its adoption of fresh start accounting (as described in Note 2 -
"Fresh Start Accounting"), the Successor Company emerged from Chapter 11 with a
beginning equity amount of $72.5 million. In August 2002, as stated above, all
of the warrants issued to the lenders of the debtor-in-possession financing
facility were exercised and recorded as common shares outstanding, with the
difference from par amount of $0.08, recorded as share premium. In August 2002,
the company incurred a net loss of $9.7 million and other comprehensive income
of $0.9 million, resulting in total equity of $89.2 million as of August 31,
2002.
On August 28, 2002, the Successor Company solicited written consents (in
lieu of holding a special meeting of shareholders) from the shareholders for the
following matters:
. authorize a four-for-one reverse share split; and
. authorize a payment of up to US$25,000 to the APW Ltd. 401(k)
Plan in lieu of issuing to the 401(k) Plan approximately 5,640
warrants (pre-split)to purchase common shares pursuant to the
Company's confirmed Amended POR.
On September 11, 2002, the Successor Company received unanimous written consent
on all of these matters from the shareholders. This represented 100% of the
authorized, issued and outstanding shares of common shares. The four-for-one
reverse share split was effective December 18, 2002. All references herein to
the average number of common shares and related per share amounts have been
restated to reflect the reverse share split.
Predecessor Company:
On July 7, 2000, Applied Power's board of directors approved the
Distribution of its Electronics businesses. The distribution occurred on July
31, 2000, with shareholders of Applied Power Inc. common stock receiving one
share of APW Ltd. common stock for every Applied Power Inc. share owned as of
the July 21, 2000 record date.
In conjunction with the Distribution, the consolidated debt of Applied
Power was realigned between APW Ltd. and Applied Power. Through an additional
investment by Applied Power on July 31, 2000, a certain portion of allocated APW
Ltd. debt was assumed by Applied Power. See Consolidated Statements of
Shareholders' Equity and Comprehensive Income (Loss).
The "Combined equity" caption in the accompanying Consolidated Statements
of Shareholders' Equity and Comprehensive Income (Loss) represents Applied
Power's cumulative net investment in the combined businesses of APW Ltd. prior
to the Distribution. Changes in the "Combined equity" caption represent the net
income (loss) of APW Ltd., net cash and noncash contributions from
(distributions to) Applied Power, changes in allocated corporate debt and
allocated corporate interest, net of tax. See the accompanying Consolidated
Statements of Shareholders' Equity and Comprehensive Income (Loss) for an
analysis of the activity in the "Combined equity" caption.
63
Prior to Predecessor Company's emergence from bankruptcy, there were
approximately 40.8 million common shares outstanding. Under the approved
Amended POR, holders of Predecessor Company's common shares received (a)
warrants representing the right to purchase 15,151 Successor Company common
shares as stated above and (b) retained their existing common stock in APW Ltd.
(which as a practical matter is in the process of liquidation). No other
distribution is expected to Predecessor Company shareholders.
Note 15--Transactions and Agreements with Applied Power and Related Parties
In order to effect the Distribution, Applied Power and APW Ltd. had entered
into the following agreements:
. Contribution Agreement, Plan and Agreement of Reorganization and
Distribution *
. General Assignment, Assumption and Agreement regarding Litigation,
Claims, and other Liabilities *
. Transitional Trademark Use and License Agreement *
. Insurance Matters Agreement
. Bill of Sale and Assumption of Liabilities *
. Employee Benefits and Compensation Agreement *
. Tax Sharing and Indemnification Agreement *
. Interim Administrative Services Agreement *
. Confidentiality and Non Disclosure Agreement
. Assumption of Applied Power Inc. Debt Obligation *
* Signifies agreement was rejected as a result of our Chapter 11 proceeding.
All of these agreements originally defined the ongoing relationship between
the parties immediately after the Distribution. However, with the exception of
the Insurance Matters Agreement and the Confidentiality and Non Disclosure
Agreement, all were rejected in conjunction with the reorganization and
emergence from Chapter 11. As a result, the Company is no longer subject to any
potential liabilities associated with the impaired agreements. On August 6,
2002, a new agreement was entered into with Actuant regarding certain income tax
items, however, no potential current or future liabilities are provided for
under this agreement. The new agreement provides that Actuant must reimburse the
Company for any amount in excess of the $23.8 million of funds (the "Offset
Funds") previously paid by the Company to Actuant over the amounts ultimately
paid by Actuant for certain legal, accounting and other costs and audit
adjustments by the IRS or other taxing authorities related to the reorganization
transactions leading up to the Distribution. Any Offset Funds remaining after
the final determination of all taxes payable are required to be distributed to
the Company by Actuant except for up to a maximum of $1.5 million that can be
retained by Actuant. No receivable has been recorded at August 31, 2002 related
to this gain contingency. The new agreement also allows the Company to carryback
certain US net operating losses and capital losses incurred in taxable years
ending in 2002 and 2001 to taxable years commencing prior to the Distribution
Date and potentially recover income taxes previously paid by Applied Power. Due
to the uncertainty of the Company's ability to recover income taxes paid prior
to the Distribution Date, the Company has fully reserved the deferred income tax
asset related to all net operating loss and capital loss carrybacks.
Employee Loan
Chairman and CEO, Richard G. Sim currently has a loan from the Company of
approximately $500,000 to partially finance the cost of a residence in London,
United Kingdom. Mr. Sim's duties as Chairman and CEO of the Company require him
to divide his time between the United States and Europe. The loan from the
Company to Mr. Sim bears an interest rate of 6.81% and is due the earlier of
July 15, 2031 or upon the sale, transfer or conveyance of the property.
64
Note 16--Supplemental Balance Sheet Information
(Dollars in thousands) August 31,
---------
Successor Predecessor
2002 2001
---- ----
Accounts receivable--
Accounts receivable ................................................. $ 131,217 $ 116,795
Less allowances ..................................................... (4,147) (3,847)
-------- ---------
Accounts receivable, net ............................................ $ 127,070 $ 112,948
========= =========
Property, plant and equipment--
Property ............................................................ $ 7,997 $ 11,113
Plant ............................................................... 32,002 46,783
Machinery and equipment ............................................. 152,947 420,019
--------- ---------
Total ............................................................ 192,946 477,915
Less accumulated depreciation ....................................... (3,390) (222,886)
--------- ---------
Property, plant and equipment, net ............................... $ 189,556 $ 255,029
========= =========
Goodwill--
Goodwill ............................................................ $ 17,484 $ 925,152
Less accumulated amortization ....................................... - (245,927)
--------- ---------
Goodwill, net ....................................................... $ 17,484 $ 679,225
========= ========
Other intangibles--
Other intangibles ................................................... $ 28,340 $ 40,527
Less accumulated amortization ....................................... - (12,911)
--------- ---------
Other intangibles, net .............................................. $ 28,340 $ 27,616
========= =========
Other current liabilities--
Restructuring - lease exit reserves ................................. $ 14,671 $ 5,343
Other current liabilities ........................................... 37,084 41,103
--------- ---------
Total ........................................................... $ 51,755 $ 46,446
========= =========
Other long-term liabilities--
Accrued pension cost (UK defined benefit pension) ................... $ 40,690 $ 9,821
Other long-term current liabilities ................................. 25,217 36,609
--------- ---------
Total ........................................................... $ 65,907 $ 46,430
========= =========
Note 17--Business Segment, Geographic and Customer Information
APW Ltd. operates as one reportable segment. APW Ltd. supplies electronic
enclosures, thermal management systems, power supplies, and cabling either as
individual products, or as an integrated system incorporating certain of APW
Ltd.'s product design, supply chain management, assembly and test capabilities.
Sales between geographic areas are insignificant and are accounted for at prices
intended to yield a reasonable return to the selling affiliate.
Enterprise-wide information is provided in accordance with SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information".
Geographical net sales is based on the origin of the sales. Asset information is
based on physical location of the assets at the end of the fiscal year. The
following table summarizes financial information by geographic region (dollars
in thousands):
Successor
Company Predecessor Company
--------------- ------------------------------------------
1 month ended 11 months ended Years Ended August 31,
----------------------
August 31, 2002 July 31, 2002 2001 2000
--------------- ---- ---- ----
Net sales:
Americas ................................... $ 45,967 $ 441,120 $ 780,248 $ 734,315
Europe and Asia ............................ 27,421 339,567 487,436 505,227
--------- --------- ----------- -----------
Totals ............................... $ 73,388 $ 780,687 $ 1,267,684 $ 1,239,542
========= ========= =========== ===========
Property, plant and equipment:
Americas ................................... $ 90,578 $ 149,723
Europe and Asia ............................ 86,144 99,015
General corporate and other ................ 12,834 6,291
--------- -----------
Totals ............................... $ 189,556 $ 255,029
========= ===========
65
One customer accounted for more than 10% of total net sales in 2002. No
single customer accounted for more than 10% of total net sales in fiscal 2001 or
2000. Export sales from United States operations were less than 3% of total net
sales in each of the periods presented.
Note 18--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, toxic tort, labor, patent and contract claims, and
commission disputes.
The Predecessor Company, as well as one current and one former executive, have
been sued in three now-consolidated actions in the United States District Court
for the Eastern district of Wisconsin 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 first of these suits, captioned Stewart Norman
Hicks v. APW Ltd. et al, was filed on December 10, 2001. The subsequently filed
suits are captioned Robert Betz v. APW Ltd. et al, and Market Street Securities
v. APW Ltd. et al. The consolidated complaint alleges violations of Federal
securities laws and seeks certification of a plaintiff class consisting of all
purchasers of the Predecessor Company's common stock between September 26, 2000
and March 20, 2001, inclusive. The Complaint does not quantify the damages
sought. The Company, as successor defendant pursuant to the plan, and the
individual defendants have moved to dismiss the consolidated complaint, and
briefing is anticipated to conclude by January 10, 2003. Under the provisions of
the Amended POR confirmed by the Bankruptcy Court on July 24, 2002, the
Company's financial exposure to an adverse judgment in this consolidated action
is limited to $250,000.
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 two sites, the Company is a minor participant,
and the Company's share of estimated cleanup costs is not likely to exceed $1.1
million and $2.3 million, respectively. 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 are recorded when
environmental remediation is probable and the costs can be reasonably estimated.
Environmental expenditures over the last three years for APW Ltd. have not been
material. 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. Environmental
remediation accruals of $5.6 million and $4.4 million were included in the
Consolidated Balance Sheets at August 31, 2002 and 2001, respectively.
Note 19--Subsequent Event
In December 2002, the Company announced plans to exit two manufacturing
facilities and involuntarily terminate approximately 400 employees. Management
plans to transfer the manufacturing operations of one exited facility to other
APW facilities and to discontinue its backplane manufacturing operations in the
other exited facility by no later than May 2003. The Company is currently in the
process of quantifying the charge it expects to record in fiscal 2003 which will
primarily be comprised of severance, lease exit and asset impairment related to
the decision to exit these facilities.
66
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of APW Ltd.:
Our audits of the consolidated financial statements referred to in our
report dated November 4, 2002, except for Note 10 and Note 14 as to the reverse
share split which are as of December 23, 2002, on page 40 of this Form 10-K also
included an audit of the financial statement schedule listed in the index
incorporated by reference under Item 15(a)(2) of this Form 10-K. In our opinion,
this financial statement schedule presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements.
PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
November 4, 2002
67
APW LTD. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(Dollars in Thousands)
Additions (Deductions)
----------------------
Balance at Net Amounts Balance
Beginning Charged to Costs (Disposed) Written Off Net At End of
Description of Period and Expenses Acquired of (Recoveries) Other (1) Period
- ----------- --------- -------- -------- ------------ --------- ------
Deducted from assets to
which they apply:
Allowance for losses--
trade accounts receivable
Successor Company 2002 One Month ............ $ 3,777 195 -- (175) -- $ 4,147
Predecessor Company 2002 Eleven Months ...... $ 3,847 2,334 (146) 2,290 32 $ 3,777
Fiscal 2001 ................................. $ 3,924 4,055 211 4,344 1 $ 3,847
Fiscal 2000 ................................. $ 3,537 1,184 57 967 113 $ 3,924
Allowance for losses--
Deferred tax assets
Successor Company 2002 One Month ............ $ 202,207 2,960 -- 718 -- $ 204,449
Predecessor Company 2002 Eleven Months ...... $ 9,784 232,661 -- 40,238 -- $ 202,207
Fiscal 2001 ................................. $ 2,861 7,238 -- 315 -- $ 9,784
Fiscal 2000 ................................. $ 1,159 2,192 -- 490 -- $ 2,861
__________
(1) Primarily represents the effect of exchange rate changes on asset
balances over the periods indicated.
68
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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.
APW Ltd.
(Registrant)
Dated: December 27, 2002
By:
-----------------------------------------
Richard D. Carroll
Vice President - Chief Financial Officer
(Principal Financial Officer and duly
authorized to sign on behalf of the
Registrant)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Richard G. Sim, Anthony W. Asmuth III and Richard
D. Carroll, and each of them, his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments to
this report, and to file the same, with all and any other regulatory authority,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents or any of them, or their substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.*
Signature Title
--------- -----
/s/ Richard G. Sim Chairman of the Board, President and
---------------------------------------------------
Richard G. Sim Chief Executive Officer; Director
/s/ Richard D. Carroll Vice President - Chief Financial Officer
---------------------------------------------------
Richard D. Carroll (Principal Financial Officer)
/s/ Todd A. Adams Controller
---------------------------------------------------
Todd A. Adams (Principal Accounting Officer)
/s/ Christopher S. Brothers Director
---------------------------------------------------
Christopher S. Brothers
/s/ J. Richard Budd, III Director
---------------------------------------------------
J. Richard Budd, III
/s/ W. Peter A. Douglas Director
---------------------------------------------------
W. Peter A. Douglas
/s/ Michael P. Harmon Director
---------------------------------------------------
Michael P. Harmon
/s/ Stephen A. Kaplan Director
---------------------------------------------------
Stephen A. Kaplan
/s/ Toni J. Smith Director
---------------------------------------------------
Toni J. Smith
*Each of the above signatures is affixed as of December 27, 2002
69
CERTIFICATIONS
I, Richard G. Sim, certify that:
1. I have reviewed this annual report on Form 10-K of APW Ltd.;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this annual
report whether there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: December 27, 2002
/s/ Richard G. Sim
-------------------
Richard G. Sim
President and
Chief Executive Officer
70
I, Richard D. Carroll, certify that:
1. I have reviewed this annual report on Form 10-K of APW Ltd.;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this annual
report whether there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: December 27, 2002
/s/ Richard D. Carroll
-----------------------
Richard D. Carroll
Vice President and
Chief Financial Officer
71
APW Ltd.
(the "Registrant")
(Commission File No. 1-15851)
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED AUGUST 31, 2002
INDEX TO EXHIBITS
- -----------------------------------------------------------------------------------------------------------------------------------
Exhibit
No. Description Incorporated Herein by Reference to Filed Herewith
- -----------------------------------------------------------------------------------------------------------------------------------
2.1(a) APW Ltd. Bankruptcy Disclosure Schedule and Exhibit 99.2 to the Registrant's Form
Plan of Reorganization 8-K dated May 1, 2002
- -----------------------------------------------------------------------------------------------------------------------------------
2.1(b) Amended and Restated Joint Plan of Exhibit 2.1 to the Registrant's Form
Reorganization of Vero Electronics, Inc. and 8-K dated June 19, 2002
APW Ltd.
- -----------------------------------------------------------------------------------------------------------------------------------
2.1(c) Order of the Supreme Court of Bermuda, inter Exhibit 2.1(c) to the Registrant's Form
alia, appointing Joint Provisional 10-Q for period ended May 31, 2002
Liquidators of APW Ltd. (now called BQX
Ltd.) dated May 30, 2002
- -----------------------------------------------------------------------------------------------------------------------------------
2.1(d) Order of the Supreme Court of Bermuda, Exhibit 2.1(d) to the Registrant's Form
extending the powers of the Joint 10-Q for period ended May 31, 2002
Provisional Liquidators of APW Ltd. (now
called BQX Ltd.) dated July 22, 2002
- -----------------------------------------------------------------------------------------------------------------------------------
2.1(e) U.S. Bankruptcy Court Order of APW Ltd. (now Exhibit 99.2 to the Registrant's Form
called BQX Ltd.), entered July 24, 2002 8-K dated July 23, 2002
- -----------------------------------------------------------------------------------------------------------------------------------
2.1(f) Bermuda Supreme Court Order of APW Ltd. (now Exhibit 99.3 to the Registrant's Form
called BQX Ltd.), entered July 30, 2002 8-K dated July 23, 2002
- -----------------------------------------------------------------------------------------------------------------------------------
3.1(a) Memorandum of Association of AWP Ltd. (N/K/A APW Ltd.) X
- -----------------------------------------------------------------------------------------------------------------------------------
3.1(b) Bye-Laws of APW Ltd. X
- -----------------------------------------------------------------------------------------------------------------------------------
4.1 Sixth Amendment to Amended and Restated Exhibit 99 to the Registrant's Form
Multicurrency Credit Agreement 10-Q dated February 28, 2002
- -----------------------------------------------------------------------------------------------------------------------------------
4.2 Amended and Restated Multi-Currency Credit Exhibit 4.1 to the Registrant's Form
Agreement dated as of July 31, 2000 among 10-Q for quarter ended May 31, 2000
APW Ltd., APW North America, Inc., APW
Holdings Denmark APS, various financial
institutions, Bank One as Syndication Agent,
The Chase Manhattan Bank as Documentation
Agent and Bank of America, National
Association, as Administrative Agent,
arranged by Banc of America Securities LLC
- -----------------------------------------------------------------------------------------------------------------------------------
4.3 Form of Amended and Restated Multi-Currency Exhibit 4.1 to the Registrant's Form
Credit Agreement among APW Ltd., Various 8-K filed May 21, 2001
Financial Institutions, Bank One N.A., Chase
Manhattan Bank and Bank of America, National
Association
- -----------------------------------------------------------------------------------------------------------------------------------
4.4 Form of First Amendment to Amended and Exhibit 4.2 to the Registrant's Form
Restated Receivables Purchasing Agreement 8-K filed May 21, 2001
among Applied Power Credit corporation, APW
North America, Inc., Barton Capital
Corporation and Societe General
- -----------------------------------------------------------------------------------------------------------------------------------
4.5 Form of Warrant and Registration Rights X
Agreement (U.S. Banks)
- -----------------------------------------------------------------------------------------------------------------------------------
4.6 Form of Intercreditor Agreement between Exhibit 4.6 to the Registrant's Form
Barton Capital Corporation, Societe General 8-K filed May 21, 2001
and Bank of America, National Association
- -----------------------------------------------------------------------------------------------------------------------------------
4.7 Form of Guaranty (U.S. subsidiaries) Exhibit 4.7 to the Registrant's Form 8-K
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72
- -----------------------------------------------------------------------------------------------------------------------------------
Exhibit
No. Description Incorporated Herein by Reference to Filed Herewith
- -----------------------------------------------------------------------------------------------------------------------------------
filed May 21, 2001
- -----------------------------------------------------------------------------------------------------------------------------------
4.8 Form of Guaranty (U.K. subsidiaries) Exhibit 4.8 to the Registrant's Form 8-K
filed May 21, 2001
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4.9 Form of Debenture (U.S.) Exhibit 4.9 to the Registrant's Form 8-K
filed May 21, 2001
- -----------------------------------------------------------------------------------------------------------------------------------
4.10 Form of Debenture (U.K.) Exhibit 4.10 to the Registrant's Form
8-K filed May 21, 2001
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4.11 Form of Assignment of Security Interest in Exhibit 4.11 to the Registrant's Form
United States Trademark and Patents among 8-K filed May 21, 2001
APW Ltd., APW North America, Inc. and Bank
of America, National Association
- -----------------------------------------------------------------------------------------------------------------------------------
4.12 Form of Pledge Agreement among APW Ltd., APW Exhibit 4.12 to the Registrant's Form
North America, Inc., Rubicon USA Inc. and 8-K filed May 21, 2001
Bank of America, National Association
- -----------------------------------------------------------------------------------------------------------------------------------
4.13 Form of Amendment to Pledge Agreement Exhibit 4.13 to the Registrant's Form
8-K filed May 21, 2001
- -----------------------------------------------------------------------------------------------------------------------------------
4.14 Form of Security Agreement among APW Ltd., Exhibit 4.14 to the Registrant's Form
APW North America, Inc., APW Holding Denmark 8-K filed May 21, 2001
APS and Bank of America, National Association
- -----------------------------------------------------------------------------------------------------------------------------------
4.15 Form of Amendment to Security Agreement Exhibit 4.15 to the Registrant's Form
8-K filed May 21, 2001
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4.16 Form of Intercreditor Agreement by and among Exhibit 4.16 to the Registrant's Form
Bank of America, N.A., various financial 8-K filed May 21, 2001
institutions, Bank One, NA and The Royal
Bank of Scotland, plc
- -----------------------------------------------------------------------------------------------------------------------------------
4.17 Form of Amendment Agreement to the Facility Exhibit 4.17 to the Registrant's Form
Agreement between APW Enclosure Products and 8-K filed May 21, 2001
Systems Limited and The National Westminster
Bank plc
- -----------------------------------------------------------------------------------------------------------------------------------
4.18 Form of Amendment Agreement to the Facility Exhibit 4.18 to the Registrant's Form
Agreement between APW Electronics Group plc, 8-K filed May 21, 2001
other Borrowers under the Agreement, and The
Royal Bank of Scotland plc
- -----------------------------------------------------------------------------------------------------------------------------------
4.19 Form of Security Agreement by and among APW Exhibit 4.19 to the Registrant's Form
Ltd., APW North America, Inc., APW Holding 8-K filed May 21, 2001
Denmark APS and The Royal Bank of Scotland
plc
- -----------------------------------------------------------------------------------------------------------------------------------
4.20 Form of The Royal Bank of Scotland Guaranty Exhibit 4.20 to the Registrant's Form
8-K filed May 21, 2001
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4.21 Form of Assignment of Security interest in Exhibit 4.21 to the Registrant's Form
United States Trademarks and Patents among 8-K filed May 21, 2001
APW Ltd., APW North America and The Royal
Bank of Scotland, plc
- -----------------------------------------------------------------------------------------------------------------------------------
4.22 Form of Pledge Agreement among APW Ltd., APW Exhibit 4.22 to the Registrant's Form
North America Inc., APW Holding Denmark APW 8-K filed May 21, 2001
and The Royal Bank of Scotland plc
- -----------------------------------------------------------------------------------------------------------------------------------
4.23 First Amendment No. 1 to Amended and Exhibit 10.1 to the Registrant's Form
Restated Multi-Currency Credit Agreement 8-K filed October 2, 2001
(including Schedules)
- -----------------------------------------------------------------------------------------------------------------------------------
4.24 First Amendment to Intercreditor Agreement Exhibit 10.2 to the Registrant's Form
(including Schedules) 8-K filed October 2, 2001
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4.25 Amended RBS and National Westminster Credit Exhibit 10.3 to the Registrant's Form
Facility Agreement 8-K filed October 2, 2001
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73
- -----------------------------------------------------------------------------------------------------------------------------------
Exhibit
No. Description Incorporated Herein by Reference to Filed Herewith
- -----------------------------------------------------------------------------------------------------------------------------------
4.26 Post-Petition Multicurrency Super Priority Exhibit 99.2 to the Registrant's
Credit Agreement (referred to as Debtor in Schedule 13E-3 filed on September 12,
Possession Financing Agreement) 2002
- -----------------------------------------------------------------------------------------------------------------------------------
4.27 Intercreditor Agreement Exhibit 99.2 to the Registrant's Form
8-K filed May 28, 2002
- -----------------------------------------------------------------------------------------------------------------------------------
4.28 Guaranty Exhibit 99.3 to the Registrant's Form
8-K filed May 28, 2002
- -----------------------------------------------------------------------------------------------------------------------------------
4.29 Reaffirmation of Existing Guaranties Exhibit 99.4 to the Registrant's Form
8-K filed May 28, 2002
- -----------------------------------------------------------------------------------------------------------------------------------
4.30 Amended and Restated Pledge Agreement Exhibit 99.5 to the Registrant's Form
8-K filed May 28, 2002
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4.31 Forbearance Agreement Exhibit 99.6 to the Registrant's Form
8-K filed May 28, 2002
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4.32 Amended and Restated Security Agreement Exhibit 99.7 to the Registrant's Form
8-K filed May 28, 2002
- -----------------------------------------------------------------------------------------------------------------------------------
9.1 Investor Rights Agreement among shareholders Exhibit 4.1 hereto
- -----------------------------------------------------------------------------------------------------------------------------------
10.1 Management Stock Incentive Plan X
- -----------------------------------------------------------------------------------------------------------------------------------
10.2 Form of Contribution Agreement, Plan and Exhibit 10.2 to the Registrant's Form 10
Agreement Regarding Litigation, Claims and Registration Statement dated May 1,
Other Liabilities between Applied Power Inc. 2000, as amended
and APW Ltd., dated as of July 21, 2000
- -----------------------------------------------------------------------------------------------------------------------------------
10.3 Form of General Assignment, Assumption and Exhibit 10.3 to the Registrant's Form 10
Agreement Regarding Litigation, Claims and Registration Statement dated May 1,
Other Liabilities between Applied Power Inc. 2000, as amended
and APW Ltd., dated as of July 21, 2000
- -----------------------------------------------------------------------------------------------------------------------------------
10.4 Form of Transitional Trademark Use and Exhibit 10.4 to the Registrant's Form 10
License Agreement between Applied Power Inc. Registration Statement dated May 1,
and APW Ltd., dated as of July 21, 2000 2000, as amended
- -----------------------------------------------------------------------------------------------------------------------------------
10.5 Form of Insurance Matters Agreement between Exhibit 10.5 to the Registrant's Form 10
Applied Power Inc. and APW Ltd., dated as of Registration Statement dated May 1,
July 21, 2000 2000, as amended
- -----------------------------------------------------------------------------------------------------------------------------------
10.6 Form of Bill of Sale and Assumption of Exhibit 10.6 to the Registrant's Form 10
Liabilities between Applied Power Inc. and Registration Statement dated May 1,
APW Ltd., dated as of July 21, 2000 2000, as amended
- -----------------------------------------------------------------------------------------------------------------------------------
10.7 Form of Employee Benefits and Compensation Exhibit 10.7 to the Registrant's Form 10
Agreement between Applied Power Inc. and APW Registration Statement dated May 1,
Ltd., dated as of July 21, 2000 2000, as amended
- -----------------------------------------------------------------------------------------------------------------------------------
10.8 Form of Tax Sharing and Indemnification Exhibit 10.8 to the Registrant's Form 10
Agreement between Applied Power Inc. and APW Registration Statement dated May 1,
Ltd., dated as of July 21, 2000 2000, as amended
- -----------------------------------------------------------------------------------------------------------------------------------
10.9 Form of Interim Administrative Services Exhibit 10.9 to the Registrant's Form 10
Agreement between Applied Power Inc. and APW Registration Statement dated May 1,
Ld., dated as of July 21, 2000 2000, as amended
- -----------------------------------------------------------------------------------------------------------------------------------
10.10 Form of Confidentiality and Nondisclosure Exhibit 10.10 to the Registrant's Form
Agreement between Applied Power Inc. and APW 10 Registration Statement dated May 1,
Ltd., dated as of July 21, 2000 2000, as amended
- -----------------------------------------------------------------------------------------------------------------------------------
10.11 Form of Patent Assignment between Applied Exhibit 10.11 to the Registrant's Form
Power Inc. and Wright Line Inc. (n/k/a APW 10 Registration Statement dated May 1,
Ltd.), dated as of July 21, 2000 2000, as amended
- -----------------------------------------------------------------------------------------------------------------------------------
10.12 Change in Control Agreement for Richard Sim Exhibit 10.13 to the Registrant's Form
10 Registration Statement dated May 1,
2000, as amended
- -----------------------------------------------------------------------------------------------------------------------------------
10.13 Change in Control Agreement for Todd Adams Exhibit 10.12 to the Registrant's Form
10 Registration Statement dated May 1,
- -----------------------------------------------------------------------------------------------------------------------------------
74
- -----------------------------------------------------------------------------------------------------------------------------------
Exhibit
No. Description Incorporated Herein by Reference to Filed Herewith
- -----------------------------------------------------------------------------------------------------------------------------------
2000, as amended
- -----------------------------------------------------------------------------------------------------------------------------------
10.14 Change in Control Agreement for Susan Hrobar Exhibit 10.13 to the Registrant's Form
10 Registration Statement dated May 1,
2000, as amended
- -----------------------------------------------------------------------------------------------------------------------------------
10.15 Change in Control Agreement for Kashyap Exhibit 10.14 to the Registrant's Form
Pandya 10 Registration Statement dated May 1,
2000, as amended
- -----------------------------------------------------------------------------------------------------------------------------------
10.16 Change in Control Agreement for Richard D. Exhibit 10.16 to the Registrant's Form
Carroll 10 Registration Statement dated May 1,
2000, as amended
- -----------------------------------------------------------------------------------------------------------------------------------
10.17 Sim Letter assumed by APW Exhibit 10.22 to the Registrant's Form
10 Registration Statement dated May 1,
2000, as amended
- -----------------------------------------------------------------------------------------------------------------------------------
10.18 Consent Agreement dated December 17, 2002 X
among APW Ltd. and various financial
institutions under the Post-Petition
Multi currency Super priority
Credit Agreement
- ------------------------------------------------------------------------------------------------------------------------------------
10.19 Consent Agreement dated December 17, 2002 X
among APW Ltd. and various financial
institutions under the Term Loan Agreement
- ------------------------------------------------------------------------------------------------------------------------------------
10.20 Form of First Amendment to Term Loan Agreement X
dated December 23, 2002 among APW Ltd. and
various financial institutions
- ------------------------------------------------------------------------------------------------------------------------------------
10.21 Form of Second Amendment to Post-Petition X
Agreement dated December 23, 2002 among
APW Ltd. and various financial institutions
- ------------------------------------------------------------------------------------------------------------------------------------
10.22 Term Loan Agreement dated as of July X
31, 2002 among AWP Ltd., various financial
institutions and Bank of America, National
Association, as Administrative Agent
- ------------------------------------------------------------------------------------------------------------------------------------
10.23 First Amendment to Post-Petition Multicurrency X
Super Priority Credit Agreement, dated as of
July 31, 2002
- ------------------------------------------------------------------------------------------------------------------------------------
10.24 Intercreditor Agreement dated as of July 31, 2002 X
- ------------------------------------------------------------------------------------------------------------------------------------
21.1 Subsidiaries of the Registrant X
- -----------------------------------------------------------------------------------------------------------------------------------
99.1 Certification Pursuant to 18 U.S.C. Section X
1350, As Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
- -----------------------------------------------------------------------------------------------------------------------------------
99.2 Certification Pursuant to 18 U.S.C. Section X
1350, As Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
- -----------------------------------------------------------------------------------------------------------------------------------
75