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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
Commission file number 0-26596
Computational Systems, Incorporated
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(Exact Name of Registrant as Specified in its Charter)
Tennessee 62-1198047
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(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
835 Innovation Drive
Knoxville, Tennessee 37932
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(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, Including Area Code: (423) 675-2110
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of class
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Common
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, 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 the 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 ]
As of February 22, 1996 there were 4,747,209 shares of common stock, of
the Registrant outstanding. The aggregate market value of such shares, other
than shares held by persons who may be deemed affiliates of the Registrant, was
$48,222,792.
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PART I
ITEM 1. BUSINESS
Computational Systems, Incorporated ("CSI" or the "Company") was
incorporated under the laws of the State of Tennessee in February 1984, under
the name Canada Systems, Incorporated. In May 1984, the Company changed its
name to Computational Systems, Incorporated. The Company's principal offices
are located at 835 Innovation Drive, Knoxville, Tennessee 37932 and its
telephone number is (423) 675-2110. At December 31, 1995, the Company
employed 350 persons, of whom 336 were full-time and 14 were part-time
employees.
The Company designs, produces and markets an integrated family of advanced
predictive maintenance products and services for use in large scale,
continuous run manufacturing facilities. The Company's Reliability-Based
Maintenance products and services help customers detect potentially disruptive
conditions in the operation of their machinery before damage or complete
mechanical failure occurs, thereby allowing maintenance to be scheduled at the
most appropriate time. The Company believes that its products and services
enable its customers to effectively increase plant capacity by reducing
unplanned downtime; reduce overall maintenance costs by minimizing parts and
labor committed to repairing capital equipment; and improve their product
quality by ensuring greater consistency in the operation of manufacturing
equipment.
The Company's products allow its customers to accomplish a wide range of
predictive maintenance tasks including detecting and diagnosing abnormal
machinery vibration, abnormal oil condition (degradation and contamination),
abnormal temperatures and misalignment and imbalance conditions. The Company
manufactures hand-held and fixed instrumentation to take measurements which
detect these conditions. All of the Company's products are supported by the
Company's proprietary, PC-based MasterTrend software platform that automates
data collection, supports local and remote transfer of the data, and analyzes
the data to detect existing and emerging problems. MasterTrend software
formats the data into reports that allows the customer to confirm the problem
diagnosis, observe trends and search for underlying causes of mechanical
problems. MasterTrend software compares data from periods of normal operation
to failure modes and learns to detect developing problems on an ongoing basis.
CSI also offers complementary services including: reliability services (turnkey
contract maintenance services tailored to a specific customer's needs); training
services; tribology services (advanced fluid analysis); and consulting and
engineering services.
The Company targets manufacturers worldwide that have continuous run
operations involving large capital investments. These target customers
typically have well-funded maintenance budgets and experience substantial
losses from unplanned downtime of production facilities. These customers
include petrochemical and chemical manufacturers, primary metals producers,
power generation companies, motor vehicle and equipment manufacturers, and
food and paper producers. The Company's customers include a substantial
number of the largest industrial U.S. companies, including Exxon, DuPont,
Alcoa, Weirton Steel, Duke Power, Tennessee Valley Authority, General Motors,
Ford, Chrysler, General Electric, Westinghouse, Miller Brewing Company,
Coca-Cola, M&M Mars and Kimberly Clark. No individual customer accounted for
more than 3% of the Company's revenues in 1994 or 1995.
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To accomplish its goal of providing the tools, technology and training
to change the way the Company's target customers perform maintenance, the
Company has developed successive generations of vibration analysis products as
well as other products which employ different technologies, all of which use
the Company's common software platform, to provide Reliability-Based
Maintenance capabilities to its target customers.
PRODUCTS AND SERVICES
The Company manufactures products for use in connection with, and offers
contract services which provide, vibration analysis , oil analysis, infrared
thermography, alignment, balancing and motor current analysis. The Company's
MasterTrend software is the PC-based common software platform linking all of
the Company's products and services. MasterTrend software (available in
Windows, DOS, and network versions) is the central point of control for
Reliability-Based Maintenance technologies. MasterTrend is designed to be
straightforward to use, while offering the diagnostic depth needed to solve
complex machinery problems.
PRODUCTS
The Company manufactures instrumentation for use in detecting and
diagnosing abnormal machinery vibration, abnormal oil condition (degradation
and contamination), abnormal temperatures and electrical defects, as well as
misalignment and imbalance conditions. These products assist plant personnel
by providing efficient data collection, analysis and reporting to determine
probable future machine failures and their causes.
VIBRATION ANALYSIS. The Company's vibration analysis products provide
a substantial part of its revenues and represent the initial products
developed by the Company. By routinely monitoring machinery vibration,
conditions which may lead to machine failure can be detected early. When
rotating equipment components begin to fail (such as a worn bearing), they
will generally produce vibration frequencies that are specific to the failure
condition and location. With an understanding of the general machine
design and its normal vibration frequencies, many of these fault vibration
frequencies can be detected. The Company's vibration analysis products
combine ease of use with state of the art technology to simplify and automate
the process of collecting and analyzing data for machinery condition
monitoring. The Company manufactures portable vibration analysis systems that
allow an operator to make spot measurements at key measurements points along a
pre-designed "route" around a factory. In addition, the Company manufactures
vibration analysis systems which provide continuous monitoring of critical
pieces of equipment. When used with the Company's MasterTrend predictive
maintenance software, data is easily stored and recalled for display and
analysis.
Operation of the Company's portable vibration analysis products is
relatively easy, requiring little training for fast, accurate and reliable
data collection. Data from a typical measurement point may be acquired in
five to ten seconds for display and analysis. A data collection route may
involve hundreds of such measurements. The Company's vibration analysis
products utilize digital signal processing. A large, backlit, wide angle
LCD display provides a complete description of the current machine and
measurement point. In addition to data collection capability, the Company's
vibration analysis products provide the ability to analyze data collected in
the field and, in conjunction with the Company's MasterTrend software, provide
a more powerful analytical tool to determine the root cause of machine
failure. The Company has also developed certain additional optional
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down-loadable programs to provide additional proactive maintenance
capabilities such as balancing, alignment and resonance testing. Prices
for the Company's vibration analysis products range from $3,000 for the
Company's model 1900 portable vibration analyzer to $30,000 for the Company's
advanced model 2120 vibration analyzer in a package with the Company's
MasterTrend software.
The Company also makes vibration analysis systems which are designed for
continuous monitoring of especially critical machinery. The Company has
designed both dedicated and movable systems, for the customer with very
advanced needs, which use continuous monitoring to warn of developing problems
or perform continuous monitoring on a short-term basis to determine the root
cause of problems. Prices for the Company's continuous monitoring products
range from approximately $20,000 for the Company's movable products to as
much as $300,000 for a dedicated monitoring systems incorporating the Company's
model 3130 analyzer.
OIL ANALYSIS (TRIBOLOGY). Wear-related fatigue in machines can be
significantly reduced through proper oil sampling, diagnostics and procurement
practices. The Company's tribology products are designed to enhance the
traditional function of oil analysis (i.e. problem detection), with solutions
which help the customer identify and correct the root causes of mechanical
wear associated with different aspects of lubrication. The Company provides a
combination of products which allow its customers to operate an on-site mini-lab
customized to the customer's needs and applications. The lab allows the
customer to quickly monitor oil condition, oil contamination, machine wear
debris, particle counts and viscosity and utilizes the Company's OilTrend
software to manage and analyze the data collected. The Company offers a
tribology total solution in which the Company's tribology consultants are
available for on-site advisory service. The total solution provides specific
strategies and recommendations for achieving long range maintenance goals such
as effective lubricant selection, system contamination control and extended
lubricant use. The Company also operates an advanced fluid analysis laboratory
to which its customers send fluid samples for highly detailed analysis. The
lab analysis provides information which allows the Company's customers to
improve plant lubricant procurement methods, contamination control methods and
filtration practices.
INFRARED THERMOGRAPHY. The Company's infrared thermography products
are designed to pinpoint problems related to faulty electrical connections and
friction induced heating and insulation deficiencies by measuring the
temperature patterns presented by the equipment. Data collection is
accomplished with a penbased analyzer as well as a lightweight, high
resolution infrared camera which incorporates thermal imaging capability. The
camera allows the customer to read the temperature of a very small object or
machine component from a distance. CSI's patented infrared thermography
data acquisition system provides a route-based approach that makes infrared
surveys more efficient and effective. The Company's Infranalysis data
storage/display/analysis/reporting software enables customers to detect and
solve maintenance problems initially indicated through temperature variation.
ALIGNMENT AND BALANCING TECHNOLOGIES. CSI's UltraSpec alignment and
balancing systems help eliminate two of the most common and costly machine
problems - misalignment and imbalance - by improving technique, data
management and job documentation, UltraSpec and its PC-based data management
program, UltraMgr, provide a complete alignment/balancing solution with
built-in error resistance, auto documentation, alignment and balancing
optimization, data management and several system configuration options. The
Company's laser alignment systems offer numerous methods of data collection
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including a partial sweep method which allows users to collect data without
having to fully rotate the shaft.
MASTERTREND SOFTWARE. The Company's proprietary MasterTrend software
is the PC-based common software platform for all of the Company's products and
services. The database administration features of MasterTrend include
database setup and management functions. In addition, MasterTrend automates
many of the routine tasks associated with data collection by creating and
managing routes. The communications and data transfer features of MasterTrend
software include and analyzer communications program which supports local and
remote transfer of data. At the conclusion of field data, the collected data
is transferred to the computer through the analyzer communications program and
is then stored in the database and can be examined and analyzed later using
MasterTrend's diagnostic and display options. With the data collected and
stored, MasterTrend's automated problem detection features use alarm algorithms
to detect not only existing problems but problems just beginning to emerge.
The advanced diagnostics and reporting features of the MasterTrend software
allow the customer to confirm the diagnosis of the problem or search further
for root causes. MasterTrend displays allow a customer to see how machine
conditions change over time, while spectral and wave form displays assist in
the in-depth analysis of developing machinery problems. Finally, the archival
features of the MasterTrend program allow the customer to document and archive
a complete history of its Reliability-Based Maintenance program and create
understandable reports for management.
SERVICES
In addition to its patented products and proprietary software, CSI has a
technical service division which provides both contract services utilizing all
of the various Reliability-Based Maintenance technologies on a turnkey basis
as well as training for personnel in organizations that have invested in these
technologies.
CSI RELIABILITY SERVICES. CSI provides contract services tailored to
a customer's needs and budget. The Company's reliability services program
allows a customer to implement any one of the individual maintenance
technologies described above or allows the customer to implement a turnkey,
multi-technology contract. In addition to long-term contracts, the Company
provides shorter-term troubleshooting services. The Company believes that
offering its services on a contract basis allows it to serve a broader
segment of the industrial market and introduce its products to potential
customers on a cost effective basis.
TRAINING SERVICES. Each year, CSI offers more than 175 technical
courses in its state-of-the-art training facilities in Knoxville, Houston, and
Leuven, Belgium, as well as at customer sites. In 1996, training facilities
are opening in San Diego and Detroit. The Company offers courses in vibration
analysis, tribology, infrared thermography, alignment/balancing, electric
motor analysis, multichannel analysis and industry specific topics. During
1995, approximately 2,500 people attended the Company's technical courses at
the Company's training facilities and at various customer sites.
TRIBOLOGY SERVICES. In addition to the Company's oil analysis products
the Company offers services designed to provide synergy to the on-site
tribology program. As described above, in the tribology total solution CSI
consultants are available for on-site advisory services. In addition, CSI
recently opened an advanced fluid analysis lab at its principal facility in
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Knoxville, which provides sophisticated oil analysis for industrial machinery.
Results from the advanced fluid analysis lab are available to the customer via
electronic data transfer.
MANAGEMENT LEVEL CONSULTING SERVICES. CSI's consulting services are
designed to provide customers with the expertise to insure the long-term
success of the customer's maintenance program. CSI's consultants conduct
in-plant evaluations of the client's facilities and develop specific
strategies for implementing or expanding the Reliability-Based Maintenance
program for that client. The service also includes management training,
identification of optimal maintenance strategies and benchmarking services
(identification of present output levels of facilities).
ENGINEERING SERVICES. CSI provides high level engineering services for
technically challenging machinery and process related problems. The services
include general design engineering service, modal and structural analysis
services, and finite element modeling services, as well as trouble shooting of
plant equipment.
ENGINEERING AND NEW PRODUCT DEVELOPMENT
ENGINEERING AND PRODUCT DEVELOPMENT. The Company's engineering and
product development teams have been integral to the Company's successful
development of its products. The Company's engineering function is headed by
Dr. Kenneth R. Piety, and is staffed with approximately 60 employees.
Development of each of the Company's products is organized around a product
development team consisting of as few as three or as many as nine members.
The teams are headed by project "champions" who not only lead the product's
development but also retain responsibility for the success of the product
through testing, marketing and developmental improvements. The objectives
of the engineering and product development teams are to continue to develop
successful maintenance products. The engineering area seeks to develop a
family of products utilizing each of the Company's principal technologies
and to integrate those products with the Company's existing product and
service lines. The Company tests each of its new products through in-house,
pre-release testing (alpha testing) and through testing of installed products
at actual facilities of customers prior to general release of the product
(beta testing).
PRODUCTS UNDER DEVELOPMENT. The Company is developing the following
products which use additional technologies to those described above, although
there can be no assurance of their successful completion or commercial
viability:
MOTOR ANALYSIS. The Company is developing an electric motor diagnostic
system designed to provide early warning of faults with respect to both
rotating and stationary windings without disassembly or interception of
operation of the motor. This system consists of an analyzing software
package which accepts data from a variety of electrical inputs including
flux sensors, current transformers and other sensors.
ULTRASONIC ANALYSIS. The Company is developing a data collection and
reporting system for the detection of faults by ultrasonic analysis. Faults
which can be detected by ultrasonic analysis include pressure leaks,
malfunctioning steam traps and corona discharge (the electrical arcing of two
machine components at high voltage).
In addition, the Company continually seeks to improve its existing
products. The Company has designed recent generations of its products to be
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downloadable so that new software, which provides increased functionality, can
be installed in the Company's products easily and on a cost effective basis.
In addition, the Company continually strives to improve its MasterTrend
software to further enhance the automation of the data collection and analysis
process and the integration of various technologies.
MANUFACTURING AND QUALITY ASSURANCE
The Company manufactures substantially all of its own products,
utilizing components specified in its engineering design. The Company
believes that by manufacturing its products in-house it is able to assure the
final quality of its products as well as implement design improvements on a
rapid basis. Because most of the Company's products are manufactured and
shipped within 4 to 6 weeks of order, CSI's senior management meets at the
beginning of each month to determine production authorization and to forecast
inventory needs for the next several months. The Company believes that this
method of production management enables it to control both material and
labor costs as effectively as possible. Because of the design of certain of
the Company's products, the Company does not rely on sole sources for some of
its components. One of the Company's goals is to reduce its reliance on sole
source suppliers as its products mature.
CUSTOMER CONCENTRATION AND BACKLOG
No customer of CSI accounted for more than 3% of the Company's revenues
in 1994 or 1995. Approximately 70% of the Company's sales are made in the
United States and 30% are international. The Company's backlog was $2.5
million at December 31, 1993, $5.1 million at December 31, 1994 and $5.1
million at December 31, 1995. The Company generally does not have a large
backlog since it produces and ships products within 4 to 6 weeks of receiving
an order. Backlog also includes future services to be provided
pursuant to service contracts.
PATENT AND PROPRIETARY RIGHTS
PATENTS. Protection of the proprietary aspects of the Company's
products is an important factor in the success of the Company. The Company's
engineering staff actively works towards developing processes, technology and
products to achieve the Company's commercial aims. It is the policy of the
Company to protect its intellectual property rights by obtaining patents from
the United States Patent and Trademark Office. To date, the Company has
obtained seven patents and has eighteen patent applications pending. To
maintain its competitive position, the Company expects to rely upon trade
secrets, technological improvements, and other unpatented proprietary
know-how, incorporated, for example, in manuals, formulae, specifications,
test data and procedures, flow charts, apparatus plans, drawings and designs.
With respect to the use and disclosure of the Company's proprietary
technology, the Company has confidentiality agreements with its employees and
the members of its Board of Directors. In addition, the Company has
confidentiality and "work-for-hire" agreements with consultants that assist
in the engineering and development of a product for the Company. There can
be no assurance that others have not or will not independently develop or
otherwise gain access to technology or information which is substantially
similar to technology which is patented by the Company or technology which
is unpatented yet relied upon by the Company.
PATENT LITIGATION. Messrs. Canada and Piety were employed by Technology
for Energy Corporation ("TEC"), prior to Mr. Canada's founding of CSI in 1984.
In 1989, TEC filed suit against the Company for, among other things,
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infringement of a patent on vibration monitoring device alleged to be used in
some of the Company's products (the "TEC Patent"). In 1992, the Company was
adjudged liable for approximately $1.5 million in damages for infringement of
the TEC Patent and was permanently enjoined from using the TEC Patent without
TEC's permission. Following an unsuccessful appeal, the Company satisfied the
judgement.
In September 1994, CSI and TEC entered into and Asset Purchase Agreement
(the "Purchase Agreement") pursuant to which the Company acquired certain
assets of TEC. As a condition to the Purchase Agreement, TEC and CSI entered
into a Release of Claims Agreement (the "Release Agreement"), pursuant to
which each party released the other from, and covenanted not to sue the other
in connection with, any and all rights arising from or relating to patents,
copyrights, trade secrets, trademarks, confidential information, and business
contracts or relationships with third parties. As a further condition to the
Purchase Agreement, TEC and CSI entered a Patent Agreement (the "Patent
Agreement"), pursuant to which TEC granted CSI a paid-up, non-exclusive
sub-license to make, use and sell products and processes covered by the TEC
Patent. The sub-license granted in the Patent Agreement is applicable to all
past and future uses of the TEC Patent in any CSI product. Following execution
of the Patent Agreement, the injunction against use of the TEC Patent by CSI
was dissolved. In connection with the TEC acquisition, the Company agreed not
to compete with certain specified activities of TEC including its nuclear
reactor business, stress analysis business and aviation business, all for a
period of five years from the date of the TEC acquisition.
IRD Mechanalysis, Inc., one of the Company's principal competitors,
holds a patent on a portable vibration data collector (the "IRD Patent"). In
1993, CSI filed an action for a declaratory judgement for non-infringement of
the IRD Patent in which IRD counterclaimed for damages for patent
infringement. In October of 1993, IRD and CSI entered into a Settlement
Agreement (the "Settlement Agreement") pursuant to which IRD granted CSI a
non-exclusive license for portable vibration data collectors incorporating
the IRD Patent. In the Settlement Agreement, CSI agreed to make certain
payments to IRD, the past payments for which have been accounted for in the
Company's cost of revenue and litigation expenses. In 1993, IRD acquired a
license from TEC to use the TEC Patent, subject to TEC's right to enforce the
patent against CSI as discussed above.
TRADEMARKS/SERVICE MARKS. The Company has registered the trade or
service marks Reliability-Based Maintenance, InTouch, MotorCheck, RollView,
WavePak, Accutrend, MachineView, MachineGuard, Nspectr, TrendSetter, OilView,
OilTrend, and UltraSpec (collectively, the "Marks") in the United Sates Patent
and Trademark Office. The Company regards its Marks as valuable assets and
believes that they have significant value in the marketing of its products.
The Company intends to protect its Marks vigorously against dilution and
infringement.
COMPETITION
The predictive maintenance industry is relatively new and the Company
faces competition within the industry from a limited number of competitors in
the products areas and from a larger number of competitors in the services
area. In the products area, the Company faces competition primarily from IRD
Mechanalysis, Inc. ("IRD"), Entek Scientific Corporation, Predict/DLI, SKF
Condition Monitoring, Inc. ("SKF") and Bentley-Nevada Corp. ("Bentley-Nevada").
The Company believes that it is a significant competitor in the products area
except that with respect to fixed-vibration monitoring equipment, Bentley-Nevada
is generally viewed to be the dominant competitor. Among the Company's other
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competitors, IRD holds one patent and a license on an additional patent
covering two processes that are used in several of the Company's leading
products, for which the Company has licensed the use of those processes. The
industry for providers of predictive maintenance services is highly fragmented
and consists in part of a number of small, contract service providers who
purchase the Company's products or products made by one of the Company's
product competitors.
The Company believes that providers of predictive maintenance products
and services compete based primarily on their ability to educate companies
about the benefits and cost effectiveness of predictive maintenance programs,
upon their ability to create, implement, and support predictive maintenance
programs, and, to a lesser degree, on price. The Company believes that
because the predictive maintenance industry and the technologies used in
performing predictive maintenance are relatively new, the ability to educate
a company about the benefits and cost effectiveness of predictive maintenance,
to assist the company in developing an appropriate predictive maintenance
program and to present the company with a total package of predictive
maintenance products and services, tends to foster a better understanding of
predictive maintenance by the company and raises the potential that the company
will implement a predictive maintenance program. The Company believes that it
is well positioned to compete in the predictive maintenance industry because
of its ability to offer fully integrated, multiple technologies for predicitve
maintenance products and services and by its ability to support those products
and services from within.
It is likely that the Company will face increased competition as the
predicitve maintenance industry grows and that the full market potential for
products and services similar to those offered by the Company is developed.
An increase of competition within the industry could have a material adverse
effect upon the Company's business.
REGULATION
The Company's operations are subject to federal, state and local laws
governing wages, working conditions, citizenship and health and sanitation
requirements and licensing. Additionally, the Company's international
revenues are subject to federal laws concerning exports. Generally, the
Company is not subject to significant export license requirements for its
products. The Company must, however, obtain an export license from the United
States Department of Commerce prior to any international shipment of
infrared thermography cameras as it is a "controlled product" pursuant to
regulations promulgated by the Bureau of Export Administration of the U.S.
Department of Commerce. However, infrared thermography cameras do not
represent a significant percentage of the Company's international revenues.
RISK FACTORS
In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, the Company is including the
following cautionary statements identifying important factors that could cause
the Company's actual results to differ materially from those projected in
forward looking statements of the Company made by, or on behalf of, the
Company.
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DEPENDENCE ON A SINGLE PRODUCT FAMILY AND NEW PRODUCT INTRODUCTIONS. A
substantial portion of the Company's revenues are derived from the sale of its
vibration analysis products. There can be no assurance that the Company's
revenues from its vibration analysis products will grow or remain at
historical levels. In addition, the Company's growth and future financial
performance depend in part upon its ability to develop and introduce new, cost
effective products and enhance existing products to meet technological advances
and customer requirements. There can be no assurance that any such product
will be successfully developed and introduced or achieve market acceptance.
Failure by the Company to anticipate or respond adequately to changes in
technology and customer requirements, or delays in product development or
introduction, could have a material adverse effect on the Company's business.
CHALLENGES DEVELOPING CUSTOMER RELATIONSHIPS IN AN EMERGING MARKET.
Because predictive maintenance is a relatively new concept and involves
relatively high capital investment on the part of the Company's target
customers, before the Company can convince its target customers to buy its
products and services, rather than similar products or services provided by
the Company's competitors, it must first convince those customers that the
technology utilized in predictive maintenance and applied by the Company's
products is sound and that the return on investment of establishing a
predictive maintenance program is adequate.
INABILITY TO OBTAIN, OR LOSS OF, PATENTS AND PROPRIETARY RIGHTS. All of
the Company's current products and those under development utilize the
Company's proprietary technologies. In addition, certain products utilize
technologies licensed to the Company by third parties. There can be no
assurance that the means utilized by the Company to protect its products and
technologies will be adequate. The inability of the Company to maintain the
proprietary aspects of its significant products and core technologies could
have a material adverse effect on the Company's results of operations. During
the last several years, the Company was involved in litigation which challenged
the right of the Company to utilize certain intellectual property in its
products. As a result of this litigation, the Company paid or incurred the
commitment to pay to third parties (including the cost of defending the
litigation) an aggregate of approximately $7.2 million for satisfaction of
claims related to patent infringement and to insure that the Company would
have the right to utilize this technology in the future pursuant to
non-exclusive licenses. The extent to which the research and development
efforts of the competitors of the Company have or will result in patents and
the extent to which the issuance of patents to others would have a material
adverse effect on the Company or would force the Company to obtain licenses
from such competitors are currently unknown. There can be no assurance that
third parties will not make claims regarding the Company's ability to use
intellectual property the Company develops, or that third parties may not own
or have the rights to technologies or processes that the Company desires to
incorporate in its products.
COMPETING TECHNOLOGIES OR TECHNOLOGICAL OBSOLESCENCE. There exists the
risk that the Company's competitors may develop products which are superior to
the Company's. The Company's product backlog of firm orders generally
represents orders expected to be filled within the two months following the
date of the order. Because of the short time frame for filling backlog
orders, the introduction of products using competing technologies could have
an immediate impact on the Company.
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SIGNIFICANT EXPENDITURES FOR RESEARCH AND DEVELOPMENT. In the last
three fiscal years, the Company has spent an aggregate of approximately $13.2
million on research and development. For the same period, the Company's net
income aggregated approximately $5 million. The Company believes that it will
be required to continue to make significant investment in research and
development to refine its existing products and continue to develop additional
advanced predictive maintenance products. These expenses are made significantly
in advance of sales of these products. The Company expenses its research and
development costs as they are incurred and there exists the risk that it will
be unable to recover expenses for the development of these products if the
products developed do not prove to be commercially successful.
FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS. The Company's revenues
are seasonal, and the Company's product backlog generally represents only
products expected to be shipped within the two months following the order.
Generally, the Company's revenues are higher every subsequent quarter of the
fiscal year, due to customers' tendencies to purchase capital assets (such as
the Company's products) towards the end of their fiscal years. Customers'
capital spending patterns can have a significant effect on the Company's
results of operations, especially during the fourth quarter when the Company
has traditionally experienced its highest revenue levels, and the results of
one quarter are not necessarily indicative of results for the next quarter.
Because of the increased number of shares outstanding after the Company's
initial offering in August 1995, increases in net income will not increase
comparative earnings per share proportionately, and any decrease in net income
will result in a larger than proportional decrease in comparative earnings per
share.
DEPENDENCE ON SENIOR MANAGEMENT. The Company's success depends upon the
continued contributions of its senior management, including Ronald G. Canada,
Chairman and Chief Executive Officer of the Company, and Dr. Kenneth R. Piety,
Vice Chairman and Vice President of Engineering of the Company. The loss of
the services of one or more of the Company's senior management could have a
material adverse effect upon the Company's business and development. The
Company does not have employment agreements with any members of senior
management. See "MANAGEMENT."
VOLATILITY OF MARKET PRICE FOR COMMON STOCK. From time to time, there
may be significant volatility in the market price for the Common Stock.
Quarterly operating results of the Company or of other similar companies,
changes in general conditions in the economy (including potential downturns in
the national economy or in the economies of other countries where the Company
makes international sales), the financial markets or the industry in which the
Company operates, natural disasters or other developments affecting the
Company or its competitors could cause the market price of the Common Stock
to fluctuate substantially. In addition, in recent years the stock market
has experienced extreme price and volume fluctuations. This volatility has
had a significant effect on the market prices of securities issued by many
companies for reasons unrelated to their operating performance.
ITEM 2. PROPERTIES
The Company's operations are primarily conducted from its 69,000 square
foot headquarters and manufacturing facility in Knoxville, which the Company
owns. The Company has plans to expand the facility to 129,000 square feet to
better suit the Company's expanding needs. The expansion of the headquarters
and manufacturing facility will be financed with a portion of the proceeds
<PAGE>
from the Initial Public Offering (see Part II, Item 5). The Company leases
property on which its satellite offices are located. These satellite
offices are located in Houston, Texas, Merrillville, Indiana, Brussels,
Belgium, Rambouillet, France and Deeside, United Kingdom. The Company
also leases a 5,000 square foot facility for Reliability Services.
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company is involved in routine litigation and
proceedings in the ordinary course of business. The Company has been involved
in material litigation concerning patent infringement in the past. Currently,
the Company does not have pending any litigation or proceeding that the
Company believes will have a material adverse effect upon the Company or its
financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There have been no matters submitted to a vote of the security holders
during the fourth quarter of 1995.
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
On August 29, 1995, the Company completed an initial public offering of
its common stock (the "Initial Public Offering"). The common stock of the
Company is traded on the Nasdaq Stock Market's National Market (the "Nasdaq
National Market") under the symbol "CSIN". As of February 19, 1996, there
were approximately 261 record holders of common stock.
The following table sets forth, for the periods indicated, the high and
low prices of the Company's Common Shares as reported by the Nasdaq National
Market:
PRICE RANGE
COMMON STOCK HIGH LOW
---------------------- ------ ------
Third Quarter 1995 $17.25 $12.50
Fourth Quarter 1995 $16.87 $14.63
The Company has never declared or paid a cash dividend on its Common
Stock. It is the current policy of the Company's Board of Directors to retain
all earnings to support operations and to finance expansion; therefore, the
Company does not anticipate declaring or paying cash dividends on the Common
Stock n the foreseeable future. Pursuant to the Company's loan agreements,
the Company is subject to certain financial covenants which may restrict the
payment of any cash dividends on its outstanding Common Stock. Future
declaration and payment of dividends, if any, will be determined in light of the
then current conditions, including the Company's earnings, operations, capital
requirements, financial condition, restrictions in financing agreements, and
other factors deemed relevant by the Board of Directors.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------
1991 1992 1993
------- ------- -------
<S> <C> <C> <C>
(In thousands, except per share data)
STATEMENT OF INCOME DATA:
Revenue, net:
Products $16,731 $19,738 $21,566
Services 2,790 3,765 4,784
------- ------- -------
Total 19,521 23,503 26,350
------- ------- -------
Cost of revenues:
Products 4,702 5,188 5,368
Services 1,589 2,061 2,938
------- ------- -------
Total 6,291 7,249 8,306
------- ------- -------
Gross margin 13,230 16,254 18,044
Operating expenses:
Selling, general and administrative 8,498 9,759 11,382
Research and development expenses 3,412 3,436 4,123
Litigation costs 2,265 831 1,617
------- ------- -------
Income from operations (945) 2,228 922
Other income (expenses):
Interest expense (70) (584) (485)
Interest income 152 140 145
Other income, net 47 70 73
Minority share of income ----- (8) (1)
------- ------- -------
Income (loss) before taxes (816) 1,846 654
Provision (benefit) for income taxes (282) 753 347
------- ------- -------
Net income (loss) $ (534) $ 1,093 $ 307
======= ======= =======
Net income per share $ (0.14) $ 0.29 $ 0.08
======= ======= =======
Pro forma earnings per share (1)
Weighted average number of common and
common equivalent shares outstanding 3,804 3,795 3,794
======= ======= =======
</TABLE>
<PAGE>
<TABLE>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------
1994 1995
------- -------
<S> <C> <C>
(In thousands, except per share data)
STATEMENT OF INCOME DATA:
Revenue, net:
Products $25,063 $31,990
Services 6,102 9,782
------- -------
Total 31,165 41,772
------- -------
Cost of revenues:
Products 6,343 9,220
Services 4,312 7,442
------- -------
Total 10,655 16,662
------- -------
Gross margin 20,510 25,110
Operating expenses:
Selling, general and administrative 13,211 15,909
Research and development expenses 4,493 4,563
Litigation costs 137 -----
------- -------
Income from operations 2,669 4,638
Other income (expenses):
Interest expense (458) (373)
Interest income 109 261
Other income, net 37 76
Minority share of income ----- -----
------- -------
Income (loss) before taxes 2,357 4,602
Provision (benefit) for income taxes 559 1,655
------- -------
Net income (loss) $ 1,798 $ 2,947
======= =======
Net income per share $ 0.51 $ 0.72
======= =======
Pro forma earnings per share (1) $ 0.68
=======
Weighted average number of common and
common equivalent shares outstanding 3,503 4,117
======= =======
</TABLE>
(1) Pro forma earnings per share for the year ended December 31, 1995 is
provided to reflect what earnings per share would have been had the
Company had available and used proceeds from the August 1995 initial
public offering to pay off long-term debt and the revolving line of
credit.
<PAGE>
<TABLE>
AS OF DECEMBER 31,
---------------------------
1991 1992 1993
------- ------- -------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital $ 2,238 $ 3,343 $ 3,231
Total assets 12,423 15,145 15,361
Long-term debt, including
current maturities 3,268 3,769 5,326
Total shareholders equity 4,376 5,498 4,822
</TABLE>
<TABLE>
AS OF DECEMBER 31,
---------------------------
1994 1995
------- -------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital $ 2,417 $16,432
Total assets 19,725 32,151
Long-term debt, including
current maturities 3,600 32
Total shareholders equity 6,870 24,527
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Since its formation in February 1984, the Company has experienced
substantial growth in the sale of its products and services. During the last
six fiscal years, the Company's net revenues have increased from $16.1 million
in 1990 to $41.8 million in 1995, an average annual increase of approximately
32%. Increases in the revenues of the Company's vibration analysis products
account for a substantial part of the Company's net revenues and have
accounted for a large portion of the Company's growth over this period, and
the Company continues to expand and enhance this product line. In the last
three years, however, the Company has developed an array of non-vibration
products utilizing a variety of technologies, as well as services incorporating
those products and technologies. These developments have lessened the
Company's dependence on a single product line, and allowed the Company to
provide a more complete line of Reliability-Based Maintenance products and
services. In October 1994, the Company completed the acquisition of certain
assets related to the services division of Technology for Energy Corporation
("TEC"), which increased the Company's services revenues derived from contract
maintenance services. Nevertheless, the Company believes that its continued
success will be dependent in large part on the continued viability of its
vibration analysis products.
The Company's revenues are classified as product revenues and service
revenues. Product revenues include the sale of the Company's integrated
instruments and software and service revenues include revenues related to the
Company's training programs, the performance of contract maintenance services
and engineering and consulting services, and services performed at the
Company's testing laboratory. Revenues are generated from the sale of
products and services in both domestic and international markets. During
1995, approximately 30% of the Company's revenues were generated in
international markets. No individual customer accounted for more than 3% of
revenues during 1995. The Company generally expects that during the next
several years service revenues will increase at a faster rate than product
revenues and that product revenues from the Company's products other than
vibration analysis products will increase at a faster rate than the Company's
vibration analysis products. A principal reason for the difference in growth
rates on both areas is the relatively small revenue base of services revenues
and product revenues from products other than vibration analysis products at
the present.
Cost of revenue includes direct expenses, such as labor and inventory,
as well as overhead allocated to direct expenses, incurred in manufacturing
products sold by the Company and estimated costs attributable to warranties.
The direct costs associated with providing services performed by the Company
for its customers are also included in costs of revenue. In addition,
royalties paid on certain patents licensed to the Company are reflected in
this category. In general, as a percentage of revenue, the cost of service
revenues is greater than the cost of product revenues. Also, as a percentage
of revenue, the cost of revenue associated with the Company's products other
than vibration analysis products is higher than the Company's costs of revenue
associated with vibration analysis products. The Company expects service
revenues and revenue from products other than vibration analysis products to
grow at a faster rate than revenue from vibration analysis products over the
course of the next several years.
<PAGE>
Selling , general and administrative ("SG&A") expense includes costs
related to the Company's sales force which is comprised of both direct
employees of the Company and independent sales representatives. Included are
the direct labor costs for employee sales representatives as well as
commissions paid to both employee sales representatives and independent sales
representatives. Costs associated with marketing and advertisements for the
Company's products and services are included in this category. Administrative
expenses, including all corporate and administrative functions that serve to
support the existing product and service businesses of the Company as well as
provide the infrastructure for future growth, are reflected in this category,
as are certain management, supervisory and staff salaries and employee
benefits, data processing, training, rent and office supply costs. In
addition, the portion of depreciation and amortization expense allocable to
SG&A expense is included in this category.
Research and development expenses include labor, overhead and materials
costs associated with the development of new products and services offered by
the Company. These costs are expensed as incurred. The Company expects that
research and development expenses will increase on an absolute basis but will
remain steady or decline as a percentage of revenues, depending on the timing
of expenditures for particular projects.
From 1991 through 1993 the Company incurred litigation costs associated
with litigating patent infringement claims and settling those claims to secure
licenses to use certain technologies which were the subject of the litigated
patents.
Interest expense includes costs and expenses associated with working
capital indebtedness and various debt-financed capital expenditures, as
evidenced by outstanding balances on the Company's principal credit
facilities. Interest income includes imputed interest on prepaid maintenance
contracts.
COMPARISON OF FISCAL YEARS ENDED DECEMBER 31, 1995 AND DECEMBER 31, 1994
REVENUES, NET. Net revenues for 1995 increased 34.0% to $41.8 million
from $31.2 million in 1994. Product revenues increased 27.6% to $32.0
million in 1995 from $25.1 million in 1994 principally as a result of the
Company's expansion into non-vibration product lines. Non-vibration product
revenues grew 83.8% to $6.8 million from $3.7 million in 1994. Service
revenues increased 60.3% to $9.8 million in 1995 from $6.1 million in 1994 as
a result of the Company's increased marketing of its services.
COST OF REVENUE. Direct product and services costs increased 56.4% to
$16.7 million in 1995 from $10.7 million in 1994. Product costs increased
45.4% to $9.2 million in 1995 from $6.3 million in 1994, and service costs
increased 72.6% to $7.4 million in 1995 from $4.3 million in 1994. Total
costs of revenue as a percentage of net revenues increased from 34.2% in 1994
to 39.9% in 1995 for several reasons. First, the expansion into non-vibration
product lines increased revenues, but involved products with lower margins.
Margins are lower on the Company's non-vibration products for two principal
reasons: (i) the lower volume of units for these products translates into a
higher per unit manufacturing cost and (ii) the Company is able to maintain
relatively high margins on its vibration analysis products because of increased
efficiencies and its competitive position in that area. Consequently, overall
product costs as a percentage of net revenues will continue to rise in the
short term as sales of non-vibration products increase as a percentage of net
revenues, but unit costs will stabilize to the extent that volume increases
<PAGE>
and manufacturing efficiencies are achieved. Second, the Company generated
greater service revenues which tend to carry a lower gross margin percentage
than the Company's product business, but adds very little to the Company's SG&A
expense. Costs associated with the Company's service business are accounted
for almost entirely in cost of revenue. Further, the service business acquired
from TEC in October, 1994 had a gross margin of approximately 4.6%, which
was significantly lower than the gross margin on the Company's existing
service business of approximately 24.4%. The Company expects, however, that
it may increase margins on the TEC service business through operational
improvements. The service costs also reflects net additions to the Company's
staff to support increased service demands.
SELLING, GENERAL AND ADMINISTRATIVE. SG&A expense increased 20.4% to
$15.9 million in 1995 from $13.2 million in 1994. The increase resulted in
part from the shift in the composition of the Company's sales force away from
the predominant use of independent sales representatives toward the use of
more employee sales representatives. This increase was partially offset by
the lower commission rates that are paid to employee sales representatives.
However, commission expense increased 21.1% to $3.9 million in 1995 from
$3.2 million in 1994 as a result of increased sales. SG&A expense also
increased in 1995 primarily as a result of increased market development
expenditures. As a result of strong revenues in 1995, however, SG&A expense
as a percentage of net revenues decreased to 38.1% in 1995 from 42.4% in 1994.
RESEARCH AND DEVELOPMENT. Research and development expense increased
by $69,000 or 1.5% to $4.6 million in 1995 from $4.5 million in 1994. As a
percentage of net product revenues, research & development expense declined to
14.3% in 1995 from 17.9% in 1994, reflecting increased revenues in 1995.
LITIGATION COSTS. There were no litigation costs in 1995, with
$137,000 in litigation costs in 1994.
INCOME FROM OPERATIONS. Income from operations for 1995 increased by
$2.0 million to $4.6 million, or 11.1% of net revenues, from $2.7 million, or
8.6% of net revenues, in 1994.
INTEREST EXPENSE AND OTHER INCOME. Interest expense decreased 18.4%
in 1995 to $373,000 from $458,000 in 1994, primarily as a result of lower
average balances on the Company's outstanding indebtedness. Other income
increased by $40,000 to $77,000 in 1995 compared to $37,000 in 1994.
INCOME TAXES. The Company's effective tax rate was 36.0% in the 1995
period as compared to a rate in 1994 of 23.7%, principally due to the decrease
in certain research and development tax credits available to the Company and
the 1994 decrease in the Deferred Tax Valuation Allowance. The Company's
effective tax rate is lower than the statutory rate primarily because of
research and development tax credits which have been available to the Company.
COMPARISON OF FISCAL YEARS ENDED DECEMBER 31, 1994 AND DECEMBER 31, 1993
REVENUES, NET. Net revenues for 1994 increased 18.3% to $31.2 million
from $26.3 million in 1993. Product revenues increased 16.2% to $25.1
million in 1994 from $21.6 million in 1993 as a result of the Company's
expansion into non-vibration product lines as well as an increase in the
Company's sales force. Non-vibration product revenues grew 144.2% to $3.7
million from $1.5 million in 1993. Service revenues increased 27.6% to $6.1
million in 1994 from $4.8 million in 1993 as a result of an increase
in the number of Regional Service Offices and the TEC acquisition in October
1994 which accounted for approximately $267,000 of the increase.
<PAGE>
COST OF REVENUE. Direct product and services costs increased 28.3% to
$10.7 million in 1994 from $8.3 million in 1993. Product costs increased
18.2% to $6.3 million in 1994 from $5.4 million in 1993, and service costs
increased 46.8% to $4.3 million in 1994 from $2.9 million in 1993. Total
costs of revenue as a percentage of net revenues increased from 31.5% in 1993
to 34.2% in 1994 for several reasons. First, the expansion into non-vibration
product lines increased revenues, but involved products with lower margins.
In addition, the TEC acquisition generated greater service revenues, but gross
margins in the services area are lower than margins in the product area.
SELLING, GENERAL AND ADMINISTRATIVE. SG&A expense increased 16.1% to
$13.2 million in 1994 from $11.4 million in 1993, as the result of a planned
increase in selling expenses to increase the size of the Company's sales
force, as well as the incremental expense for equipping sales personnel with
demonstration equipment for the sale of the Company's non-vibration product
lines, the addition of senior management personnel and the costs associated
with an emissions monitoring program that the Company ultimately decided not
to pursue. As a result of strong revenues in 1994, however, SG&A expense as
a percentage of net revenues decreased slightly to 42.4% in 1994 from 43.3%
in 1993.
RESEARCH AND DEVELOPMENT. Research and development expense increased
by approximately $400,000 or 9.0% to $4.5 million in 1994 from $4.1 million in
1993, reflecting the additions to the Company's staff in this area. As a
percentage of net product revenues, research & development expense declined to
17.9% in 1994 from 19.1% in 1993, reflecting increased revenues in 1994.
LITIGATION COSTS. Litigation costs were $137,000 in 1994, a decline
of 91.5% from $1.6 million in 1993. The decrease reflects the resolution of
the patent litigation to which the Company was a party.
INCOME FROM OPERATIONS. Income from operations for 1994 increased by
$1.7 million to $2.7 million, or 8.6% of net revenues, from $922,000, or 3.5%
of net revenues, in 1993.
INTEREST EXPENSE AND OTHER INCOME. Interest expense decreased 5.7%
in 1994 to $458,000 from $485,000 in 1993, primarily as a result of lower
average balances on the Company's outstanding indebtedness. Other income
decreased by $36,000 to $37,000 in 1994 compared to $73,000 in 1993.
INCOME TAXES. The Company's effective tax rate was 23.7% in the 1994
period as compared to a rate in 1993 of 53.1%, principally due to a change in
the deferred income tax valuation allowance.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations through a
combination of cash flow from operations, bank borrowings and equity capital.
The Company's capital requirements have arisen primarily in connection with
purchases of fixed and intangible assets, including acquisitions, and the
Company makes significant expenditures each year for research and development
and market development.
Net cash provided by operating activities in 1995 increased to
$2,545,766 from $1,367,764 in 1994 primarily due to increases in net income
and an increase in accrued liabilities reflecting the higher level of business
activity. Investing activities include additions to property, plant and
equipment and the acquisition of businesses.
<PAGE>
The Company maintains a bank line of credit that provides for borrowings
of up to $4.0 million based on a current ratio of 1.25 or better and bears
interest at the lender's base rate.
The Company's principal commitments decreased to $7.6 million as of
December 31,1995 as compared to $12.8 million as of December 31, 1994 due to
the extinguishment of long-term debt and line of credit from the proceeds of
the IPO. Of the $14.1 million net proceeds of the Company's IPO,
approximately $4.4 million was used to pay off the Company's long-term debt
and line of credit.
Although the Company has at present no acquisition agreements nor
arrangements, the Company may in the future make strategic acquisitions of
other providers of maintenance products or services using stock, cash, debt or
a combination thereof. Depending on the terms of the acquisition, the Company
may need to incur additional indebtedness or issue equity securities to make
any such acquisition.
The Company routinely engages in transactions in foreign countries.
Substantially all of the Company's transactions are denominated in U.S.
currency, thereby limiting the Company's exposure to fluctuations in foreign
currency exchange rates.
INFLATION
The Company believes that the relatively moderate rate of inflation
experienced over the past several years has not had a material impact on its
sales or profitability.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX
Consolidated Financial Statements: Page
--------
Consolidated Balance Sheets - December 31, 1994 and 1995 16
Consolidated Statements of Operations for each of the Three Years
in the period ended December 31, 1995 17
Consolidated Statements of Cash Flows for each of the Three Years
in the period ended December 31, 1995 18
Consolidated Statements of Shareholder's Equity for each of the Three
Years in the period ended December 31, 1995 19
Notes to Consolidated Financial Statements 20 - 26
Independent Accountants' Report 27
Financial Statement Schedule:
Independent Accountants Report S-1
Supplemental Schedule II - Valuation and Qualifying Accounts S-2
<PAGE>
<TABLE>
<CAPTION>
COMPUTATIONAL SYSTEMS, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
1994 1995
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ -------- $ 8,824,332
Trade accounts receivable, less allowance
for doubtful accounts of approximately
$132,000 in 1994 and 1995 6,621,610 9,980,006
Refundable income taxes 160,000 160,000
Inventories 3,578,231 3,623,124
Deferred income taxes 785,000 703,000
Prepaid expenses and other current assets 317,017 239,369
----------- -----------
Total current assets 11,461,858 23,529,831
----------- -----------
Property, plant and equipment:
Land 487,145 729,204
Building and improvements 4,460,420 4,488,421
Equipment and furniture 5,451,402 6,850,428
----------- -----------
10,398,967 12,068,053
Less accumulated depreciation (3,282,729) (4,129,812)
----------- -----------
Property, plant and equipment, net 7,116,238 7,938,241
----------- -----------
Notes receivable from shareholders 245,756 -----
Deferred income taxes 51,000 4,000
Other assets, including intangibles 850,259 678,701
----------- -----------
Total assets $19,725,111 $32,150,773
=========== ===========
<PAGE>
COMPUTATIONAL SYSTEMS, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
1994 1995
----------- ------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Checks outstanding in excess of bank balances $ 43,388 $ -------
Current maturities of long-term debt 142,468 18,377
Revolving line of credit 3,193,664 -------
Accounts payable 1,187,129 1,142,125
Accrued liabilities 2,861,626 3,977,241
Income taxes payable 272,000 492,010
Deferred maintenance contract revenue 1,344,622 1,468,238
----------- -----------
Total current liabilities 9,044,897 7,097,991
Long-term debt, less current maturities 3,457,501 13,172
Deferred maintenance contract revenue 352,875 512,159
----------- -----------
Total liabilities 12,855,273 7,623,322
----------- -----------
Commitments and contingencies
Shareholders' equity:
Common stock, no par value, 50,000,000 shares
authorized, 3,318,665 and 4,743,209 shares
issued and outstanding in 1994 and 1995,
respectively 726,248 15,459,192
Additional paid-in capital 838,494 815,862
Retained earnings 5,305,096 8,252,397
----------- -----------
Total shareholders' equity 6,869,838 24,527,451
----------- -----------
Total liabilities and shareholders' equity $19,725,111 $32,150,773
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
COMPUTATIONAL SYSTEMS, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
---------------------------------------------
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues, net:
Product $21,565,945 $25,063,227 $31,990,239
Services 4,783,795 6,102,050 9,782,244
----------- ----------- -----------
26,349,740 31,165,277 41,772,483
Cost of revenues:
Product 5,367,544 6,343,261 9,219,753
Services 2,938,208 4,312,237 7,442,778
----------- ----------- -----------
8,305,752 10,655,498 16,662,531
Gross margin 18,043,988 20,509,779 25,109,952
Costs and expenses:
Selling, general and
administrative expenses 11,382,003 13,211,343 15,909,203
Research & development expenses 4,123,280 4,492,988 4,562,481
Litigation costs 1,616,750 136,672 -----
----------- ----------- -----------
Income from operations 921,955 2,668,776 4,638,268
Other income (expenses):
Interest expense (485,199) (457,547) (373,451)
Interest income 145,187 108,865 261,184
Other income, net 72,741 36,857 76,795
Minority share of income (837) ----- -----
----------- ----------- -----------
Income before taxes 653,847 2,356,951 4,602,796
Provision for income taxes 347,037 558,684 1,655,495
----------- ----------- -----------
Income after taxes $ 306,810 $ 1,798,267 $ 2,947,301
=========== =========== ===========
Earnings per share $ 0.08 $ 0.51 $ 0.72
=========== =========== ===========
Weighted average shares and
equivalents outstanding
(in thousands) 3,794 3,503 4,117
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
COMPUTATIONAL SYSTEMS, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 306,810 $ 1,798,267 $ 2,947,301
Adjustments to reconcile net income
to net cash provided (used) by
operating activities:
Charge equivalent to tax benefit
of exercised stock options 87,000 ----- -----
Depreciation and amortization 702,291 927,803 1,321,191
Deferred income taxes 385,000 (342,000) 129,000
Accrued interest on notes from shareholders ----- (12,191) -----
Minority share of income 837 ----- -----
Changes in operating assets and liabilities:
Accounts receivable (401,541) (1,079,624) (3,358,396)
Income taxes refundable or payable (652,000) 612,000 220,010
Inventories (206,526) (1,490,401) (136,895)
Prepaid expenses and other current assets (40,523) (60,720) 77,648
Other assets 10,004 2,924 (7,604)
Accounts payable 446,230 (290,370) (45,004)
Accrued liabilities (1,549,674) 916,220 1,115,615
Deferred maintenance contract revenue 324,252 385,856 282,900
----------- ----------- -----------
Net cash provided (used) by operating activities (587,840) 1,367,764 2,545,766
----------- ----------- -----------
Cash flows from investing activities:
Purchase of property, plant and equipment (639,564) (1,754,940) (1,872,030)
Purchase of service business and related assets ----- (1,100,000) -----
Net (advances to) repayments from shareholders 203,685 (13,000) 245,756
----------- ----------- -----------
Net cash used in investing activities (435,879) (2,867,940) (1,626,274)
----------- ----------- -----------
Cash flows from financing activities:
Net borrowings under (repayments on) line of credit 410,020 2,783,644 (3,193,664)
Borrowings under long-term debt 1,463,467 ----- -----
Repayment of long-term debt (225,182) (1,726,393) (3,568,420)
Net proceeds from issuance of common stock 270,443 333,520 14,739,152
Purchases of common stock (1,021,140) (84,240) (28,840)
Checks outstanding in excess of bank balances ----- 43,338 (43,388)
----------- ----------- -----------
Net cash provided by financing activities 897,608 1,349,869 7,904,840
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (126,111) (150,307) 8,824,332
Cash and cash equivalents, at beginning of year 276,418 150,307 -----
----------- ----------- -----------
Cash and cash equivalents, at end of year $ 150,307 $ ----- $ 8,824,332
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
COMPUTATIONAL SYSTEMS, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional Total
Common Paid-In Retained Treasury Shareholders'
Stock Capital Earnings Stock Equity
----------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1993 $ 413,184 $ 755,244 $ 4,337,486 $ (7,581) $ 5,498,333
Issuance of 11,855 shares under employee stock purchase plan 29,163 ----- ----- ----- 29,163
Issuance of 145,205 shares under stock option plans 166,280 ----- ----- ----- 166,280
Issuance of 25,000 shares 75,000 ----- ----- ----- 75,000
Purchase of 446,765 shares for treasury ----- ----- ----- (1,340,295) (1,340,295)
Retirement of 449,425 treasury shares (212,344) ----- (1,135,532) 1,347,876 0
Income tax benefits related to exercised stock options ----- 87,000 ----- ----- 87,000
Net Income ----- ----- 306,810 ----- 306,810
----------- ----------- ----------- ---------- -----------
Balance, December 31, 1993 471,283 842,244 3,508,764 ----- 4,822,291
Issuance of 71,185 shares under employee stock purchase plan 213,555 ----- ----- ----- 213,555
Issuance of 12,200 shares under stock option plans 29,965 ----- ----- ----- 29,965
Issuance of 30,000 shares 90,000 ----- ----- ----- 90,000
Purchase and retirement of 28,080 shares (78,555) (3,750) (1,935) ----- (84,240)
Net income ----- ----- 1,798,267 ----- 1,798,267
----------- ----------- ----------- ---------- -----------
Balance, December 31, 1994 726,248 838,494 5,305,096 ----- 6,869,838
Issuance of 60,834 shares under employee stock purchase plan 240,081 ----- ----- ----- 240,081
Issuance of 87,300 shares under stock option plans 369,660 ----- ----- ----- 369,660
Issuance of 1,283,970 shares, net of $1,608,000 in expenses 14,129,411 ----- ----- ----- 14,129,411
and underwriting discounts
Purchase and retirement of 7,560 shares (6,208) (22,632) ----- ----- (28,840)
Net income ----- ----- 2,947,301 ----- 2,947,301
----------- ----------- ----------- ---------- -----------
Balance, December 31, 1995 $15,459,192 $ 815,862 $ 8,252,397 $ ----- $24,527,451
=========== =========== =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
COMPUTATIONAL SYSTEMS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL:
Computational Systems, Incorporated and Subsidiaries' (the Company)
principal business is to design, develop, manufacture, market and support
predictive and proactive maintenance technology products and services for
large scale, heavy industrial manufacturing facilities worldwide. The Company
has several wholly-owned subsidiaries which perform research and development
services for the commercialization of various products, and sell the Company's
products in foreign countries.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements of
the Company include the accounts of Computational Systems, Incorporated and
its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
CASH AND CASH EQUIVALENTS - For purposes of the statement of cash flows,
the Company considers all highly liquid debt instruments with a maturity of
three months or less when purchased to be cash equivalents. Substantially all
cash and cash equivalents are maintained at a local bank or in U.S.
government agency debt securities. Such items are primarily uncollateralized.
INVENTORIES - Inventories are stated at the lower of cost or market,
with cost determined using standard costs (which approximate first-in,
first-out costs).
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are stated
at cost. Routine maintenance and repairs are expensed as incurred.
Expenditures which materially increase values, change capacities or extend
useful lives of the respective assets are capitalized. Upon sale or retirement
of property, plant and equipment, the cost and accumulated depreciation are
removed from the respective accounts and the resulting gain or loss, if any,
is included in the consolidated statements of operations.
Depreciation is computed on a straight-line basis over the estimated
useful lives of the assets, which range from 2 to 31.5 years.
INTANGIBLES - Intangible assets consisting principally of acquired
patents and noncompete agreements are being amortized on a straight-line basis
over their useful lives ranging from three to eight years. Amortization of
these intangibles was $49,551 in 1994 and $179,162 in 1995. The carrying
value of intangible assets is periodically reviewed by the Company and
impairments are recognized when the expected future operating cash flows
derived from such intangible assets is less than their carrying value.
RETIREMENTS OF COMMON SHARES - Retirement of Company shares is accounted
for by reversing the amounts recorded within the applicable shareholders'
equity accounts when such shares were originally issued, with the excess cost
of such shares being charged to retained earnings.
<PAGE>
COMPUTATIONAL SYSTEMS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued):
REVENUE RECOGNITION - Product sales are recognized upon shipment of
products. Maintenance contract revenue is deferred when contracts are entered
into and recognized as revenue on the straight-line basis over the life of the
related contract. Costs associated with performing services under these
contracts are charged to expense when incurred. Other service revenues and
costs are recorded at the time such services are performed. Estimated costs
attributable to the Company's standard warranty program are provided for at
the time of sale.
RESEARCH AND DEVELOPMENT - Research and development costs are expensed
as incurred. Costs incurred in developing a product during the period that
begins when the product's technological feasibility has been established and
ending when the product is available for general release are capitalized and
are amortized over the economic life of the product. Historically such costs
have not been material.
INCOME TAXES - The Company accounts for income taxes under the asset and
liability method. The asset and liability method establishes deferred tax
assets and liabilities for the temporary differences between the financial
reporting bases and the tax bases of the Company's assets and liabilities
using tax rates expected to be in effect when such amounts are realized or
settled. Tax credits are reflected as a reduction of income tax expense in the
period earned.
EARNINGS PER SHARE - Earnings per common share have been computed by
dividing net income by the weighted average number of common and common
equivalent shares outstanding during each period. Common equivalent shares
relating to options issued during the 12 month period preceding the initial
public offering have been calculated using the treasury stock method assuming
that the options were outstanding during each period presented and that the
fair value of the Company's common stock during each period was equal to the
initial public offering price of $ 12.50 per share. Common equivalent shares
relating to additional options have been calculated using the treasury stock
method for the portion of each period for which the options were outstanding
and using the average fair value of the Company's common stock for each of the
respective periods. Pro forma earnings per share for the year ended
December 31, 1995 is $0.68. The proforma earnings per share have been provided
to reflect what earnings per share would have been had the proceeds from the
Company's August 1995 initial public offering been used by the Company on
January 1, 1995 to pay off long-term debt and the revolving line of credit.
STOCK SPLIT - On June 29, 1995, the Company's Board of Directors
approved a five-for-one common stock split, to be effected in the form of a
stock dividend, of the Company's common stock. All share, per share and
conversion amounts relating to common stock and stock options included in the
accompanying financial statements and notes reflect the stock split.
PREFERRED STOCK - The Company has authorized 5,000,000 shares of
preferred stock. The rights, privileges and dividend rates of such stock are
to be determined by the Board of Directors at the time of issuance. No
preferred shares have been issued.
<PAGE>
COMPUTATIONAL SYSTEMS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued):
MANAGEMENT ESTIMATES - The preparation of financial statements in
conformity with Generally Accepted Accounting Principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
NEW ACCOUNTING PRONOUNCEMENTS - Financial Accounting Standards Board
Statement of Financial Accounting Standard No. 123, Accounting for Stock Based
Compensation, was issued in 1995 to be effective beginning January 1, 1996 for
the Company. Management intends to comply with, at a minimum, the disclosure
requirements of this statement, but has not yet determined if the provisions
of the statement will be adopted. If adopted, it is the opinion of management
that the statement will not have a material impact on the Company's financial
position of results of operations since the Company's stock and option plans
are generally tied to the fair value of the Company's stock.
3. INVENTORIES:
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1994 1995
----------- -----------
<S> <C> <C>
Raw materials $1,873,433 $1,835,885
Work-in-process 517,969 736,109
Finished goods, net 1,186,829 1,051,130
----------- -----------
$3,578,231 $3,623,124
=========== ===========
</TABLE>
Finished goods includes certain inventory used for promotional and
demonstration purposes while being held for sale ($486,253 and $255,376 at
December 31, 1994 and 1995, respectively). Such inventory is being amortized
to cost of sales over two years.
<PAGE>
COMPUTATIONAL SYSTEMS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
4. ACCRUED LIABILITIES:
<TABLE>
<CAPTION>
Accrued liabilities consist of the following:
December 31, December 31,
1994 1995
----------- -----------
<S> <C> <C>
Accrued payroll $ 785,650 $ 882,192
Accrued vacation 503,943 624,596
Commissions payable 451,121 392,108
Accrued bonus 250,217 542,772
Other liabilities 870,695 1,535,573
---------- ----------
$2,861,626 $3,977,241
========== ==========
</TABLE>
5. DEBT:
<TABLE>
<CAPTION>
The Company's debt is summarized as follows:
December 31, December 31,
1994 1995
----------- -----------
<S> <C> <C>
7.75% bank term note payable, monthly payments of
$31,645, including interest, through October
1996, with the remaining balance due in November
1996. The estimated fair value of the debt at
December 31, 1994 was $3,432,000, based on the
present value of future payments discounted at
the estimated current market rate of 9.5%. $ 3,536,640 $ ------
Other notes payable 63,329 31,549
----------- ----------
3,599,969 31,549
Less current maturities (142,468) (18,377)
----------- ----------
$ 3,457,501 $ 13,172
</TABLE>
Unless otherwise indicated, at December 31, 1994 and 1995, the estimated
fair value of the Company's debt approximated its carrying value.
The Company has available a $4,000,000 Revolving Credit Agreement
(Agreement) expiring on December 31, 1996. The Agreement had a balance due of
$3,193,664 as of December 31, 1994 and a balance due of $0 as of December 31,
1995. Borrowings under the Agreement bear interest at the bank's base rate
(8.5% at December 31, 1994). The Company's debt is collateralized by
substantially all of the Company's assets. The Company's debt agreements
contain certain financial and operational covenants which, among other things,
require the Company to maintain minimum tangible net worth and working capital
levels and meet certain financial statement ratios. During 1995, the Company
used a portion of the proceeds from its initial public offering to pay off the
balances outstanding under its $4,000,000 Revolving Credit Agreement and its
term note.
<PAGE>
COMPUTATIONAL SYSTEMS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
6. INCOME TAXES:
<TABLE>
<CAPTION>
The provision (benefit) for income taxes, all of which relates to
continuing operations, is comprised of the following:
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal $ (125,000) $ 775,684 $1,214,495
State 87,037 125,000 312,000
---------- ---------- ----------
(37,963) 900,684 1,526,495
Deferred:
Federal 323,000 (335,000) 115,000
State 62,000 (7,000) 14,000
---------- ---------- ----------
385,000 (342,000) 129,000
---------- ---------- ----------
$ 347,037 $ 558,684 $1,655,495
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
The components of deferred income tax assets and liabilities at December 31,
1994 and 1995, are as follows:
1994 1995
------------------- -------------------
<S> <C> <C> <C> <C>
Current Noncurrent Current Noncurrent
Deferred income tax assets:
Allowance for doubtful accounts $ 50,000 $ $ 50,000 $
Demonstration equipment 96,000 77,000
Inventories 28,000 38,000
Warranty, bonus and other accruals 338,000 538,000
Deferred revenue 153,000 182,000
Tax credit carryforwards 273,000
Intangibles 23,000
------- ------- ------- -------
785,000 153,000 703,000 205,000
Deferred income tax liabilities:
Property, plant and equipment (78,000) (201,000)
Intangibles (24,000)
------- ------- ------- -------
---- (102,000) ---- (201,000)
------- ------- ------- -------
Net deferred tax asset $785,000 $ 51,000 $703,000 $ 4,000
======= ======= ======= =======
</TABLE>
Management believes that a valuation allowance is not considered
necessary at December 31, 1994 and 1995 based upon the historical levels of
taxable income and the projections for future taxable income over the periods
during which the temporary differences giving rise to deferred tax assets are
expected to be recovered or settled.
<PAGE>
COMPUTATIONAL SYSTEMS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
6. INCOME TAXES - (Continued):
The provision for income taxes in 1993, 1994 and 1995, differs from the
"expected" income tax expense (computed by applying the U.S. corporate income
tax rate of 34%) as a result of the following:
<TABLE>
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Computed "expected" tax expense $ 222,000 $ 801,000 $1,565,000
State income taxes, net of federal
income tax benefit 26,000 95,000 184,000
Research and development tax credits (138,000) (184,000) (66,000)
Change in valuation allowance 188,000 (228,000) -----
Other provision for income taxes 49,037 74,684 (27,505)
---------- ---------- ----------
$ 347,037 $ 558,684 $1,655,495
========== ========== ==========
</TABLE>
The Company's 1989 and 1990 tax returns are currently under examination
by the Internal Revenue Service (IRS). Management does not believe the
examination will result in a material impact on the Company's financial
position or results of operations.
7. EMPLOYEE STOCK AND BENEFIT PLANS:
The Company maintains incentive stock option plans. Under the 1987 Plan,
500,000 shares of the Company's common stock were reserved for options.
Options were granted to key officers and employees at the discretion of the
Company's Board of Directors at a price not less than the fair value of the
common stock at the date of grant. On July 27, 1995, the Company's shareholders
approved the 1995 Plan for the award of up to 350,000 shares. No further
options shall be granted under the 1987 Plan. Prior to the Company's initial
public offering in August, 1995, the fair value of the Company's shares was
determined by management, based on an independent valuation. Subsequent to
August, 1995 the fair value is the quoted market price of the Company's shares.
Options are exercisable ratably over five years beginning one year after the
date granted, and expire in six to ten years.
The Company's Board of Directors and management also have the ability to
grant stock options on a discretionary basis. Information with respect to all
outstanding options at December 31, is summarized as follows:
<TABLE>
1994 1995
-------------------- ----------------------
Shares Price Shares Price
------- ----------- ------- ------------
<S> <C> <C> <C> <C>
Under option at beginning of period 196,500 $1.22-$3.00 384,800 $1.22-$4.00
Options granted 220,000 $3.00-$4.00 91,730 $4.00-$16.87
Options exercised (12,200) $1.22-$2.85 87,300 $2.46-$4.00
Options canceled (19,500) $1.22-$3.00 16,500 $2.85-$3.00
------- ----------- ------- ------------
Under option at end of period 384,800 $1.22-$4.00 372,730 $1.22-$16.87
======= =========== ======= ============
</TABLE>
<PAGE>
COMPUTATIONAL SYSTEMS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
7. EMPLOYEE STOCK AND BENEFITS PLANS - (Continued):
1994 1995
------- -------
Options exercisable at end of period 85,465 65,046
======= =======
Shares available for future grant under the 1987 Plan 71,000 -----
======= =======
Shares available for future grant under the 1995 Plan ----- 298,500
======= =======
In 1990, the Board of Directors established an employee stock purchase
plan where all employees could elect to purchase an amount of common stock
equal up to 10% of their individual compensation. Shares were offered at fair
value as determined annually on January 1st by management, based on an
independent valuation and the Board reserved the right to determine those
years in which shares would be made available under the Plan. In 1994 and
1995, 71,185 and 60,834 shares, respectively, were issued to employees under
this plan at a price of $3.00 and $4.00 per share, respectively. On
July 27, 1995, the Company's shareholders approved a new employee stock
purchase plan that mirrors the 1990 Plan except that up to 150,000 shares can
be issued at a price equal to the lesser of 95% of the market price on the
last day of the plan period or the average of the market prices on the first
and last day of the plan period.
The Company has a 401(k) plan which is available to all full-time
employees and those part-time employees who have completed 1,000 hours of
employment during twelve consecutive months. The Company will contribute
one-half of the contributions made by each participant, up to a maximum
Company contribution of 3% of each participant's annual earnings. The Company
made contributions of $169,780, $216,092 and $265,397 in 1993, 1994 and 1995,
respectively.
8. RELATED PARTY NOTE RECEIVABLE:
A note receivable from the Company's largest shareholder and Chairman
was paid on June 29, 1995. The outstanding balance and accrued interest at
the time amounted to $262,772.
9. LEASES:
The Company has operating leases for certain training facilities and
office equipment. Rent expense under these operating leases was $90,267 in
1993, $86,561 in 1994 and $100,163 in 1995. Commitments under operating leases
with terms in excess of one year are approximately $32,000 as of December 31,
1995.
10. PATENT LITIGATION AND ROYALTIES:
In 1992, a competitor of the Company threatened a lawsuit alleging
infringement on certain of the competitor's patents. The Company responded by
filing a declaratory judgement lawsuit against the competitor. The matter was
settled in 1993, when the Company paid a lump sum amount to the competitor
and agreed to pay royalties in each of the years 1993 through 2001, in which
the Company sells certain products as specified in the settlement agreement.
<PAGE>
COMPUTATIONAL SYSTEMS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
10. PATENT LITIGATION AND ROYALTIES - (Continued):
The Company also pays royalties in connection with the use of certain other
patents. Royalties included in cost of sales for 1993, 1994 and 1995 were
approximately $623,000, $574,000 and $843,000 respectively.
Legal fees associated with defending the settlement paid in 1993 have
been reflected in the consolidated statement of operations as "litigation".
11. PURCHASE OF BUSINESS:
In 1994, the Company purchased the assets of the service business of a
competitor. The historical revenues and operating profit of the business are
immaterial to the Company. The purchase price was allocated to the assets
acquired as follows:
Contracts in progress $ 138,000
Furniture and software 142,000
Intangible assets, principally patents
and a noncompete agreement 820,000
----------
$1,100,000
==========
12. CASH FLOW INFORMATION:
<TABLE>
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Supplemental disclosures of cash flows:
Interest paid $ 339,816 $ 468,166 $ 184,975
Income taxes paid (refunded), net $ 470,000 $ (38,000) $1,321,000
</TABLE>
Noncash financing activity:
In 1993, the Company acquired and subsequently retired 106,385 shares of
treasury stock through the issuance of a note payable for $319,155.
13. EXPORT SALES:
Export sales were as follows for the years ended December 31, (in
thousands):
<TABLE>
1993 1994 1995
------ ------ ------
<S> <C> <C> <C>
Middle East $1,066 $ 513 $ 772
Europe 4,493 2,288 3,804
Latin America 1,507 2,649 2,652
Asia 2,208 2,088 3,437
Other areas 326 1,686 1,739
------ ------ -------
$9,600 $9,224 $12,404
====== ====== =======
</TABLE>
<PAGE>
COMPUTATIONAL SYSTEMS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
14. INITIAL PUBLIC OFFERING:
The Company filed a Form S-1 registration statement under the Securities
Act of 1933 with the Securities and Exchange Commission which became effective
on August 28, 1995. Pursuant to the registration the Company sold an initial
1,000,000 shares of no par common stock on August 28 and 258,970 shares on
September 15 under an over-allotment option. All cash received from the
initial public offering has been reported net of expenses directly related to
the offering.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Computational Systems, Incorporated and Subsidiaries
We have audited the accompanying consolidated balance sheets of Computational
Systems, Incorporated and Subsidiaries (the Company) as of December 31, 1994
and 1995, and the related consolidated statements of operations, stockholders'
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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Computational
Systems, Incorporated and Subsidiaries as of December 31, 1994 and 1995, and
the consolidated 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.
COOPERS & LYBRAND L.L.P.
Knoxville, Tennessee
February 1, 1996
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No events have occurred that would require disclosure under this item.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth certain information concerning the
directors and executive officers of the Company.
Name Age Position
- ------------------- ---- -------------------------------------------------
Ronald G. Canada 40 Chairman, Chief Executive Officer and Director
Kenneth R. Piety 47 Vice Chairman, Vice President and Director
of Engineering, Secretary and Director
John J. Cioffi 56 President, Chief Operating Officer and Director
Bryan J. Collier 56 Vice President of Finance and Chief Financial
Officer
E. Forrest Pardue 41 President, MachineView, Inc.
Richard E. Ray 64 Director
William S. Rukeyser 56 Director
James F. Smith, Jr. 65 Director
Thomas A. Valunas 51 Director
Under the terms of the Company's Charter, the members of the Board of
Directors are elected at the annual meeting of the shareholders and serve
until the next annual meeting and until their successors are duly elected and
qualified. Executive officers of the Company are elected on an annual basis
and serve at the discretion of the Board of Directors.
Ronald G. Canada founded the Company in 1984 and has served as Chairman
and Chief Executive Officer and as a director since its inception and is a key
member of the Company's engineering and product development team. Prior
thereto, Mr. Canada was a technical lead engineer at Technology for Energy
Corporation ("TEC") in Knoxville, focusing on the development of a
comprehensive surveillance system for rotating machinery.
Kenneth R. Piety has served as Vice President and Director of
Engineering since 1991, and Vice Chairman since 1994. Dr. Piety has been a
director of the Company since its inception in 1984 and Secretary since 1985.
Dr. Piety has been involved in the development of all of the Company's
products. Prior to joining the company in 1985, Dr. Piety worked as a
development engineer at TEC and at the Oak Ridge National Laboratory.
<PAGE>
John J. Cioffi has served as President, Chief Operating Officer and a
director of the Company since 1993. Prior to joining the Company, Mr. Cioffi
founded and served as the President of Crown Consulting, a Knoxville-based
strategic planning and general management consulting firm, from 1988 to 1993.
Prior to 1988, Mr. Cioffi served as Senior Vice President of Marketing of
Plasti-Line, Inc. ("Plasti-Line"), a publicly-owned sign manufacturing company
located in Knoxville, Tennessee.
Bryan J. Collier has served as Vice President of Finance since 1993.
Mr. Collier served as a director of the Company from 1987 to 1993. Prior to
joining the Company as an officer, Mr. Collier worked as a business consultant
for Millennium Associates, Inc., a Knoxville-based business consulting firm,
from 1988 to 1993. Prior to that time, Mr. Collier was Treasurer and
Secretary of Plasti-Line, Inc.
E. Forrest Pardue has served as President of MachineView, Inc., a
wholly-owned subsidiary of the Company, since 1992. From 1985 to 1992, Mr.
Pardue served as Director of Sales and Marketing for the Company.
Richard E. Ray has served as director of the Company since April 1994,
Mr. Ray is President of Richard E. Ray and Associates, a business consulting
firm. Prior to 1992, Mr. Ray served as Manager of Tennessee Operations of
Aluminum Company of America ("Alcoa"), a publicly-owned manufacturer of
aluminum products. Mr. Ray also serves as a director and Chairman of the
Audit Committee of First Tennessee National Corp., a registered bank holding
company.
William S. Rukeyser has served as a director of the Company since 1994.
Mr. Rukeyser is President of William S. Rukeyser, Inc., a Knoxville-based firm
engaged in media and other business consulting activities. From 1988 to 1994,
Mr. Rukeyser was a senior partner in Whittle Communications, serving as
editor-in-chief of the Knoxville-based company's publications and broadcasts
and as chairman and chief executive officer of Whittle Books. Prior to such
time Mr. Rukeyser worked at Time, Inc. serving as founding managing editor of
Money magazine and managing editor of Fortune magazine.
James S. Smith, Jr. has served as a director of the Company since 1993.
Mr. Smith is also a director of First American Corp. ("First American"), a
bank holding company, and from 1991 through December 1994, Mr. Smith served as
Chairman of the Board of First American and of First American National Bank.
From February 1991 until November 1991, Mr. Smith served as President and
Chief Executive Officer of First American and First American National Bank,
and from May 1990 until February 1991, as Interim Chairman of the Board,
President and Chief Executive Officer of those companies. Prior to that time,
Mr. Smith served as Vice Chairman of First American and First American National
Bank. Mr. Smith is also a director of Pilot Corporation and Plasti-Line.
Thomas A. Valunas, Jr. has served as a director of the Company since
1993 and a member of the Audit Committee and Chairman of the Compensation
Committee. Mr. Valunas is the Vice President of Finance and Chief Financial
Officer of M4 Environmental Management, Inc. ("M4"), an Oak Ridge, Tennessee
company engaged in the recycling business. Prior to joining M4 in 1995, Mr.
Valunas was the President of Tennessee Innovation Center, Inc. ("TIC"), a
subsidiary of Martin-Marietta Corporation engaged in venture capital financing
and one of the initial shareholders of CSI.
<PAGE>
The Board of Directors holds regular quarterly meetings and meets on
other occasions when required by special circumstances. Certain directors
also devote their time and attention to the Board's principal standing
committees. The committees and their primary functions are as follows.
Audit Committee - This committee makes recommendations to the Board of
Directors with respect to the Company's financial statements and the
appointment of independent accountants, reviews significant audit and
accounting policies and practices, meets with the Company's independent
accountants concerning, among other things, the scope of audits and reports,
and reviews the performance of the overall accounting and financial controls
of the Company.
Compensation Committee - This committee (the "Compensation Committee")
has the responsibility of reviewing and approving the salaries, bonuses, and
other compensation and benefits of executive officers, advising management
regarding benefits and other terms and conditions of compensation, and
administering the Company's 1995 Employee Stock Incentive Plan.
Item 11. Executive Compensation
The following table summarizes compensation earned by the Chief Executive
Officer of the Company and the Company's other three most highly compensated
executive officers who were serving as executive officers during 1995 and
received over $100,000 in salary and bonus for the year (together with the
Chief Executive Officer, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
Long - Term
Compensation
Awards
Securities
Annual Compensation Underlying All Other
Name and Principal Year Salary Bonus Options Compensation
- ------------------- ----- ------ ------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Ronald G. Canada 1995 $230,463 $64,638(1) 16,160 $ 0
Chairman and Chief 1994 178,000 32,040(1) 8,015 0
Executive Officer
Kenneth R. Piety 1995 170,673 56,020(1) 14,005 4,620(2)
Vice-Chairman and 1994 156,000 28,018(1) 31,940 3,972(2)
Vice President of
Engineering and
Secretary
John J. Cioffi 1995 146,528 49,556(1) 12,389 4,330(2)
President and Chief 1994 134,000 24,564(1) 6,140 3,978(2)
Operating Officer
Bryan J. Collier 1995 98,111 33,396(1) 8,349 3,415(2)
Vice President of 1994 90,000 16,554(1) 4,135 2,690(2)
Finance and Chief
Financial Officer
</TABLE>
(1) The amount listed represents a cash bonus received by the officer for the
fiscal year 1995 and 1994, as appropriate.
(2) The amount listed represents the contributions made to the Company's
401(k) plan by the Company on behalf of the Named Executive.
<PAGE>
The following table summarizes certain information regarding stock
options issued to the Named Executive Officers under the Company's 1995
Employee Stock Incentive Plan ("Employee Incentive Plan") pursuant to criteria
set forth in the Company's Senior Executive Compensation Plan (the "Bonus
Plan") during 1995.
<TABLE>
<CAPTION>
OPTION GRANTS IN FISCAL YEAR 1995
Individual Grants
-----------------------------------------------------------
Number of Percent of
Securities Total Options
Underlying Granted to Exercise or
Options Employees in Base Price Expiration
Name Granted (#) Fiscal Year ($ / Share) Date
- ----------------- ----------- -------------- ------------ ----------
<S> <C> <C> <C> <C>
Ronald G. Canada 16,160 17.62% $15.50 1/31/00
Kenneth R. Piety 14,005 15.27% $15.50 1/31/00
John J. Cioffi 12,389 13.51% $15.50 1/31/01
Bryan J. Collier 8,349 9.10% $15.50 1/31/01
</TABLE>
<TABLE>
<CAPTION>
OPTION GRANTS IN FISCAL YEAR 1995
Potential Realizable
Value at Assumed
Annual Rates of
Stock Price
Appreciation for
Option Term
--------------------------
<S> <C> <C>
Name 5% 10%
- ---------------- ----------- ------------
Ronald G. Canada 35,162 80,935
Kenneth R. Piety 30,473 70,142
John J. Cioffi 41,939 91,683
Bryan J. Collier 28,263 61,785
</TABLE>
The following table summarizes certain information with respect to stock
options issued to the Named Executive Officers under the Company's various
stock option plans as to the number of shares covered by both exercisable and
unexercisable stock options and options exercised during the fiscal year ended
December 31, 1995. Also reported are the values for the "in-the-money"
options, which represent the positive spread between the exercise price of any
such existing stock options and the year-end fair market value of the Common
Stock.
<PAGE>
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1995 AND
FISCAL YEAR-END OPTION VALUES
Number of Value of
Securities Unexercised
Underlying in-the-Money
Shares Options at Fiscal Options at Fiscal
Acquired on Value Year-End (#) Year-End
Name Exercise (#) Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable
- ---------------- ------------ ------------ ------------------------- -------------------------
<S> <C> <C> <C> <C>
Ronald G. Canada 0 0 1,603 / 22,572 $ 18,434.50 / $ 73,738.00
Kenneth R. Piety 0 0 6,388 / 39,557 $ 78,462.00 / $313,848.00
John J. Cioffi 30,000 285,000 1,228 / 62,301 $ 14,122.00 / $618,988.00
Bryan J. Collier 10,000 95,000 10,827 / 41,657 $134,510.50 / $413,042.00
</TABLE>
DIRECTOR'S COMPENSATION
The Company's non-employee directors receive a quarterly fee of $2,000
and reimbursement of expenses. In addition, each of the Company's
non-employee directors have received options to purchase 15,000 shares of the
Company's common Stock pursuant to the Company's Non-Employee Director Stock
Option Plan (the "Plan"). The non-employee directors may exercise the options
with respect to 5,000 shares in each of the three years beginning on a date
set forth in their option agreements. However, any portion of such 5,000
shares not purchased in any given one-year period does not carry forward to
the next one-year period. The Company will however no longer issue options
under the Plan. The Board of Directors on July 14, 1995 and the shareholders
on July 27, 1995, approved the 1995 Amended and Restated Non-Employee
Directors' Stock Option Plan (the "Directors' Plan") which provides for the
issuance of up to 60,000 shares of the Company's Common Stock. Under the
Directors' Plan, each non-employee director of the Company shall receive on
the date of the annual meeting of the Company's shareholders, commencing with
the 1996 annual meeting, an option grant for the purchase of 2,000 shares of
the Company's Common Stock. All options granted under the Directors' Plan
will have an exercise price equal to the fair market value of the Common Shares
at the date of grant, will vest one year from the date of grant and will have
a term of ten years, subject to the non-employee director's continued service
as a director.
SENIOR EXECUTIVE INCENTIVE COMPENSATION PLAN
The Company has established a Senior Executive Compensation Plan that
provides for the payment of cash bonuses and the granting of stock options to
the four top executive officers of the Company, Messrs. Canada, Piety, Cioffi
and Collier. The amount of bonuses is determined by the Compensation
Committee based upon the percentage of the annual budgetary financial goal
achieved by the Company in the fiscal year covered. The annual budget goal is
determined by the Board of Directors by assigning different percentage weights
to such items of Company performance as, among others, consolidated gross
margin, consolidated budgeted revenues and consolidated pre-tax profit. No
bonuses are payable under the Bonus Plan unless the Company's consolidated
pre-tax profit (an individual item of the overall annual budget goal) is at
least 75% of its budgeted amount for the fiscal year.
<PAGE>
As amended in January 1995, the Bonus Plan provides that the top
executives are eligible for cash bonuses of 10% to 50% of their annual base
salary and a grant of stock options, based upon the Company's achievement of
90% to 110% of the annual budget. The Bonus Plan may be amended, suspended or
discontinued at any time. Options granted pursuant to criteria established by
the Bonus Plan are granted under the Company's Employee Incentive Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors consists of Messrs.
Ray, Rukeyser, Smith and Valunas, none of whom is an employee or officer of
the Company. No executive officer of the Company served during fiscal 1995 as
a member of a compensation committee or as a director of any entity of which
any of the Company's directors serves as an executive officer.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table summarizes security ownership by (i) each director
of the Company; (ii) the Named Executive Officers; and (iii) all directors and
executive officers of the Company as a group as of December 31, 1995.
<TABLE>
Name and Amount
Address of and Nature of
Title of Beneficial Beneficial Percent
Name Class Owner Ownership (1) of Class (1)
- ---------------- -------- -------------------- ------------------- -----------
<S> <C> <C> <C> <C>
Ronald G. Canada Common 835 Innovation Drive 1,129,535 shares (2) 23.8%
Knoxville, TN. 37932
Kenneth R. Piety Common 835 Innovation Drive 679,789 shares (3) 14.3%
Knoxville, TN. 37932
John J. Cioffi Common 835 Innovation Drive 63,086 shares (4) 1.3%
Knoxville, TN. 37932
Bryan J. Collier Common 835 Innovation Drive 66,914 shares (5) 1.4%
Knoxville, TN. 37932
James F. Smith Jr. Common 835 Innovation Drive 10,000 shares *
Knoxville, TN. 37932
Richard E. Ray Common 835 Innovation Drive 10,000 shares (6) *
Knoxville, TN. 37932
Thomas A. Valunas Common 835 Innovation Drive 10,000 shares (6) *
Knoxville, TN. 37932
William Rukeyser Common 835 Innovation Drive 10,000 shares (6) *
Knoxville, TN. 37932
All executive Common 835 Innovation Drive 2,075,659 shares (7) 43.3%
officers and Knoxville, TN. 37932
directors as a
group (9 persons)
</TABLE>
* Represents less than 1% of the Common Stock outstanding.
(1) Pursuant to the rules of the Securities and Exchange Commission, certain
shares of the Company's Common Stock which a beneficial owner has the right
to acquire within 60 days of the date hereof pursuant to the exercise of
stock options are deemed to be outstanding for the purposes of computing
the percentage ownership of such owner but not deemed outstanding for the
purpose of computing percentage ownership of any other person.
<PAGE>
(2) Includes 4,835 shares which may be acquired upon the exercise of
outstanding options, and 45,000 shares that Mr. Canada beneficially owns as
trustee for various trusts for the benefit of Dr. Piety's children.
(3) Includes 9,189 shares which may be acquired upon the exercise of
outstanding options.
(4) Includes 3,706 shares which may be acquired upon the exercise of
outstanding options.
(5) Includes 12,497 shares which may be acquired upon the exercise of
outstanding options.
(6) Includes 5,000 shares which may be acquired upon the exercise of
outstanding options.
(7) Includes 45,287 shares which may be acquired upon the exercise of
outstanding options.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On April 15, 1992, the Company loaned Ronald G. Canada, Chairman and
Chief Executive Officer of the Company, $431,189 for the purpose of
constructing a home. The loan was secured by one million shares of the
Company's Common Stock, was payable in 231 monthly installments and accrued
interest at the prime rate plus one percent on a monthly basis. In 1993, Mr.
Canada sold 100,000 shares of Common Stock to the Company for a total
consideration of $300,000, of which amount Mr. Canada applied $203,685 towards
his indebtedness under the loan. In April 1994, the Company loaned Mr.
Canada an additional $12,673. This loan was secured by the same one million
shares of the Company's Common Stock securing the 1992 loan. The April, 1994
loan also accrued interest at the prime rate plus one percent and was payable
upon demand. On June 28, 1995 Mr. Canada paid $262,772, which was the entire
outstanding balance due on the loans to the Company.
On April 1, 1994, the Company entered into a Loan Agreement for a
revolving line of credit with First American National Bank (the "First
American Loan"). At the time of the transaction, James F. Smith, Jr., a
director of the Company, served both as a director of the Company and as
Chairman of the Board of First American National Bank and its parent
corporation First American Corp. At the end of fiscal year 1994, the
outstanding balance under the First American Loan was approximately $3.2
million. As of January 1, 1995, Mr. Smith was no longer an executive officer
of First American National Bank or First American Corp. although he still
occupies a position as a director of First American Corp. The balance on
the line of credit was paid down with a portion of the proceeds from the
offering of securities during the third quarter.
The Board of Directors of the Company has adopted a policy which
provides that any transactions between the Company and any of its directors,
officers or principal shareholders or affiliates thereof must be on terms no
less favorable to the Company than could be obtained from unaffiliated
parties, and must be approved by a vote of a majority of the disinterested
members of the Board of Directors.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements are provided under Item 8.
(2) Financial Statement Schedules:
Report of Independent Accountants
Schedule II - Valuation and Qualifying Accounts and Reserves
is included herein.
(3) Exhibits:
A. Incorporated by reference to the Company's Registration
Statement on Form S-1 (No. 33-94172)
Exhibit
Number Description
------- -----------
3.1 -- Restated Charter of Registrant.
3.2 -- Restated Bylaws of Registrant.
4.1 -- Specimen Common Stock certificate.
4.2 -- Article 5 of the Registrant's Restated Charter (included in
Exhibit 3.1).
4.3 -- Article 6 of the Registrant's Restated Bylaws (included in
Exhibit 3.2).
10.1 -- 1995 Employee Stock Incentive Plan.
10.2 -- 1987 Incentive Stock Option Plan.
10.3 -- Computational Systems, Incorporated Employee Stock Purchase Plan.
10.4 -- 1990 Employee Stock Purchase Plan.
10.5 -- 1995 Amended and Restated Non-Employee Directors' Stock Option
Plan.
10.6 -- Non-Employee Directors' Stock Option Plan.
10.7 -- Senior Executive Incentive Compensation Plan.
10.8 -- Letter Agreement dated June 6, 1995 between Third National Bank
of East Tennessee and Computational Systems, Incorporated
10.9 -- Amended and Restated Loan Agreement and Security Agreement dated
October 21, 1993 between Third National Bank of Tennessee and
Computational Systems, Incorporated.
10.10 -- Amended and Restated Promissory Note (Building Loan) dated
October 21, 1993 between Third National Bank of Tennessee and
Computational Systems, Incorporated.
10.11 -- Term Loan Agreement dated October 15, 1991 between Computational
Systems, Incorporated and Third National Bank of East Tennessee.
10.12 -- Construction Loan Agreement by and between Computational Systems,
Incorporated and Third National Bank of East Tennessee.
<PAGE>
10.13 -- Deed of Trust executed October 15, 1991 in favor of Third
National Bank of East Tennessee, as amended.
10.14 -- Letter Agreement dated September 30, 1994 between First American
National Bank and Computational Systems, Incorporated.
10.15 -- Loan Agreement dated April 1, 1994 between First American
National Bank and Computational Systems, Incorporated.
10.16 -- Master Promissory Note executed September 30, 1994 in favor of
First American National Bank.
10.17 -- Master Promissory Note executed April 1, 1994 in favor of First
American National Bank.
10.18 -- Patent Agreement dated September 30, 1994 between Technology for
Energy Corporation and Computational Systems, Incorporated.
10.19 -- Release of Claims dated September 30, 1994 between Technology for
Energy Corporation and Computational Systems, Incorporated.
10.20 -- Amendment to Software Agreement dated September 30, 1994 between
Technology for Energy Corporation and Computational Systems,
Incorporated.
10.21 -- Assumption of Obligations dated September 30, 1994 between
Computational Systems, Incorporated and Technology for Energy
Corporation.
10.22 -- Purchaser's Covenant Not to Compete executed September 30, 1994
in favor of Technology for Energy Corporation.
10.23 -- Seller's Covenant Not to Compete executed September 30, 1994 in
favor Computational Systems, Technology for Energy Corporation.
10.24 -- Letter Agreement dated September 18, 1992 between VFQ, Inc. and
Computational Systems, Incorporated.
10.25 -- Software License Agreement dated September 8, 1992 between VFQ,
Inc. and Computational Systems, Incorporated.
10.26 -- Agreement dated April 6, 1987 between Computational Systems,
Incorporated and Intellitech Systems, Inc., as amended by Letter
Agreement dated January 23, 1989.
10.27 -- Agreement dated June 11, 1985 between Technology for Energy
Corporation and Computational Systems, Incorporated.
10.28 -- FLIR Systems, Inc. OEM Contract dated January 21, 1993.
10.29 -- Asset Purchase Agreement dated September 30, 1994 between
Computational Systems, Incorporated and Technology for Energy
Corporation.
<PAGE>
10.30 -- Memorandum of Agreement between Computational Systems,
Incorporated and Technology for Energy Corporation dated
July 20, 1994 and related Bill and Sale of Assignment executed
July 20, 1994 in favor of Computational Systems, Incorporated by
TEC Tribology Systems (by Condition Marketing Services and
Technology for Energy Corporation).
10.31 -- Lease Agreement dated April 26, 1995 between N.V. Apollo
Development and CSI Europe (and English language summation
thereof).
10.32 -- Lease Agreement dated February 16, 1995 between Patrick Schacki
and Computational Systems, Incorporated.
10.33 -- Lease Agreement dated January 18, 1995 between Michael E. Schaad,
Trustee and Computational Systems, Incorporated.
10.34 -- Lease Agreement dated September 24, 1993 between the Clwyd County
Council (United Kingdom) and A.C. Tudor, on behalf of
Computational Systems UK Limited.
10.35 -- Lease Agreement dated October 7, 1991 between Weingarten Realty
Investors and Computational Systems, Incorporated.
10.36 -- Teaming Agreement dated April 30, 1995 between Computational
Systems, Incorporated and the Facility and Plant Services
Division of Fluor Daniel, Inc.
10.37 -- Settlement Order dated October 6, 1993 from the United States
District Court to the Eastern District of Tennessee in the case
of Computational Systems, Inc. v. IRD Mechanalysis, Inc. v.
Ronald G. Canada.
10.38 -- Form of Indemnification Agreement.
21. -- List of Subsidiaries.
B. Filed herewith
Exhibit
Number Description
------- ----------------------------------------------
11.0 - Statement re Computation of Per Share Earnings
23.1 - Independent Accountants' Consent
(b) Reports on Form 8-K filed in the fourth quarter - none
(c) Exhibits - (a), (3) referenced herein
(d) Financial Statement Schedule included herein
<PAGE>
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.
Computational Systems, Incoporated
Bryan J. Collier
By --------------------------------
Bryan J. Collier
Vice President of Finance and
Chief Financial Officer
Date: February 28, 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 dates indicated.
SIGNATURE TITLE DATE
Ronald G. Canada Chairman, Chief Executive Officer February 28, 1996
- ---------------------- and Director (Principal Executive
Ronald G. Canada Officer)
Kenneth R. Piety Vice Chairman, Vice President of February 28, 1996
- ---------------------- Engineering, Secretary, and Director
Kenneth R. Piety
John J. Cioffi President and Director February 28, 1996
- ----------------------
John J. Cioffi
Bryan J. Collier Vice President of Finance and February 28, 1996
- ---------------------- Chief Financial Officer
Bryan J. Collier (Principal Financial and
Accounting Officer)
Richard E. Ray Director February 28, 1996
- ----------------------
Richard E. Ray
William S. Rukeyser Director February 28, 1996
- ----------------------
William S. Rukeyser
James F. Smith, Jr. Director February 28, 1996
- ----------------------
James F. Smith, Jr.
Thomas A. Valunas, Jr. Director February 28, 1996
- ----------------------
Thomas A. Valunas, Jr.
<PAGE>
INDEPENDENT ACCOUNTANTS REPORT OF FINANCIAL STATEMENT SCHEDULE
In connection with our audits of the consolidated financial statements of
Computational Systems, Incorporated and Subsidiaries as of December 31, 1994
and 1995, and for each of the three years in the period ended December 31, 1995,
we have also audited the financial statement Schedule II - Valuation and
Qualifying Accounts and Reserves for the three years ended December 31, 1995.
In our opinion, this financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
Knoxville, Tennessee
February 1, 1996
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
AND RESERVES
FOR THE YEAR ENDED DECEMBER 31
<TABLE>
Col. A Col. B Col. C Col. D Col. E
Additions
-------------------------
Balance at Charged to Charged Balance
beginning costs and to other at end
Description of period expenses accounts Deductions of period
- -------------------------------- ---------- ----------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
1993 $157,243 $35,869 ------ $68,112 $125,000
1994 $125,000 $272,491 $80,120 $345,135 $132,476
1995 $132,476 $143,208 ----- $143,207 $132,477
</TABLE>
<PAGE>
COMPUTATIONAL SYSTEMS, INCORPORATED AND SUBSIDIARIES
EXHIBIT INDEX
Sequential
Exhibit Number Description Page Number
-------------- ---------------------------------------- -------------
11 Statement re: computation of per share
earnings
23.1 Independent Accountant's Consent
<PAGE>
Exhibit 11
COMPUTATION OF EARNINGS PER SHARE
FOR THE YEAR ENDED DECEMBER 31
<TABLE>
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
PRIMARY:
Weighted average number of common shares outstanding 3,569,753 3,366,734 3,824,996
Net effect of dilutive stock options based on the treasury
stock method using the average market and initial
public offering prices, as appropriate 224,725 136,595 292,255
Weighted average number of common and common
equivalent shares outstanding 3,794,478 3,503,329 4,117,251
Net income $306,810 $1,798,267 $2,947,301
Primary net income per common share $0.08 $0.51 $0.72
FULLY DILUTED:
Weighted average number of common shares outstanding 3,569,753 3,366,734 3,824,996
Net effect of dilutive stock options based on the treasury
stock method using the period-end market price if higher
than average price 224,725 136,595 303,825
Weighted average number of common and common
equivalent shares outstanding 3,794,478 3,503,329 4,128,821
Net income $306,810 $1,798,267 $2,947,301
Fully diluted net income per common share $0.08 $0.51 $0.71
</TABLE>
The difference between fully diluted earnings per share and primary earnings
per share is immaterial. Therefore, fully diluted earnings per share have not
been disclosed in the financial statements.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Computational Systems, Inc. on Form S-8 of our report dated February 1, 1996,
on our audits of the consolidated financial statements and financial statement
schedules of Computational Systems, Inc. as of December 31, 1995 and 1994, and
for the years ended December 31, 1995, 1994 and 1993, which report is included
in this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
Knoxville, Tennessee
February 27, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 8,824,332
<SECURITIES> 0
<RECEIVABLES> 10,112,006
<ALLOWANCES> 132,000
<INVENTORY> 3,623,124
<CURRENT-ASSETS> 23,529,831
<PP&E> 12,068,053
<DEPRECIATION> (4,129,812)
<TOTAL-ASSETS> 32,150,773
<CURRENT-LIABILITIES> 7,097,991
<BONDS> 13,172
0
0
<COMMON> 15,459,192
<OTHER-SE> 9,068,259
<TOTAL-LIABILITY-AND-EQUITY> 32,150,773
<SALES> 41,772,483
<TOTAL-REVENUES> 41,772,483
<CGS> 16,662,531
<TOTAL-COSTS> 16,662,531
<OTHER-EXPENSES> 20,471,684
<LOSS-PROVISION> 93,208
<INTEREST-EXPENSE> 373,451
<INCOME-PRETAX> 4,602,796
<INCOME-TAX> 1,655,495
<INCOME-CONTINUING> 2,947,301
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,947,301
<EPS-PRIMARY> 0.72
<EPS-DILUTED> 0.71
