-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VF8s2wc+eJoqPunoW49qHKJ6Onot1MW4PpEDyJdmMXFppvHmdIzkFytaQ6KsYc74 Fg41ALeLyEp60NrVkP3mWg== 0000808064-05-000081.txt : 20050908 0000808064-05-000081.hdr.sgml : 20050908 20050908172708 ACCESSION NUMBER: 0000808064-05-000081 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20050731 FILED AS OF DATE: 20050908 DATE AS OF CHANGE: 20050908 FILER: COMPANY DATA: COMPANY CONFORMED NAME: C&D TECHNOLOGIES INC CENTRAL INDEX KEY: 0000808064 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS ELECTRICAL MACHINERY, EQUIPMENT & SUPPLIES [3690] IRS NUMBER: 133314599 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09389 FILM NUMBER: 051076075 BUSINESS ADDRESS: STREET 1: 1400 UNION MEETING ROAD STREET 2: PO BOX 3053 CITY: BLUE BELL STATE: PA ZIP: 19422 BUSINESS PHONE: 2156192700 MAIL ADDRESS: STREET 1: 1400 UNION MEETING ROAD STREET 2: PO BOX 3053 CITY: BLUE BELL STATE: PA ZIP: 19422 10-Q 1 form10q2ndfy2006final.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 31, 2005 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________ Commission file number 1-9389 C&D TECHNOLOGIES, INC. (Exact name of Registrant as specified in its Charter) Delaware 13-3314599 (State of other jurisdiction of (I.R.S. Employer Incorporation or organization) Identification No.) 1400 Union Meeting Road Blue Bell, Pennsylvania 19422 (Address of principal executive office) (Zip Code) (215) 619-2700 (Registrant's telephone number, including area code) N/A (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: YES |X| NO |_| Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). YES |X| NO |_| Number of shares of the Registrant's Common Stock outstanding on July 31, 2005: 25,367,647. C&D TECHNOLOGIES, INC. AND SUBSIDIARIES FORM 10-Q INDEX Part I FINANCIAL INFORMATION Item 1 Financial Statements (Unaudited) Consolidated Balance Sheets - July 31, 2005 and January 31, 2005 3 Consolidated Statements of Operations - Three and Six Months Ended July 31, 2005 and 2004 5 Consolidated Statements of Cash Flows - Six Months Ended July 31, 2005 and 2004 6 Consolidated Statements of Comprehensive Income (Loss) - Three and Six Months Ended July 31, 2005 and 2004 8 Notes to Consolidated Financial Statements 9 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 23 Item 3 Quantitative and Qualitative Disclosures about Market Risk 33 Item 4 Controls and Procedures 34 Part II OTHER INFORMATION Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 35 Item 4 Submission of Matters to a Vote of Security Holders 35 Item 6 Exhibits 36 SIGNATURES 37 EXHIBIT INDEX 38 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements C&D TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except par value) (UNAUDITED)
July 31, January 31, 2005 2005* ========================================================================================= ASSETS Current assets: Cash and cash equivalents $ 20,915 $ 26,855 Accounts receivable, less allowance for doubtful accounts of $2,385 and $2,018 75,710 73,621 Inventories, net 81,329 77,272 Deferred income taxes 14,298 14,481 Prepaid taxes 5,928 1,644 Other current assets 2,083 2,008 - --------------------------------------------------------------------------------------- Total current assets 200,263 195,881 Property, plant and equipment, net 98,671 104,130 Deferred income taxes 287 287 Intangible and other assets, net 80,363 83,863 Goodwill 95,725 97,247 - --------------------------------------------------------------------------------------- TOTAL ASSETS $475,309 $481,408 ======================================================================================= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term debt $ 1,699 $ 1,874 Accounts payable 40,742 34,808 Book overdrafts 1,099 8,674 Accrued liabilities 24,695 24,254 Other current liabilities 13,888 10,374 - --------------------------------------------------------------------------------------- Total current liabilities 82,123 79,984 Deferred income taxes 11,746 12,216 Long-term debt 127,609 135,004 Other liabilities 37,952 36,705 - --------------------------------------------------------------------------------------- Total liabilities 259,430 263,909 - ---------------------------------------------------------------------------------------
3 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (continued) (Dollars in thousands, except par value) (UNAUDITED)
July 31, January 31, 2005 2005* ====================================================================================================== Commitments and contingencies (see Note 7) Minority interest 8,180 8,171 Stockholders' equity: Common stock, $.01 par value, 75,000,000 shares authorized; 28,749,978 and 28,714,973 shares issued, respectively 287 287 Additional paid-in capital 72,105 71,956 Treasury stock, at cost 3,382,331 and 3,368,676 shares, respectively (47,148) (47,151) Accumulated other comprehensive income 4,852 5,275 Retained earnings 177,603 178,961 - ----------------------------------------------------------------------------------------------------- Total stockholders' equity 207,699 209,328 - ----------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 475,309 $ 481,408 =====================================================================================================
* Reclassified for comparative purposes. The accompanying notes are an integral part of these statements. 4 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except per share data) (UNAUDITED)
Three months ended Six months ended July 31, July 31, 2005 2004 2005 2004 ================================================================================================================= NET SALES $ 123,076 $ 93,627 $ 245,897 $ 179,432 - ----------------------------------------------------------------------------------------------------------------- COST OF SALES 99,639 74,106 200,709 143,370 - ----------------------------------------------------------------------------------------------------------------- GROSS PROFIT 23,437 19,521 45,188 36,062 OPERATING EXPENSES: Selling, general and administrative expenses 14,345 9,667 31,024 19,701 Research and development expenses 6,311 3,187 12,524 5,856 - ----------------------------------------------------------------------------------------------------------------- OPERATING INCOME 2,781 6,667 1,640 10,505 - ----------------------------------------------------------------------------------------------------------------- Interest expense, net 2,309 807 4,313 1,094 Other (income) expense, net (258) 499 56 1,059 - ----------------------------------------------------------------------------------------------------------------- INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST 730 5,361 (2,729) 8,352 - ----------------------------------------------------------------------------------------------------------------- (Benefit) provision for income taxes (256) 2,132 (1,907) 3,239 - ----------------------------------------------------------------------------------------------------------------- INCOME (LOSS) BEFORE MINORITY INTEREST 986 3,229 (822) 5,113 - ----------------------------------------------------------------------------------------------------------------- Minority interest (64) 23 (163) (97) - ----------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) $ 1,050 $ 3,206 $ (659) $ 5,210 ================================================================================================================= Net income (loss) per common share - basic $ 0.04 $ 0.13 $ (0.03) $ 0.21 ================================================================================================================= Net income (loss) per common share - diluted $ 0.04 $ 0.13 $ (0.03) $ 0.20 ================================================================================================================= Dividends per share $ 0.01375 $ 0.02750 $ 0.02750 $ 0.04125 =================================================================================================================
The accompanying notes are an integral part of these statements. 5 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (UNAUDITED)
Six months ended July 31, 2005 2004 ================================================================================================ Cash flows from operating activities: Net (loss) income $ (659) $ 5,210 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Minority interest (163) (97) Depreciation and amortization 11,883 11,209 Deferred income taxes (256) 1,407 Loss (gain) on disposal of assets 214 (59) Changes in assets and liabilities: Accounts receivable (2,570) (3,991) Inventories (4,421) (5,110) Other current assets (122) (54) Accounts payable 6,492 4,183 Accrued liabilities 375 1,147 Income taxes payable (4,199) (1,899) Other current liabilities 3,590 (867) Other liabilities 911 1,183 Other long-term assets 906 788 Other, net 1,701 659 - ------------------------------------------------------------------------------------------------ Net cash provided by operating activities 13,682 13,709 - ------------------------------------------------------------------------------------------------ Cash flows from investing activities: Acquisition of business, net -- (75,024) Acquisition of property, plant and equipment (4,136) (5,534) Proceeds from disposal of property, plant and equipment 71 121 - ------------------------------------------------------------------------------------------------ Net cash used in investing activities (4,065) (80,437) - ------------------------------------------------------------------------------------------------ Cash flows from financing activities: Repayment of debt (7,014) (75) Proceeds from new borrowings -- 68,269 (Decrease) increase in book overdrafts (7,575) 1,305 Financing cost of long-term debt (735) (263) Proceeds from issuance of common stock, net 47 773 Purchase of treasury stock (154) (2,661) Payment of common stock dividends (349) (698) Payment of minority interest dividends -- (10) - ------------------------------------------------------------------------------------------------ Net cash (used in) provided by financing activities (15,780) 66,640 - ------------------------------------------------------------------------------------------------ Effect of exchange rate changes on cash and cash equivalents 223 (77) - ------------------------------------------------------------------------------------------------ Decrease in cash and cash equivalents (5,940) (165) Cash and cash equivalents, beginning of period 26,855 12,306 - ------------------------------------------------------------------------------------------------ Cash and cash equivalents, end of period $ 20,915 $ 12,141 ================================================================================================
6 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (Dollars in thousands) (UNAUDITED)
Six months ended July 31, 2005 2004 ============================================================================================= SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Acquired businesses: Estimated fair value of assets acquired $ -- $ 41,692 Goodwill and identifiable intangible assets -- 54,638 Cash paid, net of cash acquired -- (75,024) - --------------------------------------------------------------------------------------------- Liabilities assumed $ -- $ 21,306 ============================================================================================= (Decrease) increase in property, plant, and equipment acquisitions in accounts payable $ (440) $ 421 Annual retainer to Board of Directors paid by the issuance of common stock $ 199 $ 147 Tax effect of options exercised $ 7 $ 208 Dividend declared, but not paid $ 350 $ 349
The accompanying notes are an integral part of these statements. 7 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Dollars in thousands) (UNAUDITED)
Three months ended Six months ended July 31, July 31, 2005 2004 2005 2004 ================================================================================================ NET INCOME (LOSS) $ 1,050 $ 3,206 $ (659) $ 5,210 Other comprehensive (loss) income, net of tax: Net unrealized (loss) gain on derivative instruments (453) 157 (190) 340 Foreign currency translation adjustments (183) 762 (233) (211) - ------------------------------------------------------------------------------------------------ Total comprehensive income (loss) $ 414 $ 4,125 $(1,082) $ 5,339 ================================================================================================
The accompanying notes are an integral part of these statements. 8 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (UNAUDITED) 1. INTERIM STATEMENTS The accompanying interim consolidated financial statements of C&D Technologies, Inc. (together with its operating subsidiaries, the "Company") should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company's Annual Report to Stockholders for the fiscal year ended January 31, 2005. The January 31, 2005, amounts were derived from the Company's audited financial statements. The consolidated financial statements presented herein are unaudited but, in the opinion of management, include all necessary adjustments (which comprise only normal recurring items) required for a fair statement of the consolidated financial position as of July 31, 2005, and the related consolidated statements of operations and comprehensive income (loss) for the three and six months ended July 31, 2005 and 2004, and the related consolidated statements of cash flows for the six months ended July 31, 2005 and 2004. However, interim results of operations may not be indicative of results for the full fiscal year. The accompanying interim consolidated financial statements of the Company have been prepared in conformity with accounting principles generally accepted in the United States of America. The January 31, 2005, Consolidated Balance Sheet has been reclassified to conform to the July 31, 2005, presentation. 2. STOCK-BASED COMPENSATION Under Accounting Principles Board ("APB") Opinion No. 25, if the exercise price of the Company's employee stock options equals or exceeds the market price of the underlying stock on the date of grant, no compensation expense is recognized. As the exercise price of all options granted under the Company's stock option plans was equal to the market price of the underlying common stock on the grant date, no stock-based employee compensation cost is recognized in net income (loss). The following table illustrates the effect on net income (loss) and net income (loss) per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standard ("SFAS") No. 123, "Accounting for Stock-Based Compensation" as amended, to options granted under the stock option plans. For purposes of this pro forma disclosure, the estimated value of the options is amortized to expense over the options' vesting periods. The pro forma disclosure reflects an acceleration of most of the Company's outstanding options on March 1, 2005. Because the estimated value is determined as of the date of grant, the actual value ultimately realized by the employee may be significantly different.
Three months ended Six months ended July 31, July 31, 2005 2004 2005 2004 ================================================================================================================ Net income (loss)- as reported $ 1,050 $ 3,206 $ (659) $ 5,210 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effect 1,364 1,028 3,673 1,943 - ---------------------------------------------------------------------------------------------------------------- Net (loss) income - pro forma $ (314) $ 2,178 $(4,332) $ 3,267 ================================================================================================================ Net income (loss) per common share - basic - as reported $ 0.04 $ 0.13 $ (0.03) $ 0.21 Net (loss) income per common share - basic - pro forma $ (0.01) $ 0.09 $ (0.17) $ 0.13 Net income (loss) per common share - diluted - as reported $ 0.04 $ 0.13 $ (0.03) $ 0.20 Net (loss) income per common share - diluted - pro forma $ (0.01) $ 0.09 $ (0.17) $ 0.13 Weighted-average fair value of options granted during the year $ 3.46 $ 8.02 $ 3.46 $ 9.08
9 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollars in thousands, except per share data) (UNAUDITED) SFAS No. 123 requires the use of option pricing models that were not developed for use in valuing employee stock options. The Black-Scholes option-pricing model was developed for use in estimating the fair value of short-lived exchange traded options that have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of highly subjective assumptions, including the option's expected life and the price volatility of the underlying stock. Because changes in the subjective input assumptions can materially affect the fair value estimate, the existing models may not provide a reliable single measure of the fair value of employee stock options. On March 1, 2005, the Company's Compensation Committee authorized the vesting of all outstanding non-vested options then held by employees of the Company and any of its subsidiaries, which were granted by the Corporation under the 1996 and 1998 Stock Option Plans. In accordance with SFAS No. 123R, which is effective for the first annual period after December 15, 2005, the Company will be required to apply the expense recognition provisions under SFAS No. 123R beginning February 1, 2006. The reason that the Company accelerated the vesting of the identified stock options was to reduce the Company's compensation charge in periods subsequent to adoption of SFAS No. 123R. Of the 3,130,228 stock options outstanding on March 1, 2005, 2,501,985 were vested and 628,243 were non-vested. Of the 628,243 options which were non-vested, 604,445 were accelerated and 23,798, which were granted under the U.K. Stock Options Plan, were not accelerated. During the second quarter of fiscal year 2006, the Company issued 649,866 options. All of these options were granted with immediate vesting. 3. NEW ACCOUNTING PRONOUNCEMENTS In November 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 151, "Inventory Costs, an amendment of Accounting Research Bulletin No. 43, Chapter 4," which adopts wording from the International Accounting Standards Board's ("IASB") International Accounting Standard ("IAS") No. 2 "Inventories" in an effort to improve the comparability of cross-border financial reporting. The FASB and IASB both believe the standards have the same intent; however, an amendment was adopted to avoid inconsistent application. The new standard indicates that abnormal freight, handling costs and wasted materials (spoilage) are required to be treated as current period charges rather than as a portion of inventory cost. Additionally, the standard clarifies that fixed production overhead should be allocated based on the normal capacity of a production facility. The statement is effective for the Company beginning in fiscal year 2007. Adoption is not expected to have a material impact on the Company's consolidated operations, financial position or cash flows. In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based Payment" (SFAS No. 123R), which replaces SFAS No. 123 and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values beginning with the first annual period beginning after December 15, 2005. The pro forma disclosures previously permitted under SFAS No. 123 no longer will be an alternative to financial statement recognition. The Company is required to adopt SFAS No. 123R in the first quarter of fiscal year 2007. SFAS No. 123R permits public companies to adopt these requirements using one of two methods: o A "modified prospective" method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS No. 123R for all share-based payments granted after the effective date and (b) based on the requirements of SFAS No. 123 for all awards granted to employees prior to the effective date of SFAS No. 123R that remain unvested on the effective date. o A "modified retrospective" method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS No. 123 for purposes of pro forma disclosures. 10 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollars in thousands, except per share data) (UNAUDITED) The Company is evaluating the impact of adoption of the provisions of SFAS No. 123R as well as the impact of the Security and Exchange Commission's ("SEC") Staff Accounting Bulletin ("SAB") No. 107 "Share-Based Payment." SAB 107 was issued by the SEC in March 2005 and provides supplemental SFAS No. 123R application guidance based on the views of the SEC. The Company currently expects to apply the provisions of SFAS No. 123R utilizing the modified prospective method. In anticipation of the implementation of SFAS No. 123R, the Company has accelerated the vesting of all stock options granted under the 1996 and 1998 Stock Option Plans as of March 1, 2005. 4. INVENTORIES Inventories consisted of the following: July 31, January 31, 2005 2005 ================================================================================ Raw materials $33,604 $31,558 Work-in-process 13,829 13,084 Finished goods 33,896 32,630 - ------------------------------------------------------------------------------ Total $81,329 $77,272 ============================================================================== 11 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollars in thousands, except per share data) (UNAUDITED) 5. INCOME TAXES Six months ended July 31, 2005 2004 ================================================================================ (Benefit) provision for income taxes $(1,907) $ 3,239 Effective income tax rate 69.9% 38.8% The effective income tax rate is computed based on the (benefit) provision for income taxes as a percentage of (loss) income before income taxes and minority interest. The Company's effective income tax rate in the first six months of fiscal year 2006 was impacted by: (i) a net loss before income taxes in the first six months of fiscal year 2006 compared to income before taxes in the same period of the prior year along with a shift in the (loss) income components between United States and foreign operations; (ii) an increase in the relative size of the valuation allowance in the current year related to the United States foreign tax credits for unremitted earnings of a controlled foreign subsidiary compared to the prior year including the impact of a change in the tax laws of a foreign jurisdiction in the second quarter of fiscal year 2006; and (iii) the tax effect of the resolution of state tax matters in the first six months of fiscal years 2006 and 2005. The Company's effective tax rate for the fiscal year ended January 31, 2005, was 26.4%. In addition to the aforementioned factors that impacted the second quarter of fiscal year 2006, the primary factor impacting the effective tax rate for the fiscal year ended January 31, 2005, was the tax effect of the goodwill impairment recorded in the fourth quarter of fiscal year 2005. 6. NET INCOME (LOSS) PER COMMON SHARE Net income (loss) per common share is based on the weighted-average number of shares of Common Stock outstanding. Net income (loss) per common share - diluted reflects the potential dilution that could occur if stock options were exercised. Weighted-average common shares and common shares - diluted were as follows:
Three months ended Six months ended July 31, July 31, 2005 2004 2005 2004 ==================================================================================================== Weighted-average shares of common stock 25,358,907 25,305,795 25,352,534 25,351,724 Assumed conversion of stock options, net of shares assumed reacquired 112,319 118,608 -- 152,437 - ---------------------------------------------------------------------------------------------------- Weighted-average common shares - diluted 25,471,226 25,424,403 25,352,534 25,504,161 ====================================================================================================
During the three months ended July 31, 2005 and 2004, there were 2,970,228 and 2,760,731 outstanding employee stock options, respectively, that were out-of-the-money and, therefore, excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive. During the six months ended July 31, 2004, there were 1,513,444 outstanding employee stock options that were out-of-the-money and, therefore, excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive. These stock options could be dilutive in the future. Due to a net loss in the six months ended July 31, 2005, 65,844 of dilutive securities issuable in connection with stock option plans have been excluded from the diluted loss per share calculation because their effect would reduce the loss per share. 12 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollars in thousands, except per share data) (UNAUDITED) 7. CONTINGENT LIABILITIES Legal: In March 2003, the Company was sued in an action captioned United States of America v. C&D Technologies, Inc., in the United States District Court for the Southern District of Indiana, for alleged violations of the Clean Water Act by virtue of alleged violations of permit effluent and pretreatment discharge limits at our plant in Attica, Indiana. The complaint requests injunctive relief and civil penalties of up to the amounts provided by statute. The parties are in the process of negotiating a resolution of the matter, failing which we intend to aggressively defend the matter. Environmental: The Company is subject to extensive and evolving environmental laws and regulations regarding the clean-up and protection of the environment, worker health and safety and the protection of third parties. These laws and regulations include, but are not limited to (i) requirements relating to the handling, storage, use and disposal of lead and other hazardous materials in manufacturing processes and solid wastes; (ii) record keeping and periodic reporting to governmental entities regarding the use and disposal of hazardous materials; (iii) monitoring and permitting of air emissions and water discharge; (iv) the reduction of hazardous chemical substances in certain products; and (v) monitoring worker exposure to hazardous substances in the workplace and protecting workers from impermissible exposure to hazardous substances, including lead, used in our manufacturing process. Notwithstanding the Company's efforts to maintain compliance with applicable environmental requirements, if injury or damage to persons or the environment arises from hazardous substances used, generated or disposed of in the conduct of the Company's business (or that of a predecessor to the extent the Company is not indemnified therefor), the Company may be held liable for certain damages, costs of investigation and remediation and fines and penalties, which could have a material adverse effect on the Company's business, financial condition, or results of operations. However, under the terms of the purchase agreement with Allied Corporation ("Allied") for the acquisition of the Company (the "Acquisition Agreement"), Allied was obligated to indemnify the Company for any liabilities of this type resulting from conditions existing at January 28, 1986, that were not disclosed by Allied to the Company in the schedules to the Acquisition Agreement. These obligations have since been assumed by Allied's successor in interest, Honeywell ("Honeywell"). The Company, along with numerous other parties, has been requested to provide information to the United States Environmental Protection Agency (the "EPA") in connection with investigations of the source and extent of contamination at three lead smelting facilities (the "Third Party Facilities") to which the Company had made scrap lead shipments for reclamation prior to the date of the Acquisition Agreement. The Company and four other potentially responsible parties ("PRPs") agreed upon a cost sharing arrangement for the design and remediation phases of a project related to one of the Third Party Facilities, the former NL Industries site in Pedricktown, New Jersey, acting pursuant to a Consent Decree. The PRPs identified and sued additional PRPs for contribution. In April 2002, one of the original four PRPs, Exide Technologies ("Exide"), filed for relief under Chapter 11 of Title 11 of the United States Code. In August 2002, Exide notified the PRPs that it would no longer be taking an active role in any further action at the site and discontinued its financial participation. This resulted in a prorata increase in the liabilities of the other PRPs, including the Company, for which the Company's allocated share rose from 5.25% to 7.79%. The Company also responded to requests for information from the EPA and the state environmental agency with regard to another Third Party Facility, the "Chicago Site," in October 1991. 13 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollars in thousands, except per share data) (UNAUDITED) In August 2002, the Company was notified of its involvement as a PRP at the NL Atlanta, Northside Drive Superfund site. NL Industries, Inc. ("NL") and Norfolk Southern Railway Company have been conducting a removal action on the site, preliminary to remediation. The Company, along with other PRPs, has entered into a tolling agreement and is currently in negotiations with NL with respect to this site regarding its share of the allocated liability, which the Company expects will not have a material adverse effect on its business, financial condition or results of operations. The Company is also aware of the existence of contamination at its Huguenot, New York battery manufacturing facility, which is expected to require expenditures for further investigation and remediation. The site is listed by the New York State Department of Environmental Conservation ("NYSDEC") on its registry of inactive hazardous waste disposal sites due to the presence of fluoride and other contaminants in amounts that exceed state groundwater standards. In July 2005, NYSDEC issued a preliminary Record of Decision for the soil remediation portion of the site. Additional site data submitted by the Company in July 2005 is now under review by NYSDEC, and a remediation plan for affected ground water has not yet been finalized with or approved by the agency. In February 2000, C&D filed suit against the prior owner of the site, Avnet, Inc. ("Avnet"), and in August 2005, the Company reached tentative settlement through mediated negotiation with Avnet to bear allocated shares of the costs associated with remediation of soil and groundwater contamination on the site at issue, among other costs and expenses. The parties are in the process of documenting their agreement. Should the parties fail to reach final agreement, and unless an alternative resolution can be achieved, NYSDEC may conduct the remediation and seek recovery from the parties. The Company, together with Johnson Controls, Inc. ("JCI"), is conducting an assessment and remediation of contamination at and near its facility in Milwaukee, Wisconsin. The on-site soil remediation portion of this project was completed as of October 2001. Under the purchase agreement with JCI, the Company is responsible for (i) one-half of the cost of the on-site assessment and remediation, with a maximum liability of $1,750 (ii) any environmental liabilities at the facility that are not remediated as part of the ongoing cleanup project and (iii) environmental liabilities for any new claims made after the fifth anniversary of the closing, i.e., March 2004, that arise from migration from a pre-closing condition at the Milwaukee facility to locations other than the Milwaukee facility, but specifically excluding liabilities relating to pre-closing offsite disposal. JCI retained liability for the off-site environmental assessment and remediation of lead. In March 2004, the Company entered into an agreement with JCI to continue to share responsibility as set forth in the original purchase agreement. The Company is currently in negotiation with JCI regarding the allocation of costs for assessment and remediation of certain off-site chlorinated volatile organic compounds ("CVOCs") in groundwater. In January 1999, the Company received notification from the EPA of alleged violations of permit effluent and pretreatment discharge limits at its plant in Attica, Indiana. The Company submitted a compliance plan to the EPA in April 2002. The Company engaged in negotiations with both the EPA and Department of Justice through March 2003 regarding a potential resolution of this matter. The government filed suit against the Company in March 2003 for alleged violations of the Clean Water Act. The complaint requests injunctive relief and civil penalties of up to the amounts provided by statute. The Company anticipates that the matter will result in a penalty assessment and compliance obligations. The Company and the EPA are in active negotiation. The Company will continue to seek a negotiated or mediated resolution, failing which it would vigorously defend the action. In October 2004, the Company accrued estimated environmental clean-up and decontamination charges of $3,881 related to potentially impaired equipment at its Leola, Pennsylvania, and Huguenot, New York, facilities, the timing for which has not been ascertained. 14 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollars in thousands, except per share data) (UNAUDITED) In February 2005, the Company received a verbal request from the EPA to conduct exploratory testing to determine if the historical municipal landfill located on the Company's Attica, Indiana, property is the source of elevated levels of trichloroethylene detected in two city wells downgradient of the Company's property. A formal claim has not been made against the Company. The scope of this potential exposure is not presently defined. At this time, the Company has no reason to believe this matter will have a material adverse effect on the Company's business, financial condition or results of operations. The Company accrues reserves for liabilities in the Company's consolidated financial statements and periodically reevaluates the reserved amounts for these liabilities in view of the most current information available in accordance with SFAS No. 5, "Accounting for Contingencies." As of July 31, 2005, and January 31, 2005, accrued environmental reserves totaled $7,242 and $6,570, respectively, consisting of $3,043 and $2,362 in other current liabilities and $4,199 and $4,208 in other liabilities, respectively. Based on currently available information, management of the Company believes that appropriate reserves have been established with respect to the foregoing contingent liabilities and potential liabilities are not expected to have a material adverse effect on the Company's business, financial condition or results of operations. 8. OPERATIONS BY REPORTABLE SEGMENT The Company has the following three reportable business segments: The Standby Power Division manufactures and markets integrated reserve power systems and components for the standby power market, which includes telecommunications, uninterruptible power supplies ("UPS"), cable and utilities. Integrated reserve power systems monitor and regulate electric power flow and provide backup power in the event of a primary power loss or interruption. The Standby Power Division also produces the individual components of these systems, including reserve batteries, power rectifiers, system monitors, power boards and chargers. Major applications of these products include wireless and wireline telephone infrastructure, cable television ("CATV") signal powering, corporate data center powering and computer network backup for use during power outages. The Power Electronics Division manufactures and markets custom, standard and modified-standard electronic power supply systems, including DC to DC converters, for large original equipment manufacturers ("OEMs") of telecommunications and networking equipment, as well as office and industrial equipment. In addition, the division also manufactures power conversion products sold into military and CATV applications as well as digital panel meters and data acquisition components. The Motive Power Division manufactures complete systems and individual components (including power electronics and batteries) to power, monitor, charge and test the batteries used in electric industrial vehicles, including fork-lift trucks, automated guided vehicles and airline ground support equipment. These products are marketed to end users in a broad array of industries, dealers of fork-lift trucks and other material handling vehicles and, to a lesser extent, OEMs. 15 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollars in thousands, except per share data) (UNAUDITED) Summarized financial information related to the Company's business segments for the three and six months ended July 31, 2005 and 2004, is shown below. All sales between business segments have been eliminated.
Standby Power Motive Three months ended July 31, 2005 Power Electronics Power Consolidated =========================================================================================== Net sales $ 66,743 $ 43,667 $ 12,666 $123,076 Operating income (loss) $ 3,696 $ 1,601 $ (2,516) $ 2,781 Three months ended July 31, 2004 =========================================================================================== Net sales $ 61,494 $ 19,049 $ 13,084 $ 93,627 Operating income (loss) $ 5,761 $ 2,935 $ (2,029) $ 6,667 Six months ended July 31, 2005 =========================================================================================== Net sales $127,280 $ 92,028 $ 26,589 $245,897 Operating income (loss) $ 5,888 $ 683 $ (4,931) $ 1,640 Six months ended July 31, 2004 =========================================================================================== Net sales $122,384 $ 30,222 $ 26,826 $179,432 Operating income (loss) $ 11,153 $ 3,226 $ (3,874) $ 10,505
Some of the Company's facilities are utilized by more than one business segment. Therefore, it is not practical to disclose asset information (assets, expenditures for long-lived assets) on a segment basis. 9. DERIVATIVE INSTRUMENTS The Company is exposed to various market risks. The primary financial risks include fluctuations in interest rates, certain commodity prices and changes in currency exchange rates. The Company manages these risks through normal operating and financing activities and when appropriate through the use of derivative instruments. The Company does not invest in derivative securities for speculative purposes, but does enter into hedging arrangements in order to reduce its exposure to fluctuations in interest rates, the price of lead as well as to fluctuations in exchange rates. The Company applies hedge accounting in accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," whereby the Company designates each derivative as a hedge of (i) the fair value of a recognized asset or liability or of an unrecognized firm commitment ("fair value" hedge); or (ii) the variability of anticipated cash flows of a forecasted transaction or the cash flows to be received or paid related to a recognized asset or liability ("cash flow" hedge). From time to time, however, the Company may enter into derivatives that economically hedge certain of its risks, even though hedge accounting is not allowed by SFAS No. 133 or is not applied by the Company. In these cases, there generally exists a natural hedging relationship in which changes in fair value of the derivative, that are recognized currently in earnings, act as an economic offset to changes in the fair value of the underlying hedged item(s). 16 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollars in thousands, except per share data) (UNAUDITED) The following table provides the fair value of the Company's derivative contracts which include interest rate swaps, foreign exchange contracts and forward commodity contracts. The interest rate swaps and commodity forwards are designated as cash flow hedges and; therefore, changes in their fair value, net of tax, are recorded in accumulated other comprehensive income. At July 31, 2005, and January 31, 2005, the Company has effectively changed $50,000 and $30,000 in floating rate debt to fixed rate debt at an average rate of 4.55% and 4.94%, respectively. The Company has chosen not to apply hedge accounting to its currency contracts. Changes in the fair value of the currency contracts are recorded in other (income) expense, net. Fair Value at Fair Value at July 31, January 31, 2005 2005 ================================================================================ Interest rate swaps $ 210 $ (644) Foreign currency contracts $ (114) $ 78 Commodity forward contracts $(1,039) $ -- During the first quarter of fiscal year 2006, the Company began to enter into financial derivatives to hedge the fluctuation in the price of lead, which is the primary raw material component in our batteries. The Company expects to continue to use financial instruments as appropriate to mitigate this risk. 17 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollars in thousands, except per share data) (UNAUDITED) 10. WARRANTY The Company provides for estimated product warranty expenses when the related products are sold. Because warranty estimates are forecasts that are based on the best available information, primarily historical claims experience, claims costs may differ from amounts provided. An analysis of changes in the liability for product warranties follows: Six months ended July 31, 2005 2004 =============================================================================== Balance at beginning of period $ 8,303 $ 9,759 Opening balance sheet liability of acquired companies -- 393 Current year provisions 2,884 2,557 Expenditures (3,363) (2,842) Effect of foreign currency translation (6) -- - ------------------------------------------------------------------------------- Balance at end of period $ 7,818 $ 9,867 =============================================================================== As of July 31, 2005, accrued warranty obligations of $7,818 include $4,168 in current liabilities and $3,650 in other liabilities. As of January 31, 2005, accrued warranty obligations of $8,303 include $4,958 in current liabilities and $3,345 in other liabilities. 11. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS The Company follows SFAS No. 132 (revised 2003), "Employers' Disclosures about Pensions and Other Postretirement Benefits." This standard requires the disclosure of the components of net periodic benefit cost recognized during interim periods.
Postretirement Postretirement Pension Benefits Benefits Pension Benefits Benefits ------------------ ------------------ ------------------ ------------------ Three months Three months Six months Six months ended ended ended ended July 31, July 31, July 31, July 31, 2005 2004 2005 2004 2005 2004 2005 2004 =============================================================================================================================== Components of net periodic benefit cost: Service cost $ 436 $ 384 $ 45 $ 25 $ 936 $ 859 $ 106 $ 78 Interest cost 1,019 976 64 40 2,050 1,946 129 103 Expected return on plan assets (1,285) (1,222) -- -- (2,571) (2,435) -- -- Amortization of prior service costs 5 4 (7) 27 10 9 22 57 Recognized actuarial loss (gain) 443 373 -- (3) 878 744 -- -- - ------------------------------------------------------------------------------------------------------------------------------- Net periodic benefit cost $ 618 $ 515 $ 102 $ 89 $ 1,303 $ 1,123 $ 257 $ 238 ===============================================================================================================================
Assuming that the actual return on plan assets is consistent with the expected rate of 8.25% for the domestic plans for fiscal year 2006, and that interest rates remain constant for calendar year (plan year) 2005, the Company would not be required to make any contributions to its domestic pension plans for fiscal year 2006. The Company expects to either make discretionary contributions totaling approximately $8,342 to three of its domestic pension plans by December 31, 2005, or incur a charge to equity which, net of tax, could be in excess of $16,000. Additionally, the Company plans to make contributions of approximately $42 to its Japanese plan for fiscal year 2006. In the six-month period ended July 31, 2005, the Company made contributions of $20 to its Japanese pension plan. The Company also expects to make contributions totaling approximately $261 to the two Company sponsored postretirement benefit plans for fiscal year 2006. 18 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollars in thousands, except per share data) (UNAUDITED) 12. ACQUISITIONS On May 27, 2004, the Company acquired Celab Limited ("Celab") for approximately $10,500 net of approximately $4,700 in cash acquired, plus additional acquisition related costs of approximately $400, primarily related to legal fees and due diligence. Celab, based in Hampshire, United Kingdom, is a provider of power conversion products, predominantly sold into military, CATV and telecommunications applications in Europe. This acquisition was funded with the Company's working capital and its existing credit agreement. On June 30, 2004, the Company acquired Datel Holding Corporation and its subsidiaries ("Datel") for an aggregate purchase price of approximately $74,800 plus additional acquisition related costs of approximately $800, primarily related to legal fees, audit fees, due diligence and appraisals. The purchase price consisted of an approximately $66,400 cash payment as well as the assumption of approximately $8,400 in debt. Cash acquired in the Datel acquisition was approximately $3,100. Datel is a Mansfield, Massachusetts-based manufacturer of primarily DC to DC converters, with additional product offerings in data acquisition components and digital panel meters. The appraisal of the acquired Datel tangible and intangible assets included technology of $11,200 with an 11-year expected useful life, customer relationships of $8,900 with a 20-year expected useful life, trade names of $2,400 with a 25-year expected useful life, and acquired in-process research and development of $440, which lastly, resulted in a charge to research and development expense of this amount in the year ended January 31, 2005. The acquisition was funded with the Company's expanded revolving credit facility. On September 30, 2004, the Company acquired the Power Systems division of Celestica, Inc., which the Company now operates as "CPS," a Toronto, Ontario-based manufacturer, for approximately $52,400 plus additional acquisition related costs of approximately $1,050, primarily related to legal fees, consulting fees, audit fees, due diligence and appraisals. CPS develops DC to DC converters and AC to DC power supplies which are sold on a direct basis to large computing and communications OEMs. The appraisal of the acquired CPS tangible and intangible assets included technology of $3,760 with a weighted average 5-year expected useful life, customer relationships of $18,500 with a 20-year expected useful life, and acquired in-process research and development of $340, which resulted in a charge of the same amount to research and development expense of this in the year ended January 31, 2005. This acquisition was funded with the Company's expanded revolving credit facility. The results of operations of these businesses are included in the Company's consolidated financial statements from their respective dates of acquisition. 19 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollars in thousands, except per share data) (UNAUDITED) The following unaudited pro forma financial information combines the consolidated results of operations as if the Celab, Datel and CPS acquisitions had occurred as of the beginning of the periods presented. Pro forma adjustments include only the effects of events directly attributed to a transaction that are factually supportable. The pro forma adjustments contained in the table below include amortization of intangibles, depreciation adjustments due to the write-up of property, plant and equipment to estimated fair market value, interest expense on the acquisition debt and related income tax effects. Three months Six months ended ended July 31, 2004 July 31, 2004 ============================================================================== Net sales $131,903 $263,955 Net loss $ (1,060) $ (111) Net (loss) income per common share - basic $ (0.04) $ 0.00 Net (loss) income per common share - diluted $ (0.04) $ 0.00 The pro forma financial information does not necessarily reflect the operating results that would have occurred had the acquisitions been consummated as of the beginning of the periods presented, nor is such information indicative of future operating results. 20 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollars in thousands, except per share data) (UNAUDITED) 13. ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company's best estimate of the amount of probable credit losses in the Company's existing accounts receivable. The Company determines the allowance based on historical write-off experience by industry and regional economic data. The Company reviews its allowance for doubtful accounts quarterly. Past due balances over 90 days and over a specified amount are reviewed individually for collectibility. All other balances are reviewed on a pooled basis by age and type of receivable. Account balances are charged off against the allowance when the Company believes it is probable the receivable will not be recovered. The Company does not have any off-balance-sheet credit exposure related to its customers. Receivables consist of the following at July 31, 2005, and January 31, 2005. July 31, January 31, 2005 2005 ================================================================================ Trade receivables $ 73,261 $ 72,680 Notes receivables 660 500 Other 4,174 2,459 Allowance for doubtful accounts (2,385) (2,018) - ------------------------------------------------------------------------------ Total receivables $ 75,710 $ 73,621 ============================================================================== Following are the changes in the allowance for doubtful accounts during the periods ended: Six months ended July 31, 2005 2004 =============================================================================== Balance at beginning of period $ 2,018 $ 1,476 Accrual additions (reductions) 411 (11) (Write-offs) net of recoveries (32) (96) Translation adjustment (12) (2) Opening balance sheet of acquired companies -- 186 - ------------------------------------------------------------------------------- Balance at end of period $ 2,385 $ 1,553 =============================================================================== 14. DEBT On June 30, 2004, the Company entered into an amended and restated revolving credit agreement ("Credit Agreement" or "Facility"), with a maturity date of June 30, 2009. The financing was arranged by Banc of America Securities LLC. Under the Credit Agreement, the amount of the Facility was increased to $175,000 from $100,000 with the option, under certain conditions to increase the Facility to $200,000. The Facility was increased to $200,000 on August 3, 2004, at the Company's request. The Credit Agreement includes a $50,000 sub limit for loans in certain foreign currencies. The interest rates are determined by the Company's leverage ratio and, subject to the second amendment discussed below, are available at LIBOR plus 1% to LIBOR plus 2.75% or Prime, to Prime plus 1.25%. The rates may be adjusted based on the leverage ratio calculated after the conclusion of each quarter. The Credit Agreement requires the Company to pay a fee of .25% to .50% per annum of any unused portion of the Facility, based on the leverage ratio. 21 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollars in thousands, except per share data) (UNAUDITED) The Credit Agreement includes a letter of credit facility, not to exceed $25,000. The Credit Agreement contains certain restrictive covenants that require the Company to maintain minimum ratios such as fixed charge coverage and leverage ratios as well as minimum consolidated net worth. These covenants permit the Company to pay dividends so long as there are no defaults under the Credit Agreement. The Company was not in compliance with its leverage ratio covenant at January 31, 2005. The Company obtained a waiver of this violation on February 28, 2005. The Company entered into the second amendment to the Credit Agreement to modify this ratio through the remaining term of the agreement. The second amendment requires that the Company pledge certain assets as collateral on a going forward basis. The interest rates determined by the Company's leverage ratio were changed as a result of this second amendment. The second amendment also modified other provisions of the Credit Agreement such that it permits the Company to exclude from certain covenant calculations: (i) the write down of up to $85,000 of goodwill, (ii) up to $2,500 in severance costs in fiscal year 2006 and, (iii) all future non-cash stock option or restricted stock expense. Additionally, the second amendment required the Company to maintain minimum levels of trailing earnings before interest, taxes, depreciation and amortization as calculated quarterly through fiscal year 2006. On April 29, 2005, the Company entered into the third amendment to the Credit Agreement to correct and revise the definitional term "Consolidated EBITDA." The Company was in compliance with its Credit Agreement covenants at July 31, 2005. However, we expect that it may be difficult to meet certain of the Credit Agreement covenants at October 31, 2005. Therefore, we have begun the process of pursuing financing alternatives. We expect to conclude this process by October 31, 2005. 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands, except per share data) Item 2. Executive Overview Within the following discussion, unless otherwise stated, "quarter" and "six-month period," refer to the second quarter of fiscal year 2006 and the six months ended July 31, 2005. All comparisons are with the corresponding period in the prior year, unless otherwise stated. Three acquisitions occurred during fiscal year 2005. On May 27, 2004, we acquired Celab, based in Hampshire, United Kingdom, a provider of power conversion products, predominately sold into military, CATV and telecommunications applications in Europe. On June 30, 2004, we acquired Datel, a Mansfield, Massachusetts-based manufacturer of DC to DC converters, data acquisition components and digital meters. On September 30, 2004, we acquired the Power Systems division of Celestica, Inc., which we now operate as "CPS," a Toronto, Ontario-based company. CPS develops DC to DC converters and AC to DC power supplies which are sold on a direct basis to large computing and communications OEMs. For reporting purposes, these three acquisitions are part of the Power Electronics Division. During the second quarter of fiscal 2006, C&D announced that Dr. Jeffrey Graves had been hired to serve as President and Chief Executive Officer. Additionally, Dr. Graves was appointed to our Board of Directors. Dr. Graves replaced George MacKenzie, a member of C&D's Board of Directors who had served as interim President and Chief Executive Officer since March 24, 2005, subsequent to the resignation of Wade H. Roberts, Jr. C&D entered into an employment agreement with Dr. Graves effective as of June 21, 2005, pursuant to which he commenced employment on July 5, 2005. Also on August 11, 2005, James D. Dee was appointed Vice President, General Counsel and Corporate Secretary of C&D effective September 6, 2005. Mr. Dee succeeds to that position from Linda R. Hansen, who in March 2005 notified the Company of her planned retirement as an officer of C&D effective August 31, 2005. Finally, on August 17, 2005, C&D announced the resignation of Stephen E. Markert, Jr., Vice President, Finance and Chief Financial Officer. Mr. Markert's resignation will take effect following a transition period ending no earlier than October 14, 2005, and no later than December 10, 2005. C&D has begun an executive search to find Mr. Markert's replacement. Three Months Ended July 31, 2005, Compared to July 31, 2004 Net sales for the second quarter of fiscal year 2006 increased $29,449 or 31% to $123,076 from $93,627 in the second quarter of fiscal year 2005. This increase resulted primarily from the aforementioned acquisitions, coupled with increased sales in our Standby Power Division and the legacy portion of our Power Electronics Division, partially offset by a decline in sales in our Motive Power Division. Sales of the Power Electronics Division increased $24,618 or 129%, primarily due to an increase in net sales of $23,582 recorded by the entities acquired during fiscal year 2005. The second quarter of fiscal year 2005 includes two months of results for Celab and one month of results for Datel. CPS was acquired during the third quarter of fiscal year 2005. The legacy portion of the Power Electronics Division had a sales increase of $1,036 or 9%. Sales by the Standby Power Division increased $5,249 or 9%, primarily due to an increase in sales to the telecommunications industry. Sales by the Motive Power Division decreased $418 or 3%. The following table sets forth information on our sales by division as a percentage of total sales:
Three months ended Three months ended July 31, 2005 July 31, 2004 ------------------------------------------------------ Revenue % of Total Revenue % of Total ======================================================================================== Standby Power Division $ 66,743 54.2% $ 61,494 65.7% Power Electronics Division 43,667 35.5% 19,049 20.3% Motive Power Division 12,666 10.3% 13,084 14.0% - ------------------------------------------------------------------------------------- Total $123,076 100.0% $ 93,627 100.0% =====================================================================================
23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) (Dollars in thousands, except per share data) Gross profit for the second quarter of fiscal year 2006 increased $3,916 or 20% to $23,437 from $19,521. Gross margins decreased from 20.8% to 19.0%. Gross profit in the Power Electronics Division increased $5,446 or 79% to $12,339 from $6,893, primarily due to the results of the acquisitions, partially offset by lower gross profit within the legacy portion of the Power Electronics Division. Gross profit in the Standby Power Division declined $1,081 or 9% to $11,097 from $12,178. Gross profit in the Motive Power Division decreased $449 or 100% to $1 from $450. Selling, general and administrative expenses for the second quarter of fiscal year 2006 increased $4,678 or 48% to $14,345 from $9,667. This increase was primarily due to an increase in selling, general and administrative expenses of $2,865 incurred by the fiscal year 2005 acquisitions. Excluding the acquired companies, selling, general and administrative expenses increased $1,813. This increase was primarily due to increases in compensation costs in the amount of $883, higher costs related to Sarbanes-Oxley Act Section 404 internal control compliance in the amount of $502 and higher audit fees (not including audit fees related to Sarbanes-Oxley) in the amount of $425. Research and development expenses for the second quarter of fiscal year 2006 increased $3,124 or 98% to $6,311 from $3,187. As a percentage of sales, research and development expenses increased from 3.4% during the second quarter of fiscal year 2005 to 5.1% during the second quarter of fiscal year 2006. The increase was primarily the result of a $3,189 increase in research and development expenses incurred by the companies acquired in fiscal year 2005. Operating income for the second quarter of fiscal year 2006 decreased $3,886 or 58% to $2,781 from $6,667 in the comparable quarter of the prior fiscal year. Below is a summary of key items affecting operating income (loss) for the second quarter of fiscal year 2006: Analysis of Change in Operating Income (Loss) Second Quarter of Fiscal Year 2006 vs. Second Quarter of Fiscal Year 2005
Standby Power Motive Power Electronics Power Division Division Division Consolidated ====================================================================================================== Operating income (loss) - three-months ended July 31, 2004 $ 5,761 $ 2,935 $(2,029) $ 6,667 Lead - increased costs (2,007) -- (579) (2,586) Increase in Sarbanes-Oxley costs (188) (263) (51) (502) Operations of acquired companies -- (319) -- (319) Fiscal year 2005 Reynosa transition costs 400 -- 707 1,107 Increased environmental accruals (112) -- (539) (651) Other (158) (752) (25) (935) - --------------------------------------------------------------------------------------------------- Operating income (loss) - three-months ended July 31, 2005 $ 3,696 $ 1,601 $(2,516) $ 2,781 ===================================================================================================
Interest expense, net, for the second quarter of fiscal year 2006 increased $1,502 or 186% to $2,309 from $807 in the second quarter of fiscal year 2005, primarily due to higher average debt balances outstanding during the period as a result of funds borrowed to finance the Celab, Datel and CPS acquisitions. An income tax benefit of $256 was recorded in the second quarter of fiscal year 2006 compared to income tax expense of $2,132 in the second quarter of fiscal year 2005. The tax benefit or provision is computed on a year-to-date basis in accordance with SFAS 109, "Accounting for Income Taxes." See the following section titled "Six Months Ended July 31, 2005, Compared to July 31, 2004" for a discussion of the change in the effective tax rate from the prior year. 24 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) (Dollars in thousands, except per share data) Minority interest reflects the 33% ownership interest in the joint venture battery business located in Shanghai, China, that is not owned by us. The joint venture had a net loss during the second quarter of fiscal year 2006 compared to income during second quarter of fiscal year 2005. As a result of all of the above, net income in the amount of $1,050 was recorded in the second quarter of fiscal year 2006 as compared to net income of $3,206 in the comparable period of the prior fiscal year. On a per share basis there was net income of $0.04 - basic and diluted compared to net income of $0.13 - basic and diluted for the second quarters of fiscal years 2006 and 2005, respectively. Six Months Ended July 31, 2005, Compared to July 31, 2004 Net sales for the six months ended July 31, 2005, increased $66,465 or 37% to $245,897 from $179,432 in the six months ended July 31, 2004. This increase resulted primarily from the aforementioned acquisitions, coupled with increased sales in our Standby Power Division and the legacy portion of our Power Electronics Division, partially offset by a decline in sales in our Motive Power Division. Sales of the Power Electronics Division increased $61,806 or 205%, primarily due to an increase in net sales of $61,091 recorded by the entities acquired during fiscal year 2005. The six months ended July 31, 2005, includes two months of results for Celab and one month of results for Datel. The legacy portion of the Power Electronics Division had a sales increase of $715 or 3%. Sales by the Standby Power Division increased $4,896 or 4%, while sales by the Motive Power Division decreased $237 or 1%. The following table sets forth information on our sales by division as a percentage of total sales:
Six months ended Six months ended July 31, 2005 July 31, 2004 ------------------------------------------------------ Revenue % of Total Revenue % of Total ====================================================================================== Standby Power Division $127,280 51.8% $122,384 68.2% Power Electronics Division 92,028 37.4% 30,222 16.8% Motive Power Division 26,589 10.8% 26,826 15.0% - ----------------------------------------------------------------------------------- Total $245,897 100.0% $179,432 100.0% ===================================================================================
Gross profit for the first half of fiscal year 2006 increased $9,126 or 25% to $45,188 from $36,062. Gross margins decreased from 20.1% to 18.4%. Gross profit in the Power Electronics Division increased $13,088 or 130% to $23,121 from $10,033, primarily due to the results of the acquisitions, partially offset by lower gross profit within the legacy portion of the Power Electronics Division. Gross profit in the Standby Power Division decreased $3,364 or 14% to $21,369 from $24,733. Gross profit in the Motive Power Division declined $598 or 46% to $698 from $1,296. Selling, general and administrative expenses for the six months ended July 31, 2005, increased $11,323 or 57% to $31,024 from $19,701. This increase was primarily due to an increase in selling, general and administrative expenses of $7,183 incurred by the fiscal year 2005 acquisitions. Excluding the acquired companies, selling, general and administrative expenses increased $4,140. This increase was primarily due to increases in compensation costs in the amount of $2,288, which included severance accruals in the amount of $2,078 for former executive officers incurred during the first quarter of fiscal 2006, higher costs related to Sarbanes-Oxley Act Section 404 internal control compliance in the amount of $1,446. Research and development expenses for the first half of fiscal year 2006 increased $6,668 or 114% to $12,524 from $5,856. As a percentage of sales, research and development expenses increased from 3.3% during the six months ended July 31, 2004 to 5.1% during the six months ended July 31, 2005. The increase was primarily the result of a $6,740 increase in research and development expenses incurred by the companies we acquired in fiscal year 2005. 25 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) (Dollars in thousands, except per share data) Operating income for the first half of fiscal year 2006 decreased $8,865 or 84% to $1,640 from $10,505 in the comparable period of the prior fiscal year. Below is a summary of key items affecting operating income for the six month ended July 31, 2005, as compared with the six months ended July 31, 2004: Analysis of Change in Operating Income (Loss) First Half of Fiscal Year 2006 vs. First Half of Fiscal Year 2005
Standby Power Motive Power Electronics Power Division Division Division Consolidated ====================================================================================================== Operating income (loss) - six-months ended July 31, 2004 $ 11,153 $ 3,226 $ (3,874) $ 10,505 Lead - increased costs (4,332) -- (1,075) (5,407) Executive Severance - CEO (898) (709) (229) (1,836) Executive Severance - General Manager -- -- (242) (242) Increase in Sarbanes-Oxley costs (708) (584) (154) (1,446) Operations of acquired companies -- 240 -- 240 Fiscal year 2005 Reynosa transition costs 425 -- 736 1,161 Increased environmental accruals (96) -- (539) (635) Other 344 (1,490) 446 (700) - ---------------------------------------------------------------------------------------------------- Operating income (loss) - six-months ended July 31, 2005 $ 5,888 $ 683 $ (4,931) $ 1,640 ====================================================================================================
Interest expense, net, for the first six months of fiscal 2006 increased $3,219 or 294% to $4,313 from $1,094 in the comparable period of the prior fiscal year, primarily due to higher average debt balances outstanding during the period as a result of funds borrowed to finance the Celab, Datel and CPS acquisitions. An income tax benefit of $1,907 was recorded in the first half of fiscal year 2006 compared to income tax expense of $3,239 in the comparable period of the prior fiscal year. The effective tax rate is the (benefit) provision for income taxes as a percentage of the (loss) income before income taxes and minority interest. The effective tax rate for the six months ended July 31, 2005, was 69.9% compared to 38.8% in the six months ended July 31, 2004. The primary factors impacting the effective tax rate in the first half of fiscal 2006 were a loss before income taxes in the first six months of fiscal 2006 compared to income before taxes in the comparable period of the prior year along with a shift in the income (loss) components between United States and foreign operations, an increase in the relative size of the valuation allowance in the current year relating to the United States foreign tax credits for the unremitted earnings of a controlled foreign subsidiary compared to the prior year including the impact of a change in the tax laws of a foreign jurisdiction in the second quarter of fiscal year 2006 and the favorable tax effects of the resolution of state tax matters in the first six months of fiscal years 2006 and 2005. Minority interest reflects the 33% ownership interest in the joint venture battery business located in Shanghai, China, that is not owned by us. The joint venture had a larger net loss during the first half of fiscal year 2006 as compared to the first half of fiscal year 2005. As a result of all of the above, a net loss in the amount of $(659) was recorded during the six months ended July 31, 2005, as compared to net income of $5,210 in the comparable period of the prior fiscal year. On a per share basis there was net loss of $(0.03) - basic and diluted compared to net income of $0.21 - basic and $0.20 diluted for the six months ended July 31, 2005 and 2004, respectively. 26 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) (Dollars in thousands, except per share data) Future Outlook We expect growth in backlog and order rates from customers through the third quarter of fiscal year 2006 and beyond. However, factors such as higher raw material pricing and operational execution issues continue to negatively impact operating results. We continue to deal with increased lead costs through prudent hedging of a portion of our future lead requirements. We expect to record special charges in the third quarter, including a $1,500 charge related to continued integration efforts within the Power Electronics Division and also expect to spend approximately $700 for capital related integration expenditures. In addition, we have recently initiated an assessment of our intangible assets and expect to complete our assessment in the third quarter. Pending the completion of our assessment, impairment charges may be required related to certain intangible assets. As a result, before special charges, potential impairment charges and assuming lead pricing remains stable, we are forecasting modest sequential increases for revenues and operating profits in the third and fourth quarters of fiscal year 2006. Other integration charges, yet to be identified, may be required in the future related to the Power Electronics Division. 27 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) (Dollars in thousands, except per share data) Liquidity and Capital Resources Net cash provided by operating activities decreased $27 or 0.2% to $13,682 for the six-month period ended July 31, 2005, compared to $13,709 in the same period of the prior fiscal year. This decrease in net cash provided by operating activities was primarily due to: (i) a net loss in the first half of fiscal year 2006 as compared to net income in the first half of fiscal year 2005; and (ii) a larger net increase in our tax liability (current and deferred) in the six months ended July 31, 2005, than in the six months ended July 31, 2004. These changes, resulting in lower net cash provided by operating activities, were partially offset by: (i) an increase in other current liabilities in the six-month period ended July 31, 2005, compared to a decrease in other current liabilities in the comparable period of the prior fiscal year; and (ii) a larger increase in accounts payable in the first half of fiscal year 2006 compared to the first half of fiscal year 2005. Net cash used by investing activities decreased $76,372 or 95% to $4,065 in the six months ended July 31, 2005, as compared to $80,437 in the six months ended July 31, 2004. The primary reason for this differential was the purchases of Celab and Datel in the second quarter of fiscal year 2005. In the first half of fiscal year 2006, we had net cash used in financing activities in the amount of $15,780. This consisted primarily of a decrease in book overdrafts and repayment of debt. In the first half of fiscal year 2005, we had net cash provided by financing activities in the amount of $66,640, primarily consisting of proceeds from new borrowings used to finance our acquisitions. Our Credit Agreement contains restrictive covenants that require us to maintain minimum ratios such as fixed charge coverage and leverage ratios as well as minimum consolidated net worth. We were not in compliance with our leverage ratio covenant at January 31, 2005. We obtained a waiver of this violation on February 28, 2005. We entered into the second amendment to the Credit Agreement to modify this ratio through the remaining term of the agreement. The second amendment required us to pledge certain assets as collateral on a going forward basis. The second amendment also modified other provisions of the Credit Agreement such that it permitted us to exclude, from certain covenant calculations, (i) the write down of up to $85,000 of goodwill, (ii) up to $2,500 in severance costs in fiscal year 2006; and (iii) all future non-cash stock option or restricted stock expense. Further, the second amendment required us to maintain minimum levels of trailing earnings before interest, taxes, depreciation and amortization ("EBITDA") as calculated quarterly through fiscal year 2006. On April 29, 2005, we entered into the third amendment to the Credit Agreement to correct and revise the definitional term "Consolidated EBITDA." Capital expenditures during fiscal year 2005 were incurred to fund cost reduction programs, normal maintenance and regulatory compliance. Fiscal year 2006 capital expenditures are expected to be approximately $20,000 primarily for the construction of and relocation to our new Shanghai joint-venture facility (of which approximately $15,547 has already been received from the Chinese government to fund construction), upgrades to our Reynosa, Mexico, facility and other items expended for similar purposes as fiscal year 2005. The availability under the Credit Agreement is expected to be sufficient to meet our ongoing cash needs for working capital requirements, debt service and capital expenditures provided we meet our Credit Agreement covenants. The restrictive covenants under our credit agreement permit us to pay dividends so long as there is no default under the Credit Agreement. We were in compliance with our Credit Agreement covenants at July 31, 2005. However, we expect that it may be difficult to meet certain of the credit agreement covenants at October 31, 2005. Therefore, we have begun the process of pursuing financing alternatives. We expect to conclude this process by October 31, 2005. 28 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) (Dollars in thousands, except per share data) NEW ACCOUNTING PRONOUNCEMENTS In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an amendment of ARB No. 43, Chapter 4," which adopts wording from the IASB's IAS No. 2 "Inventories" in an effort to improve the comparability of cross-border financial reporting. The FASB and IASB both believe the standards have the same intent; however, an amendment was adopted to avoid inconsistent application. The new standard indicates that abnormal freight, handling costs and wasted materials (spoilage) are required to be treated as current period charges rather than as a portion of inventory cost. Additionally, the standard clarifies that fixed production overhead should be allocated based on the normal capacity of a production facility. The statement is effective for us beginning in fiscal year 2007. Adoption is not expected to have a material impact on our consolidated operations, financial position or cash flows. In December 2004, the FASB issued SFAS No.123 (revised 2004), "Share-Based Payment" (SFAS No. 123R), which replaces SFAS No. 123 and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values beginning with the first annual period beginning after December 15, 2005. The pro forma disclosures previously permitted under SFAS No. 123 no longer will be an alternative to financial statement recognition. We are required to adopt SFAS No. 123R in the first quarter of fiscal year 2007. SFAS No. 123R permits public companies to adopt these requirements using one of two methods: o A "modified prospective" method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS No. 123R for all share-based payments granted after the effective date and (b) based on the requirements of SFAS No. 123 for all awards granted employees prior to the effective date of SFAS No. 123R that remain unvested on the effective date. o A "modified retrospective" method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS No. 123 for purposes of pro forma disclosures. We are evaluating the impact of adoption of the provisions of SFAS No. 123R as well as the impact of the SEC's SAB No. 107 "Share-Based Payment." SAB 107 was issued by the SEC in March 2005 and provides supplemental SFAS No. 123R application guidance based on the views of the SEC. We currently expect to apply the provisions of SFAS No. 123R utilizing the modified prospective method. In anticipation of the implementation of SFAS No. 123R, we accelerated the vesting of all stock options granted under the 1996 and 1998 Stock Option Plans as of March 1, 2005; therefore, these options will not be expensed in future periods. 29 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) (Dollars in thousands, except per share data) FORWARD-LOOKING STATEMENTS Statements and information contained in this Quarterly Report on Form 10-Q that are not historical facts are "forward-looking" statements made pursuant to the safe-harbor provisions of the Private Securities Litigation Act of 1995. Forward-looking statements may be identified by their use of words like "plans," "expects," "will," "anticipates," "intends," "may," "projects," "estimates," "believes" or other words of similar meaning. All statements that address expectations or projections about the future, including, but not limited to, statements about our strategy for growth, goals, trends, product development, market position, market conditions, expenditures, sales and financial results, are forward-looking statements. Forward-looking statements are based on certain assumptions and expectations of future events and involve a number of risks and uncertainties. We cannot guarantee that these assumptions and expectations are accurate or will occur. We caution readers not to place undue reliance on these forward-looking statements. These statements speak only as of the date of this Quarterly Report on Form 10-Q, and we undertake no obligation to update or revise these statements to reflect events or circumstances occurring after the date of this Quarterly Report on Form 10-Q. o We operate worldwide and derive a portion of our revenue from sales outside the United States. Changes in the laws or policies of governmental and quasi-governmental agencies, as well as social and economic conditions, in the countries in which we operate (including the United States) could affect our business and our results of operations. In addition, economic factors (including inflation and fluctuations in interest rates and foreign currency exchange rates) and competitive factors (such as price competition and business combinations or reorganizations of competitors) or a decline in industry sales or cancelled or delayed orders due to economic weakness or changes in economic conditions, either in the United States or other countries in which we conduct business, could affect our results of operations. o Terrorist acts or acts of war, whether in the United States or abroad, could cause damage or disruption to our operations, our suppliers, channels to market or customers, or could cause costs to increase, or create political or economic instability, any of which could have a material adverse effect on our results of operations. o Our results of operations could be adversely affected by conditions in the domestic and global economies or the markets in which we conduct business, such as telecommunications, UPS, CATV, switchgear and control, material handling and military. o Our operating results could be adversely affected by increases in the cost of raw materials, particularly lead, the primary component cost of our battery products, or other product parts or components. We may not be able to fully offset the effects of higher costs of raw materials through price increases to customers or productivity improvements. A significant increase in the price of one or more raw materials, parts or components could have a material adverse effect on results of operations. o Our ability to meet customer demand depends, in part, on our ability to obtain timely and adequate supply and delivery of raw materials, including lead, which is the primary component cost of our battery products, or other product parts or components from our suppliers and internal manufacturing capacity. Although we work closely with both our internal and external suppliers (and, as to the continuing availability of lead, our industry associations) to avoid encountering unavailability or shortages, there can be no assurance that we will not encounter them in the future. The cessation, reduction or interruption of supply of raw materials (including lead), product parts or components, could have a material adverse effect on our operations. The loss of a key supplier or the inability to obtain certain key products or components could cause delays or reductions in shipments of our products or increase our costs. 30 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) (Dollars in thousands, except per share data) o Our growth objectives are largely dependent on our ability to renew our pipeline of new products and to bring these products to market. This ability may be adversely affected by difficulties or delays in product development, such as the inability to: introduce viable new products; successfully complete research and development projects or integrate or otherwise capitalize upon purchased or licensed technology; obtain adequate intellectual property protection; maintain or improve product quality; or gain market acceptance of the new products. Our growth could also be affected by competitive products and technologies. o Our ability to implement our business strategies may be hindered or delayed. As part of our strategy for growth, we have made and may continue to make acquisitions, and in the future, may make divestitures and form strategic alliances. There can be no assurance that these will be completed or beneficial to us. Acquisitions present significant challenges and risks relating to the integration of the business into our Company, including substantial management time and financial and other resources, and there can be no assurance that we will manage acquisitions successfully. o We have undertaken and may continue to undertake productivity initiatives, including, among others, re-organizations, including the shut down or sale of portions of our business, and facility rationalizations to improve performance or generate cost savings. In addition, we may from time to time relocate or consolidate one or more of our operations. There can be no assurance that any planned performance improvements or cost savings from such activities will be realized or that delays or other interruptions in production or delivery of products will not occur as the result of any rationalization, relocation or consolidation. A rationalization, relocation or consolidation could also cause asset impairments and/or trigger environmental remediation obligations. Further, there can be no assurance that any of these initiatives will be completed or beneficial to us. o Our facilities are subject to a broad array of environmental laws and regulations. The costs of complying with complex environmental laws and regulations, as well as participation in voluntary programs, are significant and will continue to be so for the foreseeable future. We are also subject to potentially significant fines and penalties for non-compliance with applicable laws and regulations. Our accruals for such costs and liabilities may not be adequate since the estimates on which the accruals are based depend on a number of factors including, but not limited to, the nature of the problem, the complexity of the issues, the nature of the remedy, the outcome of discussions with regulatory agencies and/or the government or third parties and, as applicable, other PRPs at multi-party sites, the number and financial viability of other PRPs, and risks associated with litigation and the availability, or lack thereof, of insurance coverage. o We are exposed to the credit risk of our customers, including risk of insolvency and bankruptcy. Although we have programs in place to monitor and mitigate the associated risk, there can be no assurance that such programs will be effective in reducing our credit risks or risks associated with potential bankruptcy of our customers. o Our business, results of operations and financial condition could be affected by significant pending and future litigation or claims adverse to us. These could potentially include, but are not limited to, the following: product liability, contract, employment-related, labor relations, personal injury or property damage, intellectual property, stockholder claims and claims arising from any injury or damage to persons, property or the environment from hazardous substances used, generated or disposed of in the conduct of our business (or that of a predecessor to the extent we are not indemnified for those liabilities). o We are a party to time-limited supply agreements with certain of our customers. There is no assurance that these contracts will be renewed or, if renewed, that they will be renewed on as favorable terms to us as existing agreements. 31 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) (Dollars in thousands, except per share data) o Our performance depends on our ability to attract and retain qualified personnel. We cannot assure that we will be able to continue to attract or retain qualified personnel. A portion of our workforce is unionized. From time to time, we engage in collective bargaining negotiations with the unions that represent them. If we are unable to reach agreement with any of our unionized work groups on future negotiations regarding the terms of their collective bargaining agreements, or if additional segments of our workforce become unionized, we may be subject to work interruptions or stoppages. Strikes or labor disputes with our employees may adversely affect our ability to conduct our business. o Our credit facility and covenants under our credit facility restrict our operational and financial flexibility and impose significant interest and financing costs. Also, our credit facility permits dividends to be paid on our Common Stock as long as there is no default under that agreement. Subject to that restriction and the provisions of Delaware law, future dividends will depend on our earnings, financial condition and other factors. o Our overall profitability may not meet expectations if our products, customers or geographic mix are substantially different than anticipated. Our profit margins vary among products, customers and geographic markets. Consequently, if our mix of any of these is substantially different from what is anticipated in any particular period, our earnings could be lower than anticipated. o In spite of having a disaster recovery plan in place, infrastructure failures could have a material adverse effect on our business. We are highly dependent on our systems infrastructure in order to achieve our business objectives. If we experience a problem that impairs our infrastructure, such as a power outage, computer virus, intentional disruption of information technology systems by a third party, equipment failure or computer or telephone system failure, the resulting disruptions could impede our ability to book or process orders, manufacture and ship products in a timely manner or otherwise carry on our business in the ordinary course. Any such events could cause us to lose significant customers or revenue and could require us to incur significant expense to eliminate these problems and address related security concerns. o In response to the European Union's "Restriction on Use of Hazardous Substances in Electrical and Electronic Equipment," or ("RoHS,") we established a schedule for compliance. We will continue to strive for elimination, and seek to have our component part suppliers eliminate prohibited hazardous substances consistent with legislative requirements. We will continue to actively monitor decisions around environmental legislation and align our compliance with those decisions and the needs of our customers. There is no assurance that these efforts will be successful or timely completed, the failure of either of which could have an adverse effect on our results of operations. o We have begun the process of seeking financing alternatives as we believe we may have difficulty meeting certain of our Credit Agreement covenants at October 31, 2005. There can be no assurance that we will conclude this process successfully. If we are unsuccessful in obtaining alternative financing, we will attempt to acquire either waivers or amendments to achieve compliance with our Credit Agreement. There can be no assurance that this will be successful. o Assessment of the potential impairment of property, plant and equipment, goodwill and other identifiable intangible assets is an integral part of our normal ongoing review of operations. Testing for potential impairment of long-lived assets is significantly dependent on numerous assumptions and reflects our best estimates at a particular point in time. The economic environments in which our businesses operate and key economic and business assumptions with respect to projected selling prices, market growth and inflation rates, can significantly affect the outcome of impairment tests. Estimates based on these assumptions may differ significantly from actual results. Changes in factors and assumptions used in assessing potential impairments can have a significant impact on both the existence and magnitude of impairments, as well as the time at which such impairments are recognized. Future changes in the environment and the economic outlook for the assets being evaluated could also result in additional impairment charges. The foregoing list of important factors is not all-inclusive, or necessarily in order of importance. 32 Item 3. Quantitative and Qualitative Disclosure about Market Risk We are exposed to various market risks. The primary financial risks include fluctuations in interest rates, certain commodity prices, and changes in currency exchange rates. We manage these risks through normal operating and financing activities and when appropriate through the use of derivative instruments. We do not invest in derivative securities for speculative purposes, but do enter into hedging arrangements in order to reduce our exposure to fluctuations in interest rates, the price of lead, as well as to fluctuations in exchange rates. Our financial instruments that are subject to interest rate risk consist of debt instruments and interest rate swap contracts. The debt instruments are subject to variable rate interest; therefore, the market value is not sensitive to interest rate movements. Interest rate swap contracts are used to manage our exposure to fluctuations in interest rates on our underlying variable rate debt instruments. We enter into forward contracts to hedge our exposure to certain foreign currencies and effective in the first quarter of this fiscal year we have adopted a lead hedging policy and have entered into non-deliverable forward contracts to manage the risk associated with changes in the price of lead. Additional disclosure regarding our various market risks were set forth in our fiscal year 2005 Annual Report on Form 10-K filed with the SEC. 33 Item 4. Controls and Procedures: Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act. Internal Control over Financial Reporting: There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 34 PART II. OTHER INFORMATION Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Issuer Purchases of Equity Securities:
Total Number of Maximum Number Shares Purchased (or Approximate as Part of Publicly Dollar Value) of Total Number Announced Shares that May Yet of Shares Average Price Plans Be Purchased Under the Period Purchased Paid per Share or Programs Plans or Programs ============================================================================================================ May 1 - May 31, 2005 97 $6.44 -- 1,000,000 June 1 - June 30, 2005 20,153 $7.01 -- 1,000,000 July 1 - July 31, 2005 193 $9.87 -- 1,000,000 - ----------------------------------------- ------ Total 20,443 -- ========================================= ======
On September 30, 2004, our Board of Directors authorized a new stock repurchase program. Under the program, the Company is permitted to repurchase up to 1,000,000 shares of C&D Technologies common stock having a total purchase price of no greater than $25,000,000. This program entirely replaces and supersedes all previously authorized stock repurchase programs. All of the shares purchased were purchased pursuant to deferred compensation plans. Restrictions on Dividends: The Company's Credit Agreement contains certain restrictive covenants that require the Company to maintain minimum ratios such as fixed charge coverage and leverage ratios as well as minimum consolidated net worth. These covenants permit the Company to pay dividends so long as there is no default under the Credit Agreement. Item 4. Submission of Matters to a Vote of Security Holders At the annual meeting of stockholders of C&D on June 6, 2005, the stockholders voted on two proposals: the election of eight directors for one-year terms and a proposal to ratify the appointment of PricewaterhouseCoopers LLP as the independent registered public accounting firm for C&D for the fiscal year ended January 31, 2006. Proposal 1 - Election of Directors Nominee Votes for Votes Withheld ======================================================================== William Harral, III 22,941,098 259,483 Kevin P. Dowd 22,994,369 206,212 Robert I. Harries 22,941,623 258,958 Pamela Lewis 22,967,169 233,412 George MacKenzie 22,792,955 407,626 John A. H. Shober 22,942,361 258,220 Stanley W. Silverman 22,941,628 258,953 Ellen C. Wolf 22,971,499 229,082 Proposal 2 - Ratification of the appointment of PricewaterhouseCoopers LLP as the independent registered public accounting firm for the fiscal year ending January 31, 2006. For Against Abstain ======================================================================== 23,099,220 99,969 1,392 35 Item 6. Exhibits. 10.1 Employment Agreement dated June 21, 2005, between C&D Technologies, Inc. and Dr. Jeffrey A. Graves (filed herewith). 10.2 Amendment dated May 6, 2005, to the Employment Agreement between C&D Technologies, Inc. and Linda R. Hansen (incorporated by reference to Exhibit 10.1 to C&D's Quarterly Report on Form 10-Q for quarter ended April 30, 2005). 10.3 Amendment dated May 6, 2005, to the C&D Technologies, Inc. Amended and Restated Supplemental Executive Retirement Plan (incorporated by reference to Exhibit 10.2 to C&D's Quarterly Report on Form 10-Q for quarter ended April 30, 2005). 31.1 Rule 13a-14(a)/15d-14(a) Certification of the President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). 31.2 Rule 13a-14(a)/15d-14(a) Certification of the Vice President and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). 32.1 Section 1350 Certification of the President and Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). 32.2 Section 1350 Certification of the Vice President and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). 36 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. C&D TECHNOLOGIES, INC. September 8, 2005 By: /s/ Jeffrey A. Graves --------------------------------- Jeffrey A. Graves President, Chief Executive Officer and Director (Principal Executive Officer) September 8, 2005 By: /s/ Stephen E. Markert, Jr. --------------------------------- Stephen E. Markert, Jr. Vice President Finance and Chief Financial Officer (Principal Financial and Accounting Officer) 37 EXHIBIT INDEX 10.1 Employment Agreement dated June 21, 2005, between C&D Technologies, Inc. and Dr. Jeffrey A. Graves. 31.1 Rule 13a-14(a)/15d-14(a) Certification of the President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Rule 13a-14(a)/15d-14(a) Certification of the Vice President and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Section 1350 Certification of the President and Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Section 1350 Certification of the Vice President and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 38 EX-10 2 exhibit10_1.txt Exhibit 10.1 June 21, 2005 Dr. Jeffrey A. Graves [Home address inserted] Dear Dr. Graves: C&D Technologies, Inc., a Delaware corporation (the "Company"), wishes to employ you in an executive capacity and the Company desires to encourage such employment by providing certain protections for you by entering into this Agreement with you, in return for which you agree to be employed by the Company on the terms set forth herein, to refrain from certain competitive activity and to provide the Company with certain assurances upon your departure. In consideration of same, the Company agrees to employ you, and you agree to accept such employment, under the following terms and conditions: 1. Term of Employment. Your employment under this Agreement shall continue in effect until either party shall give to the other party at least 30 days' prior written notice (or such other notice period as may be specifically provided for in this Agreement) of the termination of this Agreement (a "Termination Notice"), or until it is terminated in accordance with Section 8. If a Termination Notice is given by either party the Company shall, without any liability to you, have the right, exercisable at any time after such notice is sent to elect any other person to the office or offices in which you are then serving and to remove you from such office or offices. The period during which you are employed under this Agreement is hereafter referred to as the "Term." 2. Compensation and Benefits. (a) During the Term, you shall receive a salary for performance of your obligations under this Agreement at an initial rate of $500,000 per year, payable in such manner as is consistent with the Company's payroll practices for executives and subject to increase (but not decrease unless such decrease is applied at the same time to all executive officers of the Company and does not exceed 10% of such Base Salary) by the Board of Directors in its sole discretion. Such salary, as it may be adjusted from time to time, is hereinafter referred to as the "Base Salary." (b) During the Term, you shall have the benefit of and be entitled to participate in such employee benefit plans and programs, including life, disability and medical insurance, savings, retirement and other similar plans, as the Company now has or hereafter may establish from time to time, and in which you are entitled to participate pursuant to the terms thereof. The foregoing, however, shall not be construed to require the Company to establish any such plans or to prevent the Company from modifying or terminating any such plans, and no such action or failure thereof shall affect this Agreement. (c) During the Term, you shall be entitled (i) to participate in the Company's Management Incentive Compensation Plan or any successor thereto each year in accordance with criteria and for amounts approved by the Board of Directors, except as may otherwise be delegated to the Compensation Committee or other relevant committee, and (ii) to be granted options to acquire stock of the Company or other equity awards, to the extent (if any) approved by the Compensation Committee or the relevant committee, under the Company's stock option or equity incentive plans in effect from time to time (all such options and equity awards, "Awards"). Without limiting the foregoing, you shall have a targeted bonus for each fiscal year of 55% of your Base Salary (with the actual payment of any bonus being dependent on your achievement of targeted objectives except as otherwise set forth in this Agreement). Each of the actual annual bonuses paid to you each year is hereinafter referred to as an "Annual Bonus." (d) You shall be entitled to payments and benefits in connection with a Change of Control Termination (as defined in Exhibit A hereto) and to certain additional payments if you are subjected to the federal excise tax on excess parachute payments, as more fully set forth in Exhibit A. (e) You shall be entitled to four weeks of vacation each calendar year during the Term. (f) During the Term, the Company shall provide you with an automobile allowance of $1,100 per month that you may use for your automobile expenses. You will be taxed on this allowance and such allowance will be subject to applicable tax withholdings. 3. Duties. (a) During the Term, you shall serve and the Company shall employ you as the President and Chief Executive Officer of the Company, with such executive duties and responsibilities consistent with such positions and stature as the Board of Directors from time to time may determine. You shall report to, and act under the general direction of, the Board of Directors. You shall use your best efforts to carry out the instructions of the Board of Directors. You shall be nominated, on an annual basis as long as you continue to be employed under this Agreement, for election by the stockholders as a director of the Company and, if elected, you shall serve as a director, without additional compensation. In addition, you shall serve as an officer and/or director of any of the Company's subsidiaries, in all cases in conformity with the organizational documents and the policies of the Board of Directors of each such subsidiary, without additional compensation. You will review and agree to comply with the Company's then-current Code of Business Conduct to the same extent required for other United States-based employees of the Company. You will perform all of your responsibilities in compliance with all applicable laws. You acknowledge that in your capacity as principal executive officer of the Company, you will be expected to execute certain documents on behalf of the Company under the federal securities laws, which may include documents covering periods prior to the date of this Agreement. As of the date of this Agreement, you have no reason to believe that you would not be prepared to execute all documents required for signature by the Company's principal executive officer (e.g., the Company's -2- Quarterly Report on Form 10-Q for the second fiscal quarter ended July 31, 2005), assuming that the Company's principal financial officer and certifying financial and other employees of the Company were also prepared to execute or certify such documents as the case may be. (b) During the Term, you shall devote your entire business time and energies during normal business hours to the business and affairs of the Company and its subsidiaries. Nothing in this Section 3 shall be construed as prohibiting you from investing your personal assets in businesses in which your participation is solely that of a passive investor in such form or manner as will not violate Section 5 hereof or require any services on your part in the operation or affairs of those businesses. You may also participate in philanthropic or civic activities as long as they do not materially interfere with your performance of your duties hereunder. Service on any board of directors other than those of the Company and its subsidiaries must be approved, in advance, by the Board of Directors of the Company. (c) During the Term, you shall be subject to the Company's rules, practices and policies applicable to the Company's senior executive employees. 4. Expenses. The Company shall reimburse you for all reasonable expenses incurred by you during the Term in connection with your employment upon presentation of appropriate documentation therefor in accordance with the Company's expense reimbursement practices. In the event during the Term the Company's principal executive offices are relocated to a location that increases your commute to work by more than 35 miles, the Company shall reimburse your moving expenses (including reasonable costs relating to interim living accommodations). 5. Restrictive Covenants. (a) During the Term, and for the applicable Restricted Period (as defined below) thereafter, you shall not, without the written consent of the Board of Directors, directly or indirectly, become associated with, render services to, invest in, represent, advise or otherwise participate as an officer, employee, director, stockholder, partner or agent of, or as a consultant for, any business anywhere in the world that is competitive with the business in which the Company is engaged or in which the Company has taken affirmative steps to engage (a "Competitive Business") as of the time your employment with the Company ceases; provided, however, that (i) nothing herein shall prevent you from investing in up to 5% of the securities of any company listed on a national securities exchange or quoted on the NASDAQ quotation system, as long as your involvement with any such company is solely that of a stockholder, and (ii) nothing herein is intended to prevent you from being employed by, or otherwise rendering services to, any business other than a Competitive Business following the termination of your employment with the Company. The Restricted Period shall be the two-year period following the date your employment terminates. You acknowledge that the provisions of this Section 5 are reasonable in light of the Company's worldwide business operations and the position in which you will serve at the Company and that the provisions will not prevent you from obtaining employment after the termination of this Agreement. -3- (b) The parties hereto intend that the covenant contained in this Section 5 shall be deemed a series of separate covenants for each appropriate jurisdiction. If, in any judicial proceeding, a court shall refuse to enforce all of the separate covenants deemed included in this Section 5 on grounds that, taken together, they cover too extensive a geographic area, the parties intend that those covenants (taken in order of the least populous jurisdictions) which, if eliminated, would permit the remaining separate covenants to be enforced in that proceeding, shall, for the purpose of such proceeding, be deemed eliminated from the provisions of this Section 5. 6. Confidentiality, Noninterference and Proprietary Information. (a) In the course of your employment by the Company hereunder you will have access to Confidential or Proprietary Data or Information of the Company. You shall not at any time divulge or communicate to any person, nor shall you direct any Company employee to divulge or communicate to any person (other than to a person bound by confidentiality obligations similar to those contained herein and other than as necessary in performing your duties hereunder) or use to the detriment of the Company or for the benefit of any other person, any of such Confidential or Proprietary Data or Information, except to the extent the same (i) becomes publicly unknown other than through a breach of this Agreement by you, (ii) was known to you prior to the disclosure thereof by the Company to you from a source that was entitled to disclose it, or (iii) is subsequently disclosed to you by a third party who shall not have received it under any obligation of confidentiality to the Company. For purposes of this Agreement, the term "Confidential or Proprietary Data or Information" shall mean data or information not generally available to the public, including personnel information, financial information, customer lists, supplier lists, product and tooling specifications, trade secrets, information concerning product composition and formulas, tools and dies, drawings and schematics, manufacturing processes, information regarding operations, systems and services, know-how, computer and any other electronic, processed or collated data, computer programs, and pricing, marketing, sales and advertising data. (b) You shall not, during the Term and for the applicable Restricted Period after the termination of your employment with the Company, for your own account or for the account of any other person, (i) solicit or divert to any Competitive Business any individual or entity who is then a customer of the Company or any subsidiary or affiliate of the Company or who was a customer of the Company or any subsidiary or affiliate during the preceding twelve-month period, (ii) employ, retain as a consultant, attempt to employ or retain as a consultant, or solicit or assist any Competitive Business in employing or retaining as a consultant any individual who is then an employee of the Company or any subsidiary or affiliate or who was employed by the Company or any subsidiary or affiliate during the preceding twelve-month period, or (iii) otherwise interfere in any material respect with the Company's relationship with any of its suppliers, customers, employees or consultants; provided, however, that you shall not be prohibited from contacting suppliers or customers after termination of your employment with regard to matters that do not violate your non-competition or confidentiality obligations contained in Sections 5(a) and 6(a) or interfere in any material respect with the Company's relationship with such parties. -4- (c) You shall at all times promptly disclose to the Company, in such form and manner as the Company reasonably may require, any inventions, improvements or procedural or methodological innovations, programs, methods, forms, systems, services, designs, marketing ideas, products or processes (whether or not capable of being trademarked, copyrighted or patented) conceived or developed or created by you during and in connection with your employment hereunder and which relate to the business of the Company ("Intellectual Property"). All such Intellectual Property shall be the sole property of the Company. You shall execute such instruments and perform such acts as reasonably may be requested by the Company to transfer to and perfect in the Company all legally protectable rights in such Intellectual Property. If the Company is unable for any reason to secure your signature on such instruments, you hereby irrevocably appoint the Company and its officers and agents as your agents and attorneys-in-fact to execute such instruments and to do such things with the same legal force and effect as if executed or done by you. (d) All written, electronic and other tangible materials, records and documents made by you or coming into your possession during your employment concerning any products, processes or equipment, manufactured, used, developed, investigated or considered by the Company or otherwise concerning the business or affairs of the Company, shall be the sole property of the Company, and upon termination of your employment, or upon the request of the Company during your employment, you shall deliver the same to the Company. In addition, upon termination of your employment, or upon request of the Company during your employment, you shall deliver to the Company all other Company property in your possession or under your control, including Confidential or Proprietary Data or Information and all Company credit cards and computer and telephone equipment. 7. Equitable Relief. With respect to the covenants contained in Sections 5 and 6 of this Agreement, you acknowledge that any remedy at law for any breach of said covenants may be inadequate and that the Company, in addition to its rights at law, shall be entitled to specific performance or any other mode of injunctive or other equitable relief to enforce its rights hereunder. 8. Termination of Term. The Term shall terminate upon the following terms and conditions: (a) The Term shall automatically terminate upon your death. (b) The Term may be terminated by the Company upon your Disability. For purposes of this Agreement, "Disability" shall mean your inability, due to reasons of physical or mental health, to discharge properly a substantial portion of your duties hereunder for any 180 days (whether or not consecutive) during any period of 365 consecutive days, as determined in the opinion of a physician reasonably satisfactory to both you and the Company. If the parties do not agree on a mutually satisfactory physician within ten days after written demand by one or the other, a physician shall be selected by the president of the Pennsylvania Medical Association, and the physician shall, within 30 days thereafter, make a determination as to whether Disability exists and certify the same in writing. The services of the physician shall be paid for by the Company. You shall fully cooperate with the examining physician, including submitting -5- yourself to such examinations as may be requested by the physician for the purpose of determining whether you are disabled. (c) The Term shall terminate immediately if the Company terminates your employment for Cause. For purposes of this Agreement, "Cause" shall exist upon a finding by the Board of Directors of any of the following: (i) an act or acts of willful material misrepresentation, fraud or dishonesty by you that results in the personal enrichment of you or another person or entity at the expense of the Company; (ii) your admission, confession or conviction of any felony or any other crime or offense involving misuse or misappropriation of money or other property; (iii) any act involving gross moral turpitude by you that adversely affects the Company; (iv) your continued material breach of any obligations under this Agreement 30 days after the Company has given you notice thereof in reasonable detail, if such breach has not been cured by you during such period; or (v) your willful misconduct with respect to your duties or gross misfeasance of office. For purposes of this Section 8(c), no act or failure to act, on your part shall be considered "willful" unless it is done, or omitted to be done, by you in bad faith or without reasonable belief that your action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board of Directors or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by you in good faith and in the best interests of the Company. Your termination of employment shall not be deemed to be for Cause unless prior to such termination you have received a copy of a resolution duly adopted by the affirmative vote of not less than a majority of the disinterested membership of the Board of Directors at a meeting of such Board of Directors called and held for such purpose (after reasonable notice is provided to you and you are given an opportunity to be heard before such Board of Directors), finding that, in the good faith opinion of the Board of Directors, you are guilty of the conduct described in clause (i), (ii), (iii), (iv) or (v) above. (d) The Term shall terminate if your employment is terminated in a Change of Control Termination (as defined in Exhibit A). (e) The Term shall terminate upon the expiration of the thirty (30) day period after delivery of a Termination Notice if your employment is terminated by the Company without Cause or by you. 9. Compensation Upon Termination of Term. (a) For Any Reason. Upon termination of the Term: (i) you or your estate, as applicable, shall be paid within fifteen business days after your date of termination (A) your Base Salary through the date of termination, (B) any then-unpaid Annual Bonus or other incentive compensation that you may have earned pursuant to the terms of any applicable incentive compensation or bonus plan of the Company with respect to any fiscal year or other performance period completed prior your date of termination, and (C) any then-unused accrued vacation pay; (ii) you, your beneficiaries and/or your estate, as applicable, shall be entitled to any payments and benefits under the benefits and incentive plans and perquisite programs of the Company, in accordance with the respective terms of those plans and perquisite programs (including without limitation, any -6- conversion option available to you under the Company's life insurance plan(s)); and (iii) you or your estate, as applicable, shall be reimbursed for your business expenses incurred prior to termination in accordance with Section 4 above. (b) Change of Control Termination. Upon the termination of the Term by reason of a Change of Control Termination, you shall receive the payments and benefits set forth in Exhibit A. (c) Other Involuntary Terminations or Breach Termination. Upon the termination of the Term that is not by reason of a Change of Control Termination, but results from either a termination by the Company without Cause other than as a result of your death or Disability, or termination by you which is a Breach Termination, you shall also receive the following payments and benefits; provided, however, that any payment made or benefit provided under this Section 9(c) shall be reduced by any amount paid or payable to you and/or your family with respect to the same type of payment or benefit under any other plan maintained by the Company to avoid duplication of payments or benefits: (i) The Company shall (A) continue to pay you your Base Salary at the rate in effect on the date of termination for a period of two years after the end of the Term (the "Continuation Period") and (B) pay you a cash payment equal to your Targeted Bonus Amount (as defined below) as soon as administratively practicable following the last day of the next two fiscal year ends of the Company. (ii) The Company shall, for the Continuation Period, continue to provide you and your eligible beneficiaries (if applicable) with Welfare Benefits (as defined below) provided to you prior to the termination, other than disability insurance and severance. Notwithstanding the foregoing, to the extent the Company's plans providing Welfare Benefits do not permit the continued participation by you and/or your eligible beneficiaries or such participation would have an adverse tax impact on such plans or on the other participants in such plans or is otherwise prohibited by applicable law, the Company may instead provide materially equivalent benefits to you and/or your eligible beneficiaries outside such plans (which, in the case of medical insurance benefits, may be provided by the Company paying a portion of the premium for the continuation of such medical benefits pursuant to the provisions of the Consolidated Omnibus Budget Reconciliation Act ("COBRA") which is equal to the portion of the premium it then pays for active executive employees' medical premiums. Your entitlement to COBRA coverage shall in any event be measured from the date of termination of employment. Furthermore, if the Company is unable to continue your life insurance coverage, it shall pay you an amount equal to the premium paid during the year prior to termination times the number of years in the Continuation Period. You agree to complete such forms and take such physical examinations as may be reasonably requested by the Company in connection with such life insurance coverage. -7- Your "Targeted Bonus Amount" shall mean (x) the higher of 55% and the percentage of your targeted bonus in effect before the date of termination for purposes of determining your Annual Bonus for the year in which your termination occurs, times (y) the amount of your Base Salary as in effect for the year in which your termination occurs. "Welfare Benefits" means benefits under all health, medical, life and other welfare plans (as defined in Section 3(l) of the Employee Retirement Income Security Act of 1974, as amended), in which you were participating immediately prior to the date of termination, except for disability plans and severance plans. As used in this Section 9(c), a "Breach Termination" shall mean a termination of your employment by you due to a material breach by the Company either prior to a Change of Control or following two years after the occurrence of a Change of Control, of the provisions of this Agreement, which breach is not cured within thirty (30) days following notice by you to the Company of such breach which specifies in detail the circumstances giving rise to such breach. In order for a termination by you to be a Breach Termination, you must give notice to the Company of a material breach by the Company of this Agreement within 60 days of the date you learn of the circumstances giving rise to such material breach and you must actually give a Termination Notice in accordance with Section 1 within the 30-day period following the expiration of the Company's cure period for such breach. (d) The payment by the Company of any compensation or benefits pursuant to Section 9(c) and Exhibit A shall be conditioned on your execution of a Release (a "Release") in a form provided by and acceptable to the Company. Such Release shall be substantially in the form of Exhibit B hereto but may be modified by the Company in its sole discretion as it deems appropriate to reflect changes in law or circumstances arising after the date of this Agreement; provided, however, that no such modification shall reduce your rights or increase your obligations to the Company over those contemplated in this Agreement, including the Exhibits hereto. (e) Any payments provided for in Section 9(c)(i) will not commence until six months after your termination to the extent necessary to avoid adverse tax consequences to you under Section 409A of the Internal Revenue Code. Any payments which would have otherwise been due and payable during the first six months of the Continuation Period but for this Section 9(e) shall be paid to you in a lump sum as of the first business day following the expiration of such six-month period. 10. Indemnification. Prior to a Change of Control, the Company shall indemnify you for your acts as an officer and director in the manner provided in the by-laws of the Company, as in effect from time to time. On and after a Change of Control, the Company shall indemnify you for your acts as an officer and director of the Company in a manner no less favorable to you than as provided in the current by-laws of the Company. 11. Representations. You hereby represent and warrant that you are not subject to any employment agreement, non-competition or confidentiality agreement or other commitment that either would be violated by your entering into or performing your obligations under this Agreement or that would restrict in any manner or interfere with the performance of your obligations under this Agreement. You hereby further represent and warrant that you have not revealed to the Company or any employee of the Company any confidential information of any former employer, and you agree that you will not do so in the future. -8- 12. Entire Agreement; Modification; Construction. This Agreement, together with the Exhibits hereto and those portions of the offer letter dated June 15, 2005 (the "Offer Letter") not specifically addressed in this Agreement, and all other employee benefit plans in which you participate, constitute the full and complete understanding of the parties, and supersede all prior agreements and understandings, oral or written, between the parties, with respect to the subject matter hereof; provided, however, that if the terms of any such employee benefit plan shall be inconsistent with the provisions to this Agreement, the terms of the benefit plan shall prevail. The Offer Letter, Exhibit A and Exhibit B are hereby incorporated by reference and made a part of this Agreement. Each party to this Agreement acknowledges that no representations, inducements, promises or agreements, oral or otherwise, have been made by either party, or anyone acting on behalf of either party, that are not set forth or referred to herein. This Agreement may not be modified or amended except by an instrument in writing signed by the party against which enforcement thereof may be sought. 13. Severability. Any term or provision of this Agreement that is held to be invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent that invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction. 14. Waiver of Breach. The waiver by either party of a breach of any provision of this Agreement, which waiver must be in writing to be effective, shall not operate as or be construed as a waiver of any subsequent breach. 15. Notices. All notices hereunder shall be in writing and shall be sent by messenger or by certified or registered mail, postage prepaid, return receipt requested, if to you, to your residence set forth above, and if to the Company, to the Vice President-Human Resources, at the Company's address set forth above, or to such other address as either party to this Agreement shall specify to the other. 16. Assignability; Binding Effect. This Agreement shall not be assignable by either party, except that it may be assigned by the Company to an acquiror of all or substantially all of the assets of the Company or other successor to the Company, subject to your rights arising from a Change of Control as provided in Exhibit A and your other rights hereunder. This Agreement shall be binding upon and inure to the benefit of you, your legal representatives, heirs and distributees, and shall be binding upon and inure to the benefit and detriment of the Company, its successors and assigns. 17. No Mitigation Required. No Offset. Following any termination of your employment hereunder, you shall have no obligation to seek other employment but shall not be prohibited from doing so, and no compensation paid to you as the result of any other employment shall reduce any payment or benefit required to be provided by the Company hereunder. Not in limitation of any other rights which the Company may have, including without limitation, injunctive or other equitable relief, in the event of a violation by you of any of the covenants set forth in Section 5, Section 6 or Section 19 hereof, the Company may cease paying any benefits to you under Section 9 hereof and may seek recovery of any such amount paid to you during any period in which you were in violation of the provisions of Section 5, Section 6 or Section 19. The cessation and/or recovery -9- of any of the payments described in Section 9(c) in connection with any such violation shall not be deemed to be evidence that monetary damages are sufficient to cure any damage to the Company for any such violation. 18. Governing Law. All questions pertaining to the validity, construction, execution and performance of this Agreement shall be construed and governed in accordance with the laws of the Commonwealth of Pennsylvania, without giving effect to the conflicts or choice of law provisions thereof. 19. Nondisparagement. You agree not to publicly or privately disparage the Company, its personnel, products or services either during your employment by the Company or during the Restricted Period. 20. Survival. All of the provisions of this Agreement that by their terms are to be performed or that otherwise are to endure after the termination of this Agreement and/or the termination of your employment, including, without limitation, Sections 5, 6, 7, 10, 17 and 19, shall survive the termination of your employment and shall continue in effect for the respective periods therein provided or contemplated. 21. Headings. The headings in this Agreement are intended solely for convenience of reference and shall be given no effect in the construction or interpretation of this Agreement. 22. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument. 23. Dispute Resolution. In the event of any claim or controversy arising out of or relating to this Agreement or the performance, construction, interpretation, enforcement or breach hereof (excluding injunctive and other equitable relief regarding a dispute over the covenants contained in Sections 5, 6, and 19 hereof) (a "dispute"), the parties shall settle disputes in accordance with this Section 23. (a) Notice and Selection of Arbitrators. The parties shall first attempt to settle any disputes amicably between themselves. Should they fail to do so, either party may, upon written demand from the claiming party of the specific nature of any purported claims and the amount of damages attributable to each such claim, served upon the other, submit such dispute to binding arbitration. The arbitration panel shall consist of three arbitrators, shall take place in Philadelphia, Pennsylvania and shall proceed in accordance with the employment dispute resolution rules of the American Arbitration Association ("AAA"). Within 15 days after the commencement of arbitrations, each party shall select one arbitrator from a list of arbitrators provided by the AAA. A third neutral arbitrator shall be designated by the arbitrators selected by the parties within 15 days of their appointment. In the event that any arbitrator is not appointed within the prescribed time period, then either party may apply to the AAA for the appointment of such arbitrator. Prior to the commencement of hearings, each of the arbitrators appointed shall provide an oath or undertaking of impartiality. -10- (b) Hearings. After the arbitrators have been appointed as provided above, the arbitrators shall hold such meetings as a party may reasonably request and at such meetings hear and consider any evidence that a party desires to present. Within 60 days after the appointment of the third arbitrator, the arbitrators shall make their determination. (c) Determinations. The determination of a majority of the arbitrators shall be final and binding on the parties, regardless of whether one of the parties fails or refuses to participate in the arbitration. The arbitrators shall have the power and authority to grant any remedy or relief they deem just and equitable, including injunctive relief, specific performance (excluding, however, equitable relief regarding a dispute over the covenants contained in Sections 5, 6 and 19 hereof), and reasonable costs and expenses of such arbitration and attorneys' fees. Absent any specific order of the arbitrators, the costs and expenses of the arbitration shall be paid equally by the parties. The arbitration award, decree or order shall be in writing and shall be accompanied by a reasoned opinion. The award may be entered in any court of competent jurisdiction, and any judgment, decree or order entered in any such court and any related orders may be enforced as any other judgment, decree or order of such court. The arbitration proceedings and all materials, submissions and documents relating thereto shall be confidential, and except as may be required by law neither a party nor an arbitrator may disclose the existence, contents or results of any arbitration hereunder without the consent of all parties hereto. All disputes shall be resolved in accordance with the laws of the Commonwealth of Pennsylvania. (d) Qualifications of Arbitrators. Any arbitrator chosen by or through the AAA shall be chosen from a class of disinterested experts qualified by education, training and/or experience to resolve the particular issue(s) in dispute in an informed and efficient manner. (e) Preservation of Remedies. Notwithstanding the preceding binding arbitration provisions, the parties agree to preserve, without diminution, certain remedies that any party may exercise before, during or after an arbitration proceeding is brought. The parties shall have the right to proceed in any court of proper jurisdiction or by self-help to exercise or prosecute the following remedies, as applicable: obtaining provisional or ancillary remedies, including injunctive and other equitable relief with regard to disputes over the covenants contained in Sections 5, 6 and 19 hereof. -11- If you are in agreement with the foregoing, please sign the duplicate original in the space provided below and return it to the Company. C&D TECHNOLOGIES, INC. By: /s/ William Harral, III -------------------------------- William Harral, III Chairman of the Board of Directors Agreed as of the date above written: /s/ Jeffrey A. Graves - ------------------------------------ Jeffrey A. Graves -12- EXHIBIT A TO EMPLOYMENT AGREEMENT (THE "AGREEMENT") OF JEFFREY A. GRAVES ("EXECUTIVE") (Capitalized terms used herein and not otherwise defined have the meanings given to them in the Agreement.) I. Change of Control Termination. A "Change of Control Termination" means the occurrence of any of the following within 24 months after a Change of Control (as defined below): (a) the Executive's employment with the Company is terminated by the Executive pursuant to a Termination for Good Reason (as defined below); or (b) the Executive's employment with the Company is terminated by the Company for any reason other than death, Disability or for Cause. II. Certain Other Definitions. (a) Change of Control. For purposes of the Agreement, a "Change of Control" shall mean the first to occur of: 1. The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 30% or more of either (A) the then-outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (B) the combined voting power of the then-outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that, for purposes of this Section II(a)1, the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any majority-owned subsidiary of the Company, or (iv) any acquisition by any corporation pursuant to a transaction that complies with Subsections (A), (B) and (C) of Section II(a)3 below. 2. Individuals who, as of the date hereof, constitute the Board of Directors (the "Incumbent Board") cease, for any reason, to constitute at least a majority of the Board of Directors; provided, however, that any individual becoming a director subsequent to the date of the Agreement whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least two-thirds of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board of Directors. A-1 3. Consummation of a reorganization, merger, statutory share exchange or consolidation or similar corporate transaction involving the Company or any of its subsidiaries, a sale or other disposition of all or substantially all of the assets of the Company, or the acquisition of assets or stock of another entity by the Company or any of its subsidiaries (each, a "Business Combination"), in each case unless, following such Business Combination, (A) all or substantially all of the individuals and entities that were the beneficial owners of the Outstanding Company Common Stock and the Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of the then-outstanding shares of common stock and the combined voting power of the then-outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation that, as a result of such transaction, owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership immediately prior to such Business Combination of the Outstanding Company Common Stock and the Outstanding Company Voting Securities, as the case may be, (B) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 30% or more of, respectively, the then-outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then-outstanding voting securities of such corporation, except to the extent that such ownership existed prior to the Business Combination, and (C) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement or of the action of the Board of Directors providing for such Business Combination; or 4. Approval by the stockholders of the Company of a complete liquidation or dissolution of the Company. Notwithstanding the foregoing, no Change of Control of the Company shall be deemed to have occurred for purposes of this Agreement by reason of any actions or events in which the Executive participates in a capacity other than in his capacity as an executive or director of the Company. (b) Termination for Good Reason. For purposes of this Exhibit A, a "Termination for Good Reason" means a termination of the Executive's employment by the Executive by written Termination Notice given to the Company within 90 days after the Executive learns of the occurrence of the Good Reason event. A Termination Notice for a Termination for Good Reason shall indicate the specific provision in Section II(c) relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for Termination for Good Reason. The failure by the Executive to set forth in such Termination Notice any facts or circumstances which contribute to the showing of Good Reason shall not waive any right of Executive hereunder or preclude the Executive from asserting such fact or circumstance in enforcing his rights hereunder. The Termination A-2 Notice for a Termination for Good Reason shall provide for a date of termination not less than 10 nor more than 60 days after the date such Termination Notice is given. (c) Good Reason. For purposes of this Exhibit A, "Good Reason" shall mean the occurrence, without the Executive's express written consent, of any of the following circumstances, unless such circumstances are fully corrected prior to the date of termination specified in the Termination Notice for a Termination for Good Reason as contemplated in Section II(b) above: (i) any material diminution of the Executive's positions with Company or any material positions with its subsidiaries or affiliates, duties or responsibilities hereunder (except in each case in connection with the termination of the Executive's employment for Cause or due to the Executive's Disability or death, or temporarily as a result of Executive's illness or other absence), the failure to reelect the Executive to any office he holds with the Company as of the date of the Change of Control, or the assignment to the Executive of duties or responsibilities that are inconsistent with the Executive's position under the Agreement at the time of a Change of Control; (ii) removal of the Executive from, or the failure of the Executive to be re-elected to, the officer positions with the Company specified in the Agreement; (iii) relocation of the Company's principal executive offices to a location that increases the Executive's commute to work by more than 35 miles: (iv) failure by the Company, after the Change of Control, (A) to continue in effect, without amendment adverse to the Executive, any bonus plan, program or arrangement in which the Executive is entitled to participate immediately prior to the Change of Control (the "Bonus Plans"), provided that it shall not be "Good Reason" if the Company amends or terminates any Bonus Plan but provides the Executive with substantially similar benefits under comparable substitute plans ("Substitute Plans"), or (B) to continue the Executive as a participant in the Bonus Plans and/or Substitute Plans on at least the same basis as to potential amount of the bonus and substantially the same level of criteria for achievability thereof as the Executive participated in immediately prior to any change in such plans or awards, in accordance with the Bonus Plans and the Substitute Plans; (v) any failure to pay the Executive his Base Salary in a timely manner or any reduction in the amount of the Base Salary (vi) any material breach by the Company of any provision of the Agreement; (vii) if the Executive is on the Company's Board of Directors at the time of a Change of Control, the Executive's removal from or failure to be reelected to the Board of Directors thereafter; or (viii) failure of any successor to the Company to promptly acknowledge in writing the obligations of the Company hereunder. III. Payments and Benefits. If a Change of Control Termination occurs, the Executive shall be entitled to receive, subject to the execution of the Release, the payments and benefits set forth below in this Section III in consideration of the Executive's agreements under the Agreement, including but not limited to the Executive's agreement not to compete with the Company for a period of two years after a Change of Control pursuant to Section 5(a) of the Agreement; provided, however, that any payment made or benefit provided under this Section III shall be reduced by any amount paid or payable to the Executive and/or the Executive's family with respect to the same type of payment or benefit under any other plan maintained by the Company to avoid duplication of payments or benefits: (a) The Company shall pay to the Executive within fifteen days following the Change of Control Termination (or as of the first business day after the A-3 period in which the Executive would have otherwise incurred adverse tax consequences under Section 409A of the Internal Revenue Code if such payment is made within such period), a lump sum amount equal to (i) three times the sum of (x) the Base Salary as in effect immediately before the date of termination (disregarding any reduction thereof in violation of Section 2(a) of the Agreement) and (y) the Annual Bonus Amount. The "Annual Bonus Amount" shall mean the greater of (i) the average of the Annual Bonuses paid to the Executive with respect to each of the three most recently completed fiscal years of the Company before the date of termination for which a bonus has been paid or (ii) the Executive's Targeted Bonus Amount. (b) The Company shall provide the Executive with the benefits set forth in Section 9(c)(ii) of the Agreement, but based upon a "Continuation Period" of three years after the date of termination. (c) All outstanding Options and restricted stock awards that have been granted to the Executive by the Company at any time but have not yet expired or vested and upon which vesting depends solely upon the Executive's remaining employed by the Company for a specified period of time, shall immediately vest or become nonforfeitable, as the case may be. In the event the foregoing sentence becomes applicable, the Company agrees to cause the Board of Directors to take all steps necessary to implement the foregoing sentence. (d) The Company, at its expense, shall provide the Executive with outplacement services at a level appropriate for the most senior level of executive employees through an outplacement firm of the Executive's choice for a period of up to one year after the date of the Change of Control Termination. IV. Certain Additional Payments. (a) Anything in the Agreement and this Exhibit A to the contrary notwithstanding and except as set forth below, in the event it shall be determined that any Payment would be subject to the Excise Tax, then the Executive shall be entitled to receive an additional payment (the "Gross-Up Payment") in an amount such that, after payment by the Executive of all taxes (and any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. Notwithstanding the foregoing provisions of this Section IV(a), if it shall be determined that the Executive is entitled to the Gross-Up Payment, but that the Parachute Value of all Payments does not exceed 110% of the Safe Harbor Amount, then no Gross-Up Payment shall be made to the Executive and the amounts payable under this Agreement shall be reduced so that the Parachute Value of all Payments, in the aggregate, equals the Safe Harbor Amount. The reduction of the amounts payable hereunder, if applicable, shall be made by first reducing the payments under Section III(a) of this Exhibit A unless an alternative method of reduction is elected by the Executive, and in any event shall be made in such a manner as to maximize the Value of all Payments actually made to the Executive. For purposes of reducing the Payments to the Safe Harbor Amount, only amounts payable under this Agreement (and no other Payments) shall be reduced. If the reduction of the amount payable under this Agreement would not result in a reduction of the Parachute Value of all Payments to the Safe Harbor Amount, no amounts payable under the Agreement shall A-4 be reduced pursuant to this Section IV(a). The Company's obligations under this Section IV shall not be conditioned upon the Executive's termination of employment, and they shall survive the termination of the Executive's employment and the Term with respect to any Payments that are determined by the Accounting Firm to be contingent on a "change of control" (as defined in Section 280G of the Code) of the Company that occurs during the Term. (b) Subject to the provisions of Section IV(c), all determinations required to be made under this Section IV, including whether and when a Gross-Up Payment is required, the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by KPMG, or such other nationally recognized certified public accounting firm as may be designated by the Executive (the "Accounting Firm"). The Accounting Firm shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, the Executive may appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section IV, shall be paid by the Company to the Executive within five business days of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments that will not have been made by the Company should have been made (the "Underpayment"), consistent with the calculations required to be made hereunder. In the event the Company exhausts its remedies pursuant to Section IV(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable, but no later than ten business days after the Executive is informed in writing of such claim. The Executive shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which the Executive gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that the Company desires to contest such claim, the Executive shall: (1) give the Company any information reasonably requested by the Company relating to such claim, (2) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with A-5 respect to such claim by an attorney reasonably selected by the Company, (3) cooperate with the Company in good faith in order to effectively contest such claim, and (4) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest, and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section IV(c), the Company shall control all proceedings taken in connection with such contest, and, at its sole discretion, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the applicable taxing authority in respect of such claim and may, at its sole discretion, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis, and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties) imposed with respect to such advance or with respect to any imputed income in connection with such advance; and provided, further, that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which the Gross-Up Payment would be payable hereunder, and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of a Gross-Up Payment or an amount advanced by the Company pursuant to Section IV(c), the Executive becomes entitled to receive any refund with respect to the Excise Tax to which such Gross-Up Payment relates or with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section IV(c), if applicable) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section IV(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. A-6 (e) Notwithstanding any other provision of this Section IV, the Company may, in its sole discretion, withhold and pay over to the Internal Revenue Service or any other applicable taxing authority, for the benefit of the Executive, all or any portion of any Gross-Up Payment, and the Executive hereby consents to such withholding. (f) Definitions. The following terms shall have the following meanings for purposes of this Section IV. (i) "Code" shall mean the Internal Revenue Code of 1986, as amended, or any successor thereto. (ii) "Excise Tax" shall mean the excise tax imposed by Section 4999 of the Code, together with any interest or penalties imposed with respect to such excise tax. (iii) "Parachute Value" of a Payment shall mean the present value as of the date of the change of control for purposes of Section 280G of the Code of the portion of such Payment that constitutes a "parachute payment" under Section 280G(b)(2), as determined by the Accounting Firm for purposes of determining whether and to what extent the Excise Tax will apply to such Payment. (iv) A "Payment" shall mean any payment or distribution in the nature of compensation (within the meaning of Section 280G(b)(2) of the Code) to or for the benefit of the Executive, whether paid or payable pursuant to this Agreement or otherwise. (v) The "Safe Harbor Amount" means 2.99 times the Executive's "base amount," within the meaning of Section 280G(b)(3) of the Code. (vi) "Value" of a Payment shall mean the economic present value of a Payment as of the date of the change of control for purposes of Section 280G of the Code, as determined by the Accounting Firm using the discount rate required by Section 280G(d)(4) of the Code. V. Legal Fees. If, following a Change of Control, if the Company fails to perform any of its obligations under this Agreement or the Company or any other person asserts the invalidity of any provision of this Agreement and the Executive incurs any costs in successfully enforcing or defending any of the provisions of this Agreement, including legal fees and expenses and court costs, the Company shall reimburse the Executive for all such costs incurred by him, unless the trier of fact in such dispute determines that the Executive has not been at least partially successful in such enforcement or defense. A-7 EXHIBIT B RELEASE This Release is made this _____ day of _______________, ____ by and between C&D Technologies, Inc. ("Employer") and _________________ ("Employee"). Recitals: WHEREAS, the parties are parties to an Employment Agreement (the "Employment Agreement") dated __________, pursuant to which Employee was employed by Employer; and WHEREAS, Employee's employment and the Term, as defined in the Employment Agreement, have terminated; and WHEREAS, the execution and delivery of this Release by Employee is a condition to the Employer's obligations to pay certain compensation and provide certain benefits to Employee under the Employment Agreement; NOW THEREFORE, the parties hereto, intending to be legally bound, in consideration of the mutual promises and undertakings set forth herein, do hereby agree as follows: 1. As of _____________________, ____, Employee's employment with Employer shall terminate, and Employee shall have no further job responsibilities to perform for Employer; provided, however, that Employee shall cooperate with Employer in transitioning Employee's job responsibilities as Employer shall reasonably request, provided that Employee shall be entitled to receive reasonable compensation for any services rendered prior to such date and shall not be obligated to take any action that would interfere with any subsequent employment of Employee or otherwise result in economic hardship to Employee. 2. Employer shall pay and provide to Employee the amounts and benefits contemplated pursuant to Section __ [and Exhibit A] of the Employment Agreement, less applicable deductions; provided however, the first payment shall not be due and payable until ten days after the execution by Employee and delivery to Employer of this Release, or if later, the first business day following the date that payment would subject the Employee to adverse tax consequences under Section 409A of the Internal Revenue Code. Any payment which would have otherwise been made but for the restrictions of Section 409A of the Internal Revenue Code will be paid in a lump sum at the expiration of any applicable restriction. 3. For and in consideration of the monies and benefits paid to Employee by Employer, as more fully described in Section 2 above, and for other good and valuable consideration, Employee hereby waives, releases and forever discharges Employer, its assigns, predecessors, successors, and affiliated entities, and its current or former stockholders, officers, directors, administrators, agents, servants and employees, individually and as representatives of the corporate entity (hereinafter collectively referred to as "Releasees"), from any and all claims, suits, debts, dues, accounts, reckonings, bonds, bills, specialties, covenants, contracts, bonuses, controversies, B-1 agreements, promises, charges, complaints, damages, sums of money, interest, attorney's fees and costs, or causes of action of any kind or nature whatsoever whether in law or equity, including, but not limited to, all claims arising out of his employment or termination of employment with Employer, such as all claims for wrongful discharge, breach of contract, either express or implied, interference with contract, emotional distress, fraud, misrepresentation, defamation, claims arising under the Civil Rights Acts of 1964 and 1991, as amended, the Americans With Disabilities Act, the Age Discrimination in Employment Act (ADEA), the National Labor Relations Act, the Fair Labor Standards Act, the Employee Retirement Income Security Act of 1974 (ERISA), as amended, the Family and Medical Leave Act, the Pennsylvania Human Relations Act, the Pennsylvania Wage Payment & Collection Law, the Pennsylvania Minimum Wage Act of 1968, the Pennsylvania Equal Pay Law, and any and all other claims arising under federal, state or local law, rule, regulation, constitution, ordinance or public policy whether known or unknown, arising up to and including the date of execution of this Release; provided, however, that the parties do not release each other from any claim of breach of the terms of this Release. This release of rights does not extend to claims that may arise after the date of this Release, including without limitation, for payments or benefits described in Section 2 of this Release, nor to claims under employee benefit plans that are qualified under Section 401(a) of the Internal Revenue Code, nor to any rights of indemnification by the Company to which the Employee is otherwise entitled. Employee agrees that Employee will not initiate any charge or complaint or institute any claim or lawsuit against Releasees or any of them based on any fact or circumstance occurring up to and including the date of the execution by Employee of this Release based upon a claim that is released hereunder. 4. Employee agrees that the payments made and other consideration received pursuant to this Release are not to be construed as an admission of legal liability by Releasees or any of them and that no person or entity shall utilize this Release or the consideration received pursuant to this Release as evidence of any admission of liability since Releasees expressly deny liability. 5. Employee affirms that the only consideration for the signing of this Release are the terms stated herein and in the Employment Agreement and that no other promise or agreement of any kind has been made to Employee by any person or entity whatsoever to cause Employee to sign this Release. 6. Employee and Employer affirm that the Employment Agreement and this Release set forth the entire agreement between the parties with respect to the subject matter contained herein and supersede all prior or contemporaneous agreements or understandings between the parties with respect to the subject matter contained herein. Further, there are no representations, arrangements or understandings, either oral or written, between the parties, which are not fully expressed herein. Finally, no alteration or other modification of this Release shall be effective unless made in writing and signed by both parties. 7. Employee acknowledges that Employee has been given a period of at least 21 days within which to consider this Release. B-2 8. Following the execution of this Release, Employee has a period of seven days from the date of execution to revoke this Release, and this Release shall not become effective or enforceable until the revocation period has expired. 9. Employee certifies that Employee has returned to Employer all keys, identification cards, credit cards, computer and telephone equipment and other property or information of Employer in Employee's possession, custody, or control including, but not limited to, any information contained in any computer files maintained by Employee during Employee's employment with Employer. Employee certifies that Employee has not kept the originals or copies of any documents, files, or other property of Employer which Employee obtained or received during Employee's employment with Employer. 10. Employee acknowledges and agrees that the execution of this Release does not supercede any of the provisions of the Employment Agreement which otherwise survive the termination of Employee's employment with the Employer, including without limitation, Section 5, 6, 7 and 19 thereof. 11. Employee acknowledges that Employer advised Employee to consult with an attorney prior to executing this Release. 12. Employee affirms that Employee has carefully read this Release, that Employee fully understands the meaning and intent of this document, that Employee has signed this Release voluntarily and knowingly, and that Employee intends to be bound by the promises contained in this Release for the aforesaid consideration. IN WITNESS WHEREOF, Employee and the authorized representative of Employer have executed this Release on the dates indicated below: C&D TECHNOLOGIES, INC. Dated: By: ------------------------------- ------------------------------------- Title: ----------------------------------- Dated: ------------------------------- ----------------------------------------- (Name of Employee) B-3 ENDORSEMENT I, ___________________________________, hereby acknowledge that I was given 21 days to consider the foregoing Release and voluntarily chose to sign the Release prior to the expiration of the 21-day period. I declare under penalty of perjury under the laws of the Commonwealth of Pennsylvania that the foregoing is true and correct. EXECUTED this ________ day of __________________, ____, at ____________________________, Pennsylvania. -------------------------- (Name of Employee) B-4 EX-31 3 exhibit31_1.txt EXHIBIT 31.1 CERTIFICATION I, Jeffrey A. Graves, certify that: 1. I have reviewed this quarterly report on Form 10-Q of C&D Technologies, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report. 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: September 8, 2005 /s/ Jeffrey A. Graves ----------------- --------------------------------- Jeffrey A. Graves President and Chief Executive Officer (Principal Executive Officer) A signed original of this certification required by Section 302 has been provided to C&D Technologies, Inc. and will be retained by C&D Technologies, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. EX-31 4 exhibit31_2.txt EXHIBIT 31.2 CERTIFICATION I, Stephen E. Markert, Jr., certify that: 1. I have reviewed this quarterly report on Form 10-Q of C&D Technologies, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report. 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: September 8, 2005 /s/ Stephen E. Markert, Jr. ----------------- --------------------------------- Stephen E. Markert, Jr. Vice President Finance and Chief Financial Officer (Principal Financial and Accounting Officer) A signed original of this certification required by Section 302 has been provided to C&D Technologies, Inc. and will be retained by C&D Technologies, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. EX-32 5 exhibit32_1.txt Exhibit 32.1 SECTION 1350 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 The undersigned hereby certifies, in accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in his capacity as an officer of C&D Technologies, Inc. ("C&D"), to his knowledge, that the Quarterly Report of C&D on Form 10-Q for the period ended July 31, 2005, fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and the information contained in such report fairly presents, in all material respects, the financial condition and results of operations of C&D. Date: September 8, 2005 /s/ Jeffrey A. Graves ----------------- --------------------------------- Jeffrey A. Graves President and Chief Executive Officer (Principal Executive Officer) A signed original of this certification required by Section 906 has been provided to C&D Technologies, Inc. and will be retained by C&D Technologies, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. EX-32 6 exhibit32_2.txt Exhibit 32.2 SECTION 1350 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 The undersigned hereby certifies, in accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in his capacity as an officer of C&D Technologies, Inc. ("C&D"), to his knowledge, that the Quarterly Report of C&D on Form 10-Q for the period ended July 31, 2005, fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and the information contained in such report fairly presents, in all material respects, the financial condition and results of operations of C&D. Date: September 8, 2005 /s/ Stephen E. Markert, Jr. ----------------- --------------------------------- Stephen E. Markert, Jr. Vice President Finance and Chief Financial Officer (Principal Financial and Accounting Officer) A signed original of this certification required by Section 906 has been provided to C&D Technologies, Inc. and will be retained by C&D Technologies, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----