<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
COMMISSION FILE NUMBER 0-17575
CHEMPOWER, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Ohio
-------------------------------
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
807 East Turkeyfoot Lake Road
Akron, Ohio
---------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
34-1481970
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(I.R.S. EMPLOYER
IDENTIFICATION NO.)
44319
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(ZIP CODE)
Registrant's telephone number, including area code (330) 896-4202
Securities registered pursuant to Section 12(b) of the Act:
None
---------------------
TITLE OF EACH CLASS
None
-----------------------
NAME OF EACH EXCHANGE
ON WHICH REGISTERED
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.10 Par Value
------------------------------
TITLE OF CLASS
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]
The aggregate market value of the voting stock of the registrant held by
non-affiliates of the registrant on March 22, 1996 was $13,741,312 (3,546,145
shares at the closing price of $3 7/8 as shown by the NASDAQ/NMS Monthly
Statistical Report).
The number of shares outstanding of the issuer's Common Stock as of March
22, 1996 was 7,565,113.
Documents incorporated by reference: Certain portions of the registrant's
Proxy Statement for the Annual Meeting of Shareholders to be held on May 2, 1996
are incorporated by reference into Part III.
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PART I
ITEM 1. BUSINESS.
GENERAL
Chempower, Inc. (the "Company") and its subsidiaries currently provide
products and services in two principal business segments: Construction Services
and Manufacturing Services.
The Company was incorporated under the laws of the State of Ohio in 1985.
The predecessor of the Company began as an industrial contractor in 1974 and
entered into the asbestos abatement market in 1980. Through 1995, most of the
Company's revenues have been derived from its Construction Services. The
Company's Manufacturing Services, developed through acquisitions in an effort to
diversify and is operated through three divisions of the Company: Houston
Products, Advanced Coil Industries and Owens Precision Fabricators. In addition,
the Company recently acquired Controlled Power Limited Partnership as part of
its diversification program. See Note 11 to the Consolidated Financial
Statements for further information with respect to the Company's business
segments. The Company's strategy is to continue to diversify and expand its
Manufacturing Services segment by acquiring additional businesses.
CONSTRUCTION SERVICES
The Construction Services are offered through the Company and its
subsidiary -- Global Power Company. Global Power Company was acquired by the
Company in 1994. This segment provides a full range of construction services
including asbestos abatement, insulation, sheetmetal and mechanical services
primarily to the industrial market throughout a region which includes: Ohio,
Pennsylvania, West Virginia, Tennessee, Indiana, Virginia, Kentucky, New Jersey,
Delaware, Georgia, North Carolina, South Carolina, Alabama, Missouri, and
Maryland. The Company also distributes asbestos abatement supplies, specialized
products and insulation materials throughout this region. The Company's services
and products are primarily offered to industrial customers in the electric
utility, chemical, petroleum, paper and steel industries.
In 1995, the Company began offering mechanical construction services to its
industrial customers through Global Erectors, a division of Global Power
Company. This division maintains and repairs steam boilers and auxiliary
equipment including precipitators, scrubbers, fans, air heaters, etc. Global
Erectors has the equipment and highly skilled personnel necessary to provide
such mechanical services.
To insure the operability, environmental compliance, efficiency and safety
of their plants, industrial companies must periodically maintain, repair or
replace process equipment, operating machinery and piping systems. As a
consequence, these companies have relied on outside contractors who can perform
construction services within strict time constraints.
The Company's management maintains tight control over all phases of a
project, from estimating and bidding through project completion. The Company
receives a significant portion of its contracts through a bidding process, in
which a number of contractors are invited to bid on the project. Prior to
submitting a bid proposal, the Company assigns one or more estimators to visit
the job-site, review the proposed work area and determine the size and scope of
the work to be performed. The estimators discuss job requirements with the
customer's personnel to establish local conditions (e.g. safety and operating
regulations, plant operating schedules, availability of power and water, and
access to job-site) which may affect the scope and execution of the project. The
estimators study plant specifications and drawings and prepare a detailed
estimate and project schedule. Prior to submittal, the estimators review all
proposals with senior management.
Once the contract has been awarded, the Company assigns an on-site project
manager who coordinates the employment of a qualified labor force, delivery of
equipment and supplies to the job-site and execution of the construction
project. The Company uses a computerized job cost system
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which tracks the profitability of the project on a continual basis. The project
manager reviews the progress of a project on a regular basis with senior
management. Construction projects are performed following the Company's
operating procedures and in accordance with the federal, state and local
guidelines. Because of the health hazards posed by the industrial working
environment and the need to comply with OSHA and local regulations relating to
work place safety, the construction services must be performed by trained
personnel using approved techniques. The Company, through its Safety Department,
reviews on an on-going basis the implementation of safety procedures, monitors
work site air quality and reviews all applicable regulations.
To service its customers, the Company has established a network of
facilities within its region. The Company currently operates Construction
Service offices and warehouses in Akron, Ohio; Cincinnati, Ohio; Washington,
Pennsylvania; Winfield, West Virginia; Hurricane, West Virginia; Knoxville,
Tennessee and Waverly, Tennessee. The Company distributes asbestos abatement
equipment and safety supplies, insulation materials and accessories, and related
sheet metal products to industrial customers and other contractors. The Company
is not dependent on any one source for materials for its construction products
distribution business.
MANUFACTURING SERVICES
The Manufacturing Services segment developed through acquisitions in an
effort to diversify the operations of the Company. This business operates under
three divisions of the Company: Houston Products, Advanced Coil Industries and
Owens Precision Fabricators, as well as Controlled Power Limited Partnership, an
Illinois limited partnership, the partners of which are subsidiaries of the
Company.
Houston Products division was acquired in March, 1989 and is located in
Waverly, Tennessee. This division designs and fabricates pre-insulated panels
and other products for industrial equipment applications.
Advanced Coil Industries division was acquired in November, 1990 and is
located in Washington, Pennsylvania. This division provides roll-coating
services to various steel manufacturers for products primarily used in the
construction drainage industry.
Owens Precision Fabricators division was acquired in March, 1994 and is
located in Las Vegas, Nevada. This division fabricates metal casings for
machines used in the gaming industry, as well as offering other metal
fabrication services.
Controlled Power Limited Partnership was acquired in May, 1995 and is
located in Canton, Ohio. This Company designs and manufactures electrical
metal-clad switchgear, power distribution systems, and bus duct systems for mass
transit authorities, utilities, chemical and other industrial facilities and
also offers a broad range of metal fabrication services.
RECENT ACQUISITIONS
On May 3, 1995, the Company through its wholly-owned subsidiaries,
Southwick Corp., an Ohio corporation, and Brookfield Corp., an Ohio corporation,
purchased all of the issued and outstanding partnership units, representing all
of the partnership interests of Controlled Power Limited Partnership, an
Illinois limited partnership ("CPC"). CPC is in the business of designing,
manufacturing and selling electrical metal-clad switchgear, power distribution
systems, bus duct systems and replacement parts for mass transit authorities,
utilities, and chemical and other industrial facilities throughout the country.
Through the purchase of the units, the Company took control of CPC's inventory,
accounts receivable, patents, real estate, plant and equipment. At the present
time, it is the intention of the Company to continue the current business of CPC
and to expand the business to offer sheet metal fabrication services.
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COMPETITION
The market for the Company's Construction Services is highly competitive.
Construction orders are customarily awarded after competitive bids have been
submitted as proposals based on the estimated cost of each job. The Company
primarily competes with smaller local and regional firms. The Company also
competes, to a lesser extent, with large firms which provide services on a
regional or national basis. Competitive factors in Construction Services include
price, performance record, technical expertise, insurance, bonding and
geographical location.
The market for the Company's Manufacturing Services is competitive.
Competitive factors in Manufacturing Services include price, quality, product
availability and delivery.
CUSTOMERS
During 1995, industrial customers accounted for more than 85% of the
Company's revenues in the Construction Services segment. These principal
industrial customers are in the electric utility and chemical industries. The
Company has performed work for seven of these industrial customers for more than
nine years. The Company believes that it has been able to maintain its
long-standing relationships with its customers in this industry because of its
competitive pricing and the quality of its services.
In the Company's Manufacturing Services segment, the Owens Precision
Fabricator's division has a customer the loss of which could have a material
adverse effect on this segment.
BACKLOG
The competitive economic environment for the electric power industry in the
United States has intensified, as the Federal Energy Regulatory Commission is in
the process of implementing the provisions of the Energy Policy Act of 1992,
which deregulates the electric power generation industry by allowing independent
power producers and other companies access to its transmission and distribution
systems. The anticipation of such deregulation has forced U.S. utilities to
reduce their operating costs to become more competitive. This is being
accomplished in part by deferring repairs and refurbishments on existing
electric power plants. At February 29, 1996, the Company's Construction Services
backlog was approximately $14.4 million, of which approximately $13.4 million
represented the Company's estimate of work to be performed under blanket
maintenance agreements which do not specify a contract amount. This compares to
approximately $21.7 million of backlog at February 28, 1995, of which
approximately $12.0 million related to work under blanket maintenance agreements
which did not specify a contract amount. Contracts included in backlog may have
provisions which permit cancellation or delay in their performance and there can
be no assurance that any work or product orders included in backlog will not be
cancelled or delayed. Backlog may not be a good indication of the Company's
amount of services and products to be delivered, since a majority of the
Company's projects are typically secured and completed within a 120 day period.
At February 29, 1996 the Company's Manufacturing Services backlog was
approximately $11.4 million, of which $9.8 million related to CPC. This compares
to approximately $1.5 million of backlog at February 28, 1995.
ENVIRONMENTAL REGULATIONS
The Company's Construction Services are subject to federal laws and
regulations, including regulations of the U.S. Department of Labor under the
Occupational Safety and Health Act, the Environmental Protection Agency under
the Clean Air Act, the Comprehensive Environmental Response, Compensation and
Liability Act, the Asbestos Hazard Emergency Response Act of 1986, and the
Department of Transportation under the Transportation Safety Act. In addition, a
number of states and localities have promulgated regulations requiring, among
other things, advance notice of proposed asbestos abatement activities and the
licensing of asbestos abatement contractors and
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workers. Failure to comply with these regulations could have a material adverse
effect on the Company's business.
SEASONALITY
The Company's revenues from Construction Services may be affected by the
timing of planned outages at its industrial customers' facilities, which
generally occur during the second and fourth quarters. The effects of this
seasonality may be offset by the timing of large individual contracts,
particularly if all or a substantial portion of the contracts fall within one or
two quarters. Accordingly, the Company's quarterly results will fluctuate and
the results of one quarter should not be deemed to be representative of the
results of any other quarter or for the year.
INSURANCE AND BONDS
The Company maintains general liability insurance for claims arising from
its Construction Services and Manufacturing Services. The policy, which provides
a $6 million limit per claim and $6 million limit in the aggregate, insures
against both property damage and personal injury arising from the activities of
the Company. The policy is written on an "occurrence" basis which provides
coverage for insured risks that occur during the policy period, irrespective of
when a claim is made. Higher policy limits are available for individual
projects, on an as-needed basis. The Company also provides worker's compensation
insurance, at statutory limits, which covers the employees engaged in operations
of the Company. The Company maintains a bonding program to satisfy those
contracts which require performance and/or payment bonds.
LICENSING
A number of the states in which the Company operates its Construction
Services require that the Company obtain licenses. The Company believes that it
is in compliance with all current state licensing requirements where the Company
conducts Construction Services. Such licenses are generally subject to annual
renewal and the Company believes it will be able to obtain renewal of its
licenses. In addition, certain local jurisdictions have adopted regulations to
require the training, testing and licensing of employees engaged in contracting
activities. To date, the Company has complied with all such local regulations
where it currently conducts business.
EMPLOYEES
At December 31, 1995, the Company had 730 employees of whom 530 were
employed under Construction Services, 190 were employed under Manufacturing
Services and 10 were employed under General Corporate administration.
Of the Construction Services employees employed at December 31, 1995, 86
were salary and 444 were hourly. The number of such hourly workers fluctuates
depending upon the number and size of the projects which the Company has in
progress at any particular time. During 1995, the number of hourly-rated
employees ranged from 275 to 1,000. Most of the Company's hourly work force
under its Construction Services is represented by various labor unions under
numerous collective bargaining agreements, which have one to three year terms
but provide for automatic renewal if not terminated by a party thereto. The
majority of union members are associated with the International Association of
Heat and Frost Insulators and Asbestos Workers (AFL-CIO), the Laborers'
International Union of North America (AFL-CIO), the United Brotherhood of
Carpenters and Joiners, the Sheet Metal Workers' International Association
(AFL-CIO) and the International Brotherhood of Boilermakers (AFL-CIO). It has
been the Company's experience that hourly-rated employees are generally
available in the quantity required for its projects and the Company has
continuously employed a number of them on various projects over an extended
period of time. The Company has not experienced a significant work stoppage and
considers its employee relations to be good.
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Of the Manufacturing Services employees, 75 were salary and 115 were
hourly. The Company's hourly work force under its Manufacturing Services are not
represented by an outside labor union, with the exception of the Houston
Products division. The employees of this division are represented under the
Sheet Metal Workers' International Association (AFL-CIO). The Company considers
its employee relations under Manufacturing Services operations to be good.
ITEM 2. PROPERTIES.
The location, ownership, primary use and approximate square footage of the
facilities of the Company are set forth in the following table. The facilities
in Akron, Cincinnati and Winfield are under leases with an affiliate of the
Company, Holiday Properties, a partnership owned by Toomas J. Kukk, President
and Chief Executive Officer and Ernest M. Rochester, Secretary of the Company.
Each such lease provides for an expiration date of December 31, 1997. The
Company believes that the terms of these leases are no less favorable than those
which could have been negotiated in arms-length transactions and all rental
payments made by the Company are equal to market rates.
The Company believes that its existing facilities are adequate to meet
current requirements and that suitable additional or substitute space would be
available as needed to accommodate any expansion of operations.
<TABLE>
<CAPTION>
APPROXIMATE
PRIMARY SQUARE FEET
LOCATION OWNERSHIP USE (1) OF FLOOR SPACE
- ---------------------------------------- ---------- ---------------- --------------
<S> <C> <C> <C>
Akron, Ohio............................. Leased Hdq./Adm./Const. 36,000(2)
Canton, Ohio............................ Owned Adm./Mfg. 205,000
Cincinnati, Ohio........................ Leased Adm./Const. 25,000
Las Vegas, Nevada....................... Leased Adm./Mfg. 47,000
Washington, Pennsylvania................ Owned Adm./Const./Mfg. 112,000(2)
Knoxville, Tennessee.................... Leased Adm. 1,000
Waverly, Tennessee...................... Owned Adm./Const./Mfg. 95,000(2)
Hurricane, West Virginia................ Leased Adm. 2,000
Winfield, West Virginia................. Owned Adm./Const. 90,000
</TABLE>
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(1) Adm. -- Administrative and Sales; Const. -- Construction Warehouse;
Hdq. -- Corporate Headquarters; Mfg. -- Manufacturing facility
(2) Amount includes approximately 9,000, 30,000, and 10,000 square feet of floor
space leased to unaffiliated tenants at the Akron, Washington and Waverly
locations, respectively.
ITEM 3. LEGAL PROCEEDINGS.
The Company is subject to legal proceedings arising from the normal conduct
of business, however in the opinion of management, the ultimate disposition of
these matters will not have a material adverse effect on the financial condition
of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's security holders
during the last quarter of its fiscal year ended December 31, 1995.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company as of December 31, 1995, are listed
below:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------- ---- ----------------------------
<S> <C> <C>
Toomas J. Kukk 54 Chairman, President and
Chief Executive Officer
Robert E. Rohr 40 Vice President -- Finance
and Treasurer
Dale C. Crumley 43 Vice President --
Estimating/Engineering
Patrick F. Byrne 42 Vice President -- Operations
Ernest M. Rochester 71 Vice Chairman and Secretary
Scott R. Lowrie 36 General Counsel
</TABLE>
The following sets forth information regarding the principal occupations of
each executive officer of the Company:
Toomas J. Kukk has been Chief Executive Officer and Chairman of the Board
of Directors of the Company since its organization in 1985. Mr. Kukk had been
President of Powerhouse Equipment, Inc. (predecessor to the Company) since 1978.
Mr. Kukk was a founder of the Company and Powerhouse Equipment, Inc.
Robert E. Rohr has been Vice President -- Finance and Treasurer since 1987.
Dale C. Crumley has been Vice President -- Estimating/Engineering since
1988 and has been employed in various positions with the Company or its
predecessor since 1979.
Patrick F. Byrne has been Vice President -- Operations since 1994 and has
been employed in various positions with the Company or its predecessor since
1984.
Ernest M. Rochester has been Secretary and Vice Chairman since 1989. Mr.
Rochester has been a businessman active in private investments and the sole
proprietor of Parklynn Associates, a construction consulting firm, since 1984.
Mr. Rochester was a founder of the Company and Powerhouse Equipment, Inc.
Scott R. Lowrie has been General Counsel since 1990. Prior to joining the
Company, Mr. Lowrie was associated with the law firm of Roetzel & Andress from
1985 to 1990.
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PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON SHARES AND RELATED
SECURITY HOLDER MATTERS.
The Company's common stock is traded through the NASDAQ National Market
System under the symbol CHEM. The following table lists the high and low sales
prices of the Company's common stock for each quarterly period during the last
two fiscal years, as reported on the NASDAQ/NMS Monthly Statistical Report.
<TABLE>
<CAPTION>
PRICE RANGE
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1995 1994
------------ ------------
QUARTER ENDED HIGH LOW HIGH LOW
--------------------------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
March 31............................... $4 1/4 $3 $4 7/8 $3 3/8
June 30................................ $4 $3 $4 1/8 $3 1/4
September 30........................... $4 $3 1/4 $4 1/4 $3 1/4
December 31............................ $4 $3 1/2 $4 1/4 $3 3/4
</TABLE>
The Company has not paid dividends in the past, and it is the Company's
present policy to retain future earnings for use in its business.
As of March 22, 1996 there were 154 holders of record of the Company's
common stock, including the nominee of The Depository Trust Company which holds
2,889,595 common shares in nominee name on behalf of approximately 75 brokers
and bank participants, representing shares beneficially owned by their customers
which are held in street name. Based upon the quantity of materials requested by
these brokers and banks, the Company estimates it has approximately 1,200
beneficial owners in addition to the holders of record.
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues................................ $78,684 $64,329 $69,553 $62,741 $56,476
Operating income........................ 3,019 680 2,763 2,698 2,155
Non-operating income (expense)(1)....... 538 432 328 468 (1,044)
Net income (2).......................... 2,247 782 1,802 2,004 808
Net income per common share (2)......... .30 .11 .25 .27 .11
Weighted-average common shares
outstanding (000)..................... 7,403 7,426 7,309 7,328 7,403
BALANCE SHEET DATA:
Working capital......................... 27,141 25,432 26,650 24,801 23,490
Total assets............................ 54,570 44,182 40,496 36,732 35,907
Shareholders' equity.................... 36,965 33,592 32,256 31,182 29,123
</TABLE>
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(1) Reflects settlement of litigation for year ended December 31, 1991.
(2) Includes a loss in 1994, net of tax, of $1.9 million ($.26 per share)
resulting from a cost overrun on a major project.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The discussion of Results of Operations are grouped as follows:
CONSOLIDATED -- Represents consolidated data of Chempower, Inc. and
subsidiaries.
CONSTRUCTION SERVICES -- This category consists of Chempower, Inc.,
Hunter Insulation, Inc., Global Power Company and its Global Erectors
division, excluding Manufacturing Services.
MANUFACTURING SERVICES -- This category consists of CPC and the
Company's three divisions: Houston Products, Owens Precision Fabricators
and Advanced Coil Industries.
RESULTS OF OPERATIONS
1995 COMPARED TO 1994
Revenues for 1995 were at an all-time high of $78,684,000, an increase of
$14,355,000 or 22.3% from 1994. This increase was primarily due to the inclusion
of revenues from CPC, acquired by the Company in May, 1995 as discussed in Part
I of Form 10-K.
Selling, general and administrative expenses increased $1,845,000 during
1995 versus 1994. This increase was the result of the added operations of CPC
and, to a lesser extent, the full year of operations of Owens Precision
Fabricators and Global Power Company, both acquired in the first half of 1994.
Interest income increased to $538,000 in 1995 from $432,000 in 1994 as a
result of higher interest rates available on investments.
Net income for 1995 was $2,247,000 or $.30 per share compared to $782,000
or $.11 per share in 1994. Net income increased to 2.9% of revenues compared to
1.2% in 1994.
CONSTRUCTION SERVICES
Construction Services revenues were $51,572,000 as compared to $53,718,000
in 1994. This decrease was attributable to the decline in the total number of
projects available in the marketplace. Construction Services revenues
represented 65.5% of total revenues in 1995 as compared to 83.5% of total
revenues in 1994, primarily as a result of the increase in Manufacturing
Services revenues.
Cost of revenues represented 89.4% of revenues versus 92.5% in 1994. In
1994 the Company's cost of revenues included $3,314,000 relating to a cost
overrun on one major contract.
Operating income increased $766,000, rising to $1,640,000 in 1995. In 1994,
the Company's operating income was impacted by a cost overrun on one major
project. The Company experienced no such major cost overruns in 1995. However,
the Company did experience lower margins in Construction Services during the
year due to strong competition for a reduced number of jobs available in the
marketplace. In addition, the Company incurred additional costs with the
start-up of the Global Erectors division.
MANUFACTURING SERVICES
Manufacturing Services revenues more than doubled in 1995 to $27,112,000 as
compared to $10,611,000 from 1994. This increase was primarily the result of the
inclusion of operations from CPC and a full year of operations of Owens
Precision Fabricators.
Cost of revenues represented 76.0% of revenues versus 65.0% in 1994. This
was due to the inclusion of CPC operations during the year. A majority of the
products manufactured by CPC (i.e. electrical metal-clad switchgear and power
distribution systems) offer a lower rate of margin as compared to the Company's
other manufacturing operations.
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Operating income increased to $4,049,000 from $2,434,000 in 1994 as a
result of the inclusion of CPC and the full year of Owens Precision Fabricators
division.
RESULTS OF OPERATIONS
1994 COMPARED TO 1993
Revenues for 1994 were $64,329,000, a decrease of 7.5% from $69,553,000 in
1993. This reduction was the result of a decrease in the Construction Services
segment of the business.
Selling, general and administrative costs increased $821,000 to $7,080,000
in 1994. These expenses increased relative to 1993 due to the acquisition of
Owens Precision Fabricators and Global Power Company.
Interest income increased to $432,000 in 1994 from $328,000 in 1993 as a
result of higher interest rates available on investments.
Net income for 1994 was $782,000 or $.11 per share compared to $1,802,000
or $.25 per share in 1993. Net income declined to 1.2% of revenues compared to
2.6% in 1993, primarily due to an increase in costs of Construction Services
revenues.
CONSTRUCTION SERVICES
Construction Services revenues were $53,718,000, which is a 15.2% decrease
from record revenues of $63,349,000 achieved in 1993. This decrease was
primarily due to the absence of a major firm price project as compared to 1993.
Construction Services revenues represented 83.5% of total revenues in 1994 as
compared to 91.1% in 1993.
Cost of revenues represented 92.5% of revenues versus 89.5% in 1994. This
increase was the effect of a pretax loss of $3,314,000 resulting from a cost
overrun on one major contract.
Operating income decreased 75.3% from $3,537,000 in 1993 to $874,000 in
1994. This decrease was substantially the result of the cost overrun on the one
major project.
MANUFACTURING SERVICES
Revenues from Manufacturing Services increased 71.0% to $10,611,000 from
$6,204,000 in 1993. This rise was the result of an increased demand for
pre-insulated panel systems manufactured by our Houston Products division and
the addition of revenues earned by the Owens Precision Fabricators division.
Manufacturing Services represented 16.5% of total revenues in 1994 as compared
to 8.9% in 1993.
Cost of revenues represented 65.0% of revenues in 1994 versus 61.8% in
1993. This increase was primarily the result of lower margins experienced by the
Houston Products and Owens Precision Fabricators division in 1994.
Operating income increased 34.4% to $2,434,000 in 1994 from $1,811,000 in
1993 as the result of the increase in Manufacturing Services revenues.
LIQUIDITY AND CAPITAL RESOURCES
In 1995, the Company financed its working capital needs and acquisition of
CPC with cash from operations. Also, gross capital expenditures during the year
totaled $1,573,000 compared to $914,000 in 1994.
Working capital (current assets less current liabilities) at December 31,
1995 increased to $27,141,000 from $25,432,000 at December 31, 1994. The ratio
of current assets to current liabilities was 2.6 at the end of 1995 compared to
3.4 at the end of 1994. The Company currently has a $10,000,000 line of credit
with First National Bank of Ohio. As of December 31, 1995, there were no
outstanding amounts against the Company's credit facilities.
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The Company's current cash, funds available under its credit facility and
future cash flow from operations should be sufficient to meet capital
requirements and short-term working capital needs in 1996.
ACCOUNTING STANDARDS
The Company follows the guidelines established by Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its employees' stock options. In October 1995,
the Financial Accounting Standards Board issued SFAS No. 123, "Accounting and
Disclosure of Stock-Based Compensation," which established an alternative method
of expense recognition for stock-based compensation awards to employees based on
fair values. The Company is currently evaluating the provisions of SFAS No. 123
and has not yet determined whether it will adopt the statement for expense
recognition purposes.
EVENTS, TRANSACTIONS AND TRENDS
The Company is experiencing a slow-down in Construction Services. This is
primarily the result of the electric utilities delaying maintenance outages as
the result of the impending deregulation in the electric power industry. The
limited number of projects available in the marketplace has caused strong
competition for lower profit margin work. The Company expects this slow-down to
continue through the 1996 fiscal year and could have an adverse impact on
Construction Services.
The Company continues to experience increased workers' compensation costs
in a number of the states in which the Company operates its Construction
Services. The Company closely monitors these costs and adjusts its pricing
accordingly. However, an inability to pass these increases on could have an
adverse affect on the Company's Construction Services.
The Company continues to look for opportunities to expand Manufacturing
Services through the acquisition of additional businesses.
10
<PAGE> 12
ITEM 8. FINANCIAL STATEMENT AND SUPPLEMENTAL DATA.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Chempower, Inc.
Akron, Ohio
We have audited the accompanying consolidated balance sheets of Chempower,
Inc. and subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1995. 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 financial position of Chempower,
Inc. and subsidiaries at December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
/s/ McGLADREY & PULLEN, LLP
McGLADREY & PULLEN, LLP
Elkhart, Indiana
March 1, 1996
<PAGE> 13
CHEMPOWER, INC.
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1994 1993
----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
REVENUES......................................... $ 78,684 $ 64,329 $ 69,553
COST OF REVENUES................................. 66,740 56,569 60,531
----------- ----------- -----------
GROSS PROFIT........................... 11,944 7,760 9,022
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES..... 8,925 7,080 6,259
----------- ----------- -----------
OPERATING INCOME....................... 3,019 680 2,763
INTEREST INCOME.................................. 538 432 328
----------- ----------- -----------
INCOME BEFORE INCOME TAXES............. 3,557 1,112 3,091
INCOME TAXES..................................... 1,310 330 1,289
----------- ----------- -----------
NET INCOME............................. $ 2,247 $ 782 $ 1,802
========== ========== ==========
EARNINGS PER COMMON AND COMMON EQUIVALENT
SHARE: ........................................ $ .30 $ .11 $ .25
========== ========== ==========
WEIGHTED-AVERAGE NUMBER OF COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING.................. 7,402,502 7,425,998 7,309,002
========== ========== ==========
</TABLE>
See Notes To Financial Statements
12
<PAGE> 14
CHEMPOWER, INC.
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1994
-------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents.................................. $ 11,603 $ 11,864
Marketable securities...................................... 1,084 --
Trade receivables.......................................... 22,022 18,895
Contracts in progress...................................... 4,608 925
Inventories................................................ 4,058 3,867
Other current assets....................................... 385 471
-------- --------
Total current assets.................................. 43,760 36,022
PROPERTY and EQUIPMENT, at depreciated cost..................... 6,865 6,527
INTANGIBLE ASSETS............................................... 623 596
OTHER ASSETS.................................................... 3,322 1,037
-------- --------
$ 54,570 $ 44,182
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Trade payables............................................. $ 4,688 $ 3,125
Contracts in progress...................................... 1,465 1,120
Payroll related accruals................................... 7,740 5,310
Income taxes payable....................................... 330 243
Other current liabilities.................................. 2,396 792
-------- --------
Total current liabilities............................. 16,619 10,590
DEFERRED CREDIT, EXCESS OF ACQUIRED INTEREST OVER COST.......... 986 --
COMMITMENTS
SHAREHOLDERS' EQUITY
Common stock -- par value $.10 per share;
Authorized -- 15,000,000 shares
Issued -- 7,756,121 shares in 1995 and 7,412,571 shares
in 1994............................................... 776 741
Additional paid-in capital................................. 20,334 19,463
Retained earnings.......................................... 16,465 14,218
Treasury stock, at cost, 191,008 shares in 1995 and 103,317
shares in 1994........................................... (610) (410)
Common stock subject to repurchase......................... -- (420)
-------- --------
Total shareholders' equity............................ 36,965 33,592
-------- --------
$ 54,570 $ 44,182
======== ========
</TABLE>
See Notes To Financial Statements
13
<PAGE> 15
CHEMPOWER, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON
ADDITIONAL STOCK
COMMON PAID-IN RETAINED TREASURY SUBJECT TO
STOCK CAPITAL EARNINGS STOCK REPURCHASE
--------- --------- --------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1992......... $ 723 $18,904 $11,634 $ 79 $ --
Net Income.................... -- -- 1,802 -- --
Options exercised for 23,200
shares of common stock...... 3 49 -- -- --
Agreement to repurchase common
stock and options........... -- -- -- -- 820
Purchase of 50,000 shares of
common stock for the
treasury.................... -- -- -- 200 (200)
Transfer of 11,852 shares from
treasury to the Employee
Stock Ownership Plan........ -- -- -- (40) --
--------- --------- --------- --------- -----------
BALANCE, December 31, 1993......... 726 18,953 13,436 239 620
Net Income.................... -- -- 782 -- --
Options exercised for 56,250
shares of common stock...... 5 134 -- -- --
Common stock issued in
connection with purchase of
new division................ 10 365 -- -- --
Purchase of 50,000 shares of
common stock for the
treasury.................... -- -- -- 200 (200)
Transfer of 11,035 shares from
treasury to the Employee
Stock Ownership Plan........ -- 11 -- (29) --
--------- --------- --------- --------- -----------
BALANCE, December 31, 1994......... 741 19,463 14,218 410 420
Net Income.................... -- -- 2,247 -- --
Options exercised for 343,550
shares of common stock...... 35 871 -- -- --
Purchase of 87,691 shares of
common stock for the
treasury.................... -- -- -- 200 (420)
--------- --------- --------- --------- -----------
$ 776 $20,334 $16,465 $ 610 $ --
========= ========= ========= ========= ===========
</TABLE>
See Notes To Financial Statements
14
<PAGE> 16
CHEMPOWER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1994 1993
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income..................................... $ 2,247 $ 782 $ 1,802
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization............. 1,007 1,168 1,056
Other..................................... -- (178) (42)
Change in assets and liabilities net of
effects of business acquisitions:
Decrease (increase):
Trade receivables.................... 2,053 (676) (1,379)
Contracts in progress................ 1,815 (925) 978
Inventories and other................ 1,353 (979) 150
Increase (decrease):
Trade payables....................... (2,019) 941 (120)
Contracts in progress................ (1,801) 412 708
Accrued expenses and other........... 2,339 1,227 1,637
--------- --------- ---------
Net cash provided by operating
activities................... 6,994 1,772 4,790
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of marketable securities.............. (1,084) -- --
Proceeds from sale of short-term investments... -- -- 3,267
Purchase of property and equipment............. (1,573) (914) (809)
Business acquisitions.......................... (4,796) (2,376) --
Other.......................................... (508) 326 (10)
--------- --------- ---------
Net cash provided by (required
for) investing activities.... (7,961) (2,964) 2,448
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock......... 906 139 52
Purchase of treasury stock..................... (200) (200) (200)
--------- --------- ---------
Net cash provided by (required
for) financing activities.... 706 (61) (148)
--------- --------- ---------
Increase (decrease) in cash and
cash equivalents............. (261) (1,253) 7,090
CASH AND CASH EQUIVALENTS at beginning of year... 11,864 13,117 6,027
--------- --------- ---------
CASH AND CASH EQUIVALENTS at end of year......... $ 11,603 $ 11,864 $ 13,117
========= ========= =========
</TABLE>
See Notes To Financial Statements
15
<PAGE> 17
CHEMPOWER, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS, USE OF ESTIMATES AND SIGNIFICANT ACCOUNTING POLICIES
Nature of business:
The Company's Construction Services segment provides contracting and
material distribution primarily to industrial customers. The Manufacturing
Services segment manufactures and fabricates products for a variety of
industrial customers. The Company provides its services and products to
customers throughout the United States, generally on terms of 30 days.
Use of 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 as the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Significant accounting policies:
Principles of consolidation:
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, Hunter Insulation, Inc., Global Power
Company, Southwick Corp. and Brookfield Corp. In 1995 Southwick Corp. and
Brookfield Corp. were formed for the purpose of acquiring all the partnership
interests of Controlled Power Limited Partnership. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Cash and cash equivalents:
The Company has cash on deposit with financial institutions which, at
times, may be in excess of FDIC insurance limits. The Company considers all
highly liquid investments with an original maturity of ninety days or less when
purchased to be cash equivalents. Cash equivalents consist primarily of money
market funds.
Marketable securities:
The Company has classified all investment securities as available-for-sale.
At December 31, 1995, the fair market value of marketable securities
approximated their carrying cost.
Revenue and cost recognition:
Revenues from fixed-price construction contracts are recognized on the
percentage-of-completion method, measured by the percentage of contract costs
incurred to date to estimated total contract costs for each contract. This
method is used because management considers expended costs to be the best
available measure of progress on these contracts. Provisions for estimated
losses on uncompleted contracts are made in the period in which such losses are
determined. Changes in job performance, job conditions, and estimated
profitability are recognized in the period in which the revisions are
determined. An amount equal to contract costs attributable to claims is included
in revenue when realization is probable and the amount can be reliably
estimated. A portion of contract revenue relates to time and material contracts.
These contracts are generally billed weekly for work performed and are treated
as completed contracts at each billing.
16
<PAGE> 18
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Inventories:
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Inventories consist of asbestos abatement supplies, specialized
products, and insulation materials purchased for resale.
Depreciation and Amortization:
Depreciation of property and equipment is computed by the straight-line
method over the estimated useful lives. Generally, useful lives are 20-39 years
for buildings and leasehold improvements, 3-10 years for machinery and equipment
and 5-7 years for transportation equipment and furniture and fixtures.
Amortization of intangible assets is being computed by the straight-line
method using periods of 30-40 years. Amortization of the fair value of the
partnership over the purchase price (negative goodwill) is amortized over a
period of 3 years.
Earnings per Common and Common Equivalent Share:
Earnings per common and common equivalent share have been computed based on
the weighted-average number of shares and common equivalent shares outstanding.
For purposes of this computation, stock options are common equivalent shares.
NOTE 2. CONTRACTS IN PROGRESS AND TRADE RECEIVABLES
Comparative information with respect to fixed-price contracts in progress
at December 31, 1995 and 1994, is as follows:
<TABLE>
<CAPTION>
1995 1994
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Costs incurred on uncompleted contracts............. $ 68,335 $ 19,559
Estimated earnings.................................. 5,906 2,092
Estimated losses.................................... -- (3,314)
-------- --------
74,241 18,337
Less billings to date............................... 71,098 18,532
-------- --------
$ 3,143 $ (195)
======== ========
Included in the accompanying balance sheets under
Contracts in Progress:
Costs and estimated earnings in excess of
related billings on uncompleted contracts.... $ 4,608 $ 925
Billings in excess of related costs and
estimated earnings on uncompleted contracts
and provision for estimated losses on
contracts.................................... $ (1,465) $ (1,120)
-------- --------
$ 3,143 $ (195)
======== ========
</TABLE>
As part of the Company's percentage-of-completion method, the Company
evaluates the completion of its contracts in progress and projects the estimated
costs to complete each contract. It is common in the industry to experience
differences between estimated costs and actual costs incurred upon completion of
the contracts and to be reimbursed for additional costs incurred.
Trade receivables include amounts aggregating $1,344,000 and $920,000 at
December 31, 1995 and 1994, respectively, billed under the retainage provisions
of construction contracts. Based on the Company's experience with similar
contracts, the balances are expected to be collected in the subsequent fiscal
year. Included in other assets at December 31, 1995 is a retainage of $1,881,000
17
<PAGE> 19
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
which the Company does not expect to be collected within the year. Trade
receivables in the accompanying balance sheets at December 31, 1995 and 1994 are
stated net of an allowance for doubtful accounts of $529,000 and $79,000
respectively.
NOTE 3. PROPERTY AND EQUIPMENT
The composition of property and equipment, stated at cost, at December 31,
1995 and 1994 is as follows:
<TABLE>
<CAPTION>
1995 1994
------- -------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Land............................................. $ 263 $ 259
Buildings........................................ 2,115 1,911
Leasehold improvements........................... 553 473
Machinery........................................ 7,940 7,034
Transportation equipment......................... 1,876 1,788
Furniture and fixtures........................... 891 952
------- -------
13,638 12,417
Less accumulated depreciation.................... 6,773 5,890
------- -------
$ 6,865 $ 6,527
====== ======
</TABLE>
NOTE 4. BORROWING CAPACITY
The terms of an unsecured line of credit agreement with a bank permit the
Company to borrow a maximum of $10,000,000, none of which was outstanding at
December 31, 1995. Any borrowings under this agreement, which expires in May
1996 and bears interest at the Eurodollar rate (5.7% at December 31, 1995) plus
1%.
NOTE 5. INCOME TAX MATTERS
Deferred taxes are provided on a liability method whereby deferred income
tax assets and liabilities are computed annually for differences between the
financial statement and tax bases of assets and liabilities that will result in
taxable or deductible amounts in the future based on enacted tax laws and rates
applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax expense is
the tax payable or refundable for the period plus or minus the change during the
period in deferred tax assets and liabilities.
18
<PAGE> 20
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The composition of the deferred tax assets and liabilities, which are
included in income taxes payable, at December 31, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
1995 1994
------- ------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Gross deferred tax assets:
Bad debt allowance............................. 217 32
Accrued expenses............................... 1,148 157
Other.......................................... 11 20
------- ------
1,376 209
------- ------
Gross deferred tax liabilities:
Depreciation................................... $ (518) $ (452)
Partnership basis differences.................. (669) --
------- ------
(1,187) (452)
------- ------
Net deferred tax assets
(liabilities)........................ $ 189 $ (243)
====== ======
</TABLE>
Federal and state income tax expense for the years ended December 31, 1995,
1994 and 1993 consists of the following:
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal............................... $ 1,442 $ 409 $ 933
State................................. 300 98 311
------- ------- -------
1,742 507 1,244
------- ------- -------
Deferred:
Federal............................... (357) (147) 34
State................................. (75) (30) 11
------- ------- -------
(432) (177) 45
------- ------- -------
$ 1,310 $ 330 $ 1,289
====== ====== ======
</TABLE>
A reconciliation of the effective income tax rate with the statutory
federal income tax rate for the years ended December 31, 1995, 1994 and 1993 is
as follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- -----
<S> <C> <C> <C>
Tax at statutory rate................... 34.0% 34.0% 34.0%
State income taxes, net of federal tax
benefit............................... 7.0 8.5 8.5
Non-taxable interest income............. (4.2) (12.8) (2.7)
Other................................... -- -- 1.9
-------- -------- -----
36.8% 29.7% 41.7%
======== ======== =====
</TABLE>
NOTE 6. EMPLOYEE BENEFIT PLANS
The Company makes contributions along with many other employers to
defined-contribution union-sponsored pension plans. At December 31, 1995,
approximately 65% of the Company's employees were covered by these plans. The
Employee Retirement Income Security Act of 1974, as amended in 1980, imposes
certain liabilities upon employers who are contributors to a multi-employer
pension plan in the event of such employers' withdrawal from, or upon a
termination of
19
<PAGE> 21
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
such a plan. The share of the plans' unfunded vested liabilities allocable to
the Company, and for which it may be contingently liable, is not ascertainable
at this time.
The Company's contributions to union-sponsored employee benefit plans which
are based on varying rates for the hours worked by the employees, including the
pension plans mentioned above, totaled approximately $7,098,000, $6,448,000, and
$8,112,000 for the years ended December 31, 1995, 1994, and 1993, respectively.
The Company has a qualified Employee Stock Ownership Plan for non-union
employees under which shares of common stock are allocated to participant
employees on an annual basis, based on a determination of the Board of
Directors. The total expense for contributions to the plan for each of the years
ended December 31, 1994 and 1993 was $40,000. No contribution was made for the
year ended December 31, 1995.
During the year ended December 31, 1994, the Company adopted a qualified
profit-sharing plan, more commonly known as a 401(k) plan, for non-union
employees. The plan provides for matching contributions by the Company as
defined in the agreement and in addition, provides for discretionary
contributions annually as determined by the Board of Directors.
Prior to the acquisition of Controlled Power Limited Partnership, the
partnership had an active defined-benefit pension plan which covered
substantially all of its employees. In connection with the acquisition, the
Company curtailed the benefits of the plan and accrued a termination liability
for the unfunded amount of the plan. In 1996, the Company intends to complete
the termination of the plan by allowing employees to transfer benefits to
existing retirement plans or purchasing annuities to completely settle the
obligations.
NOTE 7. COMPENSATION PLANS AND AGREEMENTS
The Company maintains a 1991 Incentive/Non-qualified Stock Option Plan. The
Company has reserved a total of 600,000 shares for issuance to the plan. All
options are granted at the fair market value of the stock on the date of grant.
Through December 31, 1995, 596,000 options had been granted at prices of $2.88
to $3.88 per share and become exercisable at various dates through December
1997. The Company also maintained a 1989 Stock Option Plan which expired during
the year ended December 31, 1995.
A summary of the stock option plans are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------- ------- -------
<S> <C> <C> <C>
Outstanding, beginning of year.......... 820,550 855,800 752,000
Granted............................... 163,000 31,000 127,000
Cancelled during the year............. (60,000) (10,000) --
Exercised during the year............. (343,550) (56,250) (23,200)
-------- ------- -------
Outstanding, end of year................ 580,000 820,550 855,800
========= ======== ========
</TABLE>
At December 31, 1995, there were 285,000 exercisable options outstanding,
and 4,000 shares available for future grants.
The Company follows the guidelines established by Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its employees' stock options. In October 1995,
the Financial Accounting Standards Board issued SFAS No. 123, "Accounting and
Disclosure of Stock-Based Compensation," which established an alternative method
of expense recognition for stock-based compensation awards to employees based on
fair values. The Company is currently evaluating the provisions of SFAS No. 123
and has not yet determined whether it will adopt the statement for expense
recognition purposes.
20
<PAGE> 22
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 8. BUSINESS ACQUISITIONS
In May, 1995, the Company acquired all the partnership units of Controlled
Power Limited Partnership, an Illinois partnership, specializing in designing,
manufacturing, and selling electrical metal-clad switchgear, power distribution
systems, and bus duct systems. The total purchase price was $5,400,000. The
excess of the fair value of net assets over acquisition cost (negative goodwill)
is being amortized over 3 years by the straight-line method.
In April, 1994, certain assets of Global Power Company were purchased.
Pursuant to the terms of the acquisition agreement, the Company made a cash
payment of $1,718,000 to the seller at closing. The assets purchased consisted
primarily of real estate, inventories, and equipment used in the insulation
contracting services and products fabrication businesses.
In March, 1994, the Company acquired for cash and common stock, the assets
of Owens Precision Fabricators, a Nevada corporation, specializing in the
fabrication of metal products and components. The total acquisition cost of this
division was $1,097,000. The excess of the total acquisition cost over the fair
value of the net assets acquired of approximately $250,000 is being amortized
over 40 years by the straight-line method.
These acquisitions have been accounted for as purchases. Results of
operations since the acquisition dates are included in the consolidated
financial statements.
Unaudited pro forma consolidated results of operations for the years ended
December 31, 1995 and 1994 as though Controlled Power Limited Partnership had
been acquired as of January 1, 1994 are as follows: (Dollars in thousands,
except per share data)
<TABLE>
<CAPTION>
1995 1994
------- --------
<S> <C> <C>
Sales................................ $86,026 $104,829
Net income (loss).................... 2,155 (3,797)
Earnings (loss) per common and common
equivalent share................... 0.29 (0.51)
</TABLE>
The above amounts reflect adjustments to eliminate historical depreciation
and amortization expense on long-term assets acquired, for interest expense on
the prior partnership units which were converted to equity, and to provide an
income tax benefit for the pro forma loss.
NOTE 9. CASH FLOWS INFORMATION
Cash payments for income taxes, net of refunds, for the years ended
December 31, 1995, 1994, and 1993 were $1,163,000, $1,812,000, and $442,000,
respectively.
The changes in assets and liabilities are stated net of the effects of the
business acquisitions and the business acquisitions are stated net of cash
acquired.
Supplemental disclosures of non-cash investing and financing activities
during the year ended December 31, 1993 was the agreement to repurchase common
stock and options for $820,000. During 1995, the Company entered into a mutual
release and settlement agreement relating to this prior agreement, resulting in
a $220,000 forgiveness of debt.
NOTE 10. COMMITMENTS AND RELATED PARTY TRANSACTIONS
The Company self-insures for workman's compensation in certain states.
Provisions for losses under these programs are recorded based upon the Company's
estimates of the aggregate liability for claims incurred. The Company was
required in one state to fund an interest bearing deposit of $1.4 million, which
has been included in other assets.
21
<PAGE> 23
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Company leases certain of its facilities from affiliated parties under
agreements which expire on December 31, 1997 and leases a warehouse and
manufacturing facility under a noncancellable agreement which expires on August
31, 1998. These leases require annual rentals of $480,000 plus the payment of
operating expenses. The total minimum rental commitment at December 31, 1995
under the leases is $1,069,000, which is due as follows: 1996 $483,000; 1997
$480,000; and 1998 $106,000.
The total rental expense for the years ended December 31, 1995, 1994 and
1993 was $475,000, $453,000 and $304,000, respectively, of which $321,000,
$299,000 and $304,000 respectively, was paid to affiliates.
22
<PAGE> 24
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 11. SEGMENT INFORMATION AND MAJOR CUSTOMERS
The Company operates in two segments: (1) Construction Services, and (2)
Manufacturing Services. During the year ended December 31, 1995, the Company
changed the definition of its business segments to reflect its recent
acquisitions and future focus towards Manufacturing Services. Amounts for 1994
and 1993 have been restated to be consistent with those reported in 1995. The
following is a summary of selected data for these business segments: (Dollars in
thousands)
<TABLE>
<CAPTION>
CONSTRUCTION MANUFACTURING
SERVICES SERVICES CORPORATE ELIMINATIONS TOTAL
------------ ------------- --------- ------------ --------
<S> <C> <C> <C> <C> <C>
1995 --
Revenues from unaffiliated
entities....................... $ 51,572 $27,112 $ -- $ -- $78,684
Inter-segment revenues........... 1,279 1,526 -- (2,805) --
------------ ------------- --------- ------------ --------
Total revenues......... $ 52,851 $28,638 $ -- $ (2,805) $78,684
============ ============== ========== ============ ========
Operating income (loss).......... $ 1,640 $ 4,049 $(2,670) $ -- $ 3,019
Total assets..................... 21,206 18,752 14,612 -- 54,570
Capital expenditures............. 331 1,180 62 -- 1,573
Depreciation and amortization.... 900 90 17 -- 1,007
1994 --
Revenues from unaffiliated
entities....................... $ 53,718 $10,611 $ -- $ -- $64,329
Inter-segment revenues........... 14 1,628 -- (1,642) --
------------ ------------- --------- ------------ --------
Total revenues......... $ 53,732 $12,239 $ -- $ (1,642) $64,329
============ ============== ========== ============ ========
Operating income (loss).......... $ 874 $ 2,434 $(2,628) $ -- $ 680
Total assets..................... 22,014 8,318 13,850 -- 44,182
Capital expenditures............. 711 152 51 -- 914
Depreciation and amortization.... 913 224 31 -- 1,168
1993 --
Revenues from unaffiliated
entities....................... $ 63,349 $ 6,204 $ -- $ -- $69,553
Inter-segment revenues........... 77 664 -- (741) --
------------ ------------- --------- ------------ --------
Total revenues......... $ 63,426 $ 6,868 $ -- $ (741) $69,553
============ ============== ========== ============ ========
Operating income (loss).......... $ 3,537 $ 1,811 $(2,585) $ -- $ 2,763
Total assets..................... 20,780 4,511 15,205 -- 40,496
Capital expenditures............. 312 404 93 -- 809
Depreciation and amortization.... 822 208 26 -- 1,056
</TABLE>
Major Customers:
The Company had no major customers (those that account for more than 10% of
revenues) during 1995. During 1994, the Company had two major customers. One of
these customers accounted for 16.3% of the Company's 1994 revenues, while the
other accounted for 13.7% of 1994 revenues. For 1993, four customers accounted
for 20.5%, 15.6%, 13.2% and 12.2% of total revenues for that year.
23
<PAGE> 25
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The trade receivable balance associated with the major customers mentioned
above, as of December 31, 1994 and 1993, totaled approximately $4,300,000 and
$9,800,000, respectively.
NOTE 12. SELECTED UNAUDITED QUARTERLY INFORMATION
Presented below is certain selected unaudited quarterly financial
information for 1995, 1994 and 1993: (Dollars in thousands, except per share
data)
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
--------- -------- --------- --------
<S> <C> <C> <C> <C>
1995 --
Revenues......................... $19,039 $20,227 $16,430 $22,988
Gross Profit..................... 2,351 4,275 2,532 2,786
Net income....................... 262 1,034 308 643
Earnings per share............... $ .04 $ .14 $ .04 $ .08
1994 --
Revenues......................... $ 9,279 $18,572 $13,331 $23,147
Gross Profit..................... 1,485 3,262 2,068 945
Net income....................... 49 877 237 (382)
Earnings per share............... $ .01 $ .12 $ .03 $ (.05)*
</TABLE>
- ---------------
*Includes a loss, net of tax, of $1.9 million ($.26 per share) resulting from a
cost overrun on a major contract.
24
<PAGE> 26
REPORT OF INDEPENDENT ACCOUNTANTS ON SUPPLEMENTAL SCHEDULES
To the Board of Directors
Chempower, Inc.
Akron, Ohio
Our audit of the Consolidated Financial Statements of Chempower, Inc. and
subsidiaries included Schedule II contained herein, for each of the three years
in the period ended December 31, 1995. Such schedule is presented for purposes
of complying with the Security and Exchange Commission's rule and is not a
required part of the basic consolidated financial statements. In our opinion,
such schedule presents fairly the information set forth therein, in conformity
with generally accepted accounting principles.
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (File No. 33-89944) and in the related Prospectus of our
report, dated March 1, 1996, with respect to the consolidated financial
statements and schedule of Chempower, Inc. and subsidiaries included in this
Annual Report on Form 10-K for the year then ended.
/s/ McGLADREY & PULLEN, LLP
McGLADREY & PULLEN, LLP
Elkhart, Indiana
March 1, 1996
25
<PAGE> 27
CHEMPOWER, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED DEDUCTIONS BALANCE AT
BEGINNING TO FROM END
DESCRIPTION OF PERIOD OPERATIONS RESERVES* OF PERIOD
- -------------------------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts -- deducted from
trade receivables in the balance sheets:
1995.............................................. $ 79 $496** $112 $529
========= ========= ========= =========
1994.............................................. $ 79 $ 80 $ 80 $ 79
========= ========= ========= =========
1993.............................................. $ 63 $ 5 $(11) $ 79
========= ========= ========= =========
</TABLE>
- ---------------
* Write-off of bad debts, less recoveries.
** Includes $472,000 opening reserve from the acquisition of Controlled Power
Limited Partnership.
26
<PAGE> 28
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item, in addition to that set forth above
in Part I under the Caption "EXECUTIVE OFFICERS OF THE REGISTRANT," is set forth
in the section entitled "NOMINEES TO BE ELECTED AS DIRECTORS" contained in the
Company's definitive Proxy Statement to be filed with the Securities and
Exchange Commission ("the Proxy Statement") in connection with the Company's
1996 Annual Meeting of Shareholders, and such information is incorporated herein
by reference.
ITEM 11. EXECUTIVE COMPENSATION.
Incorporated by reference is the information appearing under the caption
"EXECUTIVE COMPENSATION" contained in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Incorporated by reference is the information appearing under the captions
"COMMON STOCK OWNERSHIP OF PRINCIPAL HOLDERS AND MANAGEMENT" and "NOMINEES TO BE
ELECTED AS DIRECTORS" contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated by reference is the information appearing under the caption
"TRANSACTIONS AND OTHER ARRANGEMENTS WITH MANAGEMENT" contained in the Proxy
Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(A) 1 -- FINANCIAL STATEMENTS
The following financial statements are submitted herewith:
Report of Independent Accountants.
Statements of Income, years ended December 31, 1995, 1994 and 1993.
Balance Sheets, December 31, 1995 and 1994.
Statements of Shareholders' Equity, years ended December 31, 1995,
1994 and 1993.
Statements of Cash Flows, years ended December 31, 1995, 1994 and
1993.
Notes to Financial Statements.
(A) 2 -- FINANCIAL STATEMENT SCHEDULES
The following financial information is submitted herewith:
Schedules: II -- Valuation and Qualifying Accounts
All other schedules have been omitted as they are not required or the
required information is set forth in the financial statements and the related
notes.
27
<PAGE> 29
(A) 3 -- EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT EXHIBIT
NUMBER DESCRIPTION
------ --------------------------------------------------------------------------------
<C> <S>
2.1 Asset Purchase and Sale Agreement, dated March 11, 1994, between the Company and
Owens Precision Fabricators (incorporated by reference to Exhibit 2.1 to the
Company's Form 8-K, dated April 19, 1994)
2.2 Asset Purchase and Sale Agreement, dated April 18, 1994, between the Company and
Global Power Company (incorporated by reference to Exhibit 2.2 to the Company's
Form 8-K, dated April 19, 1994)
2.3 Partnership Unit Purchase and Sale Agreement, dated as of April 13, 1995 among
Canton Power Corporation, Henry Crown and Company, and The Second Venture
("Sellers") and Southwick Corp. and Brookfield Corp. ("Buyers") (incorporated by
reference to Exhibit 2.1 to the Company's Form 8-K, dated May 3, 1995)
3.1 Second Amended and Restated Articles of Incorporation, dated May 4, 1989
(incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form
10-K for the year ended December 31, 1994)
3.2 Amended and Restated Code of Regulations, dated March 1, 1989 (incorporated by
reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1994)
10.1 1991 Incentive/Non-Qualified Stock Option Plan, dated January 25, 1991, with
form of stock option agreement attached (incorporated by reference to Exhibit
10.2 to the Company's Annual Report on Form 10-K for the year ended December 31,
1994)
10.2 Lease, dated January 1, 1995 between the Company and Holiday Properties,
relating to 807 East Turkeyfoot Lake Road (incorporated by reference to Exhibit
10.3 to the Company's Annual Report on Form 10-K for the year ended December 31,
1994)
10.3 Lease, dated January 1, 1995 between the Company and Holiday Properties,
relating to 3600 Cardiff Avenue (incorporated by reference to Exhibit 10.4 to
the Company's Annual Report on Form 10-K for the year ended December 31, 1994)
10.4 Lease, dated January 1, 1995 between the Company and Holiday Properties,
relating to 6050 West Virginia State Route 34 (incorporated by reference to
Exhibit 10.6 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1994)
10.5* Business Loan Agreement and Promissory Note, as Amended, September 7, 1995,
relating to the Company's Line of Credit Facility with First National Bank of
Ohio.
10.6 Mutual Release and Settlement Agreement, dated January 17, 1995, between the
Company and William C. Turner (incorporated by reference to Exhibit 10.8 to the
Company's Annual Report on Form 10-K for the year ended December 31, 1994)
23.0* Consent of McGladrey & Pullen, LLP (set forth on page 25 of this Annual Report
on Form 10-K)
27.1* Financial Data Schedule
</TABLE>
*Previously unfiled exhibits.
(B) -- REPORT ON FORM 8-K
During the fourth quarter of fiscal 1995, the Company filed Amendment No.
2, dated November 10, 1995, with respect to a Current Report on Form 8-K filed
during the second quarter of 1995.
28
<PAGE> 30
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:
Chempower, Inc.
Registrant
By /S/ TOOMAS J. KUKK
---------------------------
Toomas J. Kukk
Chairman of the Board,
President and Chief
Executive Officer
Dated: March 27, 1996
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 DATE INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------- ------------------------------------- ---------------
<S> <C> <C>
/s/ TOOMAS J. KUKK Chairman of the Board, President, March 27, 1996
- ----------------------------------- Chief Executive Officer (Principal
Toomas J. Kukk Executive Officer) and Director
/s/ ROBERT E. ROHR Vice President-Finance, March 27, 1996
- ----------------------------------- Treasurer (Principal Accounting
Robert E. Rohr and Financial Officer) and Director
/s/ ERNEST M. ROCHESTER Vice Chairman, Secretary March 27, 1996
- ----------------------------------- and Director
Ernest M. Rochester
/s/ NORMAN E. JACKSON Director March 27, 1996
- -----------------------------------
Norman E. Jackson
/s/ EDWARD G. KEMP Director March 27, 1996
- -----------------------------------
Edward G. Kemp
</TABLE>
29
<PAGE> 31
EXHIBIT INDEX
<TABLE>
<CAPTION>
PAGINATION BY
EXHIBIT EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION NUMBERING SYSTEM
- ------ -------------------------------------------------------------------------------------
<C> <S> <C>
10.5 Business Loan Agreement and Promissory Note, as Amended September 7,
1995, relating to the Company's Line of Credit Facility with First
National Bank of Ohio
23.0 Consent of McGladrey and Pullen, LLP (set forth on page 25 of this
Annual Report on Form 10-K)
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
[FIRST MERIT LETTERHEAD]
First National Bank of Ohio
106 South Main Street, Akron, OH 44308-1444
216 384-8000
September 7, 1995
Mr. Toomas J. Kukk
Chairman, President and CEO
Chempower, Inc.
807 E. Turkey Foot Road
Akron, Ohio 44319
Dear Mr. Kukk:
I am pleased to inform you that First National Bank of Ohio ("Bank") has
approved the renewal of a $10,000,000 Line of Credit in favor of Chempower,
Inc., subject to the following terms and conditions:
BORROWER: Chempower, Inc.
CREDIT FACILITY: $10,000,000 Line of Credit
PURPOSE: Short term working capital and other general corporate
purposes.
COLLATERAL: Unsecured
RATE: Prime, floating or 30 day LIBOR plus 1%, adjusted each
30 days
PAYMENTS: Interest payable monthly; principal payable on the
earlier of demand or the 5-31-96 expiration date of
the Line of Credit; the balance must be paid to zero
for at least 30 consecutive days during the term of
this commitment.
EXPIRATION DATE: May 31, 1996
FURTHER CONDITIONS: 1. No material adverse change in Borrower's condition,
financial or otherwise.
2. Loan documents satisfactory to Borrower and Bank, to
include a loan agreement containing certain
representations, warranties, and covenants.
<PAGE> 2
Mr. Toomas Kukk
August 31, 1995
Page 2
Mr. Kukk, I hope these terms meet with your approval. Should you have
questions, please feel free to contact me at 384-7807. If not, please sign
below and return the original of this letter to me at your earliest convenience.
Sincerely,
Nick Browning
- -----------------------------
Nicholas V. Browning
Vice President
ACCEPTED: CHEMPOWER, INC.
BY: Toomas J. Kukk DATE: September 12, 1995
----------------------------- -----------------------------
TOOMAS J. KUKK, CHAIRMAN
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 11,603
<SECURITIES> 1,084
<RECEIVABLES> 22,551
<ALLOWANCES> 529
<INVENTORY> 4,058
<CURRENT-ASSETS> 43,760
<PP&E> 13,638
<DEPRECIATION> 6,773
<TOTAL-ASSETS> 54,570
<CURRENT-LIABILITIES> 16,619
<BONDS> 0
<COMMON> 776
0
0
<OTHER-SE> 36,189
<TOTAL-LIABILITY-AND-EQUITY> 54,570
<SALES> 78,684
<TOTAL-REVENUES> 78,684
<CGS> 66,740
<TOTAL-COSTS> 66,740
<OTHER-EXPENSES> 8,925
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,557
<INCOME-TAX> 1,310
<INCOME-CONTINUING> 2,247
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,247
<EPS-PRIMARY> .30
<EPS-DILUTED> .30
</TABLE>
