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 4, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-9487
CORCOM, INC.
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(Exact name of registrant as specified in its charter)
Illinois 36-2307626
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
844 E. Rockland Road, Libertyville, Illinois 60048
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (847) 680-7400
Not Applicable
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Former name, former address and former fiscal year,
if changed since last report.
Indicate by checkmark 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practical date.
Common Stock, No Par Value - 3,823,243 Shares as of April 24, 1998
Exhibit Index on Page 9
Page 1 of 12
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CORCOM, INC.
INDEX
PART I - FINANCIAL INFORMATION Page No.
Item 1. Financial Statements
Consolidated Balance Sheets - 3
April 4, 1998 (unaudited) and December 31,
1997
Consolidated Statements of Income 4
(unaudited)--for the 13 weeks ended April 4,
1998 and March 29, 1997
Consolidated Statements of Cash Flows 5
(unaudited) - for the 13 weeks ended April 4,
1998 and March 29, 1997
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 7
Condition and Results of Operations
Item 3. Quantitative and qualitative disclosures about N/A
market risk
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 9
Signatures 9
Exhibit 10.1 - Revolving Line of Credit Note 10
Exhibit 27.1 - Financial Data Schedule N/A
(EDGAR ONLY)
Page 2 of 12
<PAGE>
PART I. FINANCIAL INFORMATION
CORCOM, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
April 4, 1998 December 31, 1997
(unaudited)
------------- -----------------
ASSETS
CURRENT ASSETS
Cash & cash equivalents $ 8,151 $8,232
Accounts receivable (net) 5,250 4,599
Inventories - Note B 5,883 6,192
Deferred income tax benefit, net 760 885
Other current assets 806 596
Total current assets 20,850 20,504
PROPERTY, PLANT & EQUIPMENT - AT COST 19,804 19,323
Less accumulated depreciation & amortization 15,156 14,849
4,648 4,474
TOTAL ASSETS $25,498 $24,978
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 62 $ 62
Accounts payable 1,515 767
Other accrued liabilities 1,133 2,077
Total current liabilities 2,710 2,906
LONG TERM DEBT 25 40
STOCKHOLDERS' EQUITY
Common stock, no par value:
Authorized 10,000,000 shares; issued
3,921,543 shares in 1998 and 3,863,543
shares in 1997 14,217 14,134
Retained Earnings 9,726 9,026
Accumulated exchange rate adjustments (335) (283)
Less cost of common stock in treasury:
98,300 shares in 1998 and 1997 (845) (845)
Total stockholders' equity 22,763 22,032
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $25,498 $24,978
See notes to Consolidated Financial Statements
Page 3 of 12
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CORCOM, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except share data)
Thirteen Weeks Ended
---------------------------------
April 4, 1998 March 29, 1997
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Net Sales $9,385 $8,993
Costs and expenses
Cost of sales 5,862 5,624
Engineering expenses 425 338
Selling, administrative and other
expenses 2,042 1,976
Interest expense 2 3
Interest income (114) (49)
8,217 7,892
Income before income tax 1,168 1,101
Income tax provision 468 360
Net income $ 700 $ 741
Weighted avg shares outstanding (Basic) 3,782,425 3,825,708
Weighted avg shares outstanding (Diluted) 3,875,393 3,971,246
Net earnings per share (Basic) - Note C $.19 $.19
Net earnings per share (Diluted) - Note C $.18 $.19
Cash dividends have not been declared in the periods covered by these
statements
See notes to Consolidated Financial Statements
Page 4 of 12
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CORCOM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
Thirteen Weeks Ended
--------------------------------
April 4, 1998 March 29, 1997
------------- --------------
OPERATING ACTIVITIES
Net cash flows from operating activities $ 346 $1,556
INVESTING ACTIVITIES
Additions to property, plant, & equipment
(net) (495) (524)
FINANCING ACTIVITIES
Stock options exercised 83 26
Repayments of notes payable and long-term
debt (15) (16)
TOTAL FINANCING ACTIVITIES 68 10
(DECREASE)INCREASE IN CASH AND CASH EQUIVALENTS (81) 1,042
Cash and cash equivalents at beginning of
period 8,232 4,789
CASH AND CASH EQUIVALENTS AT END OF PERIOD $8,151 $5,831
See notes to Consolidated Financial Statements
Page 5 of 12
<PAGE>
CORCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information in a format provided by the instructions to Form 10-Q
and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and disclosures required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the thirteen weeks ended April 4, 1998 are not necessarily indicative of
the results that may be expected for the year ending December 31, 1998. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for
the year ended December 31, 1997.
NOTE B - INVENTORIES
Major classes of the Company's inventories are as follows (in thousands):
April 4, 1998 December 31, 1997
Finished products $1,758 $2,188
Materials and work-in-process 4,125 4,004
$5,883 $6,192
NOTE C - EARNINGS PER SHARE
Basic earnings per share are based upon the weighted average number of shares
of common stock outstanding during each period. Diluted earnings per share
are based upon the weighted average number of shares of common stock and
common stock equivalents (dilutive stock options) outstanding during the each
period.
The following is a reconciliation of the numerators and denominators of the
basic and diluted EPS computation for net income:
Weighted Avg
Net Income Shares Per Share
(Numerator) (Denominator) Amounts
Thirteen weeks ended April 4, 1998:
BASIC EPS
Income available to common
shareholders $ 700,000 3,782,425 $.19
Effect of dilutive options 92,968
DILUTED EPS
Income available to common
shareholders plus assumed conversions $ 700,000 3,875,393 $.18
Thirteen weeks ended March 29, 1997:
BASIC EPS
Income available to common
shareholders $ 741,000 3,825,708 $.19
Effect of dilutive options 145,538
DILUTED EPS
Income available to common
shareholders plus assumed conversions $ 741,000 3,971,246 $.19
Page 6 of 12
<PAGE>
NOTE D - INCOME TAXES
The components of the net deferred tax asset, tax effected, recognized in the
accompanying balance sheet as of April 4, 1998 and December 31, 1997 are as
follows (in thousands):
April 4, 1998 December 31, 1997
Deferred tax assets $ 1,148 $ 1,273
Less: valuation reserve (388) (388)
Net deferred tax assets $ 760 $ 885
NOTE E - MERGER
On March 10, 1998, the Company entered into an Agreement and Plan of Merger by
and among Communications Instruments, Inc., a North Carolina corporation
("CII"), RF Acquisition Corp., an Illinois corporation and wholly owned
subsidiary of CII ("Merger Sub") and the Company (the "Merger Agreement").
CII is owned by Code Hennessy & Simmons, LLC, a Chicago based private
investment firm, and CII management. Pursuant to the Merger Agreement, (a)
CII will acquire all of the Company's issued and outstanding shares of common
stock for $13.00 per share in cash, or approximately $51.2 million, and (b)
Merger Sub will merge with and into the Company (the "Merger"), with the
Company being the surviving corporation in the Merger.
The closing of the Merger is subject to the satisfaction of certain
conditions, including, among other matters, approval by the holders of two-
thirds of the issued and outstanding shares of common stock of the Company,
certain regulatory approvals and receipt by CII of debt financing necessary to
consummate the Merger, a commitment for which has been provided by Bank of
America National Trust and Savings Association. This financing is subject to
certain conditions, including the execution of a definitive credit agreement
satisfactory to Bank of America.
CII also entered into an agreement with Werner E. Neuman, the President and
Chairman of the Board of Directors of the Company, and James A. Steinback, a
Director of the Company, whereby such individuals agreed to vote in favor of
the Merger. These two individuals hold approximately 31% of the shares
outstanding.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
Results of Operations - First quarter 1998 vs. first quarter 1997
CORCOM's net sales for the first quarter of 1998 were $9,385,000, an increase
of 4.4% from the $8,993,000 reported for the first quarter of 1997. This
increase was the result of volume increases in the Company's North American
commercial filter business. There were no appreciable price changes year to
year.
Cost of sales for the current quarter were 62.5% of net sales, about the same
as the year ago period. A portion of the Company's manufacturing costs are
Mexican peso-based. While this currency has been relatively stable over the
past year versus the US dollar, the Company's manufacturing costs could rise
if the value of the peso increases relative to the dollar, or if inflation in
Mexico escalates.
Engineering expenses, at $425,000 in the first quarter of 1998, were 26%
higher than the $338,000 reported in the first quarter of 1997, the result of
an increased commitment to new product development. Selling, administrative
and other expenses rose in 1998 to $2,042,000 from the $1,976,000 reported in
the first quarter of 1997. The largest component of this increase were higher
commission expenses on the higher level of sales volume.
Page 7 of 12
<PAGE>
Interest income in first quarter of 1998 period was $114,000 compared with
$49,000 in the first quarter of 1997. This was the result of higher cash
investments in the 1998 period.
The Company's pre-tax earnings for the first quarter of 1998 were $1,168,000
as compared with $1,101,000 for the first quarter of 1997. The reasons for
the improvement are discussed above.
The Company recorded a provision for income taxes of $468,000, or 40% of
pretax income, in the first quarter of 1998 as compared to a provision of
$360,000, or 33% of pretax income, in the first quarter of 1997.
After tax, the Company's net earnings for the first quarter of 1998 were
$700,000 ($.19 per share basic, $.18 per share diluted). This compares to net
earnings in the year ago period of $741,000 ($.19 per share basic, $.19 per
share diluted).
Liquidity and Capital Resources
As of April 4, 1998, the company had cash reserves on hand of $8,151,000 as
compared to $8,232,000 as of December 31, 1997. In addition to
current cash reserves, the Company's loan agreement with American National
Bank and Trust Company of Chicago is still in place. This agreement is an
unsecured line of credit with maximum borrowings of $4,000,000, or 80%
of eligible accounts receivable, whichever is less. Interest on this loan is
the Company's choice of either LIBOR plus one hundred fifty basis points, or
the Bank's prime rate. This agreement, which was to have expired April 30,
1998, has been extended through June 30, 1998 (see exhibit 10.1). There
were no borrowings against this agreement as of April 4, 1998.
The Company does not believe it will need to identify additional sources of
capital over the next year and feels that current cash reserves, cash provided
by operating activities, and the existing credit facility will be sufficient
to meet its operating needs and capital resource requirements.
Year 2000 Issues
In 1997, the Company began converting its computer systems to be year 2000
compliant. Most of the Company's business software consists of externally
written, generic "packages" which have already been upgraded to be year 2000
compliant by their publishers. These upgraded versions have been made
available to the Company as part of its normal software licensing and/or
maintenance agreements. In certain cases, installation of the upgraded
systems may require additional purchased hardware or software which would be
recorded as assets and amortized. In addition to its main purchased business
software, but to a much lesser extent, the Company also has some internally
developed systems and subsystems which are in the process of being made year
2000 compliant. The company does not believe it will encounter any material
problems with this conversion. Management does not feel that the cost of this
conversion will be material.
Page 8 of 12
<PAGE>
PART II. OTHER INFORMATION
CORCOM, INC.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit No. Description Page
---------- ------------------------------------ ----
10.1 Revolving Line of Credit Note 10
27.1 Financial Data Schedule (EDGAR only) N/A
(b) The Company filed a Current Report on Form 8-K (date
of report March 10, 1998) during the thirteen week
period ended April 4, 1998, covering items 5 and 7
to report the execution of the Merger Agreement
CORCOM, INC.
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.
Dated: May 4, 1998
Corcom, Inc.
(Registrant)
s/s Thomas J. Buns
By: Thomas J. Buns
Vice President & Treasurer
(Principal Financial Officer)
Page 9 of 12
<PAGE>
Exhibit 10.1
American National Bank and Trust Company of Chicago
REVOLVING LINE OF CREDIT NOTE (UNSECURED)
$4,000,000.00 Chicago, Illinois April 30,1998
Due: June 30, 1998
FOR VALUE RECEIVED, the undersigned jointly and severally if more than
one) ("Borrower"), promises to pay to the order of American National Bank and
Trust Company of Chicago ("Bank"), at its principal place of business in
Chicago, Illinois or such other place as Bank may designate from time to time
hereafter, the principal sum of FOUR MILLION AND NO/100 DOLLARS
($4,000,000.00) or such lesser principal sum as may then be owed by Borrower
to Bank hereunder, such payment to occur on June 30, 1998. Borrower's
obligations under this Note shall be defined and referred to herein as
"Borrower's Liabilities".
This Note restates and replaces a Revolving Line of Credit Note in the
principal amount of $4,000,000.00, dated December 31, 1996 executed by
Borrower in favor of Bank (the "Prior Note") and is not a repayment or
novation of the Prior Note.
Borrower may prepay all or part of the principal, together with accrued
interest on the amount so prepaid, without penalty during the term of the
Note. All prepayments shall be applied upon installments of the most remote
maturity.
The principal amount of this Note is available to the Borrower on a
revolving basis. The undersigned may borrow, repay and reborrow any amount,
subject to the limitations contained in the Loan Agreement dated December 27,
1995, as amended from time to time, executed by and between Corcom, Inc. and
Bank (the "Loan Agreement"), provided that the total outstanding principal
balance does not exceed the principal amount of this Note and that Borrower
has complied with all the terms of this Note and the Loan Agreement. The
books and records of the Bank shall be determinative of the unpaid balance of
this Note from time to time outstanding, absent manifest error.
Reference is hereby made to the Loan Agreement for a statement of the
terms and conditions under which the loan evidenced hereby has been made, is
to be repaid and for a statement of Bank's remedies upon the occurrence of an
"Event of Default" as defined in the Loan Agreement. The terms and conditions
of the Loan Agreement are incorporated herein by reference in their entirety.
Borrower's Liabilities unpaid from time to time shall bear interest
(computed on the basis of a 360day year and actual days elapsed) from the date
hereof until paid at a per annum rate at all times equal to the Bank's Base
Rate or equivalent as announced or published publicly from time to time (the
"Base Rate"). Therefore, interest shall be calculated for each day at 1/360th
of the applicable per annum rate. The Base Rate is not indicative of the
lowest or best rate offered by the Bank to any customer or group of customers.
A change in the Base Rate shall constitute a corresponding change in the
interest rate hereunder effective on and as of the date of such change in the
Base Rate. The above notwithstanding, Borrower may elect to and cause all or a
portion of the principal outstanding on this Note to bear interest at a daily
rate equal to one and one-half percent (1.5) in excess of the London Interbank
Offered Rate ("LIBOR") as announced by Bank from time to time pursuant to the
terms and conditions of that certain London Interbank Offered Rate Borrowing
Agreement between Borrower and Bank dated March 28,1995. Interest accruing
prior to maturity shall be payable by Borrower to Bank monthly, or as billed
by Bank to Borrower, at Bank's principal place of business, or at such other
place as Bank may designate from time to time hereafter. All unpaid interest
at maturity shall be paid with the principal amount of Borrower's Liabilities
due hereunder.
Upon the occurrence of an Event of Default, as hereinafter defined,
interest on the unpaid principal balance shall accrue at a rate equal to the
Page 10 of 12
<PAGE>
then existing Base Rate plus three percent (3%) per annum.
Borrower agrees that in any action or proceeding instituted to collect
or enforce collection of this Note, the amount recorded on the books and
records of the Bank shall be prima facie evidence of the unpaid principal
balance of the Note; provided that the failure of the Bank to record any
advance hereunder shall not limit or otherwise affect the obligation of the
Company to repay the principal amount owing on this Note together with accrued
interest thereon.
If any payment becomes due and payable on a Saturday, Sunday or legal
holiday under the laws of the State of Illinois, the due date of such payment
shall be extended to the next business day. If the date for any payment of
principal is thereby extended or is extended by operation of law or otherwise,
interest thereon shall be payable at the then applicable rate of interest for
such extended time.
Borrower warrants and represents to Bank that Borrower shall use the
proceeds represented by this Note solely for the proper business purposes, and
consistently with all applicable laws and statutes.
All of Bank's rights and remedies under this Note are cumulative and
non-exclusive. The acceptance by Bank of any partial payment made hereunder
after the time when any of Borrower's Liabilities become due and payable will
not establish a custom, or waive any rights of Bank to enforce prompt payment
thereof. Bank's failure to require strict performance by Borrower of any
provision of this Note shall not waive, affect or diminish any right of Bank
thereafter to demand strict compliance and performance therewith. Any waiver
of an Event of Default hereunder shall not suspend, waive or affect any other
Event of Default hereunder. Borrower and every endorser waive presentment,
demand and protest and notice of presentment, protest, default, non-payment,
maturity, release, compromise, settlement, extension or renewal of this Note,
and hereby ratify and confirm whatever Bank may do in this regard. Borrower
further waives and all notice or demand to which Bank might to entitled with
respect to this Note by virtue of any applicable statute or law (to the extent
permitted by law).
Borrower agrees to pay, upon Bank's demand therefore, any and all
reasonable costs, fees and expenses (including attorneys' fees, costs and
expenses) incurred in enforcing any of Bank's rights hereunder, and to the
extent not paid the same shall become part of Borrower's Liabilities
hereunder.
If any provision of this Note or the application thereof to any party
or circumstance is held invalid or unenforceable, the remainder of this Note
and the application thereof to other parties or circumstances will not be
affected thereby, the provisions of this Note being severable in any such
instance.
This Note is submitted by Borrower to Bank at Bank's principal place of
business and shall be deemed to have been made there at. This Note shall be
governed and controlled by the laws of the State of Illinois as to
interpretation, validity, construction, affect, choice of law and in all other
respects.
No modification, waiver, estoppel, amendment, discharge or change of
this Note or any related instrument shall be valid unless the same is in
writing and signed by the party against which the enforcement of such
modification, waiver, estoppel, amendment, discharge or change is sought.
TO INDUCE BANK TO ACCEPT THIS NOTE, BORROWER IRREVOCABLY AGREES THAT,
SUBJECT TO BANK'S SOLE AND ABSOLUTE ELECTION, ALL ACTIONS OR PROCEEDINGS IN
ANY WAY, MANNER OR RESPECT, ARISING OUT OF OR FROM OR RELATED TO THIS NOTE
SHALL BE LITIGATED IN COURTS HAVING SITUS WITHIN THE CITY OF CHICAGO, STATE OF
ILLINOIS. BORROWER HEREBY CONSENTS TO THE JURISDICTION OF ANY LOCAL, STATE OR
FEDERAL COURT LOCATED WITHIN SMD CITY AND STATE AND WAIVES ANY OBJECTION IT
MAY HAVE BASED ON IMPROPER VENUE OR FORUM NON CONVENIENS TO THE CONDUCT OF ANY
PROCEEDING INSTITUTED HEREUNDER.
Page 11 of 12
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BORROWER AND BANK IRREVOCABLY WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY
ACTION OR PROCEEDING (I) TO ENFORCE OR DEFEND ANY RIGHTS UNDER OR IN
CONNECTION WITH THIS NOTE OR ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT
DELWERED OR WHICH MAY IN THE FUTURE BE DELWERED IN CONNECTION HEREWITH OR (II)
ARISING FROM ANY DISPUTE OR CONTROVERSY IN CONNECTION WITH OR RELATED TO THIS
NOTE OR ANY SUCH AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT, AND AGREE THAT
ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A
JURY.
Signed
CORCOM, INC.,
an Illinois corporation
s/s Thomas J. Buns
By: Thomas J. Buns, Vice President
Page 12 of 12
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND THE CONSOLIDATED STATEMENTS OF INCOME
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> APR-04-1998
<CASH> 8151
<SECURITIES> 0
<RECEIVABLES> 5250
<ALLOWANCES> 0
<INVENTORY> 5883
<CURRENT-ASSETS> 20850
<PP&E> 19804
<DEPRECIATION> 15156
<TOTAL-ASSETS> 25498
<CURRENT-LIABILITIES> 2710
<BONDS> 0
<COMMON> 14217
0
0
<OTHER-SE> 8546
<TOTAL-LIABILITY-AND-EQUITY> 25498
<SALES> 9385
<TOTAL-REVENUES> 9385
<CGS> 5826
<TOTAL-COSTS> 8215
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2
<INCOME-PRETAX> 1168
<INCOME-TAX> 468
<INCOME-CONTINUING> 700
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<NET-INCOME> 700
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</TABLE>
