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 July 31, 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
September 8, 1995: 5,958,591
CHARTER POWER SYSTEMS, INC.
AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION Page No.
Item 1 - Financial Statements
Consolidated Balance Sheets -
July 31, 1995 and January 31, 1995 3
Consolidated Statements of Income -
Three and Six Months Ended July 31, 1995 and 1994 5
Consolidated Statements of Cash Flows -
Six Months Ended July 31, 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
2 of 16
CHARTER POWER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
July 31, January 31,
1995 1995
---- ----
ASSETS:
Current assets:
Cash and cash equivalents $ 1,025 $ 1,097
Restricted cash and cash equivalents -- 75
Accounts receivable, less allowance for
doubtful accounts of $1,708 and
$1,404, respectively 32,324 30,253
Inventories 33,312 26,869
Deferred income taxes 5,633 5,231
Other current assets 664 553
------- -------
Total current assets 72,958 64,078
Property, plant and equipment, net 40,447 40,059
Intangible and other assets, net 5,267 5,314
Goodwill, net 2,654 2,686
------- -------
Total assets $121,326 $112,137
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current portion of long-term debt $ 3,113 $ 3,670
Accounts payable 20,034 15,601
Accrued liabilities 14,803 13,994
Other current liabilities 2,537 3,067
------- -------
Total current liabilities 40,487 36,332
Deferred income taxes 3,612 3,552
Long-term debt 12,517 14,183
Other liabilities 7,147 6,348
------- -------
Total liabilities 63,763 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)
July 31, January 31,
1995 1995
---- ----
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value,
10,000,000 shares authorized;
6,002,041 and 5,971,041 shares
issued, respectively 60 60
Additional paid-in capital 32,421 32,053
Notes receivable from stockholders (1,656) (1,656)
Retained earnings 28,042 21,265
Treasury stock, at cost, 57,400 shares (1,304) --
------- -------
Total stockholders' equity 57,563 51,722
------- -------
Total liabilities and
stockholders' equity $121,326 $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) (Unaudited)
Three months ended Six months ended
July 31, July 31,
1995 1994 1995 1994
----- ----- ----- -----
Net sales $63,381 $47,619 $122,158 $90,263
Cost of sales 48,057 36,656 93,042 68,935
------ ------ ------ ------
Gross profit 15,324 10,963 29,116 21,328
Selling, general and
administrative expenses 7,382 5,739 14,447 11,440
Research and development
expenses 1,447 1,423 3,040 2,325
------ ------ ------ ------
Operating income 6,495 3,801 11,629 7,563
Interest expense, net 294 355 525 590
Other expense, net 199 108 255 294
------ ------ ------ ------
Income before income
taxes 6,002 3,338 10,849 6,679
Provision for income taxes 2,072 1,168 3,744 2,501
------ ------ ------ ------
Net income $ 3,930 $ 2,170 $ 7,105 $ 4,178
====== ====== ======= ======
Net income per common and
common equivalent share $ .61 $ .35 $ 1.11 $ .68
====== ====== ====== ======
Weighted average common and
common equivalent shares 6,434 6,169 6,414 6,116
====== ====== ====== ======
Dividends per share $0.0275 $0.0275 $ 0.0550 $0.0550
====== ====== ======= ======
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)
Six months ended
July 31,
1995 1994
---- ----
Cash flows provided (used) by operating activities:
Net income $7,105 $4,178
Adjustments to reconcile net income
to net cash provided (used) by
operating activities:
Depreciation and amortization 3,138 3,459
Deferred taxes (342) --
Loss (gain) on disposal of assets 139 (225)
Changes in:
Accounts receivable (2,024) (7,905)
Inventories (6,418) (1,318)
Other current assets (185) (312)
Accounts payable 4,431 628
Accrued liabilities (27) 998
Income taxes payable 78 (1,299)
Other current liabilities (533) (1,343)
Other liabilities 799 486
Other, net (225) 359
------- -------
Net cash provided (used) by operating
activities 5,936 (2,294)
------- -------
Cash flows provided (used) by investing activities:
Acquisition of business, net -- (5,966)
Acquisition of property, plant and equipment (3,430) (3,600)
Proceeds from disposal of property,
plant and equipment -- 363
------- -------
Net cash used by investing activities (3,430) (9,203)
------- -------
Cash flows provided (used) by financing activities:
Reduction of long-term debt (2,223) (1,599)
Proceeds from new borrowings -- 10,338
Financing costs of long-term debt -- (34)
Issuance of shares under stock option plan 368 805
Payment of common stock dividends (492) (484)
Purchase of treasury stock (317) --
------- -------
Net cash (used) provided by financing
activities (2,664) 9,026
------- -------
Effect of exchange rate changes on cash 11 (14)
------- -------
The accompanying notes are an integral part of these statements.
6 of 16
CHARTER POWER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Dollars in thousands)
(Unaudited)
Six months ended
July 31,
1995 1994
---- ----
Decrease in cash and cash equivalents (147) (2,485)
Cash and cash equivalents at beginning
of period 1,172 3,821
------- -------
Cash and cash equivalents at end of
period $1,025 $1,336
======= =======
SUPPLEMENTAL CASH FLOW
DISCLOSURES
Interest paid, net $ 701 $ 701
Income taxes paid 4,008 3,800
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 July 31, 1995, the
consolidated statements of income for the three and six months ended
July 31, 1995 and 1994 and consolidated statements of cash flows for
the six months ended July 31, 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:
July 31, January 31,
1995 1995
---- ----
Raw materials $13,068 $ 9,780
Work-in-progress 9,399 7,893
Finished goods 10,845 9,196
------- -------
$33,312 $26,869
======= =======
3. INCOME TAXES
A reconciliation of the provision for income taxes from the
statutory rate to the effective rate is as follows:
Six months ended
July 31,
1995 1994
---- ----
U.S. statutory income tax 35.0% 35.0%
State tax, net of federal income
tax benefit 3.7 3.9
Reduction in valuation allowance (3.8) --
Other (0.4) (1.5)
---- ----
34.5% 37.4%
==== ====
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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, Mexican, 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 July 31, 1995, the
related consolidated statements of income for the three and six months
ended July 31, 1995 and 1994 and the consolidated statements of cash
flows for the six months ended July 31, 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
August 21, 1995
12 of 16
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Net sales for the fiscal 1996 second quarter and six months ended July
31, 1995 increased $15,762,000 or 33%, and $31,895,000 or 35%,
respectively, compared to the equivalent periods 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
29% and 43% of the increase for the quarter and year to date,
respectively. In addition, sales of standby power products increased
25% for the quarter and 24% for the half year due to increases during
both periods in telecommunications, control, UPS and sales to AT&T.
Motive power sales were up 32% for the current quarter and 20% for the
first half of the year due to higher volume and prices.
Gross profit increased $4,361,000 or 40% for the quarter and
$7,778,000 or 37% for the six-month period. Gross margin increased to
24.2% from 23.0% for the quarter and to 23.8% from 23.6% for the year
to date, primarily as a result of higher sales volumes and continued
improvements in operating efficiencies partially offset by higher
material costs.
Selling, general and administrative expenses for the quarter increased
29% primarily due to higher commission and sales expense due to volume
increases in the standby and motive power businesses, coupled with
costs associated with the Company's program to maximize shareholder
value. For the six-month period, selling, general and administrative
expenses increased 26% due to the power supply business acquired,
higher commission and sales expense due to volume increases in the
standby and motive power businesses and the Company's program to
maximize shareholder value discussed above.
Research and development expenses were relatively flat for the quarter
and increased $715,000 or 31% year to date, primarily due to the power
supply business acquired.
Interest expense, net, decreased for the quarter and six-month period
due to lower debt balances, partially offset by higher effective
rates.
Other expense, net, increased in the second quarter due to a foreign
exchange loss, partially offset by higher nonoperating income. For
the six-month period, other expense, net, decreased 13% due to a
foreign exchange gain in the current period versus an exchange loss in
the prior period, coupled with higher nonoperating income.
13 of 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
As a result of the above, income before income taxes increased by 80%
for the quarter and by 62% for the six-month period. Net income for
the quarter rose 81% to $3,930,000 or $0.61 per share while for the
six-month period, net income rose 70% to $7,105,000 or $1.11 per
share.
The effective tax rate decreased to 35% from 37% for the comparative
six-month period 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.
LIQUIDITY AND CAPITAL RESOURCES
Net cash flows provided by operating activities for the current period
increased to $5,936,000 compared to the $2,294,000 net cash used by
operating activities for the prior period. This increase was
primarily due to higher current year net income, higher payables
supporting higher inventories, the absence of a temporary
deterioration of receivables of the power supply business that
occurred in the prior year and timing of required tax payments, offset
by higher current year receivables and inventories supporting current
year higher sales volumes.
Net cash used by investing activities consisted of $3,430,000 for
acquisition of property, plant and equipment, a decrease of $5,773,000
from the prior year 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 $2,664,000 compared to net
cash provided by financing activities of $9,026,000 in the prior year.
The additional borrowings in the prior year were used primarily to
fund 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, repurchase
of up to 600,000 shares of the Company's Common Stock and possible
strategic acquisitions. Capital expenditures in the first half 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 4. Submission of Matters to a Vote of Security Holders
(a) The Company held its annual meeting of shareholders on June
26, 1995.
(b) See Item 4(c) below.
(c) Each of David Beretta and Glenn M. Feit was elected as a
director by a vote of 5,429,682 for and 86,122 withheld.
Each of A. Lawrence Fagan, Merril M. Halpern, Jerome L.
Katz, Patricia R. Merrick and Alfred Weber was elected as a
director by a vote of 5,429,982 for and 85,822 withheld.
Warren A. Law was elected as a director by a vote of
5,429,282 with 86,522 withheld. George J. Sbordone was
elected as a director by a vote of 5,429,582 with 86,222
withheld.
The appointment of Coopers & Lybrand L.L.P. as the Company's
independent accountants for the year ending January 31, 1996
was ratified by a vote of 5,506,104 for and 500 against,
with 9,200 abstentions.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Stock Purchase Agreement dated May 26, 1988, between
Robert Alvine ("Alvine") and the Company; Option
Agreement dated May 26, 1988, between Alvine and the
Company; Registration Rights Agreement dated May 26,
1988, between Alvine and the Company; Amendment
Agreement dated May 30, 1989, between Alvine and the
Company (filed herewith).
10.2 Employment Agreement dated May 30, 1989, between Alfred
Weber ("Weber") and the Company; Stock Purchase
Agreement dated May 30, 1989, between Weber and the
Company; Option Agreement dated May 30, 1989, between
Weber and the Company; Registration Rights Agreement
dated May 30, 1989, between Weber and the Company
(filed herewith).
10.3 Employment Agreement dated January 26, 1990, between
Leslie Holden and the Company (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).
27. Financial Data Schedule
(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.
September 12, 1995 BY: \s\ Alfred Weber
_________________________________
Alfred Weber
President and Chief
Executive Officer
September 12, 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 Stock Purchase Agreement dated May 26, 1988, between Robert
Alvine ("Alvine") and the Company; Option Agreement dated
May 26, 1988, between Alvine and the Company; Registration
Rights Agreement dated May 26, 1988, between Alvine and the
Company; Amendment Agreement dated May 30, 1989, between
Alvine and the Company.
10.2 Employment Agreement dated May 30, 1989, between Alfred
Weber ("Weber") and the Company; Stock Purchase Agreement
dated May 30, 1989, between Weber and the Company; Option
Agreement dated May 30, 1989, between Weber and the Company;
Registration Rights Agreement dated May 30, 1989, between
Weber and the Company.
10.3 Employment Agreement dated January 26, 1990, between Leslie
Holden and the Company.
11. Computation of per share earnings.
15. Letter from Coopers & Lybrand L.L.P., independent
accountants for the Company regarding unaudited interim
financial information.
27. Financial Data Schedule