SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended April 30, l995 Commission File No. 1-9389
CHARTER POWER SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 13-3314599
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3043 Walton Road
Plymouth Meeting, Pennsylvania 19462
(Address of principal executive office) Zip Code
(610) 828-9000
(Registrant's telephone number, including area code)
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_____
Number of shares of the Registrant's Common Stock outstanding on
June 8, 1995: 5,976,291
CHARTER POWER SYSTEMS, INC.
AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION Page No.
Item 1 - Financial Statements
Consolidated Balance Sheets -
April 30, 1995 and January 31, 1995 3
Consolidated Statements of Income -
Three Months Ended April 30, 1995 and 1994 5
Consolidated Statements of Cash Flows -
Three Months Ended April 30, 1995 and 1994 6
Notes to Consolidated Financial Statements 8
Report of Independent Accountants 12
Item 2 - Management's Discussion and Analysis 13
Of Financial Condition and Results
of Operations
PART II. OTHER INFORMATION 15
SIGNATURES 16
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CHARTER POWER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
April 30, January 31,
1995 1995
---- ----
ASSETS:
Current assets:
Cash and cash equivalents $ 2,516 $ 1,097
Restricted cash and cash equivalents - 75
Accounts receivable, less allowance for
doubtful accounts of $1,770 and
$1,404, respectively 34,550 30,253
Inventories 31,861 26,869
Deferred income taxes 5,432 5,231
Other current assets 461 553
------- -------
Total current assets 74,820 64,078
Property, plant and equipment, net 40,256 40,059
Intangible and other assets, net 5,335 5,314
Goodwill, net 2,677 2,686
------- -------
Total assets $123,088 $112,137
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current portion of long-term debt $ 3,121 $ 3,670
Accounts payable 23,027 15,601
Accrued liabilities 14,340 13,994
Income taxes payable 1,455 --
Other current liabilities 2,729 3,067
------- -------
Total current liabilities 44,672 36,332
Deferred income taxes 3,582 3,552
Long-term debt 13,342 14,183
Other liabilities 6,786 6,348
------- -------
Total liabilities 68,382 60,415
The accompanying notes are an integral part of these statements.
3 of 16
CHARTER POWER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(Dollars in thousands)
(Unaudited)
April 30, January 31,
1995 1995
---- ----
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value,
10,000,000 shares authorized;
5,976,291 and 5,971,041 shares
issued, respectively 60 60
Additional paid-in capital 32,113 32,053
Notes receivable from stockholders (1,656) (1,656)
Retained earnings 24,276 21,265
Treasury stock, at cost, 5,300 shares (87) --
------- -------
Total stockholders' equity 54,706 51,722
------- -------
Total liabilities and
stockholders' equity $123,088 $112,137
======= =======
The accompanying notes are an integral part of these statements.
4 of 16
CHARTER POWER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
(Unaudited)
Three months ended
April 30,
1995 1994
----- -----
Net sales $58,777 $42,644
Cost of sales 44,985 32,279
------ ------
Gross profit 13,792 10,365
Selling, general and administrative
expenses 7,065 5,701
Research and development expenses 1,593 902
------- -------
Operating income 5,134 3,762
Interest expense, net 231 235
Other expense, net 56 186
------- -------
Income before income taxes 4,847 3,341
Provision for income taxes 1,672 1,333
------- -------
Net income $ 3,175 $ 2,008
======= =======
Net income per common and common
equivalent share $ .50 $ .33
======= =======
Weighted average common and common
equivalent shares 6,395 6,061
======= =======
Dividends per share $0.0275 $0.0275
======= =======
The accompanying notes are an integral part of these statements.
5 of 16
CHARTER POWER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Three months ended
April 30,
1995 1994
---- ----
Cash flows provided (used) by operating activities:
Net income $3,175 $2,008
Adjustments to reconcile net income
to net cash provided (used) by
operating activities:
Depreciation and amortization 1,536 1,685
Deferred taxes (171) --
Changes in:
Accounts receivable (4,230) (4,853)
Inventories (4,960) (1,358)
Other current assets (104) (84)
Accounts payable 7,423 1,202
Accrued liabilities 329 608
Income taxes payable 1,653 479
Other current liabilities (340) (408)
Other liabilities 438 226
Other, net (188) 248
------- -------
Net cash provided (used) by operating
activities 4,561 (247)
------- -------
Cash flows provided (used) by investing activities:
Acquisition of business, net -- (5,966)
Acquisition of property, plant and equipment (1,648) (1,683)
------- -------
Net cash used by investing activities (1,648) (7,649)
------- -------
Cash flows provided (used) by financing activities:
Reduction of long-term debt (1,390) (148)
Proceeds from new borrowings -- 5,750
Financing costs of long-term debt -- (34)
Issuance of shares under stock option plan 60 --
Payment of common stock dividends (164) (161)
Purchase of treasury stock (87) --
------- -------
Net cash (used) provided by financing
activities (1,581) 5,407
------- -------
Effect of exchange rate changes on cash 12 (15)
------- -------
The accompanying notes are an integral part of these statements.
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CHARTER POWER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Dollars in thousands)
(Unaudited)
Three months ended
April 30,
1995 1994
---- ----
Increase (decrease) in cash and cash
equivalents 1,344 (2,504)
Cash and cash equivalents at beginning
of period 1,172 3,821
------- -------
Cash and cash equivalents at end of
period $2,516 $1,317
======= =======
SUPPLEMENTAL CASH FLOW
DISCLOSURES
Interest paid, net $ 482 $ 346
Income taxes paid 189 854
SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Liabilities assumed in acquisition $ -- $3,132
The accompanying notes are an integral part of these statements.
7 of 16
CHARTER POWER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(UNAUDITED)
1. INTERIM STATEMENTS
The accompanying interim consolidated financial statements
should be read in conjunction with the consolidated financial
statements and notes thereto contained in the Company's Annual Report
to Shareholders for the fiscal year ended January 31, 1995. 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 presentation
of the consolidated financial position as of April 30, 1995 and the
consolidated statements of income and cash flows for the three months
ended April 30, 1995 and 1994. However, interim results of operations
necessarily involve more estimates than annual results and are not
indicative of results for the full fiscal year.
2. INVENTORIES
Inventories consisted of the following:
April 30, January 31,
1995 1995
---- ----
Raw materials $11,245 $9,780
Work-in-progress 9,135 7,893
Finished goods 11,481 9,196
------- -------
$31,861 $26,869
======= =======
3. INCOME TAXES
A reconciliation of the provision for income taxes from the
statutory rate to the effective rate is as follows:
Three months ended
April 30,
1995 1994
---- ----
U.S. statutory income tax 35.0% 34.0%
State tax, net of federal income
tax benefit 3.7 4.3
Reduction in valuation allowance (3.8) --
Other (0.4) 1.6
---- ----
34.5% 39.9%
==== ====
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CHARTER POWER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands)
(UNAUDITED)
4. CONTINGENT LIABILITIES
With regard to the following contingent liabilities there have
been no material changes since January 31, 1995.
Because the Company uses lead and other hazardous substances in
its manufacturing processes, it is subject to numerous federal,
Canadian, state and local laws and regulations that are designed to
protect the environment and employee health and safety. These laws
and regulations include requirements of periodic reporting to
governmental agencies regarding the use and disposal of hazardous
substances and compliance with rigorous criteria regarding exposure to
employees and the disposal of scrap. In the opinion of the Company,
the Company complies in all material respects with these laws and
regulations, and such compliance has not had, and is not expected to
have, a material effect on the business, financial condition or
results of operations of the Company.
Notwithstanding such compliance, if damage to persons or the
environment has been or is caused by hazardous substances used or
generated in the conduct of the Company's business, the Company may be
held liable for the damage and be required to pay the cost of
remedying the same, and the amount of any such liability might be
material to the results of operations or financial condition.
However, under the terms of the purchase agreement with Allied for the
Acquisition of the Company (the "Acquisition Agreement"), Allied is
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.
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 several 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.
As of January 16, 1989, the Company, with the concurrence of Allied,
entered into an agreement with other potentially responsible parties
(PRPs) relating to remediation of a portion of one of the Third Party
Facilities, the former NL Industries ("NL"), facility in Pedricktown,
New Jersey (the "NL Site"), which agreement provides for their joint
funding on a proportionate basis of certain remedial investigation and
feasibility study activities with respect to that site.
9 of 16
CHARTER POWER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands)
(UNAUDITED)
4. CONTINGENT LIABILITIES (continued)
In fiscal 1993 in accordance with an EPA order, a group
comprised of the Company and 30 other parties commenced work on the
cleanup of a portion of the NL Site based on a specified remedial
approach which is now completed. Based on currently available
information and well defined contribution levels of the other parties,
including NL Industries, the Company does not expect to incur costs in
excess of the $138 previously reserved.
With regard to the remainder of the NL Site, the EPA is pursuing
negotiations with NL and the other PRPs, including the Company,
regarding the conduct and funding of the remedial work plan. The EPA
has proposed a cost allocation plan, however, the allocation
percentages between parties and the basis for allocation of cost are
not defined in the plan or elsewhere. Therefore, a reliable range of
the potential cost to the Company of this phase of the clean-up cannot
currently be determined. Accordingly, the Company has not created any
reserve for this potential exposure.
The remedial investigation and feasibility study at a second
Third Party Facility, the former Tonolli Incorporated facility at
Nesquehoning, Pennsylvania (the "Tonolli Site"), were completed in
fiscal 1993. The EPA and the PRPs are continuing to evaluate the
draft remedial design work plan for the site. Based on the estimated
cost of the remedial approach selected by the EPA, the Company
believes that the potential cost of remedial action at the Tonolli
Site is likely to range between $16,000 and $17,000. The Company's
allocable share of this cost has not been finally determined, and will
depend on such variables as the financial capability of various other
potentially responsible parties to fund their respective allocable
shares of the remedial cost. Based on currently available
information, however, the Company believes that its most likely
exposure with respect to the Tonolli Site will be the approximately
$579 previously reserved, the majority of which is expected to be paid
over the next three to five years.
The Company has responded to requests for information from the
EPA with regard to three other Third Party Facilities, one in
September 1991, one (the "Chicago Site") in October 1991 and the third
(the "ILCO Site") in October 1993. Of the three sites, the Company
has been identified as a PRP at the ILCO and Chicago Sites only.
10 of 16
CHARTER POWER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
4. CONTINGENT LIABILITIES (continued)
Based on currently available information, the Company believes that
the potential cost of remediation at the ILCO Site is likely to range
between $54,000 and $59,000 (based on the estimated costs of the
remedial approach selected by the EPA). The Company's allocable share
of this cost has not been finally determined and will depend on such
variables as the financial capability of various other PRPs to fund
their respective allocable shares of the remedial cost. Based on
currently available information, however, the Company believes that
its most likely exposure with respect to the ILCO Site is an
immaterial amount which has been previously reserved, most of which is
expected to be paid over the next three to five years.
Based on currently available information, the Company believes
that the potential cost of the remediation at the Chicago site is
likely to range between $8,000 and $10,500 (based on the preliminary
estimated costs of the remediation approach negotiated with the EPA).
Sufficient information is not available to determine the Company's
allocable share of this cost. Based on the available preliminary
information, however, the Company believes that its exposure with
regard to the Chicago Site will be approximately $283, which has been
reserved for in the Company's consolidated financial statements, the
majority of which is expected to be paid over the next two to five
years.
Allied has accepted responsibility under the Acquisition
Agreement for potential liabilities relating to all Third Party
Facilities other than the aforementioned Sites. Based on currently
available information, management of the Company believes that the
foregoing will not have a material adverse effect on the Company's
financial condition or results of operations.
11 of 16
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Charter Power Systems, Inc.
We have reviewed the accompanying consolidated balance sheet of
Charter Power Systems, Inc. and Subsidiaries as of April 30, 1995, and
the related consolidated statements of income and cash flows for the
three months ended April 30, 1995 and 1994. These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by
the American Institute of Certified Public Accountants. A review of
interim financial information consists principally of applying
analytical procedures to financial data and making inquiries of
persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with
generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications
that should be made to the accompanying consolidated financial
statements for them to be in conformity with generally accepted
accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet as of January 31,
1995 and the related consolidated statements of income, stockholders'
equity and cash flows for the year then ended (not presented herein);
and in our report dated March 24, 1995, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying consolidated balance
sheet as of January 31, 1995, is fairly presented, in all material
respects, in relation to the consolidated balance sheet from which it
has been derived.
\s\ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
May 30, 1995
12 of 16
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Net sales for the fiscal 1996 first quarter ended April 30, 1995
were up $16,133,000 or 38 percent compared to the equivalent quarter
in fiscal 1995. Sales recorded by International Power Systems, Inc.
purchased as of March 29, 1994 and sales of the switching power supply
division of Basler Electric Company purchased as of January 24, 1995
accounted for 57 percent of this increase. In addition, total standby
product sales were up 22 percent with increases in telecommunications,
control, UPS and sales to AT&T, partially offset by lower
international sales. Motive power sales were up 10 percent resulting
from higher volume with relatively flat selling prices.
Gross profit increased $3,427,000 or 33 percent as gross margin
decreased to 23.5 percent from 24.3 percent, primarily resulting from
higher material costs and fluctuations in the Company's product mix,
partially offset by continued improvements in operating efficiencies.
Selling, general and administrative expenses increased 24
percent due mainly to the power supply businesses acquired and higher
commission and sales expense due to volume increases in the standby
and motive power business.
Research and development expenses increased 77 percent due to
the power supply businesses acquired.
Interest expense, net, was unchanged due to flat debt levels and
higher effective rates, offset by higher interest income.
Other expense, net, decreased $130,000 primarily due to a
foreign exchange gain in the first quarter ended April 30, 1995 versus
a foreign exchange loss in the prior year quarter.
As a result of the above, income before income taxes increased
45 percent over the prior year quarter and net income of $3,175,000,
or 50 cents a share, increased 58 percent from the $2,008,000, or 33
cents a share, for the first quarter of fiscal 1995.
The effective tax rate decreased to 34.5 percent from 39.9
percent due to a reduction in the valuation allowance related to the
revaluation of the realization of the stock option compensation
deferred tax asset due to increases in the price of the Company's
common stock.
13 of 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
LIQUIDITY AND CAPITAL RESOURCES
Net cash flows provided by operating activities for the period
ending April 30, 1995 increased to $4,561,000 compared to the $247,000
net cash used by operating activities for the prior year period. The
fiscal 1996 first quarter increase was caused primarily by an increase
in accounts payable and income taxes payable in this year's first
quarter, partially offset by increased inventories needed to support
the higher sales volume.
Net cash used by investing activities consisted of $1,648,000
for acquisition of property, plant and equipment, a decrease of
$6,001,000 from the prior year's first quarter which included
comparable property, plant and equipment acquisitions and the purchase
of the custom power supply business and certain net assets of ITT
PowerSystems Corporation.
Net cash used by financing activities was $1,581,000 compared to
net cash provided by financing activities of $5,407,000 in the prior
year's first quarter. The additional borrowings in the prior year
were used primarily for the funding of the aforementioned acquisition.
The Company's availability under the current loan agreement is
expected to be sufficient to meet its ongoing cash needs for working
capital requirements, debt service, capital expenditures and possible
strategic acquisitions. Capital expenditures in the first quarter of
fiscal 1996 were incurred primarily to fund new product development,
capacity expansion, a continuing series of cost reduction programs,
normal maintenance capital, and regulatory compliance. Fiscal 1996
expenditures are expected to be approximately $8,000,000 for similar
purposes, excluding strategic acquisitions.
14 of 16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.1 Employment Agreement dated April 3, 1995 between Stephen E.
Markert, Jr. and the Company (filed herewith).
10.2 Employment Agreement dated April 3, 1995 between A.T.(Paul)
Kambouroglou and the Company (filed herewith).
10.3 Amendment Agreement dated April 3, 1995 to Employment
Agreement between Leslie Holden and the Company (filed
herewith).
10.4 Amendment Agreement dated April 3, 1995 to Employment
Agreement between A. Gordon Goodyear and the Company (filed
herewith).
10.5 Amendment Agreement dated April 3, 1995 to Employment
Agreement between George C. Branca and the Company (filed
herewith).
10.6 Charter Power Systems, Inc. Incentive Compensation Plan
(filed herewith).
11. Computation of per share earnings (filed herewith).
15. Letter from Coopers & Lybrand L.L.P., independent
accountants for the Company regarding unaudited interim
financial information (filed herewith).
(b) Reports on Form 8-K:
None
15 of 16
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.
CHARTER POWER SYSTEMS, INC.
June 14, 1995 BY: \s\ Alfred Weber
_________________________________
Alfred Weber
President and Chief
Executive Officer
June 14, 1995 BY: \s\ Stephen E. Markert, Jr.
_________________________________
Stephen E. Markert, Jr.
Vice President Finance and
Treasurer
Principal Financial and
Accounting Officer
16 of 16
EXHIBIT INDEX
10.1 Employment Agreement dated April 3, 1995 between Stephen E.
Markert, Jr. and the Company (filed herewith).
10.2 Employment Agreement dated April 3, 1995 between A.T.(Paul)
Kambouroglou and the Company (filed herewith).
10.3 Amendment Agreement dated April 3, 1995 to Employment
Agreement between Leslie Holden and the Company (filed
herewith).
10.4 Amendment Agreement dated April 3, 1995 to Employment
Agreement between A. Gordon Goodyear and the Company (filed
herewith).
10.5 Amendment Agreement dated April 3, 1995 to Employment
Agreement between George C. Branca and the Company (filed
herewith).
10.6 Charter Power Systems, Inc. Incentive Compensation Plan
(filed herewith).
11. Computation of per share earnings (filed herewith).
15. Letter from Coopers & Lybrand L.L.P., independent
accountants for the Company regarding unaudited interim
financial information (filed herewith).