UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 1997
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 No. 1-9389
CHARTER POWER SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 13-3314599
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1400 Union Meeting Road
Blue Bell, Pennsylvania 19422
(Address of principal executive office)
(Zip Code)
(215) 619-2700
(Registrant's telephone number, including area code)
______________________________________________
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO_____
Number of shares of the Registrant's Common Stock outstanding on June 5, 1997:
6,104,425
<PAGE>
CHARTER POWER SYSTEMS, INC.
AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION Page No.
Item 1 - Financial Statements
Consolidated Balance Sheets -
April 30, 1997 and January 31, 1997................. 3
Consolidated Statements of Income -
Three Months Ended April 30, 1997 and 1996.......... 5
Consolidated Statements of Cash Flows -
Three Months Ended April 30, 1997 and 1996.......... 6
Notes to Consolidated Financial Statements.......... 8
Report of Independent Accountants................... 13
Item 2 - Management's Discussion and Analysis
Of Financial Condition and Results of Operations.... 14
PART II. OTHER INFORMATION 17
SIGNATURES 18
2
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CHARTER POWER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
April 30, January 31,
1997 1997
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 1,033 $ 952
Restricted cash and cash equivalents - 1
Accounts receivable, less allowance for
doubtful accounts of $1,565 and
$1,414, respectively 42,362 41,682
Inventories 41,539 38,943
Deferred income taxes 7,325 7,315
Other current assets 638 437
------- -------
Total current assets 92,897 89,330
Property, plant and equipment, net 52,404 52,469
Intangible and other assets, net 5,555 6,208
Goodwill, net 11,614 11,966
------- -------
Total assets $162,470 $159,973
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 486 $ 476
Accounts payable 22,764 23,730
Accrued liabilities 16,719 14,468
Other current liabilities 6,328 5,220
------- -------
Total current liabilities 46,297 43,894
Deferred income taxes 4,206 3,923
Long-term debt 24,422 29,351
Other liabilities 8,787 7,899
------- -------
Total liabilities 83,712 85,067
------- -------
The accompanying notes are an integral part of these statements.
3
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CHARTER POWER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(Dollars in thousands)
(Unaudited)
April 30, January 31,
1997 1997
---- ----
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value,
10,000,000 shares authorized;
6,557,976 and 6,547,476 shares
issued, respectively 66 65
Additional paid-in capital 39,539 39,326
Minimum pension liability adjustment (136) (136)
Treasury stock, at cost, 470,551 shares (11,232) (11,232)
Note receivable from stockholder,
net of discount of $68 and
$85, respectively (1,654) (1,636)
Cumulative translation adjustment (685) (374)
Retained earnings 52,860 48,893
------- -------
Total stockholders' equity 78,758 74,906
------- -------
Total liabilities and
stockholders' equity $162,470 $159,973
======= =======
The accompanying notes are an integral part of these statements.
4
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CHARTER POWER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
(Unaudited)
Three months ended
April 30,
1997 1996
---- ----
Net sales $73,346 $62,429
Cost of sales 54,363 47,308
------ ------
Gross profit 18,983 15,121
Selling, general and administrative
expenses 9,255 7,443
Research and development expenses 2,076 1,874
------ ------
Operating income 7,652 5,804
Interest expense, net 376 262
Other expense (income), net 712 ( 3)
------ ------
Income before income taxes 6,564 5,545
Provision for income taxes 2,429 1,899
------ ------
Net income $ 4,135 $ 3,646
====== ======
Net income per common and
common equivalent share $ .66 $ .56
====== ======
Weighted average common and
common equivalent shares 6,265 6,548
====== ======
Dividends per share $ .0275 $ .0275
====== ======
The accompanying notes are an integral part of these statements.
5
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CHARTER POWER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Three months ended
April 30,
1997 1996
---- ----
Cash flows provided (used) by operating activities:
Net income $ 4,135 $ 3,646
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,359 1,940
Deferred income taxes 273 150
Changes in:
Accounts receivable (740) (2,096)
Inventories (2,625) (2,964)
Other current assets (203) (478)
Accounts payable (964) 4,121
Accrued liabilities 2,250 (444)
Income taxes payable 1,849 1,489
Other current liabilities (654) (33)
Other liabilities 888 66
Other, net (224) 25
------ ------
Net cash provided by operating activities 7,344 5,422
------ ------
Cash flows provided (used) by investing activities:
Acquisition of businesses, net of cash
acquired - (19,739)
Acquisition of property, plant and equipment (2,298) (4,310)
Change in restricted cash 1 1,311
------ ------
Net cash used by investing activities (2,297) (22,738)
------ ------
Cash flows provided (used) by financing activities:
Repayment of long-term debt (4,919) (6,367)
Proceeds from new borrowings - 19,784
Proceeds from issuance of common stock 127 331
Payment of common stock dividends (167) (173)
------ ------
Net cash provided (used) by financing activities (4,959) 13,575
------ ------
Effect of exchange rate changes on cash (7) 4
------ ------
The accompanying notes are an integral part of these statements.
6
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CHARTER POWER SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Dollars in thousands)
(Unaudited)
Three months ended
April 30,
1997 1996
---- ----
Increase (decrease) in cash and cash
equivalents 81 (3,737)
Cash and cash equivalents at beginning
of period 952 5,472
------ ------
Cash and cash equivalents at end of
period $ 1,033 $ 1,735
====== ======
SUPPLEMENTAL CASH FLOW
DISCLOSURES
Cash paid during the year for:
Interest paid, net $ 484 $ 248
Income taxes paid 308 261
SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Acquired businesses*:
Estimated fair value of assets acquired - $ 13,544
Goodwill and identifiable intangible
assets - 12,655
Purchase price obligations - (1,358)
Cash paid, net of cash acquired - (19,739)
------ -------
Liabilities assumed - $ 5,102
====== =======
Dividends declared but not paid $ 168 $ 177
Note receivable from stockholder in connection
with issuance of common stock - $ 664
* Restated to include final opening balance sheet adjustments as of
January 31, 1997.
The accompanying notes are an integral part of these statements.
7
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CHARTER POWER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(UNAUDITED)
1. INTERIM STATEMENTS
The accompanying interim consolidated financial statements should be read
in conjunction with the consolidated financial statements and notes thereto
contained in the Company's Annual Report to Shareholders for the fiscal year
ended January 31, 1997. The January 31, 1997 amounts were derived from the
Company's audited financial statements. The consolidated financial statements
presented herein are unaudited but, in the opinion of management, include all
necessary adjustments (which comprise only normal recurring items) required for
a fair presentation of the consolidated financial position as of April 30, 1997
and the consolidated statements of income and cash flows for the three months
ended April 30, 1997 and 1996. However, interim results of operations
necessarily involve more estimates than annual results and are not indicative of
results for the full fiscal year.
2. INVENTORIES
Inventories consisted of the following:
April 30, January 31,
1997 1997
---- ----
Raw materials ............................ $18,528 $17,506
Work-in-progress ......................... 10,456 11,599
Finished goods ........................... 12,555 9,838
------ ------
$41,539 $38,943
====== ======
3. INCOME TAXES
A reconciliation of the provision for income taxes from the statutory rate
to the effective rate is as follows:
Three months ended
April 30,
1997 1996*
---- ----
U.S. statutory income tax 35.0% 35.0%
State tax, net of federal income tax benefit 3.6 3.3
Reduction of taxes provided in prior years -- (3.6)
Tax effect of foreign operations (1.4) --
Foreign sales corporation (1.2) (0.7)
Other 1.0 0.2
---- ----
37.0% 34.2%
==== ====
*Reclassified for comparative purposes.
8
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CHARTER POWER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands)
(UNAUDITED)
4. CONTINGENT LIABILITIES
With regard to the following contingent liabilities there have been no
material changes since January 31, 1997.
Because the Company uses lead and other hazardous substances in its
manufacturing processes, it is subject to numerous federal, Canadian, Mexican,
Irish, state and local laws and regulations that are designed to protect the
environment and employee health and safety. These laws and regulations include
requirements of periodic reporting to governmental agencies regarding the use
and disposal of hazardous substances and compliance with rigorous criteria
regarding exposure to employees and the disposal of scrap. In the opinion of the
Company, the Company complies in all material respects with these laws and
regulations.
Notwithstanding such compliance, if damage to persons or the environment
has been or is caused by hazardous substances used or generated in the conduct
of the Company's business, the Company may be held liable for the damage and be
required to pay the cost of remedying the same, and the amount of any such
liability might be material to the results of operations or financial condition.
However, under the terms of the purchase agreement with Allied for the
Acquisition of the Company (the Acquisition Agreement), Allied is obligated to
indemnify the Company for any liabilities of this type resulting from conditions
existing at January 28, 1986 that were not disclosed by Allied to the Company in
the schedules to the Acquisition Agreement.
The Company, along with numerous other parties, has been requested to
provide information to the United States Environmental Protection Agency (the
EPA) in connection with investigations of the source and extent of contamination
at several lead smelting facilities (the Third Party Facilities) to which the
Company had made scrap lead shipments for reclamation prior to the date of the
Acquisition. As of January 16, 1989, the Company, with the concurrence of
Allied, entered into an agreement with other potentially responsible parties
(PRPs) relating to remediation of a portion of one of the Third Party
Facilities, the former NL Industries (NL), facility in Pedricktown, New Jersey
(the NL Site), which agreement provides for their joint funding on a
proportionate basis of certain remedial investigation and feasibility study
activities with respect to that site.
9
<PAGE>
CHARTER POWER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands)
4. CONTINGENT LIABILITIES (continued)
In fiscal 1993 in accordance with an EPA order, a group comprised of the
Company and 30 other parties commenced work on the cleanup of a portion of the
NL Site based on a specified remedial approach which is now completed. The
Company did not incur costs in excess of the amount 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
expects to recover a portion of its monetary obligations for the remediation of
the Tonolli Site through litigation against third parties and recalcitrant PRPs.
The Company has responded to requests for information from the EPA with
regard to four other Third Party Facilities, one in September 1991, one (the
Chicago Site) in October 1991, one (the ILCO Site) in October 1993 and the
fourth (Bern Metal Super Fund Site) in March 1997. Of the four sites, the
Company has been identified as a PRP at the ILCO and Chicago Sites only.
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
10
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CHARTER POWER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands)
4. CONTINGENT LIABILITIES (continued)
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.
5. ACQUISITIONS
Effective February 22, 1996 the Company acquired certain equipment and
inventory of LH Research, Inc. (LH) used in its power supply business, along
with all rights to the name "LH Research." In addition, 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 $5,158 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 the shares previously acquired represented in
excess of 99.6% of the outstanding PCC common stock. As of May 29, 1996, the
Company purchased all remaining shares of PCC common stock and shares of PCC
common stock issuable upon exercise of stock options.
The acquisitions were recorded using the purchase method of accounting. The
aggregate purchase prices were $4,428 and $16,932 for LH and PCC, respectively.
The purchase prices were allocated on the basis of the estimated fair market
11
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CHARTER POWER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands)
5. ACQUISITIONS (continued)
values of the assets acquired and liabilities assumed. The results of operations
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 both acquisitions had occurred as of
the beginning of the periods presented. Pro forma adjustments include only the
effects of events directly attributed to a transaction that are factually
supportable and expected to have a continuing impact. The pro forma adjustments
contained in the table below include amortization of intangibles, interest
expense on the acquisition debt, elimination of interest expense on debt not
acquired, reduction of certain selling, general and administrative expenses and
the related income tax effects.
Three months ended
April 30, 1996
------------------
Net sales.............................. $64,352
Net income............................. $ 3,392
Net income per common share ........... $ .52
The pro forma financial information does not necessarily reflect the
operating results that would have occurred had the acquisitions been consummated
as of the above dates, nor is such information indicative of future operating
results. In addition, the pro forma financial results contain estimates since
the acquired businesses did not maintain information on a period comparable with
the Company's fiscal year-end.
6. STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS NOT YET ADOPTED
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share." SFAS No. 128 specifies new standards designed to improve the earnings
per share (EPS) information provided in financial statements by simplifying the
existing computational guidelines, revising the disclosure requirements, and
increasing the comparability of EPS data on an international basis. Some of the
changes made to simplify the EPS computations include: (i) eliminating the
presentation of primary EPS and replacing it with basic EPS, with the principal
difference being that common stock equivalents are not considered in computing
basic EPS, (ii) eliminating the modified treasury stock method and the three
percent materiality provision and (iii) revising the contingent share provisions
and the supplemental EPS data requirements. SFAS No. 128 also makes a number of
changes to existing disclosure requirements. SFAS No. 128 is effective for
financial statements issued for periods ending after December 15, 1997. The
Company has not yet determined the impact of the implementation of SFAS No. 128.
12
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Charter Power Systems, Inc.
We have reviewed the accompanying consolidated balance sheet of Charter Power
Systems, Inc. and Subsidiaries as of April 30, 1997, the related consolidated
statements of income for the three months ended April 30, 1997 and 1996 and the
related consolidated statements of cash flows for the three months ended April
30, 1997 and 1996. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of January 31, 1997 and the related
consolidated statements of income, stockholders' equity and cash flows for the
year then ended (not presented herein); and in our report dated March 14, 1997,
we expressed an unqualified opinion on those consolidated financial statements.
In our opinion, the information set forth in the accompanying consolidated
balance sheet as of January 31, 1997, is fairly presented, in all material
respects, in relation to the consolidated balance sheet from which it has been
derived.
/s/ Coopers & Lybrand L.L.P.
------------------------
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
May 28, 1997
13
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Net sales for the fiscal 1998 first quarter increased $10,917,000 or 17
percent compared to the equivalent quarter in fiscal 1997. This increase was
primarily due to higher sales of non-telecommunications related power supplies,
telecommunications-related sales and motive power sales. A portion of the sales
increase resulted from the recording of a full quarter of sales by the Company's
PCC subsidiary during fiscal 1998, versus a partial quarter in the comparable
period of the prior year due to the acquisition of PCC on March 12, 1997. On a
company-wide basis, fiscal 1998 first quarter telecommunications-related sales
increased 11 percent and were approximately 44 percent of total company sales
versus 47 percent of sales for the first quarter of fiscal 1997. Motive power
sales were up 20 percent for the current quarter due to higher volumes and
prices.
Gross profit for the first quarter of fiscal 1998 increased $3,862,000 or
26 percent to $18,983,000 from $15,121,000 in the first quarter of fiscal 1997,
resulting in a gross margin of 25.9 percent versus 24.2 percent in the prior
year. Gross margin increased primarily as a result of higher sales volumes,
shift in product mix and lower material costs, partially offset by higher
depreciation.
Selling, general and administrative expenses for the first quarter of
fiscal 1998 increased $1,812,000 or 24 percent over the comparable period of the
prior year. This increase was due to higher payroll costs, goodwill
amortization, due diligence costs, consulting fees and the recording of a full
quarter of selling, general and administrative expenses by the Company's PCC
subsidiary during fiscal 1998, versus a partial quarter in the comparable period
of the prior year due to the acquisition of PCC.
Research and development expenses remained proportional to sales at 3
percent of sales for the first quarter of fiscal 1998 and 1997.
Interest expense, net, increased for the quarter primarily due to higher
debt balances.
Other expense, net, for the first quarter of fiscal 1998 increased $715,000
over the comparable quarter of the prior year. This increase was primarily due
to higher amortization expense associated with the write-off of capitalized debt
acquisition costs related to the Company's current credit facility and the
Development Authority of Rockdale County Industrial Revenue Bonds. Other
expense, net, also increased due to a foreign exchange loss during the current
quarter versus a slight exchange gain in the first quarter of fiscal 1997,
coupled with lower nonoperating income during the first quarter of fiscal 1998.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
As a result of the above, income before income taxes for the first quarter
of fiscal 1998 increased $1,019,000 or 18 percent from the comparable quarter of
the prior year. Provision for income taxes increased $530,000 for the first
quarter of fiscal 1998 versus the first quarter of the prior year as a result of
higher income before taxes and a higher effective tax rate. The effective tax
rate for the current quarter increased to 37.0 percent versus 34.2 percent for
the first quarter of fiscal 1997 which included a benefit associated with a
reduction in taxes provided for in prior years. Net income rose 13 percent from
the first quarter of fiscal 1997 to $4,135,000 or 66 cents per share.
Liquidity and Capital Resources
- -------------------------------
Net cash flows provided by operating activities increased 35 percent to
$7,344,000 for the first quarter of fiscal 1998 compared to $5,422,000 for the
same quarter of the prior year. This increase was primarily due to higher
depreciation and amortization expense during the current first quarter; less of
an increase in accounts receivable; and an increase in accrued liabilities
during the first quarter of fiscal 1998 versus a decrease in the first quarter
of fiscal 1997. These changes resulting in higher cash flows from operations,
were partially offset by a decrease in accounts payable during the first quarter
of fiscal 1998 compared to an increase in fiscal 1997 which included the
required purchase of certain raw materials with extended payment terms.
Net cash used by investing activities decreased $20,441,000 to $2,297,000
in the first quarter of fiscal 1998 versus the first quarter of fiscal 1997
which included the purchase by the company of PCC and certain equipment and
inventory of LH for $19,739,000.
Net cash used by financing activities was $4,959,000 compared to net cash
provided by financing activities of $13,575,000 in the prior year's first
quarter. The additional borrowings in the prior year's first quarter were used
primarily for the funding of the acquisitions of PCC and LH. The repayment of
long-term debt totaling $4,919,000 for the current quarter was lower than the
first quarter of fiscal 1997 which included the accelerated retirement of the
Company's remaining term loan portion of its long-term debt.
The Company's availability under the current loan agreement is expected to
be sufficient to meet its ongoing cash needs for working capital requirements,
debt service, capital expenditures and possible strategic acquisitions. Capital
expenditures in the first quarter of fiscal 1998 were incurred primarily to fund
capacity expansion, new product development, a continuing series of cost
reduction programs, normal maintenance capital, and regulatory compliance.
Fiscal 1998 capital expenditures are expected to be approximately $16,000,000
for similar purposes.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Forward Looking Statements
- --------------------------
Certain information contained in this Quarterly Report on Form 10-Q,
including, without limitation, information appearing under Item 2, "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
Quarterly Report on Form 10-Q.
16
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
4.1 Sixth Amendment to Financing and Security Agreement dated April 16,
1997 (filed herewith).
10.1 Charter Power Systems, Inc. Incentive Compensation Plan (filed here-
with).
11. Computation of per share earnings (filed herewith).
15. Letter from Coopers & Lybrand L.L.P., independent accountants for the
Company, regarding unaudited interim financial information (filed
herewith).
27. Financial Data Schedule (filed herewith).
(b) Reports on Form 8-K:
None.
17
<PAGE>
SIGNATURES
- -------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHARTER POWER SYSTEMS, INC.
June 13, 1997 BY: /s/ Alfred Weber
---------------------------------
Alfred Weber
Chairman, President and Chief
Executive Officer
June 13, 1997 BY: /s/ Stephen E. Markert, Jr.
----------------------------------
Stephen E. Markert, Jr.
Vice President Finance and
Treasurer
(Principal Financial and
Accounting Officer)
18
<PAGE>
EXHIBIT INDEX
4.1 Sixth Amendment to Financing and Security Agreement dated April 16,
1997 (filed herewith).
10.1 Charter Power Systems, Inc. Incentive Compensation Plan (filed here-
with).
11. Computation of per share earnings (filed herewith).
15. Letter from Coopers & Lybrand L.L.P., independent accountants for the
Company regarding unaudited interim financial information (filed
herewith).
27. Financial Data Schedule (filed herewith).
19
<PAGE>
SIXTH AMENDMENT
TO FINANCING AND SECURITY AGREEMENT
THIS SIXTH AMENDMENT TO FINANCING AND SECURITY AGREEMENT (this "Amendment")
is made as of this 16th day of April, 1997, by and among CHARTER POWER SYSTEMS,
INC., a corporation organized and existing under the laws of the State of
Delaware ("Charter Power"), C&D CHARTER POWER SYSTEMS, INC., a corporation
organized and existing under the laws of the State of Delaware ("C&D Charter"),
INTERNATIONAL POWER SYSTEMS, INC., a corporation organized and existing under
the laws of the State of Arizona ("International"), RATELCO ELECTRONICS, INC., a
corporation organized and existing under the laws of the State of Delaware
("Ratelco"), C&D/CHARTER HOLDINGS, INC., a corporation organized and existing
under the laws of the State of Delaware ("Charter Holdings"), CHARTER POWER OF
CALIFORNIA, a corporation organized and existing under the laws of the State of
California ("Charter California"), POWER CONVERTIBLES CORPORATION, a corporation
organized and existing under the laws of the State of Arizona ("PCC"), PCC DE
MEXICO S.A. DE C.V. ("PCC Mexico"), POWER CONVERTIBLES IRELAND LIMITED ("PCC
Ireland") and LH RESEARCH, INCORPORATED, a corporation organized and existing
under the laws of the State of Delaware ("LH Research") (Charter Power, C&D
Charter, International, Ratelco, Charter Holdings and Charter California, PCC,
PCC Mexico, PCC Ireland and LH Research are herein collectively referred to as
the "Borrowers" and individually as a "Borrower"); NATIONSBANK, N.A., a national
banking association, in its capacity as a lender ("NationsBank"), FLEET BANK,
NATIONAL ASSOCIATION, a national banking association and successor in interest
to NatWest Bank N.A., being formerly known as National Westminster Bank NJ
("Fleet"), CORESTATES BANK, N.A., a national banking association ("CoreStates")
(NationsBank, CoreStates, and Fleet are herein collectively referred to as the
"Lenders" and individually, as a "Lender"); and NATIONSBANK, N.A., a national
banking association, in its capacity as agent for the Lenders (the "Agent");
Witnesseth:
RECITALS
A. The Lenders, the Borrowers and the Agent are parties to that certain
Financing and Security Agreement dated September 26, 1994 (as amended, restated,
supplemented or otherwise modified, the "Credit Agreement"). Under and subject
to the provisions of the Credit Agreement, the Lenders agreed to establish
jointly and severally in favor of the Borrowers (i) a revolving credit facility
in a maximum principal amount not to exceed SIXTY-FIVE MILLION DOLLARS
($65,000,000) (the "Total Revolving Credit Committed Amount"), (ii) a term loan
facility (collectively, the "Term Loans") in an original principal amount not to
exceed FIFTEEN MILLION DOLLARS ($15,000,000) (the "Total Term Loan Committed
Amount") and (iii) a letter of credit facility as part of the Revolving Credit
Facility (the "Letter of Credit Facility") in a maximum principal amount not to
exceed EIGHT MILLION DOLLARS ($8,000,000) (the "Letter of Credit Committed
Amount").
B. The Borrowers have requested that the Lenders and the Agent agree to
amend certain terms and conditions of the Credit Agreement, and subject to the
provisions of this Amendment, the Lenders and the Agent have so agreed;
provided, that the Borrowers execute and deliver this Amendment.
<PAGE>
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Borrowers, the Lenders and the Agent hereby agree as follows:
1. The recitals set forth above are true and accurate in each and every
respect and are incorporated herein by reference. All capitalized terms used
herein but not specifically defined herein shall have the respective meanings
given such terms in the Credit Agreement, unless the context indicates or
dictates a contrary meaning.
2. The Credit Agreement is hereby amended as follows:
a. Section 2.1.11 of the Credit Agreement (as added by the Second
Amendment to Financing and Security Agreement dated January 26, 1996)
is hereby deleted in its entirety and the following is substituted in
its place:
2.1.11 Conversion of Revolving Loan Advances for Stock Purchases;
Mandatory Reductions in Total Revolving Credit Facility. The Borrowers
jointly and severally covenant and agree that if at any time the
aggregate principal amount of Revolving Loan advances used to purchase
Stock at any time and from time to time equals or exceeds Fifteen
Million Dollars ($15,000,000) and such aggregate principal amount
(each a "Stock Purchase Advance") has not yet been converted to a
Converted Stock Loan in accordance with the provisions of this Section
2.1.11, that portion of the Stock Purchase Advance in excess of Seven
Million Dollars ($7,000,000) shall be converted into a term loan
having a maturity date which is three (3) years after the effective
date of the conversion (each referred to herein as a "Converted Stock
Loan"); provided that (i) all Stock purchased with the proceeds of
such Stock Purchase Advance shall have been purchased by Charter Power
in accordance with the provisions of Section 6.2.4 of this Agreement,
(ii) there shall not exist a Default or an Event of Default under this
Agreement as of the effective date of such conversion, and (iii) the
Borrowers shall have executed and delivered to the Agent a series of
promissory notes (as from time to time extended, amended, restated,
supplemented or otherwise modified, the "Converted Stock Notes" and
individually a "Converted Stock Note") substantially in the form of
Exhibit A-3 attached to and made a part of this Agreement, with
appropriate insertions and such other documents as the Agent and/or
any of the Lenders may reasonably require to confirm the validity of
the Obligations, as converted, and any Liens and security interests.
Each Lender's Converted Stock Note shall be dated as of the date the
Stock Purchase Advance, in part evidenced by such Converted Stock
Note, equals or exceeds Fifteen Million Dollars ($15,000,000), shall
be payable to the order of such Lender at the times provided in the
Converted Stock Note, and shall be in the principal amount of such
Lender's Proportionate Share of that portion of the respective Stock
Purchase Advance exceeding Seven Million Dollars ($7,000,000). If as
of the effective date of any proposed conversion the Borrowers would
not be entitled to convert any Stock Purchase Advance to a Converted
Stock Loan, such Stock Purchase Advance, together with any unpaid and
accrued interest thereon, shall be payable jointly and severally by
the Borrowers ON DEMAND.
-2-
<PAGE>
The unpaid principal balance of each Converted Stock Loan shall
bear interest at a floating and fluctuating rate of interest equal to
the Interest Rate or Interest Rates then available for the Converted
Term Loan, as selected by the Borrowers in accordance with the pro-
visions of Section 2.4. The unpaid principal balance of each Converted
Stock Loan, together with unpaid and accrued interest thereon, shall
be due and payable in consecutive quarterly installments on the first
day of each quarterly period commencing with the first such date
following the effective date of the Converted Stock Loan; the
principal amount of each such quarterly installment shall be
sufficient to fully amortize the principal balance of the Converted
Stock Loan in approximately equal quarterly principal installments by
the maturity date of such Converted Stock Loan.
Subject to the terms of Section 2.4.5 of the Credit Agreement,
the Borrowers may, at their option, at any time and from time to time,
prepay, the Converted Stock Loans, in whole or in part, upon at least
five (5) Business Days prior written notice to the Agent, specifying
the date and amount of the proposed prepayment. Subject to the terms
of Section 2.4.5 of the Credit Agreement, each Converted Stock Note
may be prepaid, in whole or in part, without premium or penalty. The
amount to be prepaid, together with unpaid and accrued interest
thereon through the date of prepayment if the prepayment is intended
to prepay the Converted Stock Loans in whole, shall be paid by the
Borrowers to the Agent for the ratable benefit of the Lenders on the
date specified for such prepayment. Partial prepayments shall be in an
amount not less than Two Hundred Thousand Dollars ($200,000) and shall
be applied first to all unpaid and accrued late charges, second to any
unpaid and outstanding Enforcement Costs, third to any billed and
unpaid interest on the Converted Stock Loans, and then to principal
against the principal installments in the inverse order of their
maturities.
The Total Revolving Credit Committed Amount shall be
automatically and permanently reduced by the principal amount of each
Converted Stock Loan as of the effective date of such Converted Stock
Loan. If, after giving effect to any such reduction in the Total
Revolving Credit Committed Amount, the then outstanding principal
amount of the Revolving Loan exceeds the Total Revolving Credit
Committed Amount as so reduced, the Borrowers jointly and severally
shall contemporaneously with such reduction (a) make a mandatory
prepayment of the Revolving Loan in the amount of such excess, and (b)
pay to the Agent for the ratable benefit of the Lenders an amount
equal to unpaid interest on the amount of such excess and the pro rata
portion of the Revolving Credit Unused Line Fee accrued to the date of
such mandatory prepayment. After each such reduction, the Revolving
Credit Unused Line Fee shall be calculated with respect to the Total
Revolving Credit Committed Amount as so reduced.
For purposes of this Agreement, all Stock purchases shall be
deemed to have been financed with the proceeds of the Revolving Loan,
regardless of the actual source of funds for the purchase.
-3-
<PAGE>
b. Section 6.2.7 on page 111 of the Credit Agreement is hereby amended to
permit a one-time only increase in the maximum amount of permitted Capital
Expenditures to Twenty Million Dollars ($20,000,000) for the fiscal year ending
January 31, 1998. Any unused portion of this increase above the Eight Million
Dollars ($8,000,000) currently permitted for Capital Expenditures for such
fiscal year, shall not be added to or constitute a part of the Carry Forward
Amount allowed under Section 6.2.7. For all fiscal years ending after January
31, 1998, the Capital Expenditure Ceiling shall remain equal to the amounts
currently permitted under Section 6.2.7.
3. The terms, conditions and provisions of this Amendment shall not be
effective until each of the following conditions precedent have been satisfied
fully to the extent and in the manner required by the Agent: (i) the Borrowers,
the Agent and the Lenders execute and deliver this Amendment, (ii) the Borrowers
furnish to the Agent (1) the original stock certificates issued by LH Research
to C&D Charter, together with fully executed, irrevocable blank stock powers for
all such stock certificates and (2) an opinion of counsel from the Borrowers'
counsel and satisfactory to the Agent and its counsel, required in connection
with the execution and delivery of the Third Amendment to Financing and Security
Agreement dated March 13, 1996, and (iii) the Borrowers shall have reimbursed
the Agent for all fees and expenses reasonably incurred by the Agent in
connection with the transactions contemplated by this Amendment (including,
without limitation, attorneys' fees and expenses).
4. The terms "this Agreement" as used in the Credit Agreement and the terms
"Credit Agreement" as used in any of the Financing Documents shall mean the
Credit Agreement as modified herein unless the context clearly indicates or
dictates a contrary meaning.
5. The Borrowers will execute such confirmatory instruments with respect to
the Credit Agreement and/or any of the Financing Documents as the Agent may
reasonably require.
6. The Borrowers ratify and confirm all of their respective liabilities and
obligations under the Credit Agreement and agree that, except as expressly
modified in this Amendment, the Credit Agreement continues in full force and
effect as if set forth specifically herein. The Borrowers, the Agent and the
Lenders agree that this Amendment shall not be construed as an agreement to
extinguish the original obligations under the Credit Agreement and shall not
constitute a novation as to any of the joint and several obligations of the
Borrowers under the Credit Agreement.
7. This Amendment may not be amended, changed, modified, altered or
terminated without in each instance the prior written consent of the Agent, the
Lenders and the Borrowers. This Amendment shall be construed in accordance with,
and governed by, the laws of the State of Maryland.
8. The Borrowers agree that neither the execution and delivery of this
Amendment nor any of the terms, provisions, covenants, or agreements contained
in this Amendment shall in any manner release, impair, lessen, waive, or
otherwise adversely affect the joint and several liability and obligations of
the Borrowers under the terms of the Credit Agreement.
-4-
<PAGE>
9. This Agreement may be executed in any number of duplicate originals or
counterparts, each of such duplicate originals or counterparts shall be deemed
to be an original and all taken together shall constitute but one and the same
instrument.
IN WITNESS WHEREOF, the Borrowers, the Agent and the Lenders have caused
this Amendment to be executed under seal as of the date first above written.
ATTEST: CHARTER POWER SYSTEMS, INC.
/s/ Robert Marley By: /s/ Stephen E. Markert, Jr. (Seal)
- ----------------- ----------------------------
Name: Name:
Title: Treasurer Title: Vice President
ATTEST: C&D CHARTER POWER SYSTEMS, INC.
/s/ Robert Marley By: /s/ Stephen E. Markert, Jr. (Seal)
- ----------------- ----------------------------
Name: Name:
Title: Treasurer Title: Vice President
ATTEST: INTERNATIONAL POWER SYSTEMS, INC.
/s/ Robert Marley By: /s/ Stephen E. Markert, Jr. (Seal)
- ----------------- ----------------------------
Name: Name:
Title: Treasurer Title: Vice President
ATTEST: RATELCO ELECTRONICS, INC.
/s/ Robert Marley By: /s/ Stephen E. Markert, Jr. (Seal)
- ----------------- ----------------------------
Name: Name:
Title: Treasurer Title: Vice President
ATTEST: C&D/CHARTER HOLDINGS, INC.
/s/ Kerry M.Kane By: /s/ Robert Marley (Seal)
- ----------------- ----------------------------
Name: Kerry Kane Name: Robert T. Marley
Title: President Title: Vice President
ATTEST: CHARTER POWER OF CALIFORNIA
/s/ Robert Marley By: /s/ Stephen E. Markert, Jr. (Seal)
- ----------------- ----------------------------
Name: Name:
Title: Treasurer Title: Vice President
-5-
<PAGE>
ATTEST: POWER CONVERTIBLES CORPORATION
/s/ Robert Marley By: /s/ Stephen E. Markert, Jr. (Seal)
- ----------------- ----------------------------
Name: Name:
Title: Treasurer Title: Vice President
ATTEST: PCC DE MEXICO S.A. DE C.V.
/s/ Robert Marley By: /s/ Stephen E. Markert, Jr. (Seal)
- ----------------- ----------------------------
Name: Name:
Title: Treasurer Title: Vice President
ATTEST: POWER CONVERTIBLES IRELAND LIMITED
/s/ Robert Marley By: /s/ Stephen E. Markert, Jr. (Seal)
- ----------------- ----------------------------
Name: Name:
Title: Treasurer Title: Vice President
ATTEST: LH RESEARCH, INCORPORATED
/s/ Robert Marley By: /s/ Stephen E. Markert, Jr. (Seal)
- ----------------- ----------------------------
Name: Name:
Title: Treasurer Title: Vice President
WITNESS: NATIONSBANK, N.A.
in its capacity as Agent
/s/ Stacy L. Denson By: /s/ Patrick M. Moore (Seal)
- ------------------- ----------------------------
Stacy L. Denson Name: Patrick M. Moore
Title: Vice President
WITNESS: NATIONSBANK, N.A.
in its capacity as a Lender
/s/ Stacy L. Denson By: /s/ Patrick M. Moore (Seal)
- ------------------- ----------------------------
Stacy L. Denson Name: Patrick M. Moore
Title: Vice President
WITNEESS: CORESTATES BANK, N.A.
in its capacity as a Lender
/s/ By: /s/ Karl F. Schultz (Seal)
- ----------------- ----------------------------
Name: Karl F. Schultz
Title: Vice President
-6-
<PAGE>
WITNESS: FLEET BANK, NATIONAL ASSOCIATION
(formerly known as NatWest Bank N.A.)
in its capacity as a Lender
/s/ Shary Seaburg By: /s/ G. Steven Kalin (Seal)
- ----------------- ----------------------------
Shary Seaburg Name: G. Steven Kalin
Title:
-7-
<PAGE>
CHARTER POWER SYSTEMS, INC.
---------------------------
INCENTIVE COMPENSATION PLAN
---------------------------
FOR EXECUTIVE AND KEY SALARIED EMPLOYEES
----------------------------------------
(EXCLUDES SALES BONUS PROGRAM)
------------------------------
FOR THE YEAR ENDING JANUARY 31, 1998
------------------------------------
I. INTRODUCTION
------------
The Incentive Compensation Plan for Executives and Key Salaried
Employees as adopted and amended by the Compensation Committee of the
Board of Directors is designed to reward individual performance as
measured against specified objectives. The Plan is also designed to
recognize other employees for a completely discretionary bonus based
upon significant contribution. Executive and key employees who joined
the company in the plan year may, with the approval of the
Chairman/President, participate in the Incentive Compensation Plan on a
prorated basis (based on the number of full months they are actively
employed).
II. ESTABLISHMENT OF OBJECTIVES
---------------------------
Each executive and key employee shall establish at the beginning of
each year, with his/her supervisor, objectives against which his/her
performance for that year shall be measured.
These objectives must correspond to the overall goals of the company.
III. OBJECTIVES
----------
Objectives include: earnings per share; achieving corporate cash flow
goals and other significant individual goals.
IV. ADDITIONAL CRITERIA & CONDITIONS
--------------------------------
- 60% or more of individual participants' priorities must be
accomplished to earn any bonus.
- It is possible for participants to receive in excess of 100%
achievement of an individual goal. However, these achievements must
satisfy the combined judgement of the individual's direct manager, the
Chairman/President and the Compensation Committee.
<PAGE>
- At its sole discretion, the Board reserves the right to recognize
significant issues, factors or contributions related to individual
participants and to adjust all or part of any participant's bonus
accordingly. The Board reserves the right to alter, amend, reduce,
suspend or terminate the Incentive Plan. Only active employees (those
physically performing their assigned duties) are eligible to
participate in the Incentive Compensation Plan.
-Employees who terminate their employment with the company, or
employees who are terminated by the company for any reason whatsoever,
are not eligible for incentive compensation for the fiscal year during
which employment is terminated.
<PAGE>
EXHIBIT 11
CHARTER POWER SYSTEMS, INC. AND SUBSIDIARIES
EARNINGS PER SHARE COMPUTATIONS
(Dollars and shares in thousands)
(Unaudited)
Three Months Ended
April 30,
------------------
1997 1996
---- ----
NET INCOME $4,135 $3,646
===== =====
Weighted average number of common
shares outstanding 6,083 6,283
Effect of shares issuable under
stock option plan 182 265
----- -----
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING (PRIMARY) 6,265 6,548
===== =====
NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARE (PRIMARY) $ 0.66 $ 0.56
===== =====
Weighted average number of common
shares outstanding 6,083 6,283
Effect of shares issuable under
stock option plan 182 266
----- -----
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING (FULLY DILUTED) 6,265 6,549
===== =====
NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARE (FULLY DILUTED) $ 0.66 $ 0.56
===== =====
EXHIBIT 15
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
re: Charter Power Systems, Inc. and Subsidiaries
Registration on Forms S-8 (Registration No. 33-31978,
No. 33-71390, No. 33-86672 and No. 333-17979)
We are aware that our report dated May 28, 1997 on our review of interim
financial information of Charter Power Systems, Inc. and Subsidiaries for the
period ended April 30, 1997 and included in the Company's quarterly report on
Form 10-Q for the quarter then ended is incorporated by reference in the
registration statements of Charter Power Systems, Inc. and Subsidiaries on Forms
S-8 (Registration No. 33-31978, No. 33-71390, No. 33-86672 and No. 333-17979).
Pursuant to Rule 436(c) under the Securities Act of 1933, this report should not
be considered a part of the registration statement prepared or certified by us
within the meaning of Sections 7 and 11 of that Act.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
June 13, 1997
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet as of 4/30/97 and statement of income for the period
ended 4/30/97 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-END> APR-30-1997
<CASH> 1033
<SECURITIES> 0
<RECEIVABLES> 43927
<ALLOWANCES> 1565
<INVENTORY> 41539
<CURRENT-ASSETS> 92897
<PP&E> 52404
<DEPRECIATION> 0
<TOTAL-ASSETS> 162470
<CURRENT-LIABILITIES> 46297
<BONDS> 24422
0
0
<COMMON> 66
<OTHER-SE> 78692
<TOTAL-LIABILITY-AND-EQUITY> 162470
<SALES> 73346
<TOTAL-REVENUES> 73346
<CGS> 54363
<TOTAL-COSTS> 54363
<OTHER-EXPENSES> 2076
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 376
<INCOME-PRETAX> 6564
<INCOME-TAX> 2429
<INCOME-CONTINUING> 4135
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4135
<EPS-PRIMARY> .66
<EPS-DILUTED> .66
</TABLE>
