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As filed with the Securities and Exchange Commission on June 21, 2004

Registration No. 333-115553



SECURITIES AND EXCHANGE COMMISSION

AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933


ENERSYS
(Exact name of registrant as specified in its charter)

Delaware   23-3058564   3691
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer
Identification No.)
  (Primary Standard Industrial Classification Code Number)

EnerSys
2366 Bernville Road
Reading, PA 19605
(610) 208-1991
(Address, including zip code, and telephone number, including area code, of registrant's principal executive offices)

Michael T. Philion
Executive Vice President—Finance
Chief Financial Officer
EnerSys
2366 Bernville Road
Reading, PA 19605
(610) 208-1991
(Name, address, including zip code, and telephone number, including area code, of agent for service)


Copies to:

Steven R. Finley
Gibson, Dunn & Crutcher LLP
200 Park Avenue
New York, NY 10166
(212) 351-4000
Fax: (212) 351-4035
  Joseph M. Harenza
Stevens & Lee
111 North Sixth Street
Reading, PA 19603
(610) 478-2160
Fax: (610) 371-8500
  Richard D. Truesdell, Jr.
Davis Polk & Wardwell
450 Lexington Avenue
New York, NY 10017
(212) 450-4000
Fax: (212) 450-3800

        Approximate date of commencement of proposed sale to the public:    As soon as practicable after this registration statement becomes effective.

        The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission acting pursuant to such section 8(a) may determine.




The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

PROSPECTUS (Subject to Completion)

Issued                             , 2004

              Shares

LOGO

COMMON STOCK


EnerSys is offering                             shares of its common stock. This is our initial public offering and no public market exists for our shares. We anticipate that the initial public offering price of our common stock will be between $                           and $                           per share.


We have applied to list our common stock on the New York Stock Exchange under the trading symbol "ENS".


Investing in our common stock involves risks. See "Risk Factors" beginning on page 8.


PRICE $          PER SHARE


 
  Price to
Public

  Underwriting
Discounts and
Commissions

  Proceeds to
EnerSys

Per Share   $   $   $
Total   $                     $                     $                  

We have granted the underwriters the right to purchase up to an additional              shares to cover over-allotments.

As of the completion of the offering, investment funds affiliated with Morgan Stanley & Co. Incorporated, one of the representatives of the underwriters of this offering, will own     % of our common stock.

The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares to purchasers on                        , 2004.


MORGAN STANLEY   LEHMAN BROTHERS
BANC OF AMERICA SECURITIES LLC

                        , 2004


[IFC]


TABLE OF CONTENTS

 
  Page

Prospectus Summary

 

1

Risk Factors

 

8

Special Note About Forward-Looking Statements

 

16

Use of Proceeds

 

17

Dividend Policy

 

17

Capitalization

 

18

Unaudited Pro Forma Consolidated Financial Information

 

19

Dilution

 

24

Selected Consolidated Financial and Operating Data

 

26

Management's Discussion and Analysis of Financial Condition and Results of Operations

 

29

Business

 

52

Management

 

67

Certain Relationships and Transactions

 

80

Principal Stockholders

 

83

Description of Our Credit Facilities

 

85

Description of Capital Stock, Certificate of Incorporation and Bylaws

 

89

Shares Eligible for Future Sale

 

93

Underwriters

 

95

Material United States Income and Estate Tax Consequences to Non-United States Stockholders

 

98

Validity of Common Stock

 

100

Experts

 

100

Where You Can Find More Information

 

101

Index to Financial Statements

 

F-1

        You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information that is different. This prospectus may only be used where it is legal to sell these securities. The information in this prospectus may be accurate only on the date of this prospectus.


        This offering of common stock is only being made to persons in the United Kingdom whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses or otherwise in circumstances which have not resulted and will not result in an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995 or the UK Financial Services and Markets Act 2000 ("FSMA"), and each underwriter has only communicated or caused to be communicated and will only communicate or cause to be communicated any invitation or inducement to engage in investment activity (within the meaning of section 21 of the FSMA) received by it in connection with the issue or sale of the common stock in circumstances in which section 21(1) of FSMA does not apply to EnerSys, the issuer of such common stock. Each of the underwriters agrees and acknowledges that it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the common stock in, from or otherwise involving the United Kingdom.

        The EnerSys common stock may not be offered, transferred, sold or delivered to any individual or legal entity other than to persons who trade or invest in securities in the conduct of their profession or trade (which includes banks, securities intermediaries (including dealers and brokers), insurance companies, pension funds, other institutional investors and commercial enterprises which as an ancillary activity regularly invest in securities) in the Netherlands.

i


        Until    , 2004, all dealers that buy, sell or trade shares of our common stock, whether or not participating in the offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.


        The trademark and trade names referred to in this prospectus are the property of their respective owners.

        We have provided certain statistics in this prospectus on the worldwide industrial battery business. Those statistics for North America are derived from information supplied by Battery Council International—which we refer to as BCI—and for Europe are derived from information supplied by the Association of European Storage Battery Manufacturers—which we refer to as EuroBat. BCI and EuroBat are voluntary associations of battery manufacturers. For geographic areas not covered by BCI or EuroBat, including for the Middle East, Africa and Asia, these statistics are derived from management's estimates. We believe these statistics are reasonable estimates. Market share data, however, are subject to change and cannot be verified with complete certainty due to limits on the availability and reliability of raw data, the voluntary nature of the data gathering process and other limitations and uncertainties inherent in any statistical survey of market shares.

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PROSPECTUS SUMMARY

        This summary highlights information contained elsewhere in this prospectus. This summary may not contain all of the information that you should consider before deciding to invest in the shares of common stock. We urge you to read this entire prospectus carefully, including the "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" sections and our consolidated financial statements and the notes to those statements. The terms "EnerSys," "we," "our," and "us" refer to EnerSys—which is a holding company—and its consolidated subsidiaries. We use the term "the company" when we wish to refer only to the holding company and not to EnerSys and its consolidated subsidiaries. Our fiscal year ends on March 31. References in this prospectus to a fiscal year, such as "fiscal 2004," relate to the fiscal year ended on March 31 of that calendar year. For reading ease, certain financial information is presented on a rounded basis, which may cause minor rounding differences.

EnerSys Overview

        We are one of the world's largest manufacturers, marketers and distributors of industrial batteries. We also manufacture, market and distribute related products such as chargers, power equipment and battery accessories, and we provide related after-market and customer-support services for lead-acid industrial batteries. Industrial batteries generally are characterized as reserve power batteries or motive power batteries.

        For 2003, we believe that we held approximately 24% of the worldwide market share in the lead-acid industrial battery business, with market shares of 30% in North America, 30% in Europe and 5% in Asia. For 2003, we believe that our worldwide market share of reserve power batteries was approximately 20% and in motive power batteries was approximately 28%. Our net sales for fiscal 2004 were $969.1 million, of which approximately 42% was attributable to the Americas, 53% to Europe, the Middle East and Africa, which we refer to as EMEA, and 5% to Asia. We report our financial results on a March 31 fiscal year basis.

        Our reserve power batteries are marketed and sold principally under the PowerSafe, DataSafe and Genesis brands. Our motive power batteries are marketed and sold principally under the Hawker, Exide and General brands. We also manufacture and sell related direct current—DC—power products including chargers, electronic power equipment and a wide variety of battery accessories. Our battery products span a broad range of sizes, configurations and electrical capacities, enabling us to meet a wide variety of customer applications. We manufacture reserve power and motive power batteries at 19 manufacturing facilities located across the Americas, Europe and Asia and market and sell these products globally in more than 100 countries to over 10,000 customers through a network of distributors, independent representatives and an internal sales force.

        We provide responsive and efficient after-market support for our products through strategically located warehouses and a company-owned service network supplemented by independent representatives.

Our Industry

        The size of the worldwide industrial lead-acid battery market in 2003 was $3.6 billion according to BCI, EuroBat and management estimates. The two key components of the industrial lead-acid battery market are reserve power batteries—a $2.0 billion market—and motive power batteries—a $1.6 billion market. The aerospace and defense market is an additional important sector of the battery industry, which is not included as a component of the $3.6 billion worldwide market information above.

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        Reserve power batteries, also known as network, standby or stationary power batteries, are used primarily for backup power applications to ensure continuous power supply in case of main (primary) power failure or outage.

        For many critical systems, power loss, even for short periods of time, can result in loss of process control, massive data loss and significant financial liability. Reserve power batteries are essential for the continuous operations of communications providers, financial institutions, computer and computer-controlled systems and electric utilities.

        Motive power batteries are used primarily to provide power for electric material handling and ground handling equipment. Motive power batteries are used primarily in electric industrial forklift trucks. Motive power batteries compete primarily with propane- and diesel-powered internal combustion engines.

Our Strengths

        We believe that our competitive strengths should enable us to expand our global market share and position us to achieve profitable growth. These strengths include:


Our Strategy

        Our primary business objective is to capitalize on our competitive strengths to continue to expand our global market share, increase our net sales and improve our profit margins. We intend to achieve these objectives by implementing the following strategies:

Additional Considerations

        We operate in an extremely competitive industry and are subject to continual pricing pressure. We have been and may continue to be adversely affected by cyclical industry conditions and volatile raw materials costs. Because we use significant amounts of lead and acid in our operations, we are exposed to the risk of material environmental, health and safety liabilities. Many new energy storage technologies have been introduced, and we will need to acquire or develop products and technologies that will compete effectively in the future. For a discussion of these and other risks that you should consider before investing in our common stock, see "Risk Factors" beginning on page 8.

Our History and Recent Financing Activity

        EnerSys and its predecessor companies have been manufacturers of industrial batteries for over 90 years. Morgan Stanley Capital Partners teamed with the management of Yuasa Inc. in late 2000 to acquire from Yuasa Corporation (Japan) its reserve power and motive power battery businesses in North and South America. The acquired businesses included the Exide, General and Yuasa brands. On January 1, 2001, we changed our name from Yuasa Inc. to EnerSys to reflect our focus on the energy systems nature

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of our businesses. In early 2002, we acquired the reserve power and motive power business of the Energy Storage Group, or ESG, of Invensys plc, whose principal brands were Hawker, PowerSafe and DataSafe.

        On March 17, 2004, we completed funding for a recapitalization. Prior to the recapitalization, we had $219.0 million of senior debt outstanding, consisting of $177.6 million of term loans, a $17.0 million receivables facility and a $24.4 million revolving credit facility, with a weighted average interest rate of 4.3%. In order to extend the maturities of our outstanding debt, obtain greater financial flexibility, take advantage of favorable debt capital markets and historically low interest rates and provide liquidity to our existing stockholders, we entered into the following new financial arrangements:

        We used the proceeds of the senior secured term loan B and senior second lien term loan to refinance substantially all of our existing debt and pay accrued interest in the aggregate amount of $219.0 million, to fund a cash payment of $270.0 million to our existing stockholders and management and to pay transaction costs of $11.0 million. We intend to use a portion of the proceeds of this offering to repay the full amount outstanding under the $120.0 million senior second lien term loan and a portion of the amount outstanding under the $380.0 million senior secured term loan B. For additional information on our new financing arrangements, see "Description of Our Credit Facilities."

        Our principal executive offices are located at 2366 Bernville Road, Reading, PA 19605. Our telephone number at that address is (610) 208-1991.

        We have engaged in a number of transactions with, and have other relationships with, affiliates of the representatives of the underwriters of this offering.

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        As a result of the Morgan Stanley Funds holding    % of our outstanding shares of common stock after giving effect to this offering, and their rights under the securityholder agreement, Morgan Stanley may be deemed to control our management and policies.

The Offering

Shares offered               shares
Shares to be outstanding after the offering               shares
Use of proceeds   $            to prepay the entire principal and accrued interest (expected to be approximately $         million based on current interest rates) and prepayment penalty ($2.4 million) on our $120.0 million senior second lien term loan and to prepay a portion ($         million) of our $380.0 million senior secured term loan B, and the balance for general corporate purposes.

Proposed NYSE symbol

 

ENS

        References in this prospectus to the number of shares offered, and the number to be outstanding after the offering, do not include:

        Except as otherwise indicated, all information in this prospectus gives effect to:


Summary Consolidated Financial, Operating and Pro Forma Data

        The following tables set forth certain summary consolidated financial, operating and pro forma data. You should read the selected financial data presented below in conjunction with our consolidated financial statements and the notes to our consolidated financial statements included elsewhere in this prospectus and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The summary consolidated financial data presented for each of the fiscal years in the three-year period ended March 31, 2004, and the balance sheet data at March 31, 2004, have been derived from our consolidated financial statements, which have been audited by Ernst & Young LLP, our independent registered public accounting firm.

        The summary pro forma as adjusted consolidated statement of operations for fiscal 2004 gives effect to the new financing arrangements we entered into in March 2004, and the anticipated use of the estimated proceeds of this offering as if such transactions had taken place on April 1, 2003. The summary as adjusted consolidated balance sheet as at March 31, 2004, gives effect to the anticipated use of the estimated proceeds of this offering as if it had taken place on March 31, 2004. See "Use of Proceeds" for information regarding our computation of the estimated proceeds of this offering.

        We are presenting this summary pro forma consolidated financial information for illustrative purposes only. This information is not necessarily indicative of what our operating results or financial position would

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have been if these transactions had taken place on the assumed dates or throughout the period presented, nor is it necessarily indicative of our future results of operations.

 
  Fiscal Year Ended March 31,
 
  2002
  2003
  2004
  Pro forma as adjusted 2004
 
  (in thousands, except per share amounts)

Consolidated Statement of Operations Data(1):                        

Net sales

 

$

339,340

 

$

859,643

 

$

969,079

 

$

969,079
Cost of goods sold     266,493     653,998     722,825     722,825
   
 
 
 
Gross profit     72,847     205,645     246,254     246,254

Operating expenses

 

 

53,463

 

 

150,618

 

 

170,412

 

 

170,412
Special charges relating to restructuring, bonuses and uncompleted acquisitions     68,448         21,147     9,095
Amortization     51     51     51     51
   
 
 
 
Operating earnings (loss)     (49,115 )   54,976     54,644     66,696
Interest expense     13,294     20,511     20,343      
Special charges relating to a settlement agreement and write-off of deferred finance costs             30,974      
Other expense (income), net     1,744     (742 )   (4,466 )    
   
 
 
 
(Loss) earnings before income taxes     (64,153 )   35,207     7,793      
Income tax expense (benefit)     (22,171 )   12,355     2,957      
   
 
 
 
Net (loss) earnings   $ (41,982 ) $ 22,852   $ 4,836   $  

Net (loss) earnings per share

 

 

 

 

 

 

 

 

 

 

 

 
  Basic   $     $     $     $  
  Diluted   $     $     $     $  

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 
  Basic                        
  Diluted                        
 
  Fiscal Year Ended March 31,
 
 
  2002
  2003
  2004
 
 
  (in thousands)

 
Consolidated cash flow data:                    
Cash flows from operating activities   $ 21,068   $ 55,438   $ 39,192  
Cash flows from investing activities     (335,951 )   (12,923 )   (26,981 )
Cash flows from financing activities     314,795     (8,209 )   (39,989 )
Other Operating Data:(1)                    
Capital expenditures   $ 12,944   $ 23,623   $ 28,580  
EBITDA(2)     (39,563 )   91,651     65,175  
Special charges related to restructuring, bonuses, uncompleted acquisitions, a settlement agreement and write-off of deferred finance costs(3)     68,448         52,121  

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  As of March 31, 2004
 
  Actual
  As adjusted
 
  (in thousands)

Consolidated Balance Sheet Data:            
Cash and cash equivalents   $ 17,207   $  
Working capital     134,727      
Total assets     1,151,068      
Total debt     511,303      
Preferred stock     7    
Total stockholders' equity     239,302      

(1)
Includes the results of operations of ESG for the full years for fiscal 2003 and fiscal 2004, but only for nine days in fiscal 2002.

(2)
EBITDA is defined as earnings before interest expense, income tax expense, depreciation and amortization. EBITDA is not a measure of financial performance under accounting principles generally accepted in the United States and should not be considered an alternative to net earnings or any other measure of performance under accounting principles generally accepted in the United States as a measure of performance or to cash flows from operating, investing or financing activities as an indicator of cash flows or as a measure of liquidity. EBITDA has its limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under generally accepted accounting principles. Some of these limitations are:

it does not reflect our cash expenditures for capital expenditures or contractual commitments;

it does not reflect the impact of changes in effective tax rates or the use of net operating losses;

although depreciation and amortization are non-cash charges, the assets being depreciated or amortized often will have to be replaced and EBITDA does not reflect the cash requirements for such replacements;

it does not reflect changes in, or cash requirements for, our working capital requirements; and

it does not reflect the cash necessary to make payments of interest or principal on our indebtedness.
 
  Fiscal Year Ended March 31,
 
  2002
  2003
  2004
 
  (in thousands)

EBITDA   $ (39,563 ) $ 91,651   $ 65,175
  Depreciation and amortization     11,296     35,933     37,039
  Interest expense     13,294     20,511     20,343
  Income tax (benefit) expense     (22,171 )   12,355     2,957
   
 
 

Net (loss) earnings

 

$

(41,982

)

$

22,852

 

$

4,836
   
 
 

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(3)
Special charges are discussed in detail in the notes to our consolidated financial statements and in "Management's Discussion and Analysis of Financial Condition and Results of Operations." The fiscal 2002 charges were primarily for the closures of a plant and certain other locations in the U.S. and our South American operations. The charges in fiscal 2004 related primarily to a settlement with Invensys, the recapitalization in March 2004 and costs of uncompleted acquisition attempts.

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RISK FACTORS

        You should carefully consider the risks described below before investing in our common stock. Our business is also subject to the risks that affect many other companies, such as technological obsolescence, labor relations and geopolitical events.

Risks Relating to Our Business

        We compete with a number of major domestic and international manufacturers and distributors of reserve and motive power lead-acid batteries, as well as a large number of smaller, regional competitors. Due to excess capacity in some sectors of our industry, consolidation among industrial battery purchasers and the financial difficulties being experienced by several of our competitors, we have been subjected to continual and significant pricing pressures. We anticipate heightened competitive pricing pressure as Chinese and other foreign producers, able to employ labor at significantly lower costs than producers in the U.S. and Western Europe, expand their export capacity and increase their marketing presence in our major U.S. and European markets. Several of our competitors have strong technical, marketing, sales, manufacturing, distribution and other resources, as well as significant name recognition, established positions in the market and long-standing relationships with original equipment manufacturers and other customers. In addition, certain of our competitors own lead smelting facilities which, during periods of lead cost increases or price volatility, may provide a competitive pricing advantage and reduce their exposure to volatile raw material costs. Our ability to maintain and improve our operating margins has depended, and continues to depend, on our ability to control and reduce our costs. We cannot assure you that we will be able to continue to reduce our operating expenses, to raise or maintain our prices or increase our unit volume, in order to maintain or improve our operating results.

        Our operating results are affected by the general cyclical pattern of the industries in which our major customer groups operate and the overall economic conditions in which we and our customers operate. For example, the significant capital expenditures made by the telecommunications industry during the period from fiscal 1999 through fiscal 2001, as numerous companies expanded their systems and installed standby backup battery power systems, drove demand for our reserve power products. As the telecommunications industry dramatically reduced building new systems in response to massive overcapacity, the demand for our reserve power products for this important application declined significantly. Both our reserve power and motive power segments are heavily dependent on the end-user markets they serve, such as telecommunications, uninterruptible power systems and electric industrial forklift trucks. A weak capital expenditure environment in these markets has had and can be expected to have a material adverse effect on our results of operations.

        We employ significant amounts of lead, plastics, steel, copper and other materials in our manufacturing processes. We estimate that raw materials costs account for approximately 49% of our cost of goods sold. Lead is our most significant raw material and represents approximately 30% of our total raw materials costs. The costs of these raw materials, particularly lead, are volatile and beyond our control. Volatile raw materials costs can significantly affect our operating results and make period-to-period comparisons extremely difficult. We cannot assure you that we will be able to hedge our raw material requirements at a reasonable cost or to pass on to our customers the increased costs of our raw materials.

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        In the manufacture of our products throughout the world, we process, store, dispose of and otherwise use large amounts of hazardous materials, especially lead and acid. As a result, we are subject to extensive and changing environmental, health and safety laws and regulations governing, among other things: the generation, handling, storage, use, transportation and disposal of hazardous materials; remediation of polluted ground or water; emissions or discharges of hazardous materials into the ground, air or water; and the health and safety of our employees. Compliance with these laws and regulations results in ongoing costs. Failure to comply with these laws or regulations, or to obtain or comply with required environmental permits, could result in fines, criminal charges or other sanctions by regulators. From time to time we have had instances of alleged or actual noncompliance that have resulted in the imposition of fines, penalties and required corrective actions. Our ongoing compliance with environmental, health and safety laws, regulations and permits could require us to incur significant expenses, limit our ability to modify or expand our facilities or continue production and require us to install additional pollution control equipment and make other capital improvements. In addition to compliance, investigation and cleanup costs, and fines, penalties and required corrective actions, private parties, including current or former employees, could bring personal injury or other claims against us due to the presence of, or exposure to, hazardous substances used, stored or disposed of by us or contained in our products.

        Certain environmental laws assess liability on owners or operators of real property for the cost of investigation, removal or remediation of hazardous substances at their current or former properties or at properties at which they have disposed of hazardous substances. These laws may also assess costs to repair damage to natural resources. We may be responsible for remediating damage to our properties that was caused by former owners. Soil and groundwater contamination has occurred at some of our current and former properties and may occur or be discovered at other properties in the future. We are currently investigating, remediating and monitoring soil and groundwater contamination at certain of our properties, and we may be required to conduct these operations at other properties in the future. In addition, we have been, currently are and in the future may be liable to contribute to the cleanup of locations owned or operated by other persons to which we or our predecessor companies have sent wastes for disposal, pursuant to federal and other environmental laws. Under these laws, the owner or operator of contaminated properties and companies that generated, disposed of or arranged for the disposal of wastes sent to a contaminated disposal facility can be held jointly and severally liable for the investigation and cleanup of such properties, regardless of fault.

        We currently are listed as a potentially responsible party at one federal Superfund site, the NL Industries / Taracorp Superfund site in Granite City, Illinois. This site consists of a former secondary lead smelter and surrounding property. Our identification as a potentially responsible party with respect to this site arises from our purchase of ESG from Invensys. We understand that the parties are negotiating a settlement with respect to this site and believe that our exposure in the settlement would be approximately $130,000.

        We cannot assure you that we have been or at all times will be in compliance with environmental laws and regulations or that we will not be required to expend significant funds to comply with, or discharge liabilities arising under, environmental laws, regulations and permits, or that we will not be exposed to material environmental, health or safety litigation.

        In addition, recent legislation proposed by the European Union may affect us and the lead acid battery industry. In November 2003, the European Commission issued a Directive that recommends the elimination of mercury in batteries and the reclamation of spent lead and cadmium batteries for recycling (a "closed-loop" life cycle). On April 20, 2004, the European Parliament approved legislation that would effectively ban lead and cadmium in batteries as well as mercury, with the exception of batteries for which no suitable alternatives exist. While we do not believe that such alternatives currently exist, a suitable substitute for lead acid batteries may be identified or developed. In response to the vote of the European

9



Parliament, the European Commission stated it would not endorse a ban on lead or cadmium in batteries and affirmed its original proposal for closed-loop recycling regulations. The European Council, the main decision-making body of the European Union, is expected to comment on the new battery Directive within the coming months. We cannot predict whether the Council will adopt the view of the Parliament or the Commission. Enactment and implementation of the European Parliament's Directive by the Member States could have a material adverse affect on our business, results of operations and financial condition.

        We invoice foreign sales and service transactions in local currencies, using actual exchange rates during the period. We translate our non-U.S. assets and liabilities into U.S. dollars using current rates as of the balance sheet date. Because a significant portion of our revenues and expenses are denominated in foreign currencies, changes in exchange rates between the U.S. dollar and foreign currencies, primarily the euro, British pound and Chinese renminbi, may adversely affect our revenue, cost of revenue and operating margins. For example, foreign currency depreciation against the U.S. dollar will reduce the value of our foreign revenues and operating earnings. Foreign currency depreciation against the U.S. dollar will result in a reduction of our net investment in foreign subsidiaries.

        Most of the risk of fluctuating foreign currencies is in our European operations, which comprised approximately half of our net sales during the last two fiscal years. The euro is the dominant currency in our European operations. The 14% appreciation in the value of the euro compared to the dollar during fiscal 2003 and 18% during fiscal 2004 had a significant impact on our reported results. Our sales in Europe were translated to the dollar at a rate 11.4% higher in fiscal 2003 than they would have been had the sales been translated at average exchange rates in effect in fiscal 2002, representing an increase of approximately $45 million; and were translated at a rate 17.0% higher in fiscal 2004 compared to average exchange rates in fiscal 2003, representing an increase of approximately $74 million.

        The impact of currency changes on our operating earnings is substantially similar as the impact on net sales. In fiscal 2003, operating earnings in Europe were approximately 11% higher than they would have been if translated at average exchange rates in fiscal 2002, representing an increase of approximately $3 million. In fiscal 2004, operating earnings in Europe were approximately 17% higher than they would have been if translated at the average exchange rates in fiscal 2003, representing an increase of approximately $5 million.

        The translation impact from currency fluctuations on net sales and operating earnings in the Americas and Asia is minimal as virtually all net sales and operating earnings are in dollars or are pegged to the dollar.

        Foreign currency depreciation will make it more expensive for our non-U.S. subsidiaries to purchase certain of our raw material commodities that are priced globally in U.S. dollars. Significant movements in foreign exchange rates can have a material impact on our results of operations and financial condition. We do not engage in significant hedging of our foreign currency exposure and cannot assure you that we would be able to hedge our foreign currency exposures at a reasonable cost.

        We currently have significant manufacturing and distribution facilities outside of the U.S., including in the United Kingdom, France, Germany, China, Mexico, Poland, Spain, Italy and Canada. We may face political instability and economic uncertainty, cultural and religious differences and difficult labor relations in our foreign operations. We also may face barriers in the form of long-standing relationships between potential customers and their existing suppliers, national policies favoring domestic manufacturers and protective regulations including exchange controls, restrictions on foreign investment or the repatriation of profits or invested capital, changes in export or import restrictions and changes in the tax system or rate of taxation in countries where we do business. We cannot assure you that we will be able successfully to

10


develop and expand our international operations and sales or that we will be able to overcome the significant obstacles and risks of our international operations.

        Many new energy storage technologies, other than lead-acid, have been introduced over the past several years. In addition, recent advances in fuel cell and flywheel technology have been introduced for use in selected applications that compete with the end uses for lead-acid industrial batteries. For many important and growing markets, such as aerospace and defense, lithium-based battery technologies have large and growing market shares and lead-acid technologies have decreasing market shares. Our ability to achieve significant and sustained penetration of key developing markets, including aerospace and defense, will depend upon our success in developing or acquiring these and other technologies, either independently, through joint ventures or through acquisitions. If we fail to develop or acquire, and to manufacture and sell, products that satisfy our customers' demands, or if we fail to respond effectively to new product announcements by our competitors by quickly introducing competitive products, market acceptance of our products could be reduced and our business could be adversely affected. We cannot assure you that our products will remain competitive with products based on technologies other than lead-acid.

        We rely on a combination of copyright, trademark, patent and trade secret laws, non-disclosure agreements and other confidentiality procedures and contractual provisions to establish, protect and maintain our proprietary intellectual property and technology and other confidential information. Certain of these technologies, especially in thin plate pure lead technology, are important to our business and are not protected by patents. For fiscal 2004, our net sales of products using thin plate pure lead technology were approximately $125 million. Despite our efforts to protect our proprietary intellectual property and technology and other confidential information, unauthorized parties may attempt to copy or otherwise obtain and use our intellectual property and proprietary technologies.

        Exide Technologies, during the course of its Chapter 11 proceedings, has sought to reject certain agreements related to the 1991 sale of Exide Technologies' industrial battery business to Yuasa, including the exclusive, perpetual, worldwide and transferable license to use the Exide name on industrial batteries that we acquired in the Yuasa purchase. If the court were to find in favor of Exide Technologies, our license to use the Exide name could be terminated.

        The Exide trade name is one of our better-known brands. Our Exide-branded batteries represented approximately 12% of our net sales for fiscal 2004. We introduced testimony in the court proceedings from an expert witness who estimated that we would suffer damages of approximately $60 million over a seven-year period from price erosion, profit on lost sales and incremental rebranding expense in the event that the license were terminated. This expert's assessment of our damages assumed, contrary to our current belief, that the court would not delay the effective date of the termination.

        As with any litigation, the outcome of this proceeding is uncertain. We cannot assure you that we will retain the right to use the Exide brand, even for a brief period of time, upon the resolution of this dispute by the court.

        The trend by a number of our North American and Western European customers to move manufacturing operations and expand their businesses into Asia and other low labor-cost markets may have an adverse impact on our business. As our customers in traditional manufacturing-based industries seek to move their manufacturing operations to lower cost territories, there is a risk that these customers

11


will source their energy storage products from competitors located in those territories and will cease or reduce the purchase of products from our manufacturing plants. We cannot assure you that we will be able to compete effectively with manufacturing operations of energy storage products in those territories, whether by establishing or expanding our manufacturing operations in those lower-cost territories or acquiring existing manufacturers.

        We must continue to implement cost reduction initiatives to achieve additional cost savings in future periods. We cannot assure you that we will be able to achieve all of the cost savings that we expect to realize from current or future initiatives. In particular, we may be unable to implement one or more of our initiatives successfully or we may experience unexpected cost increases that offset the savings that we achieve. Given the continued competitive pricing pressures experienced in our industry, our failure to realize cost savings would adversely affect our results of operations.

        The success of our business will depend upon the quality of our products and our relationships with customers. In the event that our products fail to meet our customers' standards, our reputation could be harmed, which would adversely affect our marketing and sales efforts. We cannot assure you that our customers will not experience quality problems with our products.

        We rely upon a combination of trademark, licensing and contractual covenants to establish and protect the brand names of our products. We have registered many of our trademarks in the U.S. Patent and Trademark Office and in other countries. In many market segments, our reputation is closely related to our brand names. Monitoring unauthorized use of our brand names is difficult, and we cannot be certain that the steps we have taken will prevent their unauthorized use, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the U.S. We cannot assure you that our brand names will not be misappropriated or utilized without our consent or that such actions will not have a material adverse effect on our reputation and on our results of operations.

        As part of our business strategy, we have grown, and plan to continue growing, by acquiring other product lines, technologies or facilities that complement or expand our existing business. We may be unable to implement this part of our business strategy and may not be able to make acquisitions to continue our growth. There is significant competition for acquisition targets in the industrial battery industry. We may not be able to identify suitable acquisition candidates or negotiate attractive terms. In addition, we may have difficulty obtaining the financing necessary to complete transactions we pursue. In that regard, our credit facilities restrict the amount of additional indebtedness that we may incur to finance acquisitions and place other restrictions on our ability to make acquisitions. Our failure to execute our acquisition strategy could have a material adverse effect on our business. The amounts we may pay for acquisitions are subject to limits on individual transactions and aggregate limits over the term of the credit facilities—until 2011 under the senior secured credit facility and until 2012 if we do not prepay in full the senior second lien credit facility. Our individual transaction limits are $25.0 million cash and $75.0 million total (cash and company stock), and our aggregate limits are $100.0 million cash and $200.0 million total. Our ability to incur additional indebtedness also is restricted such that any significant acquisitions that could not be financed through cash generated from operations would need to be financed through issuance of additional company common stock. Exceeding any of these limitations would require the consent of our lenders. We cannot assure you that our acquisition strategy will be successful.

12


        Future acquisitions may involve the issuance of our equity securities as payment, in part or in full, for the businesses or assets acquired. Any future issuances of equity securities would dilute your ownership interests. In addition, future acquisitions might not increase, and may even decrease, our earnings or earnings per share and the benefits derived by us from an acquisition might not outweigh or might not exceed the dilutive effect of the acquisition. We also may incur additional debt or suffer adverse tax and accounting consequences in connection with any future acquisitions.

        Where we are successful in completing acquisitions, we might experience difficulties in integrating the acquired business or assets. Acquisitions can entail planned write-offs and charges, as we attempt to realize synergies and cost reductions by restructuring our businesses to maximize the benefits of an acquisition, such as a portion of the special charges we recorded in fiscal 2002 in connection with the acquisition of ESG from Invensys. Acquisitions might result in unanticipated liabilities, unforeseen expenses and distraction of management time and attention. We recorded a charge of $24.4 million in fiscal 2004 to reflect a settlement of a number of issues with Invensys relating to the ESG acquisition, $20.0 million of which was attributable to the repayment of the notes we issued to Invensys—which we refer to as seller notes—in payment of a portion of the purchase price of ESG.

Risks Relating to Our Substantial Debt and Our Liquidity

        We have a significant amount of debt. On an as adjusted basis, giving effect to the recapitalization that occurred on March 17, 2004, and our anticipated use of the estimated proceeds of this offering, we would have had $                 million of debt outstanding on March 31, 2004, our ratio of debt to total capitalization on March 31, 2004, would have been                and our interest expense for fiscal 2004 would have been $                 million. Our significant amount of debt could have important consequences to our stockholders. For example, it could:

        We cannot assure you that we will generate sufficient cash flow to meet our debt service requirements, to fund our operations and meet our business plan, to take advantage of opportunities to acquire other businesses or to develop new products or penetrate new markets.

        Our financing arrangements contain a number of financial covenants, such as interest coverage and leverage ratios, and restrictive covenants that limit the amount of debt we can incur and restrict our ability to pay dividends or make other payments in connection with our capital stock, make acquisitions or investments, make capital expenditures, enter into sale/leaseback transactions, sell, buy or pledge assets

13


and prepay debt. See "Description of Our Credit Facilities—Covenants," beginning on page 86, for a discussion of these covenants.

        Our ability to comply with these financial covenants can be affected by events beyond our control, and we cannot assure you that we will be able to comply with those covenants. A breach of any of these covenants could result in a default under our financing arrangements. Upon the occurrence of an event of default under any of our financing arrangements, the lenders could elect to declare all amounts outstanding thereunder to be immediately due and payable and terminate all commitments to extend further credit. If the lenders accelerate the repayment of borrowings, we cannot assure you that we would have sufficient assets to repay the amounts due. Certain defaults, or the acceleration of any repayment obligation, under any of our material debt instruments would permit the holders of our other material debt to accelerate our obligations with respect to such other material debt.

Risks Relating to the Offering

        After giving effect to the offering, the Morgan Stanley Funds will own approximately                % of our outstanding common stock. Two of our directors, Messrs. Hoffen and Fry, and two of our director nominees, Messrs. Hoffman and Elliott, are employees of Morgan Stanley. As a result of these relationships, Morgan Stanley may be deemed to control our management and policies. In addition, Morgan Stanley may be deemed to control all matters requiring stockholder approval, including the election of our directors, the adoption of amendments to our certificate of incorporation and the approval of mergers and sales of all or substantially all our assets. Circumstances could arise under which the interests of Morgan Stanley could be in conflict with the interests of our other stockholders.

        One of the representatives of the underwriters—Banc of America Securities LLC—is affiliated with a lender under our credit facilities. We expect to use substantially all of the net proceeds of this offering to repay outstanding indebtedness under our credit facilities, including approximately $            that will be payable with respect to indebtedness owed to Bank of America, N.A., an affiliate of Banc of America Securities LLC. As a result, this underwriter may have a conflict of interest.

        Prior to this offering, as a privately-held company, we were not subject to any of the corporate governance and financial reporting practices and policies required of a publicly-traded company. We are in the process of implementing the controls and procedures, but cannot assure you that our audit controls and procedures will comply with all of these practices and policies. Implementation of these practices and policies could disrupt our business, distract our management and employees and increase our costs. If we fail to develop and maintain effective controls and procedures, we may be unable to provide the required financial information in a timely and reliable manner.

        Since Morgan Stanley Dean Witter Capital Partners IV, L.P., which we refer to as MSCP IV, and other existing shareholders will continue to hold more than 50% of the voting power of EnerSys after giving effect to the offering, we are a "controlled company" for purposes of the New York Stock Exchange listing requirements. As such, we have opted out of several of the NYSE's corporate governance requirements. Among other things, this means that our Board of Directors, our compensation committee and our

14


nominating and corporate governance committee are not required to be independent. Morgan Stanley is acting as one of the representatives of the underwriters of this offering.

        If a trading market develops for our common stock, our employees, investment funds affiliated with Morgan Stanley and our officers and directors, who will collectively own                % of our shares upon completion of the offering, may elect to sell their shares of our common stock or exercise their stock options in order to sell the stock underlying their options. Sales of a substantial number of shares of our common stock in the public market after this offering could depress the market price of our common stock and impair our ability to raise capital through the sale of additional equity securities. Officers, directors and stockholders owning substantially all of our shares, have agreed, subject to exceptions, that without the prior written consent of the underwriters they will not, directly or indirectly, sell any of these shares or exercise any of their options for 180 days after the date of this prospectus, subject to certain extensions. These agreements, however, can be waived by Morgan Stanley and Lehman Brothers in their sole discretion.

        There currently is no public market for our common stock. An active trading market for our common stock may not develop. If a trading market does develop, our stock price could be volatile. You may be unable to resell the common stock you buy at or above the initial public offering price. We will establish the initial public offering price through our negotiations with the representatives of the underwriters. You should not view the price they and we establish as any indication of the price that will prevail in the trading market.

        The public offering price of our shares of common stock is significantly higher than the net tangible book value per share of our common stock. Purchasers of our common stock in this offering will experience immediate and substantial dilution in pro forma net tangible book value of $                per share. Additional book value dilution is likely to occur upon the exercise of options. To the extent we raise additional capital by issuing equity securities, our stockholders may experience further substantial book value dilution.

15



SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS

        We have made forward-looking statements in this prospectus, primarily in the sections entitled "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business." Forward-looking statements include the information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, potential growth opportunities and the effects of future regulation and competition. Generally, you can identify these statements because they use words like "anticipates," "believes," "estimates," "expects," "future," "intends," "plans" or the negative of such terms or similar terms. These statements are only our current expectations. They are based on our management's beliefs and assumptions and on information currently available to our management.

        Forward-looking statements involve risks, uncertainties and assumptions. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy. Actual results may differ materially from those expressed in these forward-looking statements due to a number of uncertainties and risks, including the risks described in this prospectus and other unforeseen risks. You should not put undue reliance on any forward-looking statements.

        We undertake no obligation to update forward-looking statements after we distribute this prospectus except as may be required under the federal securities laws.

16



USE OF PROCEEDS

        We estimate that the net proceeds of the sale of the        shares of common stock that we are selling in this offering will be $         million, based on an assumed initial public offering price of $        per share, the mid-point of the range on the front cover of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters' over-allotment option is exercised in full, we estimate that we will receive net proceeds of $         million.

        We currently anticipate that we will use approximately $      of the net proceeds to prepay the entire principal of and accrued interest (expected to be approximately $         million based on current interest rates) and prepayment penalty ($2.4 million) on our $120.0 million senior second lien term loan and approximately $         to prepay a portion ($         million) of the amount outstanding under our $380.0 million senior secured term loan B. We currently anticipate that we will use the remainder of the net proceeds for general corporate purposes. We entered into the $120.0 million senior second lien term loan and the $380.0 million senior secured term loan B on March 17, 2004. The principal of the senior second lien term loan is due in a single installment on March 17, 2012, and bears interest either at a LIBOR rate plus 5% or a floating base rate determined by the lender plus 4%. The principal of the senior secured term loan B is subject to scheduled quarterly amortization of 0.25% of the initial principal amount, payable in arrears, for the first 6.75 years, and 93.25% of the initial principal in the final quarter of the seventh year, and bears interest either at a LIBOR rate plus a variable interest rate margin or a floating base rate determined by the lender plus a variable interest rate margin.

        We used the proceeds of these loans to refinance substantially all of our existing debt and pay accrued interest in the aggregate amount of $219.0 million, to pay fees and expenses of $11.0 million in connection with the new credit facilities and to make a cash payment in the aggregate amount of $270.0 million of which $258.0 million was distributed to our preferred and common stockholders, pro rata in accordance with their stockholdings, and $12.0 million was paid to management in the form of one-time bonuses. The purpose of the bonuses was to treat management equitably with other stockholders, by providing for a cash distribution to each individual based on the aggregate in-the-money value of his or her vested options. For additional information on these credit facilities including their terms and the use of their proceeds, see "Description of our Credit Facilities."


DIVIDEND POLICY

        We do not anticipate declaring or paying any cash dividends in the foreseeable future. The timing and amount of future cash dividends, if any, would be determined by our Board of Directors and would depend upon our earnings, financial condition and cash requirements at the time. See "Description of our Credit Facilities" for a discussion of restrictions in our credit facilities that may limit our ability to pay cash dividends in the future.

        In connection with our recent recapitalization on March 17, 2004, we distributed $258.0 million to our existing stockholders, pro rata on the basis of their relative ownership interests in the company. We do not intend to make similar distributions in the future.

17



CAPITALIZATION

        The following table sets forth our cash and cash equivalents and our consolidated capitalization at March 31, 2004:

        You should read this table in conjunction with our consolidated financial statements and the notes thereto included elsewhere in this prospectus.

 
  March 31, 2004

 
  Actual
  As Adjusted
 
  (In thousands)

Cash and cash equivalents   $ 17,207   $  
   
 
Debt            
  Revolving credit facility        
  Senior secured term loan B     380,000      
  Senior second lien term loan     120,000    
  Capital lease and other obligations     11,303     11,303
   
 
    Total debt     511,303      

Stockholders' equity

 

 

 

 

 

 
  Preferred Stock     7    
  Common Stock     4      
  Paid-in-capital     188,872      
  Retained earnings (deficit)     (8,839 )    
  Accumulated other comprehensive income     59,258     59,258
   
 
    Total stockholders' equity     239,302      
   
 
      Total capitalization   $ 750,605   $  
   
 

18



UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

        Our audited consolidated financial statements for fiscal 2004 are included elsewhere in this prospectus. The unaudited pro forma consolidated financial information presented herein should be read together with those financial statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations."

        The unaudited pro forma consolidated financial information has been provided to enable readers to understand our historical financial results in relation to our recent recapitalization that occurred on March 17, 2004, and the sale of our common stock offered by this prospectus.

        Our historical March 31, 2004, balance sheet already reflects the financial impact of the recapitalization. We prepared the unaudited consolidated pro forma balance sheet to reflect the offering as if it had occurred on March 31, 2004. We prepared the unaudited pro forma consolidated statements of operations to reflect the recapitalization and the offering of our common stock as if such events had occurred on April 1, 2003.

        The pro forma consolidated balance sheet data at March 31, 2004, and statement of operations data for fiscal 2004, give effect to the recapitalization, the sale of         shares of our common stock at an assumed public offering price of $        per share and the conversion of our preferred stock into         shares of our common stock immediately prior to the closing of this offering, along with the anticipated use of the estimated proceeds from this offering to prepay indebtedness and for other general corporate purposes.

        We have excluded $18.6 million of special charges, which includes $6.6 million in deferred financing charges and $12.0 million in one-time bonus payments to management in connection with the recapitalization, from our pro forma results of operations for fiscal 2004. For additional information on these one-time bonus payments, see "Use of Proceeds" and "Management—Executive Compensation."

        Certain information normally included in financial statements prepared in accordance with generally accepted accounting principles in the U.S. has been omitted pursuant to the rules and regulations of the SEC. The pro forma consolidated statement of operations data for fiscal 2004 are not necessarily indicative of results that would have occurred had the recapitalization and this offering been completed on April 1, 2003, and should not be construed as being representative of future results of operations. Likewise, the pro forma consolidated balance sheet data at March 31, 2004, are not necessarily indicative of our financial position at March 31, 2004, had the offering been completed on March 31, 2004.

19


 
  Fiscal Year Ended March 31, 2004
 
  Historical
  Recapitalization
adjustments

  Pro forma for
recapitalization

  Offering
adjustments

  Pro forma for
recapitalization
and as
adjusted for
offering(8)

 
  (unaudited)

 
  (in thousands, except per share data)

Pro Forma Consolidated Statement of Operations                              

Net sales

 

$

969,079

 

$


 

$

969,079

 

$


 

$

969,079
Cost of goods sold     722,825         722,825         722,825
   
 
 
 
 
Gross profit     246,254         246,254         246,254

Operating expenses

 

 

170,412

 

 


 

 

170,412

 

 


 

 

170,412
Special charges relating to restructuring, bonuses and uncompleted acquisitions     21,147     (12,052 )(1)   9,095         9,095
Amortization expense     51         51         51
   
 
 
 
 
Operating earnings     54,644     12,052     66,696         66,696

Interest expense

 

 

20,343

 

 

11,023

  (2)

 

31,366

 

 

 

  (5)

 

 
Special charges relating to a settlement agreement and write-off of deferred finance costs     30,974     (6,569 )(3)   24,405          
Other (income) expense, net     (4,466 )       (4,466 )        
   
 
 
 
 
Earnings before income taxes     7,793     7,598     15,391            

Income tax expense

 

 

2,957

 

 

2,811

  (4)

 

5,768

 

 

 

  (6)

 

 
   
 
 
 
 
Net earnings   $ 4,836   $ 4,787   $ 9,623   $     $  
   
 
 
 
 

Net earnings (loss) per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Basic   $     $   $   $   (7) $
  Diluted   $     $   $   $   (7) $

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Basic                              
  Diluted                              

Pro forma earnings (loss) per share (9)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Basic   $     $   $   $   $  
  Diluted   $     $   $   $   $  

Pro forma weighted average shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Basic                              
  Diluted                              

(1)
Amount represents the elimination of compensation expense of $12.0 million, before taxes, incurred in connection with the March 17, 2004 recapitalization. For additional information on this payment, see "Use of Proceeds" and "Management—Executive Compensation."

(2)
Amount represents a net increase in interest expense of $11.0 million, before taxes, associated with the increased debt from the recapitalization, including $1.6 million of amortization for the increased deferred financing costs and the elimination of $2.0 million in amortization of deferred financing costs from the previous credit facility. For purposes of this calculation, the interest rates used were the actual rates (an average 4.8%) that existed at March 31, 2004.

(3)
Amount represents the elimination of special charges, before taxes, of $6.6 million in deferred financing costs related to the early extinguishment of debt in connection with the March 17, 2004 recapitalization.

(4)
Amount represents the income tax expense from (1), (2) and (3) above at our current 37% effective tax rate.

(5)
Amount represents reduced interest expense, before taxes, resulting from the anticipated use of the estimated proceeds from this offering to repay certain debt, of $     million from a reduction of $        of senior secured term loan B, of $7.3 million from repayment of $120.0 million of senior second lien term loan and of $     million reduction in amortization of deferred financing costs related to the debt that will be prepaid with the use of proceeds. For purposes of this calculation, the interest rates used were the actual rates (an average 4.6%) that existed at March 31, 2004.

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(6)
Amount represents the income tax expense from (5) above at our current 37% effective tax rate.

(7)
Reflects the conversion of our preferred stock into     shares of common stock and the sale of     shares of common stock in the offering.

Unaudited
pro forma basic and diluted earnings per share have been calculated in accordance with the SEC rules for initial public offerings. These rules require that the weighted average share calculation give retroactive effect to any changes in our capital structure as well as the number of shares whose sale proceeds will be used to repay any debt as reflected in the pro forma adjustments. Therefore, pro forma weighted average shares for purposes of the unaudited pro forma basic earnings per share calculation consist of approximately      shares of our common stock outstanding prior to this offering and     million shares of our common stock being offered hereby.

(8)
The Company expects to incur $        of prepayment penalty and the write-off of deferred finance costs as a result of the offering. These fees have been excluded from the pro forma statements of operations.

(9)
Reflects pro forma share data giving effect to the increase of $        , which represents the number of shares that, when multiplied by the offering price of $        , is sufficient to replace the capital in excess of earnings as a result of the distribution to shareholders of $258.0 million in connection with our recapitalization.

21


 
  As of March 31, 2004
 
  Historical
  Offering
adjustments

  Pro forma as adjusted for offering
 
  (unaudited)
(in thousands)

Pro Forma Consolidated
Balance Sheet
                 

Assets

 

 

 

 

 

 

 

 

 
Current assets:                  
  Cash and cash equivalents   $ 17,207   $   (1) $  
  Accounts receivable, net     227,752           227,752
  Inventories, net     131,712           131,712
  Deferred taxes     24,616           24,616
  Prepaid expenses     17,873           17,873
  Other current assets     4,543           4,543
   
 
 
    Total current assets     423,703            

Property, plant, and equipment, net

 

 

284,850

 

 

 

 

 

284,850
Goodwill     306,825           306,825
Other intangible assets, net     75,495           75,495
Deferred taxes     26,025           26,025
Other     34,170       (2)    
   
 
 
    Total assets   $ 1,151,068   $     $  
   
 
 

Liabilities and stockholders' equity

 

 

 

 

 

 

 

 

 
Current liabilities:                  
  Short-term debt   $ 2,712   $   $ 2,712
  Current portion of long-term debt     7,014         (3)    
  Current portion of capital lease obligations     2,150           2,150
  Accounts payable     113,043           113,043
  Accrued expenses     163,717           163,717
  Deferred taxes     340           340
   
 
 
    Total current liabilities     288,976            

Long-term debt

 

 

496,200

 

 

 

  (3)

 

 
Capital lease obligations     3,227           3,227
Deferred taxes     60,952           60,952
Other     62,411           62,411
   
 
 
    Total liabilities     911,766            

Stockholders' equity:

 

 

 

 

 

 

 

 

 
  Preferred Stock     7     (7 )(4)  
  Common Stock     4         (4)    
                (5)    
  Paid-in capital     188,872         (5)    
                (4)    
  Retained earnings (deficit)     (8,839 )          
                (6)    
  Accumulated other comprehensive income     59,258           59,258
   
 
 
    Total stockholders' equity     239,302            
   
 
 
      Total liabilities and stockholders' equity   $ 1,151,068   $     $  
   
 
 

22



(1)
Amount represents cash remaining for general corporate purposes from this offering after prepayment of debt and payment of the estimated expenses of this offering.

(2)
Amount represents the deferred financing fees associated with the prepayment of debt.

(3)
Amount represents the use of proceeds from this offering to prepay certain indebtedness.

(4)
Amount reflects the conversion of                shares of our preferred stock at the issuance amount plus a cumulative amount from the date of issuance to the date of conversion at a rate of 7.5% per year, compounded quarterly, into                shares of common stock upon completion of this offering.

(5)
Amount represents the sale of    shares of common stock in this offering at an assumed initial public offering price of $    per share, less related estimated expenses of $             million, for net proceeds of $             million.

(6)
Amount represents the prepayment penalty and deferred financing fees associated with the prepayment of debt with the anticipated proceeds from this offering.

23



DILUTION

        At March 31, 2004, our net tangible book (deficit) was $(143.0) million, or $        per share of common stock. Net tangible book value (deficit) per share is equal to our stockholders' equity (deficit) less goodwill and other intangible assets, divided by the total number of outstanding shares of our common stock. After giving effect to the sale of the shares of our common stock offered by us at an assumed initial public offering price of $        per share, the mid-point of the range on the cover of this prospectus, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, and the anticipated application of the proceeds from the offering, our net tangible book value at March 31, 2004, would have been $     million, or $        per share. This represents an immediate increase in net tangible book value of $        per share to existing stockholders and an immediate dilution of $        per share to new investors purchasing shares of our common stock in this offering.

        The following table illustrates the dilution per share:

Assumed initial public offering price per share         $  
  Net tangible book value (deficit) per share at March 31, 2004 before giving effect to the offering   $        
  Increase in net tangible book value per share attributable to new investors purchasing shares in the offering            
   
     
Net tangible book value per share after giving effect to the offering            
         
Dilution in net tangible book value per share to new investors         $  
         

        If the underwriters exercise their over-allotment option in full, the net tangible book value per share after giving effect to the offering would be $        per share. This represents an increase in net tangible book value of $        per share to existing stockholders and dilution in net tangible book value of $        per share to new investors.

        The following table summarizes, as of March 31, 2004, the differences between the number of shares of common stock purchased from us, the total cash consideration and the average price per share paid by the existing stockholders and by the new investors purchasing stock in the offering at an assumed initial offering price of $        per share, before deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us:

 
  Shares purchased
  Total cash consideration
   
 
  Average price
per share

 
  Number
  Percentage
  Amount
  Percentage
Existing stockholders         % $       % $  
New investors                        
   
 
 
 
     
Total       100.0 % $     100.0 % $  
   
 
 
 
     

24


        If the underwriters exercise their over-allotment option in full, our existing stockholders would own        % and our new investors would own         % of the total number of shares of our common stock outstanding after this offering.

        The preceding discussion and table assumes no exercise of:

        To the extent that any options are exercised, there will be further dilution to new investors. If all of our outstanding options as of March 31, 2004, had been exercised, the pro forma net tangible book value per share after this offering would have been $        per share, representing an increase in pro forma net tangible book value of $        per share to existing stockholders and a dilution in the pro forma net tangible book value of $        per share to new investors.

25



SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

        The following tables set forth certain selected consolidated financial and operating data. We were incorporated in October 2000 for the purpose of acquiring the Yuasa Inc. industrial battery business from Yuasa Corporation (Japan) and did not have any operations prior to October 1, 2000. Selected consolidated financial data for the periods prior to October 1, 2000, are derived from the consolidated financial statements of Yuasa Inc., which we refer to as the Predecessor Company. The summary consolidated financial data presented below for the three-year period ended March 31, 2004, and the balance sheet data at March 31, 2002, 2003 and 2004, have been derived from our consolidated financial statements which have been audited by Ernst & Young LLP, independent auditors. The summary consolidated financial data presented below as of and for the six months ended March 31, 2001 have been derived from audited financial statements that are not included in this prospectus. The summary consolidated financial data presented below as of and for the fiscal year ended March 31, 2000, and as of and for the six months ended September 30, 2000, have been derived from unaudited financial statements that are not included in this prospectus. You should read the selected financial data presented below in conjunction with our consolidated financial statements and the notes to our consolidated financial statements included elsewhere in this prospectus and "Management's Discussion and Analysis of Financial Condition and Results of Operations."

 
  Fiscal Year
Ended
March 31,

  Six Months
Ended
September 30,

  Six Months
Ended
March 31,

  Fiscal Year Ended March 31,
 
 
  2000
  2000
  2001
  2002
  2003
  2004
 
 
  (Predecessor Company)

  (EnerSys)

 
      (in thousands, except per share amounts)  
Consolidated Statement of Operations:(1)                                      
Net sales   $ 385,124   $ 228,295   $ 233,051   $ 339,340   $ 859,643   $ 969,079  
Cost of goods sold     294,899     175,457     173,146     266,493     653,998     722,825  
   
 
 
 
 
 
 
Gross profit     90,225     52,838     59,905     72,847     205,645     246,254  

Operating expenses

 

 

57,923

 

 

32,774

 

 

30,795

 

 

53,463

 

 

150,618

 

 

170,412

 
Special charges relating to restructuring, bonuses and uncompleted acquisitions                 68,448         21,147  
Amortization(2)     4,052     1,774     2,373     51     51     51  
   
 
 
 
 
 
 
Operating earnings (loss)     28,250     18,290     26,737     (49,115 )   54,976     54,644  
Interest expense     10,582     5,633     7,667     13,294     20,511     20,343  
Special charges relating to a settlement agreement and write-off of deferred finance costs                         30,974  
Other (income) expense, net     384     368     264     1,744     (742 )   (4,466 )
   
 
 
 
 
 
 
Earnings (loss) before income taxes     17,284     12,289     18,806     (64,153 )   35,207     7,793  
Income tax expense (benefit)     6,970     4,967     8,351     (22,171 )   12,355     2,957  
   
 
 
 
 
 
 
Net earnings (loss)   $ 10,314   $ 7,322   $ 10,455   $ (41,982 ) $ 22,852   $ 4,836  
   
 
 
 
 
 
 

Net earnings (loss) per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Basic               $     $     $    
  Diluted               $     $     $    

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Basic                                
  Diluted                                
 
  Fiscal Year
Ended
March 31,

  Six Months
Ended
September 30,

  Six Months
Ended
March 31,

  Fiscal Year Ended March 31,
 
 
  2000
  2000
  2001
  2002
  2003
  2004
 
 
  (Predecessor Company)

  (EnerSys)

 
      (in thousands)        
Consolidated cash flow data: (3)                                      
Cash flows from operating activities     n/a     n/a   $ 30,269   $ 21,068   $ 55,438   $ 39,192  
Cash flows from investing activities     n/a     n/a     (15,965 )   (335,951 )   (12,923 )   (26,981 )
Cash flows from financing activities     n/a     n/a     (7,303 )   314,795     (8,209 )   (39,989 )
Other Operating Data:(1)                                      
Capital expenditures   $ 16,796   $ 10,317   $ 16,049   $ 12,944   $ 23,623   $ 28,580  
EBITDA(4)     45,692     25,596     35,715     (39,563 )   91,651     65,175  
Special charges related to restructuring, bonuses, uncompleted acquisitions, a settlement agreement and write-off of deferred finance costs(5)                 68,448         52,121  

26



 


 

As of March 31,

 
  2000
  2001
  2002
  2003
  2004
 
  (Predecessor Company)

  (EnerSys)

 
  (in thousands)

Balance Sheet Data:                              
Cash and cash equivalents   $ 199   $ 9,135   $ 9,075   $ 44,296   $ 17,207
Working capital     17,081     52,776     104,418     135,356     134,727
Total assets     244,808     445,002     978,889     1,075,808     1,151,068
Total debt     99,788     152,003     253,394     252,162     511,303
Preferred stock             7     7     7
Total stockholders equity   $ 69,427   $ 172,362   $ 414,847   $ 465,747   $ 239,302

(1)
Includes the results of operations of ESG for the full years for fiscal 2003 and fiscal 2004, but only for nine days in fiscal 2002.

(2)
If SFAS No. 142, "Goodwill and Other Intangible Assets," had been adopted as of April 1, 1999, the absence of goodwill amortization would have increased the net earnings for the fiscal year ended March 31, 2000, six months ended September 30, 2000, and six months ended March 31, 2001, by approximately $1,847, $780 and $2,365, respectively.

(3)
Information not available for fiscal 2000 and the first six months of 2001.

(4)
EBITDA is defined as earnings before interest expense, income tax expense, depreciation and amortization. EBITDA is not a measure of financial performance under accounting principles generally accepted in the United States and should not be considered an alternative to net income or any other measure of performance under accounting principles generally accepted in the United States as a measure of performance or to cash flows from operating, investing or financing activities as an indicator of cash flows or as a measure of liquidity. EBITDA has its limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under generally accepted accounting principles. Some of these limitations are:

    it does not reflect our cash expenditures for capital expenditures or contractual commitments;

    it does not reflect the impact of changes in effective tax rates or the use of net operating losses;

    although depreciation and amortization are non-cash charges, the assets being depreciated or amortized often will have to be replaced and EBITDA does not reflect the cash requirements for such replacements;

    it does not reflect changes in, or cash requirements for, our working capital requirements; and

    it does not reflect the cash necessary to make payments of interest or principal on our indebtedness.


Because of these limitations, EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying on our GAAP results as well as on our EBITDA and by carefully budgeting our projected cash requirements for interest, capital expenditures and taxes. Our calculation of EBITDA may be different from the calculations used by other companies, and therefore comparability may be limited. Certain financial covenants in our senior secured credit facility and our senior second lien credit facility are based on EBITDA, subject to adjustments, and therefore EBITDA for purposes of these financial covenants may be calculated differently from EBITDA as shown above. Depreciation and amortization in the table excludes amortization of deferred financing costs, which is included in interest expense.

27


        The following table provides a reconciliation of EBITDA to net earnings (loss):

 
  Fiscal Year Ended March 31,
 
  2002
  2003
  2004
 
  (in thousands)

EBITDA   $ (39,563 ) $ 91,651   $ 65,175
  Depreciation and amortization     11,296     35,933     37,039
  Interest expense     13,294     20,511     20,343
  Income tax (benefit) expense     (22,171 )   12,355     2,957
   
 
 

Net (loss) earnings

 

$

(41,982

)

$

22,852

 

$

4,836
   
 
 

We have included EBITDA primarily as a performance measure because management uses it as a key measure of our performance and ability to generate cash necessary to meet our future debt service and capital expenditure requirements. Management also uses EBITDA to measure our compliance with important financial covenants under our credit facilities and to analyze our performance against our key public-company competitors, recognizing that the different ways in which different companies calculate EBITDA limits its usefulness as a measure of comparability.

(5)
Special charges are discussed in detail in the notes to our consolidated financial statements and in "Management's Discussion and Analysis of Financial Condition and Results of Operations." The fiscal 2002 charges were primarily for the closures of a plant and certain other locations in the U.S. and our South American operations. The charges in fiscal 2004 related primarily to a settlement with Invensys, the recapitalization in March 2004 and costs of uncompleted acquisition attempts.

28



MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        The following discussion and analysis of our financial condition and results of our operations should be read in conjunction with our consolidated financial statements and accompanying notes included elsewhere in this prospectus. Some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to our plans and strategy, constitutes forward-looking statements that involve risks and uncertainties. See "Forward-Looking Statements" and "Risk Factors" for more information.

Introduction

        We manufacture, market and distribute reserve power and motive power lead-acid industrial batteries and related products such as chargers, power equipment and battery accessories. We also provide related after-market and customer-support services for lead-acid industrial batteries. We market and sell our products globally in more than 100 countries to over 10,000 customers through a network of distributors, independent representatives and an internal sales force. For fiscal 2004, we derived approximately 70% of our revenue from our internal sales force. No single customer accounts for greater than 6% of our consolidated revenue.

        We have two business segments: reserve power and motive power. Net sales classifications by segment are as follows:

        We evaluate business segment performance based primarily upon operating earnings, exclusive of restructuring charges and unusual and special charge items. All other corporate and centrally incurred regional costs are allocated to the business segments based principally on net sales. We evaluate business segment cash flow and financial position performance based primarily upon capital expenditures and primary working capital levels. Primary working capital for this purpose is trade accounts receivable, plus inventories, minus trade accounts payable and the resulting net amount is divided by the trailing three month net sales (annualized) for the respective business segment or reporting location, to derive a primary working capital percentage ratio. Although we monitor the three elements of primary working capital (receivables, inventory and payables), our primary focus is on the total amount. Primary working capital was $203.3 million (yielding a primary working capital percentage ratio of 22.1%) at March 31, 2003, and $246.4 million (yielding a primary working capital percentage ratio of 22.4%) at March 31, 2004. Since fiscal 2003 was the first full year after the ESG acquisition, prior comparative figures for primary working capital are not meaningful. We closely manage our level of working capital due to the significant impact it has on cash flow and, as a result, our level of debt. Lastly, on a consolidated basis, we review short and long term debt levels, on a daily basis, with corresponding leverage ratios monitored, primarily using debt to EBITDA ratios, excluding special charges. EBITDA is earnings before interest, income taxes, depreciation and amortization. Special charges are expenses not normally incurred in the day-to-day operations of our business and, in our opinion, are not indicative of our core operating performance. Examples include charges incurred in fiscal 2002 to restructure the predecessor company operations and charges incurred in fiscal 2004 associated with the costs of an uncompleted acquisition attempts, an omnibus settlement with Invensys and costs in connection with a recapitalization transaction.

        We operate and manage our business in three primary geographic regions of the world—the Americas, Europe and Asia. Our business is highly decentralized with 19 manufacturing locations throughout the world. Over half of our net sales for fiscal 2003 and fiscal 2004 were generated outside of

29



North America. Approximately half of our manufacturing and distribution facilities are located outside of the U.S. See "Risk Factors—Risks Relating to Our Business" and "Business—Facilities." Our international operations may be adversely affected by actions taken by foreign governments or other forces or events over which we may have no control. Our management structure and financial reporting systems, and associated internal controls and procedures, are all consistent with our two business segments and three geographic regions in which we operate. We report on a March 31 fiscal year.

        Our financial results are largely driven by the following factors:

        In fiscal 2004, approximately 34% of our total costs were fixed and 66% were variable.

        Starting in fiscal 2002, the telecommunications industry dramatically reduced building new systems in response to massive overcapacity. Additionally, in fiscal 2002 and fiscal 2003 the global economy was weak. These conditions combined to produce excess capacity in some sectors of our industry, driving consolidation among industrial battery purchasers. Several of our competitors experienced financial difficulties. As a result, we have been subjected to continual and significant pricing pressures over the past several years. We anticipate heightened competitive pricing pressure as Chinese and other foreign producers, able to employ labor at significantly lower costs than producers in the U.S. and Western Europe, expand their export capacity and increase their marketing presence in our major U.S. and European markets. Our ability to maintain and improve our operating margins has depended, and continues to depend, on our ability to control our costs and maintain our pricing. As a result, our business strategy has been highly focused on increasing our market share, tightly controlling capital expenditures and cash and reducing our costs as sales volumes fell.

        There have been several key stages in the development of our business, which explain to a significant degree our results of operations over the past four years.

        We were formed in late 2000 by Morgan Stanley Capital Partners and the management of Yuasa Inc. to acquire the industrial battery business of Yuasa Corporation (Japan) in North and South America. Our reported results for the period prior to the acquisition of this business reflect the operations of the predecessor company to the business we acquired.

        In addition, our results of operations for the past three fiscal years have been significantly affected by our acquisition of ESG on March 22, 2002. This acquisition more than doubled our size. Our results of operations for fiscal 2002 include ESG for only nine days, while our results for fiscal 2003 and 2004 include ESG for the full fiscal year. Giving effect to the ESG acquisition, as if it occurred at the beginning of fiscal 2002, pro forma net sales and net loss would have been $897.5 million and $(36.4 million), respectively. We incurred special charges of $68.4 million in fiscal 2002, as discussed under "Consolidated fiscal year ended March 31, 2003, compared to fiscal year ended March 31, 2002, statement of operations highlights—Special Charges." These charges adversely affected our reported results.

30



        Our successful integration of ESG provided global scale in both the reserve and motive power markets. The ESG acquisition also provided us with a further opportunity to reduce costs and improve operating efficiency that, among other initiatives, led to closing underutilized manufacturing plants, distribution facilities, sales offices and eliminating other redundant costs, including staff. As noted above, we recorded a $68.4 million special charge in fiscal 2002 associated with this business activity and strategy.

        The cash purchase price for ESG was approximately $363 million and was financed by convertible preferred stock of $283 million, a seller note of $58.3 million and additional borrowings. We acquired net assets of approximately $363 million, which included goodwill of approximately $172 million. On March 17, 2004, we refinanced the ESG acquisition debt and completed a recapitalization transaction in which we entered into a new $600 million financing arrangement, consisting of a $100 million senior secured revolving credit facility, a $380 million senior secured term loan B and a $120 million senior second lien term loan. We will repay the $120 million senior second lien term loan and a portion of the $380 million senior secured term loan B with a portion of the proceeds of this offering. We used $500 million of the proceeds of these credit facilities to repay existing debt of $219 million, to fund a cash payment of $270 million to our existing stockholders and management and to pay transaction costs of $11 million.

        Our historical consolidated financial statements show our result of operations as a private company. After completion of this offering, we will be a public company, and we estimate that the incremental costs of complying with our new public company reporting obligations will be approximately $5 million per year.

        Our operating results are directly affected by the general cyclical pattern of the industries in which our major customer groups operate. For example, the significant capital expenditures made by the telecommunications industry during the period from fiscal 1999 through fiscal 2001 drove demand for our reserve power products, as numerous companies expanded their systems and installed standby backup battery power systems. However, the demand for our reserve power systems declined when the telecommunications industry significantly reduced building new systems in response to massive overcapacity.

        Both our reserve power and motive power segments are heavily dependent on the end markets they serve, and our results of operations will vary depending on the capital expenditure environment in these markets. In addition, general economic conditions in the U.S. and international markets in which we and our customers operate also affect demand for our products. Sales of our motive power products, for example, depend significantly on demand for new electric industrial forklift trucks, which in turn depends on end-user demand for additional motive capacity in their distribution and manufacturing facilities. The overall economic conditions in the markets we serve can be expected to have a material effect on our results of operations.

        In fiscal 2003, market and economic conditions stabilized, the euro strengthened on average for the year by 14% against the dollar and our cost-reduction initiatives yielded savings in excess of $35.0 million. In fiscal 2004, market and economic conditions generally were stable and began improving, particularly in the second half of the fiscal year in the Americas and Asia. See "Quarterly Information." In fiscal 2004, excluding special charges, earnings and operating cash flow increased as sales volume (excluding the effect of foreign currency translation) increased approximately 4%, the euro strengthened on average for the year by 18% against the dollar and cost-reduction programs yielded approximately $30.0 million of additional savings.

        In late fiscal 2004, our primary raw material costs began increasing significantly, with the cost of lead—approximately 30% of our total raw material costs—increasing approximately 30% in the fourth quarter of fiscal 2004 over the prior fiscal quarter. We anticipate our average cost of lead in fiscal 2005 will be substantially higher than in fiscal 2004. We enacted a series of list price increases totaling approximately 5% in late fiscal 2004, which will increase our battery selling prices during fiscal 2005 if these increases are accepted by our customers. We cannot assure you that our price increases will be accepted by the industry.

31



Further cost-reduction programs have been identified that will partially offset rising raw material costs. If lead prices for fiscal 2004 remain at their current level, and if we are unable to adjust our pricing to accommodate increased lead costs, we would experience a significant decline in operating earnings in fiscal 2005.

        Cost savings programs are and have been a continuous element of our business strategy and are directed primarily at further reductions in plant manufacturing (labor and overhead) and raw material costs. Numerous individual cost savings opportunities are identified and evaluated by management with a formal selection and approval process that results in an ongoing list of cost savings projects to be implemented. In certain cases, projects are either modified or abandoned during their respective implementation phases. In order to realize cost savings benefits for a majority of these initiatives, costs are incurred either in the form of capital expenditures, funding the cash obligations of previously recorded restructuring expenses or current period expenses. During fiscal 2004, approximately $10 million of our capital expenditures were related to cost savings initiatives, and we funded approximately $7.7 million of cash obligations associated with previously recorded restructuring activities. Current period expenses were not significant during fiscal 2004.

        Net sales include: the invoiced amount for all products sold and services provided; freight costs, when paid for by our customers; less all related allowances, rebates, discounts and sales, value-added or similar taxes.

        Cost of goods sold includes: the cost of material, labor and overhead; the cost of our service businesses; freight; warranty and other costs such as distribution centers; obsolete or slow moving inventory provisions; and certain types of insurance.

        We estimate that the Cost of goods sold includes the following approximate components of cost for fiscal 2004:

Raw materials   49 %
Labor and overhead   40  
   
 
  Subtotal   89  

Freight

 

6

 
All other, including warranty expense   5  
   
 
  Total   100 %
   
 

        These components of cost of goods sold are substantially similar in our two business segments and remain relatively consistent from year to year.

        We employ significant amounts of lead, plastics, steel, copper and other materials in our manufacturing processes. The costs of these raw materials, particularly lead, are volatile and beyond our control. Lead costs increased approximately $12 million in fiscal 2004 as a result of price increases experienced during that year. Lead is our single largest raw material item and represents approximately 30% of total raw material costs. Lead prices have experienced significant volatility during the past six months. The highest price for lead during fiscal 2004 was $0.4423 per pound on March 1, 2004, and the highest price for lead since the end of fiscal 2004 was $0.3860 per pound on April 1, 2004. Lead, plastics, steel and copper in the aggregate represent approximately 75% of our total raw material costs. Volatile raw materials costs can significantly affect our operating results and make period-to-period comparisons difficult. The costs of commodity raw materials such as lead, steel and copper have increased significantly in recent periods. We attempt to control our raw material costs through strategic purchasing decisions. Where possible, we pass along some or all of our increased raw material costs to our customers. The

32



following table shows certain average commodity prices for fiscal 2002, 2003 and 2004 and the spot prices as of May 4, 2004:

 
  Fiscal year ended March 31,
   
 
  May 4, 2004
 
  2002
  2003
  2004
Lead $/lb.(1)   $ 0.2159   $ 0.2053   $ 0.2773   $ 0.3406
Steel $/lb.(2)     0.1502     0.1700     0.1688     0.3500
Copper $/lb.(3)     0.7158     0.7074     0.9307     1.2770

(1)
Source: London Metal Exchange

(2)
Source: Nucor Corporation

(3)
Source: Comex for 2002 and 2003 and London Metal Exchange for 2004

        Labor and overhead are primarily attributable to our manufacturing facilities. Labor costs represent approximately 57% of this total category. Overhead includes plant operating costs such as utilities, repairs and maintenance, taxes, supplies and depreciation.

        Operating expenses include all non-manufacturing selling, general and administrative, engineering and other expenses. These include salaries and wages, sales commissions, fringe benefits, supplies, maintenance, general business taxes, rent, communications, travel and entertainment, depreciation, advertising and bad debt expenses.

        Operating expenses are incurred in the following functional areas of our business and are substantially similar in both of our business segments. Approximately 61% of total operating expenses are for staff costs.

Selling   67 %
General and administrative   27  
Engineering   6  
   
 
  Total   100 %
   
 

        Special charges are expenses not normally incurred in the day-to-day operations of our business. The special charges recorded in fiscal 2002 related to restructuring, a portion of which the ESG operations acquired from Invensys. These charges include closure of a redundant U.S. manufacturing facility, terminating non-strategic operations in South America and eliminating redundant EnerSys products. The special charges recorded in fiscal 2004 related to the settlement with Invensys discussed elsewhere in this prospectus, primarily the early extinguishment of the seller notes that we delivered as part of the consideration for the purchase of ESG in March 2002, as well as costs incurred in connection with our recapitalization in March 2004.

        Other income (expense), net includes non-operating foreign currency transaction gains (losses), fixed asset disposal gains (losses), license fees and rental income. Our exposure to exchange rate fluctuations is largely limited to currency translation gains (losses) reflected on our financial statements. Due to our global manufacturing and distribution footprint, which means that most of our operating costs and revenues are incurred and paid in local currencies, we believe that we have a significant natural hedge against the impact on our business of exchange rate fluctuations.

33



Results of Operations

 
  Fiscal 2003
  Fiscal 2004
  Increase (Decrease)
 
 
  In
Millions

  As %
Net Sales

  In
Millions

  As %
Net Sales

  In
Millions

  %
 
Net sales   $ 859.6   100.0 % $ 969.1   100.0 % $ 109.5   12.7 %
Cost of goods sold     653.9   76.1     722.8   74.6     68.9   10.5  
   
 
 
 
 
     
Gross profit     205.7   23.9     246.3   25.4     40.6   19.7  
Operating expenses     150.6   17.5     170.5   17.6     19.9   13.2  
Special charges relating to restructuring, bonuses and uncompleted acquisitions     0.0   0.0     21.1   2.2     21.1   n/a  
Amortization     0.1   0.0     0.1   0.0     (0.0 ) (0.0 )
   
 
 
 
 
     
Operating earnings     55.0   6.4     54.6   5.6     (0.4 ) (0.7 )
Interest expense     20.5   2.4     20.3   2.1     (0.2 ) (1.0 )
Special charges relating to a settlement agreement and write-off of deferred finance costs     0.0   0.0     31.0   3.2     31.0   n/a  
Other (income) expense, net     (0.7 ) (0.1 )   (4.5 ) (0.5 )   3.8   n/a  
   
 
 
 
 
     
Earnings before income taxes     35.2   4.1     7.8   0.8     (27.4 ) (77.8 )
Income tax expense     12.3   1.4     3.0   0.3     (9.3 ) (75.6 )
   
 
 
 
 
     
Net earnings   $ 22.9   2.7 % $ 4.8   0.5 % ($ 18.1 ) (79.0 )
   
 
 
 
 
     

        Our fiscal 2004 results were favorably affected by an improving global economic climate, particularly in the Americas and Asia during the second half of the fiscal year, increased sales volume (excluding the effect of foreign currency translation) of 3.8%, cost reduction programs that saved approximately $30 million and continued low interest rates. Net earnings were $4.8 million. Comparisons with the prior fiscal year can be misleading, because we incurred no special charges in fiscal 2003 and incurred special charges aggregating $52.1 million in fiscal 2004. In order to make such comparisons more meaningful, we evaluate our performance primarily based on operating earnings without giving effect to special charges and other unusual items. Management believes that it is better able to evaluate performance by focusing on our operations excluding special charges.

        Net sales by geographic region were as follows:

 
  Fiscal 2003
  Fiscal 2004
  Increase
 
 
  In
Millions

  % Total
Sales

  In
Millions

  % Total
Sales

  In
Millions

  %
 
Europe   $ 434.5   50.5 % $ 511.1   52.7 % $ 76.6   17.6 %
Americas     392.0   45.6     408.8   42.2     16.8   4.3  
Asia     33.1   3.9     49.2   5.1     16.1   48.6  
   
 
 
 
 
     
  Total   $ 859.6   100.0 % $ 969.1   100.0 % $ 109.5   12.7  
   
 
 
 
 
     

        The net sales growth in Asia and the Americas was primarily driven by sales volume increases, while the growth in Europe was virtually all attributable to the strengthening of major European currencies, primarily the euro, against the dollar. Pricing was generally stable during fiscal 2004, with the exception of certain reserve power products, particularly in Asia, where pricing declined modestly.

34



        Operating earnings by geographic region were as follows:

 
  Fiscal 2003
  Fiscal 2004
  Increase (Decrease)
 
 
  In
Millions

  As%
Net Sales

  In
Millions

  As%
Net Sales

  In
Millions

  %
 
Europe   $ 26.7   6.1 % $ 37.0   7.2 % $ 10.3   38.6 %
Americas     24.7   6.3     34.4   8.4     9.7   39.3  
Asia     5.7   17.2     4.3   8.7     (1.4 ) (24.6 )
   
 
 
 
 
     
  Subtotal     57.1   6.6     75.7   7.8     18.6   32.6  
Eliminations, special charges and other     (2.1 ) (0.2 )   (21.1 ) (2.2 )   (19.0 ) n/a  
   
 
 
 
 
     
    Total   $ 55.0   6.4 % $ 54.6   5.6 % $ (0.4 ) (0.7 )
   
 
 
 
 
     

        Our fiscal 2004 operating results reflect $21.1 million of special charges. The table above shows our operating earnings by geographic region, excluding special charges, which is how they are evaluated by management, and reconciles these results to our consolidated operating earnings including special charges. The special charges are described in detail below under "Special Charges." Europe accounted for 49% of our operating earnings for fiscal 2004, the Americas for 45% and Asia for 6%. Our operating earnings, giving effect to the special charges, were 0.7% lower than operating earnings for fiscal 2003, but improved significantly when special charges are excluded. This improvement is primarily attributable to a modest improvement in sales volumes, the strong European currencies, primarily the euro, and cost savings programs. Operating earnings margins for fiscal 2004, giving effect to the special charges, decreased by 80 basis points but, excluding special charges, improved 120 basis points primarily as a result of increased sales volumes and cost savings programs.

        In the Americas, operating earnings increased as substantial improvements were achieved in cost reductions and unit sales volume increased, particularly in the motive power business. In Europe, operating earnings increased as substantial improvements were achieved in cost reduction and European currencies, primarily the euro, strengthened compared to the dollar. In Asia, operating earnings decreased as pricing declined approximately 3% and significant startup costs were incurred in adding sales offices and related costs during the year.

        A discussion of specific fiscal 2004 versus fiscal 2003 operating results follows, including an analysis and discussion of the results of our two business segments.

 
  Fiscal 2003
  Fiscal 2004
  Increase
 
 
  In
Millions

  % Total
Sales

  In
Millions

  % Total
Sales

  In
Millions

  %
 
Reserve power   $ 426.9   49.7 % $ 480.0   49.5 % $ 53.1   12.4 %
Motive power     432.7   50.3     489.1   50.5     56.4   13.0  
   
 
 
 
 
     
  Total   $ 859.6   100.0 % $ 969.1   100.0 % $ 109.5   12.7  
   
 
 
 
 
     

        Fiscal 2004 unit sales volume increased 3.8% or $32.6 million with the balance of the fiscal 2004 increase of $76.9 million attributable to the strong European currencies, primarily the euro, compared to the dollar. The euro exchange rate to the dollar averaged 1.18 ($ / €) in fiscal 2004 compared to 1.00 ($ / €) in fiscal 2003. Pricing was stable but down slightly for fiscal 2004. Motive power pricing was stable throughout fiscal 2004, with the Americas flat and Europe down approximately 0.5%. Reserve power pricing was down approximately 1% during fiscal 2004, with the Americas and Europe down slightly and Asia down approximately 3%, as competitive factors in China, which recently have stabilized, have driven pricing down over the past two-year period and are now comparable with pricing levels in other regions of the world.

35


        Fiscal 2004 net sales growth in the Asia reserve power business was very strong with an increase of approximately 49%, based primarily upon a focused expansion of our sales offices and added sales personnel, selected new products and strong market growth in China. We expect the Asian market will continue to grow at a faster rate than other regions of the world for our reserve power products.

        Fiscal 2004 net sales volume growth, excluding the effect of foreign currency translation, in reserve power and motive power was approximately 3.8% and 4.3%, respectively, compared to fiscal 2003 levels. In reserve power, Asia experienced strong fiscal 2004 growth as previously discussed, with the Americas up approximately 1% and Europe flat over fiscal 2003. In motive power, fiscal 2004 sales volume, excluding the effect of foreign currency translation, increased approximately 7% in the Americas and 2% in Europe compared to fiscal 2003.

        Our fiscal 2004 sales also benefited from improving economic conditions in the second half of the year, particularly in the Americas and Asia, for many of our end markets applications, such as electric industrial forklift trucks, wireless telecom and aerospace and defense. As further evidence of the improved business climate and its favorable impact on our financial results in the second half of fiscal 2004, the following table shows growth rates in fiscal 2004 compared to fiscal 2003 third and fourth quarters net sales and operating earnings:

 
  3rd Quarter
  4th
Quarter

  3rd Quarter
  4th
Quarter

 
 
   
   
  Excluding Special Charges
 
Net sales   $ 253,246   $ 275,374   $ 253,296   $ 275,379  
Net sales growth rate                          
  In dollars     19.0 %   19.3 %   19.0 %   19.4 %
Special charges relating to restructuring, bonuses and uncompleted acquisitions   $ 9,045   $ 12,052   $   $  
Operating earnings   $ 11,953   $ 12,783   $ 21,048   $ 24,835  

Operating earnings growth rate

 

 

 

 

 

 

 

 

 

 

 

 

 
  In dollars     (22.6 )%   (26.0 )%   35.5 %   43.4 %
  Margin (decrease) increase     (2.6 )%   (2.9 )%   1.0 %   1.5 %
 
  Fiscal 2003
  Fiscal 2004
  Increase
 
 
  In
Millions

  As %
Net Sales

  In
Millions

  As %
Net Sales

  In
Millions

  %
 
Gross profit   $ 205.7   23.9 % $ 246.3   25.4 % $ 40.6   19.7 %

        The improvement in gross profit was realized by both business segments and was driven primarily by increased net sales volume and cost savings programs, partially offset by higher raw material costs in the second half of fiscal 2004. Lead costs increased approximately $12 million in fiscal 2004 as a result of higher prices. Because of these higher costs and price volatility, we have modified and implemented new purchasing initiatives, such as lead tolling arrangements and lead hedging contracts, to mitigate increased raw materials costs. Fiscal 2004 cost savings initiatives of approximately $25 million improved gross profit, with most savings related to reductions in manufacturing plant costs (labor and overhead), particularly in Europe, and raw material costs. These cost reduction programs remain a critical element of our business strategy to continue to improve efficiencies, optimize our manufacturing capacity and further reduce our costs. We anticipate fiscal 2005 cost savings program will realize additional savings.

36



 
  Fiscal 2003
  Fiscal 2004
  Increase
 
 
  In
Millions

  As %
Net Sales

  In
Millions

  As %
Net Sales

  In
Millions

  %
 
Operating expenses   $ 150.6   17.5 % $ 170.4   17.6 % $ 19.8   13.1 %

        Selling expenses, as a percentage of operating expenses, were approximately 66.5% in fiscal 2003 and 64.3% in fiscal 2004. We incurred increased selling expenses in Asia in fiscal 2004 as we expanded our sales locations and personnel in Asia.

        Included in our fiscal 2004 operating results are $52.1 million of special charges as follows:

 
  Fiscal 2004
 
  In
Millions

  Fiscal Quarter
Recorded

Recorded as an operating expense:          
  Special bonus   $ 12.0   4th
  Uncompleted acquisition attempts     6.8   3rd
  Restructuring     2.3   3rd
   
   
    Total operating expense     21.1    

Recorded in other non-operating expenses:

 

 

 

 

 
  Invensys settlement agreement     24.4   3rd
  Deferred finance costs     6.6   4th
   
   
    Total other non-operating expense     31.0    
   
   
     
Combined total

 

$

52.1

 

 
   
   

        The special bonus was paid in connection with the March 17, 2004 recapitalization transaction. As part of the recapitalization transaction, in order to provide liquidity to our existing stockholders, we distributed $258.0 million to our preferred and common stockholders, pro rata in accordance with their stockholdings. In order to treat management equitably with other stockholders, because significant portions of management's equity interests are in the form of options to purchase shares of our common or preferred stock, we made a cash distribution to each individual based on the aggregate in-the-money value of his or her vested options. These one-time bonus payments were made to all members of management who held unexercised options. The amounts paid to our five highest-compensated officers are disclosed in "Management—Executive Compensation."

        The charge for uncompleted acquisitions primarily includes legal and professional fees, and the plant closing costs are related to the final settlement of labor matters from a North American plant closed in fiscal 2002.

        The $24.4 million charge associated with Invensys represents an omnibus settlement that, among other items, repaid seller notes, terminated a battery supply agreement and canceled common stock warrants, all of which were attributable to the ESG acquisition. Approximately $20.0 million of this special charge is attributable to the early extinguishment of the seller notes. The deferred financing costs written off related to debt refinanced in the March 2004 recapitalization.

        In the aggregate, $33.5 million of these special charges were recorded in the third quarter and $18.6 million in the fourth quarter of fiscal 2004. Of the total $52.1 million in special charges, $6.6 million was a non-cash item.

37



 
  Fiscal 2003
  Fiscal 2004
  Increase (Decrease)
 
 
  In
Millions

  As %
Net Sales

  In
Millions

  As %
Net Sales

  In
Millions

  %
 
Reserve power   $ 31.2   7.3 % $ 38.7   8.1 % $ 7.5   24.0 %
Motive power     23.8   5.5     37.0   7.6     13.2   55.5  
   
 
 
 
 
     
  Subtotal     55.0   6.4     75.7   7.8     20.7   37.6  

Special charges relating to restructuring, bonuses and uncompleted acquisitions

 

 


 


 

 

(21.1

)

(2.2

)

 

(21.1

)

n/a

 
   
 
 
 
 
     
  Total   $ 55.0   6.4 % $ 54.6   5.6 % $ (0.4 ) (0.7 )
   
 
 
 
 
     

        Fiscal 2004 operating earnings decreased 0.7% to $54.6 million while the operating margin decreased by 80 basis points to 5.6%. Fiscal 2004 operating earnings, excluding special charges of $21.1 million, increased 37.6% to $75.7 million while the margin increased 140 basis points to 7.8%. We experienced increases and margin improvements in both segments of our business. This improvement in operating earnings excluding special charges is primarily attributable to increases in sales volume, cost savings initiatives and the strength of the European currencies, partially offset by higher raw material costs and increased operating expenses.

        Fiscal 2004 interest expense of $20.3 million (net of interest income of $0.3 million) was essentially flat compared to fiscal 2003 of $20.5 million with a lower average interest rate of 5.0% in fiscal 2004 compared to 5.1% in fiscal 2003, and the lower average debt outstanding of $285 million compared to $292 million in fiscal 2003. The average debt outstanding includes the face amount of the discounted seller notes redeemed in December 2003 and borrowings under our accounts receivable financing program. Included in fiscal 2004 interest expense are non-cash charges of $4.9 million compared to $5.3 million in fiscal 2003. This increase is primarily due to the reduction in the non-cash credit in fiscal 2003 associated with our interest rate options, which expired in fiscal 2004, partially offset by a reduction in the charge associated with the accretion expense of the Invensys seller notes. Included in both years is approximately $2 million of amortization of deferred financing costs.

        Fiscal 2004 other income of $4.5 million consists primarily of non-operating foreign currency transaction gains of $4.0 million, which is also the primary reason for the significant increase compared to fiscal 2003. This large fiscal 2004 foreign currency transaction gain is primarily attributable to the strengthening of the euro against the dollar for certain debt transactions that occurred during the first and second quarters of fiscal 2004.

        Fiscal 2004 earnings before income taxes were $7.8 million, a decrease of $27.4 million or 77.8% compared to fiscal 2003, primarily attributable to $52.1 million of fiscal 2004 special charges.

        The fiscal 2004 effective income tax rate was 37% compared to 35% in fiscal 2003. This increase is largely the result of increased U.S. federal income taxes on certain types of undistributed foreign income (Subpart F) and increased U.S. state income taxes, as many states in which we operate continue to increase

38


rates or reduce available income exclusions. We expect the effective tax rate in fiscal 2005 will be approximately 37%.

        Fiscal 2004 net earnings were $4.8 million or a decrease of 78.8% compared to fiscal 2003 net earnings of $22.9 million. Excluding the $52.1 million in special charges (net of tax), we would have recorded net earnings of $37.7 million in fiscal 2004, an increase of 64.6% compared to fiscal 2003 with a margin of 3.9%. This increase in net earnings is primarily attributable to increased sales volume, cost savings initiatives, stable interest expense and increased other income from foreign currency gains, offset by higher raw material and operating costs.

        Consolidated fiscal year ended March 31, 2003, compared to fiscal year ended March 31, 2002, statement of operations highlights

 
  Fiscal 2002
  Fiscal 2003
  Increase (Decrease)
 
 
  In
Millions

  As %
Net Sales

  In
Millions

  As %
Net Sales

  In
Millions

  %
 
Net sales   $ 339.3   100.0 % $ 859.6   100.0 % $ 520.3   153.3   %
Cost of sales     266.5   78.5     653.9   76.1     387.4   145.4   
   
 
 
 
 
     
Gross profit     72.8   21.5     205.7   23.9     132.9   182.6   
Operating expenses     53.5   15.8     150.6   17.5     97.1   181.5   
Special charges relating to restructuring, bonuses and uncompleted acquisitions     68.4   20.2     0.0   0.0     (68.4 ) (100.0 )
Amortization     0.0   0.0     0.1   0.0     0.1   n/a  
   
 
 
 
 
     
Operating earnings (loss)     (49.1 ) (14.5 )   55.0   6.4     104.1   (212.0 )
Interest expense     13.3   3.9     20.5   2.4     7.2   54.1   
Special charges relating to a settlement agreement and write-off of deferred finance costs     0.0   0.0     0.0   0.0     0.0   n/a  
Other (income) expense, net     1.8   0.5     (0.7 ) (0.1 )   (2.5 ) (138.9 )
   
 
 
 
 
     
Earnings (loss) before income taxes     (64.2 ) (18.9 )   35.2   (4.1 )   99.4   (154.8 )
Income tax expense (benefit)     (22.2 ) (6.5 )   12.3   1.4     34.5   (155.4 )
   
 
 
 
 
     
Net earnings (loss)   $ (42.0 ) (12.4 )% $ 22.9   2.7 % $ 64.9   (154.5 )
   
 
 
 
 
     

        Fiscal 2003 operating results include the ESG acquisition for a full fiscal year, while fiscal 2002 includes only nine days or $11.5 million in net sales. Accordingly, the significant increase in most components of fiscal 2003 income statement line items is primarily attributable to the impact of this fiscal 2002 acquisition. Giving effect to the ESG acquisition, as if it occurred at the beginning of fiscal 2002, pro forma net sales and net loss for fiscal 2002 would have been $897.5 million and $36.4 million, respectively. We incurred $68.4 million in fiscal 2002 special charges. The ESG acquisition increased fiscal 2003 net sales by approximately $563 million.

        Our fiscal 2003 operating results were negatively affected by a weak and volatile global economic climate, particularly in the Americas reserve power market, reduced sales volumes, excluding the effect of foreign currency translation, of approximately 7% when giving effect to the ESG acquisition as if it occurred at the beginning of fiscal 2002, higher interest expense attributable to the ESG acquisition, offset

39



in part by non-operating currency gains attributable to strengthening European currencies, primarily the euro, that increased net sales approximately $50 million, and cost savings initiatives that resulted in savings exceeding $35 million.

        Our fiscal 2002 results included $68.4 million in charges described below under "Special Charges." These charges included $51.7 million in non-cash items.

        Net sales by geographic region were as follows:

 
  Fiscal 2002
  Fiscal 2003
  Increase
 
  In
Millions

  % Total
Sales

  In
Millions

  % Total
Sales

  In Millions
Europe   $ 8.8   2.6%   $ 434.5   50.5%   $ 425.7
Americas     330.2   97.3         392.0   45.6         61.8
Asia     0.3   0.1         33.1   3.9         32.8
   
 
 
 
 
  Total   $ 339.3   100.0%   $ 859.6   100.0%   $ 520.3
   
 
 
 
 

        The $520.3 million increase in fiscal 2003 net sales was the result of the ESG acquisition. Pricing declined in fiscal 2003 in excess of 1%, particularly in reserve power products.

        Our fiscal 2003 operating earnings by geographic region were $26.7 million in Europe (6.1% margin), $24.7 million in the Americas (6.3% margin) and $5.7 million (17.2% margin) in Asia. A fiscal 2002 operating loss of $49.1 million (14.5% margin) was incurred. This loss included a special charge of $68.4 million described below under "Special Charges."

        A discussion of specific fiscal 2003 versus fiscal 2002 operating results follows, including an analysis and discussion of the results of our two business segments.

 
  Fiscal 2002
  Fiscal 2003
  Increase (Decrease)
 
  In
Millions

  As %
Total Sales

  In
Millions

  As %
Total Sales

  In
Millions

  %
Reserve power   $ 162.6   47.9%   $ 426.9   49.7%   $ 264.3   162.5%
Motive power     176.7   52.1         432.7   50.3         256.0   144.9    
   
 
 
 
 
   
  Total   $ 339.3   100.0%   $ 859.6   100.0%   $ 520.3   153.3    
   
 
 
 
 
   

        The inclusion of ESG net sales for the full year of fiscal 2003 resulted in an increase of approximately $563 million in net sales compared with fiscal 2002, partially offset by a decrease of approximately $43 million in the pre-acquisition EnerSys business. The $43 million decrease included the cost related to the closure of certain facilities at the end of fiscal 2002. Fiscal 2002 net sales included $11.5 million from ESG. Foreign currency translation adjustments of $50.0 million, primarily the euro, had approximately a 6% positive impact on net sales in fiscal 2003. Both reserve power and motive power fiscal 2003 net sales increased by approximately 150% as a result of the ESG acquisition. Giving effect to the ESG acquisition as of the beginning of fiscal 2002, pro forma sales volume, excluding the effect of foreign currency translation, decreased in fiscal 2003 by approximately 7%. Of this fiscal 2003 pro forma sales volume decrease, excluding the effect of foreign currency translation, approximately 14% was in the reserve power segment, particularly in the Americas where sales volumes, excluding the effect of foreign currency translation, decreased approximately 25%. The motive power segment decreased approximately 1% in fiscal 2003 on a pro forma basis. The fiscal 2003 weakness experienced in reserve power was primarily the result of the continued retrenchment in the global telecommunications industry that began in fiscal 2002, and reduction in the UPS and other reserve power industries largely attributable to the fiscal 2003 general

40



decline in global economic conditions. The motive power segment decreased largely as a result of the cyclical nature of the electric industrial forklift truck market, due to weak global economic conditions.

        Total gross profit margin was 23.9% in fiscal 2003 and 21.5% in fiscal 2002, an increase of 240 basis points. The increase in gross profit margin in fiscal 2003 principally relates to gaining economies of scale from cost reductions and continued tight cost controls. Cost savings initiatives, resulting principally from the ESG acquisition, were the main factor in increasing margins. The $132.8 million increase in fiscal 2003 gross profit is primarily attributable to the ESG acquisition.

        Operating expenses were $150.6 million in fiscal 2003 (17.5% of net sales) and $53.5 million in fiscal 2002 (15.8% of net sales). Fiscal 2003 operating expenses, as a percent of net sales, increased 170 basis points compared to fiscal 2002 because of the ESG acquisition. Operating expense ratios are higher in our European businesses, primarily due to those operations being more decentralized than our operations in the Americas and Asia. Approximately $97 million of the increase in operating expenses, excluding the effects of strengthening European currencies, is due to the ESG acquisition. Foreign currency translation adjustments, primarily the euro, increased fiscal 2003 operating expenses by approximately 6%. Fiscal 2003 operating expenses, as a percent of net sales, increased 170 basis points compared to fiscal 2002, again because of the ESG acquisition. Operating expense ratios are higher in our European businesses, primarily due to those operations being more decentralized than our operations in the Americas and Asia.

        Included in our fiscal 2002 operating results are $68.4 million of special charges as follows:

North American plant closure   $ 29.6
Closure of South American operations     27.3
Product rationalization and other     7.5
Other location closures     4.0
   
  Total   $ 68.4
   

        These charges in part resulted from the ESG acquisition, as redundant facilities and costs were eliminated to improve future operating efficiencies and profitability. Of this total cost, $51.7 million was a non-cash charge, primarily from the North American plant closure ($23.1 million) and closure of the South American operations ($20.8 million). The remaining $16.7 million of cash costs are legal and professional expenses, severance and operating costs of closed facilities, including the South American operations, until disposition. As of March 31, 2004, the cumulative cash costs incurred associated with these special charges was $11.1 million.

41



 
  Fiscal 2002
  Fiscal 2003
  Increase (Decrease)
 
 
  In
Millions

  As %
Net Sales

  In
Millions

  As %
Net Sales

  In Millions
  %
 
Reserve power   $ 7.7   4.7 % $ 31.2   7.3 % $ 23.5   305.2 %
Motive power     11.6   6.6     23.8   5.5     12.2   105.2  
   
 
 
 
 
     
  Subtotal     19.3   5.7     55.0   6.4     35.7   185.0  

Special charges relating to restructuring, bonuses and uncompleted acquisitions

 

 

(68.4)

 

(20.2

)

 


 


 

 

68.4

 

n/a

 
   
 
 
 
           
  Total   $ (49.1)   (14.5 %) $ 55.0   6.4 %   104.1   n/a  
   
 
 
 
           

        Our fiscal 2002 operating results reflect $68.4 million of special charges. The table above shows our operating earnings by segment, excluding special charges, which is how they are evaluated by management, and reconciles these results to our consolidated operating earnings including special charges. The special charges are described below under "Special charges." Operating earnings margins for fiscal 2002 and fiscal 2003 are not comparable due to the special charges incurred in fiscal 2002, which resulted in an operating loss in fiscal 2002. In addition to the improvement in fiscal 2003 operating earnings from the ESG acquisition, operating earning margins, excluding the fiscal 2002 special charge, improved 70 basis points primarily due to cost reduction initiatives that resulted in savings in excess of $35.0 million.

        Fiscal 2003 interest expense of $20.5 million, net of interest income of $0.2 million, increased by $7.2 million compared to fiscal 2002. The significant increase in fiscal 2003 interest expense was due primarily to the higher average level of debt outstanding ($292 million as compared to $162 million in fiscal 2002) as a result of debt incurred in March 2002 for the acquisition of ESG. The average debt level includes the face amount of the discounted seller notes and borrowings under our accounts receivable financing program. Interest expense attributable to the higher borrowing level was $6.6 million, partially offset by $3.7 million due to lower average borrowing rates of 5.1% as compared to 7.3% in fiscal 2002. Included in fiscal 2003 interest expense are non-cash charges of $5.3 million compared to $1.6 million in fiscal 2002. This $3.7 million increase is primarily attributable to $4.1 million for the accretion expense of the Invensys seller notes, $0.9 million of additional amortization from deferred financing costs associated with the added borrowings for the ESG acquisition, offset by a $1.6 million non-cash credit associated with our interest rate options which expired in fiscal 2004.

        Fiscal 2003 other income of $0.7 million is primarily attributable to non-operating foreign currency transaction gains (euro versus dollar) while the fiscal 2002 other expense of $1.7 million is primarily attributable to non-operating foreign currency transaction losses of $2.0 million. The fiscal 2002 foreign currency transaction losses are attributable to our operations in both Brazil and Argentina, as both the Brazilian real and Argentina peso declined significantly as compared to the dollar during that year. Our South American operations were discontinued as of the end of fiscal 2002.

        Earnings before income taxes was $35.2 million (4.1% of net sales) in fiscal 2003 compared with a loss before income tax benefit of $64.2 million (-18.9% of net sales) in fiscal 2002. Fiscal 2002 earnings before tax, excluding the special charges discussed above, were $4.3 million (1.3% of net sales).

        We recorded a provision for income taxes of $12.4 million in fiscal 2003 compared with a benefit for income taxes of $22.2 million in fiscal 2002. The effective income tax expense and benefit rate is 35% in both fiscal 2002 and 2003.

42


        We recorded net earnings of $22.9 million (2.7% margin) in fiscal 2003 compared with a net loss of $42.0 million (-12.4% margin) in fiscal 2002. This $64.9 million increase in fiscal 2003 net earnings is primarily the result of the ESG acquisition and the $44.1 million special charges net of tax that were recorded in fiscal 2002.

Liquidity and Capital Resources

        Cash and cash equivalents at March 31, 2002, 2003 and 2004 were $9.1 million, $44.3 million and $17.2 million, respectively.

        Cash provided by operating activities for fiscal 2002, 2003 and 2004 was $21.1 million, $55.4 million and $39.2 million, respectively. The reduction in operating cash flow in fiscal 2004 was principally due to the special charges and an increase in working capital commensurate with our sales increase. Cash expenditures related to the fiscal 2002 restructuring actions, which are included in operating activities, were $8.8 million in fiscal 2003 and $2.3 million in fiscal 2004, principally related to staff redundancy. In addition, we paid $12.0 million in fiscal 2003 and $5.3 million in fiscal 2004 primarily for staff redundancy, against a liability established in fiscal 2002 with the acquisition of ESG for ESG-related restructuring activities.

        Cash used for investing activities for fiscal 2002, 2003 and 2004 was $336.0 million, $12.9 million and $27.0 million, respectively. Capital expenditures were $12.9 million, $23.6 million and $28.6 million in fiscal 2002, 2003 and 2004, respectively. The use of cash in fiscal 2002 included the ESG acquisition.

        Cash provided by (used in) financing activities for fiscal 2002, 2003 and 2004 was $314.8 million, $(8.2) million and $(40.0) million, respectively. The fiscal 2002 amount was principally a result of $283.0 million in proceeds from the issuance of preferred stock and $36.0 million in proceeds from the issuance of long-term debt, both of which were used to finance the ESG acquisition. The fiscal 2004 amount reflects the financing transactions related to the Invensys settlement and the recapitalization.

        In December 2003, we entered into an agreement with Invensys plc under which we paid $94.1 million for the repurchase of seller notes and warrants delivered to Invensys as part of the consideration for the ESG acquisition and in settlement of other matters, primarily termination of a supply agreement. The Invensys settlement transaction was funded by utilizing $43.1 million of short-term investments, $19.0 million of borrowings from an accounts receivable financing facility that was paid off on March 9, 2004, $7.0 million additional tranche B borrowing and a $25.0 million revolver drawdown.

        In connection with the cash payment, on March 17, 2004, we refinanced our previously existing credit facilities and entered into a new $480.0 million senior secured credit facility, which consists of a $380.0 million senior secured term loan B and a $100.0 million senior secured revolving credit facility, and entered into a new $120.0 million senior second lien term loan. We used the proceeds of the combined $500.0 million in term loans to fund a cash payment to our existing stockholders and certain members of our management in the amount of $270.0 million, refinance the majority of our existing debt and pay accrued interest in the amount of $219.0 million and to pay transaction costs of $11.0 million. No amounts were borrowed under the revolving credit line in conjunction with the cash payment. The purpose of the $270.0 million cash payment was to provide liquidity to our existing stockholders and management. Because this distribution was made from the proceeds of the new credit facilities described above, we do not believe it will have any significant impact on our cash and debt management policies.

        The $380.0 million senior secured term loan B has a 0.25% quarterly principal amortization and matures on March 17, 2011. The $120.0 million senior second lien term loan matures as a single installment on March 17, 2012. The $100.0 million senior secured revolving credit facility matures on

43



March 17, 2009. Borrowings under the credit agreements bear interest at a floating rate based, at our option, upon a LIBOR rate plus an applicable percentage or the greater of the federal funds rate plus 0.5% or the prime rate, plus an applicable percentage. The effective borrowing rates for fiscal 2002, 2003 and 2004 were 7.3%, 5.1% and 5.0%, respectively.

        All obligations under the credit agreements are secured by, among other things, substantially all of our U.S. assets. Our credit agreements contain various covenants which, absent prepayment in full of the indebtedness and other obligations, or the receipt of waivers, would limit our ability to conduct certain specified business transactions, buy or sell assets out of the ordinary course of business, engage in sale and leaseback transactions, pay dividends and take certain other actions.

        We currently are in compliance with all covenants and conditions under our credit agreements. Since we believe that we will continue to comply with these covenants and conditions, we believe that we have adequate availability of funds to meet our expected cash requirements.

        Continuing to focus on manufacturing efficiency and cost reduction programs is an important element of our strategy. See "Business—Our Strategy." Our cash spending related to cost savings programs in fiscal 2003 and fiscal 2004 was $18.1 million and $10.0 million, respectively. Capital expenditures related to these programs were an additional $6.2 million in fiscal 2003 and $10.0 million in fiscal 2004. The cash spending for our ongoing cost reduction initiatives is planned in advance each year and is part of our periodic review of expected cash requirements for future periods. We do not believe the overall impact of this spending on our liquidity and capital resources is material to our cash resources and available liquidity sources.

        In addition to cash flows from operating activities, we had available credit lines of $124.6 million at March 31, 2004 to cover any short-term liquidity requirements. On a long-term basis, our senior secured revolving credit facility is committed through March 2009, as long as we continue to comply with the covenants and conditions of the facility agreement. Our senior secured credit facility also permits us to borrow an additional $145.0 million from all other sources. See "Description of Our Credit Facilities" for additional information on our covenant requirements and on conditions to borrowing.

        At March 31, 2004, we had certain cash obligations, which are due as follows:

 
  Total
  Less than 1 year
  1 to 3 years
  4 to 5 years
  After 5 years
 
  (in millions)

Short-term debt   $ 2.7   $ 2.7   $   $   $
Long-term debt     503.2     7.0     7.6     7.6     481.0
Capital lease obligations     5.4     2.1     3.3        
Operating leases     25.0     10.2     11.4     3.2     0.2
Purchase contracts     11.9     11.9            
Restructuring     50.4     33.5     16.9        
   
 
 
 
 
  Total   $ 598.6   $ 67.4   $ 39.2   $ 10.8   $ 481.2
   
 
 
 
 

        Under our senior secured credit facility, we had outstanding standby letters of credit of $0.0 million, $0.2 million and $0.3 million at March 31, 2002, 2003 and 2004, respectively. The amounts shown in the table above do not include interest charges on these cash obligations.

        Our focus on working capital management and cash flow from operations is measured by our ability to reduce total debt and reduce our leverage ratios. Shown below are the leverage ratios in connection with our credit facilities for fiscal 2003 and 2004. Our higher leverage in fiscal 2004 reflects the recapitalization in March 2004. We will reduce leverage substantially with the proceeds of this offering. The leverage ratio

44


for fiscal 2004, adjusted for the offering and assuming net proceeds of $            , is      times adjusted EBITDA as described below. We believe our future operating cash flow, net of capital expenditures, will reduce total debt and our leverage ratios.

 
  Fiscal 2003
  Fiscal 2004
  Fiscal 2004
as adjusted

 
  (in millions)

EBITDA(1)   $ 91.7   $ 65.2   $  
Adjustments per credit agreement definitions(2)         53.8      
Adjusted EBITDA per credit agreements     91.7     119.0      
Senior debt, net(3)     151.9     375.4      
Total debt, net(3)     254.6     501.3      

Leverage ratios:

 

 

 

 

 

 

 

 

 
Senior debt/adjusted EBITDA ratio(4)     1.7X     3.2X          X
  Maximum ratio permitted     3.2X     3.9X          X
Total debt/adjusted EBITDA ratio(4)     2.8X     4.2X          X
  Maximum ratio permitted     4.8X     5.0X          X

(1)
We have included EBITDA because management uses it as a key measure of our performance and ability to generate cash necessary to meet our future debt service and capital expenditure requirements. EBITDA is defined as earnings before interest expense, income tax expense, depreciation and amortization. EBITDA is not a measure of financial performance under accounting principles generally accepted in the United States and should not be considered an alternative to net earnings or any other measure of performance under accounting principles generally accepted in the United States as a measure of performance or to cash flows from operating, investing or financing activities as an indicator of cash flows or as a measure of liquidity. Our calculation of EBITDA may be different from the calculations used by other companies, and therefore comparability may be limited. Certain financial covenants in our senior secured credit facility and our senior second lien credit facility are based on EBITDA, subject to adjustments, which is shown above. Because we have a significant amount of debt, and because continued availability of credit under our senior secured credit facility is critical to our ability to meet our business plan, we believe that an understanding of the key terms of our credit agreements is important to an investor's understanding of our financial condition and liquidity risks. Failure to comply with our financial covenants, unless waived by our lenders, would mean we could not borrow any further amounts under our revolving credit facility and would give our lenders the right to demand immediate repayment of all outstanding term and revolving credit loans. We would be unable to continue our operations at current levels if we lost the liquidity provided under our credit agreements. Depreciation and amortization in this table excludes the amortization of deferred financing costs, which is included in interest expense. The following table provides a reconciliation of EBITDA to net earnings (loss):

 
  Fiscal Year Ended March 31,
 
  2002
  2003
  2004
 
  (in thousands)

EBITDA   $ (39,563 ) $ 91,651   $ 65,175
  Depreciation and amortization     11,296     35,933     37,039
  Interest expense     13,294     20,511     20,343
  Income tax expense (benefit)     (22,171 )   12,355     2,957

Net earnings (loss)

 

$

(41,982

)

$

22,852

 

$

4,836
(2)
Adjustments to EBITDA for the credit agreement definitions include all of the special charges of $52.1 million in fiscal 2004 and other adjustments in the aggregate of $1.7 million.

45


(3)
Debt includes capital lease obligations and is net of U.S. cash and cash equivalents. Senior debt excludes the Invensys seller notes in 2003 and the senior second lien term loan and unsecured debt in 2004.

(4)
These ratios are included to show compliance with the leverage ratios set forth in our credit facilities. We show both our current ratios and the maximum ratios permitted under our senior secured credit facility. The maximum ratios permitted under the senior second lien credit facility are less restrictive than those shown.

        Stockholders' equity decreased $226.4 million during fiscal 2004, principally reflecting the cash distribution of $258.4 million in our recapitalization on March 17, 2004, and cancellation of warrants of $5.0 million, partially offset by net earnings of $4.8 million, currency translation adjustments of $30.3 million, primarily due to the strengthening of European currencies, unrealized gain on derivative instruments (interest rate swaps) of $0.9 million and a reduction in the minimum pension liability adjustment of $0.9 million.

        Stockholders' equity increased $50.9 million during fiscal 2003, principally reflecting net earnings of $22.9 million, currency translation adjustments of $32.4 million primarily due to the strengthening of European currencies, partially offset by unrealized loss on derivative instruments (interest rate swaps) of $2.6 million and an increase in the minimum pension liability adjustment of $1.7 million.

        We have exposure to interest rate risk from our short-term and long-term debt, both of which have variable interest rates.

        In February 2001, we entered into interest rate swap agreements to fix the interest rate on $60.0 million of our floating rate debt through February 22, 2006, at 5.59% per year. In April and May, 2004, we amended these agreements to extend the maturity to February 22, 2008, and reduce the fixed rate to 5.16% per year beginning May 24, 2004.

        Also in April 2004, we entered into interest rate swap agreements to fix the interest rates on an additional $60.0 million of floating rate debt through May 5, 2008. The fixed rates per year begin May 5, 2004, and are 2.85% during the first year, 3.15% the second year, 3.95% the third year and 4.75% the fourth year.

        In total, these interest rate swap agreements provide protection against significant increases in LIBOR (the base variable interest rate on the majority of our debt) on $120.0 million of our debt.

        An increase in base interest rates would increase the fair value of the interest rate swap agreements. However, assuming the swaps stay in place until maturity, the change in fair value would have no effect on interest expense, cash flows or other results of operations.

        We are also exposed to foreign currency exchange risks. The geographic diversity of our sales and costs mitigates the risk of the volatility of currency in any particular region of the world. As of March 31, 2004, we had not entered into any foreign currency forward contracts.

        To ensure a steady supply of lead and to mitigate against large increases in cost, we enter into contracts with our suppliers for the purchase of lead. Each such contract is for a period not extending

46



beyond one year. Under these contracts, we were committed to the purchase of the following amounts of lead:

Date

  $'s Purchased
  # Pounds Purchased
  Average
Cost/Pound

  Approximate % of
Annual Lead Consumption

 
 
  (in millions)

  (in millions)

   
   
 
May 3, 2004   $ 28.8   90.9   $ 0.32   28 %
March 31, 2004     11.9   38.7     0.31   12  
March 31, 2003     16.2   62.6     0.26   20  

        We have significant risk in our exposure to certain raw material costs, which were approximately 49% of total cost of goods sold in fiscal 2004. Our largest single raw material cost is for lead, which also has experienced a significant increase in cost during the second half of fiscal 2004 and remains volatile. A 10% increase (over our actual average cost in fiscal 2004) in our cost of lead would increase our annual total cost of goods sold by approximately $11.0 million or 1.1% of net sales.

        Based on changes in the timing and amount of interest rate and foreign currency exchange rate movements and our actual exposures and hedges, actual gains and losses in the future may differ from our historical results.

Seasonality

        Our business generally does not experience significant monthly or quarterly fluctuations in net sales volume as a result of weather or other trends that can be directly linked to seasonality patterns. However, our second fiscal quarter normally experiences moderate reductions in net sales volume as compared to our first fiscal quarter for that year, due to summer manufacturing shutdowns of our customers and holidays primarily in the United States and Western Europe. Additionally, our fourth fiscal quarter normally experiences the highest sales volume of any fiscal quarter within a given year. Many reserve power telecommunications customers tend to perform extensive service and engage in higher battery replacement and maintenance activities in the first calendar quarter of a year, which is our fourth fiscal quarter. In addition, many of our largest industrial customers are on a calendar fiscal year basis and many tend to purchase their durable goods more heavily in that quarter than any other within the calendar year.

Critical Accounting Policies and Estimates

        The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying footnotes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results could differ from those estimates, and such differences may be material to the financial statements. The process of determining significant estimates is fact specific and takes into account factors such as historical experience, current and expected economic conditions, product mix and, in some cases, actuarial techniques. We evaluate these significant factors as facts and circumstances dictate. Historically, actual results have not differed significantly from those determined using estimates. The following are the accounting policies that most frequently require us to make estimates and judgments and are critical to understanding our financial condition, results of operations and cash flows:

        Sales are recorded when the terms of the customer agreement are fulfilled, the product has been shipped and title has passed or the services have been provided, the sales price is fixed or determinable and collectibility is reasonably assured. We reduce sales by applicable allowances, rebates, discounts and sales, value-added or similar taxes at the time of sale.

47


        We maintain an allowance for estimated losses resulting from the inability of customers to make required payments. The allowance is based on historical data and trends, as well as a review of relevant factors concerning the financial capability of our customers.

        We sell our products to customers with typical manufacturers' product warranties covering defects in workmanship and materials. The length of the warranty term depends on the product being sold, but generally reserve power products carry a one year warranty and motive power products carry a one- to five-year warranty. We accrue our estimated exposure to warranty claims at the time of sale based upon historical experience. We review these estimates on a regular basis and adjust the warranty provisions as actual experience differs from historical estimates or other information becomes available.

        We adjust our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions.

        We test goodwill for impairment on an annual basis or upon the occurrence of certain circumstances or events. We follow the two-step testing method as prescribed by SFAS No. 142. In the first step, the fair value of the reporting units is determined based on a discounted cash flow analysis approach. If the net book value of the reporting units does not exceed the fair value, the second step of the impairment test (calculating the impairment loss of the goodwill by comparing the book value of the goodwill to the fair value of the goodwill) is not necessary. We have recorded no impairment of goodwill.

        We review and evaluate our long-lived assets for impairment when events or changes in circumstances indicate the related carrying amounts may not be recoverable. An impairment is considered to exist if total estimated future cash flows on an undiscounted basis are less than the carrying value amount of the asset. An impairment loss is measured and recorded based on discounted estimated future cash flows or other fair value techniques. Assumptions underlying future cash flow estimates are subject to risks and uncertainties.

        We use certain assumptions in the calculation of the actuarial valuation of our defined benefit plans. These assumptions include the weighted average discount rate, rates of increase in compensation levels and expected long-term rates of return on assets. If actual results are less favorable than those projected by us, additional expense may be required.

        As of March 31, 2004, our consolidated benefit obligations exceeded our accrued benefit costs by approximately $13 million. Fiscal 2004 periodic pension cost was approximately $4 million.

        We account for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes," which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between book and tax bases or recorded assets and liabilities. SFAS No. 109 also

48


requires that deferred tax assets be reduced by a valuation allowance, if it is more likely than not that some portion or all of the deferred tax assets will not be recognized.

        At March 31, 2002, we had deferred tax assets ($50.2 million) in excess of deferred tax liabilities ($45.7 million) of $4.5 million. At March 31, 2003, we had deferred tax liabilities ($71.1 million) in excess of deferred tax assets ($47.4 million) of $23.7 million. At March 31, 2004, we had deferred tax liabilities ($61.3 million) in excess of deferred tax assets ($50.6 million) of $10.7 million. The deferred tax assets at March 31, 2002, 2003 and 2004 of $50.2 million, $47.4 million and $50.6 million, respectively, are net of valuation allowances of $41.1 million, $66.9 million and $74.1 million, respectively. We have recorded the above valuation allowances primarily for net operating loss carryforwards in foreign tax jurisdictions that have incurred significant past tax losses, and have determined that it is more likely than not that these deferred tax assets will not be realized.

        We evaluate on a quarterly basis the realizability of our deferred tax assets by assessing our valuation allowance and by adjusting the amount of such allowance, if necessary. The factors used to assess the likelihood of realization are our forecast of future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets.

New Accounting Pronouncements

        In December 2003, the FASB issued SFAS No. 132 (revised 2003), Employers' Disclosures about Pensions and Other Postretirement Benefits. The revisions to SFAS No. 132 are intended to improve financial statement disclosures for defined benefit plans and was initiated in 2003 in response to concerns raised by investors and other users of financial statements about the need for greater transparency of pension information. In particular, the standard requires that companies provide more details about their plan assets, benefit obligations, cash flows, benefit costs and other relevant quantitative and qualitative information. The guidance is effective for fiscal years ending after December 15, 2003. We have complied with these revised disclosure requirements.

        In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This statement amends SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, to provide clarification on the financial accounting and reporting of derivative instruments and hedging activities and requires contracts with similar characteristics to be accounted for on a comparable basis. Our adoption of SFAS No. 149 during 2003 did not have a material effect on our financial condition or results of operations.

        In January 2003, the FASB issued Financial Interpretation (FIN) 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 and in December 2003 issued a revised interpretation ("FIN 46R"). FIN 46 and FIN 46R address consolidation by business enterprises of certain variable interest entities. It applies to us in our first reporting period ending after March 15, 2004. This pronouncement did not have an effect on our financial position and results of operations.

49



Quarterly Information

        Fiscal 2003 and 2004 quarterly operating results, and the associated quarterly trends within each of those two fiscal years, are affected by the same economic and business conditions as described in the fiscal 2004 versus fiscal 2003 and fiscal 2003 versus fiscal 2002 analyses previously discussed.

 
  Fiscal 2003
  Fiscal 2004
 
 
  June 30,
2002
1st Qtr.

  Sept 29,
2002
2nd Qtr.

  Dec 29,
2002
3rd Qtr.

  March 31,
2003
4th Qtr.

  June 29,
2003
1st Qtr.

  Sept 28,
2003
2nd Qtr.

  Dec 28,
2003
3rd Qtr.

  March 31,
2004
4th Qtr.

 
 
  (in millions, except per share amounts)

 
Net sales   $ 208.4   $ 207.6   $ 212.9   $ 230.7   $ 218.3   $ 222.1   $ 253.3   $ 275.4  
Cost of goods sold     162.8     157.6     160.2     173.3     165.7     164.8     189.3     203.0  
   
 
 
 
 
 
 
 
 
Gross profit     45.6     50.0     52.7     57.4     52.6     57.3     64.0     72.4  
Operating expenses, including amortization     36.3     37.1     37.2     40.1     40.1     39.9     43.0     47.6  
Special charges relating to restructuring, bonuses and uncompleted acquisitions                             9.1     12.0  
   
 
 
 
 
 
 
 
 
Operating earnings     9.3     12.9     15.5     17.3     12.5     17.4     11.9     12.8  
Interest expense     5.0     4.5     5.4     5.6     5.1     5.1     5.6     4.5  
Special charges relating to a settlement agreement and write-off of deferred finance costs                             24.4     6.6  
Other (income) expense, net     (0.3 )   0.4     0.0     (0.8 )   (2.0 )   (1.7 )   (0.3 )   (0.5 )
   
 
 
 
 
 
 
 
 
Earnings (loss) before income taxes     4.6     8.0     10.1     12.5     9.4     14.0     (17.8 )   2.2  
Income tax expense (benefit)     1.6     2.8     3.5     4.5     3.6     5.3     (7.4 )   1.5  
   
 
 
 
 
 
 
 
 
Net earnings (loss)   $ 3.0   $ 5.2   $ 6.6   $ 8.0   $ 5.8   $ 8.7   $ (10.4 ) $ 0.7  
   
 
 
 
 
 
 
 
 
Net earnings (loss) per share                                                  
  Basic   $     $     $     $     $     $     $     $    
   
 
 
 
 
 
 
 
 
  Diluted   $     $     $     $     $     $     $     $    
   
 
 
 
 
 
 
 
 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Basic                                                  
  Diluted                                                  

        Quarterly net sales by business segment were as follows:

 
  Fiscal 2003
  Fiscal 2004
 
 
  1st Qtr.
  2nd Qtr.
  3rd Qtr.
  4th Qtr.
  1st Qtr.
  2nd Qtr.
  3rd Qtr.
  4th Qtr.
 
 
  (in millions)

 
Net sales:                                                  
  Reserve power   $ 101.6   $ 102.8   $ 99.7   $ 122.8   $ 107.4   $ 109.4   $ 127.0   $ 136.2  
  Motive power     106.8     104.8     113.2     107.9     110.9     112.7     126.3     139.2  
   
 
 
 
 
 
 
 
 
    Total   $ 208.4   $ 207.6   $ 212.9   $ 230.7   $ 218.3   $ 222.1   $ 253.3   $ 275.4  
   
 
 
 
 
 
 
 
 
Segment net sales as % total:                                                  
    Reserve power     48.8 %   49.5 %   46.8 %   53.2 %   49.2 %   49.3 %   50.1 %   49.5 %
    Motive power     51.2     50.5     53.2     46.8     50.8     50.7     49.9     50.5  
   
 
 
 
 
 
 
 
 
    Total     100.0 %   100.0 %   100.0 %   100.0 %   100.0 %   100.0 %   100.0 %   100.0 %
   
 
 
 
 
 
 
 
 

50


        Fiscal 2004 net sales growth on a quarter to quarter sequential basis was primarily due to sales volume increases (decreases), excluding the effect of foreign currency translation, of approximately (6%), 2%, 10% and 7% respectively, and the strengthening of European currencies, primarily the euro, versus the dollar throughout the year. For fiscal 2004, annual sales volume increased by approximately 4% for both the reserve power and motive power business segments and the company in total. The dollar to euro exchange rate averaged 1.18 for 2004, with the spot rates 1.09 at March 31, 2003, and 1.23 at March 31, 2004.

        Fiscal 2003 net sales growth on a quarter to quarter sequential basis was primarily due to the strengthening of European currencies, primarily the euro, versus the dollar throughout the year. Fiscal 2003 net sales volume increases (decreases) on a quarter to quarter sequential basis were approximately (1%), (2%), 2% and 2% respectively, and for the entire fiscal 2003, decreased approximately 7% on a pro forma basis versus fiscal 2002. The dollar to euro exchange rate averaged 1.00 for fiscal 2003, with the spot rates 0.87 at March 31, 2002, and 1.09 at March 31, 2003. Fiscal 2003 annual sales volume (excluding the effect of foreign currency translation) decreased approximately 14% in reserve power and 1% in motive power when compared to fiscal 2002 levels on a pro forma basis.

        The mix of reserve power and motive power sales to total sales did not fluctuate significantly during the quarterly periods within fiscal 2003 and fiscal 2004.

        Fiscal 2004 quarterly operating earnings were as follows:

 
  1st Qtr.
  2nd Qtr.
  3rd Qtr.
  4th Qtr.
 
 
  (in millions)

 
Operating earnings   $ 12.5   $ 17.4   $ 11.9   $ 12.8  
  Margin                          
Special charges relating to restructuring bonuses and uncompleted acquisitions             (9.1 )   (12.0 )
  Margin             (3.6 )%   (4.4 )%
Operating earnings, excluding special charges relating to restructuring bonuses and uncompleted acquisitions     12.5     17.4     21.0     24.8  
  Margin     5.7 %   7.8 %   8.3 %   9.0 %

        Excluding the special charges in the third and fourth quarters, fiscal 2004 operating earnings grew on a quarter to quarter sequential basis primarily due to unit sales volume increases, the strengthening of European currencies and cost savings initiatives. The fiscal 2004 quarterly improvements in operating earnings margins from 5.7% in the first quarter to 9% in the fourth quarter are due to both unit sales volume increases and cost savings of approximately $30 million for the year.

        Fiscal 2003 quarterly operating earnings grew on a quarter to quarter sequential basis primarily due to the strengthening European currencies and cost savings initiatives. The fiscal 2003 quarterly improvements in operating earnings margins from 4.5% in the first quarter to 7.5% in the fourth quarter are primarily due to cost savings that were in excess of $35 million for the fiscal year.

        Fiscal 2004 other income includes approximately $4 million of non-operating foreign currency gains primarily attributable to certain debt transactions. Included in the fiscal 2004 first and second quarters are $1.6 million and $1.5 million, respectively, of foreign currency gains from these debt transactions.

51



BUSINESS

Overview

        We are one of the world's largest manufacturers, marketers and distributors of lead-acid industrial batteries. We also manufacture, market and distribute related products such as chargers, power equipment and battery accessories, and we provide related after-market and customer-support services for lead-acid industrial batteries. Industrial batteries generally are characterized as reserve power batteries or motive power batteries.

        We believe that we hold approximately 24% of the worldwide market share in the lead-acid industrial battery business, with market shares of 30% in North America, 30% in Europe and 5% in Asia. For 2003, we believe that our worldwide market share in reserve power batteries was approximately 20% and in motive power batteries was approximately 28%. In addition, we sell to the aerospace and defense markets. Our net sales for fiscal 2004 were $969.1 million, of which approximately 42% was attributable to the Americas, 53% to Europe, the Middle East and Africa, which we refer to as EMEA, and 5% to Asia.

        Our reserve power batteries are marketed and sold principally under the PowerSafe, DataSafe and Genesis brands. Our motive power batteries are marketed and sold principally under the Hawker, Exide and General brands. We also manufacture and sell related direct current—DC—power products including chargers, electronic power equipment and a wide variety of battery accessories. Our battery products span a broad range of sizes, configurations and electrical capacities, enabling us to meet a wide variety of customer applications.

        We manufacture reserve power and motive power batteries at 19 manufacturing facilities located across the Americas, Europe and Asia and market and sell these products globally in more than 100 countries to over 10,000 customers through a network of distributors, independent representatives and an internal sales force. We provide responsive and efficient after-market support for our products through strategically located warehouses and a company-owned service network supplemented by independent representatives.

Our Industry

        The size of the worldwide industrial lead-acid battery market in 2003 was $3.6 billion, according to BCI, EuroBat and management estimates. The two key components of this market are reserve power batteries—a $2.0 billion market—and motive power batteries—a $1.6 billion market. The aerospace and defense market is an additional important sector of the battery industry, but is not included as a component of the $3.6 billion worldwide market information above.

        Reserve power batteries also are known as network, standby or stationary power batteries and are used primarily for backup power applications to ensure continuous power supply in case of main (primary) power failure or outage.

        Reserve power batteries are used primarily to supply standby DC operating power for:

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        For many critical systems, power loss, even for short periods of time, can result in loss of process control, massive data loss and significant financial liability. Reserve power batteries are essential for the continuing operations of financial institutions, computer and computer-controlled systems, communications providers and electric utilities.

        There are two major reserve power lead-acid battery technologies, each designed for specific applications: vented (flooded) and valve-regulated lead-acid (VRLA, or sealed). Vented batteries require periodic watering and maintenance. Valve-regulated batteries require less maintenance, and are often smaller, than vented batteries. Our thin plate pure lead (TPPL) VRLA technology provides high performance premium solutions for demanding customer applications.

        We estimate that the worldwide market for reserve power lead-acid based battery products in 2003 was $2.0 billion, divided by geographic market and end-use as follows:


2003 Worldwide Reserve Power Battery Market

Geographic
market

 

End-use
application(2)

CHART

 

CHART

Source: BCI, EuroBat and management estimates.

(1)
Europe, Middle East and Africa

(2)
North America only

        Motive power batteries are used primarily to provide power for electric material handling and ground handling equipment. Motive power batteries are primarily used in electric industrial forklift trucks. Motive power batteries compete primarily with propane- and diesel-powered internal combustion engines.

        Motive power batteries are used principally in the following applications:

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        We estimate that the total market for motive power lead-acid based battery products for fiscal 2003 was approximately $1.6 billion, consisting of the following:

2003 Worldwide Motive Power Battery Market

Geographic
market

 

End-user
applications(1)

CHART

 

CHART

Source: BCI, EuroBat and management estimates.

(1)
North America only

Industry Trends

        We believe that the following key trends will continue to affect the industrial battery business:

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Our Strengths

        We believe that our competitive strengths should enable us to expand our global market share and position us to achieve profitable growth. These strengths include:

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Our Strategy

        Our primary business objective is to capitalize on our competitive strengths to continue to expand our global market share, increase our net sales and improve our profit margins. We intend to achieve these objectives by implementing the following strategies:

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        Our ability to achieve our strategy of expansion through acquisitions could be limited by restrictions contained in our credit facilities. The amounts we may pay for acquisitions are subject to per transaction limits for individual transactions and aggregate limits over the term of the credit facilities (until 2011 under the senior secured credit facility and 2012 if we do not prepay in full the senior second lien credit facility). Our limits are $25.0 million cash and $75.0 million total (cash and company stock), and our aggregate limits for individual transactions are $100.0 million cash and $200.0 million total. Furthermore, we may not invest more than $15.0 million in joint ventures and $10.0 million in other ventures over the term of the credit facilities. Our ability to incur additional indebtedness also is restricted such that any significant acquisitions that could not be financed through cash generated from operations would need to be financed through issuance of additional company common stock. Exceeding any of our acquisition, investment or additional indebtedness limitations would require the consent of our lenders. See "Description of Our Credit Facilities—Covenants" for further information on these limitations.

Our Products

        Based on information from industry sources, we believe that we are the largest supplier of lead-acid reserve power products on a worldwide basis, with a 20% market share in 2003. Our sales of reserve power products during fiscal 2004 by end-market were as follows:

Fiscal 2004 Reserve Power Sales

CHART

        Our reserve power products include a variety of lead-acid batteries, both flooded and VRLA, and other DC power equipment and services. Reserve power products are used to provide backup or standby power for critical facilities or electrical equipment in the event of a loss of power from the primary power source.

        The primary applications for reserve power batteries are:

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        We also manufacture and purchase for resale a wide variety of battery trays, component racks and other accessories that are used in conjunction with our reserve power systems products and a complete line of cabinets for installation of lead-acid batteries. Many of our battery racks and cabinets are designed to meet very demanding customer specifications, including racks designed to withstand seismic shocks. Our ability to customize trays, racks and other accessories gives us a competitive advantage over many of our competitors who do not provide this level of service.

        Our reserve power battery product and related products are sold worldwide primarily under the PowerSafe, DataSafe, Genesis, Cyclon, Odyssey, Huada, Varta and Armasafe brand names.

Brand

  Summary technical description
  Applications
PowerSafe   A premium range of highly reliable flooded VRLA products   Serves the demanding requirements of telecommunications, including central office, outside plant and wireless applications, electric utility, including power generation, transmission and distribution applications, and switchgear markets
DataSafe   A full range of flooded and VRLA batteries   Specifically designed for the high power requirements of the most demanding UPS systems, ranging from workstations to data centers
Genesis   An extensive range of premium pure lead, lead calcium and Gel VRLA batteries   Provides superior performance for such diverse applications as security systems, emergency lighting, UPS, mobility, cable TV and medical uses
Cyclon   A special spiral wound design of our TPPL VRLA technology   Delivers high performance in very dense design, while delivering superior battery life characteristics, providing customers with a compact solution to their power requirements
Odyssey   Premium TPPL VRLA batteries   For car audio, marine and starting, lighting and ignition applications for motorcycles, personal watercraft, all terrain vehicles and specialty commercial vehicles
Huada   An extensive range of VRLA batteries designed for the China market   Designed to meet the needs of the various power segments of the China telecommunications and UPS markets
Varta   Flooded standard batteries   A well recognized and highly regarded regional brand in Germany and Eastern Europe that is used extensively in the European defense market, including submarine batteries
Armasafe   TPPL technology designed to perform to military specifications   Used for tactical military vehicles such as the M1-A1 Abrams tank and the Humvee

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        Based on information from industry sources, we believe that our worldwide market share in the motive power market was 28% in 2003. Our sales of motive power products in fiscal 2004 by end-market were as follows:

Fiscal 2004 Motive Power Sales

         GRAPHIC

        Our motive power products include complete systems and individual components used to power, monitor, charge and test the batteries used in electric industrial forklift trucks and other material handling equipment. Motive power batteries typically are designed to provide relatively high discharge rates for a six- to eight-hour operating period. They also require rugged design to withstand the rigors of operation within moving industrial vehicles that subject them to high levels of vibration and shock.

        The primary applications for motive power batteries are:

        Our motive power chargers convert AC to DC power to recharge motive power batteries during the intervals between operating periods of the vehicles in which the batteries are installed. Our other principal motive power accessories include electronic controls to operate chargers from remote locations and a system for periodically adding water to batteries.

        Our motive power batteries are sold worldwide primarily under the brands Hawker, Exide and General, and a line of battery handling equipment and accessories under the ProSeries brand, which includes products such as automated battery charging systems, racks and safety equipment. Our Hawker brand is the largest motive power brand, by sales, in the world.

Brand/Sub-brand

  Summary technical description
  Applications
Hawker        
  Perfect Plus
Evolution
  Utilize round tube, positive plate design   Electric industrial forklift trucks
 
Energy Plus
Powerline
Top Power
Waterless

 

Utilize flat plate design

 

 

Exide-Ironclad
Workhog
Deserthog
Loadhog
Smarthog
Superhog

 

Utilize square tube positive plate design which provides more power over longer periods of time and higher voltages under load

 

Electric industrial forklift trucks
General
General Series
HUP
  Utilize flat plate design for reliable, cost-effective power   Electric industrial forklift trucks

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        We are one of the largest manufacturers and distributors of motive power battery chargers in the world. These products are sold principally under the brand names Hawker, Exide and General. We are one of the only manufacturers to offer all three types of proven technology: ferro-resonant, silicon rectifiers and switchmode or high-frequency chargers. Our chargers are designed to recharge our batteries as well as any of our competitors' batteries. Recently, we developed a range of "smart" chargers, capable of communicating with our batteries and forklift trucks, enabling users to obtain valuable information.

Our Customers

        We serve over 10,000 customers in over 100 countries, on a direct basis or through our distributors with $408.8 million or 42.2% of our net sales attributable to the Americas and $560.3 million or 57.8% attributable to other countries. No single customer accounts for more than 6% of our revenues.

        Our reserve power customers consist of regional customers such as Verizon, British Telecom, Telstra and China Telecom as well as global customers including Nokia, Powerware, Emerson, MGE and Siemens. These customers are in diverse markets ranging from telecom to UPS, electric utilities, security systems, emergency lighting and personal mobility. In addition, we sell our aerospace and defense products to numerous countries, including the governments of the U.S., Germany and the U.K. and to major defense and aviation original equipment manufacturers, which we refer to as OEMs, including Lockheed-Martin and Boeing.

        Our motive power customers include a large, diversified customer base. We are not overly dependent on any particular end market or geographic region. These customers include materials handling equipment dealers, OEMs and end users of such equipment. End users include manufacturers, distributors, warehouse operators, retailers, airports, mine operations and railroads. Several of our top motive power customers are forklift truck manufacturers, including the Linde Group, Jungheinrich and Crown Lift Trucks. We also sell to a significant buying group, NACCO Material Handling, a group of forklift truck dealers that have associated for the purpose of increasing their purchasing power.

Distribution and Services

        We distribute, sell and service reserve power products globally through a combination of company-owned offices, independent manufacturers' representatives and distributors managed by our regional sales managers. With our global manufacturing locations and regional warehouses, we believe we are well positioned to meet our customers' delivery and servicing requirements. We have targeted our approach to meet local market conditions, which we believe provides the best possible service for our regional customers and our global accounts.

        We distribute, sell and service our motive power products throughout the world, principally through company-owned sales and service facilities, as well as through independent manufacturers' representatives. We believe we are the only battery manufacturer in the motive power battery industry that operates a primarily company-owned service network. This company-owned network allows us to offer high-quality service, including preventative maintenance programs and customer support. Our warehouses and service locations enable us to respond quickly to customers in the markets we serve. The extensive industry experience of our sales organization results in strong long-term customer relationships.

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Manufacturing and Raw Materials

        We believe that our global approach to manufacturing has significantly helped us increase our market share during the past several years. We manufacture our products at nine facilities in the Americas, eight facilities in Europe and two facilities in China. With a view toward projected demand, we strive to optimize and balance capacity at our battery manufacturing facilities located throughout the world, while simultaneously minimizing our product cost. By taking a global view of our manufacturing requirements and capacity, we are better able to anticipate potential capacity bottlenecks and equipment and capital funding needs.

        The primary raw materials used to manufacture our products include lead, plastics, steel and copper. We purchase lead, which accounts for approximately 30% of our raw material purchases, from a number of leading suppliers throughout the world. Because lead is traded on the world's commodity markets and its price fluctuates daily, we enter into hedging arrangements from time to time for our projected requirements to mitigate the adverse effects of these fluctuations. We also enter into similar arrangements in connection with our purchases of steel. With respect to the remainder of our raw materials, we generally seek to enter into one- to two-year fixed-priced contracts when cost effective.

Competition

        The industrial lead-acid battery market is highly competitive and has experienced substantial consolidation both among competitors who manufacture and sell industrial batteries and among customers who purchase industrial batteries. Our competitors range from development stage companies to major domestic and international corporations. We also compete with other energy storage technologies such as non-lead-acid batteries, fuel cells and flywheels.

        We compete primarily on the basis of reputation, product quality, reliability of service, delivery and price. We believe that our products and services are competitively priced. We believe we possess an approximate 24% global market share in our products and enjoy an incumbent advantage due to barriers to entry. These barriers include the tendency of reserve power battery customers to buy from suppliers on whom they rely with confidence for their critical power needs and the preference of large multinational customers to centralize battery purchases with equally large suppliers equipped with responsive and global servicing networks. An additional barrier is the large initial capital requirement for entrants to develop the necessary manufacturing capacity.

        We believe we have one of the largest market shares, on a worldwide basis, for reserve power products. We compete principally with Exide Technologies, GS Yuasa and C&D Technologies, as well as Fiamm and East Penn Manufacturing.

        We believe we have one of the largest market shares, on a worldwide basis, for motive power products. Our principal competition in our motive power segment is Exide Technologies. In North America, we also compete with East Penn Manufacturing and C&D Technologies. In Europe, we also compete with Fiamm and Hoppecke. In Asia, we also compete with JSB, Shinkobe, Yuasa and Hitachi.

Warranties

        Warranties for our products vary by geography and product and are competitive with other suppliers of these types of products. Generally, our reserve power products carry a one-year warranty and our motive power products warranties range from one to five years. The warranty on our battery chargers typically ranges from one to three years.

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        The length of our warranties is sometimes extended to reflect varied regional characteristics and competitive influences. In some cases, we may extend the warranty period to include a pro rata period, which is typically based around the design life of the product and the application served. Our warranties generally cover defects in workmanship and materials and are limited to specific usage parameters.

Intellectual Property

        There are no patents that we consider to be material to our business. Although from time to time we apply for patents on new inventions and designs, we believe that the growth of our business will depend primarily upon the quality of our products and our relationships with our customers, rather than the extent of our patent protection.

        Although other manufacturers possess thin plate pure lead technology, we are the only manufacturer of products using TPPL technology in the markets we serve. This technology is not patented. We believe that a significant capital investment would be required by any party desiring to produce products using TPPL technology for these markets.

        We own or possess licenses and other rights to use a number of trademarks. We have registered many of these trademarks in various styles in the U.S. Patent and Trademark Office and with other countries. Our various trademark registrations currently have a duration of approximately one to 12 years, varying by mark and jurisdiction of registration. We endeavor to keep all of our material registrations current. We believe that many such rights and licenses are important to our business by helping to develop strong brand-name recognition in the marketplace. Some of our significant trademarks include: Exide, Exide-Ironclad, HUP, Loadhog, Superhog, Workhog, Deserthog, Smarthog, Cobra, GBC, ESB, Hybernator, Liberator, Oasis, Titan PowerTech, PowerGuard, PowerPlus, LifePlus, Waterless, Powerline, Energy Plus, LifeGuard, PowerLease, Envirolink, Varta, Perfect, Hawker, Armasafe+, Odyssey, PowerSafe, DataSafe, Genesis, Cyclon, Genesis NP, Genesis Pure Lead, Supersafe, Oldham, Chloride and Espace.

        See "Litigation—Exide Litigation" for information concerning currently pending litigation involving our continuing right to use the Exide trademark.

Product and Process Development

        Our product and process development efforts are focused on the creation and optimization of new battery products using existing technologies, which differentiate our stored energy solutions from our competition's. We allocate our resources to the following key areas:


Employees

        At March 31, 2004, we had approximately 6,500 employees. Of these employees, approximately 3,300, almost all of whom work in our European facilities, were covered by collective bargaining agreements. The average term of these agreements is one to two years, with the longest term being three and one-half years. These agreements expire over the period from 2004 to 2007.

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        We consider our employee relations to be good. We have not experienced any material labor unrest, disruption of production or strike.

Environmental Matters

        In the manufacture of our products throughout the world, we process, store, dispose of and otherwise use large amounts of hazardous materials, especially lead and acid. As a result, we are subject to extensive and changing environmental, health and safety laws and regulations governing, among other things: the generation, handling, storage, use, transportation and disposal of hazardous materials; remediation of polluted ground or water; emissions or discharges of hazardous materials into the ground, air or water; and the health and safety of our employees. Compliance with these laws and regulations results in ongoing costs. Failure to comply with these laws and regulations, or to obtain or comply with required environmental permits, could result in fines, criminal charges or other sanctions by regulators. From time to time we have had instances of alleged or actual noncompliance that have resulted in the imposition of fines, penalties and required corrective actions. Our ongoing compliance with environmental, health and safety laws, regulations and permits could require us to incur significant expenses, limit our ability to modify or expand our facilities or continue production and require us to install additional pollution control equipment and make other capital improvements. In addition to compliance, investigation and cleanup costs, and fines, penalties and required corrective actions, private parties, including current or former employees, could bring personal injury or other claims against us due to the presence of, or their exposure to, hazardous substances used, stored, transported or disposed of by us or contained in our products.

        Certain environmental laws assess liability on owners or operators of real property for the cost of investigation, removal or remediation of hazardous substances at their current or former properties or at properties at which they have disposed of hazardous substances. These laws may also assess costs to repair damage to natural resources. We may be responsible for remediating damage to our properties that was caused by former owners. Soil and groundwater contamination has occurred at some of our current and former properties and may occur or be discovered at other properties in the future. We currently are investigating, remediating and monitoring soil and groundwater contamination at certain of our properties, and we may be required to conduct these operations at other properties in the future. In addition, we have been, currently are and in the future may be liable to contribute to the cleanup of locations owned or operated by other persons to which we or our predecessor companies have sent wastes for disposal, pursuant to federal and other environmental laws. Under these laws, the owner or operator of contaminated properties and companies that generated, disposed of or arranged for the disposal of wastes sent to a contaminated disposal facility can be held jointly and severally liable for the investigation and cleanup of such properties, regardless of fault.

        We currently are listed as a potentially responsible party at one federal Superfund site, the NL Industries / Taracorp Superfund site in Granite City, Illinois. This site consists of a former secondary lead smelter and surrounding property. Our identification as a potentially responsible party with respect to this site arises from our purchase of ESG from Invensys. Invensys has represented that they will indemnify us for this liability. Invensys is currently negotiating a settlement in this matter for approximately $130,000.

        Four of our facilities in the United States and Europe are certified to ISO 14001 standards. ISO 14001 is a globally recognized, voluntary program that focuses on the implementation, maintenance and continual improvement of an environmental management system and the improvement of environmental performance.

        Manchester, England.    Environmental site assessments conducted after our acquisition of our Manchester, England battery facility have revealed three issues of potential significant concern: lead slag piles that may pose a health risk are located in the vicinity of a public footpath on the property; the potential restoration of the Manchester, Bolton and Bury Canal by British Waterways may lead to sampling and/or remediation obligations with respect to our property bordering the canal; and there may be multiple

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and as yet unidentified areas of soil and groundwater contamination at the facility. We believe we have a contractual right to be indemnified by Invensys for these potential environmental liabilities and submitted a notice of claim to Invensys in May 2003 regarding these issues. No government or third party lawsuits, regulatory actions or orders have been filed with respect to this site to date, and all our actions at this site to date are voluntary. The only action that has been taken at this site is the testing of the footpath area, which is ongoing. To date, Invensys has assumed full responsibility for this testing. We have also established reserves of approximately $5.3 million for the facility, which reserve is not discounted by any amounts we expect to recover from Invensys. Based on the information available at this time, we believe these reserves are sufficient to satisfy our environmental liabilities at this facility.

        Sumter, South Carolina.    We currently are responsible for certain cleanup obligations at the former Yuasa lead acid battery facility in Sumter, South Carolina, which has been the subject of soil cleanup based on elevated levels of lead. The lead acid battery facility was closed in 2001 and is separate from our current metal fabrication facility in Sumter. Remediation issues related to lead contamination in the soil were addressed pursuant to a 1998 Consent Order with the State of South Carolina, and are now considered closed. We are subject to ongoing stormwater inspection requirements under a 2000 Consent Order based on suspected lead contamination. We also are in ongoing discussions with the State of South Carolina regarding alleged trichloroethylene (TCE) and other contamination in the soil and groundwater that predates our ownership of this facility. We believe we may be indemnified by Yuasa for environmental liabilities at this facility and have submitted a notice of claim to Yuasa regarding these issues. We also believe we may be insured against losses arising out of this alleged contamination pursuant to our environmental insurance policy for U.S. facilities, and have filed a notice of claim with our insurance company regarding this contamination. Based on the preliminary nature of these issues, we have not received a response to our indemnification or insurance claim. We have established reserves of approximately $1.8 million for the environmental issues at this facility, which reserve is not discounted by any amounts we might recover from third parties. Based on current information, we believe these reserves are adequate to satisfy our environmental liabilities at this facility.

        European Union Lead Acid Battery Legislation.    Recent legislation proposed by the European Union may affect us and the lead acid battery industry. In November 2003, the European Commission issued a Directive that recommends the elimination of mercury in batteries and the reclamation of spent lead and cadmium batteries for recycling (a "closed-loop" life cycle). On April 20, 2004, the European Parliament approved legislation that would effectively ban lead and cadmium in batteries as well as mercury, with the exception of batteries for which no suitable alternatives exist. While we do not believe that such alternatives currently exist, a suitable substitute for lead acid batteries may be identified or developed. In response to the vote of the European Parliament, the European Commission stated it would not endorse a ban on lead or cadmium in batteries and affirmed its original proposal for closed-loop recycling regulations. The European Council, the main decision-making body of the European Union, is expected to comment on the new battery Directive within the coming months. We cannot predict whether the Council will adopt the view of the Parliament or the Commission. Enactment and implementation of the European Parliament's Directive by the Member States could have a material adverse affect on our business, results of operations and financial conditions.

Litigation

        When we acquired Yuasa's North and South American industrial battery business in 2000, we acquired the worldwide right to use the Exide trademark on industrial batteries. Yuasa had acquired an exclusive, perpetual, worldwide and transferable license to use the Exide name on industrial batteries in 1991 when it bought Exide Technologies' industrial battery business.

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        In 2002, Exide Technologies filed for protection under Chapter 11 of the U.S. Bankruptcy Code. During the course of its Chapter 11 proceedings, Exide Technologies sought to reject certain agreements related to the 1991 sale of Exide Technologies' industrial battery business to Yuasa, including the trademark license referred to above. We opposed Exide Technologies' attempt to reject these agreements. If the court were to find in favor of Exide Technologies, our license to use the Exide name could be terminated. If the license were so terminated, we believe that the court might delay the effective date of the termination for some reasonable period.

        The Exide trade name is one of our better-known brands. Our Exide-branded batteries represented approximately 12% of our net sales for fiscal 2004. We introduced testimony in the court proceedings from an expert witness who estimated that we would suffer damages of approximately $60 million over a seven-year period from price erosion, profit on lost sales and incremental rebranding expense in the event that the license were terminated. This expert's assessment of our damages assumed, contrary to our current belief, that the court would not delay the effective date of the termination.

        We believe that we should prevail but, as with any litigation, the outcome is uncertain. If we do not ultimately prevail, we believe that, if the court were to provide us with a reasonable time period to continue to use the name while we rebrand our products in order to mitigate potential price erosion and sales loss, the termination of the license should not have a material adverse effect on our financial condition or operating results.

        From time to time, we are involved in litigation incidental to the conduct of our business. We do not expect that any of this litigation, individually or in the aggregate, will have a material adverse effect on our financial condition, results of operations or cash flow.

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Facilities

        Set forth below is a table of our principal manufacturing and principal distribution facilities, their principal functions, the approximate size of the facility and whether the facility is owned or leased.

Location

  Function/Products Produced(1)
  Size
(square feet)

  Owned/Leased
North America:            
Reading, PA   Corporate Offices   109,000   Owned
Richmond, KY   Motive and Reserve Power Batteries   277,000   Owned
Cleveland, OH   Motive Power Chargers   66,000   Owned
Ooltewah, TN   Motive Power Batteries   90,000   Owned
Warrensburg, MO   Reserve Power Batteries   341,000   Owned
Hays, KS   Reserve Power Batteries   351,000   Owned
Sumter, SC   Metal fabrication, Motive and Reserve Power   52,000   Owned
Santa Fe Springs, CA   Distribution Center, Motive and Reserve Power Batteries   35,000   Leased
Carlstadt, NJ   Distribution Center, Motive and Reserve Power Batteries   25,000   Leased
Tijuana, Mexico   Reserve Power Batteries   156,000   Owned
Monterrey, Mexico   Reserve and Motive Power Batteries   80,000   Owned
Brampton, Canada   Assembly and distribution, Motive and Reserve Power Batteries   37,000   Leased

Europe:

 

 

 

 

 

 
Arras, France   Reserve and Motive Power Batteries   484,000   Owned
Newport, Wales   Reserve Power Batteries   233,000   Owned
Manchester, England   Reserve Power Batteries   475,000   Owned
Hagen, Germany   Reserve and Motive Power Batteries   395,000   Owned/Leased
Bielsko-Biala, Poland   Motive Power Batteries   172,000   Leased
Brebieres, France   Motive Power Chargers   41,000   Leased
Zamudio, Spain   Reserve and Motive Power Batteries   55,000   Owned
Villanova, Italy   Reserve and Motive Power Batteries   50,000   Leased
Herstal, Belgium   Distribution Center, Motive and Reserve Power Batteries   84,000   Leased

Asia:

 

 

 

 

 

 
Shenzhen, China   Reserve Power Batteries   176,000   Owned
Jiangsu, China   Reserve Power Batteries   130,000   Owned

(1)
The primary function of listed facilities is manufacturing industrial batteries, unless otherwise noted.

Quality Systems

        We utilize a global strategy for quality management systems, policies and procedures, the basis of which is the ISO 9001:2000 standard. We believe in the principles of this standard and reinforce this by mandatory compliance for all manufacturing, sales and service locations that are registered to the ISO 9001 standard. This strategy enables us to provide effective products and services to meet our customers' needs.

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MANAGEMENT

Directors and Executive Officers

        Set forth below is certain information regarding our executive officers and directors.

Name

  Age
  Position
John D. Craig   53   Chairman of the Board of Directors, President and Chief Executive Officer
Michael T. Philion   52   Executive Vice President—Finance and Chief Financial Officer
Charles K. McManus   57   Executive Vice President—North America Reserve Power and Worldwide Marketing
John A. Shea   41   Executive Vice President—Motive Power Americas
Richard W. Zuidema   55   Executive Vice President—Administration
Cheryl A. Diuguid   53   Senior Vice President—Asia
Raymond R. Kubis   50   President—Europe
Howard I. Hoffen   40   Director
Eric T. Fry   37   Director
Michael C. Hoffman   41   Director Nominee
Chad L. Elliott   32   Director Nominee
                           Director Nominee
                           Director Nominee

        Executive officers are appointed by and serve at the pleasure of our board of directors. A brief biography of each director and executive officer follows:

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Composition of the Board After This Offering

        Upon the closing of this offering, our board of directors will consist of seven members, including                and                , independent directors who have been named to serve on our board of directors effective as of the closing of this offering. We expect to add a third independent member to our board of directors within 12 months after the closing of this offering. There are no family relationships among our directors or executive officers.

        Messrs. Hoffen and Fry serve, and Messrs. Hoffman and Elliott have been nominated to serve, on our board of directors by Morgan Stanley Funds, pursuant to the securityholder agreement that we entered into with the Morgan Stanley Funds and our other principal equity holders prior to this offering. The securityholder agreement entitles MSCP IV to designate a majority of the nominees for election to the board of directors and also provides that our chief executive officer shall be nominated to the board of directors. The parties to the securityholder agreement have agreed to vote their shares of common stock to elect such nominees for director.

        Pursuant to our certificate of incorporation, our board of directors is divided into three classes. The members of each class will serve for a staggered, three-year term. Upon the expiration of the term of a class of directors, nominees for directors in that class will be considered for election for three-year terms at the annual meeting of stockholders in the year in which the term of directors in that class expires. The classes are composed of the following directors:

        Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of our directors. This classification of our board of directors may have the effect of delaying or preventing changes in control of our company.

Committees of our Board of Directors

        At the closing of this offering, our board of directors will have an audit committee, a compensation committee and a nominating and corporate governance committee, each of which will have the composition and responsibilities described below. Our board of directors from time to time may establish other committees.

        Since MSCP IV and other existing shareholders will continue to hold more than 50% of the voting power of EnerSys after giving effect to the offering, we are a "controlled company" within the meaning given to that term in the New York Stock Exchange listing requirements. So long as we are a "controlled company," we are exempt from certain listing requirements, including, among others, the requirements that a majority of our board of directors be independent directors and that all the members of our compensation and nominating and corporate governance committees be independent directors.

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        Upon the closing of this offering, our audit committee will consist of                ,                 and Mr. Fry.                has been determined to be our "audit committee financial expert," as such term is defined in Item 401(h) of Regulation S-K. The audit committee will be responsible for:


        Within 12 months after the closing of this offering, we plan to nominate an additional new independent member to the audit committee to replace Mr. Fry so that all three of our audit committee members will be "independent," as such term is defined in Rule 10A-3(b)(i) under the Securities Exchange Act of 1934, as amended.

        Our board of directors has adopted a written charter for the audit committee, which will be available on our website at http://www.enersys.com.

        Upon the closing of this offering, our compensation committee will consist of one independent director, and Mr. Hoffen and Mr. Fry. The compensation committee is responsible for:

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        None of our executive officers serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers who serve on our board or compensation committee.

        Upon the closing of this offering, our nominating and corporate governance committee will consist of one independent director, and Mr. Hoffen and Mr. Fry. The nominating and corporate governance committee will be responsible for identifying and recommending potential candidates qualified to become board members, recommending directors for appointment to board committees and developing and recommending to our board a set of corporate governance principles.

Director Compensation

        Upon the closing of the offering, we expect to pay our directors (other than directors who are our employees) an annual retainer of $            and a fee of $            for each of our board meetings, and $            for each committee meeting, attended. We will reimburse any member of our board who is not an employee for reasonable expenses incurred in connection with his or her attendance at board and committee meetings. We also plan to grant stock options or other awards under our 2004 Equity Incentive Plan to independent directors.

Limitation of Liability and Indemnification of Directors and Officers

        Delaware law, our certificate of incorporation and our bylaws contain limitation of liability provisions and provisions for indemnification of our directors and officers. See "Description of Capital Stock, Certificate of Incorporation and Bylaws" for a summary of these provisions.

        In addition, we have entered into, or will have entered into prior to the closing of this offering, an indemnity agreement with each of our directors and executive officers. Pursuant to this agreement, we will indemnify, to the fullest extent permitted by the Delaware General Corporation Law, each director or executive officer who is, or is threatened to be made, a party to any proceeding by virtue of the fact that such person is or was one of our directors or officers. Indemnification will be provided for all costs, judgments, penalties, fines, liabilities and amounts paid in settlement of any such proceeding and for expenses actually and reasonably incurred in connection with any such proceeding.

Executive Compensation

        The following table shows the annual cash compensation and certain other compensation paid or accrued by us for fiscal 2004 to our Chief Executive Officer and our other four most highly compensated executive officers. We refer to these officers collectively as our named executive officers.

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Summary Compensation Table

 
   
   
   
  Long-Term
Compensation
Awards

 
 
  Annual Compensation
  Securities
Underlying
Options
(#)

   
 
Name and Principal Position

  All Other
Compensation

 
  Salary
  Bonus
  Other
 
John D. Craig
Chairman, President and Chief Executive Officer
  $ 725,000   $
$
725,000
3,687,855
(1)
(2)
$ 2,100 (3)     $   (4)
Michael T. Philion
Executive Vice President—Finance, Chief Financial Officer and Director
  $ 335,000   $
$
201,000
1,580,280
(1)
(2)
$ 2,100 (3)     $ 13,235 (5)
Richard W. Zuidema
Executive Vice President—Administration and Director
  $ 336,000   $
$
201,600
1,207,049
(1)
(2)
$ 2,100 (3)     $ 13,387 (5)
John A. Shea
Executive Vice President—Motive Power Americas
  $ 311,000   $
$
186,600
1,259,796
(1)
(2)
$ 2,100 (3)     $ 12,749 (5)
Raymond R. Kubis
President—Europe
  $ 366,048 (6) $
$
217,587
415,477
(1)(7)
(2)
$   (8)     $ 22,860 (9)

(1)
Consists of normal bonus for fiscal 2004 paid in fiscal 2005.

(2)
Consists of a one-time payment in connection with our recapitalization on March 17, 2004. In order to treat management equitably with other stockholders, because significant portions of management's equity interests are in the form of options to purchase shares of our common or preferred stock, we made a cash distribution to each individual based on the aggregate in-the-money value of his or her vested options. These one-time bonus payments were made to all members of management who held unexercised options.

(3)
Consists of car allowance benefits.

(4)
Consists of long-term disability premiums in the amount of $7,150, 401(k) matching contributions in the amount of $17,010 plus benefits under a split dollar life insurance policy in the amount of $            . These benefits represent the price of the term portion of the policy premiums plus the discounted present value of the imputed interest on the investment portion of the premiums over Mr. Craig's expected life.

(5)
Consists of 401(k) matching contributions.

(6)
U.S. dollar equivalent of annual salary of €297,600, based on the exchange rate at March 31, 2004, $1.23 to €1.00.

(7)
Consists of U.S. dollar equivalent of fiscal 2004 bonus of €176,900, based on the exchange rate at March 31, 2004, $1.23 to €1.00.

(8)
U.S. dollar equivalent of €          , based on the exchange rate at March 31, 2004, $1.23 to €1.00. This represents perquisites paid to Mr. Kubis for fiscal 2004 and includes private school tuition of $55,781 for Mr. Kubis' children, personal travel expenses of $9,546, car allowance benefits of $2,688 and payments of $            for tax advisory services.

(9)
This represents the U.S. dollar equivalent of €18,585 in pension contributions to an individual retirement account, based on the exchange rate at March 31, 2004, $1.23 to €1.00.

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        The following table sets forth information regarding stock options granted during fiscal 2004 to the executive officers named below.

 
   
   
   
   
  Potential Realizable
Value at Assumed
Annual Rates
of Stock Price
Appreciation for
Option Term(2)

 
  Number of
Securities
Underlying
Options
Granted (#)(1)

  Percentage of
Total Options
Granted to
Employees in
Fiscal 2004

   
   
 
  Exercise Price
per Share
($/Sh)

  Expiration
Date

 
  5%
  10%
John D. Craig
Chairman, President and Chief Executive Officer
      2.78
4.54
4.64
7.60
4.12
      10/30/07
10/30/07
10/30/10
10/30/10
10/30/10
       

Michael T. Philion
Executive Vice President—Finance, Chief Financial Officer

 

 

 

1.11
1.81
1.86
3.04
1.65

 

 

 

10/30/07
10/30/07
10/30/10
10/30/10
10/30/10

 

 

 

 

Richard W. Zuidema
Executive Vice President—Administration

 

 

 

1.11
1.81
1.86
3.04
1.65

 

 

 

10/30/07
10/30/07
10/30/10
10/30/10
10/30/10

 

 

 

 

John A. Shea
Executive Vice President—Motive Power Americas

 

 

 

1.11
1.81
1.86
3.04
1.65

 

 

 

10/30/07
10/30/07
10/30/10
10/30/10
10/30/10

 

 

 

 

Raymond R. Kubis
President—Europe

 

 

 

1.11
1.81
1.86
3.04
1.65

 

 

 

10/30/07
10/30/07
10/30/10
10/30/10
10/30/10

 

 

 

 

(1)
One-half of the options granted in fiscal 2004 vested upon grant. The unvested portion of the grant vests 50% per year over two years.

(2)
Potential realizable values are net of exercise price, but before any taxes associated with exercise. The assumed rates of stock appreciation are provided in accordance with SEC rules based upon an assumed initial public offering price of $                        per share, and do not represent our estimate or projection of future stock price.

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Aggregated Option Exercises in Fiscal 2004 and Fiscal Year-End Option Values

        None of our named executive officers exercised options to purchase our common stock during fiscal 2004. The following table shows information about the value of each of our named executive officers' unexercised options as of March 31, 2004.

Fiscal 2004
Year-End Option Values

 
  Number of
Securities Underlying
Unexercised Options
at Fiscal Year-End(1)

  Value of Unexercised
In-the-Money Options
at Fiscal Year-End(2)

 
  Exercisable
  Unexercisable
  Exercisable
  Unexercisable
John D. Craig
Chairman, President and Chief Executive Officer
               
Michael T. Philion
Executive Vice President—Finance, Chief Financial Officer
               
Richard W. Zuidema
Executive Vice President—Administration
               
John A. Shea
Executive Vice President—Motive Power Americas
               
Raymond R. Kubis
President—Europe
               

(1)
Includes common stock equivalent number of shares issuable if certain stock options had been exercised for preferred stock and then converted into common stock, all as of March 31, 2004. As of March 31, 2004, there were            stock options outstanding for preferred stock, convertible into            shares of common stock. Named executive officers held            of these preferred stock options.

(2)
There was no public trading market for our common stock as of March 31, 2004. Accordingly, these values have been based upon an assumed initial public offering price of $        per share less the applicable exercise price payable for these shares, multiplied by the number of shares underlying the option.

Equity Compensation Plan Information

        The following table sets forth information as of March 31, 2004, regarding all of our existing compensation plans pursuant to which equity securities are authorized for issuance to employees and non-employee directors.

Plan Category

  Number of
securities to be issued
upon exercise of
outstanding options,
warrants and rights

  Weighted average
exercise price of
outstanding options,
warrants and rights

  Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))

  Total of securities
reflected in
columns (a) and (c)

 
  (a)

  (b)

  (c)

  (d)

Equity Compensation Plans Approved By Stockholders(1)                

Equity Compensation Plans Not Approved By Stockholders

 


 


 


 

   
 
 
 

Total

 

 

 

 

 

 

 

 

(1)
Consists of options to purchase shares of common stock or preferred stock under the EnerSys Management Equity Plan ("MEP"), which was adopted by stockholders on        . Options granted under this plan generally vest 25% per year from the date of grant. Upon an IPO, an additional 30% of granted options vest immediately.

Employment Agreements

        All of our named executive officers have entered into employment or directorship agreements with us. The following is a description of the material terms of these agreements.

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        We entered into an employment agreement with Mr. Craig on November 9, 2000. Mr. Craig's employment agreement is for a three-year term that is automatically extended on a daily basis to continue for three years from the date of such extension. Mr. Craig's employment agreement provides that after an initial public offering of our stock, we will use our best efforts to nominate him as Chairman of the board and that he shall also serve as the Chief Executive Officer and Chairman of the Board of each direct and indirect subsidiary of EnerSys. Mr. Craig's employment agreement provides that he may not compete with our business for three years following termination of his employment. We entered into employment agreements with each of Messrs. Philion, Zuidema and Shea on November 9, 2000. The employment agreements entered into by Messrs. Philion, Zuidema and Shea are for a two-year term that is automatically extended on a daily basis to continue for two years from the date of such extension. These employment agreements provide generally that the executive may not compete with our business for two years following termination of his employment.

        Subject to annual increases at the sole discretion of the compensation committee, Mr. Craig's base salary is $725,000, Mr. Philion's base salary is $335,000, Mr. Zuidema's base salary is $336,000 and Mr. Shea's base salary is $311,000. Contingent upon meeting goals established by the Board of Directors and the compensation committee, Mr. Craig is entitled to a bonus of up to 100% of base salary, and each of Mr. Philion, Mr. Zuidema and Mr. Shea is entitled to a bonus of up to 60% of base salary.

        We may terminate the employment of Mr. Craig, Philion, Zuidema or Shea for cause if he has been involved in any of the following: the commission of a felony or crime involving moral turpitude; a knowing and intentional fraud; an act or omission that is materially injurious to EnerSys; or the willful and continued failure or refusal to substantially perform his duties as an employee. If we were to terminate one of these executive's employment without cause, or if he resigns with good reason, we would be obligated to pay him his base salary, plus annual bonuses in an amount equal to the average of his two most recent annual bonuses, for the remainder of the term of the employment agreement. The employment agreements provide that if any payments due to the executive are subject to excise tax under Section 4999 of the Internal Revenue Code of 1986, we will provide the executive with a tax gross-up payment to negate the excise tax. "Good reason" means any of the following: a decrease in base salary; a material diminution of authority, responsibilities or positions; a relocation to any office location that is more than 50 miles from Reading, Pennsylvania; or our giving notice that we intend to discontinue the automatic extension of the employment agreement.

        On January 8, 2002, Mr. Kubis entered into a directorship agreement and a managing directorship agreement with respect to his services as President—Europe. These directorship agreements are for two-year terms that may be extended at our option. They provide generally that Mr. Kubis may not compete with our business for at least 12 months following termination of his directorship. Subject to annual increases at the sole discretion of the compensation committee, Mr. Kubis's base salary is €297,600 (U.S. dollar equivalent of $366,048, based on the exchange rate at March 31, 2004, $1.23 to €1.00) and, contingent upon meeting goals established by the Board of Directors and the compensation committee, Mr. Kubis is entitled to an annual bonus of up to 60% of base salary.

        We may terminate Mr. Kubis' directorship appointment for cause if he has been involved in any of the following: the commission of a felony or crime involving moral turpitude; a knowing and intentional fraud; an act or omission that is materially injurious to EnerSys; or the willful and continued failure or refusal to substantially perform his duties as a director. If we were to terminate Mr. Kubis' appointment without cause, or if he resigned with good reason, we would be obligated to pay him his base remuneration, plus annual bonuses in an amount equal to the average of his two most recent annual bonuses, for two years. The directorship agreement provides that if any payments due to Mr. Kubis are subject to excise tax under Section 4999 of the Internal Revenue Code of 1986, we will provide Mr. Kubis with a tax gross-up payment

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to negate the excise tax. "Good reason" means any of the following: a decrease in base remuneration; a material diminution of authority, responsibilities or positions; a relocation from Brussels, Belgium to any other location, unless Mr. Kubis is relocated to the United States or, upon 90 days prior notice and the payment of reasonable relocation expenses, to London, Paris or Frankfort; or a failure to renew the managing directorship agreement.

Management Equity Plan

        The following is the summary of the material terms of our Management Equity Plan, which we refer to as the MEP. This description is not complete. For more information, we refer you to the full text of the MEP, which has been filed as an exhibit to the registration statement of which this prospectus forms a part. We originally adopted the MEP effective as of November 22, 2000. Immediately prior to the closing of this offering, the MEP will be amended to provide that no additional awards shall be granted pursuant to it.

        The MEP authorized the grant of "non-qualified" (for purposes of the Internal Revenue Code of 1986, as amended (the "Code")) stock options and restricted stock to our officers and key employees. The number of shares reserved pursuant to outstanding awards under the MEP is subject to adjustment as a result of mergers, consolidations, stock dividends, stock splits and other dilutive changes in our common stock.

        Administration.    The MEP is administered by our compensation committee, provided that all actions of the compensation committee require the prior approval of the board. The compensation committee may adopt such rules as it may deem appropriate in order to carry out the purpose of the MEP. All questions of interpretation, administration and application of the MEP shall be determined in good faith by a majority of the members of the compensation committee, except that the compensation committee may authorize any one or more of its members, or any officer, to execute and deliver documents on behalf of the compensation committee.

        Options.    The compensation committee awarded options to purchase            shares of our common stock pursuant to the MEP. The compensation committee determined the terms for each option, except that the exercise price of the options is specified in the MEP. The exercise of certain options, however, have been adjusted to take into account the effects of certain corporate restructurings and distributions. An option holder may exercise an option by written notice and payment of the exercise price in cash or, in the sole discretion of the compensation committee by "cashless" exercise, in shares of our common stock already owned by the option holder, in other property acceptable to the compensation committee or in any combination of cash, "cashless" exercise, shares of common stock or such other property as determined by the compensation committee in its discretion. Options awarded under the MEP have generally been subject to vesting at the rate of 25% per year. However, certain awards that related to prior option awards were given vesting from the date of their related option awards. Further, as a result of this offering, all outstanding options were given an additional 30 percentage points of vesting (but not in excess of 100% overall vesting).

        Restricted Stock.    The compensation committee awarded            shares of restricted stock pursuant to the MEP. Restricted stock awards consist of shares of stock that are transferred to the participant subject to restrictions that may result in forfeiture if specified conditions are not satisfied. The compensation committee determined the restrictions and conditions applicable to each award of restricted stock at the time of grant. However, all shares of restricted stock were fully vested upon award.

        Transferability.    Awards granted under the MEP generally are not transferable other than by will or by the laws of descent and distribution.

        Change of Control.    In the event that (i) the company is merged or consolidated with another corporation, (ii) all or substantially all the assets of the company are acquired by another corporation, person or entity, or (iii) the company is reorganized, dissolved or liquidated, the compensation committee may in its discretion (A) adjust the number of awards granted to each participant and the number of

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awards that may be granted generally pursuant to the MEP, (B) adjust the exercise price of any options, and (C) make any other adjustments, or take such action, as the compensation committee, in its discretion, deems appropriate.

        Forfeiture of Awards.    The MEP generally provides for forfeiture of awards granted under the MEP in the event a participant engages in a "competing business" (as defined in the MEP) or engages in a "wrongful solicitation" (as defined in the MEP) while employed by the Company or a subsidiary or within 13 months of termination of employment.

        Term of the MEP; Amendment and Termination.    The MEP became effective on                        , 2000, was amended and restated on               , 2004, and will continue until terminated by the board. The board may at any time and from time to time alter, amend, suspend or terminate the MEP in whole or in part. Generally, no termination or amendment of the MEP may, without the consent of the participant to whom any awards previously have been granted, adversely affect the rights of such participant in such awards. As indicated above, however, there is no present intent to grant addition awards under this MEP, except for an adjustment, required by its terms.

2004 Equity Incentive Plan

        The following is a summary of the material terms of our 2004 Equity Incentive Plan, which we refer to as the 2004 EIP. This description is not complete. For more information, we refer you to the full text of the 2004 EIP, which has been filed as an exhibit to the registration statement of which this prospectus forms a part. We adopted the 2004 EIP effective as of            , 2004.

        The 2004 EIP authorizes the grant of "non-qualified" (for purposes of the Code) stock options, incentive stock options (for purposes of the Code), stock appreciation rights (including tandem stock appreciation rights), restricted stock, restricted stock units and other stock-based awards to our employees, directors and affiliates. A maximum of            shares of our common stock may be subject to awards under the 2004 EIP. The number of shares issued or reserved pursuant to the 2004 EIP (or pursuant to outstanding awards) is subject to adjustment as a result of mergers, consolidations, reorganizations, stock splits, stock dividends and other dilutive changes in our common stock. Shares subject to any awards that expire without being exercised or that are forfeited shall again be available for future grants of awards under the 2004 EIP. In addition, shares subject to awards that have been retained by us in payment or satisfaction of the purchase price or tax withholding obligation of an award shall not count against the limit described above.

        Administration.    The 2004 EIP is administered by our compensation committee provided that all actions of the compensation committee require prior approval of the board. The committee has the sole discretion to determine the employees and directors to whom awards may be granted under the 2004 EIP, the manner in which such awards will vest and the other conditions applicable to awards. Options, stock appreciation rights, restricted stock and other stock-based awards may be granted by the committee to employees and directors in such numbers and at such times during the term of the 2004 EIP as the committee shall determine. The committee is authorized to interpret the 2004 EIP, to establish, amend and rescind any rules and regulations relating to the 2004 EIP and to make any other determinations that it deems necessary or desirable for the administration of the 2004 EIP. The committee may correct any defect, supply any omission or reconcile any inconsistency in the 2004 EIP in the manner and to the extent the committee deems necessary or desirable.

        Options.    The compensation committee will determine the exercise price and other terms for each option and whether the options are non-qualifed stock options or incentive stock options. Incentive stock options may be granted only to employees and are subject to certain other restrictions. To the extent an option intended to be an incentive stock option does not so qualify, it will be treated as a non-qualified option. An option holder may exercise an option by written notice and payment of the exercise price in a form acceptable to the committee, which may include: by cash, check or wire transfer; by the surrender of a

77



number of shares of common stock already owned by the option holder for at least the minimum period required by law and to avoid any accounting charge with a fair market value equal to the exercise price; through the delivery of irrevocable instructions to a broker to sell shares obtained upon the exercise of the option and to deliver to us an amount out of the proceeds of the sale equal to the aggregate exercise price for the shares being purchased; or another method approved by the committee.

        Stock Appreciation Rights.    The compensation committee may grant stock appreciation rights independent of or in connection with an option. The exercise price per share of a stock appreciation right will be an amount determined by the committee, and the committee will determine the other terms applicable to stock appreciation rights. Generally, each stock appreciation right will entitle a participant upon exercise to an amount equal to:

        Payment shall be made in common stock or in cash, or partly in common stock and partly in cash, all as shall be determined by the committee.

        Restricted Stock and Restricted Stock Units.    The compensation committee may award restricted common stock and restricted stock units. Restricted stock awards consist of shares of stock that are transferred to the participant subject to restrictions that may result in forfeiture if specified conditions are not satisfied. Restricted stock unit awards result in the transfer of shares of cash or stock to the participant only after specified conditions are satisfied. The committee will determine the restrictions and conditions applicable to each award of restricted stock or restricted stock units.

        Other Stock-Based Awards.    The compensation committee may grant awards of rights to purchase stock, bonus shares, phantom stock units, performance shares and other awards that are valued in whole or in part by reference to, or are otherwise based on the fair market value of, shares of our common stock. The other stock-based awards will be subject to terms and conditions established by the committee.

        Performance  Criteria.    Vesting of awards granted under the 2004 EIP may be subject to the satisfaction of one or more performance goals established by the compensation committee. The performance goals may vary from participant to participant, group to group, and period to period.

        Transferability.    Unless otherwise determined by the compensation committee, awards granted under the 2004 EIP are not transferable other than by will or by the laws of descent and distribution.

        Change of Control.    The compensation committee may provide, either at the time an award is granted or thereafter, that a change in control (as defined in the 2004 EIP) that occurs after the offering shall have such effect as specified by the committee, or no effect, as the committee in its sole discretion may provide.

        Term of the 2004 EIP; Amendment and Termination.    The 2004 EIP became effective on                    , 2004, and will terminate on the tenth anniversary thereof unless sooner terminated. The board may amend, alter or discontinue the 2004 EIP in any respect at any time, but no amendment may diminish any of the rights of a participant under any awards previously granted, without his or her consent, unless such amendment affected all participants in the same manner. In addition, shareholder approval is required for any amendment that would (i) increase the maximum number of shares available for awards, (ii) reduce the price at which options may be granted, (iii) reduce the exercise price of any outstanding option, or (iv) extend the term of the 2004 EIP.

Federal Income Tax Consequences of Awards Under the MEP and 2004 EIP.

        The following discussion summarizes certain federal income tax consequences of the issuance and receipt of options and other stock-based awards under the MEP and the 2004 EIP under the law as in effect on the date hereof. The summary does not purport to cover all federal employment tax or other federal tax

78



consequences that may be associated with the MEP or the 2004 EIP, nor does it cover state, local, or non-U.S. taxes.

        When a non-qualified stock option is granted, no income will be recognized by the option holder. When a non-qualified stock option is exercised, in general, the option holder will recognize ordinary compensation income equal to the excess, if any, of the fair market value of the underlying common stock on the date of exercise over the exercise price multiplied by the number of shares of common stock subject to the option that was exercised. We are entitled to a deduction subject to possible limitations under Sections 162(m) and 280G of the Code as discussed below equal to the amount of compensation income recognized by the option holder for our taxable year that ends with or within the taxable year in which the option holder recognized the compensation.

        A participant is not taxed on the grant or exercise of an incentive stock option (an "ISO"). The difference between the exercise price and the fair market value of the shares on the exercise date will, however, be a preference item for purposes of the alternative minimum tax. If an option holder holds the shares acquired upon exercise of an ISO for at least two years following the option grant date and at least one year following exercise, the option holder's gain, if any, upon a subsequent disposition of such shares is long term capital gain. The measure of the gain is the difference between the proceeds received on disposition and the option holder's basis in the shares (which generally equals the exercise price). If an option holder disposes of stock acquired pursuant to exercise of an ISO before satisfying the one and two-year holding periods described above, the option holder will recognize both ordinary income and capital gain in the year of disposition. The amount of the ordinary income will be the lesser of (i) the amount realized on disposition less the option holder's adjusted basis in the stock (usually the exercise price) or (ii) the difference between the fair market value of the stock on the exercise date and the exercise price. The balance of the consideration received on such a disposition will be long-term capital gain if the stock had been held for at least one year following exercise of the ISO and otherwise will be short-term capital gain. We are not entitled to an income tax deduction on the grant or exercise of an ISO or on the option holder's disposition of the shares after satisfying the holding period requirement described above. If the holding periods are not satisfied, we will be entitled to a deduction in the year the option holder disposes of the shares in an amount equal to the ordinary income recognized by the option holder.

        When a stock appreciation right is granted, no income will be recognized by the participant. When a stock appreciation right is exercised, in general, the participant will recognize ordinary compensation income equal to the cash and/or the fair market value of the shares received upon exercise. We are entitled to a deduction subject to possible limitations under Sections 162(m) and 280G of the Code as discussed below equal to the compensation income recognized by the participant.

        Generally, when a restricted stock unit or a share of restricted stock is granted, no income will be recognized by the participant. Upon the payment to the participant of common shares in respect of restricted share units or the release of restrictions on restricted stock, the participant generally recognizes ordinary compensation income equal to the fair market value of the shares as of the date of delivery or release. We are entitled to a deduction subject to possible limitations under Sections 162(m) and 280G of the Code as discussed below equal to the compensation income recognized by the participant.

        In general, under Section l62(m) of the Code, remuneration paid by a public corporation to its chief executive officer or any of its other top four named executive officers, ranked by pay, is not deductible to the extent it exceeds $1,000,000 for any year. However, Section 162(m) excepts from this rule certain amounts payable pursuant to plans or agreements adopted before an initial public offering if certain additional requirements are met. We intend to take advantage of this exception and expect that Section 162(m) will not limit the deductibility of any amounts payable pursuant to the MEP or the 2004 EIP.

        Under the so-called "golden parachute" provisions of the Code, the accelerated vesting of stock options and benefits paid under other awards in connection with a change in control of a corporation may be required to be valued and taken into account in determining whether participants have received compensatory payments, contingent on the change in control, in excess of certain limits. If these limits are exceeded, a portion of the amounts payable to the participant may be subject to an additional 20% federal tax and may be nondeductible to us.

        A participant may be required to pay to us or make arrangements satisfactory to us to satisfy all federal, state and other withholding tax requirements related to awards under the MEP or the 2004 EIP.

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CERTAIN RELATIONSHIPS AND TRANSACTIONS

Relationship with Morgan Stanley

        After giving effect to this offering, the Morgan Stanley Funds will own    % of our outstanding common stock and, should the underwriters exercise the over-allotment option,        % of our outstanding common stock.

        As of March 31, 2004, Morgan Stanley Senior Funding, Inc., a subsidiary of Morgan Stanley, had a $5.0 million participation in and acts as an agent under our new senior secured credit facility, and it acts as an agent under our new senior second lien term loan. Morgan Stanley Senior Funding was the lead lender and acted as agent under our former senior secured credit facility. Morgan Stanley & Co. Incorporated, an affiliate of Morgan Stanley, is acting as one of the representatives of the underwriters of this offering.

        Since the beginning of our 2002 fiscal year until repayment of our former secured credit facility in March 2004, Morgan Stanley Senior Funding received fees totaling $360,000 for its services as agent under that facility. In addition to these fees, affiliates of Morgan Stanley have received a total of $             million in fees and expense reimbursements for services provided to us since the beginning of our 2002 fiscal year, including $             million in connection with the ESG acquisition. In connection with the March 2004 refinancing of our existing credit agreements and related recapitalization, Morgan Stanley Senior Funding received the following fees for its role in arranging the new credit facilities: $0.7 million for the senior secured revolving credit facility, $1.1 million for the senior secured term loan B and $1.0 million for the senior second lien term loan. Morgan Stanley Senior Funding is not entitled to receive any ongoing fees or expense reimbursements for any services rendered under the credit agreements. Morgan Stanley Senior Funding is not committed to fund any portion of the senior secured term loan B or the senior second lien term loan and accordingly will not receive any amounts if any of those loans are prepaid.

        As part of the March 2004 recapitalization and the related distribution of $258 million to stockholders, the Morgan Stanley Funds received approximately $217 million.

Securityholder Agreement

        We entered into a securityholder agreement with MSCP IV and our other equity holders dated as of November 9, 2000, providing for certain governance matters, restrictions on transfers of our equity interests by certain equity holders and certain registration rights. On                        , 2004, we entered into an amended and restated securityholder agreement, which we refer to herein as the securityholder agreement, with MSCP IV, the other Morgan Stanley Funds, certain investment funds affiliated with J.P. Morgan, which we refer to as the J.P. Morgan Funds, and certain entities affiliated with GM, which we refer to as the GM Shareholders, as well as with certain members of our senior management who own an aggregate of            shares of common stock and options to purchase an aggregate of            shares of common stock.

        All significant decisions involving our company or our subsidiaries require the approval of our board of directors, acting by a simple majority vote. The securityholder agreement provides that our board of directors will consist of seven members upon the closing of this offering, which may be increased to not more than nine members at the discretion of our board of directors. Our chief executive officer will be a nominee for election to our board of directors. MSCP IV is entitled to designate a majority of the nominees for election to our board of directors and to designate a majority of the members of our compensation committee and nominating and corporate governance committee. The parties to the securityholder agreement have agreed with us to vote their shares of common stock to elect such nominees for director. Such rights are subject to any listing requirement of the New York Stock Exchange on which the shares of our common stock are expected to be traded, and to any other requirements of the Exchange Act, which may require that some of such nominees and committee members be "independent," as such term is defined in Rule 10A-3(b)(i) under the Exchange Act or otherwise. Such rights to designate a majority of such nominees or committee members will terminate when we are no longer able to take advantage of the "controlled company" exemption under the New York Stock Exchange listing requirements. Thereafter, and until the Morgan Stanley Funds cease to own at least 15% of our

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outstanding common stock, MSCP IV will be entitled to designate a number of such nominees or members that is proportionate to its percentage holdings of our common stock.

        Since MSCP IV and other existing stockholders will continue to hold more than 50% of the voting power of our common stock following this offering, we can be considered a "controlled company" within the meaning given to that term in the New York Stock Exchange listing requirements. So long as we are a "controlled company," we are permitted to and have opted out of many of the NYSE's corporate governance requirements, including, among others, the requirements that a majority of our board of directors be independent directors and that all the members of our compensation and nominating and corporate governance committees be independent directors.

        We have agreed with each member of our senior management who is a party to the securityholder agreement that such person may not, directly or indirectly, transfer or encumber his or her shares of our common stock owned, or issuable upon the exercise of options, immediately prior to the closing of this offering, subject to certain exceptions (including transfers to facilitate certain "cashless exercises" of options to acquire common stock). These restrictions terminate with respect to such person when either (a) the Morgan Stanley Funds own less than 15% of our outstanding common stock or (b) with respect to vested shares and options under the 2000 MEP, such person's employment is terminated by us without "cause" or by such person for "good reason," or upon such person's death, "permanent disability" or "retirement" (in each case as defined in such agreement), but in no event earlier than the one hundred eightieth day after the completion of this offering.

        We have agreed with each of our institutional stockholders, other than the MSCP Funds, that is a party to the securityholder agreement that such stockholder may not, directly or indirectly, transfer or encumber its shares of our common stock owned immediately prior to the closing of this offering, subject to certain exceptions. These restrictions terminate when the Morgan Stanley Funds own less than 15% of our outstanding common stock.

        We have agreed that each MSCP Fund and each J. P. Morgan Fund and GM Shareholder has the ability, subject to certain exceptions, to require us to register the shares of common stock held by parties to the securityholder agreement in connection with the resale of such shares, so long as the aggregate market value of the shares to be registered is at least $50 million, in the case of requests involving an underwritten public offering, or $15 million, in the case of any other public offering. In addition, each party to the securityholder agreement will have the ability to exercise certain "piggyback" registration rights in connection with other registered offerings by us.

Indemnity and Expense Agreement

        We have agreed with each Morgan Stanley Fund, in an agreement dated March 22, 2002, that, to the fullest extent permitted by law, none of such stockholders, or any of their respective partners or other affiliates, or their respective members, shareholders, directors, managers, officers, employees, agents or other affiliates, or any person or entity who serves at the request of any such stockholder on behalf of any person or entity as an officer, director, manager, partner or employee of any person or entity (referred to as indemnified parties), shall be liable to us for any act or omission taken or suffered by such indemnified party in connection with the conduct of our affairs or otherwise in connection with such stockholder's ownership of shares of our common stock, unless such act or omission resulted from fraud, wilful misconduct or gross negligence by such indemnified party or any mistake, negligence, dishonesty or bad faith of any agent of such indemnified party.

        We have also agreed with each Morgan Stanley Fund that, to the fullest extent permitted by law, we will indemnify each of such indemnified parties for any and all liabilities and expenses (including amounts paid in satisfaction of judgments, in compromises and settlements, as fines and penalties and legal or other costs and reasonable expenses of investigating or defending against any claim or alleged claim) of any nature whatsoever, known or unknown, liquidated or unliquidated, that are incurred by such indemnified party and arise out of or in connection with our affairs, or any indemnified party's ownership of shares of our common stock, including acting as a director, manager or officer or its equivalent; provided that an

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indemnified party shall be entitled to indemnification only to the extent that such indemnified party's conduct did not constitute fraud, wilful misconduct or gross negligence.

        We have also agreed to pay, or reimburse, each Morgan Stanley Fund for, all such stockholder's reasonable out-of-pocket fees and expenses incurred in connection with or related to such stockholder's ownership of shares of our common stock. Since the beginning of our 2002 fiscal year, we have paid a total of $0.2 million to the Morgan Stanley Funds under this agreement.

        As a result of the Morgan Stanley Funds holding approximately    % of our outstanding shares of common stock, after giving effect to this offering, and their rights under the securityholder agreement, Morgan Stanley may be deemed to control our management and policies. In addition, Morgan Stanley may be deemed to control all matters requiring stockholder approval, including the election of our directors, the adoption of amendments to our certificate of incorporation and the approval of mergers and sales of all or substantially all our assets. Circumstances could arise under which the interests of Morgan Stanley could be in conflict with the interests of our other stockholders.

Relationship with our Management

        We have entered into employment or directorship agreements with our executive officers, granted stock options to our executive officers under our management equity plan and paid certain bonuses to our executive officers. See "Management."

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PRINCIPAL STOCKHOLDERS

        Set forth below is certain information concerning the beneficial ownership, as of                        , 2004, of our common stock and preferred stock, and as adjusted to give effect to the offering, by each person known to us to be a beneficial owner of more than 5% of any class of our capital stock, by each of our directors, by each of our named executive officers, by and by all our directors and executive officers as a group.

 
  Before the Offering
  After the Offering
 
  Common Stock
  Preferred Stock
  Common Stock
 
  Number of
Shares

  Percent
of Class

  Number of
Shares

  Percent
of Class

  Number of
Shares

  Percent
of Class

MSCP Funds(1)
1585 Broadway
New York, NY 10036
      97.4 %     66.4 %      
MSGEM Funds(2)
1585 Broadway
New York, NY 10036
          10.6        
J.P. Morgan Funds(3)
522 Fifth Avenue
New York, NY 10036
          12.4        
GM Shareholders(4)
767 Fifth Avenue
New York, NY 10153
          10.6        
John D. Craig(5)               *        
Michael T. Philion(6)               *        
Charles K. McManus(7)               *        
Richard W. Zuidema(8)               *        
John A. Shea(9)               *        
Raymond R. Kubis(10)                    
Cheryl A. Diuguid(11)                    
Howard I. Hoffen(12)                        
Eric T. Fry(12)                        
Michael C. Hoffman(12)                        
Chad L. Elliott                
All directors and executive officers as a group
(Eleven persons, including Messrs. Craig, Philion, McManus, Zuidema, Shea, Kubis, Hoffen, Fry, Hoffman, Elliott and Ms. Diuguid)
                       

*
Less than 1% of the shares of common stock.

(1)
Includes Morgan Stanley Dean Witter Capital Partners IV, L.P., MSDW IV 892 Investors, L.P. and Morgan Stanley Dean Witter Capital Investors IV, L.P. Includes        shares of common stock and        shares of common stock issuable upon the conversion of preferred stock.

(2)
Includes Morgan Stanley Global Emerging Markets Private Investment Fund, L.P. and Morgan Stanley Global Emerging Markets Private Investors, L.P. Includes        shares of common stock issuable upon the conversion of preferred stock.

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(3)
Includes J.P. Morgan Direct Corporate Finance Institutional Investors LLC, J.P. Morgan Direct Corporate Finance Private Investors LLC and 522 Fifth Avenue Fund, L.P. Includes         shares of common stock issuable upon the conversion of preferred stock.

(4)
Includes First Plaza Group Trust and GM Capital Partners I, L.P. Includes        shares of common stock issuable upon the conversion of preferred stock.

(5)
Includes        shares of common stock and        shares of common stock subject to outstanding options that are exercisable within 60 days.

(6)
Includes        shares of common stock and        shares of common stock subject to outstanding options that are exercisable within 60 days.

(7)
Includes        shares of common stock and        shares of common stock subject to outstanding options that are exercisable within 60 days.

(8)
Includes        shares of common stock and        shares of common stock subject to outstanding options that are exercisable within 60 days.

(9)
Includes            shares of common stock and            shares of common stock subject to outstanding options that are exercisable within 60 days.

(10)
Includes 0 shares of common stock and            shares of common stock subject to outstanding options that are exercisable within 60 days.

(11)
Includes 0 shares of common stock and            shares of common stock subject to outstanding options that are exercisable within 60 days.

(12)
Messrs. Hoffen, Fry and Hoffman are Managing Directors of Morgan Stanley and exercise shared voting and investment power over the shares owned by the Morgan Stanley Funds. Messrs. Hoffen, Fry and Hoffman disclaim beneficial ownership of these shares except to the extent of their pecuniary interest therein.

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DESCRIPTION OF OUR CREDIT FACILITIES

General

        Our wholly-owned subsidiary, EnerSys Capital Inc., entered into new senior secured and senior second lien credit facilities on March 17, 2004, with a group of lenders for which Bank of America, N.A., acts as administrative agent and collateral agent, Morgan Stanley Senior Funding, Inc., acts as syndication agent, and Lehman Commercial Paper Inc., acts as documentation agent. Morgan Stanley & Co. Inc., an affiliate of Morgan Stanley Senior Funding, Lehman Brothers Inc., an affiliate of Lehman Commercial Paper Inc., and Banc of America Securities LLC, an affiliate of Bank of America, N.A., are acting as the representatives of the underwriters of the offering.

        The $480.0 million senior secured facility consists of:

        The senior second lien term loan consists of an eight-year term loan in the initial aggregate principal amount of $120.0 million.

        The proceeds of the term loan B and the second lien term loan were used to repay existing indebtedness and accrued interest in the aggregate amount of $219.0 million, to fund a cash payment in the aggregate amount of $270.0 million to existing stockholders and management and to pay transaction costs of $11.0 million.

Guarantees and Security

        The obligations of EnerSys Capital under the senior secured credit facility and the senior second lien credit facility are guaranteed by the company and each of the existing and future direct and indirect wholly-owned subsidiaries of EnerSys Capital other than foreign subsidiaries. The obligations of EnerSys Capital, the company and each of the subsidiary guarantors under the senior secured credit facility are secured by a first priority security interest in substantially all of the assets of EnerSys Capital, the company and the subsidiary guarantors, but the collateral is limited to 65% of the voting stock of any foreign subsidiary. The obligations of EnerSys Capital, the company and each of the subsidiary guarantors under the senior second lien credit facility are secured by a second-priority lien in the same collateral.

Interest Rates

        Interest accrues on loans under our credit facilities at rates equal to LIBOR or, at our option, an alternate base rate—Bank of America's prime rate or the federal funds rate plus 0.5%—in each case as in effect from time to time, plus an applicable interest rate margin. For LIBOR-based loans under the senior secured credit facility the applicable margin is currently 2.5% per year, with provisions for decreases in the margin in increments of 0.25% if our leverage ratio (determined as described under "Covenants" below) improves. The lowest applicable margin is 1.5%, which would apply if our leverage ratio improved to less than 2.5 to 1. Applicable margins on base rate loans under the senior secured credit facility range from the currently-applicable level of 1.5% per year to a low of 0.5% and would decline in tandem with margins on LIBOR-based loans (also in increments of 0.25%) if our leverage ratio improved. Under the senior second lien credit facility the applicable margins are 5.0% per year for LIBOR-based loans and 4.0% for base rate loans. For a period of at least three years, EnerSys Capital is required to maintain interest rate protection on a portion of the term loans to minimize its exposure to increases in short-term interest rates.

Maturity

        The lenders' commitments under the senior secured revolving credit facility terminate on March 17, 2009. Generally, amounts repaid under the senior secured revolving credit facility may be re-borrowed

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until its termination or such date as the revolving commitments are earlier terminated or reduced. The senior secured term loan B is subject to quarterly amortization in an amount equal to 0.25% of its initial principal amount, with the entire remaining principal balance payable on March 17, 2011. Principal under the senior second lien term loan is payable in a single installment on March 17, 2012.

Prepayment and Commitment Reductions

        Under the terms of our credit facilities, we are permitted to use proceeds of this offering to repay amounts outstanding under our senior second lien term loan, so long as the net proceeds of the offering are at least $50.0 million and we have a leverage ratio of 3.0 to 1 or less after giving effect to such prepayment. We expect to meet these conditions and intend to repay in full amounts outstanding under our senior second lien term loan. The prepayment of the senior second lien term loan to be made from the proceeds of the common stock offered hereby will require payment of a prepayment premium of 2.00%. Thereafter, the following amounts must be applied to prepay principal outstanding under, and to permanently reduce commitments under, the senior secured credit facility:

        The senior secured facility provides that we may make optional prepayments of loans, in whole or in part, from time to time without premium or penalty. We may reduce or terminate the unused portion of the revolving credit commitment under the senior secured facility at any time without penalty.

Covenants

        The credit facilities contain affirmative covenants and other requirements. In general, the affirmative covenants provide for mandatory reporting of financial and other information to the lenders and notice to the lenders upon the occurrence of certain events. The affirmative covenants also include, among other things, a requirement to implement interest rate protection agreements on a portion of our debt and standard covenants requiring us to, among other things, keep our assets in good repair and insured, comply with laws, keep proper books and records, pay taxes in a timely manner and follow other similar good business practices all in a manner consistent with past practice.

        The credit facilities contain negative covenants and restrictions, including restrictions on our ability to:

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        The credit facilities require that we meet certain specified financial ratios which are measured by reference to our consolidated earnings before interest, income taxes, depreciation and amortization, or EBITDA, as calculated in accordance with the terms of the credit facilities. The following minimum or maximum ratios pertain to the senior secured credit facility. The covenant ratios in the senior second lien credit facility are less restrictive.

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Events of Default

        The credit facilities contain certain customary events of default including non-payment of principal, interest or other amounts, inaccuracy of representations and warranties, violation of covenants, cross-default to certain other indebtedness and agreements, bankruptcy and insolvency events, ERISA events, material judgments, actual or asserted impairment of loan documentation or security and change of control events.

Fees and Expenses

        We are required to pay certain fees in connection with the credit facilities, including letter of credit fees, a fixed annual administrative agency fee and commitment fees on the senior secured credit facility payable quarterly in arrears and based on the average daily unused portion of the commitment.

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DESCRIPTION OF CAPITAL STOCK, CERTIFICATE OF INCORPORATION AND BYLAWS

General Matters

        Upon the closing of this offering, our authorized capital stock will consist of            shares of common stock, par value $.01 per share, of which             shares will be issued and outstanding (            shares if the underwriters exercise their over-allotment option in full) and            shares of undesignated preferred stock, par value $.01 per share, none of which will be outstanding, and we will have outstanding options to purchase an aggregate of            shares of common stock.

        As of                        , 2004, we had outstanding            shares of Class A Common Stock,            shares of Class A Convertible Preferred Stock, and options to purchase an aggregate of            shares of our Class A Common Stock. Prior to the closing of this offering, all our outstanding shares of Class A Convertible Preferred Stock will be converted into an aggregate of            shares of Class A Common Stock, and thereafter all            of our then outstanding shares of Class A Common Stock will be reclassified into      shares of our common stock and each of such shares of common stock will be split into            shares of common stock.

        The following summary describes the material provisions of our capital stock. We urge you to read our certificate of incorporation and our bylaws, which are included as exhibits to the registration statement of which this prospectus forms a part.

        Certain provisions of our certificate of incorporation and bylaws summarized below will become operative immediately prior to consummation of this offering and may be deemed to have an anti-takeover effect and may delay or prevent a tender offer or takeover attempt that a stockholder might consider in its best interest, including those attempts that might result in a premium over the market price for the shares.

Common Stock

        Upon the closing of this offering, we will have one class of common stock. All holders of shares of common stock are entitled to the same rights and privileges. Holders of shares of common stock are entitled to one vote per share on the election or removal of our directors and on all other matters to be voted on by our stockholders.

        Holders of shares of common stock are not entitled to any preemptive right to subscribe for additional shares of common stock. The holders of shares of common stock are entitled to receive dividends, when, as and if declared by our board of directors, out of funds legally available therefor. Holders of shares of common stock are entitled to share ratably, upon dissolution or liquidation, in the assets available for distribution to holders of shares of common stock after the payment of all prior claims.

Preferred Stock

        Upon the closing of this offering, our authorized capital stock will include    million shares of undesignated preferred stock, none of which will be issued or outstanding. Our board of directors will be authorized, without further action by our stockholders, to provide for the issuance of such preferred stock in one or more series and to fix the dividend rate, conversion privileges, voting rights, redemption rights, redemption price or prices, liquidation preferences and qualifications, limitations and restrictions thereof with respect to each series. Holders of shares of preferred stock may be entitled to receive a preference payment in the event of any liquidation, dissolution or winding-up of our company before any payment is made to the holders of shares of our common stock. In some circumstances, the issuance of shares of preferred stock may render more difficult or tend to discourage a merger, tender offer or proxy contest, the assumption of control by a holder of a large block of our securities or the removal of incumbent management. Upon the affirmative vote of our board of directors, without stockholder approval, we may issue shares of preferred stock with voting and conversion rights that could adversely affect the holders of shares of our common stock. We have no current intention to issue any additional shares of preferred

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stock. Shares of our Class A Convertible Preferred Stock converted prior to the closing of this offering will not be reissued.

Section 203 of the Delaware General Corporation Law

        Section 203 of the Delaware General Corporation Law may have the effect of delaying, deferring or preventing a change of control. In general, Section 203 of the Delaware General Corporation Law prohibits a publicly held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years following the date such stockholder became an "interested stockholder," unless:

        A "business combination" includes certain mergers, stock or asset sales and other transactions resulting in a financial benefit to the "interested stockholder." An "interested stockholder" is a person who, together with affiliates and associates, owns (or in the preceding three years, did own) 15% or more of the voting stock. However, the Morgan Stanley Funds and their affiliates will not be deemed to be "interested stockholders" regardless of the percentage of our voting stock owned by them. The statute could prohibit or delay mergers or other takeover or change in control attempts and, accordingly, may discourage attempts to acquire us.

Limitation of Liability and Indemnification of Directors and Officers

        We have included in our certificate of incorporation and bylaws provisions to:

        Acting pursuant to the provisions of our certificate of incorporation and bylaws and the provisions of Section 145 of the Delaware General Corporation Law, we have entered into agreements with each of our officers and directors to indemnify them to the fullest extent permitted by such provisions and such law. We also are authorized to carry directors' and officers' insurance providing indemnification for our directors, officers and certain employees for some liabilities. We believe that these indemnification provisions and insurance are useful to attract and retain qualified directors and executive officers.

        The limitation of liability and indemnification provisions in our certificate of incorporation and bylaws may discourage stockholders from bringing a lawsuit against directors for breach of their fiduciary duty. These provisions also may have the effect of reducing the likelihood of derivative litigation against

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directors and officers, even though such an action, if successful, might otherwise benefit us and our stockholders. In addition, your investment may be adversely affected to the extent we pay the costs of settlement and damage awards against directors and officers pursuant to these indemnification provisions.

        Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors or officers pursuant to the provisions described above, or otherwise, we have been advised that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.

Other Provisions of our Certificate of Incorporation and Bylaws

        Classified Board of Directors.    Our certificate of incorporation provides for our board of directors to be divided into three classes of directors serving staggered three-year terms. Each class shall consist, as nearly as may be practicable, of one-third of the total number of directors constituting our entire board of directors. As a result, approximately one-third of our board of directors will be elected each year. Moreover, except as otherwise provided in our securityholder agreement, stockholders may remove a director only for cause. This provision, when coupled with the provisions of our certificate of incorporation and bylaws authorizing, except as otherwise provided in our securityholder agreement, only our board of directors to fill vacant directorships, will preclude a stockholder from removing incumbent directors without cause and simultaneously gaining control of our board of directors by filling the vacancies created by such removal with its own nominees. This provision of our certificate of incorporation may not be amended or repealed by our stockholders except with the consent of the holders of two-thirds of our outstanding common stock.

        Special Meeting of Stockholders.    Our certificate of incorporation provides that special meetings of our stockholders may be called only by our board of directors or the Chairman of our board of directors. This provision will make it more difficult for stockholders to take action opposed by our board of directors. This provision of our certificate of incorporation may not be amended or repealed by our stockholders except with the consent of the holders of two-thirds of our outstanding common stock.

        No Stockholder Action by Written Consent.    Our certificate of incorporation provides that no action required or permitted to be taken at any annual or special meeting of our stockholders may be taken without a meeting, and the power of our stockholders to consent in writing, without a meeting, to the taking of any action is specifically denied. Such provision limits the ability of any stockholder to take action immediately and without prior notice to our board of directors. Such a limitation on a majority stockholder's ability to act might affect such person's or entity's decision to purchase our voting securities. This provision of our certificate of incorporation may not be amended or repealed by the stockholders except with the consent of the holders of two-thirds of our outstanding common stock.

        Advance Notice Requirements for Stockholder Proposals and Director Nominations.    Our bylaws provide that stockholders seeking to bring business before an annual meeting of stockholders, or to nominate candidates for election as directors at an annual or special meeting of stockholders, must provide timely notice thereof in writing. To be timely, a stockholder's notice must be delivered to, or mailed and received at, our principal executive offices: in the case of an annual meeting that is called for a date that is within 30 days before or after the anniversary date of the immediately preceding annual meeting of stockholders, not less than 60 days nor more than 90 days prior to such anniversary date; and in the case of our annual meeting to be held during fiscal 2005 and in the case of an annual meeting that is called for a date that is not within 30 days before or after the anniversary date of the immediately preceding annual meeting, or in the case of a special meeting of stockholders called for the purpose of electing directors, not later than the close of business on the tenth day following the date on which notice of the date of the meeting was mailed or public disclosure of the date of the meeting was made, whichever occurs first. Our bylaws also specify certain requirements for a stockholder's notice to be in proper written form. These provisions may preclude some stockholders from bringing matters before the stockholders at an annual or

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special meeting or from making nominations for directors at an annual or special meeting. As set forth below, our bylaws may not be amended or repealed by our stockholders, except with the consent of holders of two-thirds of our outstanding common stock.

        Adjournment of Meetings of Stockholders.    Our bylaws provide that when a meeting of our stockholders is convened, the presiding officer, if directed by our board of directors, may adjourn the meeting if no quorum is present for the transaction of business or if our board of directors determines that adjournment is necessary or appropriate to enable the stockholders to consider fully information that our board of directors determines has not been made sufficiently or timely available to stockholders or to otherwise effectively exercise their voting rights. This provision will, under certain circumstances, make more difficult or delay actions by the stockholders opposed by our board of directors. The effect of such provision could be to delay the timing of a stockholders' meeting, including in cases where stockholders have brought proposals before the stockholders that are in opposition to those brought by our board of directors and therefore may provide our board of directors with additional flexibility in responding to such stockholder proposals. As set forth below, our bylaws may not be amended or repealed by our stockholders, except with the consent of holders of two-thirds of our outstanding common stock.

        No Cumulative Voting.    The Delaware General Corporation Law provides that stockholders are not entitled to the right to cumulate votes in the election of directors unless our certificate of incorporation provides otherwise. Our certificate of incorporation does not provide for cumulative voting.

        Authorized but Unissued Capital Stock.    Our certificate of incorporation authorizes our board of directors to issue one or more classes or series of preferred stock, and to determine, with respect to any such class or series of preferred stock, the voting powers (if any), designations, powers, preferences, rights and qualifications, limitations or restrictions of such preferred stock. We have no current intention to issue any additional shares of preferred stock.

        The Delaware General Corporation Law does not require stockholder approval for any issuance of previously authorized shares of our capital stock. However, the listing requirements of the New York Stock Exchange, which would apply so long as our common stock is listed on the New York Stock Exchange, require stockholder approval of certain issuances equal to or exceeding 20% of the then outstanding voting power or then outstanding number of shares of our common stock. These additional shares may be used for a variety of corporate purposes, including future public offerings, to raise additional capital or to facilitate acquisitions.

        One of the effects of the existence of unissued and unreserved common stock or preferred stock may be to enable our board of directors to issue shares to persons friendly to current management, which issuance could render more difficult or discourage an attempt to obtain control of our company by means of a merger, tender offer, proxy contest or otherwise, and thereby protect the continuity of our management and possibly deprive the stockholders of opportunities to sell their shares of common stock at prices higher than prevailing market prices.

        Amendment of the Bylaws.    Our certificate of incorporation provides that our bylaws may not be amended or repealed by our stockholders except with the consent of holders of two-thirds of our outstanding common stock and grants our board of directors the authority to amend and repeal our bylaws without a stockholder vote in any manner not inconsistent with the laws of Delaware or our certificate of incorporation. This provision will make it more difficult for our stockholders to make changes to our bylaws that are opposed by our board of directors. This provision of our certificate of incorporation may not be amended or repealed by our stockholders except with the consent of the holders of two-thirds of our outstanding common stock.

Transfer Agent and Registrar

        National City Bank, Cleveland, Ohio, is the transfer agent and registrar for our common stock.

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SHARES ELIGIBLE FOR FUTURE SALE

        Prior to this offering, there has been no market for our common stock. Future sales in the public market of substantial amounts of our common stock, including shares issued upon exercise of outstanding options after any restrictions on sale lapse, could adversely affect prevailing market prices and impair our ability to raise equity capital in the future.

        After this offering,          shares of our common stock will be outstanding. The shares sold in the offering, plus any shares sold upon exercise of the over-allotment option described in "Underwriters," will be freely tradable without restriction under the Securities Act, unless purchased by our "affiliates," as that term is defined in Rule 144 under the Securities Act.

        We anticipate that, following the completion of the offering, all                        shares of common stock outstanding prior to this offering will be subject to the lock-up agreement described in "Underwriters." All such shares are subject to registration rights, as described above under "Certain Relationships and Transactions—Securityholder Agreement."

        The following table shows the number of shares of our common stock that will be subject to the restrictions of Rule 144, the number of restricted shares eligible for resale under both Rule 144(k) and Rule 701, and the dates that such shares will be eligible for resale.

 
  Number of Shares
  Date First Eligible
for Resale

Shares Eligible for Resale under Rule 144        
Shares Eligible for Resale under Rule 144(k)        
Shares Eligible for Resale under Rule 701        

        After this offering,           shares of our common stock will be subject to outstanding options.

        The          shares of common stock held after this offering by our existing stockholders will be "restricted securities" within the meaning of Rule 144. Restricted securities may be sold in the public market only if the sale is registered or if the securities or the transaction qualifies for an exemption from registration. One such exemption, under Rule 144 under the Securities Act, is summarized below. Sales of restricted securities in the public market, or the availability of those shares for sale, could adversely affect the market price of our common stock.

        Under Rule 144, a person, or persons whose shares are aggregated, who has beneficially owned restricted securities for at least one year will be entitled to sell, within any three-month period, a number of shares that does not exceed the greater of:

        Sales under Rule 144 also are subject to other requirements regarding the manner of sale, notice and availability of current public information about us.

        Under Rule 144(k), a person who is not deemed to have been one of our "affiliates" at any time during the 90 days preceding a sale, and who has beneficially owned the restricted securities proposed to be sold for at least two years, is entitled to sell those shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144.

        We and our executive officers and directors have agreed with the underwriters not to:

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        After the expiration of the lock-up period, if the underwriters' over-allotment option is not exercised in full, a substantial number of additional shares could become available for sale to the public.

        Under Rule 701, shares of our common stock acquired upon the exercise of currently outstanding options or pursuant to other rights granted under our stock plans may be resold, to the extent not subject to lock-up agreements, (1) by persons other than affiliates, beginning 90 days after the effective date of this offering, subject only to the manner-of-sale provisions of Rule 144 and (2) by affiliates, subject to the manner-of-sale, current public information, and filing requirements of Rule 144, in each case, without compliance with the one-year holding period requirement of Rule 144.

        We intend to file a registration statement on Form S-8 under the Securities Act as soon as practicable after completion of this offering to register shares of common stock reserved for issuance under the MEP and the 2004 EIP. This registration will permit the resale of these shares by nonaffiliates in the public market without restriction under the Securities Act, upon completion of the lock-up period described above. Shares of common stock registered under the Form S-8 registration statement held by affiliates will be subject to Rule 144 volume limitations.

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UNDERWRITERS

        Under the terms and subject to the conditions contained in an underwriting agreement dated the date of this prospectus, the underwriters named below, for whom Morgan Stanley & Co. Incorporated, Lehman Brothers Inc. and Banc of America Securities LLC are acting as representatives, have severally agreed to purchase, and EnerSys has agreed to sell to them, severally, the number of shares indicated below:

Name

  Number of
Shares

Morgan Stanley & Co. Incorporated    
Lehman Brothers Inc.     
Banc of America Securities LLC    
   
  Total    
   

        The underwriters are offering the shares of common stock subject to their acceptance of the shares from EnerSys and subject to prior sale. The underwriting agreement provides that the obligations of the several underwriters to pay for and accept delivery of the shares of common stock offered by this prospectus are subject to the approval of certain legal matters by their counsel and to certain other conditions. The underwriters are obligated to take and pay for all of the shares of common stock offered by this prospectus if any such shares are taken. However, the underwriters are not required to take or pay for the shares covered by the underwriters' over-allotment option described below.

        The underwriters initially propose to offer part of the shares of common stock directly to the public at the public offering price listed on the cover page of this prospectus and part to certain dealers at a price that represents a concession not in excess of $        a share under the public offering price. Any underwriter may allow, and such dealers may reallow, a concession not in excess of $        a share to other underwriters or to certain dealers. After the initial offering of the shares of common stock, the offering price and other selling terms may from time to time be varied by the representatives.

        The following table shows the offering price to the public, underwriting discounts and commissions and proceeds, before expenses, to EnerSys. The information assumes either no exercise or full exercise by the underwriters of the over-allotment option.

 
  Per Share
  Without
Option

  With Option
Public offering price   $     $     $  
Underwriting discounts and commissions                  
   
 
 
Proceeds, before expenses, to EnerSys   $     $     $  

        EnerSys has granted to the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to an aggregate of        additional shares of common stock at the public offering price set forth on the cover page of this prospectus, less underwriting discounts and commissions. The underwriters may exercise this option solely for the purpose of covering over-allotments, if any, made in connection with the offering of the shares of common stock offered by this prospectus. To the extent the option is exercised, each underwriter will become obligated, subject to certain conditions, to purchase about the same percentage of the additional shares of common stock as the number listed next to the underwriter's name in the preceding table bears to the total number of shares of common stock listed next to the names of all underwriters in the preceding table. If the underwriters' option is exercised in full, the total price to the public would be $        , the total underwriters' discounts and commissions would be $        and total proceeds to EnerSys would be $        .

        The underwriting discounts and commissions will be determined by negotiations among EnerSys and the representatives and are a percentage of the offering price to the public. Among the factors to be considered in determining the discounts and commissions will be the size of the offering, the nature of the security to be offered and the discounts and commissions charged in comparable transactions. The estimated offering expenses payable by EnerSys in addition to the underwriting discounts and commissions, are approximately        , which includes legal, accounting and printing costs and various other fees associated with registering and listing the common stock.

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        The underwriters have informed EnerSys that they do not intend to confirm sales to accounts over which they exercise discretionary authority without the prior written approval of the customer.

        Application has been made to have the common stock approved for quotation on the New York Stock Exchange under the symbol "ENS."

        Each of EnerSys and the directors, executive officers and other stockholders of EnerSys have agreed that, without the prior written consent of Morgan Stanley & Co. Incorporated and Lehman Brothers Inc. on behalf of the underwriters, they will not, during the period ending 180 days after the date of this prospectus:

whether any such transaction described above is to be settled by delivery of common stock or such other securities, in cash or otherwise. The restrictions described in this paragraph do not apply to:


        The 180-day restricted period described above is subject to extension such that, in the event that either (1) during the last 17 days of the 180-day restricted period, we issue an earnings release or material news or a material event relating to us occurs or (2) prior to the expiration of the 180-day restricted period, we announce that we will release earnings results during the 16-day period beginning on the last day of the 180-day period, the "lock-up" restrictions described above will, subject to limited exceptions, continue to apply until the expiration of the 18-day period beginning on the earnings release or the occurrence of the material news or material event.

        In order to facilitate the offering of the common stock, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the common stock. Specifically, the underwriters may sell more shares than they are obligated to purchase under the underwriting agreement, creating a short position. A short sale is covered if the short position is no greater than the number of shares available for purchase by the underwriters under the over-allotment option. The underwriters can close out a covered short sale by exercising the over-allotment option or purchasing shares in the open market. In determining the source of shares to close out a covered short sale, the underwriters will consider, among other things, the open market price of shares compared to the price available under the over-allotment option. The underwriters may also sell shares in excess of the over-allotment option, creating a naked short position. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common stock in the open market after pricing that could adversely affect investors who purchase in the offering. As an additional means of facilitating the offering, the underwriters may bid for, and purchase, shares of common stock in the open market to stabilize the price of the common stock. The underwriting syndicate may also reclaim selling concessions allowed to an underwriter or a dealer for distributing the common stock in the offering, if the syndicate repurchases previously distributed common stock to cover syndicate short positions or to stabilize the price of the common stock. These activities may raise or maintain the market price of the common stock above

96



independent market levels or prevent or retard a decline in the market price of the common stock. The underwriters are not required to engage in these activities, and may end any of these activities at any time.

        Investment funds affiliated with Morgan Stanley & Co. Incorporated will continue to own a majority of the outstanding common stock of EnerSys after giving effect to this offering. The securityholder agreement among EnerSys, the Morgan Stanley Funds, the J.P. Morgan Funds, the GM Shareholders and certain members of our senior management provides that the Morgan Stanley Funds are entitled to designate a majority of the nominees for election to our board of directors and to designate a majority of the members of our compensation committee and nominating and corporate governance committee. Eric T. Fry and Howard I. Hoffen, each of whom is an employee of Morgan Stanley & Co. Incorporated, currently serve as and were appointed directors by the Morgan Stanley Funds. Michael C. Hoffman and Chad L. Elliott, each of whom is an employee of Morgan Stanley Capital Partners, are director nominees designated by the Morgan Stanley Funds. See "Certain Relationships and Related Transactions."

        The underwriters and their affiliates have from time to time provided, and expect to provide in the future, investment banking, commercial banking and other financial services to EnerSys for which they have received and may continue to receive customary fees and commissions. Morgan Stanley Senior Funding was the lead lender and acted as agent under our former senior secured credit facility. Bank of America, N.A., an affiliate of Banc of America Securities LLC, is a lender and acts as administrative agent and collateral agent under our new $480.0 million senior secured facility and $120.0 million senior second lien term loan. In addition, Bank of America, N.A. is the counterparty to three interest rate swap agreements we entered into in order to fix the interest rate on a portion of our floating rate debt. Morgan Stanley Senior Funding and Lehman Commercial Paper Inc., an affiliate of Lehman Brothers Inc., are committed to provide funding under our senior secured revolving credit facility. In addition, Morgan Stanley Senior Funding acts as syndication agent and Lehman Commercial Paper Inc. acts as documentation agent under our new credit facilities. In connection with the establishment of our new credit facilities, we paid aggregate fees of approximately $2.8 million to Morgan Stanley Senior Funding, $3.9 million to Bank of America, N.A., and $1.8 million to Lehman Commercial Paper.

        Morgan Stanley & Co. Incorporated may be deemed to be an "affiliate" of EnerSys, as defined by Rule 2720 of the Conduct Rules of the National Association of Securities Dealers ("Rule 2720"). Accordingly, this offering will be conducted in compliance with the requirements of Rule 2720. Under the provisions of Rule 2720, when a NASD member distributes securities of an affiliate, the public offering price of the securities can be no higher than that recommended by the "qualified independent underwriter," as such term is defined in Rule 2720. In accordance with such requirements, Lehman Brothers Inc. has agreed to serve as a "qualified independent underwriter" and has conducted due diligence and will recommend a maximum price for the shares of common stock. We have agreed to indemnify Lehman Brothers Inc. for acting as a qualified independent underwriter against certain liabilities, including under the Securities Act.

        EnerSys and the underwriters have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act.

Pricing of the Offering

        Prior to this offering, there has been no public market for the shares of common stock. The initial public offering price will be determined by negotiations among EnerSys and the representatives of the underwriters. Among the factors to be considered in determining the initial public offering price will be the future prospects of EnerSys and its industry in general, sales, earnings and certain other financial operating information of EnerSys in recent periods, and the price-earnings ratios, price-sales ratios, market prices of securities and certain financial and operating information of companies engaged in activities similar to those of EnerSys. The estimated initial public offering price range set forth on the cover page of this preliminary prospectus is subject to change as a result of market conditions and other factors.

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MATERIAL UNITED STATES INCOME AND ESTATE TAX CONSEQUENCES TO
NON-UNITED STATES STOCKHOLDERS

        The following is a general discussion of the material U.S. federal income and estate tax consequences to a non-U.S. holder of the ownership and disposition of our common stock. For the purpose of this discussion, a non-U.S. holder is any holder that for U.S. federal income tax purposes is not a U.S. person or a partnership. For purposes of this discussion, the term U.S. person means:

        If a partnership holds common stock, the tax treatment of a partner will generally depend on the status of the partner and upon the activities of the partnership. Accordingly, partnerships which hold our common stock and partners in such partnerships should consult their tax advisors.

        This discussion assumes that non-U.S. holders will hold our common stock issued pursuant to the offering as a capital asset (generally, property held for investment). This discussion does not address all aspects of U.S. federal income and estate taxation that may be relevant in light of a non-U.S. holder's special tax status or special tax situation. U.S. expatriates or former long-term residents, life insurance companies, tax-exempt organizations, dealers in securities or currency, banks or other financial institutions, investors whose functional currency is other than the U.S. dollar, that have elected mark-to-market accounting, who acquired our common stock as compensation, or that hold our common stock as part of a hedge, straddle, constructive sale, conversion, or other risk reduction transaction, and special status corporations (such as "controlled foreign corporations," "foreign investment companies," "passive foreign investment companies," "foreign personal holding companies," and corporations that accumulate earnings to avoid U.S. income tax) are among those categories of potential investors that are subject to special rules not covered in this discussion. This discussion does not address any tax consequences arising under the laws of any state, local or non-U.S. taxing jurisdiction. Furthermore, the following discussion is based on current provisions of the Internal Revenue Code of 1986, as amended, and Treasury Regulations and administrative and judicial interpretations thereof, all as in effect on the date hereof, and all of which are subject to change, possibly with retroactive effect. Accordingly, each non-U.S. holder should consult its tax advisor regarding the U.S. federal, state, local and non-U.S. income and other tax consequences of acquiring, holding and disposing of shares of our common stock.

Dividends

        We do not anticipate paying any dividends on our common stock for the foreseeable future. However, if we do pay dividends on our common stock, those payments will constitute dividends for U.S. tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. To the extent those dividends exceed our current and accumulated earnings and profits, the dividends will constitute a return of capital and will first reduce a holder's tax basis, but not below zero, and then will be treated as gain from the sale of stock.

        Any dividend (out of earnings and profits) paid to a non-U.S. holder of common stock generally will be subject to U.S. withholding tax at a rate of 30% of the gross amount of the dividend or such lower rate as may be specified by an applicable tax treaty. In order to receive a reduced treaty rate, a non-U.S. holder must provide us with an Internal Revenue Service ("IRS") Form W-8BEN (or successor form) or an

98



appropriate substitute form certifying qualification for the reduced rate. The non-U.S. holder must periodically update the information on such forms. Such non-U.S. holder may also be required to obtain and provide a U.S. taxpayer identification number and/or demonstrate residence in the applicable foreign jurisdiction by providing documentation issued by the government of such jurisdiction. Furthermore, Treasury Regulations require special procedures for payments through qualified intermediaries. A non-U.S. holder of common stock that is eligible for a reduced rate of withholding tax pursuant to a tax treaty may obtain a refund of any excess amounts currently withheld by filing an appropriate claim for refund with the IRS.

        Dividends received by a non-U.S. holder that are effectively connected with a U.S. trade or business conducted by the non-U.S. holder are exempt from the 30% withholding tax. In order to obtain this exemption, a non-U.S. holder must provide us with an IRS Form W-8ECI (or successor form) or an appropriate substitute form properly certifying such exemption. "Effectively connected" dividends, although not subject to withholding tax, are taxed at the same graduated rates applicable to U.S. persons, net of certain deductions and credits. If the non-U.S. holder is eligible for the benefits of a tax treaty between the United States and the holder's country of residence, any effectively connected dividends or gain would generally be subject to U.S. federal income tax only if such amount is also attributable to a permanent establishment or fixed base maintained by the holder in the United States.

        In addition to the graduated tax described above, dividends received by a corporate non-U.S. holder that are effectively connected with a U.S. trade or business of the corporate non-U.S. holder may also, under certain circumstances, be subject to a branch profits tax at a rate of 30% or such lower rate as specified by an applicable tax treaty.

Gain on Disposition of Common Stock

        A non-U.S. holder generally will not be subject to U.S. federal income tax on any gain recognized upon the sale or other disposition of our common stock unless:

Federal Estate Taxes

        Common stock owned or treated as owned by an individual who is a non-U.S. holder at the time of death will be included in the individual's gross estate for U.S. federal estate tax purposes and may be subject to U.S. federal estate tax, unless an applicable tax treaty provides otherwise. An individual may be subject to U.S. federal estate tax but not U.S. federal income tax as a resident or may be subject to U.S. federal income tax as a resident but not U.S. federal estate tax.

99



Information Reporting and Backup Withholding

        Generally, we must report annually to the IRS the amount of dividends paid, the name and address of the recipient, and the amount, if any, of tax withheld in the case of each non-U.S. holder. A similar report is sent to the holder. Tax treaties or other agreements may require the IRS to make its reports available to tax authorities in the recipient's country of residence.

        Payments of dividends or of proceeds on the disposition of stock made to a non-U.S. holder may be subject to backup withholding (currently at a rate of 28%) unless the non-U.S. holder establishes an exemption, for example by properly certifying its non-U.S. status on a Form W-8BEN (or successor form) or an appropriate substitute form. Notwithstanding the foregoing, backup withholding may apply if either we or our paying agent has actual knowledge, or reason to know, that the holder is a U.S. person or that any other condition of exemption is not satisfied.

        The payment of the gross proceeds of the sale, exchange or other disposition of our common stock to or through the U.S. office of any broker, U.S. or foreign, will be subject to information reporting and possible backup withholding unless the non-U.S. holder, prior to payment, certifies as to its non-U.S. status under penalties of perjury or otherwise establishes an exemption, and provided that the broker does not have actual knowledge, or reason to know, that the purported non-U.S. holder is actually a U.S. person or that the conditions of any other exemption are not in fact satisfied. The payment of the gross proceeds of the sale, exchange or other disposition of our common stock to or through a non-U.S. office of a non-U.S. broker will not be subject to information reporting or backup withholding unless the non-U.S. broker has certain types of relationships with the United States (a "U.S.-related person"). In the case of the payment of the gross proceeds of the sale, exchange or other disposition of our common stock to or through a non-U.S. office of a broker that is either a U.S. person or a U.S.-related person, Treasury Regulations do not require backup withholding but do require information reporting on the payment unless the broker, prior to payment, (a) has documentary evidence in its files that the owner is a non-U.S. holder, and (b) has no knowledge, or reason to know, to the contrary.

        Backup withholding is not an additional tax. Rather, the U.S. income tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund may be obtained, provided that the required information is furnished to the IRS.

        The preceding discussion of material U.S. federal income and estate tax consequences is general information only and is not tax advice. Accordingly, each investor should consult its own tax advisor as to the particular tax consequences of purchasing, holding and disposing of our common stock, including the applicability and effect of any state, local or non-U.S. tax laws and of any changes or proposed changes in applicable law.


VALIDITY OF COMMON STOCK

        Gibson, Dunn & Crutcher LLP, New York, New York, will pass upon the validity of the shares of our common stock offered in the offering. Stevens & Lee, Reading, Pennsylvania also has acted as our counsel in connection with the offering. The underwriters will be represented by Davis Polk & Wardwell, New York, New York.


EXPERTS

        The consolidated financial statements of EnerSys at March 31, 2004 and 2003, and for each of the three years in the period ended March 31, 2004, appearing in this prospectus and registration statement have been audited by Ernst & Young LLP, independent registered public accounting firm, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.

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        The combined financial statements of Energy Storage Group for the period from April 1, 2001 to March 22, 2002, appearing in this prospectus and registration statement have been audited by Ernst & Young, independent auditors, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.


WHERE YOU CAN FIND MORE INFORMATION

        We have filed with the Securities and Exchange Commission a registration statement on Form S-1, including exhibits and schedules, under the Securities Act with respect to the common stock to be sold in the offering. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement or the exhibits and schedules that are part of the registration statement. Any statements made in this prospectus as to the contents of any contract, agreement or other document are not necessarily complete. With respect to each such contract, agreement or other document filed as an exhibit to the registration statement, we refer you to the exhibit for a more complete description of the matter involved, and each statement in this prospectus shall be deemed qualified in its entirety by this reference. You may read and copy all or any portion of the registration statement or any reports, statements or other information in the files at the following public reference facilities of the SEC:

Room 1024
450 Fifth Street, N.W.
Washington, DC 20549

        Upon completion of this offering, we will be required to file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission. You may read and copy any documents filed by us at the address set forth above.

        You can request copies of these documents upon payment of a duplicating fee by writing to the SEC. You may call the SEC at 1-800-SEC-0330 for further information on the operation of its public reference rooms. Our filings, including the registration statement, will also be available to you on the Internet web site maintained by the SEC at http://www.sec.gov.

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FINANCIAL STATEMENTS


Contents

EnerSys
Consolidated financial statements for fiscal years ended March 31, 2002, 2003 and 2004

Report of Independent Registered Public Accounting Firm   F-2

Audited Consolidated Financial Statements

 

 

Consolidated Balance Sheets

 

F-3
Consolidated Statements of Operations   F-4
Consolidated Statements of Changes in Stockholders' Equity   F-5
Consolidated Statements of Cash Flows   F-6
Notes to Consolidated Financial Statements   F-8

Energy Storage Group
Combined financial statements for the period from April 1, 2001 to March 22, 2002

Report of Independent Auditors   F-36

Combined Financial Statements

 

 

Combined Statement of Operations

 

F-37
Combined Statement of Invested Capital   F-38
Combined Statement of Cash Flows   F-39
Notes to Combined Financial Statements   F-40

EnerSys Financial Statement Schedule

 

 
Valuation and Qualifying Accounts   S-1

F-1



Report of Independent Registered Public Accounting Firm

The Board of Directors
EnerSys

        We have audited the accompanying consolidated balance sheets of EnerSys as of March 31, 2003 and 2004, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for each of the three years in the period ended March 31, 2004. Our audits also included the financial statement schedule listed in the index at Item 16(b). These consolidated financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits.

        We conducted our audits in accordance with auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of EnerSys at March 31, 2003 and 2004, and the consolidated results of its operations and its cash flows for each of the three years in the period ended March 31, 2004, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

    /s/ Ernst & Young LLP

Philadelphia, Pennsylvania
May 14, 2004

F-2



EnerSys

Consolidated Balance Sheets

(In Thousands, Except Per Share Data)

 
  March 31
 
 
  2003
  2004
 
Assets              
Current assets:              
  Cash and cash equivalents   $ 44,296   $ 17,207  
  Accounts receivable, net     189,014     227,752  
  Inventories, net     106,998     131,712  
  Deferred taxes     29,798     24,616  
  Prepaid expenses     9,107     17,873  
  Other current assets     3,940     4,543  
   
 
 
Total current assets     383,153     423,703  

Property, plant, and equipment, net

 

 

275,659

 

 

284,850

 
Goodwill     295,705     306,825  
Other intangible assets, net     75,541     75,495  
Deferred taxes     17,634     26,025  
Other     28,116     34,170  
   
 
 
Total assets   $ 1,075,808   $ 1,151,068  
   
 
 

Liabilities and stockholders' equity

 

 

 

 

 

 

 
Current liabilities:              
  Short-term debt   $ 1,311   $ 2,712  
  Current portion of long-term debt     13,052     7,014  
  Current portion of capital lease obligations     2,208     2,150  
  Accounts payable     94,999     113,043  
  Accrued expenses     134,749     163,717  
  Deferred taxes     1,478     340  
   
 
 
Total current liabilities     247,797     288,976  

Long-term debt

 

 

231,844

 

 

496,200

 
Capital lease obligations     3,747     3,227  
Deferred taxes     69,664     60,952  
Other liabilities     57,009     62,411  
   
 
 
Total liabilities     610,061     911,766  

Stockholders' equity:

 

 

 

 

 

 

 
  Series A Convertible Preferred Stock, $0.01 par value, 2,500,000 shares authorized, 665,883 shares issued and outstanding     7     7  
  Class A Common Stock, $0.01 par value, 1,000,000 shares authorized, 386,471 shares issued and outstanding     4     4  
  Class B Common Stock, $0.01 par value, 1,000,000 shares authorized, no shares issued and outstanding          
  Paid-in capital     447,239     188,872  
  Retained earnings (deficit)     (8,675 )   (8,839 )
  Accumulated other comprehensive income     27,172     59,258  
   
 
 
Total stockholders' equity     465,747     239,302  
   
 
 
Total liabilities and stockholders' equity   $ 1,075,808   $ 1,151,068  
   
 
 

See accompanying notes.

F-3



EnerSys

Consolidated Statements of Operations

(In Thousands Except Share and Per Share Data)

 
  Fiscal year ended March 31
 
 
  2002
  2003
  2004
 
Net sales   $ 339,340   $ 859,643   $ 969,079  
Cost of goods sold     266,493     653,998     722,825  
   
 
 
 
Gross profit     72,847     205,645     246,254  

Operating expenses

 

 

53,463

 

 

150,618

 

 

170,412

 
Special charges relating to restructuring, bonuses and uncompleted acquisitions     68,448         21,147  
Amortization expense     51     51     51  
   
 
 
 
Operating (loss) earnings     (49,115 )   54,976     54,644  
Interest expense     13,294     20,511     20,343  
Special charges relating to a settlement agreement and write-off of deferred finance costs             30,974  
Other expense (income), net     1,744     (742 )   (4,466 )
   
 
 
 
(Loss) earnings before income taxes     (64,153 )   35,207     7,793  

Income tax (benefit) expense

 

 

(22,171

)

 

12,355

 

 

2,957

 
   
 
 
 
Net (loss) earnings   $ (41,982 ) $ 22,852   $ 4,836  
Series A convertible preferred stock dividends     (13 )   (17,309 )   (24,689 )
   
 
 
 
Net (loss) earnings available to common shareholders   $ (41,995 ) $ 5,543   $ (19,853 )
   
 
 
 

Net (loss) earnings per common share:

 

 

 

 

 

 

 

 

 

 
  Basic   $ (108.66 ) $ 14.34   $ (51.37 )
   
 
 
 
  Diluted   $ (108.66 ) $ 14.16   $ (51.37 )
   
 
 
 

Weighted-average shares of common stock outstanding:

 

 

 

 

 

 

 

 

 

 
  Basic     386,471     386,471     386,471  
   
 
 
 
  Diluted     386,471     391,448     386,471  
   
 
 
 

See accompanying notes.

F-4



EnerSys

Consolidated Statements of Changes in Stockholders' Equity

(In Thousands)

 
  Series A
Convertible
Preferred
Stock

  Class A
Common
Stock

  Class B
Common
Stock

  Paid-in
Capital

  Retained
Earnings
(Deficit)

  Accumulated
Other
Comprehensive
Income (Loss)

  Total
Stockholders'
Equity

 
Balance at March 31, 2001   $   $ 4   $   $ 164,246   $ 10,455   $ (2,343 ) $ 172,362  
Issuance of Series A Convertible Preferred Stock     7             282,993             283,000  
Net loss                     (41,982 )       (41,982 )
Cumulative effect of accounting change on derivative instruments, net of tax $144                         245     245  
Other comprehensive income                                            
Minimum pension liability adjustment, net of tax of $400                         (600 )   (600 )
Unrealized loss on derivative instruments, net of tax of $741                         (1,111 )   (1,111 )
Foreign currency translation adjustment                         2,933     2,933  
                                       
 
Comprehensive loss                                         (40,515 )
   
 
 
 
 
 
 
 
Balance at March 31, 2002     7     4         447,239     (31,527 )   (876 )   414,847  
Net earnings                     22,852         22,852  
Other comprehensive income                                            
Minimum pension liability adjustment, net of tax of $1,030                         (1,741 )   (1,741 )
Unrealized loss on derivative instruments, net of tax of $1,722                         (2,583 )   (2,583 )
Foreign currency translation adjustment                         32,372     32,372  
                                       
 
Comprehensive income                                         50,900  
   
 
 
 
 
 
 
 
Balance at March 31, 2003     7     4         447,239     (8,675 )   27,172     465,747  
Distribution to stockholders                 (258,367 )           (258,367 )
Cancellation of warrants                     (5,000 )       (5,000 )
Net earnings                     4,836         4,836  
Other comprehensive income                                            
Minimum pension liability adjustment, net of tax of $(667)                         885     885  
Unrealized income on derivative instruments, net of tax of $(581)                         871     871  
Foreign currency translation adjustment                         30,330     30,330  
                                       
 
Comprehensive income                                         36,922  
   
 
 
 
 
 
 
 
Balance at March 31, 2004   $ 7   $ 4   $   $ 188,872   $ (8,839 ) $ 59,258   $ 239,302  
   
 
 
 
 
 
 
 

See accompanying notes.

F-5



EnerSys

Consolidated Statements of Cash Flows

(In Thousands)

 
  Fiscal year ended March 31
 
 
  2002
  2003
  2004
 
Cash flows from operating activities                    
Net (loss) earnings   $ (41,982 ) $ 22,852   $ 4,836  
Adjustments to reconcile net (loss) earnings to net cash provided by operating activities:                    
  Noncash special charges             6,569  
  Settlement agreement expense             24,405  
  Depreciation and amortization     12,393     38,002     39,047  
  Provision for doubtful accounts     1,804     1,860     849  
  Provision for deferred taxes, less amounts related to restructuring     783     8,379     (6,640 )
  Provision for restructuring, net of related accumulative foreign currency translation adjustments     41,882          
  Accretion of discount on notes payable     97     4,112     3,341  
  Issuance of subordinated notes         2,781      
  Option liability loss (gain)     184     (1,233 )   (27 )
  Loss on disposal of fixed assets     1     97     45  
  Changes in assets and liabilities, net of effects of acquisition:                    
    Accounts receivable     6,248     1,464     (17,556 )
    Inventory     19,415     9,450     (13,927 )
    Prepaid expenses     (6,804 )   (6,822 )   (6,852 )
    Other assets         4,487     2,610  
    Accounts payable     (23,990 )   2,697     9,533  
    Accrued expenses     11,037     (32,688 )   (11,804 )
    Other liabilities             4,763  
   
 
 
 
    Net cash provided by operating activities     21,068     55,438     39,192  
Cash flows from investing activities                    
Capital expenditures     (12,944 )   (23,623 )   (28,580 )
Purchase of businesses, net of cash acquired     (323,200 )   10,707     1,181  
Proceeds from disposal of property, plant, and equipment     193     (7 )   418  
   
 
 
 
Net cash used in investing activities     (335,951 )   (12,923 )   (26,981 )
                     

F-6


Cash flows from financing activities                    
Net (decrease) increase in short-term debt   $ (250 ) $ (877 ) $ 1,401  
Proceeds from the issuance of long-term debt     36,000         507,675  
Deferred financing costs             (11,000 )
Payments of long-term debt     (3,955 )   (6,211 )   (184,453 )
Proceeds from the issuance of Series A Convertible Preferred Stock     283,000          
Payments of capital lease obligations, net         (1,121 )   (1,145 )
Payment under settlement agreement             (89,100 )
Buy back of outstanding stock warrants             (5,000 )
Distribution to stockholders             (258,367 )
   
 
 
 
Net cash provided by (used in) financing activities     314,795     (8,209 )   (39,989 )
Effect of exchange rate changes on cash     28     915     689  
   
 
 
 
Net (decrease) increase in cash     (60 )   35,221     (27,089 )
Cash and cash equivalents at beginning of year     9,135     9,075     44,296  
   
 
 
 
Cash and cash equivalents at end of year   $ 9,075   $ 44,296   $ 17,207  
   
 
 
 

See accompanying notes.

F-7



EnerSys

Notes to Consolidated Financial Statements

March 31, 2004

(In Thousands, Except Per Share Data)

1. Summary of Significant Accounting Policies

Description of Business

        EnerSys (the Company) is a leading worldwide manufacturer and supplier of lead-acid industrial batteries consisting of reserve power batteries serving the telecommunications, uninterruptible power systems (UPS), switchgear and electrical control systems and aerospace and defense markets, and motive power batteries primarily serving the electric industrial forklift truck market. The Company was formed on November 9, 2000 when EnerSys acquired the industrial battery business of Yuasa Inc. in North and South America from Yuasa Corporation (Japan).

Principles of Consolidation

        The consolidated financial statements include the accounts of the Company and its majority-owned and wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

Foreign Currency Translation

        Results of foreign operations are translated into United States dollars using average exchange rates during the period while assets and liabilities are translated into United States dollars using current rates as of the balance sheet date. The resulting translation adjustments are accumulated as a separate component of stockholders' equity.

        Transaction gains and losses resulting from exchange rate changes on transactions denominated in currencies other than the functional currency of the applicable subsidiary are included in other expense (income), net in the year in which the change occurs.

Revenue Recognition

        The Company recognizes revenue when the earnings process is complete. This occurs when products are shipped to the customer in accordance with terms of the agreement, transfer of title and risk of loss, collectibility is reasonably assured and pricing is fixed and determinable. Accruals are made at the time of sale for sales returns and other allowances based on the Company's experience.

Freight Expense

        Amounts billed to customers for outbound freight costs are classified as sales in the consolidated income statement. Costs incurred by the Company for outbound freight costs to customers are classified in cost of sales.

Warranties

        Substantially all of the Company's products are generally warranted for a period of one to five years. The Company provides for estimated product warranty expenses when the related products are sold.

Cash and Cash Equivalents

        Cash and cash equivalents include all highly liquid investments with an original maturity of three months or less when purchased. United States short-term investments included in cash and cash equivalents at March 31, 2003 and 2004 were $31,663 and $8,058, respectively.

F-8



Accounts Receivable

        Accounts receivable are reported net of an allowance for doubtful accounts of $8,492 and $6,722 at March 31, 2003 and 2004, respectively. The allowance is based on management's estimate of uncollectible accounts, analysis of historical data and trends, as well as review of all relevant factors concerning the financial capability of its customers. Accounts receivable are considered to be past due based on how payments are received compared to the customer's credit terms. Accounts are written off when management determines the account is worthless. Finance charges are generally not assessed or collected on past due accounts.

Inventories

        Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. The cost of inventory consists principally of material, labor, and associated overhead.

Property, Plant, and Equipment

        Property, plant, and equipment are recorded at cost and include expenditures that substantially increase the useful lives of the assets. Depreciation is provided using the straight-line method over the estimated useful lives of the assets as follows: 10 to 33 years for buildings and improvements and 3 to 15 years for machinery and equipment.

        Depreciation expense for the fiscal years ended March 31, 2002, 2003 and 2004 totaled $10,679, $35,278 and $36,989, respectively. Maintenance and repairs are expensed as incurred. Interest on capital projects is capitalized during the construction period and amounted to $620, $179 and $194 for the fiscal years ended March 31, 2002, 2003 and 2004, respectively. Gains and losses from dispositions or retirements of property, plant, and equipment are recognized currently.

Intangible Assets

        Effective April 1, 2001, the Company early adopted Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 eliminates the amortization of goodwill and indefinite-lived intangible assets and requires a review at least annually for impairment. The Company has determined that tradenames and goodwill are indefinite-lived assets, as defined by SFAS No. 142, and therefore not subject to amortization.

        SFAS No. 142 prescribes a two-step method for determining goodwill impairment. In the first step, the fair value of the Company's reporting units was determined using a discounted cash flow analysis approach. Since the net book value of the reporting units did not exceed the fair value, the second step of the impairment test was not necessary. SFAS No. 142 requires the Company to perform impairment tests on an annual basis and whenever events or circumstances occur indicating that the tradenames or goodwill may be impaired.

Environmental Expenditures

        Environmental expenditures that will benefit future operations are capitalized; all other environmental expenditures are expensed as incurred. Accruals are recorded when environmental expenditures for remedial efforts are probable and the amounts can be reasonably estimated.

F-9



Impairment of Long-Lived Assets

        SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets, requires that companies consider whether indicators of impairment of long-lived assets held for use are present. If such indicators are present, companies determine whether the sum of the estimated undiscounted future cash flows attributable to such assets is less than their carrying amount, and if so, companies recognize an impairment loss based on the excess of the carrying amount of the assets over their fair value. Accordingly, management will periodically evaluate the ongoing value of property and equipment.

Financial Instruments

        The Company's financial instruments include cash and cash equivalents, accounts receivable, accounts payable, and debt. In addition, the Company uses interest rate swap and option agreements to manage risk on a portion of its floating-rate debt.

        Because of short maturities, the carrying amount of cash and cash equivalents, accounts receivable, accounts payable, and short-term debt approximates fair market value. The fair value of the Company's long-term debt, described in Note 9, approximates its carrying value and the fair value of derivative instruments is described in Note 12.

Income Taxes

        Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. These temporary differences are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to be realized.

        Valuation allowances are recorded to reduce deferred tax assets when it is probable that a tax benefit will not be realized. The provision for income taxes represents income taxes paid or payable for the current year and the change in deferred taxes adjusted for purchase accounting adjustments during the year.

Deferred Financing Fees

        In March 2004, the Company entered into two credit facilities with various portions that will expire in 2009, 2011 and 2012. Deferred financing fees associated with the new credit facilities of $11,000 were incurred and will be amortized over the life of the new credit facilities. $6,569 of deferred financing fees related to the previously existing credit facility were written off and charged to Special Charges in March 2004. Deferred financing fees, net of accumulated amortization totaled $8,634 and $10,935 as of March 31, 2003 and 2004, respectively. Amortization expense included in interest expense was $1,097, $2,069 and $2,012 for the fiscal years ended March 31, 2002, 2003 and 2004, respectively.

Derivative Financial Instruments

        The Company has entered into interest rate swap agreements and option agreements to manage risk on a portion of its long-term floating-rate debt. The agreements are with major financial institutions, and the Company believes the risk of nonperformance by the counterparties is negligible. The counterparties to these agreements are lenders under the Credit Agreement and liabilities related to these agreements are covered under the security provisions of the Credit Agreement. The Company does not hold or issue

F-10



derivative financial instruments for trading or speculative purposes. SFAS No. 133, as amended, establishes accounting and reporting standards for derivative instruments and hedging activities. The Company recognizes all derivatives as either assets or liabilities in the accompanying balance sheet and measures those instruments at fair value. Changes in the fair value of those instruments are reported in accumulated other comprehensive income (loss) if they qualify for hedge accounting, or in earnings if they do not qualify for hedge accounting. Derivatives qualify for hedge accounting if they are designated as hedge instruments and if the hedge is highly effective in achieving offsetting changes in the fair value of cash flow of the asset or liability hedged. Accordingly, gains and losses from changes in derivative fair value are deferred until the underlying transaction occurs. Interest expense on the debt is adjusted to include the payments made or received under such hedge agreements. Any deferred gains or losses associated with derivative instruments, which on infrequent occasions may be terminated prior to maturity are recognized in earnings in the period in which the underlying hedged transaction is recognized. In the event a designated hedged item is sold, extinguished or matures prior to the termination of the related derivative instrument, such instrument would be closed and the resulting gain or loss would be recognized in earnings.

Stock-Based Compensation Plans

        In December 2002, FASB issued SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure. SFAS No. 148 amends SFAS No. 132, Accounting for Stock-Based Compensation, to provide alternative methods for a voluntary transition to the fair-value method of accounting for stock-based employee compensation. SFAS No. 148 also amends the disclosure provisions of SFAS No. 123 to require disclosure in the summary of significant accounting policies of the effects of an entity's accounting policy with respect to stock-based employee compensation on reported net income. The adoption of the standard was effective for fiscal years beginning after December 15, 2002. Rather than adopt the fair-value method of accounting for stock-based compensation, the Company chose to continue accounting for such items using the intrinsic value method. As required, the Company did adopt the disclosure provisions of this standard.

        In 2001, the Company established a stock-based compensation plan, which is more fully described in Note 16. The Company uses the accounting method under Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations of this plan. Under APB Opinion No. 25, generally, when the exercise price of the Company stock options equals the fair market value of the underlying stock on the date of the grant, no compensation expense is recognized. The following table illustrates the effect of net income if the Company had applied the fair value recognition

F-11



provisions of SFAS No. 123 to its stock-related compensation. For purposes of pro forma disclosures, the estimated fair value of the stock options is amortized to expense over their vesting periods.

 
  Fiscal year ended March 31
 
 
  2002
  2003
  2004
 
Net (loss) earnings available to common stockholders, as reported   $ (41,995 ) $ 5,543   $ (19,853 )
Stock-based employee compensation cost, net of tax, that would have been included in the determination of net income if the fair value based method had been applied to all awards     (1,588 )   (3,585 )   (3,646 )
   
 
 
 
Net (loss) earnings available to common stockholders, pro forma   $ (43,583 ) $ 1,958   $ (23,499 )
   
 
 
 

Pro forma net (loss) earnings per common share:

 

 

 

 

 

 

 

 

 

 
  Basic   $ (112.77 ) $ 5.07   $ (60.80 )
   
 
 
 
  Diluted   $ (112.77 ) $ 5.01   $ (60.80 )
   
 
 
 

Accumulated Other Comprehensive Income (Loss)

        The components of accumulated other comprehensive (loss) income, net of tax, are as follows:

 
  Beginning
Balance

  Before-Tax
Amount

  Tax Benefit
(Expense)

  Net-of-Tax
Amount

  Ending
Balance

 
March 31, 2002                                
Minimum pension liabilities   $   $ (1,000 ) $ 400   $ (600 ) $ (600 )
Unrealized loss on derivative instruments         (1,463 )   597     (866 )   (866 )
Foreign currency translation adjustment     (2,343 )   2,933         2,933     590  
   
 
 
 
 
 
Accumulated other comprehensive (loss) income, net of tax   $ (2,343 ) $ 470   $ 997   $ 1,467   $ (876 )
   
 
 
 
 
 

March 31, 2003

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Minimum pension liabilities   $ (600 ) $ (2,771 ) $ 1,030   $ (1,741 ) $ (2,341 )
Unrealized loss on derivative instruments     (866 )   (4,305 )   1,722     (2,583 )   (3,449 )
Foreign currency translation adjustment     590     32,372         32,372     32,962  
   
 
 
 
 
 
Accumulated other comprehensive (loss) income, net of tax   $ (876 ) $ 25,296   $ 2,752   $ 28,048   $ 27,172  
   
 
 
 
 
 

March 31, 2004

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Minimum pension liabilities   $ (2,341 ) $ 1,552   $ (667 ) $ 885   $ (1,456 )
Unrealized (loss) income on derivative instruments     (3,449 )   1,452     (581 )   871     (2,578 )
Foreign currency translation adjustment     32,962     30,330         30,330     63,292  
   
 
 
 
 
 
Accumulated other comprehensive (loss) income, net of tax   $ 27,172   $ 33,334   $ (1,248 ) $ 32,086   $ 59,258  
   
 
 
 
 
 

F-12


        The foreign currency translation adjustment primarily resulted from the weakening of the United States dollar. The majority of the Company's European subsidiaries utilize the euro as their functional currency. The exchange rate of the euro to the United States dollar increased from $.87 as of March 31, 2002 to $1.09 as of March 31, 2003 to $1.23 as of March 31, 2004.

Earnings Per Share

        Basic earnings per common share (EPS) are computed by dividing net earnings available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock.

New Accounting Pronouncements

        In December 2003, the FASB issued SFAS No. 132 (revised 2003), Employers' Disclosures about Pensions and Other Postretirement Benefits. The revisions to SFAS No. 132 are intended to improve financial statement disclosures for defined benefit plans and was initiated in 2003 in response to concerns raised by investors and other users of financial statements, about the need for greater transparency of pension information. In particular, the standard requires that companies provide more details about their plan assets, benefit obligations, cash flows, benefit costs and other relevant quantitative and qualitative information. The guidance is effective for fiscal years ending after December 15, 2003. The Company has complied with these revised disclosure requirements (see Note 14).

        In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This statement amends SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, to provide clarification on the financial accounting and reporting of derivative instruments and hedging activities and requires contracts with similar characteristics to be accounted for on a comparable basis. Our adoption of SFAS No. 149 during 2003 did not have a material effect on our financial condition or results of operations.

        In January 2003, the FASB issued Financial Interpretation (FIN) 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 and in December 2003 issued a revised interpretation ("FIN 46R"). FIN 46 and FIN 46R address consolidation by business enterprises of certain variable interest entities. It applied to the Company in the first reporting period ending after March 15, 2004. This pronouncement did not have an effect on the Company's financial position and results from operations.

Collective Bargaining

        At March 31, 2004, the Company had approximately 6,500 employees. Of these employees, approximately 3,300, almost all of whom work in the Company's European facilities, were covered by collective bargaining agreements. The average term of these agreements is one to two years, and these agreements expire over the period through 2007.

Use of Estimates

        The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

F-13



Reclassifications

        Certain amounts in the prior years' financial stateme