FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED JANUARY 31, 1996
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
CHARTER POWER SYSTEMS, INC.
(Exact name of Registrant as specified in its Charter)
State or other jurisdiction of incorporation or organization: DELAWARE
I.R.S. Employer Identification Number: 13-3314599
Address of principal executive offices: 1400 Union Meeting Road
Blue Bell, Pennsylvania 19422
Registrant's telephone number, including area code: (215) 619-2700
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF CLASS
------------------------
Common Stock
par value $.01 per share
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X]
Aggregate market value of the voting stock held by nonaffiliates of the
Registrant, based on the closing price on April 23, 1996: $165,833,800
Number of shares outstanding of each of the Registrant's classes of common
stock as of April 23, 1996: 6,285,276 shares of Common Stock, par value $.01 per
share.
DOCUMENTS INCORPORATED BY REFERENCE:
Registrant's Proxy Statement to be filed
pursuant to Regulation 14A within 120 Part III
days after the end of Registrant's fiscal -----------------
year covered by this Form 10-K (Part of Form 10-K into which
- ------------------------------------------- Document is incorporated.)
TABLE OF CONTENTS
PAGE
----
PART I
Item 1 Business 1
Item 2 Properties 11
Item 3 Legal Proceedings 12
Item 4 Submission of Matters to a Vote
of Security Holders 12
PART II
Item 5 Market for Registrant's Common Equity
and Related Stockholder Matters 12
Item 6 Selected Financial Data 13
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 8 Financial Statements and Supplementary Data 20
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 20
PART III
Item 10 Directors and Executive Officers of
the Registrant 20
Item 11 Executive Compensation 20
Item 12 Security Ownership of Certain Beneficial Owners
and Management 20
Item 13 Certain Relationships and Related Transactions 20
PART IV
Item 14 Exhibits, Financial Statement Schedule and Reports
on Form 8-K 21
SIGNATURES 25
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE F-1
i
CHARTER POWER SYSTEMS, INC.
PART I
ITEM 1. BUSINESS
GENERAL
Charter Power Systems, Inc. (together with its operating subsidiaries, the
"Company") is a leading North American producer of integrated reserve power
systems for telecommunications, electronic information and industrial
applications. The Company is also a leading producer of embedded high frequency
switching power supplies for use in telecommunications equipment, advanced
office electronics and sophisticated computer systems and of motive power
systems for electric industrial vehicles. The Company's integrated reserve power
systems are comprised of industrial lead-acid batteries, as well as power
rectifiers, power control and distribution equipment and related accessories.
The Company sells these products both as individual components and as integrated
power systems.
The Company was organized in November 1985 to acquire all the assets of the
eighty-year old C&D Power Systems division (the "Division") of Allied
Corporation ("Allied"). The Division's business essentially was unchanged by the
acquisition, which was completed on January 28, 1986. Shares of Common Stock,
par value $.01 per share ("Common Stock"), of the Company were first issued to
the public in February 1987.
In October 1992, the Company purchased substantially all of the assets and
assumed certain liabilities of the manufacturing division of Ratelco, Inc.
("Ratelco"), a Seattle-based manufacturer and distributor of power electronics
equipment, used primarily in the regulated telecommunications power market.
Ratelco also markets a nonregulated range of alarm and monitoring equipment for
use with telecommunications power systems.
Effective March 29, 1994, the Company purchased substantially all of the
assets and assumed certain liabilities of the PowerSystems Division of ITT, a
Tucson, Arizona based company which designs and manufactures custom power
supplies. The power supplies are used in the telecommunications power market and
the office equipment market in such applications as telecommunication systems,
copiers, computers and work stations.
Effective January 24, 1995, the Company purchased certain assets and
assumed certain liabilities from the switching power supply division of Basler
Electric Company, a Highland, Illinois-based manufacturer of electrical
components. These power supplies are used for office electronics and
communications applications.
On November 21, 1995, the Company sold 50,000 shares of Common Stock in a
public offering.
Effective February 22, 1996, the Company purchased certain equipment and
inventory of LH Research, Inc., a Costa Mesa, California based manufacturer of
standard power supply systems for the electronics industry. The power supplies
are used in telecommunications, computer, medical, process control and other
industrial applications.
Effective March 12, 1996, the Company acquired from Burr-Brown Corporation
its entire interest in Power Convertibles Corporation ("PCC") consisting of
1,044,418 shares of PCC common
stock and all outstanding preferred stock. In addition the Company acquired or
repaid approximately $5,200,000 of indebtedness of PCC. On April 26, 1996, the
Company acquired 190,000 shares of PCC Common Stock from the former chief
executive officer of PCC, which together with shares previously acquired by the
Company represents in excess of 99.6% of the outstanding PCC Common Stock. The
Company intends to make offers to purchase the remaining shares of PCC Common
Stock and shares of PCC Common Stock covered by stock options. Tucson, Arizona
based PCC produces DC to DC converters used in communications, computer, medical
and industrial and instrumentation markets and also produces battery chargers
for cellular phones.
References to a fiscal year mean the Company's fiscal year ended in the
January of the year mentioned.
FORWARD LOOKING STATEMENTS
Certain information contained in this Annual Report on Form 10-K,
including, without limitation, information appearing under Item 1, "Business,"
and Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations," are forward-looking statements (within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934). Factors that appear with the forward-looking statements,
or in the Company's other Securities and Exchange Commission filings, could
affect the Company's actual results and could cause the Company's actual results
to differ materially from those expressed in any forward-looking statements made
by the Company in this Annual Report on Form 10-K.
MARKETS
The Company manufactures and markets products in three general categories:
(i) integrated reserve power systems and components for the standby power
market; (ii) custom, standard and modified standard embedded high frequency
AC-to-DC and DC-to-DC switching power supplies; and (iii) motive power systems.
For fiscal 1996, 1995, and 1994 sales of standby power products accounted
for 52.5%, 54.0% and 64.9% of the Company's sales (see "Business - Products and
Customers"), respectively. For fiscal 1996, 1995 and 1994 sales of power
supplies accounted for 17.9%, 12.8% and 0% of the Company's sales, respectively.
For fiscal 1996, 1995 and 1994 sales of motive power products accounted for
29.6%, 33.2% and 35.1% of the Company's sales, respectively. The percentage of
the Company's sales related to power supplies has increased as a result of
acquisitions.
The majority of the Company's standby power products are used in
telecommunications applications such as central telephone exchanges, microwave
relay stations, PBX (private branch exchange) systems and cellular mobile
telephone systems. Other applications for the Company's standby power batteries
include UPS (uninterruptible power supply), principally for computers and
computer-controlled equipment, and as backup for support systems for submarines,
missiles and other weapons systems. In addition, the Company supplies batteries
and power electronics equipment for switchgear and instrumentation control
systems for electric utilities.
The majority of the Company's power supply products are sold to OEMs
(original equipment manufacturers) of electronic products on either a custom,
standard or modified standard basis.
2
Power supplies are embedded in almost all electronic products and are used to
convert incoming utility voltage (either 110V or 220/240V AC) to a DC voltage.
The majority of the Company's motive power products are used to provide the
primary power source for forklift trucks and other materials handling vehicles.
The balance are used in a variety of other applications, such as automated
guided vehicle systems and airline ground support equipment. A significant
portion of these sales include products to recharge motive power batteries.
The Company supplies certain of its standard standby power and motive power
products to the U.S. Government. Company sales directly to the government have
accounted for less than 5% of its sales during each of its last three fiscal
years.
PRODUCTS AND CUSTOMERS
RESERVE POWER SYSTEMS
The Company is a leading producer of fully integrated reserve power
systems, which monitor and regulate electric power flow and provide backup power
in the event of a primary power loss or interruption. The Company also produces
the individual components of these systems, including power rectifiers, system
monitors, power boards, chargers and reserve batteries.
The Company manufactures and markets a wide range of power electronics to
meet the needs of its customers. The Company's power electronics products
consist principally of power rectifiers and power control, distribution and
monitoring equipment. The Company's power rectifiers convert or "rectify"
external AC power into DC power at the required level and quality of voltage and
apply the DC power to constantly charge the reserve battery and operate the
user's equipment. For installations with end applications that require varied
power levels, the Company's power control and distribution equipment distributes
the rectified power at the appropriate power level for each of the applications.
The Company manufactures lead acid batteries for use in reserve power
systems. These batteries are sold in a wide range of sizes and configurations in
two broad categories: flooded and valve-regulated. Flooded batteries require
periodic watering and maintenance. Valve-regulated batteries require less
maintenance and are often smaller. Customer demand for valve-regulated batteries
has increased over the past several years.
Telecommunications. The Company's major telecommunications customers
include national long distance companies, RBOCs, cellular system operators,
paging systems and PBX telephoning locations using fiber optic cable, microwave
transmission or traditional copper-wired systems.
The Company has recently introduced several new modular power plants, which
are a type of integrated reserve power system. These products, which are
referred to as the Liberty AGM Series Power Plant and the Liberty ACM Series
Power Plant, integrate advanced rectifiers with high output valve-regulated
batteries.
One of the Company's historically important telecommunications products has
been the Round Cell reserve power battery, a flooded product which was
originally designed and patented by the Bell Laboratories of AT&T for use in
AT&T's own facilities and customer installations. The Company or its predecessor
has manufactured Round Cells for AT&T since 1972 and has been the
3
exclusive manufacturer since 1982. Sales of all products to AT&T accounted for
11.4% of the Company's sales for fiscal 1996. No other customer accounted for
more than 5% of the Company's sales during any of the past three fiscal years.
Uninterruptible Power Supplies. The Company produces batteries for UPS
systems, which provide instant battery backup in the event of primary power loss
or interruption on sensitive equipment, thereby permitting an orderly shutdown
of the equipment or continued operation until the primary source comes back on
line. Large UPSs are used principally for mainframe computers, minicomputers,
networks, workstations and computer-controlled equipment. The Company also
produces batteries for submarine and missile support systems.
Equipment for Electric Utilities and Industrial Control Applications. The
Company produces rectifiers and batteries used in reserve power systems for
switchgear and instrumentation control systems used in electric utilities and
industrial control applications. These power systems enable fossil fuel, hydro
and nuclear power generating stations, switching substations and industrial
control facilities to be shut down in an orderly fashion during emergencies or
power failures by providing auxiliary power.
EMBEDDED HIGH FREQUENCY SWITCHING POWER SUPPLIES
The Company, through its International Power Systems subsidiary ("IPS"),
designs, manufactures and distributes custom, standard and modified standard
electronic power supply systems built for large OEMs of telecommunications
equipment, office products, computers and workstations. In addition, the Company
manufactures high frequency switching power supplies for reserve power
applications that are sold under the "Ratelco" brand name.
IPS's power supply systems incorporate advanced technology and are designed
for dependable operation of the host equipment. The Company's IPS products
include AC-to-DC power supplies, DC-to-DC converters and high voltage power
supplies for use in a large number of industrial applications, with outputs
ranging from several watts to several kilowatts. AC-to-DC power supplies convert
alternating current, the form in which virtually all power is delivered by
electric utilities to end users, into precisely controlled direct current of the
constant voltage required by sensitive electronic applications. DC-to-DC
converters convert one constant voltage into another constant voltage. DC-to-DC
converters are widely used in distributed power systems where power is delivered
within the equipment at a high voltage and is converted to a lower voltage to
permit the operation of microelectronics components such as microprocessors and
analog to digital converters.
In the telecommunications industry, the Company's power supplies are
broadly used in PBX equipment and data network systems. In the office
electronics industry, advanced copying systems with fully automated computer-
controlled imaging, printing, collating and binding capabilities incorporate
IPS's power supplies. The Company also produces power supplies for workstations
and other sophisticated computers.
MOTIVE POWER SYSTEMS
The Company produces 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. The Company's
customers include end users in a broad array of industries, dealers of fork-lift
trucks
4
and other materials handling vehicles and, to a lesser extent, OEMs. The
Company's motive power products are sold under the "C&D Motive Power Systems"
name.
The Company offers two primary lines of motive power systems targeted at
different niches: the C Line and recently announced Olympian, for general
materials handling applications, and the high energy density Suprema Line, which
is designed for narrow aisle, high lift warehousing where battery size is
restricted and energy demands are high. In addition, in 1994, the Company
introduced the SmartBattery, a microprocessor-based module for monitoring usage,
charge levels and discharge cycles that is integrated into a motive power
battery to extend its life cycle.
SALES, INSTALLATION AND SERVICING
The sales, installation and servicing of the Company's power systems
products are performed through a network of independent manufacturer
representatives located throughout the United States and Canada. The Company's
IPS products are represented by a different network of independent manufacturer
representatives. Each independent manufacturer representative operates under a
contract with the Company providing for compensation on a commission basis.
In addition to the network of independent manufacturer representatives, the
Company maintains an internal sales force consisting primarily of regional sales
managers and product/market specialists. The regional managers are each
responsible for managing a number of independent manufacturer's representatives
and for developing longer-term supplier relationships with large OEMs and
national accounts. The Company's internal sales staff services certain large
customers directly.
Charter Power also maintains an internal marketing department. This
department manages the development of new products from the initial concept
definition and management approval stage through the engineering, production and
sales processes. This department also is responsible for applications
engineering and technical training of sales representatives. In addition, the
marketing department develops an annual advertising plan that includes a broad
variety of media such as literature, magazines, video and audio tapes and
computer software.
The Company maintains branch sales offices in the United States and Canada
with the support of the Company's headquarters and service personnel and has
relationships with sales representatives in Malaysia, China, the Philippines,
the Middle East and most of Central and South America, including Mexico and
Brazil.
The Company's products typically are sold upon terms requiring payment in
full within 30 to 60 days. The Company warrants its products to perform as rated
for specified periods of time, ranging from one to twenty years depending on the
type of product and its application, in an amount that decreases over the life
of the product. The lengthiest warranties generally are applicable to standby
power batteries.
BACKLOG
The level of unfilled orders at any given date during the year may be
materially affected by the timing and product mix of the Company's receipt of
orders and, taking into account considerations of manufacturing capacity and
flexibility, the speed with which those orders are filled. Accordingly, the
Company's backlog at any particular date is only indicative of expected future
5
shipments, and period-to-period comparisons may not be meaningful. Orders for
the Company's products are subject to cancellation by the customer prior to
shipment.
The Company normally ships standby power products within two weeks to two
months after order and motive power products within two days to four weeks after
order. The Company's order backlog at January 31, 1996 was $33,604,000 and at
January 31, 1995 was $42,059,000. This decrease in the backlog was due to a
significant decrease in lead times required by customers throughout the
industry. Virtually all of the January 31, 1996 backlog will be filled during
fiscal 1997.
MANUFACTURING AND RAW MATERIALS
The Company manufactures its products at seven domestic plants and a plant
in Mexico. Most key product lines are manufactured at a single focused plant in
order to optimize manufacturing efficiency, asset management and quality
control.
In fiscal 1991, the Company began capacity expansion at several of its
plants, which is continuing. In order to reduce costs and improve manufacturing
efficiency, the Company closed its one Canadian plant and transferred those
manufacturing operations to three of the Company's domestic facilities (see
"Business - International Operations"). Consolidation continued during fiscal
1994 with the Company consolidating the existing standby power electronics
manufacturing at the Conshohocken facility into the Dunlap facility where the
Company's motive power electronics products are manufactured. In addition, the
Company continued the process of moving product lines from the Seattle,
Washington facility to the Dunlap, Tennessee and Nogales, Mexico facilities that
was started in fiscal 1995.
When the Company acquired the PowerSystems Division of ITT in fiscal 1995,
it entered into an agreement pursuant to which a third party "shelter company"
provides to IPS the Nogales, Mexico facility and employs Mexican staff and labor
to assemble IPS's products.
The principal raw materials used in the manufacture of the Company's
products include lead, steel, copper, plastics and electronic components, all of
which are generally available from multiple suppliers. Other than the required
use of two suppliers of lead for the production of Round Cell batteries for
AT&T, the Company uses a number of suppliers to satisfy its raw materials needs.
During fiscal 1996 the Company has continued its program of ISO
recognition. Headquarters has been successfully audited for its compliance to
ISO 9001 while the Leola plant has been fully certified to ISO 9001 standards.
In addition, IPS was granted ISO 9001 certification at its Tucson, Arizona and
Nogales, Mexico facilities during fiscal 1996.
COMPETITION
The Company competes with respect to all of its products on the basis of
reputation, product quality and reliability, service capability and technology.
The Company also competes on the basis of price and its relationships with large
customers.
The Company is a leading North American producer of integrated reserve
power systems and power electronics equipment and believes that it is one of the
four largest producers of reserve power systems in North America. In motive
power, the Company believes that one competitor,
6
Yuasa Exide, Inc., has a significantly larger market share than the Company, and
that the Company, along with two other manufacturers, occupies a second tier of
the market in which they have a significantly larger market share than their
smaller competitors.
In addition, the Company believes that it has certain competitive
advantages in specific product lines. In reserve power systems, Charter Power
believes that it is one of only two major North American companies that
manufactures complete, integrated reserve power systems consisting of both
electronics and batteries, its other major competitors manufacturing either
electronics or batteries, but not both. In motive power, all of the Company's
major competitors supply integrated power systems, but only the Company and one
competitor manufacture both electronics and batteries. For both reserve and
motive power systems, Charter Power believes that the ability to provide a
single source for design, engineering, manufacturing and service is an important
element in its competitive position. With respect to power supplies, the Company
believes that it is one of the largest competitors in this fragmented industry.
When lead prices rise, certain of the Company's competitors that own
smelting operations may have lower lead costs than the Company. However, when
lead prices decline, the high fixed costs associated with these operations may
provide the Company with a cost advantage.
RESEARCH AND DEVELOPMENT
The Company maintains an extensive technology department. Its focus is on
the development of new and custom products (including custom power supplies),
the ongoing development and improvement of existing products, sustaining
engineering, production engineering (including quality testing and managing the
expansion of production capacity) and the evaluation of competitive products.
The Company's research and development facilities feature advanced computer-
aided design and testing equipment, including x-ray and scanning electron
microscope equipment for detecting latent flaws which might cause premature
failure in a product. Technology and engineering personnel coordinate all
activities closely with operations, sales and marketing areas in order to better
meet the needs of customers.
The Company continues to develop new products in all areas of its business.
During fiscal 1996, the new products introduced included the MCT II battery for
reserve power applications and the C 45 and Olympian batteries for motive power
applications.
INTERNATIONAL OPERATIONS
Through fiscal 1992, the Company manufactured a substantial line of standby
power and motive power batteries at its Perth, Ontario plant for the Canadian
market. However, the demand for these products was significantly affected by the
continued recessionary economic environment in the Company's Canadian markets
and the accelerating shift in customer demand in certain key standby power
market sectors. These factors prompted the Company to close its Perth plant in
fiscal 1993.
The Company continues to export to and sell in Canada the full range of its
motive and standby power products through its network of independent Canadian
representatives and one branch office. Canadian operations accounted for less
than 5% of the Company's sales for the last three fiscal years.
7
In addition, the Company manufacturers a large portion of its power
supplies in Mexico through a shelter company for ultimate sale in the United
States. The Company has no significant sales in Mexico.
PATENTS AND TRADEMARKS
The Company follows a policy of applying for patents on new inventions and
designs and actively pursuing pending and future patent applications. The
Company would aggressively assert infringement claims when, in the judgment of
the Company, this is warranted. The Company believes that the growth of its
business will depend primarily upon the quality of its products and its
relationships with its customers, rather than the extent of its patent
protection. While the Company believes that patents are important to its
business operations, the loss of any single or several patents would not have a
material adverse effect on the Company. During fiscal 1996, the Company filed
patent applications directed to several new developments and continued to
prosecute United States and foreign applications which had been previously
filed.
The Company regards its trademarks C&D, LIBERTY, LIBERTY SERIES and RATELCO
as being of substantial value in the marketing of its products. The Company has
registered its C&D, LIBERTY, LIBERTY SERIES and RATELCO trademarks in the United
States Patent and Trademark Office and the Company also has applications pending
for registrations of other trademarks in the United States. The Company's
trademarks include COMPUCHARGE, ELITE, FERRO FIVE, GUARDIAN, GUARDSMAN, RANGER,
RANGERNET and SCOUT.
EMPLOYEES
At January 31, 1996, the Company had 1,395 employees. Of these employees,
1,111 were employed in manufacturing and 284 were employed in field sales,
technical, manufacturing support, sales support, marketing and administrative
activities. In addition, the Company is provided the services of approximately
461 employees in a Mexican shelter company for its Nogales, Mexico manufacturing
facility.
The Company's management considers its employee relations to be
satisfactory. Employees in four plants are not represented by a union. Employees
at the other three plants are represented by three different unions under
collective bargaining agreements.
ENVIRONMENTAL REGULATION
The Company's operations are subject to extensive and evolving
environmental laws and regulations regarding the clean-up and protection of the
environment and worker health and safety. These laws and regulations include
requirements relating to the handling, storage, use and disposal of hazardous
materials and solid wastes, recordkeeping and periodic reporting to governmental
entities regarding the use of hazardous substances and disposal of hazardous
wastes, monitoring and permitting of air and water emissions and monitoring and
protecting workers from exposure to hazardous substances, including lead used in
the Company's manufacturing processes.
The Company operates under what it believes is a comprehensive
environmental, health and safety compliance program, which is headed by an
environmental director and staffed with trained environmental professionals. As
part of its program, the Company has prepared written environmental and health
and safety practice manuals, conducts regular employee training seminars,
8
undertakes internal and external audits of its operations and environmental and
health and safety programs and practices and engages in sampling and monitoring
of employee air, blood lead levels and other chemical exposures. In addition,
the Company also has installed certain pollution abatement equipment to minimize
or reduce emissions of regulated pollutants into the environment and monitors
and seeks to resolve potential environmental liabilities that result from or may
arise from current and historic hazardous materials handling and waste disposal
practices. The Company has instituted a hazardous materials recapture and
recycling program at each of its facilities and for its customers.
While the Company believes that it is in material compliance with the
applicable environmental requirements, it has received, and in the future may
receive, citations and notices from governmental regulatory authorities that
certain of its operations are not in compliance with its permits or applicable
environmental requirements. Occasionally the Company is required to pay a
penalty or fine, to install control technology or to make equipment or process
changes (or a combination thereof) as a result of the non-compliance or changing
regulatory requirements. When the Company receives a notice of a non-compliance,
it regularly undertakes to achieve compliance and works with the authorities to
resolve satisfactorily the issues raised. The associated costs have not had a
material effect on the Company's business, financial condition or results of
operations.
Notwithstanding the Company's efforts to maintain compliance with
applicable environmental requirements, if 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 its predecessors to the extent the Company
is not indemnified therefor), the Company may be held liable for the damage and
for the costs of the environmental investigation and remediation, which could
have a material adverse effect on the Company's business, financial condition or
results of operations.
In view of the potential financial effect such environmental liabilities
could have, when the Company acquired the assets of its predecessor from Allied
in January 1986, it secured an obligation from Allied to indemnify the Company
from undisclosed environmental liabilities resulting from conditions existing as
of the closing date. With the exception of four sites disclosed by Allied at the
time of the acquisition, Allied has accepted indemnification responsibility for
the Company's potential liabilities at those third party owned or operated sites
with respect to which the Company has been named as a potentially responsible
party by the United States Environmental Protection Agency or state
environmental agencies under the federal Superfund law or comparable state
environmental laws.
With respect to the four sites not being covered by the Allied indemnity,
based upon the most currently available information, the Company believes that
its share of liability at these sites will not have a material adverse effect on
the Company's business, financial condition or results of operations. Moreover,
the Company has accrued reserves for these and other immaterial potential
environmental liabilities in its consolidated financial statements and
periodically reevaluates the reserved amounts for these liabilities in view of
the most current information available to it.
The Company also is aware of the existence of potential contamination at
two of its properties which may require expenditures for further investigation
and remediation. At the Company's Huguenot, New York facility, fluoride
contamination in an inactive lagoon exceeding the state's groundwater standards,
which existed prior to the Company's acquisition of the site, has resulted in
the site being listed on the registry of inactive hazardous waste disposal sites
maintained
9
by the New York State Department of Environmental Conservation. The prior owner
of the site, Avnet, Inc., ultimately may bear some, as yet undetermined, share
of the costs associated therewith.
The Company's Conyers, Georgia facility was listed on the Georgia State
Hazardous Sites Inventory. Soil at the site, which was likely contaminated from
a leaking underground acid neutralization tank and possibly stormwater runoff,
has been excavated and disposed of by the Company, and a hydrogeologic study was
undertaken to assess the impact to groundwater. Although that study did not
reveal any groundwater impact, the state environmental agency has requested
further information and additional investigation or remediation may be necessary
before the site may be removed from its Hazardous Sites Inventory.
With respect to each of the properties described in the preceding two
paragraphs, the Company has accrued a reserve in its consolidated financial
statements for its estimate of the potential costs and liabilities associated
with the potential contamination. The costs and potential liabilities for these
matters, in the Company's opinion, are not likely to affect materially the
Company's business, financial condition or results of operations.
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ITEM 2. PROPERTIES
Set forth below is certain information, as of January 31, 1996, with
respect to the Company's principal properties. The Company's interest in all of
its properties is subject to liens securing its bank debt. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources."
SQUARE PRODUCTS MANUFACTURED
LOCATION FOOTAGE AT OR USE OF FACILITY
-------- ------- ---------------------
UNITED STATES PROPERTIES
------------------------
MANUFACTURING:
- -------------
Attica, Indiana 196,000 Large standby power batteries
and motive power batteries
Conshohocken, Pennsylvania 130,000 Metal trays, metal racks and
cabinets, battery R&D
laboratories, distribution
center
Conyers, Georgia 161,000 Small standby power batteries
Dunlap, Tennessee 73,000 Motive power and standby
power electronics products,
cabinets and metal racks
Huguenot, New York 148,000 Motive power batteries
Leola, Pennsylvania 150,000 Large standby power batteries
Seattle, Washington 45,000 Standby power electronics
products
OTHER:
- ------
Plymouth Meeting, Pennsylvania 30,000 World headquarters
Tucson, Arizona 45,000 Headquarters of International
Power Systems, Inc. and
electronics R&D laboratories
INTERNATIONAL PROPERTIES
------------------------
MANUFACTURING:
- -------------
Nogales, Sonora, Mexico 83,000 Power supplies
OTHER:
- -----
Mississauga, Ontario 20,000 Canadian branch
headquarters, sales office
and distribution center
The Company owns its Attica, Conyers, Leola and Conshohocken properties.
The Huguenot property is leased under an industrial revenue bond financing
arrangement entitling the Company
11
to purchase the property for a nominal amount at the end of the term of the
related financing. In connection with the Acquisition, Allied agreed to pay the
principal and interest due under this financing arrangement. The Nogales, Mexico
property is made available through a shelter company in Mexico. The Plymouth
Meeting, Dunlap, Seattle, Mississauga, and Tucson facilities and the Company's
branch sales office are leased. The lease of the Dunlap property terminates in
January 2004. The Company has an option to purchase the Dunlap property during
the lease term for $1,160,000. After the sale of the Plymouth Meeting property
on January 29, 1996 the Company leased a portion of the building until it
relocated its headquarters operations to a leased facility in Blue Bell,
Pennsylvania on March 8, 1996.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in ordinary routine litigation incidental to the
conduct of its business. None of such routine litigation, individually or in the
aggregate, is material to its financial condition or results of operations in
any year. See "Business - Environmental Regulation" for a description of certain
administrative proceedings in which the Company is involved.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock began trading on The Nasdaq National Market on
October 27, 1995 under the symbol CHTR. Prior to October 27, 1995 the Common
Stock was listed and principally traded on the American Stock Exchange (the
"AMEX"), under the symbol CHP. The approximate number of beneficial and
registered record holders of the Company's Common Stock on April 23, 1996 was
1,367.
The following table sets forth, for the periods indicated, the high and low
sales prices for the Company's Common Stock as reported by the AMEX through
October 26, 1995 and The Nasdaq National Market thereafter. These prices
represent actual transactions, but do not reflect adjustment for retail markups,
markdowns or commissions.
YEAR ENDED
------------------
JANUARY 31, 1996 JANUARY 31, 1995
------------------ ------------------
FISCAL QUARTER HIGH LOW HIGH LOW
-------------- ---- --- ---- ---
First Quarter $22 $19 1/4 $12 7/8 $ 9 3/4
Second Quarter 25 1/4 19 7/8 14 1/2 11 1/2
Third Quarter 31 3/4 24 1/8 16 3/8 12 3/8
Fourth Quarter 29 24 21 3/8 15 7/8
The Company began paying quarterly cash dividends on its Common Stock in
April 1987. The dividend declared in each quarter since then has been $.0275 a
share.
12
The Company's bank loan agreement permits quarterly dividends to be paid on
the Company's Common Stock so long as there is no default under that agreement.
Subject to such restriction and the provisions of Delaware law, the Board of
Directors currently intends to continue paying quarterly dividends in the future
at the rate currently paid. There can be no assurance, however, as to the
payment or amount of future dividends, since they will depend on the Company's
earnings and financial condition and other factors.
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical financial data for the periods indicated
have been derived from the Company's consolidated financial statements, which
have been audited by Coopers & Lybrand L.L.P., independent accountants. The
information below should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the Company's
consolidated financial statements for fiscal 1996, 1995 and 1994, which appear
elsewhere herein.
13
FISCAL YEAR
-------------------------------------------
1996(6) 1995(5) 1994 1993(4) 1992
-------- -------- -------- -------- --------
(In thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Net sales $242,422 $200,009 $162,005 $134,064 $151,201
Cost of sales 185,808 154,464 123,560 105,387 117,390
-------- -------- -------- -------- --------
Gross profit 56,614 45,545 38,445 28,677 33,811
Selling, general and
administrative expenses 27,781 24,796 23,121 22,184 18,994
Research and development expenses 6,196 5,284 2,746 2,161 1,815
Restructuring charges (1) -- -- -- 3,106 5,171
-------- -------- -------- -------- --------
Operating income 22,637 15,465 12,578 1,226 7,831
Interest expense, net 1,063 1,222 1,003 1,022 2,187
Other expense, net 423 310 809 522 491
-------- -------- -------- -------- --------
Income (loss) before income taxes
and cumulative effect of change
in accounting principle 21,151 13,933 10,766 (318) 5,153
Provision for income taxes 7,107 4,556 4,359 319 2,216
-------- -------- -------- -------- --------
Income (loss) before cumulative
effect of change in
accounting principle 14,044 9,377 6,407 (637) 2,937
Cumulative effect of change
in accounting principle (2) -- -- -- 1,074 --
-------- -------- -------- -------- --------
Net income (loss) $ 14,044 $ 9,377 $ 6,407 $ (1,711) $ 2,937
======== ======== ======== ======== ========
Income (loss) before cumulative effect
of change in accounting principle per
common and common equivalent
share (3) $ 2.18 $ 1.51 $ 1.08 $ (.11) $ .50
Cumulative effect of change in
accounting principle per common and
common equivalent share (3) -- -- -- (.18) --
-------- -------- -------- -------- --------
Net income (loss) per common and
common equivalent share (3) $ 2.18 $ 1.51 $ 1.08 $ (.29) $ .50
======== ======== ======== ======== ========
Dividends per common share $ .11 $ .11 $ .11 $ .11 $ .11
======== ======== ======== ======== ========
BALANCE SHEET DATA:
Working capital $ 50,302 $ 27,746 $ 18,556 $ 15,698 $ 19,394
Total assets 130,827 112,137 93,255 97,633 87,422
Short-term debt (exclusively current
portion of long-term debt) 200 3,670 3,121 4,263 635
Long-term debt 15,417 14,183 11,149 20,643 25,240
Stockholders' equity 68,926 51,722 41,031 33,146 35,157
14
(1) In Fiscal 1992, the Company recorded a provision of $5,171 for the closure
of its Perth, Ontario manufacturing plant and the integration of that
manufacturing capability into its remaining facilities.
In Fiscal 1993, the Company recorded a provision of $2,048 for costs
related to the rationalization of the Company's standby power electronics
business resulting from the Ratelco acquisition. The Company also recorded a
provision of $1,058 primarily consisting of severance and other related costs
attributable to a restructuring of management.
(2) The Company provides certain health care and life insurance benefits for
retired employees who meet certain service requirements under an employee
benefit plan (the "Plan"). Under the Plan, the Company contributes a fixed
amount and requires the retiree to fund the remaining cost. In Fiscal 1993, the
Company adopted the provisions of SFAS 106. Under SFAS 106, the expected cost of
the benefits provided by existing postretirement plans is actuarially determined
and accrued ratably from the date of hire to the date the employee is fully
eligible to receive the benefits. Previously, postretirement benefits expense
was recognized when the insurance premiums were incurred. In Fiscal 1993, the
accumulated postretirement benefit obligation (APBO) at February 1, 1992 was
recognized separately as the cumulative effect of a change in accounting
principle resulting in a charge of $1,074 (after related income tax benefit of
$716), or $.18 per share. As the Company's contribution is frozen, the change in
future health care costs should not materially impact the APBO.
(3) Based on 6,451,289, 6,210,793, 5,922,511, 5,840,832, and 5,901,548 weighted
average shares outstanding and the effect of shares issuable under stock options
based on the treasury stock method for fiscal 1996, 1995, 1994, 1993 and 1992,
respectively.
(4) Effective October 31, 1992, the Company acquired substantially all of the
assets of the Ratelco Manufacturing Division of Ratelco, Inc., a manufacturer of
power electronics equipment, for cash and the assumption of certain liabilities.
The Company has accounted for the acquisition under the purchase method. The
excess of net assets over the purchase price was immaterial.
(5) Effective March 29, 1994, the Company, through its subsidiary,
International Power Systems, Inc., acquired for cash, certain assets and assumed
specific liabilities of the custom power supply business of ITT PowerSystems
Corporation. See notes to consolidated Financial Statements.
(6) Effective January 24, 1995, the Company purchased certain assets and
assumed certain liabilities from the switching power supply business of Basler
Electric Company, a Highland, Illinois-based manufacturer of electrical
components. See notes to consolidated Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
IMPACT OF ECONOMY AND SHIFT IN CUSTOMER DEMAND
During fiscal 1996 improved economic conditions resulted in higher demand
for the Company's standby power products. In the telecommunications market, the
continuing shift in customer demand from the flooded battery products was
reflected in the growth in sales of Liberty 2000, a premium valve-regulated
battery.
The Company's motive power sales continued to grow, however, the growth
rate was less than the growth in the overall market due to selective pricing.
15
RAW MATERIAL PRICING AND PRODUCTIVITY
Lead, steel, copper, plastics and electronic components are the major raw
materials used in the manufacture of the Company's industrial batteries and,
accordingly, represent a significant portion of the Company's materials costs.
During fiscal 1996, 1995 and 1994, North American producer prices of lead have
been rising, averaging $.44, $.38 and $.32/lb., respectively. The price of lead
is currently at its highest level since fiscal 1991.
The Company has undertaken a long-term cost containment program to maximize
manufacturing efficiency and continues as a matter of course to allocate a
significant amount of its normal annual capital expenditures to cost containment
and productivity improvement projects.
INFLATION
The Company's costs of manufacturing materials and labor and most other
operating costs are affected by inflationary pressures. The Company's ability to
pass along inflationary cost increases through higher prices may be limited
during periods of stable or declining lead prices because of industry pricing
practices that tend to link product prices and lead prices. The Company believes
that, over recent years, it generally has been able to offset inflationary cost
increases by effective raw materials purchasing programs, price increases of its
products, increases in labor productivity and improvements in overall
manufacturing efficiency.
16
RESULTS OF OPERATIONS
The following table sets forth selected items in the Company's consolidated
statements of income as a percentage of sales for the periods indicated.
FISCAL YEAR
----------------
1996 1995 1994
---- ---- ----
Net sales 100.0% 100.0% 100.0%
Cost of sales 76.6 77.2 76.3
----- ----- -----
Gross profit 23.4 22.8 23.7
Selling, general and administrative expenses 11.5 12.4 14.2
Research and development expenses 2.6 2.7 1.7
----- ----- -----
Operating income 9.3 7.7 7.8
Interest expense, net 0.4 0.6 0.6
Other expense, net 0.2 0.1 0.5
----- ----- -----
Income before income taxes 8.7 7.0 6.7
Provision for income taxes 2.9 2.3 2.7
----- ----- -----
Net income 5.8% 4.7% 4.0%
===== ===== =====
FISCAL 1996 COMPARED TO FISCAL 1995
Net sales for fiscal 1996 increased 21 percent to $242,422,000 from $200,009,000
in fiscal 1995. Fiscal 1996 sales of standby power products, up in virtually
every category, increased 18 percent over the prior year resulting from higher
unit volumes and slightly higher unit prices. The most significant increases
occurred in sales to the domestic and international telecommunications
industries. Sales of the Company's Liberty 2000 series product increased 45
percent over the prior year. 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 purchased as
of January 24, 1995 rose 69 percent over fiscal 1995. Approximately 57 percent
of this increase was related to the business acquired from the Basler Electric
Company. On a company wide basis, domestic and international sales of standby
power products and power supplies to the telecommunications market increased 33
percent over fiscal 1995. Sales of motive power products were up 8 percent over
the prior year due to slightly higher volumes and prices.
Gross profit for fiscal 1996 increased $11,069,000 or 24 percent to $56,614,000
from $45,545,000 in the prior fiscal year, resulting in a gross margin of 23.4
percent versus 22.8 percent in the prior year. Gross margins increased 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 decreased to 11.5 percent of sales
in fiscal 1996 from 12.4 percent in the prior year as a result of operating
leverage generated from the higher sales volume.
17
Research and development expenses remained proportional to sales as a relative
percentage for both fiscal 1996 and fiscal 1995.
Interest expense, net, decreased 13 percent from fiscal 1996 to fiscal 1995
due to lower debt balances, offset by slightly higher effective rates.
Other expense, net, increased $113,000 primarily due to a full year's
amortization of capitalized debt cost versus a partial year in fiscal 1995 and
lower nonoperating income in fiscal 1996, partially offset by a lower exchange
loss in the current year.
As a result of the above, for fiscal 1996, income before income taxes
increased $7,218,000 or 52 percent from fiscal 1995 and net income rose 50
percent from fiscal 1995 to $14,044,000 or $2.18 per share.
FISCAL 1995 COMPARED TO FISCAL 1994
Sales for fiscal 1995 increased 23.5% to $200,009,000 from $162,005,000 in
fiscal 1994. Sales of standby power products increased 2.7% over fiscal 1994
resulting almost exclusively from higher unit volumes, as unit prices decreased
slightly versus fiscal 1994. Unit growth in the standby power segment emanated
from several factors. The telecommunications industry as a whole continued to
grow, and the Company successfully increased its penetration of this industry
resulting in sales growth to this sector in excess of the sector's overall
growth. Sales of the Liberty 2000 series almost doubled versus fiscal 1994. The
Company's sales growth was in part offset by two factors which reduced sales by
approximately $13,000,000: the completion of the Puerto Rico Electric Power
Authority project in fiscal 1994, and significant reduction in round cell sales
to a single customer (the Company expects round cell sales will continue to
diminish in significance as the Company's business grows over time). Adjusting
for these two factors, the Company's standby power sales grew approximately
19.1% over fiscal 1994. Motive power sales of both batteries and chargers
increased 16.7% to $66,372,000 in fiscal 1995 from $56,866,000 in fiscal 1994
with higher unit volumes more than offsetting lower prices, as customers' motive
power needs increased due to overall economic growth in this sector. In
addition, sales increased over fiscal 1994 as a result of the first quarter
acquisition of IPS, which increased sales $25,709,000 over the previous year.
Gross profit for fiscal 1995 increased $7,100,000 to $45,545,000 from
$38,445,000 in fiscal 1994, with a gross margin of 22.8%, down from 23.7% in the
prior year. Gross profit increases were due primarily to the aforementioned
sales increases. The reduction in gross margin results in part from (i) the
acquisition of IPS and the related integration expenses, (ii) overhead
absorption and volume-related issues emanating from the aforementioned reduction
in round cell sales to a single customer, and (iii) fluctuations in the
Company's product mix. Gross margins were negatively impacted in the latter part
of fiscal 1995 by the overall rise in material prices. This resulted in the
Company instituting price increases in the third and fourth quarters of fiscal
1995.
Selling, general and administrative expenses ("SG&A") increased $1,675,000
to $24,796,000 in fiscal 1995 from $23,121,000 in fiscal 1994. SG&A expenses as
a percentage of sales declined to 12.4% in fiscal 1995 from 14.2% in fiscal
1994. Selling expense as a percentage of sales was 10.4% in fiscal 1995, versus
11.3% in fiscal 1994. This reduction was due in part to the lower commission
structure attributable to IPS sales and to the operating leverage attributable
to the increased direct sales generated by the Company's captive sales personnel
(versus commission sales by the independent manufacturer representatives).
General and administrative expenses were down 17.1% primarily due to (i) lower
compensation expense related to a change in the structure of the Company's stock
option plan, and (ii) a reduction in other outside service expenses.
18
Research and development expenses increased $2,538,000 to $5,284,000 in
fiscal 1995 due primarily to R&D expenditures at IPS.
Operating income increased 23.0% to $15,465,000 in fiscal 1995 from
$12,578,000 in fiscal 1994 as a result of the aggregate of the aforementioned
factors.
Interest expense, net, increased 21.8% to $1,222,000 due to higher
effective interest rates.
Other expense, net, decreased 61.7% to $310,000 due to lower financial
services cost, lower foreign exchange expense and higher miscellaneous
nonoperating income.
Income tax expense increased $197,000 due to higher operating income
partially offset by a decrease in the deferred tax valuation allowance. This
decrease relates to the revaluation of the realization of deferred tax assets
due to changes in state tax laws and the stock option compensation deferred tax
asset due to increases in the price of the Company's common stock.
Net income increased $2,970,000 due primarily to the increase in operating
income and the acquisition of IPS.
LIQUIDITY AND CAPITAL RESOURCES
Net cash flows provided by operating activities increased to $14,975,000 in
fiscal 1996 compared to $10,066,000 in fiscal 1995. This increase was primarily
due to higher current year net income and payables partially offset by increased
inventories and a smaller increase in accounts receivables than the prior year.
The inventory increase was related to the higher sales volumes and the Company's
strategic decision to have more inventory available to meet competitive
pressures, coupled with the purchase of inventory related to the business
acquired from the Basler Electric Company.
Net cash used by investing activities decreased $4,067,000 to $10,685,000
in fiscal 1996 from $14,752,000 in fiscal 1995. This decrease was primarily the
result of lower acquisition expenditures coupled with the net proceeds from the
disposal of property, plant and equipment related to the fourth quarter fiscal
1996 sale of the Company's headquarters building located in Plymouth Meeting,
Pennsylvania. The decrease was partially offset by restricted cash related to
the Development Authority of Rockdale County Industrial Development Revenue
Bonds obtained in fiscal 1996 to finance the Company's expansion of its Conyers,
Georgia plant.
Net cash provided by financing activities decreased to $76,000 in fiscal
1996, a decrease of $2,371,000 from the prior year, which included additional
borrowings primarily for the IPS Acquisition. Fiscal 1996 cash provided by
financing activities included proceeds from the issuance of 50,000 shares of
common stock in a public offering and proceeds from the exercise of stock
options during the year, coupled with a repayment in notes receivable from
shareholders. These items were partially offset by the purchase of treasury
stock.
On January 26, 1996, the Company's revolving credit facility was increased
from $45,000,000 to $65,000,000. 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. Fiscal 1996 capital expenditures were incurred primarily
to fund new product development, capacity expansion, a continuing series of cost
reduction programs, normal maintenance capital, and regulatory compliance.
Fiscal 1997 capital expenditures are expected to be approximately $17,000,000
for similar purposes.
19
The Company has been notified that it is a potentially responsible party
and has responded to requests for information relating to various Third Party
Facilities (see note 8[B] to the notes to consolidated financial statements).
STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS NOT YET ADOPTED
In March 1995, the Financial Accounting Standards Board (FASB) issued SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," which is effective for fiscal years beginning after
December 15, 1995. The provisions of SFAS No. 121 require the Company to review
its long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable through
future cash flows. Any loss will be recognized in the statement of income and
certain disclosures regarding the impairment will be made in the financial
statements. The Company is evaluating the provisions of SFAS No. 121 and does
not anticipate adoption to have a material effect on its financial position or
results of operations.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which is effective for fiscal years beginning after December 15,
1995. This statement allows entities to choose between a new fair value based
method of accounting for employee stock options or similar equity instruments
and the current method of accounting prescribed by Accounting Principles Board
Opinion No. 25. Entities electing to remain with the accounting in Opinion No.
25 must make pro forma disclosures of net income and net income per share as if
the fair value method of accounting had been applied. The Company expects to
continue accounting for employee stock options and similar equity instruments in
accordance with Opinion No. 25.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data listed in Item 14(a)(1)
hereof are incorporated herein by reference and are filed as part of this
report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
The information required by Part III (Items 10 through 13) is incorporated
herein by reference to the captions "Principal Stockholders," "Election of
Directors," "Management" and "Certain Transactions" in the Company's definitive
Proxy Statement to be filed pursuant to Regulation 14A within 120 days after the
end of the Company's fiscal year covered by this report.
20
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K.
(A) DOCUMENTS FILED AS PART OF THIS REPORT:
(1) THE FOLLOWING FINANCIAL STATEMENTS ARE INCLUDED IN THIS REPORT ON
FORM 10-K:
CHARTER POWER SYSTEMS, INC. AND SUBSIDIARIES
Report of Independent Accountants
Consolidated Balance Sheets as of January 31, 1996 and 1995
Consolidated Statements of Income for the years ended January 31,
1996, 1995 and 1994
Consolidated Statements of Stockholders' Equity for the years ended
January 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended January
31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
(2) THE FOLLOWING FINANCIAL STATEMENT SCHEDULE IS INCLUDED IN THIS
REPORT ON FORM 10-K:
CHARTER POWER SYSTEMS, INC. AND SUBSIDIARIES
for the years ended January 31, 1996, 1995 and 1994
Report of Independent Accountants on Schedule
II. Valuation and Qualifying Accounts
(3) EXHIBITS:
3.1 Restated Certificate of Incorporation of the Company, as
amended (incorporated by reference to Exhibit 3.1 to the
Company's Registration Statement on Form S-1, No. 33-10889).
3.2 By-laws of the Company, as amended (filed herewith).
4.1 Financing and Security Agreement dated as of September 26,
1994 among NationsBank, N.A., CoreStates Bank, N.A., National
Westminster Bank, NJ and Charter Power Systems, Inc. and its
subsidiaries (incorporated by reference to Exhibit 10.1 to
the Company's Current Report on Form 8-K dated September 26,
1994); First Amendment thereto dated December 13, 1995 and
Second Amendment thereto dated January 26, 1996 (filed
herewith).
21
4.2 Loan Agreement between Pennsylvania Economic Development
Financing Authority ("PEDFA") and the Company and Remarketing
Agreement between PNC Securities Corp. ("PNC") and the
Company, both dated as of December 1, 1991 (incorporated by
reference to Exhibit 10.6 to the Company's Annual Report on
Form 10-K for the year ended January 31, 1992); Reimbursement
Agreement dated as of September 1994 among NationsBank, N.A.
and Charter Power Systems, Inc. and its subsidiaries
(incorporated by reference to Exhibit 10.2 to the Company's
Current Report on Form 8-K dated September 26, 1994); all
relating to the issuance of $1,400,000 principal amount of
PEDFA Economic Development Revenue Bonds, 1991 Series D6.
4.3 Loan Agreement between PEDFA and the Company and Remarketing
Agreement between PNC and the Company, both dated as of
December 1, 1991 (incorporated by reference to Exhibit 10.7
to the Company's Annual Report on Form 10-K for the year
ended January 31, 1992); Reimbursement Agreement dated as of
September 1994 among NationsBank, N.A. and Charter Power
Systems, Inc. and its subsidiaries (incorporated by reference
to Exhibit 10.3 to the Company's Current Report on Form 8-K
dated September 26, 1994); all relating to the issuance of
$1,900,000 principal amount of PEDFA Economic Development
Revenue Bonds, 1991 Series B2.
10.1 Purchase Agreement dated November 27, 1985, among Allied,
Allied Canada Inc. and the Company; Amendments thereto dated
January 28 and October 8, 1986 (incorporated by reference to
Exhibit 10.1 to the Company's Registration Statement on Form
S-1, No. 33-10889).
10.2 Agreement dated December 15, 1986, between the Company and
Allied (incorporated by reference to Exhibit 10.2 to the
Company's Registration Statement on Form S-1, No. 33-10889).
10.3 Lease Agreement dated February 15, 1994 by and between
Sequatchie Associates, Incorporated and C&D Charter Power
Systems, Inc. (incorporated by reference to Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q for the quarter
ended April 30, 1994).
10.4 C&D Charter Power Systems, Inc. Savings Plan (incorporated by
reference to Exhibit 10.9 to the Company's Annual Report on
Form 10-K for the fiscal year ended January 31, 1995).
10.5 C&D Charter Power Systems, Inc. Pension Plan for Salaried
Employees as restated and amended (incorporated by reference
to Exhibit 10.10 to the Company's Annual Report on Form 10-K
for the fiscal year ended January 31, 1995); First and Second
Amendments thereto dated December 20, 1995 (filed herewith).
10.6 Charter Power Systems, Inc. Incentive Compensation Plan
(incorporated by reference to Exhibit 10.6 to the Company's
Quarterly Report on Form 10-Q for the quarter ended April 30,
1995).
22
10.7 Employment Agreement dated May 30, 1989, between Alfred Weber
("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
(incorporated by reference to Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended July 31,
1995); Amendment Agreement to Option Agreement dated as of
July 22, 1990 between Weber and the Company (incorporated by
reference to Exhibit 10.20 to the Company's Annual Report on
Form 10-K for the fiscal year ended January 31, 1991); Second
Amendment Agreement dated June 10, 1991 between Weber and the
Company (incorporated by reference to Exhibit 4 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
April 30, 1991); Third Amendment Agreement dated July 23,
1992 and Fourth Amendment Agreement dated as of January 1,
1993 between Weber and the Company (incorporated by reference
to Exhibit 10.19 to the Company's Annual Report on Form 10-K
for the fiscal year ended January 31, 1993).
10.8 Employment Agreement dated January 26, 1990, between Leslie
Holden and the Company (incorporated by reference to Exhibit
10.3 to the Company's Quarterly Report on Form 10-Q for the
quarter ended July 31, 1995); Amendment thereto dated April
3, 1995 (incorporated by reference to Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
April 30, 1995).
10.9 Agreement dated March 28, 1994, between C&D Charter Power
Systems, Inc. and AT&T (incorporated by reference to Exhibit
10.20 to the Company's Annual Report on Form 10-K for the
fiscal year ended January 31, 1994).
10.10 Employment Agreement dated March 1, 1994 between A. Gordon
Goodyear and the Company (incorporated by reference to
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q
for the quarter ended April 30, 1994); Amendment thereto
dated April 3, 1995 (incorporated by reference to Exhibit
10.4 to the Company's Quarterly Report on Form 10-Q for the
quarter ended April 30, 1995).
10.11 Employment Agreement dated April 7, 1992 between George C.
Branca and the Company (incorporated by reference to Exhibit
10.3 to the Company's Quarterly Report on Form 10-Q for the
quarter ended April 30, 1994); Amendment thereto dated April
3, 1995 (incorporated by reference to Exhibit 10.5 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
April 30, 1995).
10.12 Employment Agreement dated April 3, 1995 between Stephen E.
Markert, Jr. and the Company (incorporated by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended April 30, 1995).
10.13 Employment Agreement dated April 3, 1995 between A. T. (Paul)
Kambouroglou and the Company (incorporated by reference to
Exhibit 10.2
23
to the Company's Quarterly Report on Form 10-Q for the
quarter ended April 30, 1995).
10.14 Employment Agreement dated August 15, 1995 between Stephen
Weglarz, Esq. and the Company (incorporated by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended October 31, 1995).
21 Subsidiaries of the Company (incorporated by reference to
Exhibit 21 to the Company's Annual Report on Form 10-K for
the fiscal year ended January 31, 1995).
23 Consent of Independent Accountants (filed herewith).
27 Financial Data Schedule (filed herewith).
99.1 Additional undertaking in connection with the Company's
Registration Statement on Form S-8 No. 33-31978 (filed
November 7, 1989), the Company's Registration Statement on
Form S-8 No. 33-71390 (filed October 27, 1993) and the
Company's Registration Statement on Form S-8 No. 33-86672
(filed November 23, 1994).
The registrant undertakes to furnish the Commission with a copy of certain
agreements which are not being filed in accordance with to Item 601
(b)(4)(iii) of Regulation S-K.
(B) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed by the Company during the last
quarter of the period covered by this report.
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
April 30, 1996 By: /s/ Alfred Weber
-----------------------
Alfred Weber
Chairman, President
and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Alfred Weber Chairman, President and April 30, 1996
- --------------------------- Chief Executive Officer
Alfred Weber
/s/ Stephen E. Markert, Jr. Vice President Finance and April 30, 1996
- --------------------------- Treasurer (Principal Financial
Stephen E. Markert, Jr. and Accounting Officer)
/s/ George J. Sbordone Director April 30, 1996
- ---------------------------
George J. Sbordone
/s/ David Beretta Director April 30, 1996
- ---------------------------
David Beretta
/s/ Glenn M. Feit Director April 30, 1996
- ---------------------------
Glenn M. Feit
/s/ Merril M. Halpern Director April 30, 1996
- ---------------------------
Merril M. Halpern
/s/ Jerome L. Katz Director April 30, 1996
- ---------------------------
Jerome L. Katz
/s/ Warren A. Law Director April 30, 1996
- ---------------------------
Warren A. Law
25
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
FINANCIAL STATEMENTS
CHARTER POWER SYSTEMS, INC. AND SUBSIDIARIES
PAGE
----
Report of Independent Accountants................... F-2
Consolidated Balance Sheets as of
January 31, 1996 and 1995.......................... F-3
Consolidated Statements of Income
for the years ended January 31, 1996,
1995 and 1994...................................... F-4
Consolidated Statements of
Stockholders' Equity for the years
ended January 31, 1996, 1995 and 1994.............. F-5
Consolidated Statements of Cash Flows
for the years ended January 31, 1996,
1995 and 1994...................................... F-6
Notes to Consolidated Financial Statements.......... F-8
FINANCIAL STATEMENT SCHEDULE
CHARTER POWER SYSTEMS, INC. AND SUBSIDIARIES
For the years ended January 31, 1996, 1995 and 1994
Report of Independent Accountants on Schedule....... S-1
Schedule II. Valuation and Qualifying Accounts..... S-2
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Charter Power Systems, Inc.
We have audited the accompanying consolidated balance sheets of Charter Power
Systems, Inc. and Subsidiaries as of January 31, 1996 and 1995, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended January 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Charter
Power Systems, Inc. and Subsidiaries as of January 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended January 31, 1996, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
March 22, 1996
F-2
CHARTER POWER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 31,
(DOLLARS IN THOUSANDS)
1996 1995
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 5,472 $ 1,097
Restricted cash and cash equivalents 5,402 75
Accounts receivable, less allowance for doubtful
accounts of $1,421 in 1996 and $1,404 in 1995 31,855 30,253
Inventories 35,227 26,869
Deferred income taxes 6,235 5,231
Other current assets 1,367 553
------- -------
Total current assets 85,558 64,078
Property, plant and equipment, net 39,375 40,059
Intangible and other assets, net 3,287 5,314
Goodwill, net 2,607 2,686
------- -------
Total assets $130,827 $112,137
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 200 $ 3,670
Accounts payable 19,008 15,601
Accrued liabilities 13,513 13,994
Other current liabilities 2,535 3,067
------- -------
Total current liabilities 35,256 36,332
Deferred income taxes 2,750 3,552
Long-term debt 15,417 14,183
Other liabilities 8,478 6,348
------- -------
Total liabilities 61,901 60,415
------- -------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, 10,000,000 shares
authorized; 6,326,176 and 5,971,041 shares issued
in 1996 and 1995, respectively 63 60
Additional paid-in capital 36,283 32,053
Minimum pension liability adjustment (760) -
Treasury stock, at cost, 57,400 shares (1,304) -
Notes receivable from stockholders - (1,656)
Retained earnings 34,644 21,265
------- -------
Total stockholders' equity 68,926 51,722
------- -------
Total liabilities and stockholders' equity $130,827 $112,137
======= =======
See notes to consolidated financial statements.
F-3
CHARTER POWER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED JANUARY 31,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1996 1995 1994
---- ---- ----
Net sales $242,422 $200,009 $162,005
Cost of sales 185,808 154,464 123,560
------- ------- -------
Gross profit 56,614 45,545 38,445
Selling, general and administrative expenses 27,781 24,796 23,121
Research and development expenses 6,196 5,284 2,746
------- ------- -------
Operating income 22,637 15,465 12,578
Interest expense, net 1,063 1,222 1,003
Other expense, net 423 310 809
------- ------- -------
Income before income taxes 21,151 13,933 10,766
Provision for income taxes 7,107 4,556 4,359
------- ------- -------
Net income $ 14,044 $ 9,377 $ 6,407
======= ======= =======
Net income per common and common
equivalent share:
Primary $ 2.18 $ 1.51 $ 1.08
Assuming full dilution $ 2.18 $ 1.50 $ 1.08
See notes to consolidated financial statements.
F-4
CHARTER POWER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JANUARY 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Minimum Notes
Common Stock Additional Pension Treasury Stock Receivable Total
------------ Paid-In Liability -------------- From Retained Stockholders'
Shares Amount Capital Adjustment Shares Amount Stockholders Earnings Equity
------ ------ ------- ---------- ------ ------ ------------ -------- ------------
Balance as of January 31, 1993 5,775,291 $58 $28,088 $(1,769) $6,769 $33,146
Net income 6,407 6,407
Dividends to stockholders,
$.11 per share (637) (637)
Stock option compensation 1,492 1,492
Amortization of discount on
stockholder notes (49) (49)
Tax effect relating to
stock options exercised 32 32
Principal payments on stock-
holder notes 162 162
Stock options exercised 62,125 478 478
--------- -- ------ ------ ------ ------ ------ ------ ------
Balance as of January 31, 1994 5,837,416 58 30,090 (1,656) 12,539 41,031
Net income 9,377 9,377
Dividends to stockholders,
$.11 per share (651) (651)
Stock option compensation 717 717
Tax effect relating to stock
options exercised 141 141
Stock options exercised 133,625 2 1,105 1,107
--------- -- ------ ------ ------ ------ ------ ------ ------
Balance as of January 31, 1995 5,971,041 60 32,053 (1,656) 21,265 51,722
Net income 14,044 14,044
Dividends to stockholders,
$.11 per share (665) (665)
Tax effect relating to stock
options exercised 1,426 1,426
Principal payments on stock-
holder notes 1,656 1,656
Minimum pension liability
adjustment $(760) (760)
Purchase of common stock (57,400) $(1,304) (1,304)
Issuance of common stock 50,000 667 667
Stock options exercised 305,135 3 2,137 2,140
--------- -- ------ --- ------ ----- ------ ------ ------
Balance as of January 31, 1996 6,326,176 $63 $36,283 $(760) (57,400) $(1,304) - $34,644 $68,926
========= == ====== ==== ====== ====== ====== ====== ======
See notes to consolidated financial statements.
F-5
CHARTER POWER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JANUARY 31,
(DOLLARS IN THOUSANDS)
1996 1995* 1994*
---- ---- ----
Cash flows provided (used) by operating activities:
Net income $ 14,044 $ 9,377 $ 6,407
Adjustments to reconcile net income to net
cash provided by operating activities :
Depreciation and amortization 6,109 6,892 7,460
Deferred income taxes (1,237) (43) (477)
Loss (gain) on disposal of assets 428 (175) 222
Stock option compensation - 717 1,445
Changes in:
Accounts receivable (1,570) (8,548) 2,658
Inventories (8,341) 1,560 (1,319)
Other current assets (56) (115) 153
Accounts payable 3,405 2,008 290
Accrued liabilities 1,600 922 1,752
Income taxes payable 670 (1,282) 888
Other current liabilities (794) (2,372) (3,770)
Other liabilities 1,143 1,313 232
Other, net (426) (188) 307
------ ------ ------
Net cash provided by operating activities 14,975 10,066 16,248
------ ------ ------
Cash flows provided (used) by investing activities:
Acquisition of businesses, net - (8,038) -
Acquisition of property, plant and equipment (7,937) (7,650) (3,611)
Proceeds from disposal of property,
plant and equipment 2,579 551 92
Change in restricted cash (5,327) 385 141
------ ------ -------
Net cash used by investing activities (10,685) (14,752) (3,378)
-------- ------- -------
Cash flows provided (used) by financing activities:
Repayment of long-term debt (8,669) (18,956) (10,636)
Proceeds from new borrowings 6,500 21,414 -
Financing costs of long-term debt (257) (471) (25)
Repayment of notes receivable from stockholders 1,656 - 162
Proceeds from issuance of common stock, net 2,807 1,107 478
Purchase of treasury stock (1,304) - -
Payment of common stock dividends (657) (647) (635)
------- ------- -------
Net cash provided (used) by financing activities 76 2,447 (10,656)
------- ------- -------
Effect of exchange rate changes on cash 9 (25) (15)
------- ------- -------
Increase (decrease) in cash and cash equivalents 4,375 (2,264) 2,199
Cash and cash equivalents at beginning of year 1,097 3,361 1,162
------- ------ -------
Cash and cash equivalents at end of year $ 5,472 $ 1,097 $ 3,361
======= ====== =======
* Reclassified for comparative purposes
See notes to consolidated financial statements.
F-6
CHARTER POWER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED JANUARY 31,
(DOLLARS IN THOUSANDS)
1996 1995 1994
---- ---- ----
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid during the year for:
Interest paid, net $1,419 $1,291 $1,286
Income taxes paid $7,674 $5,880 $3,947
SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Liabilities assumed in acquisitions - $3,468 -
Dividends declared but not paid $ 172 $ 164 $ 160
See notes to consolidated financial statements.
F-7
CHARTER POWER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
________
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION:
Charter Power Systems, Inc. was incorporated in November 1985. The Company
manufactures battery power systems and their components for commercial,
industrial and government use in the North American and export standby power and
motive power markets. The Company also manufactures embedded high frequency
switching power supplies for use in telecommunication equipment, advanced office
electronics and sophisticated computer systems. On January 28, 1986, the Company
purchased substantially all of the assets of the C&D Power Systems division of
Allied Corporation (Allied) (the Acquisition).
The consolidated financial statements include the accounts of Charter Power
Systems, Inc. and its wholly owned subsidiaries (collectively the Company). All
significant intercompany accounts and transactions have been eliminated.
ACCOUNTING ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FOREIGN CURRENCY TRANSLATION:
Assets and liabilities in foreign currencies are translated into U.S.
dollars at the rate of exchange prevailing at the balance sheet date. Revenue
and expenses are translated at the average rate of exchange for the period.
Transaction gains (losses) included in income for the years ended January 31,
1996, 1995 and 1994 were not material.
DERIVATIVE FINANCIAL INSTRUMENTS:
Derivative financial instruments are utilized by the Company to reduce
foreign exchange and interest rate risks. The Company has established a control
environment which includes polices and procedures for risk assessment and the
approval, reporting and monitoring of derivative financial instrument
activities. The Company does not hold or issue financial instruments for trading
purposes and it prohibits the use of derivatives for speculative purposes.
Derivative financial instruments are accounted for on an accrual basis. Income
and expense are recorded in the same category as that arising from the related
asset or liability being hedged.
The Company selectively uses foreign currency forward and option contracts
to offset the effects of exchange rate changes on cash flows denominated in
foreign currencies, primarily the Canadian dollar. Gains and losses were not
material in any year.
The Company uses an interest rate swap agreement to reduce the impact of
interest rate changes on its debt. The interest rate swap agreement involves the
exchange of variable for fixed rate interest payments without the exchange of
the underlying notional amount (see Note 5).
F-8
CHARTER POWER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
________
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS:
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents. The Company's cash
management program utilizes zero balance accounts. Accordingly, all book
overdraft balances have been reclassified to accounts payable and amounted to
$4,761 and $3,127 at January 31, 1996 and 1995, respectively.
INVENTORIES:
Inventories are stated at the lower of cost or net realizable value. Cost
is generally determined by the last-in, first-out (LIFO) method for financial
statement and federal income tax purposes.
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment acquired as of the Acquisition is recorded at
the then fair value. Property, plant and equipment acquired subsequent to the
Acquisition is recorded at cost or fair market value if part of an acquisition.
Plant and equipment, including capital leases, are depreciated on the straight-
line method for financial reporting purposes over estimated useful lives which
range from 3 to 10 years for machinery and equipment, and 10 to 40 years for
buildings and improvements. The Company's policy is to capitalize interest
during the period of construction.
The cost of maintenance and repairs is charged to expense as incurred.
Renewals and betterments are capitalized. Upon retirement or other disposition
of items of plant and equipment, the cost of the item and related accumulated
depreciation are removed from the accounts and any gain or loss is included in
income.
The Company capitalizes purchased software, including certain costs
associated with its installation. The cost of software capitalized is amortized
over its estimated useful life, generally five years, using the straight-line
method.
INTANGIBLE AND OTHER ASSETS:
Intangible and other assets, net, includes assets acquired resulting from
business acquisitions and are being amortized on the straight-line method over
their estimated periods of benefit. Accumulated amortization as of January 31,
1996 and 1995 was $946 and $731, respectively.
GOODWILL:
Goodwill represents the excess of cost over the fair value of net assets
acquired and is being amortized on the straight-line method over 40 years. The
recoverability of goodwill is periodically reviewed by the Company. In assessing
recoverability, many factors are considered, including operating results and
cash flows. The Company believes that no impairment of goodwill existed at
January 31, 1996. Accumulated amortization as of January 31, 1996 and 1995 was
$830 and $741, respectively.
F-9
CHARTER POWER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
________
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCRUED LIABILITIES:
Included in accrued liabilities as of January 31, 1996 and 1995 are $2,216
and $2,103 of accrued vacation, $1,642 and $1,791 of accrued sales commissions
and $2,675 and $1,612 of accrued workers compensation insurance, respectively.
OTHER LIABILITIES:
The Company provides for estimated warranty costs at the time of sale.
Accrued warranty obligations of $2,007 and $1,880 are included in other current
liabilities and $4,234 and $2,985 are included in other liabilities as of
January 31, 1996 and 1995, respectively.
INCOME TAXES:
The Company follows Statement of Financial Accounting Standards (SFAS) No.
109 "Accounting for Income Taxes," which requires recognition of deferred tax
liabilities and assets for the expected future tax consequences of events that
have been included in the financial statements or tax returns using tax rates in
effect for the year in which the differences are expected to reverse.
NET INCOME PER SHARE:
Net income per common and common equivalent share for the years ended
January 31, 1996, 1995 and 1994 are based on the weighted average number of
shares of Common Stock outstanding and the effect of shares issuable under stock
options based on the treasury stock method. Fully diluted earnings per share
reflects dilution related to stock options due to the use of the market price at
the end of the period, when higher than the average price for the period.
Weighted average common and common equivalent shares were as follows:
January 31,
-----------------------------------
1996 1995 1994
---- ---- ----
Primary 6,451,289 6,210,793 5,922,511
Fully diluted 6,455,467 6,256,066 5,948,966
F-10
CHARTER POWER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
________
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS NOT YET ADOPTED:
In March 1995, the Financial Accounting Standards Board (FASB) issued SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," which is effective for fiscal years beginning after
December 15, 1995. The provisions of SFAS No. 121 require the Company to review
its long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable through
future cash flows. Any loss will be recognized in the statement of income and
certain disclosures regarding the impairment will be made in the financial
statements. The Company is evaluating the provisions of SFAS No. 121 and does
not anticipate adoption to have a material effect on its financial position or
results of operations.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which is effective for fiscal years beginning after December 15,
1995. This statement allows entities to choose between a new fair value based
method of accounting for employee stock options or similar equity instruments
and the current method of accounting prescribed by Accounting Principles Board
Opinion No. 25. Entities electing to remain with the accounting in Opinion No.
25 must make pro forma disclosures of net income and net income per share as if
the fair value method of accounting had been applied. The Company expects to
continue accounting for employee stock options and similar equity instruments in
accordance with Opinion No. 25.
2. RESTRICTED CASH AND CASH EQUIVALENTS
At January 31, 1996, the Company had debt proceeds of $5,402 which were
available solely for the acquisition and installation of equipment at the
Company's existing industrial battery manufacturing facility located in Conyers,
Georgia (see Note 5).
At January 31, 1995, the Company had $75 which was available solely for the
payment of certain warranty claims which arose from the sale of product on or
before the effective date of a previous acquisition. The balance remaining after
satisfaction of these claims was returned to the seller.
F-11
CHARTER POWER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
________
3. INVENTORIES
Inventories consisted of the following:
January 31,
------------------
1996 1995
---- ----
Raw materials $14,033 $ 9,780
Work-in-progress 9,357 7,893
Finished goods 11,837 9,196
------- ------
$35,227 $26,869
======= =======
If the first-in, first-out (FIFO) method of inventory accounting had been
used (which approximates current cost), inventories would have been $3,205 and
$3,308 higher than reported as of January 31, 1996 and 1995, respectively.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, net, consisted of the following:
January 31,
-----------------
1996 1995
---- ----
Land $ 487 $ 804
Buildings and improvements 16,281 19,284
Furniture, fixtures and equipment 63,617 59,446
Construction in progress 3,950 1,349
------- -------
84,335 80,883
Less:
Accumulated depreciation 44,960 40,824
------- -------
$39,375 $40,059
======= =======
For the years ended January 31, 1996, 1995 and 1994, depreciation
charged to operations amounted to $5,555, $6,597 and $7,144; maintenance and
repair costs expensed totaled $5,939, $5,665 and $4,587; and interest
capitalized amounted to $60, $87 and $50, respectively.
F-12
CHARTER POWER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
________
5. LONG-TERM DEBT
Long-term debt consisted of the following:
January 31,
-----------
1996 1995
---- ----
Revolving credit facility (Revolving Credit);
maximum commitment of $65,000 and $45,000 at
January 31, 1996 and 1995, respectively; bearing
interest at Prime or LIBOR plus 1.25% - -
Term loan (Term Loan); original amount
of $15,000, bearing interest at Prime or LIBOR plus
1.45%, principal payable in equal quarterly payments
of $750 which commenced on December 1, 1994
(effective rate on a weighted average basis, 7.05% and
7.37% as of January 31, 1996 and 1995, respectively) $ 6,250 $13,500
Pennsylvania Economic Development Financing
Authority (PEDFA) Taxable Development Revenue Bonds,
1991 Series B2, supported by a letter of credit, bearing
interest at a rate set on a weekly basis which approximates
the commercial paper rate (effective rate on a weighted
average basis, 5.60% as of January 31, 1996 and 4.85%
as of January 31, 1995), principal payable in monthly install-
ments of $8 from December 1993 through November 1999
and of $108 from December 1999 through November 2000 1,684 1,784
PEDFA Economic Development Revenue Bonds,
1991 Series D6, supported by a letter of credit, bearing
interest at a rate set on a weekly basis which approximates
the commercial paper rate (effective rate on a weighted
average basis, 3.55% as of January 31, 1996 and 3.41%
as of January 31, 1995), principal payable in monthly
installments of $8 from December 1993 through November
1999 and of $67 from December 1999 through November 2000 1,183 1,283
Development Authority of Rockdale County Industrial
Development Revenue Bonds, Series 1995, (Georgia Bonds),
supported by a letter of credit (Georgia L/C), bearing interest
at a rate set on a weekly basis which approximates tax exempt
A+ rated debt securities (effective rate on weighted average
basis, 3.45% as of January 31, 1996), principal payable at
maturity December 1, 2005 6,500 -
Capital lease obligations, bearing interest ranging
from 12.71% to 13.27% - 161
Amount due to former owner of acquired business,
noninterest bearing, payable in various amounts through
July 1995 - 1,125
------ -------
15,617 17,853
Less current portion 200 3,670
------ -------
$15,417 $14,183
====== =======
F-13
CHARTER POWER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
________
5. LONG-TERM DEBT (CONTINUED)
On September 26, 1994 the Company entered into a three-bank credit
facility consisting of a $45,000 revolving credit facility and a $15,000 term
loan. The bank group consists of NationsBank, NA, National Westminster Bank, New
Jersey and CoreStates Bank N.A. (The Lenders). On January 26, 1996 the Revolving
Credit facility was increased from $45,000 to $65,000.
The Revolving Credit is a three-year facility with two one-year extension
options subject to The Lenders' approval or the facility may be converted to a
three-year converted term loan (Converted Loan) at the Company's discretion at
any maturity date. On January 26, 1996 the Company exercised its first option
and extended the facility from three to four years. The Company has the right to
use up to $8,000 of the availability under the Revolving Credit to provide for
the issuance of letters of credit, including the letters of credit covering the
$2,900 PEDFA loans (The PEDFA L/C), for the account of the Company. The Georgia
L/C was issued independent of the Revolving Credit and does not impair the
$8,000 availability. At January 31, 1996, $6,575 was outstanding under the
Georgia L/C. The aggregate value of the letters of credit outstanding was
$11,477 and $5,108 at January 31, 1996 and 1995, respectively. The availability
under the Revolving Credit was $53,523 and $39,892 at January 31, 1996 and 1995,
respectively. A letter of credit fee of between 1.00% and 1.25% per annum on the
aggregate face amount of any outstanding letters of credit is payable quarterly.
A commitment fee of 0.25% per annum on the amount of remaining availability is
payable quarterly.
The interest rates are based on a financial coverage ratio. As of January
31, 1996 the lowest rate available under the facility was in effect. The
available interest rates under the current agreement are in the following
ranges; Prime to Prime plus 0.75% or LIBOR plus 1.25% to LIBOR plus 1.75% on the
Revolving Credit; Prime to Prime plus 0.75% or LIBOR plus 1.45% to LIBOR plus
2.00% on all Term Loans; Prime plus 0.25% to Prime plus 1.00% or LIBOR plus
1.70% to LIBOR plus 2.25% on all Converted Loans.
The maximum aggregate amounts of loans outstanding under the
Revolving Credit were $7,237, $14,000, and $8,816 during the years ended January
31, 1996, 1995 and 1994, respectively. For those years, the outstanding loans
(excluding the PEDFA L/C guarantees) under the Revolving Credit computed on a
monthly basis averaged $2,204, $6,808, and $5,213 at a weighted average interest
rate of 8.53%, 7.33% and 5.26%, respectively.
Short-term debt of $3,000 under the Term Loan has been classified as
long-term because of the Company's intent to renew the borrowing using an
available long-term revolving credit facility.
F-14
CHARTER POWER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
________
5. LONG-TERM DEBT (CONTINUED)
On December 20, 1995 the Company entered into an interest rate swap
agreement with a notional amount of $6,500. This swap agreement effectively
fixed the interest rate on a like amount of our floating rate debt at 7.26% and
expires on December 20, 2002. At January 31, 1996 the estimated fair value of
this interest rate swap agreement is not material. The ultimate amounts paid or
received under this agreement, however, depends on future interest rates. The
estimates of fair value are based on market prices or current rates offered for
debt and swaps with similar terms and maturities.
The Revolving Credit and Term Loan are collateralized by liens upon
substantially all the Company's assets. The agreement contains certain
restrictive covenants, including certain cash flow and financial ratio
requirements and a restriction on capital expenditures. The agreement permits
payment of dividends on the Company's Common Stock so long as there is no
default under the agreement.
The PEDFA bonds are subject to mandatory redemption upon the
occurrence of certain events, including the termination of the PEDFA L/C. The
tax exempt bonds are subject to mandatory redemption if they lose their tax
exempt status.
The Company was in compliance with its lending agreement covenants at
January 31, 1996 and 1995, respectively.
As of January 31, 1996, the required minimum annual principal reduction of
long-term debt for each of the next five years is as follows:
1997 $ 200
1998 200
1999 6,450
2000 517
2001 1,750
Thereafter 6,500
------
$15,617
======
F-15
CHARTER POWER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
________
6. STOCKHOLDERS' EQUITY
(A) STOCK OPTION PLAN:
The Company has a stock option plan, under which options to purchase a
total of 939,750 shares of Common Stock were authorized to be granted to
eligible employees. Options are to be granted at no less than 100% of the fair
market value on the date of grant in the case of incentive stock options and at
such price as the Compensation Committee of the Board of Directors deems
appropriate in the case of nonqualified stock options for terms expiring no more
than ten years and one day after the date of grant. The options are exercisable
upon vesting as determined by the Compensation Committee at the time the options
are granted.
A summary of stock option activity related to the Company's plan is as
follows:
Beginning Granted Exercised Canceled Ending
Balance During During During Balance
Outstanding Year Year Year Outstanding Exercisable
----------- ----- ----- ----- ----------- -----------
Year ended January 31, 1996
Number of shares 403,600 - 94,125 7,675 301,800 187,300
Average option price per share $9.96 - $9.20 $10.39 $10.19 $9.06
Year ended January 31, 1995
Number of shares 306,625 266,350 133,625 35,750 403,600 155,125
Average option price per share $7.58 $12.36 $8.28 $13.69 $9.96 $6.69
Year ended January 31, 1994
Number of shares 355,250 37,000 62,125 23,500 306,625 232,625
Average option price per share $7.40 $9.89 $7.71 $8.13 $7.58 $7.65
There were 284,895 and 277,220 shares available for future grants of
options as of January 31, 1996 and 1995, respectively.
(B) GRANT OF OPTIONS:
In June, 1988 and May, 1989, the Company granted options to purchase
237,386 and 110,000 shares, respectively, of Common Stock to certain executives
for terms expiring April 30, 1993 and 1994, respectively, at $6.04 per share.
In June, 1991: (i) a certain executive vested in his options to purchase 26,376
shares of common stock; and (ii) the agreements regarding the remaining options
were amended whereby certain vesting criteria were eliminated and the expiration
dates changed, so that these options vested on April 30, 1994 and would expire
on October 31, 1995 and April 30, 1996 for options to purchase 211,010 and
110,000 shares, respectively. During the year ended January 31, 1994, the
option to purchase 26,376 shares expired prior to exercise. During the year
ended January 31, 1996 the option to purchase 211,010 shares was exercised. The
Company has recorded compensation expense related to these options of $0, $66
and $265 in the years ended January 31, 1996, 1995 and 1994, respectively.
F-16
CHARTER POWER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
__________
7. INCOME TAXES
The provisions for income taxes as shown in the accompanying consolidated
statements of income consisted of the following:
January 31,
-------------------------------
1996 1995 1994
---- ---- ----
Currently payable:
Federal $ 7,156 $3,888 $4,019
State 1,068 616 748
Foreign Sales Corporation 120 95 69
----- ----- -----
8,344 4,599 4,836
----- ----- -----
Deferred:
Federal (1,052) 437 (182)
State (185) (480) (295)
------ ----- -----
(1,237) (43) (477)
------ ----- -----
$ 7,107 $4,556 $4,359
====== ====== ======
The components of the deferred tax asset and liability as of January
31, 1996 and 1995 were as follows:
1996 1995
---- ----
Deferred tax asset:
Vacation and compensation accruals $3,686 $3,064
Restructuring reserves 297 251
Postretirement benefits 716 688
Warranty reserves 2,490 1,785
Bad debt, inventory and return allowances 961 990
Environmental reserves 502 528
Other accruals 822 552
Valuation allowance - (792)
------ ------
Total deferred tax asset 9,474 7,066
------ ------
Deferred liability:
Depreciation and amortization (5,049) (4,700)
Pension obligation (740) (487)
Other (200) (200)
------ ------
Total deferred liabilities (5,989) (5,387)
------ ------
Net deferred tax asset $3,485 $1,679
===== =====
The decrease in the valuation allowance of $792 and $671 during the years
ended January 31, 1996 and 1995 relates to the revaluation of the realization of
deferred tax assets related to state income taxes due to changes in state tax
laws of $0 and $443 and to revaluation of the stock option compensation deferred
tax asset due to increases in the price of the Company's common stock of $792
and $228, respectively.
F-17
CHARTER POWER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
__________
7. INCOME TAXES (CONTINUED)
Reconciliations of the provisions for income taxes at the U. S. Federal
statutory rate to the effective tax rates for the years ended January 31, 1996,
1995 and 1994, respectively, are as follows:
January 31,
-----------------------
1996 1995 1994
---- ---- ----
U.S. statutory income tax $7,403 $4,777 $3,668
State tax, net of federal
income tax benefit 574 401 453
Reduction in valuation allowance (792) (671) -
Stock option compensation - 23 276
Foreign sales corporation (150) (119) (128)
Other 72 145 90
------ ------ ------
$7,107 $4,556 $4,359
====== ====== ======
8. COMMITMENTS AND CONTINGENCIES
(A) OPERATING LEASES:
The Company leases certain manufacturing and office facilities and certain
equipment under operating lease agreements. Certain leases contain renewal
options and some have purchase options, and generally provide that the Company
shall pay for insurance, taxes and maintenance. As of January 31, 1996, the
Company had future minimum annual lease obligations under leases with
noncancellable lease terms in excess of one year as follows:
1997 $1,172
1998 1,034
1999 959
2000 903
2001 802
Thereafter 4,726
-----
$9,596
=====
Total rent expense for all operating leases for the years ended January 31,
1996, 1995 and 1994 was $1,800, $1,512 and $1,086, respectively.
(B) CONTINGENT LIABILITIES:
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.
F-18
CHARTER POWER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
_______
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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.
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 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
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.
F-19
CHARTER POWER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
_______
8. COMMITMENTS AND CONTINGENCIES (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 the
EPA that it is a de minimis PRP at the ILCO Site. 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, the majority 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 currently
available information, however, the Company believes that its most likely
exposure with respect to the Chicago Site will be the approximately $283
previously reserved, 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.
(C) PURCHASE COMMITMENTS:
The Company has long-term relationships pertaining to the purchase of
certain raw materials with various suppliers through December 31, 1996. These
purchase commitments are not expected to exceed usage requirements.
9. MAJOR CUSTOMER
A single United States customer accounted for 11.4%, 9.9% and 13.8% of net
sales for the years ended January 31, 1996, 1995 and 1994, respectively.
10. CONCENTRATION OF CREDIT RISK
Financial instruments which subject the Company to potential concentration
of credit risk consist principally of trade receivables and temporary cash
investments. The Company places its temporary cash investments with various
financial institutions and, generally, limits the amount of credit exposure to
any one financial institution. Except as discussed in Note 9, concentrations of
credit risk with respect to trade receivables is limited by a large customer
base and its geographic dispersion. The Company performs ongoing credit
evaluations of its customers' financial condition and requires collateral, such
as letters of credit, in certain circumstances.
F-20
CHARTER POWER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
________
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments including cash and cash
equivalents, accounts receivable, accounts payable and accrued liabilities
approximate fair value due to the relatively short maturity of these
instruments. The carrying value of long term debt, including the current
portion, approximates fair value based on the incremental borrowing rates
currently available to the Company for loans with similar terms, maturity and
tax exempt status.
12. RELATED PARTY TRANSACTIONS
In connection with the Acquisition, the Company entered into a consulting
agreement with an affiliate of certain of the Company's major stockholders.
Effective January 1, 1992, the agreement was amended to eliminate the Company's
obligation to pay regular periodic consulting fees and to substitute therefore
an obligation to pay certain fees in connection with potential acquisitions by
the Company. The agreement was terminated on November 1, 1995. For the years
ended January 31, 1996, 1995 and 1994 the Company paid $0, $80 and $20,
respectively.
In May 1988, the Company entered into an agreement with a former executive
providing for (i) the purchase of 316,515 shares of Common Stock at $4.20 a
share, payable in cash in the amount of $.01 a share and the balance of $4.19 a
share in a noninterest bearing note and (ii) the grant of certain options (see
Note 6). The note matured on October 31, 1995 and was repaid. For financial
reporting purposes, the note was discounted to present value as of the date of
issuance.
In May 1989, the Company entered into an agreement with another executive
providing for (i) the purchase of 60,000 shares of Common Stock at $5.50 a
share, payable in cash in the amount of $.01 a share and an interest bearing
note at 12.5% (6.0% per annum effective July 1, 1992) maturing April 30, 1998
(subject to acceleration under certain circumstances), and (ii) the grant of
certain options (see Note 6). This note was repaid in the current year.
The statements of income for the years ended January 31, 1996, 1995 and
1994 include executive contracts expenses of $0, $66 and $265, respectively.
The Company had a consulting agreement with a firm of which one of the
former executives is the sole stockholder and chief executive officer, under
which the firm agreed to provide business consulting services to the Company.
The agreement terminated on April 30, 1994 and provided for an annual consulting
fee under which the Company paid $25 and $100 for the years ended January 31,
1995 and 1994, respectively.
13. EMPLOYEE BENEFIT PLANS
(A) The Company has various noncontributory defined benefit pension plans,
which cover substantially all employees.
The Company's funding policy is to contribute annually an amount that can
be deducted for federal income tax purposes using a different actuarial cost
method and different assumptions than those used for financial reporting
purposes. Pension benefits for the Company's defined benefit plans are generally
based on employee's years of service and qualifying compensation during the
years of employment. Plan assets are invested in commingled trust funds
consisting primarily of equity and U.S. Government securities.
F-21
CHARTER POWER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
________
13. EMPLOYEE BENEFIT PLANS (CONTINUED)
The following table represents the funded status of the Company's plans and
amounts included in the Company's balance sheets:
January 31, 1996 January 31, 1995
---------------- ----------------
Under- Over- Under-
funded funded funded
Plans Plans Plans
----- ----- -----
Actuarial present value
of benefit obligations:
Vested benefit obligation $23,225 $2,965 $14,492
======= ====== =======
Accumulated benefit
obligation $24,699 $3,253 $15,422
======= ====== =======
Projected benefit
obligation $28,726 $3,253 $17,958
Plan assets at fair value 25,423 3,295 16,998
------ ----- ------
Projected benefit obligation
(in excess of) less than plan assets (3,303) 42 (960)
Unrecognized net loss 3,659 998 912
Prior service cost not yet recognized
in net periodic pension cost (2) 14 (16)
Adjustment required to recognize
minimum liability (1,341) - -
------ ----- ------
(Accrued) prepaid pension cost $ (987) $1,054 $ (64)
====== ===== ======
The provisions of SFAS No. 87, "Employers Accounting for Pensions," require
the recognition of an additional minimum liability for each defined pension plan
for which the accumulated benefit obligation exceeds plan assets. The reduction
of the benefit obligation discount rate from 9.25% to 7.25% increased the
accumulated benefit obligation at January 31, 1996. Accordingly, the Company has
recorded an additional long-term liability of $1,341 with an offsetting
intangible asset. Because the asset recognized may not exceed the amount of
unrecognized prior service cost of $12, the balance of $760, net of tax
benefits, is reported as a separate reduction of stockholders' equity at January
31, 1996.
For the years ended January 31, 1996, 1995 and 1994, the actuarially
computed net pension expense included the following components:
1996 1995 1994
---- ---- ----
Service cost $ 733 $ 864 $ 783
Interest cost 1,906 1,794 1,675
Actual return on plan assets (6,216) 116 (1,997)
Net amortization and deferrals 4,506 (1,858) 248
------ ------ ------
Net pension expense $ 929 $ 916 $ 709
====== ====== ======
F-22
CHARTER POWER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
________
13. EMPLOYEE BENEFIT PLANS (CONTINUED)
Actuarial assumptions used in accounting for the plans for the years
ended January 31, 1996, 1995 and 1994 were as follows:
1996 1995 1994
---- ---- ----
Discount rate:
Pension expense 9.25% 7.675% 8.25%
Benefits obligations 7.25% 9.25% 7.675%
Rates of increase in
compensation levels 4.6% to 8.6% 4.6% to 8.6% 4.6 to 8.6%
Expected long-term rate
of return on assets 8.75% 8.75% 9.0%
(B) The Company provides certain health care and life insurance
benefits for retired employees who meet certain service requirements under a
frozen plan (the Plan). Under the Plan, the Company contributes a fixed amount
and requires the retiree to fund the remaining cost. As the Company's
contribution is frozen, the change in future health care costs should not
materially impact the APBO.
The components of postretirement benefit expense follow:
1996 1995 1994
---- ---- ----
Service cost of benefits earned $ 49 $ 63 $ 62
Interest cost on liability 111 119 127
Net amortization (37) - -
--- --- ---
Postretirement benefit costs $123 $182 $189
=== === ===
The following table sets forth the Plan's postretirement benefit liability
as of January 31, 1996 and 1995:
1996 1995
---- ----
Accumulated postretirement benefit obligation:
Current retirees $ 638 $ 731
Fully eligible actives 602 503
Other actives 270 212
------ ------
Total accumulated postretirement benefit obligation 1,510 1,446
Unrecognized net gain (279) (325)
------ ------
Accrued postretirement benefit liability $ 1,789 $ 1,771
====== ======
The accumulated postretirement benefit obligation was determined using a
discount rate of 7.25% and 9.25% for the years ended January 31, 1996 and 1995,
respectively.
(C) All employees not covered by collective bargaining agreements
are eligible to participate in various defined contribution retirement plans.
The Company's contributions under the plan are based on specified percentages of
employee contributions. The Company's cost was $633, $526 and $366 for the years
ended January 31, 1996, 1995 and 1994, respectively.
F-23
CHARTER POWER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
________
14. ACQUISITIONS
(A) Effective March 29, 1994, the Company, through its subsidiary,
International Power Systems, Inc., (IPS) acquired for cash, certain assets and
assumed specific liabilities of the custom power supply business of ITT
PowerSystems Corporation.
The acquisition was recorded using the purchase method of accounting
and the net purchase price of $5,966 approximated the fair value of the net
assets acquired. The results of operations of this acquisition are included in
the Company's consolidated financial statements from the date of acquisition.
The following unaudited pro forma financial information combines the
consolidated results of operations as if the custom power supply business of ITT
PowerSystems Corporation had been acquired 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 and expected to have
a continuing impact.
January 31,
-------------------
1995 1994
---- ----
Net sales $204,505 $190,887
Net income $ 9,495 $ 6,830
Net income per common share
on a fully diluted basis $ 1.52 $ 1.15
The pro forma financial information does not necessarily reflect the
operating results that would have occurred had the acquisition been consummated
as of the above dates, nor is such information indicative of future operating
results.
(B) Effective January 24, 1995, the Company purchased certain assets and
assumed certain liabilities from the switching power supply business of Basler
Electric Company, a Highland, Illinois-based manufacturer of electrical
components. These power supplies are used for office electronics and
communications applications.
The acquisition was recorded using the purchase method of accounting and
the net purchase price of $3,197, of which $1,125 was included in current
portion of long-term debt at January 31, 1995, approximated the fair value of
the net assets acquired. The results of operations of this acquisition are
included in the Company's consolidated financial statements from the date of
acquisition and are not material in relation to the Company's consolidated
financial statements.
15. SUBSEQUENT EVENTS
Effective February 22, 1996, the Company's wholly owned subsidiary, IPS,
acquired substantially all the assets of LH Research, Inc., a producer and
marketer of standard power supply systems for the electronics industry. In
consideration of the assets acquired, the Company assumed certain specified
contracts to which LH Research, Inc. was a party and paid cash of approximately
$4,100.
F-24
CHARTER POWER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
________
15. SUBSEQUENT EVENTS (CONTINUED)
Effective March 12, 1996, the Company acquired from Burr-Brown Corporation,
for approximately $15,400 subject to certain adjustments, its entire interest in
Power Convertibles Corporation (PCC) consisting of 1,044,418 shares of PCC
common stock and all outstanding preferred stock and acquired or repaid
the indebtedness of PCC. The Company funded the acquisition using its existing
credit facilities. PCC produces battery chargers for cellular phones and DC to
DC converters used in communications, computer, medical, industrial and
instrumentation markets.
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data for the years ended January 31, 1996 and 1995
follow:
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
For the year ended
January 31, 1996:
Net sales $58,777 $63,381 $61,456 $58,808
Gross profit 13,792 15,324 14,744 12,754
Operating income 5,134 6,495 6,124 4,884
Net income 3,175 3,930 3,896 3,043
Net income per share $ .50 $ .61 $ .60 $ .47
For the year ended
January 31, 1995:
Net sales $42,644 $47,619 $54,617 $55,129
Gross profit 10,365 10,963 12,893 11,324
Operating income 3,762 3,801 4,610 3,292
Net income 2,008 2,170 2,751 2,448
Net income per share $ .33 $ .35 $ .44 $ .38
F-25
REPORT OF INDEPENDENT ACCOUNTANTS ON SCHEDULE
To the Board of Directors and Stockholders of
Charter Power Systems, Inc.
Our report on the consolidated financial statements of Charter Power Systems,
Inc. and Subsidiaries is included on page F-2 of this Form 10-K. In connection
with our audits of such financial statements, we have also audited the related
financial statement schedule listed in item 14(a) (2) of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
March 22, 1996
S-1
CHARTER POWER SYSTEMS, INC. AND SUBSIDIARIES
SCHEDULE II.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JANUARY 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
Additions
Charged Additions Balance
Balance at (Credited) Charged at
Beginning to Costs & to Other End of
of Period Expenses Accounts(b) Deductions Period
--------- --------- ----------- ----------- -------
Deducted From Assets
- --------------------
Allowance for Doubtful Accounts:
Year ended January 31, 1996 $1,404 $ 136 $ - $ 119 (a) $1,421
Year ended January 31, 1995 1,622 (151) 137 204 (a) 1,404
Year ended January 31, 1994 1,819 81 - 278 (a) 1,622
_________
(a) Amounts written-off, net of recoveries.
(b) Additions related to business acquisitions.
S-2
EXHIBIT INDEX
3.2 By-Laws of the Company, as amended
4.1 First and Second Amendment to Financing and Security Agreement
10.5 First and Second Amendment to the C&D Charter Power Systems, Inc.
Pension Plan for Salaried Employees
23 Consent of Independent Accountants
27 Financial Data Schedule