SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended May 31, 2002 Commission file number 333-49957-01
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EAGLE-PICHER HOLDINGS, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 13-3989553
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
11201 North Tatum Blvd., Suite 110, Phoenix, Arizona 85028
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(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code 602-923-7200
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(Not Applicable)
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Former name, former address and former fiscal year,
if changed since last report
EAGLE-PICHER HOLDINGS, INC. IS FILING THIS REPORT VOLUNTARILY IN ORDER TO COMPLY
WITH THE REQUIREMENTS OF THE TERMS OF ITS 9 3/8% SENIOR SUBORDINATED NOTES AND
11 3/4% SERIES B CUMULATIVE EXCHANGEABLE PREFERRED STOCK AND IS NOT REQUIRED TO
FILE THIS REPORT PURSUANT TO EITHER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
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 twelve months, and (2) has been subject to such filing
requirements for the past 90 days. (See explanatory note immediately above.)
Yes No x
--- ---
Indicate by check mark whether the additional registrant, Eagle-Picher
Industries, Inc., 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.
Yes x No
---- ---
963,500 shares of common capital stock, $.01 par value each, were outstanding at
July 15, 2002.
1
TABLE OF ADDITIONAL REGISTRANTS
Jurisdiction of IRS Employer
Incorporation or Commission File Identification
Name Organization Number Number
---- ------------ ------ ------
Eagle-Picher Industries, Inc. Ohio 333-49957 31-0268670
Daisy Parts, Inc. Michigan 333-49957-02 38-1406772
Eagle-Picher Development Co., Inc. Delaware 333-49957-03 31-1215706
Eagle-Picher Far East, Inc. Delaware 333-49957-04 31-1235685
Eagle-Picher Minerals, Inc. Nevada 333-49957-06 31-1188662
Eagle-Picher Technologies, LLC Delaware 333-49957-09 31-1587660
Hillsdale Tool & Manufacturing Co. Michigan 333-49957-07 38-0946293
EPMR Corporation (f/k/a Michigan
Automotive Research Corp.) Michigan 333-49957-08 38-2185909
2
TABLE OF CONTENTS
Page
Number
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements......................................... 4
Condensed Consolidated Statements of Income (Loss)(Unaudited).... 4
Condensed Consolidated Balance Sheets (Unaudited)................ 5
Condensed Consolidated Statements of Cash Flows (Unaudited)...... 7
Notes to Condensed Consolidated Financial Statements (Unaudited). 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 24
Item 3. Quantitative and Qualitative Disclosures About Market Risk... 33
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................ 35
Item 6. Exhibits and Reports on Form 8-K............................. 35
Signatures............................................................ 36
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
EAGLE-PICHER HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)(UNAUDITED)
(Dollars in thousands, except per share amounts)
Three Months Ended Six Months Ended
May 31 May 31
---------------------- ----------------------
2002 2001 2002 2001
---- ---- ---- ----
Net Sales $ 181,327 $ 184,127 $ 340,676 $ 348,156
--------- --------- --------- ---------
Operating Costs and Expenses:
Cost of products sold (exclusive
of depreciation) 140,279 147,499 266,326 277,627
Selling and administrative 21,247 13,611 34,915 24,871
Depreciation 11,714 11,379 22,331 21,632
Amortization of intangibles 4,298 4,149 8,520 8,105
Restructuring 2,998 - 2,998 -
Divestitures 5,845 500 5,970 500
Management compensation - special 2,381 1,889 2,381 1,889
Insurance related losses 3,100 - 3,100 -
Other (36) (62) (222) (269)
--------- --------- --------- ---------
191,826 178,965 346,319 334,355
--------- --------- --------- ---------
Operating Income (Loss) (10,499) 5,162 (5,643) 13,801
Interest expense (11,222) (10,078) (22,303) (20,250)
Other income(expense) 573 (66) 976 839
--------- --------- --------- ---------
Income(Loss)from Continuing Operations
Before Taxes (21,148) (4,982) (26,970) (5,610)
Income Taxes (Benefit) 820 (1,645) 1,205 (1,775)
--------- --------- --------- ---------
Income (Loss) from Continuing Operations (21,968) (3,337) (28,175) (3,835)
Discontinued Operations:
Loss from operations of discontinued
Segment, net of income taxes (benefit) of
$(900) - - - (1,657)
Loss on disposal of business segment
Including provisions of $682 and $1,768
For operating losses during phase-out
Periods, net of income tax benefits of
$1,575 and $9,800 - (2,925) - (18,200)
--------- --------- --------- ---------
Net Income (Loss) $ (21,968) $ (6,262) $ (28,175) $ (23,692)
--------- --------- --------- ---------
Income (Loss) Applicable to
Common Shareholders $ (25,687) $ (9,580) $ (35,406) $ (30,144)
========= ========= ========= =========
Comprehensive Income (Loss) $ (20,776) $ (7,082) $ (26,832) $ (24,589)
========= ========= ========= =========
Basic Loss per Share to Common Shareholders:
Income (Loss) from continuing operations $ (26.63) $ (6.77) $ (36.63) $ (10.45)
Discontinued operations net income (Loss) - (2.97) - (20.17)
--------- --------- --------- ---------
Net Income (Loss) $ (26.63) $ (9.74) $ (36.63) $ (30.62)
========= ========= ========= =========
See accompanying notes to the condensed consolidated financial statements.
4
EAGLE-PICHER HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands)
May 31 November 30
ASSETS 2002 2001
---- ----
CURRENT ASSETS
Cash and cash equivalents $ 22,088 $ 24,620
Receivables, less allowances 54,642 105,622
Inventories:
Raw materials and supplies 21,767 24,737
Work in process 27,167 32,038
Finished goods 12,797 18,569
-------- --------
61,731 75,344
Net assets of operations to be sold 4,298 3,258
Prepaid expenses 11,196 9,552
Deferred income taxes 24,287 24,287
-------- --------
Total current assets 178,242 242,683
-------- --------
PROPERTY, PLANT AND EQUIPMENT 354,622 352,883
Less accumulated depreciation 152,646 136,128
-------- --------
Net property, plant and equipment 201,976 216,755
EXCESS OF ACQUIRED NET ASSETS OVER COST, net of
accumulated amortization of $65,536 and
$57,624, respectively 171,850 179,762
OTHER ASSETS 88,497 86,711
-------- --------
Total Assets $640,565 $725,911
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 83,067 $ 86,297
Long-term debt - current portion 23,935 41,957
Income taxes 783 1,209
Other accrued liabilities 78,120 71,816
-------- --------
Total current liabilities 185,905 201,279
LONG-TERM DEBT - less current portion 356,782 401,169
DEFERRED INCOME TAXES 7,001 6,277
OTHER LONG-TERM LIABILITIES 28,437 27,755
-------- --------
Total Liabilities 578,125 636,480
-------- --------
11-3/4% CUMULATIVE REDEEMABLE EXCHANGEABLE
PREFERRED STOCK; authorized 50,000 shares;
issued and outstanding 14,191 shares 130,317 123,086
-------- --------
5
EAGLE-PICHER HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands)
May 31 November 30
2002 2001
---- ----
SHAREHOLDERS' EQUITY (DEFICIT)
Common stock voting - $.01 par value each:
1,000,000 shares authorized and issued 10 10
Additional paid-in capital 99,991 99,991
Deficit (158,799) (123,393)
Other comprehensive income (loss) (4,387) (5,730)
Treasury Stock, at cost: 36,500 and 27,750 shares (4,692) (4,533)
--------- ---------
Total Shareholders' Equity (Deficit) (67,877) (33,655)
--------- ---------
Total Liabilities and Shareholders'
Equity (Deficit) $ 640,565 $ 725,911
========= =========
See accompanying notes to the condensed consolidated financial statements.
6
EAGLE-PICHER HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
Six Months Ended
May 31
--------------------
2002 2001
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(28,175) $(23,692)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 32,456 31,360
Provision for discontinued operations - 18,200
Divestitures 5,970 500
Changes in assets and liabilities:
Receivables 49,822 (14,492)
Inventories 8,973 5,546
Accounts payable (2,692) 7,796
Accrued liabilities 3,290 (1,790)
Other (8,729) (1,562)
-------- --------
Net cash provided by operating activities 60,915 21,866
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of divisions 6,300 -
Capital expenditures (8,918) (22,344)
Other 1,082 (2,022)
-------- --------
Net cash provided by (used in) investing activities
(1,536) (24,366)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Reduction of long-term debt (18,520) (9,548)
Net borrowings (repayments) under revolving credit agreements (43,946) 11,556
Other 555 (205)
-------- --------
Net cash provided by (used in) financing activities (61,911) 1,803
-------- --------
NET CASH PROVIDED BY DISCONTINUED OPERATIONS - 1,540
-------- --------
7
EAGLE-PICHER HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
Six Months Ended
May 31
----------------
2002 2001
---- ----
Net increase (decrease) in cash and cash equivalents (2,532) 843
Cash and cash equivalents, beginning of period 24,620 7,467
-------- --------
Cash and cash equivalents, end of period $ 22,088 $ 8,310
======== ========
Supplemental cash flow information: 2002 2001
---- ----
Cash paid during the three months ended May 31:
Interest paid $ 14,379 $ 14,468
Income taxes paid (refunded), net $ (5,074) $ (135)
Cash paid during the six months ended May 31:
Interest paid $ 19,382 $ 18,704
Income taxes paid (refunded), net $ (4,801) $ (1,902)
See accompanying notes to the condensed consolidated financial statements.
8
EAGLE-PICHER HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
A. BASIS OF REPORTING FOR INTERIM FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements of
Eagle-Picher Holdings, Inc. (the "Company") have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission ("SEC"). Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make the information presented not misleading. These financial statements should
be read in conjunction with the financial statements and notes thereto for the
fiscal year ended November 30, 2001 presented in the Company's Form 10-K filed
with the SEC on February 15, 2002, as amended on March 8, 2002.
The financial statements presented herein reflect all adjustments
(consisting of normal and recurring accruals) which, in the opinion of
management, are necessary to fairly state the results of operations for the
three months and six months ended May 31, 2002 and May 31, 2001. Results of
operations for interim periods are not necessarily indicative of results to be
expected for an entire year. Certain prior year amounts have been reclassified
to conform with current year financial statement presentation.
B. BASIC EARNINGS PER SHARE
The calculation of net income (loss) per share is based upon the average
number of common shares outstanding, which was 964,500 in the three months ended
May 31, 2002, 966,458 in the six months ended May 31, 2002, 983,500 in the three
months ended May 31, 2001 and 984,333 in the six months ended May 31, 2001. The
net loss applicable to common shareholders represents the net income reduced by,
or the net loss increased by, accreted dividends on preferred stock of $3,719
and $7,231 for the three and six months ended May 31, 2002, respectively and
$3,318 and $6,452 for the three and six months ended May 31, 2001, respectively.
No potential common stock was outstanding during the three and six months ended
May 31, 2002 or 2001.
C. DISCONTINUED OPERATIONS
The assets and business of the Construction Equipment Division (CED),
which comprised the Machinery Segment, were sold December 14, 2001 as noted in
the previous 10K filing for the year ended November 30, 2001. Pursuant to the
transaction, $5,600 of liabilities were assumed or retained as of November 30,
2001. At May 31, 2002 the remaining balance of those liabilities was
approximately $3,340 recorded in Other Accrued Liabilities. The results of the
Machinery Segment's operations were reported separately as discontinued
operations throughout 2001.
Inventory of approximately $1,416 remains in the net assets of operations
to be sold at May 31, 2002, which the purchaser of CED is obligated to purchase
during 2002.
D. RESTRUCTURING
In November 2001, the Company recorded asset write-downs and other charges
totaling $14,163 in connection with a restructuring plan (the "Plan"). The Plan
primarily relocates
9
the Company's corporate headquarters from Cincinnati, Ohio to Phoenix, Arizona
and closes three plants in the Technologies segment as it eliminates certain
product lines in the Special Purpose Battery category. The costs related to the
Plan, which were recognized as a separate component of operating expenses in the
fourth quarter of 2001, included approximately $5,425 related to the facilities,
$5,044 related to involuntary severance of approximately 165 employees and
$3,694 in other costs to exit business activities.
Facility costs include adjustments of $3,575 recorded against Property
Plant and Equipment for asset impairments and adjustments of $1,850 recorded in
Other Accrued Liabilities for future lease commitments, less estimated proceeds
received from subleasing.
The Company has determined that a portion of the assets in its over-funded
pension plan can be made available to pay severance costs related to the
restructuring plan. The Company has amended the pension plan and has provided
new or amended severance plans to allow for such payments. Approximately $2,556
of severance has been paid out or is expected to be paid out of the pension
plan. This resulted in a reduction of the restructuring provision originally
recorded in the fourth quarter of 2001.
On May 31, 2002 the Company announced it would exit the Gallium business
in its Technologies segment due to the downturn in the fiber-optic,
tele-communication and semiconductor markets, the primary markets for its
Gallium products. This action resulted in a $5,482 charge to restructuring
expense in the quarter ended May 31, 2002. This charge consists of an inventory
impairment totaling $2,943 representing the loss to be incurred from the
liquidation of current inventory. The charge also consists of an accrual
totaling $2,339 recorded in Other Accrued Liabilities representing the loss to
be incurred from the liquidation of inventory to be purchased under firm
purchase commitments, lease impairments and severance. A $200 asset impairment
was recorded against Property, Plant and Equipment at May 31, 2002.
An analysis of the asset impairment, accrued liabilities and amounts
utilized related to the plans is as follows:
FACILITIES SEVERANCE OTHER TOTAL
---------- --------- ----- -----
Original Charges $ 5,425 $ 5,044 $ 3,694 $ 14,163
Amounts Utilized - (202) - (202)
-------- -------- -------- --------
Balance at November 30, 2001 5,425 4,842 3,694 13,961
Amounts Utilized (29) (910) - (939)
-------- -------- -------- --------
Balance at February 28, 2002 5,396 3,932 3,694 13,022
-------- -------- -------- --------
Amounts Utilized (172) (760) (1,419) (2,351)
Amounts Added/(Reversed) - (2,664) 181 (2,483)
New Restructuring - 15 5,467 5,482
Amounts offset against
asset values (3,575) - (3,143) (6,718)
-------- -------- -------- --------
Balance at May 31, 2002 $ 1,649 $ 523 $ 4,780 $ 6,952
======== ======== ======== ========
E: DIVESTITURES
The $17,766 in reserves previously established for divestitures as noted
in the Company's Annual Report on Form 10-K for the fiscal year ended November
30, 2001, totaled approximately $19,990 at May 30, 2002. The activity in these
reserves, recorded in Other Accrued Liabilities, for the six months ended May
31, 2002 was $940 in expenditures and approximately $3,164 in additional
accruals recorded for costs related to certain litigation issues and
environmental remediation.
In the quarter ended May 31, 2002 the Company signed a letter of intent to
sell certain assets and liabilities of the Precision Products business in its
Technologies segment to a group of employees and management personnel. The
Company recorded a $2,806 estimated
10
loss on sale recorded in the Divestitures line item on the Statement of Income.
The net asset held for sale after this write down, is $2,882.
F: ACCOUNTS RECEIVABLE ASSET BACKED SECURITIZATION
In January 2002 the Company entered into an agreement with a major U.S.
financial institution to sell an undivided interest in certain receivables of
the Company and certain of its domestic subsidiaries through an unconsolidated
qualifying special purpose entity, Eagle-Picher Funding Corporation ("EPFC").
Initially $47,000 of proceeds from this new facility were used to payoff amounts
outstanding under the Company's existing Receivables Agreement with its wholly
owned subsidiary Eagle-Picher Acceptance Corporation on the closing date and for
other corporate purposes. The agreement involves the sale of receivables of the
Company and certain of its domestic subsidiaries to EPFC, which in turn sells an
undivided beneficial interest in a revolving pool of receivables to the
financial institution. EPFC has no recourse against the Company and its
subsidiaries for failure of the debtors to pay when due. The agreement provides
for continuation of the program on a revolving basis for approximately a
three-year period.
The Company accounts for the securitization of accounts receivables in
accordance with SFAS No. 140 "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, a replacement of FASB
Statement 125." At the time the receivables are sold, the balances are removed
from the condensed consolidated balance sheets. Costs associated with the
transactions, primarily related to the discount, are charged to the condensed
consolidated statement of income (loss).
In conjunction with the initial transaction in which $82,475 of
receivables were sold to EPFC, the Company incurred charges of approximately
$1,500 which are included in Interest Expense on the condensed consolidated
statements of income (loss). The Company continues to service the sold
receivables and receives monthly servicing fees from EPFC of approximately 1%
(annually) of the average balance of the receivables pool. The Company's
retained interest in the receivables are carried at fair value which is
estimated as the net realizable value. The net realizable value considers the
collection period and includes an estimated provision for credit losses and
returns and allowances.
At May 31, 2002, the Company's retained interest, including a service fee
receivable of $89, was approximately $32,900 and the revolving pool of
receivables that the Company services totaled approximately $85,983. The
outstanding balance of the undivided interest sold to the financial institution
recorded on EPFC was $52,350 at May 31, 2002. During the quarter and six months
ended May 31, 2002, proceeds from new securitizations outside of the initial
sale, were $165,430 and $274,505 respectively and proceeds from collections
reinvested in securitizations totaled $153,498 and $258,003 respectively. The
effective interest rate in the securitization was approximately 2.9%.
G. INSURANCE RELATED LOSSES
In the second quarter ended May 31, 2002, the Company recorded a charge
against an insurance receivable related to the fire in its Harrisonville,
Missouri bulk pharmaceutical manufacturing plant. This resulted from an
anticipated shortfall on insurance proceeds due to the insurance underwriter
contesting coverage. The fire occurred in the third quarter of 2001 in
the Technologies segment.
H. LEGAL MATTERS
For other information on legal proceedings, see Item 3 of the Company's
Annual Report on Form 10-K for the fiscal year ended November 30, 2001.
11
On January 25, 1996, Richard Darrell Peoples, a former employee of
Eagle-Picher Industries, Inc., filed a Qui Tam suit under seal in the United
States District Court for the Western District of Missouri (the "Missouri
Court"). A Qui Tam suit is a lawsuit brought by a private individual pursuant to
federal statute, allegedly on behalf of the U.S. Government. The U.S. Government
has declined the opportunity to intervene or take control of this Qui Tam suit.
EPI became aware of the suit on October 20, 1997, when it was served on EPI,
after it had been unsealed. The suit involves allegations of irregularities in
testing procedures in connection with certain U.S. Government contracts. The
allegations are similar to allegations made by the former employee, and
investigated by outside counsel for EPI, prior to the filing of the Qui Tam
suit. Outside counsel's investigation found no evidence to support any of the
employee's allegations, except for some inconsequential expense account matters.
EPI, which believes that the U.S. Government did not incur any expense as a
result of those matters, reported to the U.S. Government the employee's
allegations and the results of outside counsel's investigation. The employee
also initiated a different action against EPI in 1996 for wrongful termination,
in which he alleged many of the same acts complained of in the Qui Tam suit. The
Missouri Court dismissed that action with prejudice in October 1996. On June 16,
1998, the Missouri Court granted EPI's Motion to Dismiss the Qui Tam suit. The
Court, however, allowed Mr. Peoples to amend his complaint. Mr. Peoples filed an
amended complaint, and EPI's Motion to Dismiss the Amended Complaint was denied
on January 20, 1999. Since that time the case has been in a discovery phase. EPI
intends to contest this suit vigorously. EPI does not believe that resolution of
this lawsuit will have a material adverse effect on EPI's financial condition,
results of operations or cash flows.
On May 8, 1997, Caradon Doors and Windows, Inc. ("Caradon"), filed suit
against the Company's wholly owned subsidiary, Eagle-Picher Industries, Inc.
("EPI") in the United States District Court for the Northern District of Georgia
(the "Georgia Court") alleging breach of contract, negligent misrepresentation,
and contributory infringement and seeking contribution and indemnification in an
amount not less than $10 million (the "Caradon Suit"). The Caradon suit arose
out of patent infringement litigation between Caradon and Therma-Tru Corporation
extending over the 1989-1996 time period, the result of which was for Caradon to
be held liable for patent infringement in an amount believed to be in excess of
$10 million. In June 1997, EPI filed a Motion with the United States Bankruptcy
Court for the Southern District of Ohio, Western Division, ("Bankruptcy Court")
seeking an order enforcing EPI's plan of reorganization as confirmed by the
Bankruptcy Court in November 1996 (the "Plan") against Caradon, and enjoining
the Caradon suit from going forward. The Bankruptcy Court in a decision entered
on December 24, 1997, held that the Caradon suit did violate the Plan and
enjoined Caradon from pursuing the Caradon suit. Caradon appealed the Bankruptcy
Court's decision to the United States District Court for the Southern District
of Ohio (the "District Court"), and in a decision entered on February 3, 1999,
the District Court reversed and remanded the matter back to the Bankruptcy
Court. The Bankruptcy Court held a hearing on this matter on September 24 and
25, 2001, and on May 9, 2002 again held that the Caradon suit violated the Plan
and therefore Caradon's claims had been discharged and enjoined Caradon from
pursuing the Caradon Suit. Caradon has appealed this decision to the District
Court. EPI intends to contest this suit vigorously. EPI does not believe that
resolution of this suit will have a material adverse effect on EPI's financial
condition, results of operations or cash flows.
On December 1, 1999, Eagle-Picher Technologies, LLC ("EPT") acquired the
depleted zinc distribution business (the "DZ Business") of Isonics Corporation
("Isonics") for approximately $8.2 million, payable $6.7 million at closing and
$1.5 million in three installments of $500,000 each payable on the first three
anniversaries of the closing. At the time of the acquisition, a single customer
represented approximately 55% of the DZ Business. Following the completion of
the acquisition, this customer informed EPT that it would no longer be
purchasing depleted zinc from an outside supplier. EPT initiated binding
arbitration against Isonics on March 26, 2001 with the American Arbitration
12
Association in Dallas, Texas pursuant to contractual dispute resolution
procedures. EPT's arbitration demand is based on breach of representations and
warranties in the purchase and sale agreement for the DZ Business as well as
fraud and negligent misrepresentation, and seeks to recover damages in excess of
$10 million and other remedies. While the Company believes it has a meritorious
claim against Isonics, there can be no assurance that the Company will obtain
any recovery as a result of this claim.
In connection with the purchase of the DZ Business, EPT agreed to sell 200
kg of isotopically purified silicon-28 to Isonics. Due to various factors, EPT
has not yet delivered any silicon-28 to Isonics. Isonics has asserted a
counterclaim against EPT in the DZ Business arbitration described above for
failure to deliver silicon-28, seeking damages in excess of $10 million. EPT
believes that any obligation to deliver silicon-28 has been excused by, among
other things, a force majeure clause in the purchase and sale agreement for the
DZ Business. Contemporaneously with the purchase and sale of the DZ Business,
EPT and Isonics entered into a supply agreement (the "Supply Agreement")
pursuant to which EPT agreed that, commencing upon delivery of 200 kg of
silicon-28, EPT would devote the capacity of a pilot plant used to produce such
material to producing silicon-28 and sell all silicon-28 produced in such pilot
plant and meeting certain specifications, as well as any silicon-29 or
silicon-30 actually produced as a byproduct, to Isonics for a ten year term.
Isonics amended its counterclaim in the DZ Business arbitration to assert a
claim that the Supply Agreement requires EPT to produce a certain amount of
silicon-28, silicon-29 and silicon-30 and alleging damages of not less than $75
million for anticipatory breach of such alleged obligation. EPT believes that
the terms of the Supply Agreement and applicable law clearly establish that the
Supply Agreement does not impose any obligation to produce any quantity of
silicon-28, silicon-29 or silicon-30 and that Isonics' claims are without merit.
Isonics also amended its counterclaim to allege that EPT's parent company,
Eagle-Picher Industries, Inc. ("EPI") is liable for any damages of EPT under an
"alter ego" theory, a claim which EPI and EPT believe is also without merit. EPT
and EPI intend to assert other defenses as well and to defend this counterclaim
vigorously. EPT continues to explore alternative processes that may enable it to
produce silicon-28, but there is no assurance that such efforts will be
successful.
EPI, EPT and Isonics filed motions for summary judgement with the
arbitration panel. The panel granted EPI's motions for summary judgement and
denied the other motions for summary judgement. An arbitration hearing is
scheduled for the week of July 29, 2002.
On September 25, 2001, Andries Ruijssenaars, former President and Chief
Executive Officer of the Company, filed a lawsuit against the Company, certain
of its directors and ABN AMRO Bank in the U.S. District Court for the Southern
District of Ohio, Western Division, relating to the purchase of Mr.
Ruijssenaar's common stock in the Company and his benefits under the EPI's
Supplemental Executive Retirement Plan (SERP). Mr. Ruijssenaars claims that the
per share price for 2001 under the Company's Incentive Stock Plan, which is
generally applicable to all Plan participants and results in approximately $2.8
million for Mr. Ruijssenaars' 30,000 shares of common stock, was not correctly
determined and claims approximately $4.7 million for his shares. Mr.
Ruijssenaars' lawsuit also challenges a rule adopted by the committee for the
Plan, deferring the obligation of the Company to repurchase stock in the event
contracts to which the Company is a party, including its debt agreements,
restrict such repurchase. Mr. Ruijssenaars' lawsuit also challenges EPI's
determination of benefits under the SERP and claims that EPI is obligated to
purchase an annuity for his additional SERP benefit accrued after 2000 based on
theories of promissory estoppel, equitable estoppel, breach of contract and
ERISA. Mr. Ruijssenaars has also asserted claims of fraud, conspiracy, breach of
fiduciary duty and conversion. Mr. Ruijssenaars seeks approximately $2.3 million
with respect to the SERP, as well as punitive damages. The Company has reached a
tentative agreement with Mr. Ruijssenaars to settle this litigation, subject to
negotiation of documentation. If such agreement is not finalized, the Company
intends to contest this suit vigorously. The Company does not
13
believe that resolution of this lawsuit will have a material adverse effect on
its financial condition, result of operations or cash flows.
On October 30, 2001, GMAC Business Credit, LLC (GMAC) and Eagle Trim, Inc.
filed a lawsuit in the United States District Court for the Eastern District of
Michigan, Southern Division, against EPI arising out of the sale of EPI's former
automotive interior trim division to Eagle Trim. In connection with that sale,
EPI guaranteed to GMAC, which funded the acquisition, that approximately $3.9
million of receivables relating to tooling purchased by EPI on behalf of
customers would be paid by November 2001. Eagle Trim ceased operations during
2001, at which time Eagle Trim and GMAC allege that approximately $2.7 million
of the tooling receivables had not been collected and did not exist at the time
of the sale. GMAC claims $2.7 million plus interest on the guaranty, and GMAC
and Eagle Trim have asserted claims for fraud and misrepresentation and are
seeking $24.5 million in damages. EPI is currently investigating these
allegations, but denies any fraud or misrepresentation. EPI intends to contest
this suit vigorously. EPI does not believe that resolution of this lawsuit will
have a material adverse effect on EPI's financial condition, results of
operations or cash flows.
In addition, the Company is involved in routine litigation, environmental
proceedings and claims pending with respect to matters arising out of the normal
course of business. In management's opinion, the ultimate liability resulting
from all claims, individually or in the aggregate, will not materially affect
the Company's consolidated financial position, results of operations or cash
flows.
I. SEGMENT REPORTING
The Company has the following reportable segments: Automotive,
Technologies and Minerals. The method for determining what information to report
is based on the way management organizes the operating segments within the
Company for making operational decisions and assessing performance. The
operations in the Automotive Segment provide mechanical and structural parts and
raw materials for passenger cars, vans, trucks and sport utility vehicles for
original equipment manufacturers and replacement markets. The operations in the
Technologies Segment produce a variety of products for the aerospace, nuclear,
telecommunications, electronics, and other industrial markets. The operations in
the Minerals Segment mine and refine diatomaceous earth products.
The accounting policies used to develop segment information correspond to
those disclosed in the Company's consolidated financial statements for the year
ended November 30, 2001 included in Form 10-K. Sales between segments are not
material. The Company does not allocate certain corporate expenses to its
segments.
Information about reported segment income or loss is as follows for the
three months ended May 31, 2002 and 2001:
Three Months Ended Six Months Ended
May 31 May 31
---------------------- -----------------------
2002 2001 2002 2001
--------- --------- --------- ---------
(In thousands of dollars)
Net Sales
Automotive $ 116,754 $ 114,751 $ 220,232 $ 215,538
Technologies 47,839 52,460 88,360 100,327
Minerals 16,734 16,916 32,084 32,291
--------- --------- --------- ---------
14
Total $ 181,327 $ 184,127 $ 340,676 $ 348,156
========= ========= ========= =========
Income (Loss) from Continuing
Operations Before Taxes:
Automotive $ (2,061) $ (2,739) $ (4,456) $ (3,386)
Technologies (12,817) (1,115) (16,010) (897)
Minerals 2,610 191 2,933 (297)
Divested Operations (5,845) (500) (5,970) (500)
Corporate (3,035) (819) (3,467) (530)
--------- --------- --------- ---------
Total $ (21,148) $ (4,982) $ (26,970) $ (5,610)
========= ========= ========= =========
Depreciation and Amortization:
Automotive $ 10,958 $ 10,133 $ 20,604 $ 19,383
Technologies 3,616 3,776 7,275 7,363
Minerals 1,328 1,390 2,748 2,740
Corporate 110 229 224 251
--------- --------- --------- ---------
Total $ 16,012 $ 15,528 $ 30,851 $ 29,737
========= ========= ========= =========
Interest Expense:
Automotive $ 4,961 $ 5,310 $ 10,227 $ 10,431
Technologies 3,584 3,610 7,082 7,172
Minerals 752 785 1,457 1,565
Corporate/Intersegment 1,925 (373) 3,537 1,082
--------- --------- --------- ---------
Total $ 11,222 $ 10,078 $ 22,303 $ 20,250
========= ========= ========= =========
J. SUPPLEMENTAL GUARANTOR INFORMATION
The indebtedness of EPI includes a syndicated secured loan facility
("Credit Agreement") and $220.0 million in senior subordinated notes
("Subordinated Notes"). Both the Credit Agreement and the Subordinated Notes are
guaranteed on a full, unconditional and joint and several basis by the Company
and certain of EPI'S wholly-owned domestic subsidiaries ("Subsidiary
Guarantors") including Carpenter Enterprises Ltd., which was acquired in 1999.
Management has determined that full financial statements and other disclosures
concerning EPI or the Subsidiary Guarantors would not be material to investors
and such financial statements are not presented. The following supplemental
condensed combining financial statements present information regarding EPI, the
Subsidiary Guarantors and the subsidiaries that did not guarantee the debt.
EPI and the Subsidiary Guarantors are subject to restrictions on the
payment of dividends under the terms of both the Credit Agreement and the
Indenture supporting the Subordinated Notes, both of which were filed with the
Company's Form S-4 Registration Statement No. 333-49957-01 filed on April 11,
1998 and amended on May 20, 1998 and June 5, 1998, and both of which were
incorporated by reference to the Company's Form 10-K which was filed on February
15, 2002 and amended on March 8, 2002.
15
EAGLE-PICHER HOLDINGS,INC.
SUPPLEMENTAL CONDENSED COMBINING STATEMENTS OF INCOME (LOSS) (UNAUDITED)
THREE MONTHS ENDED MAY 31, 2002
GUARANTORS
------------------------ NON-GUARANTORS
EAGLE-PICHER SUBSIDIARY FOREIGN
ISSUER HOLDINGS, INC. GUARANTORS SUBSIDIARIES ELIMINATIONS TOTAL
------ -------------- ---------- ------------ ------------ -----
(IN THOUSANDS OF DOLLARS)
Net Sales
Customers $ 13,065 $ - $ 145,484 $ 22,778 $ - $ 181,327
Intercompany 3,987 - 3,531 2 (7,520) -
Operating Costs and Expenses:
Cost of products sold (exclusive 10,140 - 119,538 18,121 (7,520) 140,279
of depreciation)
Selling & administrative 5,870 2 13,264 2,164 (53) 21,247
Intercompany charges (3,210) - 2,516 641 53 -
Depreciation 767 - 10,087 860 - 11,714
Amortization of intangibles 932 - 3,060 306 - 4,298
Management compensation-special 2,381 - - - - 2,381
Insurance related losses - - 3,100 - - 3,100
Restructuring (2,483) - 5,481 - - 2,998
Divestitures 3,039 - 2,806 - - 5,845
Other (3) - (33) - - (36)
--------- --------- --------- --------- --------- ---------
Total 17,433 2 159,819 22,092 (7,520) 191,826
--------- --------- --------- --------- --------- ---------
Operating Income (Loss) (381) (2) (10,804) 688 - (10,499)
Other Income (Expense)
Interest expense (3,394) - (6,534) (1,607) 313 (11,222)
Other income (expense) 283 - 400 203 (313) 573
Equity in earnings (loss) of
consolidated subsidiaries (15,742) (21,966) 589 - 37,119 -
--------- --------- --------- --------- --------- ---------
Income (Loss) from Continuting (19,234) (21,968) (16,349) (716) 37,119 (21,148)
Operations Before Taxes
Income Taxes (Benefit) - - - 820 - 820
--------- --------- --------- --------- --------- ---------
Income (Loss) from Continuing
Operations (19,234) (21,968) (16,349) (1,536) 37,119 (21,968)
Discontinued Operations - - - - - -
--------- --------- --------- --------- --------- ---------
Net Income (Loss) $ (19,234) $ (21,968) $ (16,349) $ (1,536) $ 37,119 $ (21,968)
========= ========= ========= ========= ========= =========
16
EAGLE-PICHER HOLDINGS,INC.
SUPPLEMENTAL CONDENSED COMBINING STATEMENTS OF INCOME (LOSS) (UNAUDITED)
SIX MONTHS ENDED MAY 31, 2002
GUARANTORS
------------------------ NON-GUARANTORS
EAGLE-PICHER SUBSIDIARY FOREIGN
ISSUER HOLDINGS, INC. GUARANTORS SUBSIDIARIES ELIMINATIONS TOTAL
------ -------------- ---------- ------------ ------------ -----
(IN THOUSANDS OF DOLLARS)
Net Sales
Customers $ 24,700 $ - $ 272,249 $ 43,727 $ - $ 340,676
Intercompany 7,610 - 6,357 4 (13,971) -
Operating Costs and Expenses:
Cost of products sold (exclusive 18,652 - 226,588 35,057 (13,971) 266,326
of depreciation)
Selling & administrative 12,169 2 18,763 4,081 (100) 34,915
Intercompany charges (5,860) - 4,982 778 100 -
Depreciation 1,914 - 18,791 1,626 - 22,331
Amortization of intangibles 1,866 - 6,101 553 - 8,520
Management compensation-special 2,381 - - - - 2,381
Insurance related losses - - 3,100 - - 3,100
Restructuring (2,483) - 5,481 - - 2,998
Divestitures 3,164 - 2,806 - - 5,970
Other (7) - (215) - - (222)
--------- --------- --------- --------- --------- ---------
Total 31,796 2 286,397 42,095 (13,971) 346,319
--------- --------- --------- --------- --------- ---------
Operating Income (Loss) 514 (2) (7,791) 1,636 - (5,643)
Other Income (Expense)
Interest expense (6,325) - (14,056) (2,880) 958 (22,303)
Other income (expense) 761 - 804 369 (958) 976
Equity in earnings (loss) of
consolidated subsidiaries (19,812) (28,173) 1,168 - 46,817 -
--------- --------- --------- --------- --------- ---------
Income (Loss) from Continuting (24,862) (28,175) (19,875) (875) 46,817 (26,970)
Operations Before Taxes
Income Taxes (Benefit) - - 12 1,193 - 1,205
--------- --------- --------- --------- --------- ---------
Income (Loss) from Continuing
Operations (24,862) (28,175) (19,887) (2,068) 46,817 (28,175)
Discontinued Operations - - - - - -
--------- --------- --------- --------- --------- ---------
Net Income (Loss) $ (24,862) $ (28,175) $ (19,887) $ (2,068) $ 46,817 $ (28,175)
========= ========= ========= ========= ========= =========
17
EAGLE-PICHER HOLDINGS, INC.
SUPPLEMENTAL CONDENSED COMBINED BALANCE SHEETS (UNAUDITED)
AS OF MAY 31, 2002
GUARANTORS
------------------------ NON-GUARANTORS
EAGLE-PICHER SUBSIDIARY FOREIGN
ISSUER HOLDINGS, INC. GUARANTORS SUBSIDIARIES ELIMINATIONS TOTAL
------ ------------- ---------- ------------ ------------ -----
(IN THOUSANDS OF DOLLARS)
Assets
Cash and cash equivalents $ 17,286 $ 1 $ 440 $ 4,361 $ - $ 22,088
Receivables, net 5,072 - 32,252 17,318 - 54,642
Intercompany accounts receivable 1,723 - 4,532 113 (6,368) -
Inventories 3,869 - 46,192 12,819 (1,149) 61,731
Net assets of operations to be sold 245 - 4,053 - - 4,298
Prepaid expenses 1,718 - 7,630 3,055 (1,207) 11,196
Deferred income taxes 24,287 - - - - 24,287
--------- --------- --------- --------- --------- ---------
Total current assets 54,200 1 95,099 37,666 (8,724) 178,242
Property, Plant & Equipment, net 25,303 - 146,336 30,369 (32) 201,976
Investment in Subsidiaries 82,874 66,897 10,090 - (159,861) -
Excess of Acquired Net Assets Over Cost, net 40,075 - 114,499 20,415 (3,139) 171,850
Other Assets 74,313 - 21,658 12,706 (20,180) 88,497
--------- --------- --------- --------- --------- ---------
Total Assets $ 276,765 $ 66,898 $ 387,682 $ 101,156 $(191,936) $ 640,565
========= ========= ========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Accounts payable $ 14,642 $ - $ 63,463 $ 4,962 $ - $ 83,067
Intercompany accounts payable - - - 5,572 (5,572) -
Long-term debt - current portion 21,665 - - 2,270 - 23,935
Income taxes (392) - - 1,175 - 783
Other current liabilities 47,532 - 27,118 3,526 (56) 78,120
--------- --------- --------- --------- --------- ---------
Total current liabilities 83,447 - 90,581 17,505 (5,628) 185,905
Long-term Debt - less current portion 356,782 - - 10,086 (10,086) 356,782
Deferred Income Taxes 9,363 - - - (2,362) 7,001
Other Long-Term Liabilities 26,173 22 970 1,272 - 28,437
--------- --------- --------- --------- --------- ---------
Total Liabilities 475,765 22 91,551 28,863 (18,076) 578,125
Intercompany Accounts (251,551) - 240,851 38,643 (27,943) -
11 3/4% Cumulative Redeemable
Exchangeable Preferred Stock - 130,317 - - - 130,317
Shareholders' Equity (Deficit) 52,551 (63,441) 55,280 33,650 (145,917) (67,877)
--------- --------- --------- --------- --------- ---------
Total Liabilities and Shareholders'
Equity (Deficit) $ 276,765 $ 66,898 $ 387,682 $ 101,156 $(191,936) $ 640,565
========= ========= ========= ========= ========= =========
18
EAGLE-PICHER HOLDINGS, INC.
SUPPLEMENTAL CONDENSED COMBINING STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED MAY 31, 2002
<Table>
<Caption>
GUARANTORS
------------------------- NON-GUARANTORS
EAGLE-PICHER SUBSIDIARY FOREIGN
ISSUER HOLDINGS, INC. GUARANTORS SUBSIDIARIES ELIMINATIONS TOTAL
------ -------------- ---------- ------------- ------------ -----
(IN THOUSANDS OF DOLLARS)
Cash Flows From Operating Activities:
Net Income (Loss) $(24,862) $(28,175) $(19,887) $ (2,068) $ 46,817 $(28,175)
Adjustments to reconcile net income
(loss) to cash provided by (used in)
operating activities:
Equity in earnings (loss) of consolidated
subsidiaries 19,812 28,173 (1,168) -- (46,817) --
Depreciation and amortization 5,385 -- 24,892 2,179 -- 32,456
Divestitures 3,164 -- 2,806 -- -- 5,970
Changes in assets and liabilities, net of effect --
of acquisitions and divestitures 44,016 162 57,975 (4,478) (47,011) 50,664
-------- -------- -------- -------- -------- --------
Net cash provided by (used in)
operating activities 47,515 160 64,618 (4,367) (47,011) 60,915
-------- -------- -------- -------- -------- --------
Cash Flows From Investing Activities:
Proceeds from sales of divisions 6,300 -- -- -- -- 6,300
Capital expenditures (251) -- (7,494) (1,173) -- (8,918)
Other 268 -- 1,675 (861) -- 1,082
-------- -------- -------- -------- -------- --------
Net cash provided by (used in)
investing activities 6,317 -- (5,819) (2,034) -- (1,536)
-------- -------- -------- -------- -------- --------
Cash Flows From Financing Activities:
Reduction of long-term debt (18,520) -- (42,452) -- 42,452 (18,520)
Net borrowings(repayments)under revolving
credit agreements (30,500) -- (13,522) 76 -- (43,946)
Other -- (160) 658 57 -- 555
-------- -------- -------- -------- -------- --------
Net cash provided by (used in)
financing activities (49,020) (160) (55,316) 133 42,452 (61,911)
-------- -------- -------- -------- -------- --------
Increase (decrease) in cash and
cash equivalents 4,812 -- 3,483 (6,268) (4,559) (2,532)
Intercompany accounts (4,671) -- (3,514) 3,693 4,492 --
Cash and cash equivalents,
beginning of period 17,145 1 471 6,936 67 24,620
-------- -------- -------- -------- -------- --------
Cash and cash equivalents,
end of period $ 17,286 $ 1 $ 440 $ 4,361 $ -- $ 22,088
======== ======== ======== ======== ======== ========
19
EAGLE-PICHER HOLDINGS,INC.
SUPPLEMENTAL CONDENSED COMBINING STATEMENTS OF INCOME (LOSS) (UNAUDITED)
THREE MONTHS ENDED MAY 31, 2001
GUARANTORS
------------------------ NON-GUARANTORS
EAGLE-PICHER SUBSIDIARY FOREIGN
ISSUER HOLDINGS, INC. GUARANTORS SUBSIDIARIES ELIMINATIONS TOTAL
------ -------------- ---------- ------------ ------------ -------
(IN THOUSANDS OF DOLLARS)
Net Sales
Customers $ 11,914 $ - $ 149,951 $ 22,262 $ - $ 184,127
Intercompany 3,520 - 3,652 - (7,172) -
Operating Costs and Expenses:
Cost of products sold (exclusive 9,123 - 128,043 17,712 (7,379) 147,499
of depreciation)
Selling & administrative 5,979 - 5,647 2,072 (87) 13,611
Intercompany charges (1,792) - 1,753 (48) 87 -
Depreciation 1,029 - 9,389 961 - 11,379
Amortization of intangibles 930 - 2,860 359 - 4,149
Other 2,378 - (44) (7) - 2,327
--------- --------- --------- --------- --------- ---------
Total 17,647 - 147,648 21,049 (7,379) 178,965
--------- --------- --------- --------- --------- ---------
Operating Income (Loss) (2,213) - 5,955 1,213 207 5,162
Other Income (Expense)
Interest expense (2,717) - (8,872) (480) 1,991 (10,078)
Other income (expense) 943 - 1,607 (56) (2,560) (66)
Equity in earnings (loss) of
consolidated subsidiaries (809) (6,261) 40 - 7,030 -
--------- --------- --------- --------- --------- ---------
Income (Loss) from Continuting (4,796) (6,261) (1,270) 677 6,668 (4,982)
Operations Before Taxes
Income Taxes (Benefit) (2,512) - (16) 883 - (1,645)
--------- --------- --------- --------- --------- ---------
Income (Loss) from Continuing
Operations (2,284) (6,261) (1,254) (206) 6,668 (3,337)
Discontinued Operations (2,925) - - (10) 10 (2,925)
--------- --------- --------- --------- --------- ---------
Net Income (Loss) $ (5,209) $ (6,261) $ (1,254) $ (216) $ 6,678 $ (6,262)
========= ========= ========= ========= ========= =========
20
EAGLE-PICHER HOLDINGS,INC.
SUPPLEMENTAL CONDENSED COMBINING STATEMENTS OF INCOME (LOSS) (UNAUDITED)
SIX MONTHS ENDED MAY 31, 2001
GUARANTORS
------------------------ NON-GUARANTORS
EAGLE-PICHER SUBSIDIARY FOREIGN
ISSUER HOLDINGS, INC. GUARANTORS SUBSIDIARIES ELIMINATIONS TOTAL
------ -------------- ---------- ------------ ------------ -----
(IN THOUSANDS OF DOLLARS)
Net Sales
Customers $ 24,784 $ - $ 277,381 $ 45,991 $ - $ 348,156
Intercompany 7,370 - 7,521 1 (14,892) -
Operating Costs and Expenses:
Cost of products sold (exclusive 18,563 - 237,212 36,952 (15,100) 277,627
of depreciation)
Selling & administrative 10,813 - 10,085 4,148 (175) 24,871
Intercompany charges (3,321) - 3,243 (97) 175 -
Depreciation 2,155 - 17,693 1,784 - 21,632
Amortization of intangibles 1,864 - 5,526 715 - 8,105
Other 2,237 - (100) (17) - 2,120
--------- --------- --------- --------- --------- ---------
Total 32,311 - 273,659 43,485 (15,100) 334,355
--------- --------- --------- --------- --------- ---------
Operating Income (Loss) (157) - 11,243 2,507 208 13,801
Other Income (Expense)
Interest expense (4,960) - (18,181) (1,031) 3,922 (20,250)
Other income (expense) 905 - 3,486 939 (4,491) 839
Equity in earnings (loss) of
consolidated subsidiaries (1,817) (23,692) 701 - 24,808 -
--------- --------- --------- --------- --------- ---------
Income (Loss) from Continuting (6,029) (23,692) (2,751) 2,415 24,447 (5,610)
Operations Before Taxes
Income Taxes (Benefit) (3,283) - (15) 1,523 - (1,775)
--------- --------- --------- --------- --------- ---------
Income (Loss) from Continuing
Operations (2,746) (23,692) (2,736) 892 24,447 (3,835)
Discontinued Operations (19,857) - - 27 (27) (19,857)
--------- --------- --------- --------- --------- ---------
Net Income (Loss) $ (22,603) $ (23,692) $ (2,736) $ 919 $ 24,420 $ (23,692)
========= ========= ========= ========= ========= =========
21
EAGLE-PICHER HOLDINGS, INC.
SUPPLEMENTAL CONDENSED COMBINING STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED MAY 31, 2001
GUARANTORS
------------------------ NON-GUARANTORS
EAGLE-PICHER SUBSIDIARY FOREIGN
ISSUER HOLDINGS, INC. GUARANTORS SUBSIDIARIES ELIMINATIONS TOTAL
------ -------------- ---------- ------------ ------------ -----
(IN THOUSANDS OF DOLLARS)
Cash Flows From Operating Activities:
Net Income (Loss) $(22,603) $(23,692) $ (2,736) $ 919 $ 24,420 $(23,692)
Adjustments to reconcile net income
(loss) to cash provided by (used in)
operating activities:
Equity in earnings of consolidated subsidiaries 1,817 23,692 (701) - (24,808) -
Depreciation and amortization 5,432 - 23,429 2,499 - 31,360
Provision for discontinued operations 18,200 18,200
Divestitures 500 500
Changes in assets and liabilities, net of
effects of acquisitions and divestitures 3,525 - (12,712) 1,706 2,979 (4,502)
-------- -------- -------- -------- -------- --------
Net cash provided by operating activities 6,871 - 7,280 5,124 2,591 21,866
-------- -------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (4,739) - (12,492) (5,113) - (22,344)
Other (1,116) (1,103) - 197 - (2,022)
-------- -------- -------- -------- -------- --------
Net cash used in investing activities (5,855) (1,103) (12,492) (4,916) - (24,366)
-------- -------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Reduction of long-term debt (9,548) - - - - (9,548)
Borrowings (repayments) on revolving
credit agreements 11,340 - 1,000 (784) - 11,556
Other - - - (205) - (205)
-------- -------- -------- -------- -------- --------
Net cash provided by (used in) financing activities 1,792 - 1,000 (989) - 1,803
-------- -------- -------- -------- -------- --------
Net cash provided by (used in) discontinued operations 1,540 - - - - 1,540
-------- -------- -------- -------- -------- --------
Increase (decrease) in cash and
cash equivalents 4,348 (1,103) (4,212) (781) 2,591 843
Intercompany accounts (3,657) 1,103 4,195 1,992 (3,633) -
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 1,297 1 539 4,313 1,317 7,467
-------- -------- -------- -------- -------- --------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 1,988 $ 1 $ 522 $ 5,524 $ 275 $ 8,310
======== ======== ======== ======== ======== ========
22
EAGLE-PICHER HOLDINGS, INC.
SUPPLEMENTAL CONDENSED COMBINED BALANCE SHEETS (UNAUDITED)
AS OF NOVEMBER 30, 2001
GUARANTORS
------------------------ NON-GUARANTORS
EAGLE-PICHER SUBSIDIARY FOREIGN
ISSUER HOLDINGS, INC. GUARANTORS SUBSIDIARIES ELIMINATIONS TOTAL
------ -------------- ---------- ------------ ------------ -----
(IN THOUSANDS OF DOLLARS)
Assets
Cash and cash equivalents $ 17,145 $ 1 $ 471 $ 6,936 $ 67 $ 24,620
Receivables, net (12,668) - 103,168 15,122 - 105,622
Intercompany accounts receivable 46,674 - 3,559 65 (50,298) -
Inventories 4,129 - 59,704 12,882 (1,371) 75,344
Net assets of operations to be sold 3,610 - - 5,954 (6,306) 3,258
Prepaid expenses 1,378 - 6,152 2,887 (865) 9,552
Deferred income taxes 24,287 - - - - 24,287
--------- --------- --------- --------- --------- ---------
Total current assets 84,555 1 173,054 43,846 (58,773) 242,683
Property, Plant & Equipment, net 28,733 - 157,653 30,401 (32) 216,755
Investment in Subsidiaries 83,571 95,169 16,058 - (194,798) -
Excess of Acquired Net Assets Over Cost, net 41,939 - 120,969 19,994 (3,140) 179,762
Other Assets 73,049 - 13,789 10,719 (10,846) 86,711
--------- --------- --------- --------- --------- ---------
Total Assets $ 311,847 $ 95,170 $ 481,523 $ 104,960 $(267,589) $ 725,911
========= ========= ========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Accounts payable $ 16,156 $ - $ 62,171 $ 7,970 $ - $ 86,297
Intercompany accounts payable 76 - 48 7,404 (7,528) -
Long-term debt - current portion 25,569 - 14,250 9,430 (7,292) 41,957
Income taxes (283) - - 1,491 1 1,209
Other current liabilities 42,342 - 26,363 3,111 - 71,816
--------- --------- --------- --------- --------- ---------
Total current liabilities 83,860 - 102,832 29,406 (14,819) 201,279
Long-term Debt - less current portion 401,169 - 42,452 - (42,452) 401,169
Deferred Income Taxes 9,362 - - - (3,085) 6,277
Other Long-Term Liabilities 25,911 19 1,000 825 - 27,755
--------- --------- --------- --------- --------- ---------
Total Liabilities 520,302 19 146,284 30,231 (60,356) 636,480
Intercompany Accounts (288,578) - 262,878 35,782 (10,082) -
11 3/4% Cumulative Redeemable
Exchangeable Preferred Stock - 123,086 - - - 123,086
Shareholders' Equity (Deficit) 80,123 (27,935) 72,361 38,947 (197,151) (33,655)
--------- --------- --------- --------- --------- ---------
Total Liabilities and Shareholders'
Equity (Deficit) $ 311,847 $ 95,170 $ 481,523 $ 104,960 $(267,589) $ 725,911
========= ========= ========= ========= ========= =========
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
SIGNIFICANT ACCOUNTING POLICIES
The condensed consolidated financial statements of Eagle-Picher
Holdings, Inc. are prepared in conformity with accounting principles generally
accepted in the United States of America. The preparation of these financial
statements requires the use of estimates, judgments, and assumptions that affect
the reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the period
presented. The Company believes that of its significant accounting policies, the
following may involve a higher degree of judgments, estimates and complexity:
Environmental Reserves
The Company is subject to extensive and evolving federal, state and
local environmental laws and regulations. Governmental authorities may enforce
these laws and regulations with a variety of enforcement measures, including
monetary penalties and remediation requirements. The Company is involved in
various stages of investigation and remediation related to environmental
remediation projects at a number of sites as a result of past and present
operations, including currently-owned and formerly-owned plants. Also, the
Company has received notice that it may have liability under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 as a Potentially
Responsible Party at a number of sites ("Superfund Sites"). The ultimate cost of
site remediation is difficult to predict given the uncertainties regarding the
extent of the required remediation, the interpretation of applicable laws and
regulations and alternative remediation methods. There can be no assurances that
environmental laws and regulations will not become more stringent in the future
or that the Company will not incur significant costs in the future to comply
with such laws and regulations. Accordingly, future information and developments
will require the Company to continually reassess the expected impact of these
environmental matters.
Impairment of Long-Lived Assets
The Company periodically reviews the carrying value of its long-lived
assets held and used and assets to be disposed of, including goodwill, when
circumstances warrant such a review. If the carrying value of a long-lived asset
is considered impaired, an impairment charge is recorded for the amount by which
the carrying value of the long-lived assets exceeds its fair value. The Company
believes its estimates of fair value are reasonable considering currently
applicable accounting guidance, however changes in the fair values and
circumstances and the implementation of Statement of Accounting Standards No.
142, "Goodwill and Intangible Assets", which is discussed in the Company's Form
10-K for the Year Ended November 30, 2001 and is effective for the first quarter
of fiscal year 2003, could affect the evaluations.
Revenue Recognition
A portion of the Company's revenues is derived from contracts, which
are accounted for under the percentage of completion method of accounting. This
method requires a higher degree of judgment and the use of estimates than other
revenue recognition methods. The judgments and estimates involved include the
Company's ability to accurately estimate the contracts' percentage of completion
and the reasonableness of the estimated costs to complete, among other factors,
at each financial reporting period.
Risk Management Activities
24
The Company is exposed to market risk including changes in interest
rates, currency exchange rates and commodity prices. The Company uses derivative
instruments to manage its interest rate and foreign currency exposures. The
Company does not use derivative instruments for speculative or trading purposes.
Generally, the Company enters into hedging relationships such that changes in
the fair values or cash flows of items and transactions being hedged are
expected to be offset by corresponding changes in the values of the derivatives.
The Company accounts for its derivatives in accordance with Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities". Such accounting is complex, evidenced by
the significant interpretations of the primary accounting standard, which
continues to evolve.
RESULTS OF OPERATIONS
Please refer to Note I. regarding Segment Reporting contained in Item
1. of this report.
The Automotive Segment
Sales of the Automotive Segment increased 1.7% from $114.8 million in
the second quarter of 2001 to $116.8 million in the comparable period of 2002.
In the first six months of 2002, net sales were $220.2 million compared to
$215.5 million in the same period of 2001, an increase of 2.2%. The modest
recovery in the United States automotive industry is the primary reason for
improved sales.
The loss from continuing operations before taxes was ($2.1) million and
($4.5) million in the quarter and six months ended May 31, 2002 compared to a
loss from continuing operations before taxes of ($2.7) million and ($3.4)
million for the comparable periods in 2001, respectively. The improved earnings
in the quarter resulted from higher gross margins of $.6 million from additional
volumes and a favorable mix shift, as well as productivity improvements yielding
$.7 million in incremental margins. Offsetting these gains were $.7 million in
recruiting and severance payments and $.9 million in higher depreciation and
amortization costs primarily related to an adjustment to bring these costs in
line with estimated periods of active production on existing automotive
programs. The Automotive segment also experienced $.4 million lower interest
allocations and had lower foreign currency transaction costs of $.9 million
compared the second quarter of last year primarily due to the strengthening of
the Euro.
Automotive Segment Outlook
Sales in the third quarter of the fiscal year are expected to be
somewhat lower than those of the second quarter, which is typical in the
automotive industry, due to shutdowns of the major automobile manufacturers for
model changeovers and retooling. Sales in the third quarter of 2002 are expected
to be flat compared to the same period last year. The outlook for the Automotive
Segment for fiscal year 2002 provided in the Company's Annual Report on Form
10-K continues to represent Management's view of the Automotive Segment.
The Technologies Segment
Sales of the Technologies Segment decreased $4.7 million or 8.9% from
$52.5 million in the second quarter of 2001 to $47.8 million in the comparable
period of 2002, and decreased $11.9 million or 11.9% from $100.3 million to
$88.4 million for the six months ending May, 2002 as compared to the first six
months of 2001.
The second quarter 2002 sales decline was due primarily to $6.5 million
lower sales of products to telecommunications and semi-conductor customers, $1.2
million lower sales due to reduced volumes in the Precision Products commercial
metal fabrication operations, a business to be sold in the third quarter of
2002, and $.5 million less
25
sales to satellite communications customers. These reductions were partially
offset by higher sales totaling approximately $4.5 million in the higher margin
product lines of enriched boric acid sold to the nuclear industry, military
batteries and Chemsyn pharmaceutical products.
The sales decline for the six months ended May, 2002 resulted primarily
from $9.0 million lower sales to telecommunications and semi-conductor
customers, $2.9 million lower sales to satellite customers and $3.6 million
lower sales of metal fabrication products, partially offset by $3.9 million
higher sales of enriched boric acid products and $2.6 million additional sales
of military batteries.
Loss from continuing operations before taxes was $(12.8) million in the
second quarter of 2002, compared to a loss of $(1.1) million in the same quarter
of 2001. The $(12.8) million loss resulted from $1.6 million in higher gross
margin, despite lower sales, from favorable mix and productivity improvements,
offset by a $(5.5) million restructuring charge to earnings associated with the
decision to exit the Gallium-based materials business due to continued soft
demand from customers in the telecommunications and semi-conductor markets (see
footnote D, above), a $(4.5) million charge for various legal issues described
in footnote H and a $(3.1) million charge for insurance related losses as
described in footnote G. Additionally, the Segment incurred a $(1.1) million
expense in the quarter for business consulting fees related to development of
strategic initiatives.
Technologies Segment Outlook
During the second quarter the Company initiated the process of selling
its Precision Products commercial metal fabrication operations which for the
first six months of fiscal 2002 reported sales of approximately $2.6 million and
$(.5) million EBITDA. The sale of that operation is expected to be completed
during the third quarter.
Sales for the third quarter are expected to be down slightly over the
second quarter and approximately 5% below the same period for fiscal year 2001
due to reduced demand in the telecommunications and semi-conducting markets for
Gallium and Germanium-based products and lost revenue associated with the sale
of the Precision Products commercial metal fabrication operations.
The Company's outlook for the year for the Technologies segment is for
sales of approximately $190 million which is 5% below 2001. This reflects the
sale and exiting of certain product lines discussed above.
The Minerals Segment
Comparative sales of the Minerals Segment were nearly flat at $16.8
million in the second quarter of 2002 compared to $16.9 in 2001. Sales for the
first six months of the year were $32.1 million in 2002 and $32.3 million in
2001. Decreased international volumes primarily in Europe have offset increased
sales in North America.
Despite flat sales, income from continuing operations before taxes
improved in the second quarter of 2002 to $2.6 million, compared to $.2 million
in the second quarter of 2001. For the six-month period ended May 31, 2002
income from continuing operations before taxes was $2.9 million compared to a
loss of $(.3) million in the same period of 2001. Improved profitability for the
quarter was attributable to $1.0 million from lower energy costs, $.4 million
from favorable mix shift to higher margin products, $.4 million from improved
production efficiencies and lower foreign currency transaction costs of $.4
million compared to the second quarter of last year, primarily due to the
strengthening of the Euro.
Minerals Segment Outlook
26
Sales in the Minerals Segment for the third quarter of fiscal year 2002
are expected to be slightly higher than sales for the second quarter and ahead
of sales for the same period of fiscal year 2001. The outlook for the Minerals
Segment for fiscal year 2002 is for sales to be flat with 2001 but profitability
to be consistent with projections set forth in the Company's Annual Report on
Form 10K.
Summary of the Company
Net Sales. The Company's net sales were $181.3 million and $184.1
million in the second quarters of 2002 and 2001, respectively, a decrease of
1.5%. Increased sales of the Automotive Segment were more than offset by
declines in the Technologies Segment which was negatively impacted by soft
markets in telecommunications and semi-conductors.
Cost of Products Sold. Cost of products sold, decreased as a percentage
of net sales from 80.1% in the second quarter of 2001 to 77.4% in the comparable
period of 2002. This decrease is attributable to the improved margins related to
lower energy costs and favorable mix in the Minerals Segment, a change in
product mix and productivity that occurred in the Technologies Segment, and
improved sales mix and operating efficiencies in the Automotive Segment.
Selling and Administrative. Selling and administrative expenses
increased to $21.2 million in the second quarter of 2002 from $13.6 million in
the comparable period of 2001. On a year-to-date basis, selling and
administrative expenses were $34.9 million and $24.9 million in 2002 and 2001,
respectively. The increased costs for the second quarter of 2002 were
attributable to $4.8 million in reserves related to legal matters discussed in
footnote H, $1.4 million in consulting costs primarily related to development of
strategic initiatives for the Technologies segment, and $1.2 million in
severance, recruiting and relocation costs as the Company has continued its
investment in strengthening the leadership of the Company.
Depreciation and Amortization. Depreciation and amortization expense
was $16.0 million and $15.5 million in the second quarters of 2002 and 2001,
respectively, and $30.9 million and $29.7 million in the six months ended May
31, 2002 and 2001, respectively. The increase is primarily attributable to a
$1.1 million charge in the second quarter of 2002 to reflect estimated periods
of active production on existing automotive programs.
Restructuring. On May 31, 2002 the Company announced it would exit the
Gallium business in its Technologies segment due to the downturn in the
fiber-optic, tele-communication and semiconductor markets. This resulted in a
$5.5 million charge recorded to restructuring expense during the quarter. The
Company also reduced the amounts accrued for restructuring recorded in 2001 by
$2.5 million primarily to reflect severance payments made from the Company's
over funded pension plan to eligible employees as detailed in footnote D, above,
which had previously been recorded as an expense.
Divestitures. During the second quarter, the Company recorded
approximately $3.2 million in additional accruals recorded for costs related to
certain litigation issues and environmental remediation related to operations
divested prior to November 30, 2001 as noted in footnote E. In the second
quarter of 2002 the Company signed a letter of intent to sell certain assets and
liabilities of the Precision Products business in its Technologies segment to a
group of employees and management personnel. The Company recorded a $2.8 million
estimated loss on sale related to this action. The net asset held for sale after
this write down, is $2.9 million.
Management Compensation - Special. Management compensation expenses of
$2.4 million and $1.9 million in the second quarters of 2002 and 2001,
respectively, relate to compensation to former senior officers upon their
separation from the Company.
Insurance Related Losses. In the second quarter 2002, the Company
recorded $3.1
27
million in charges primarily related to an insurance receivable related to the
third quarter 2001 fire in its Harrisonville, Missouri bulk pharmaceutical
manufacturing plant due to the insurance underwriter contesting coverage. The
Company disputes the insurance carrier's position and is vigorously pursuing
efforts to collect on its claims, but the realization of the receivable is
uncertain at this time.
Interest Expense. Interest expense was $11.2 million in the second
quarter of 2002 and $10.1 million in the second quarter of 2001. Interest
expense was $22.3 million and $20.3 million for the six months ended May 31,
2002 and 2001, respectively. In the six months ended May 31, 2001, approximately
$1.7 million in interest expense was included in Discontinued Operations in the
condensed consolidated statements of income (loss). Included in interest in 2002
is approximately $1.8 million in fees and other costs primarily related to the
Accounts Receivable Asset Backed Securitization as discussed in Note F in Item
1. In accordance with SFAS 140 "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, a replacement of FASB
statement 125", the Company has expensed these costs as incurred, rather than
amortizing them over the term of the agreement. Amounts paid to banks and other
institutions in the second quarter of 2002 for borrowed funds was $.6 million
less than similar amounts incurred for the second quarter of 2001. This
improvement reflects actual lower debt levels throughout the quarter and
interest rates slightly lower in 2002 on variable rate debt.
Income (Loss) from Continuing Operations Before Taxes. The loss from
continuing operations before taxes was $(21.1) million and $(5.0) million in the
second quarters of 2002 and 2001, respectively. The difference is due primarily
to gross margin improvements across the Company of approximately $4.5 million
and a $2.5 million reduction of previously accrued restructuring charges, offset
by the following special charges totaling approximately $23 million recorded in
the second quarter of 2002:
- Accruals related to various legal matters aggregating $7.6 million;
- Restructuring charges of $5.5 million related to the exiting of the
Gallium product line;
- Recognition of an estimated $2.8 million loss on sale of the Precision
Product business in the Technologies segment;
- Charges of $3.1 million related primarily to an insurance receivable
related to a fire in 2001 in a chemical plant;
- A $1.1 million charge to depreciation to reflect estimated periods of
active production on existing automotive programs;
- Management compensation expenses of $2.4 million related to
compensation to former senior officers upon their separation from the
Company; and
- $.5 million of severance costs related to management changes, primarily
in the Company's Automotive segment.
The Company also incurred costs of $1.4 million in the second quarter of 2002
for consulting expenses for the development of strategic initiatives.
Income Taxes (Benefit). Income taxes (benefit) were $.8 million and
$(1.6) million in the second quarters of 2002 and 2001, respectively, and $1.2
million and $(1.8) million in the six months ended May 31, 2002 and 2001,
respectively.
Discontinued Operations. Throughout 2001, the Company accounted for its
former Machinery Segment as a discontinued operation. This business was sold in
December 2001, but the Company has accounted for the business as if it had been
sold as of November 30, 2001. As a result, there is no effect on operations in
2002 for this Segment.
Net Income (Loss). Net income (loss) for the second quarters of 2002
and 2001 were $(22.0) million and $(6.3) million, respectively. The net loss in
2002 was significantly impacted by the provision of approximately $23 million in
charges for business restructuring, certain legal matters for divested
operations and other factors discussed under Income (Loss) from Continuing
Operations Before Taxes above.
28
Dividends accreted of $3.8 million and $3.3 million in the second
quarters of 2002 and 2001, respectively, on the 11 3/4% Cumulative Redeemable
Exchangeable Preferred Stock ("Preferred Stock") increased the loss applicable
to common shareholders to $25.7 million and $9.6 million, respectively.
Company Outlook
The Company's sales for fiscal year 2002 are expected to be in the
range of $690 million to $695 million, which is down slightly from the $700
million outlook set forth in its fiscal year 2001 Annual Report on Form 10-K.
Lower sales in the Minerals and Technologies segments will be partially offset
by higher sales in the Automotive segment.
Pretax loss is now projected in the range of $(20) million to $(25)
million, compared the $(2) million to $(5) million outlook set forth in its
fiscal year 2001 Annual Report on Form 10-K. The difference is attributable to
the approximately $23 million in charges in the second quarter for business
restructuring, certain legal matters for divested operations and other factors
discussed under Income (Loss) from Continuing Operations Before Taxes above.
The Company expects EBITDA (as defined under Financial Condition,
below)for fiscal year 2002 to be within a range of $93 million to $97 million.
This estimate remains consistent with the outlook for the Company set forth in
its fiscal year 2001 Annual Report on Form 10K.
29
FINANCIAL CONDITION
The following are certain financial data regarding EBITDA, as defined
below, cash flows and earnings to fixed charges and preferred stock dividends
(excluding the Machinery Segment):
Six Months Ended
May 31
2002 2001
(In millions of dollars)
EBITDA $46.9 $46.8
Cash provided by operating activities 60.9 21.9
Cash provided by (used in)investing activities (1.5) (24.4)
Cash provided by (used in) financing
activities (61.9) 1.8
Cash provided by discontinued Operations - 1.5
Preferred stock dividends accreted 7.2 6.5
Earnings/fixed charges and preferred stock dividends (.14)X .56X
Deficiency 34.2 12.1
EBITDA
The Company's EBITDA is defined for purposes hereof as earnings from
continuing operations before income taxes, interest expense, depreciation and
amortization and certain items determined by management to be in the nature of
nonrecurring or special items. These are: gains or losses on sales of business
units, management compensation (special), accruals for non routine litigation,
divestiture related expenses, restructuring charges, insurance related gains and
losses and non-cash items relating to accruals for the Company's stock
appreciation rights plan. For a description of such items, see "Results of
Operations - Summary of the Company - Income (Loss) from Continuing Operations
Before Taxes" above. EBITDA, as defined herein, may not be comparable to
similarly titled measures reported by other companies and should not be
construed as an alternative to operating income or to cash flows from operating
activities, as determined by accounting principles generally accepted in the
United States of America, as a measure of the Company's operating performance
or liquidity, respectively. Funds depicted by EBITDA are not available for
management's discretionary use to the extent they are required for debt service
and other commitments.
The Company's EBITDA for the six months ended May 31, 2002 and 2001, was
$46.9 million and $46.8 million, respectively.
Operating Activities
Cash provided by operating activities was $60.9 million and $21.9 million
for the six months ended May 31, 2002 and 2001, respectively, and consisted of
the following:
Six Months Ended May 31
-----------------------
2002 2001
---- ----
(in millions of dollars)
Income (Loss) from continuing
Operations before taxes $ (27.0) $ (5.6)
Depreciation and amortization,
30
Excluding amortization of
Deferred financing costs 30.9 29.7
Divestitures 6.0 .5
Excess of interest expense
over interest paid 2.4 1.5
Income taxes refunded (paid), net 4.8 1.9
Working capital and other 43.8 (6.1)
----- -----
$60.9 $21.9
===== =====
See "Results of Operations" for discussions concerning income (loss)
before taxes, depreciation and amortization, divestitures and interest expense.
The excess of interest expense over interest paid results primarily from
amortization of deferred financing costs, which does not affect cash.
The Company received a "quick refund" in the second quarter of 2002 and
2001 of income taxes paid in the prior fiscal years.
Net cash provided by operating activities for the six months ended May 31,
2002 was $60.9 million compared to $21.9 million for the comparable 2001 period.
The majority of the increase in net inflow of cash from operating activities
occurred as a result of the Company selling certain of its receivables to an
unconsolidated qualifying special purpose entity (see note F to condensed
consolidated financial statement). A decrease in the Company's inventory
provided $9.0 million, a decrease in accounts payable used $2.7 million and an
increase in accruals provided $3.3 million. Other assets and liabilities, net,
used $8.7 million.
Investing Activities
Investing activity used $1.5 million in cash during the six months ended
May 31, 2002 compared to $24.4 million being used in the six months ended May
31, 2001 primarily for capital expenditures. During the first quarter of 2002,
$6.3 million was provided from proceeds from the sale of CED. Capital
expenditures amounted to $8.9 million for the six months ended May 31, 2002
compared to $22.3 million for the six months ended May 31, 2001.
Financing Activities
Financial activities used $61.9 million for the six months ended May 31,
2002 compared to the six months ended May 31, 2001 where $1.8 million was
provided. During the six months ended May 31, 2002, the Company used $43.9
million to reduce its revolving credit facility primarily from proceeds
associated with the sale of the Company's receivables to an unconsolidated
qualifying special purpose entity. Both regularly scheduled debt payments and
the proceeds for the sale of CED resulted in a $18.5 million decline in the
Company's term debt during the six months ended May 31, 2002.
Earnings to Fixed Charges and Preferred Stock Dividends
Ratio of earnings from continuing operations to fixed charges and
preferred stock dividends for the six months ended May 2002 and 2001 was (.14x)
and .56x, respectively. In 2002 and 2001, earnings were insufficient to cover
fixed charges and preferred stock dividends by $34.2 million and $12.1 million
respectively. In 2002 the ratio was significantly impacted by $6.0 million in
divestiture related expenses, $3.0 million of restructuring charges and $3.1
million in insurance related losses. If these items were excluded from the
calculation in 2002, the ratio of earnings from continuing operations to
31
fixed charges and preferred stock dividends would be .26x and earnings would not
have been sufficient to cover fixed charges and preferred stock dividends by
$22.1 million. On that basis, 2002 and 2001 are more comparable.
Liquidity and Capital Resources
The Company's cash flow from operations and available credit facilities
are considered adequate to fund both the short-term and long-term capital needs
of the Company. As of May 31, 2002, the Company had $70.6 million unused under
its senior secured revolving credit facility and $1.4 million unused under its
European unsecured lines of credit. However, due to various financial covenant
limitations under the Company's senior secured credit agreement (the "Credit
Agreement") measured on the last day of each quarter, on May 31, 2002, the
Company could incur only an additional $47.5 million of indebtedness.
At May 31, 2002, the Company was in compliance with the covenants of its
senior secured credit agreement and senior subordinated notes. As noted in Note
F in Item 1 above, the Company has adopted Financial Accounting Standards Board
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" in conjunction with the Asset Backed
Securitization. However, under the definitions contained in the Credit
Agreement, the aggregate amount of capital investment by the conduit, $52.4
million as of May 31, 2002, is treated as indebtedness for purposes of various
financial covenants in the Credit Agreement.
The Company has entered into various interest rate swap agreements to
manage its variable interest rate exposure. Per the terms of the swap
agreements, the Company exchanges, at specified intervals, the difference
between fixed and variable interest amounts based on a notional amount of $90
million of the debt under the Credit Agreement at a weighted average interest
rate of 5.678% plus the applicable spread beginning March 5, 2001 and maturing
December 15, 2003.
Commencing March 1, 2003, dividends on the Company's Convertible
Exchangeable Preferred Stock become cash payable at 11-3/4% per annum; the first
semi-annual dividend payment of $8.3 million is due September 1, 2003. If the
Company does not pay cash dividends on the preferred stock, then holders of the
preferred stock become entitled to elect a majority of the Board of Directors of
Eagle-Picher Holdings. Dakruiter S.A., a company controlled by Granaria Holdings
B.V., holds approximately 51.8% of the preferred stock and therefore Granaria
Holdings would continue to be able to elect the entire Board of Directors of
Eagle-Picher Holdings.
The Company's $220 million revolving credit facility in its senior Credit
Agreement expires February 28, 2004. The Company will be required to extend or
replace this facility before that date. As of May 31, 2002, the Company had
borrowed approximately $111.5 million and had approximately $37.9 million of
letters of credit issued under this facility.
Restrictions on Payment of Dividends
EPI and the Subsidiary Guarantors are subject to restrictions on the
payment of dividends and other forms of payment in both the Credit Agreement and
the Indenture for the Subordinated Notes. Those restrictions generally prohibit
the payment of dividends to the Company either directly by EPI or indirectly
through any Subsidiary Guarantor. Certain limited exceptions are provided
allowing for payments to the Company. Specifically, EPI is authorized to make
payments to the Company in amounts not
32
in excess of any amounts the Company is required to pay to meet its consolidated
income tax obligations. Additional payments from EPI to the Company are
permitted commencing September 1, 2003 in amounts not in excess of the Company's
obligations to make any cash dividend payments required to be paid under the
Company's Preferred Stock and to make any cash interest payments required to be
paid under any debentures issued by the Company in exchange for the Company's
Preferred Stock ("Exchange Debentures").
Forward-Looking Statements
This report contains statements which, to the extent that they are not
statements of historical fact, constitute "forward looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995, Section 21E
of the Securities Exchange Act of 1934. The words "estimate," "anticipate,"
"project," "intend," "believe," "expect," and similar expressions are intended
to identify forward-looking statements. Forward-looking statements include, but
are not limited to, statements under the headings "Automotive Segment Outlook,"
"Technologies Segment Outlook," "Minerals Segment Outlook," and "Company
Outlook." Such forward-looking information involves risks and uncertainties that
could cause actual results to differ materially from those expressed in any such
forward-looking statements. These risks and uncertainties include, but are not
limited to, the ability of the Company to maintain existing relationships with
customers, demand for the Company's products, the ability of the Company to
successfully implement productivity improvements and/or cost reduction
initiatives, the ability of the Company to develop, market and sell new
products, the ability of the Company to obtain raw materials, increased
government regulation or changing regulatory policies resulting in higher costs
and/or restricting output, increased price competition, currency fluctuations,
general economic conditions, acquisitions and divestitures, technological
developments and changes in the competitive environment in which the Company
operates. Persons reading this report are cautioned that such forward-looking
statements are only predictions and that actual events or results may differ
materially.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company enters into interest rate swap agreements to manage interest
rate costs and risks associated with changing interest rates. The differential
to be paid or received under these agreements is accrued and recognized as
adjustments to interest expense. During the first quarter ended February 28,
2001, the Company had entered into various interest rate swap agreements with a
commercial bank having a total notional amount of $90 million. The effective
dates of these agreements are March 5, 2001 and March 15, 2001 and they mature
December 5, 2003 and December 15, 2003, respectively. These agreements
effectively change the interest rate exposure on $90 million of the Company's
floating debt to a fixed rate of 5.678% plus the applicable spread. The Company
may enter into additional interest rate swap agreements through the maturity
date of the Credit Agreement as market conditions warrant. Based on the fair
value of the interest rate swap agreements being held as of May 31, 2002, the
Company has recorded a net loss of $4.3 million in accumulated other
comprehensive income in the accompanying condensed consolidated balance sheets.
The remaining amount of loans outstanding under the Credit Agreement bear
interest at floating rates.
The Company's industrial revenue bonds ("IRB's") bear interest at variable
rates based on the market for similar issues. Loans under the IRB's are not
covered by the Swap Agreements.
As of May 31, 2002, $141.4 million of revolving and term loans were
outstanding under the Credit Agreement, of which, interest on $90.0 million is
essentially fixed by the Swap Agreements. The interest rate risk on the
remaining debt outstanding under the foreign lines of credit and the IRB's,
which in the aggregate totals $19.3 million, has not been hedged. Accordingly, a
1% increase in the applicable index rates would result in additional interest
expenses of $.7 million per year, assuming no change in the current
33
level of borrowing.
The Company also enters into various foreign currency forward contracts to
hedge a portion of its forecasted sales, generally within the next 12 months.
The Company manages most of these exposures on a consolidated basis, which
allows for netting certain exposures to take advantage of any natural offsets.
The Company's principal areas of exposure are related to sales denominated in
the currencies of Europe, Mexico and Canada with the majority of this exposure
in European currencies. As of May 31, 2002, the Company had outstanding foreign
exchange forward contracts with aggregate notional amounts of $13.5 million.
Based on the fair value of the futures contracts being held as of May 31, 2002,
the Company has recorded a net loss of $.5 million in accumulated other
comprehensive income in the accompanying condensed consolidated balance sheets.
34
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Please refer to Note H regarding Legal Matters contained in Item 1 of
this report, which is incorporated by reference in this Part II, as its Item 1.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.65 Fifth Amendment to Credit Agreement dated as of May 3, 2002.*
* Incorporated by reference from the Company's Form 8-K filed
May 17, 2002.
(b) Reports on Form 8-K
Form 8-K filed May 17, 2002 reporting an amendment to Eagle Picher
Industries' senior secured credit facility.
35
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EAGLE-PICHER HOLDINGS, INC.
/s/ Thomas R. Pilholski
------------------------------
Thomas R. Pilholski
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
DATE July 15, 2002
---------------------
36
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EAGLE-PICHER INDUSTRIES, INC.
/s/ Thomas R. Pilholski
--------------------------------
Thomas R. Pilholski
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
DATE July 15, 2002
---------------------
37
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DAISY PARTS, INC.
/s/ Tom B. Scherpenberg
-----------------------------
Tom B. Scherpenberg
Treasurer
(Principal Financial Officer)
DATE July 15, 2002
---------------------
38
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EAGLE-PICHER DEVELOPMENT COMPANY, INC.
/s/ Tom B. Scherpenberg
--------------------------------------
Tom B. Scherpenberg
Treasurer
(Principal Financial Officer)
DATE July 15, 2002
---------------------
39
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EAGLE-PICHER FAR EAST, INC.
/s/ Tom B. Scherpenberg
-----------------------------
Tom B. Scherpenberg
Treasurer
(Principal Financial Officer)
DATE July 15, 2002
---------------------
40
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EAGLE-PICHER MINERALS, INC.
/s/ Tom B. Scherpenberg
------------------------------
Tom B. Scherpenberg
Treasurer
(Principal Financial Officer)
DATE July 15, 2002
---------------------
41
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EAGLE-PICHER TECHNOLOGIES, LLC
/s/ Bradley J. Waters
-----------------------------------
Bradley J. Waters
Vice President,
and Chief Financial Officer
DATE July 15, 2002
---------------------
42
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HILLSDALE TOOL & MANUFACTURING CO.
/s/ Tom B. Scherpenberg
----------------------------------
Tom B. Scherpenberg
Treasurer
(Principal Financial Officer)
DATE July 15, 2002
---------------------
43
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EPMR CORPORATION (F/K/A MICHIGAN
AUTOMOTIVE RESEARCH CORPORATION)
/s/ Tom B. Scherpenberg
-----------------------
Tom B. Scherpenberg
Treasurer
(Principal Financial Officer)
DATE July 15, 2002
---------------------
44