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 October 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
December 11, 1995: 6,250,101
CHARTER POWER SYSTEMS, INC.
AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION Page No.
Item 1 - Financial Statements
Consolidated Balance Sheets -
October 31, 1995 and January 31, 1995 3
Consolidated Statements of Income -
Three and Nine Months Ended October 31, 1995
and 1994 5
Consolidated Statements of Cash Flows -
Nine Months Ended October 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 16
SIGNATURES 17
2 of 17
CHARTER POWER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
October 31, January 31,
1995 1995
---- ----
ASSETS:
Current assets:
Cash and cash equivalents $ 1,259 $ 1,097
Restricted cash and cash equivalents -- 75
Accounts receivable, less allowance for
doubtful accounts of $1,545 and
$1,404, respectively 34,600 30,253
Inventories 36,443 26,869
Deferred income taxes 5,510 5,231
Other current assets 1,254 553
------- -------
Total current assets 79,066 64,078
Property, plant and equipment, net 40,980 40,059
Intangible and other assets, net 5,152 5,314
Goodwill, net 2,637 2,686
------- -------
Total assets $127,835 $112,137
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current portion of long-term debt $ 2,517 $ 3,670
Accounts payable 21,186 15,601
Accrued liabilities 15,565 13,994
Other current liabilities 2,257 3,067
------- -------
Total current liabilities 41,525 36,332
Deferred income taxes 3,741 3,552
Long-term debt 13,624 14,183
Other liabilities 7,475 6,348
------- -------
Total liabilities 66,365 60,415
------- -------
The accompanying notes are an integral part of these statements.
3 of 17
CHARTER POWER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(Dollars in thousands)
(Unaudited)
October 31, January 31,
1995 1995
---- ----
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value,
10,000,000 shares authorized;
6,017,491 and 5,971,041 shares
issued, respectively 60 60
Additional paid-in capital 32,597 32,053
Notes receivable from stockholders (1,656) (1,656)
Retained earnings 31,773 21,265
Treasury stock, at cost, 57,400 shares (1,304) --
------- -------
Total stockholders' equity 61,470 51,722
------- -------
Total liabilities and
stockholders' equity $127,835 $112,137
======= =======
The accompanying notes are an integral part of these statements.
4 of 17
CHARTER POWER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
(Unaudited) (Unaudited)
Three months ended Nine months ended
October 31, October 31,
1995 1994 1995 1994
----- ----- ----- -----
Net sales $61,456 $54,617 $183,614 $144,880
Cost of sales 46,712 41,724 139,754 110,659
------ ------ ------ -------
Gross profit 14,744 12,893 43,860 34,221
Selling, general and
administrative expenses 7,056 6,840 21,503 18,280
Research and development
expenses 1,564 1,443 4,604 3,768
------ ------ ------ ------
Operating income 6,124 4,610 17,753 12,173
Interest expense, net 288 374 813 964
Other expense, net 17 89 272 383
------ ------ ------ ------
Income before income
taxes 5,819 4,147 16,668 10,826
Provision for income taxes 1,923 1,396 5,667 3,897
------ ------ ------ ------
Net income $ 3,896 $ 2,751 $ 11,001 $ 6,929
====== ====== ====== ======
Net income per common and
common equivalent share $ .60 $ .44 $ 1.71 $ 1.12
====== ====== ====== ======
Weighted average common and
common equivalent shares 6,443 6,262 6,424 6,162
====== ====== ====== ======
Dividends per share $0.0275 $0.0275 $ 0.0825 $ 0.0825
====== ====== ======= ======
The accompanying notes are an integral part of these statements.
5 of 17
CHARTER POWER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Nine months ended
October 31,
1995 1994
---- ----
Cash flows provided (used) by operating activities:
Net income $11,001 $ 6,929
Adjustments to reconcile net income
to net cash provided (used) by
operating activities:
Depreciation and amortization 4,750 5,227
Deferred taxes (90) 72
Loss (gain) on disposal of assets 175 (225)
Stock option compensation -- 405
Changes in:
Accounts receivable (4,279) (11,702)
Inventories (9,536) (3,320)
Other current assets (425) (301)
Accounts payable 5,583 4,166
Accrued liabilities 1,714 2,175
Income taxes payable (271) (867)
Other current liabilities (815) (1,677)
Other liabilities 1,127 710
Other, net (278) 17
------ ------
Net cash provided by operating
activities 8,656 1,609
------ ------
Cash flows provided (used) by investing activities:
Acquisition of business, net -- (5,966)
Acquisition of property, plant and equipment (5,455) (5,491)
Proceeds from disposal of property,
plant and equipment -- 551
------ ------
Net cash used by investing activities (5,455) (10,906)
------ ------
Cash flows provided (used) by financing activities:
Reduction of long-term debt (3,619) (13,407)
Proceeds from new borrowings 1,907 21,414
Financing costs of long-term debt -- (456)
Issuance of shares under stock option plan 544 917
Payment of common stock dividends (657) (647)
Purchase of treasury stock (1,304) --
------ ------
The accompanying notes are an integral part of these statements.
6 of 17
CHARTER POWER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Dollars in thousands)
(Unaudited)
Nine months ended
October 31,
1995 1994
---- ----
Net cash (used) provided by financing
activities (3,129) 7,821
------ ------
Effect of exchange rate changes on cash 15 (10)
------ ------
Increase(decrease) in cash and cash equivalents 87 (1,486)
Cash and cash equivalents at beginning
of period 1,172 3,821
------ ------
Cash and cash equivalents at end of
period $ 1,259 $ 2,335
====== ======
SUPPLEMENTAL CASH FLOW
DISCLOSURES
Interest paid, net $ 1,078 $1,109
Income taxes paid 6,029 4,692
SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Liabilities assumed in acquisition $ -- $3,022
The accompanying notes are an integral part of these statements.
7 of 17
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 October 31, 1995, the
consolidated statements of income for the three and nine months ended
October 31, 1995 and 1994 and consolidated statements of cash flows
for the nine months ended October 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:
October 31, January 31,
1995 1995
---- ----
Raw materials $13,670 $ 9,780
Work-in-progress 11,281 7,893
Finished goods 11,492 9,196
------- -------
$36,443 $26,869
======= =======
3. INCOME TAXES
A reconciliation of the provision for income taxes from the
statutory rate to the effective rate is as follows:
Nine months ended
October 31,
1995 1994
---- ----
U.S. statutory income tax 35.0% 35.0%
State tax, net of federal income
tax benefit 3.4 3.1
Reduction in valuation allowance (3.8) --
Other (0.6) (2.1)
---- ----
34.0% 36.0%
==== ====
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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.
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 17
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"), was 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 17
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. However, on
October 31, 1995 the Company received confirmation from EPA that it is
a de minimis PRP at the ILCO Site. Based on currently available
information 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 17
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 October 31, 1995,
the related consolidated statements of income for the three and nine
months ended October 31, 1995 and 1994 and the related consolidated
statements of cash flows for the nine months ended October 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 state-
ments 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
November 21, 1995
12 of 17
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net sales for the fiscal 1996 third quarter and nine months ended
October 31, 1995 increased $6,839,000 or 13 percent and $ 38,734,000
or 27 percent, respectively, compared to the equivalent periods in
fiscal 1995. The combined sales of the Company's International Power
Systems, Inc. subsidiary ("IPS") which was formed early in fiscal 1995
to acquire certain assets of ITT PowerSystems Corporation (the "IPS
Acquisition") and the switching power supply division of Basler
Electric Company ("Basler") purchased as of January 24, 1995 rose 32
percent for the quarter and 94 percent year to date compared to the
equivalent periods in fiscal 1995. For the third quarter, sales of
standby power products were up 13 percent, and, for the nine months
ended October 31, 1995, sales of standby power products increased 20
percent due to higher sales in virtually every standby category.
Motive power sales for the quarter were relatively flat due to lower
volumes offset by higher prices while year to date sales increased 14
percent due to higher volumes and prices.
Gross profit increased $1,851,000 or 14 percent for the quarter and
$9,639,000 or 28 percent for the nine month period. Gross margin
increased to 24.0 percent from 23.6 percent for the third quarter and
to 23.9 percent from 23.6 percent 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. The Company
has instituted a price increase for the motive power business in the
fourth quarter.
Selling, general and administrative expenses for the quarter increased
3 percent for the quarter due to amortization of intangible costs
resulting from the Basler acquisition, coupled with slightly higher
sales expense related to sales volume increases. For the nine-month
period, selling, general and administrative expenses increased 18
percent due to the power supply business acquired, higher commission
and sales expense due to volume increases in the standby and motive
power businesses and costs associated with the Company's program to
maximize shareholder value. This program was completed in the first
half of fiscal 1996.
Page 13 of 17
Research and development expenses increased for the quarter and nine-
month period $121,000 or 8 percent and $836,000 or 22 percent,
respectively, primarily due to the Basler Acquisition.
Interest expense, net, decreased 23 percent for the quarter and 16
percent for the nine-month period due to lower debt balances, offset
by slightly higher effective rates.
As a result of the above, income before income taxes increased by 40
percent for the quarter and by 54 percent for the nine-month period.
Net income for the quarter rose 42 percent to $3,896,000 or $0.60 per
share while for the nine-month period, net income rose 59 percent to
$11,001,000 or $1.71 per share.
The effective tax rate decreased to 34 percent from 36 percent for the
comparative nine-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 resulting from increases in the
price of the Company's common stock.
LIQUIDITY AND CAPITAL RESOURCES
Net cash flows provided by operating activities for the nine-month
period increased to $8,656,000 compared to $1,609,000 for the prior
year period. This increase was primarily due to higher current year
net income and higher payables partially offset by increased invento-
ries related to higher sales volumes and less of an increase in
receivables versus the prior period.
Net cash used by investing activities consisted of $5,455,000 for
acquisition of property, plant and equipment, a decrease of $5,451,000
from the prior year period which included the IPS Acquisition and
comparable property, plant and equipment acquisitions.
Net cash used by financing activities for the nine months ended
October 31, 1995 was $3,129,000 compared to net cash provided by
financing activities of $7,821,000 in the prior year period. Current
year cash used by financing activities included $1,304,000 related to
the purchase of treasury stock. The additional borrowings in the
prior year period were used primarily for the funding of the afore-
mentioned acquisition.
Page 14 of 17
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 nine months
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
capital expenditures are expected to be approximately $9,000,000
for similar purposes, excluding strategic acquisitions.
Page 15 of 17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Employment Agreement dated August 15, 1995 between
Stephen Weglarz, Esq. 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 (filed herewith).
(b) Reports on Form 8-K:
None
16 of 17
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.
December 13, 1995 BY: \s\ Alfred Weber
_________________________________
Alfred Weber
President and Chief
Executive Officer
December 13, 1995 BY: \s\ Stephen E. Markert, Jr.
_________________________________
Stephen E. Markert, Jr.
Vice President Finance and
Treasurer
Principal Financial and
Accounting Officer
17 of 17
EXHIBIT INDEX
10.1 Employment Agreement dated August 15, 1995 between Stephen
Weglarz, Esq. 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.