| EXIDE TECHNOLOGIES Item 1A Risk Factors (in thousands, except per share data) The Company has experienced significant increases in raw material prices, particularly lead, and further changes in the prices of raw materials or in energy costs could have a material adverse impact on the Company |
| Lead is the primary material by weight used in the manufacture of batteries, representing approximately one-third of the Company’s cost of goods sold |
| Average lead prices quoted on the London Metal Exchange (“LME”) have risen dramatically, increasing from dlra920dtta00 per metric tonne for fiscal 2005 to dlra1cmam041dtta00 per metric tonne for fiscal 2006 |
| As of June 23, 2006, lead prices quoted on the LME were dlra927dtta00 per metric tonne |
| If the Company is unable to increase the prices of its products proportionate to the increase in raw material costs, the Company’s gross margins will decline |
| The Company cannot provide assurance that it will be able to hedge its lead requirements at reasonable costs or that the Company will be able to pass on these costs to its customers |
| Increases in the Company’s prices could also cause customer demand for the Company’s products to be reduced and net sales to decline |
| The rising cost of lead requires the Company to make significant investments in inventory and accounts receivable, which reduces amounts of cash available for other purposes, including making payments on its notes and other indebtedness |
| The Company also consumes significant amounts of steel and other materials in its manufacturing process and incurs energy costs in connection with manufacturing and shipping of its products |
| The market prices of these materials are also subject to fluctuation, which could further reduce the Company’s available cash |
| The going concern modification received from the Company’s independent registered public accounting firm could cause adverse reactions from the Company’s creditors, vendors, customers and others |
| Our financial statements for our fiscal year ended March 31, 2006 contain an audit report from our independent registered public accounting firm PricewaterhouseCoopers LLP that contains a going concern modification stating that the uncertainty with respect to our ability to maintain compliance with our financial covenants through fiscal 2007 raises substantial doubt about our ability to continue as a going concern |
| This going concern modification was based on our suffering recurring losses and negative cash flows from operations and our inability to comply with one or more of the covenants of our senior secured credit facility during fiscal 2005 and 2006 |
| There is no assurance that we will be able to meet our fiscal 2007 business plan and be in compliance with our senior secured credit facility through the period as of March 31, 2007 |
| This going concern modification could create concerns on the part of our creditors, vendors, customers and others about whether we will be able to fulfill our contractual obligations and otherwise continue to operate our business, which could result in a tightening of our liquidity |
| The going concern modification could also be perceived negatively by the capital markets, which could adversely affect the prices of our common stock and our notes as well as our ability to raise capital |
| 12 _________________________________________________________________ [45]Table of Contents The Company is subject to a preliminary SEC inquiry |
| The Enforcement Division of the SEC has told the Company that it has commenced a preliminary inquiry into statements the Company made during fiscal year 2006 about its ability to comply with fiscal 2005 loan covenants and the going concern qualification in the audit report in the Company’s Annual report on Form 10-K for fiscal 2005, which the Company filed with the SEC in June 2005 |
| If the preliminary inquiry results in a formal investigation, it could have a material adverse effect on the Company’s financial position, results of operations and cash flows |
| The Company is subject to fluctuations in exchange rates and other risks associated with its non-US operations which could adversely affect the Company’s results of operations |
| The Company has significant manufacturing operations in, and exports to, several countries outside the US Approximately 58prca of the Company’s net sales for fiscal 2006 were generated in Europe, Asia and Australia with the vast majority generated in Europe in Euros and British Pounds |
| Because such a significant portion of the Company’s operations is based overseas, the Company is exposed to foreign currency risk, resulting in uncertainty as to future assets and liability values, and results of operations that are denominated in foreign currencies |
| The Company invoices foreign sales and service transactions in local currencies, using actual exchange rates during the period, and translates these revenues and expenses into US dollars at average monthly exchange rates |
| Because a significant portion of the Company’s net sales and expenses are denominated in foreign currencies, the depreciation of these foreign currencies in relation to the US dollar could adversely affect the Company’s reported net sales and operating margins |
| The Company translates its non-US assets and liabilities into US dollars using current rates as of the balance sheet date |
| Therefore, foreign currency depreciation against the US dollar would result in a decrease of the Company’s net investment in foreign subsidiaries |
| In addition, foreign currency depreciation, particularly depreciation of the Euro, would make it more expensive for the Company’s non-US subsidiaries to purchase certain of the Company’s raw material commodities that are priced globally in US dollars, such as lead, which is quoted on the LME in US dollars |
| The Company does not engage in significant hedging of its foreign currency exposure and cannot assure that it will be able to hedge its foreign currency exposures at a reasonable cost |
| There are other risks inherent in the Company’s non-US operations, including: • changes in local economic conditions, including disruption of markets; • changes in laws and regulations, including changes in import, export, labor and environmental laws; • exposure to possible expropriation or other government actions; and • unsettled political conditions and possible terrorist attacks against American interests |
| These and other factors may have a material adverse effect on the Company’s non-US operations or on its results of operations and financial condition |
| The Company’s liquidity is affected by the seasonality of its business |
| Warm winters and cool summers adversely affect the Company |
| The Company sells a disproportionate share of its automotive aftermarket batteries during the fall and early winter |
| Resellers buy automotive batteries during these periods so they will have sufficient inventory for cold weather periods |
| In addition, many of the Company’s industrial battery customers in Europe do not place their battery orders until the end of the calendar year |
| This seasonality increases the Company’s working capital requirements and makes it more sensitive to fluctuations in the availability of liquidity |
| Unusually cold winters or hot summers may accelerate battery failure and increase demand for automotive replacement batteries |
| Mild winters and cool summers may have the opposite effect |
| As a result, if the Company’s sales are reduced by an unusually warm winter or cool summer, it is not possible for the Company to recover these sales in later periods |
| Further, if the Company’s sales are adversely affected by the weather, it cannot make offsetting cost reductions to protect the Company’s liquidity and gross margins in the short-term because a large portion of the Company’s manufacturing and distribution costs are fixed |
| Decreased demand in the industries in which the Company operates may adversely affect its business |
| The Company’s financial performance depends, in part, on conditions in the automotive, material handling and telecommunications industries, which, in turn, are generally dependent on the US and global economies |
| As a result, 13 _________________________________________________________________ [46]Table of Contents economic and other factors adversely affecting production by OEMs and their customers’ spending could adversely impact the Company’s business |
| Relatively modest declines in customer purchases from the Company could have a significant adverse impact on its profitability because the Company has substantial fixed production costs |
| If the Company’s OEM and large aftermarket customers reduce their inventory levels, and reduce their orders, the Company’s performance would be significantly adversely impacted |
| In this environment, the Company cannot predict future production rates or inventory levels or the underlying economic factors |
| Continued uncertainty and unexpected fluctuations may have a significant negative impact on the Company’s business |
| The remaining portion of the Company’s battery sales are of aftermarket batteries |
| The factors influencing demand for automotive replacement batteries include: (1) the number of vehicles in use; (2) average battery life; (3) the average age of vehicles and their operating environment; (4) weather conditions; and (5) population growth and overall economic conditions |
| Any significant adverse change in any one of these factors may have a significant negative impact on the Company’s business |
| The loss of the Company’s sole supplier of polyethylene battery separators would have a material adverse effect on the Company’s business |
| The Company relies exclusively on a single supplier to fulfill its needs for polyethylene battery separators—a critical component to many of the Company’s products |
| There is no second source that could readily provide the volume of polyethylene separators used by the Company |
| As a result, any major disruption in supply from this supplier would have a material adverse impact on the Company |
| If the Company is not able to maintain a good relationship with this supplier, or if for reasons beyond the Company’s control the supplier’s service were disrupted, the Company’s business may experience a significant negative impact |
| Many of the industries in which the Company operates are cyclical |
| The Company’s operating results are affected by the general cyclical pattern of the industries in which its major customer groups operate |
| Any decline in the demand for new automobiles, light trucks, and sport utility vehicles could have a material adverse impact on the financial condition and results of operations of the Company’s Transportation divisions |
| A weak capital expenditure environment in the telecommunications, uninterruptible power systems and electric industrial forklift truck markets could have a material adverse impact on the financial condition and results of operations of the Company’s Industrial Energy divisions |
| The Company is subject to pricing pressure from its larger customers |
| The Company faces significant pricing pressures in all of its business segments from its larger customers |
| Because of their purchasing size, the Company’s larger customers can influence market participants to compete on price and other terms |
| Such customers also use their buying power to negotiate lower prices |
| If the Company is not able to offset pricing reductions resulting from these pressures by improved operating efficiencies and reduced expenditures, those price reductions may have an adverse impact on the Company’s business |
| The Company faces increasing competition and pricing pressure from other companies in its industries, and if the Company is unable to compete effectively with these competitors, the Company’s sales and profitability could be adversely affected |
| The Company competes with a number of major domestic and international manufacturers and distributors of lead acid batteries, as well as a large number of smaller, regional competitors |
| Due to excess capacity in some sectors of its industry and consolidation among industrial purchasers, the Company has been subjected to continual and significant pricing pressures |
| The North American, European and Asian lead-acid battery markets are highly competitive |
| The manufacturers in these markets compete on price, quality, technical innovation, service and warranty |
| In addition, the Company is experiencing heightened competitive pricing pressure as Asian producers, able to employ labor at significantly lower costs than producers in the US and Western Europe, expand their export capacity and increase their marketing presence in the Company’s major markets |
| If the Company is not able to develop new products or improve upon its existing products on a timely basis, the Company’s business and financial condition could be adversely affected |
| 14 _________________________________________________________________ [47]Table of Contents The Company believes that its future success depends, in part, on the ability to develop, on a timely basis, new technologically advanced products or improve on the Company’s existing products in innovative ways that meet or exceed its competitors’ product offerings |
| Maintaining the Company’s market position will require continued investment in research and development and sales and marketing |
| Industry standards, customer expectations, or other products may emerge that could render one or more of the Company’s products less desirable or obsolete |
| The Company may be unsuccessful in making the technological advances necessary to develop new products or improve our existing products to maintain its market position |
| If any of these events occur, it could cause decreases in sales and have an adverse effect on the Company’s business and financial condition |
| The Company may be adversely affected by the instability and uncertainty in the world financial markets and the global economy, including the effects of turmoil in the Middle East |
| Instability in the world financial markets and the global economy, including (and as a result of) the turmoil in the Middle East, may create uncertainty in the industries in which the Company operates, and may adversely affect its business |
| In addition, terrorist activities may cause unpredictable or unfavorable economic conditions and could have a material adverse impact on the Company’s operating results and financial condition |
| The Company may be unable to successfully implement its business strategy, which could adversely affect its results of operations and financial condition |
| The Company’s ability to achieve its business and financial objectives is subject to a variety of factors, many of which are beyond the Company’s control |
| For example, the Company may not be successful in increasing its manufacturing and distribution efficiency through productivity, process improvements and cost reduction initiatives |
| Further, the Company may not be able to realize the benefits of these improvements and initiatives within the time frames the Company currently expects |
| In addition, we may not be successful in increasing the Company’s percentage of captive arrangements and spent battery collections or in hedging its lead requirements, leaving it exposed to fluctuations in the price of lead |
| Additionally, the Company’s implementation of these strategies could be delayed due to our limited liquidity |
| Any failure to successfully implement the Company’s business strategy could adversely affect results of operations and financial condition, and could further impair the Company’s ability to make certain strategic capital expenditures and meet its restructuring objectives |
| The Company is subject to costly regulation in relation to environmental, health and safety matters, which could adversely affect its business and results of operations |
| In the manufacture of its products throughout the world, the Company manufactures, distributes, recycles and otherwise uses large amounts of potentially hazardous materials, especially lead and acid |
| As a result, the Company is subject to a substantial number of costly regulations, including limits on employee blood lead levels |
| In particular, the Company is required to comply with increasingly stringent requirements of federal, state and local environmental and occupational safety and health laws and regulations in the US and other countries, including those governing emissions to air, discharges to water, noise and odor emissions; the generation, handling, storage, transportation, treatment and disposal of waste materials; and the cleanup of contaminated properties and human health and safety |
| Compliance with these laws and regulations results in ongoing costs |
| The Company could also incur substantial costs, including cleanup costs, fines and civil or criminal sanctions, third party property damage or personal injury claims, or costs to upgrade or replace existing equipment, as a result of violations of or liabilities under environmental laws or non-compliance with environmental permits required at its facilities |
| In addition, many of the Company’s current and former facilities are located on properties with histories of industrial or commercial operations |
| Because some environmental laws can impose liability for the entire cost of cleanup upon any of the current or former owners or operators, regardless of fault, the Company could become liable for the cost of investigating or remediating contamination at these properties if contamination requiring such activities is discovered in the future |
| The Company may become obligated to pay material remediation-related costs at its Tampa, Florida facility in the amount of approximately dlra12cmam500 to dlra20cmam500, at the Columbus, Georgia facility in the amount of approximately dlra6cmam000 to dlra9cmam000 and at the Sonalur, Portugal facility in the amount of dlra3cmam500 to dlra7cmam000 |
| The Company cannot be certain that it has been, or will at all times be, in complete compliance with all environmental requirements, or that the Company will not incur additional material costs or liabilities in connection with these requirements in excess of amounts it has reserved |
| Private parties, including current or former employees, could bring personal injury or other claims against the Company due to the presence of, or exposure to, hazardous substances used, stored or disposed of by it, or contained in its products, especially lead |
| Environmental requirements are complex and have tended to become more stringent over time |
| These requirements or their enforcement may change in the future in a manner that could have a material adverse effect on the Company’s business, results of operations and financial condition |
| The Company has 15 _________________________________________________________________ [48]Table of Contents made and will continue to make expenditures to comply with environmental requirements |
| These requirements, responsibilities and associated expenses and expenditures, if they continue to increase, could have a material adverse effect on the Company’s business and results of operations |
| While the Company’s costs to defend and settle claims arising under environmental laws in the past have not been material, the Company cannot provide assurance that this will remain so in the future |
| The EPA or state environmental agencies could take the position that the Company has liability under environmental laws that were not discharged in bankruptcy |
| To the extent these authorities are successful in disputing the pre-petition nature of these claims, the Company could be required to perform remedial work that has not yet been performed for alleged pre-petition contamination, which would have a material adverse effect on the Company’s financial condition, cash flows or results of operations |
| The EPA or state environmental agencies could take the position that the Company has liability under environmental laws that were not discharged in bankruptcy |
| To the extent these authorities are successful in disputing the pre-petition nature of these claims, the Company could be required to perform remedial work that has not yet been performed for alleged pre-petition contamination, which would have a material adverse effect on the Company’s financial condition, cash flows or results of operations |
| The Company has previously been advised by the EPA or state agencies that it is a “Potentially Responsible Party” under the Comprehensive Environmental Response, Compensation and Liability Act or similar state laws at 97 federally defined Superfund or state equivalent sites |
| At 45 of these sites, the Company has paid its share of liability and believes that it is probable that its liability for most of the remaining sites will be treated as disputed unsecured claims under the Company’s Joint Plan of Reorganization under the Plan |
| However, there can be no assurance that these matters will be discharged |
| In addition, the EPA, in the course of negotiating this pre-petition claim, had notified the Company of the possibility of additional clean-up costs associated with Hamburg, Pennsylvania properties of approximately dlra35cmam000 |
| To the extent the EPA or other environmental authorities disputed the pre-petition nature of these claims, the Company would intend to resist any such effort to evade the bankruptcy law’s intended result, and believes there are substantial legal defenses to be asserted in that case |
| However, there can be no assurance that we would be successful in challenging any such actions |
| The Company may be adversely affected by legal proceedings to which the Company is, or may become, a party |
| The Company and its subsidiaries are currently, and may in the future become, subject to legal proceedings which could adversely affect our results of operations, liquidity and financial condition |
| See Note 15 to the Consolidated Financial Statements |
| The cost of resolving the Company’s pre-petition disputed claims, including legal and other professional fees involved in settling or litigating these matters, could have a material adverse effect on its financial condition, cash flows and results of operations |
| At March 31, 2006, there are approximately fourteen hundred pre-petition disputed unsecured claims on file in the bankruptcy case that remain to be resolved through the Plan’s claims reconciliation and allowance procedures |
| The Company established a reserve of common stock and warrants to purchase common stock for issuance to holders of these disputed unsecured claims as the claims are allowed by the bankruptcy court |
| Although these claims are generally resolved through the issuance of common stock and warrants from the reserve rather than the payment of money, the process of resolving these claims through settlement or litigation requires considerable Company resources, including expenditures for legal and professional fees and the attention of Company personnel |
| These costs could have a material adverse effect on the Company’s financial condition, cash flows and results of operations |
| The Company is unable to predict how the recent declines in its stock price will impact this process given that its common stock is the currency in which these claims are resolved |
| On the one hand, lower stock prices may make some plaintiffs less willing to litigate but, on the other hand, may make some plaintiffs less willing to settle for less than the full amount of their claims depending on a variety of factors, including the strength of the plaintiff’s claims and the size of the plaintiff’s anticipated ultimate award |
| The Company’s ability to operate its business effectively could be impaired if the Company fails to attract and retain experienced key personnel |
| The Company’s success depends, in part, on the continued contributions and experience of its senior officers and other key personnel |
| Certain of the Company’s senior officers are relatively new |
| The fact that certain of the Company’s key senior officers are recent additions to its staff, and may not possess knowledge of historical operations, could adversely affect the operation of the Company’s business |
| Moreover, if in 16 _________________________________________________________________ [49]Table of Contents the future the Company loses or suffers an extended interruption in the service of one or more of its other senior officers or key employees, the Company’s financial condition and operating results may be adversely affected |
| Work stoppages or other labor issues at the Company’s facilities or its customers’ or suppliers’ facilities could adversely affect the Company’s operations |
| At March 31, 2006, approximately 20prca of the Company’s North American and many of its non-US employees were unionized |
| It is likely that a significant portion of the Company’s workforce will remain unionized for the foreseeable future |
| It is also possible that the portion of the Company’s workforce that is unionized may increase in the future |
| Contracts covering approximately 591 of the Company’s domestic employees will expire in 2007, and the remainder thereafter |
| In addition, contracts covering most of the Company’s union employees in Europe and the rest of the world expire on various dates through fiscal 2007 |
| Although the Company believes that its relations with employees are generally good, if conflicts develop between the Company and its employees’ unions in connection with the renegotiation of these contracts or otherwise, work stoppages or other labor disputes could result |
| A work stoppage at one or more of the Company’s plants, or a material increase in its costs due to unionization activities, may have a material adverse effect on the Company’s business |
| Work stoppages at the facilities of the Company’s customers or suppliers may also negatively affect the Company’s business |
| If any of the Company’s customers experience a material work stoppage, that customer may halt or limit the purchase of the Company’s products |
| This could require the Company to shut down or significantly reduce production at facilities relating to those products |
| Moreover, if any of the Company’s suppliers experience a work stoppage, the Company’s operations could be adversely affected if an alternative source of supply is not readily available |
| The Company’s substantial indebtedness could adversely affect its financial condition |
| The Company has a significant amount of indebtedness |
| As of March 31, 2006, the Company had total indebtedness, including capital leases, of approximately dlra701cmam004 |
| The Company’s level of indebtedness could have significant consequences |
| For example, it could: • limit the Company’s ability to borrow money or sell stock to fund its working capital, capital expenditures, acquisitions and debt service requirements; • substantially increase the Company’s vulnerability to changes in interest rates, because a substantial portion of its indebtedness will bear interest at floating rates; • limit the Company’s flexibility in planning for, or reacting to, changes in its business and future business opportunities; • make the Company more vulnerable to a downturn in its business or in the economy; • place the Company at a disadvantage to some of its competitors, who may be less highly leveraged; and • require a substantial portion of the Company’s cash flow from operations to be used for debt payments, thereby reducing the availability of its cash flow to fund working capital, capital expenditures, acquisitions and other general corporate purposes |
| One or a combination of these factors could adversely affect the Company’s financial condition |
| Subject to restrictions in the indenture governing the Company’s senior secured notes and convertible notes and its senior secured credit facility, the Company may incur additional indebtedness, which could increase the risks associated with its already substantial indebtedness |
| Restrictive covenants limit the Company’s ability to operate its business and to pursue its business strategies, and its failure to comply with these covenants could result in an acceleration of its indebtedness |
| The Company’s senior credit facility and the indenture governing its senior secured notes contain covenants that restrict its ability to finance future operations or capital needs, to respond to changing business and economic conditions or to engage in other transactions or business activities that may be important to its growth strategy or otherwise important to the Company |
| The credit agreement and the indenture governing the Company’s senior secured notes restrict, among other things, the Company’s ability and the ability of its subsidiaries to: 17 _________________________________________________________________ [50]Table of Contents • incur additional indebtedness or enter into sale and leaseback transactions; • pay dividends or make distributions on the Company’s capital stock or certain other restricted payments or investments; • purchase or redeem stock; • issue stock of the Company’s subsidiaries; • make investments and extend credit; • engage in transactions with affiliates; • transfer and sell assets; • effect a consolidation or merger or sell, transfer, lease or otherwise dispose of all or substantially all of the Company’s assets; and • create liens on the Company’s assets to secure debt |
| In addition, the Company’s senior credit facility requires the Company to maintain minimum consolidated earnings before interest, taxes, depreciation, amortization, and restructuring (“Adjusted EBITDA”) and minimum leverage ratio of consolidated debt to Adjusted EBITDA, as well as requiring the Company to repay outstanding borrowings with portions of the proceeds the Company receives from certain sales of property or assets and specified future debt offerings |
| The Company’s ability to comply with these provisions may be affected by events beyond its control, and it may not be able to meet the financial ratios |
| Any breach of the covenants in the Company’s senior secured credit agreement or the indenture governing its senior secured notes could cause a default under the Company’s senior secured credit agreement and other debt (including the notes), which would restrict the Company’s ability to borrow under its credit facility, thereby significantly impacting the Company’s liquidity |
| If there were an event of default under any of the Company’s debt instruments that was not cured or waived, the holders of the defaulted debt could cause all amounts outstanding with respect to the debt instrument to be due and payable immediately |
| The Company’s assets and cash flow may not be sufficient to fully repay borrowings under its outstanding debt instruments if accelerated upon an event of default |
| If, as or when required, the Company is unable to repay, refinance or restructure its indebtedness under, or amend the covenants contained in, its senior credit facility, the lenders under its senior credit facility could institute foreclosure proceedings against the assets securing borrowings under the senior credit facility |
| The Company’s internal control over financial reporting was not effective as of March 31, 2006 |
| Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, and the rules and regulations promulgated thereunder, our management was required to furnish a report on, and our independent registered public accounting firm attested to, our internal controls over financial reporting in our annual report on Form 10-K for the year ending March 31, 2006 |
| In connection with the preparation of this report, our management assessed the effectiveness of our internal control over financial reporting as of March 31, 2006, and this assessment identified several material weaknesses relating to ineffective controls over accounting for inventories and investments in affiliates, lack of sufficient resources in accounting and finance, lack of segregation of duties and ineffective controls over period-end accounting for income taxes |
| Because of these material weaknesses, our management concluded that our internal controls over financial reporting were not effective as of March 31, 2006, based on the criteria in the Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission |
| In an effort to remediate the material weaknesses and other deficiencies, we are currently implementing a number of changes to our internal control including hiring additional accounting personnel to focus on ongoing remediation initiatives |
| However, there can be no assurance that such remediation steps will be successful, that we will not have significant deficiencies or other material weaknesses in the future or that, when next evaluated, our management will conclude, and our auditors will determine, that our internal control over financial reporting is effective |
| Any failure to implement effective 18 _________________________________________________________________ [51]Table of Contents internal controls could harm our operating results or cause us to fail to meet our reporting obligations |
| Inadequate internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of the notes or our common stock, and may require us to incur additional costs to improve our internal control system |
| The Company’s liquidity position remains constrained |
| If the Company fails to meet operations objectives and the shortfall is not replaced through other means, the lack of liquidity would have a material adverse impact on the Company |
| The company’s current liquidity position remains constrained |
| The Company has an operational plan that would provide adequate liquidity to fund its operations through the remainder of the fiscal year |
| The Company has reduced its planned capital expenditures and planned restructuring activities in order to provide additional liquidity |
| If the Company fails to meet its operations objectives, including working capital reductions, and if such shortfall is not replaced through proceeds from a rights offering or other means, the lack of liquidity would have a material adverse impact on the Company’s ability to fund its operations and financial obligations and cause the Company to evaluate a restructuring of its obligations |
| The Company has entered into a plea agreement with the US Attorney for the Southern District of Illinois under which it is required to pay a fine of dlra27dtta5 million over five years |
| If the Company is unable to post adequate security for this fine by February 2007 and the US District Court is unwilling to modify the plea agreement, the Company could be unable to remain in compliance with its senior credit facility and senior secured notes, which could have a material adverse effect on its business and financial condition |
| In 2001, the Company reached a plea agreement with the US Attorney for the Southern District of Illinois (the “US Attorney”) resolving an investigation into a scheme by former officers and certain corporate entities involving fraudulent representations and promises in connection with the distribution, sale and marketing of automotive batteries between 1994 and 1997 |
| The Company agreed to pay a fine of dlra27dtta5 million over five-years to five years probation and to cooperate with the US Attorney in its prosecution of the former officers |
| The Company filed for bankruptcy in April 2002 and did not pay any installments of the criminal fine before or during its bankruptey proceedings, nor did it pay any installments of the criminal fine after the Company emerged from bankruptcy in May 2004 |
| In 2002, the US Attorney filed a claim against the Company as a general unsecured creditor and on May 31, 2006, the District Court approved a Joint Agreement and Proposed Joint Resolution of Issues Raised in the Government’s Motion Filed on November 18, 2005 Regarding the Payment of Criminal Fine and modified our schedule to pay the dlra27dtta5 million fine through quarterly payments over the next five years, ending in 2011 |
| Under the order, the Company must provide security in a form acceptable to the court and to the government by February 26, 2007 for its guarantee of any remaining unpaid portion of the fine, but may petition the court if it believes its financial viability would be jeopardized by providing such security |
| If the Company is not able to provide security in a form acceptable to the court and to the government by February 26, 2007 and the district court is unwilling to modify the plea agreement, then the resulting obligation to provide such security could result in the inability to maintain compliance with the senior credit facility and senior secured notes, which could have a material adverse effect on the Company’s business and financial condition |
| Holders of the Company’s common stock are subject to the risk of dilution of their investment as the result of the issuance of additional shares of common stock and warrants to purchase common stock to holders of pre-petition claims to the extent the reserve of common stock and warrants established to satisfy such claims is insufficient |
| Pursuant to the Company’s 2004 Plan of Reorganization (the “Plan”), the Company has established a reserve of common stock and warrants to purchase common stock for issuance to holders of unsecured pre-petition disputed claims |
| To the extent this reserve is insufficient to satisfy these disputed claims, the Company would be required to issue additional shares of common stock and warrants, which would result in dilution to holders of its common stock |
| The Company agreed pursuant to the Plan to issue 25cmam000 shares of common stock and warrants initially exercisable for 6cmam250 shares of common stock, distributed as follows: • holders of pre-petition secured claims were allocated collectively 22cmam500 shares of common stock; and • holders of general unsecured claims were allocated collectively 2cmam500 shares of common stock and warrants to purchase 6cmam250 shares of common stock at dlra32dtta11 per share, and approximately 13dtta4prca of such new common stock and warrants were initially reserved for distribution for disputed claims under the Plan’s claims reconciliation and allowance procedures |
| Under the claims reconciliation and allowance process set forth in the Plan, the Official Committee of Unsecured Creditors, in consultation with the Company, established a reserve to provide for a pro rata distribution of common stock and warrants to holders of disputed claims as they become allowed |
| As claims are evaluated and processed, the Company will object to some claims or portions thereof, and upward adjustments (to the extent stock and warrants not previously distributed remain) or downward adjustments to the reserve will be made pending or following adjudication of these objections |
| Predictions regarding the allowance and classification of claims are inherently difficult to make |
| With respect to environmental claims in particular, there is inherent difficulty in assessing the Company’s potential liability due to the large number of other potentially responsible parties |
| For example, a demand for the total cleanup costs of a landfill used by many entities may be asserted by the government using joint and several liability theories |
| Although the Company believes that there is a reasonable basis in law to believe that the Company will ultimately be responsible for only its share of these remediation costs, there can be no assurance that the Company will prevail on these claims |
| In addition, the scope of remedial costs, or other environmental injuries, are highly variable and estimating these costs involves complex legal, scientific and technical judgments |
| Many of the claimants who have filed disputed claims, particularly environmental and personal injury claims, produce little or no proof of fault on which the Company can assess its potential liability and either specify no determinate amount of damages or provide little or no basis for the alleged damages |
| In some cases the Company is still seeking additional information needed for claims assessment and information that is unknown to the Company at the current time may significantly affect its assessment regarding the adequacy of the reserve amounts in the future |
| As general unsecured claims have been allowed in the bankruptcy court, the Company has distributed common stock at a rate of approximately one share per dlra383dtta00 in allowed claim amount and approximately one warrant per dlra153dtta00 in allowed claim amount |
| These rates were established based upon the assumption that the stock and warrants allocated to non-noteholder general unsecured claims on the effective date of the Plan, including the reserve established for disputed claims, would be fully distributed so that the recovery rates for all allowed unsecured claims would comply with the Plan without the need for any redistribution or supplemental issuance of securities |
| If the amount of non-noteholder general unsecured claims that is eventually allowed exceeds the amount of claims anticipated in the setting of the reserve, additional common stock and warrants will be issued for the excess claim amounts at the same rates as used for the other non-noteholder general unsecured claims |
| If this were to occur, additional common stock would also be issued to the holders of pre-petition secured claims to maintain the ratio of their distribution in common stock at nine times the amount of common stock distributed for all unsecured claims |