SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
Commission file number 0-26596
Computational Systems, Incorporated
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Tennessee 62-1198047
- --------------------------------- --------------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Indentification No.)
835 Innovation Drive
Knoxville, Tennessee 37932
- --------------------------------------- ----------
(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, Including Area Code: (423) 675-2110
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Common Stock outstanding - 4,864,277 shares at November 11, 1996
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
- -------------------------------------------------------------------------------
Consolidated Condensed Balance Sheets 3
Consolidated Condensed Statements of Income 4
Consolidated Condensed Statements of Cash Flows 5
Notes to Consolidated Condensed Financial Statements 6 - 7
<PAGE>
COMPUTATIONAL SYSTEMS, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $7,642,238 $8,824,332
Accounts receivable, less allowance for
doubtful accounts 9,876,754 9,980,006
Inventories 3,695,237 3,623,124
Other current assets 1,160,690 1,102,369
------------- ------------
Total current assets 22,374,919 23,529,831
------------- ------------
Property, plant and equipment:
Land 729,204 729,204
Building and improvements 5,414,512 4,488,421
Equipment and furniture 11,138,964 6,850,428
------------- ------------
17,282,680 12,068,053
Less accumulated depreciation (5,243,632) (4,129,812)
------------- ------------
Total property, plant and equipment, net 12,039,048 7,938,241
------------- ------------
Other assets, including intangibles 881,757 682,701
------------- ------------
Total assets 35,295,724 32,150,773
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt 17,887 18,377
Accounts payable and other current liabilities 3,434,190 2,610,363
Accrued liabilities 3,473,100 4,469,251
------------- ------------
Total current liabilities 6,925,177 7,097,991
Long-term debt, less current maturities 0 13,172
Deferred maintenance contract revenue 628,492 512,159
------------- ------------
Total liabilities 7,553,669 7,623,322
------------- ------------
Shareholders' equity:
Common stock, no par value, 50,000,000
shares authorized, 4,852,479 and 4,743,209
shares issued and outstanding in 1996 and
1995, respectively 16,037,270 15,459,192
Additional paid-in capital 815,862 815,862
Retained earnings 10,888,923 8,252,397
------------- ------------
Total shareholders' equity 27,742,055 24,527,451
------------- ------------
Total liabilities and shareholders' equity $35,295,724 $32,150,773
============= ============
The accompanying notes are an integral part of these consolidated condensed
financial statements.
<PAGE>
COMPUTATIONAL SYSTEMS, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------ ------------------------------
September 30, September 29, September 30, September 29,
1996 1995 1996 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues, net:
Product $8,097,196 $7,910,124 $24,384,835 $22,363,593
Services 3,136,994 2,516,779 8,790,040 7,096,406
------------- ------------- ------------- -------------
11,234,190 10,426,903 33,174,875 29,459,999
Cost of revenues:
Product 2,012,988 2,212,571 6,343,710 6,801,265
Services 2,588,260 1,816,964 7,067,769 5,279,079
------------- ------------- ------------- -------------
4,601,248 4,029,535 13,411,479 12,080,344
Gross margin 6,632,942 6,397,368 19,763,396 17,379,655
------------- ------------- ------------- -------------
Costs and expenses
Selling , general and administrative 3,830,679 4,176,240 12,410,321 11,318,332
Research & development 1,062,254 1,177,261 3,593,907 3,407,089
------------- ------------- ------------- -------------
4,892,933 5,353,501 16,004,228 14,725,421
------------- ------------- ------------- -------------
Income from operations 1,740,009 1,043,867 3,759,168 2,654,234
Other income (expense)
Interest expense (579) (82,058) (1,945) (372,702)
Interest income 132,794 52,705 385,254 97,032
Other income (expense), net (21,386) (10,833) (22,898) (9,626)
------------- ------------- ------------- -------------
110,829 (40,186) 360,411 (285,296)
------------- ------------- ------------- -------------
Income before taxes 1,850,838 1,003,681 4,119,579 2,368,938
------------- ------------- ------------- -------------
Provision for taxes 666,302 361,429 1,483,050 852,922
------------- ------------- ------------- -------------
Net Income $1,184,536 $642,252 $2,636,529 $1,516,016
============= ============= ============= =============
Earnings per share $0.24 $0.16 $0.52 $0.40
Weighted average shares outstanding 5,026,920 4,137,284 5,061,429 3,819,753
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
<PAGE>
COMPUTATIONAL SYSTEMS, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, September 29,
1996 1995
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $2,636,529 $1,516,016
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,366,637 544,831
Deferred income taxes (176,000) (131,000)
Changes in operating assets and
liabilities:
Accounts receivable 103,252 (1,351,885)
Income taxes refundable (payable) 447,500 0
Inventories (319,162) (230,468)
Prepaids (56,341) (23,476)
Other assets (315,448) 0
Accounts payable 156,749 (18,804)
Accrued liabilities (1,142,634) 1,224,368
Deferred maintenance contract revenue 783,411 243,753
------------- -------------
Net cash provided by operating activities 3,484,493 1,773,335
------------- -------------
Cash flows from investing activities:
Purchase of property, plant and equipment (5,086,003) (1,020,943)
Notes receivable from shareholders 0 245,756
Deposits (other assets) 0 132,666
------------- -------------
Net cash used in investing activities (5,086,003) (642,521)
------------- -------------
Cash flows from financing activities:
Net borrowings under (repayments on)
line of credit 0 (3,193,664)
Repayments of long-term debt (13,662) (3,562,610)
Proceeds from issuance of common stock 433,078 14,448,257
Purchases of common stock 0 (28,840)
Checks outstanding in excess of bank balances 0 (43,388)
------------- -------------
Net cash provided by financing activities 419,416 7,619,755
------------- -------------
Net increase (decrease) in cash and cash equivalents (1,182,094) 8,750,569
Cash and cash equivalents, at beginning of period 8,824,332 0
------------- -------------
Cash and cash equivalents, at end of period $7,642,238 $8,750,569
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
<PAGE>
COMPUTATIONAL SYSTEMS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. INTERIM FINANCIAL STATEMENTS:
Information in the accompanying financial statements and notes to the
financial statements for the interim periods is unaudited. The accompanying
unaudited consolidated condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of regulation
S-X. Accordingly, they do not include all the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the nine months ended September 30, 1996, are
not necessarily indicative of the results that may be expected for the year
ended December 31, 1996. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's Form 10-K
for December 31, 1995.
2. INVENTORIES:
Inventories consist of the following:
September 30, December 31,
1996 1995
------------- ------------
(Unaudited)
Raw Materials $1,733,691 $1,835,885
Work in-process 717,143 736,109
Finished goods, net 1,244,403 1,051,130
------------- ------------
$3,695,237 $3,623,124
3. CASH FLOW INFORMATION:
September 30, September 29,
1996 1995
------------- ------------
(Unaudited) (Unaudited)
Supplemental disclosures of cash flows:
Interest paid $ 2,079 $ 267,229
Income taxes paid, net $ 1,293,000 $ 370,000
<PAGE>
COMPUTATIONAL SYSTEMS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
4. ACQUISITION:
On October 28, 1996 the Company acquired Maintenance & Diagnostics, LLC
(M&D),and the rights to use certain technology from a third party, for
approximately $7.6 million payable in a combination of cash and stock. The
purchase price consisted of $3.88 million payable in cash to owners of M&D (a
portion of which was paid at closing and a portion of which will be paid on
January 2, 1997). The purchase price also consisted of an aggregate of 51,047
shares of CSI common stock to the owners of M&D and 49,805 shares to the third
party (for the rights to use certain technology and other rights). The Company
also repaid $1.48 million for amounts owed under M&D's line of credit agreement
with one of its owners. CSI also issued options to acquire an aggregate of
150,000 shares of CSI common stock at current fair market value to certain of
the owners of M&D. M&D operates a research, service and training center
for the electric power industry.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Comparison of Three Months Ended September 30, 1996 and September 29, 1995
Revenues, Net. Total revenues increased 7.7% in the three months ended
September 30, 1996 ("the 1996 period") to $11.2 million, compared to $10.4
million in the three months ended September 29, 1995 ("the 1995 period").
Revenues from the sale of products increased 2.4% to $8.1 million in the 1996
period from $7.9 million in the 1995 period. An underlying reason for the small
increase in product revenues was the significant increase in backlog orders.
The product backlog as of September 30, 1996 increased $920,000 to $2.5 million
as compared to $1.6 million as of September 29, 1995. Service revenues
increased 24.6% to $3.1 million in the 1996 period from $2.5 million in the 1995
period primarily as a result of the increased emphasis in maintenance contracts
and consulting services due to greater sales support.
Cost of Revenue. Total costs of revenues increased 14.2% to $4.6 million
in the 1996 period from $4.0 million in the 1995 period. As a percentage of net
revenues, total cost of revenue increased from 38.6% in the 1995 period to 41.0%
in the 1996 period. Product costs decreased 9.0% to $2.0 million in the 1996
period, down from $2.2 million in the 1995 period. This is primarily due to a
three hundred basis point increase in the overall product gross margin
percentage, which resulted from favorable pricing resulting from the use of
blanket purchase orders. Evidence of the favorable pricing is the reduction of
standard costs for 1996. A reduction in the labor hours required to assemble
an item also contributed to the decrease in product costs. Service costs
increased 42.4% to $2.6 million in the 1996 period from $1.8 million in the 1995
period. As a percentage of service revenues, service costs increased 10.3 basis
points from 72.2% in 1995 to 82.5% in 1996. This is due primarily to the
addition of thirteen field service reps and the increased costs associated with
the increased consulting service revenues. Costs associated with the Company's
service business are accounted for almost entirely in cost of revenue.
Selling, General and Administrative. SG&A expense decreased 8.3% to $3.8
million in the 1996 period from $4.2 million in the 1995 period. The decrease
was due primarily to favorable experiences with bad debts, health self insurance
claims and other miscellaneous expenses in comparison to the prior year.
SG&A expense, as a percentage of net revenues, decreased to 34.1% in the 1996
period from 40.1% in the 1995 period.
Research and Development. Research and development expenses decreased by
$115,000 or 9.8% to $1.1 million in the 1996 period from $1.2 million in the
1995 period. As a percentage of net product revenues, research and development
expenses declined to 13.1% in the 1996 period from 14.9% in the 1995 period. A
significant portion of the decrease in research and development is due to the
capitalization of the costs incurred to develop new products.
Income from Operations. Income from operations for the 1996 period
increased 66.7% to $1.7 million or 15.4% of net revenue, from $1.0 million, or
10.0% of net revenue, in the 1995 period. Total operating expenses decreased
by 8.6%.
Interest Expense/Income. Interest expense decreased from approximately
$82,000 in the 1995 period to less than $1,000 in the 1996 period, primarily as
a result of the retirement of debt and borrowings under the line of credit from
the proceeds of the Company's Initial Public Offering (IPO) in August 1995.
Interest income increased 152.0% in the 1996 period to $133,000 from $53,000 in
the 1995 period due to proceeds from the IPO being invested in short-term
government securities that bear interest at approximately 5% per anum.
<PAGE>
Income Taxes. The Company's effective tax rate for the 1995 and 1996
periods was approximately 36%.
Comparison of Nine Months Ended September 30, 1996 and September 29, 1995
Revenues, Net. Total revenues increased 12.6% in the nine months ended
September 30, 1996 ("the 1996 period") to $33.2 million, compared to $29.5
million in the nine months ended September 29, 1995 ("the 1995 period").
Revenues from the sale of products increased 9.0% to $24.4 million in the 1996
period from $22.4 million in the 1995 period. The increase in product revenues
is due primarily to the introduction of the Company's two-channel 2120 analyzer
in early 1996. Service revenues increased 23.9% to $8.8 million in the 1996
period from $7.1 million in the 1995 period primarily as a result of an
increased emphasis in the maintenance contracts area, consulting services and
an increased number of predictive maintenance service contracts due to greater
sales support.
Cost of Revenue. Total costs of revenues increased 11.0% to $13.4 million
in the 1996 period from $12.1 million in the 1995 period. As a percentage of
net revenues, total cost of revenue decreased from 41.0% in the 1995 period to
40.4% in the 1996 period. Product costs decreased 6.7% to $6.3 million in the
1996 period from $6.8 million in the 1995 period primarily due to favorable
pricing that resulted from the use of blanket purchase orders causing a
reduction of standard costs, decreased labor hours required in the manufacturing
process due to improved technologies, while other efficiencies and improvements
were derived from the Company's ISO 9002 processes. Service costs increased
33.9% to $7.1 million in the 1996 period from $5.3 million in the 1995 period.
As a percentage of service revenues, service costs increased 6.0 basis points
from 74.4% in 1995 to 80.4% in 1996. This is due primarily to the front-end
loaded cost of establishing an increased number of field service locations
through mid-year 1996, costs associated with support of our consulting
contracts, as well as a general increase in services costs associated with
higher services revenues. Costs associated with the Company's service business
are accounted for almost entirely in cost of revenue.
Selling, General and Administrative. SG&A expense increased 9.6% to
$12.4 million in the 1996 period from $11.3 million in the 1995 period. The
increase was due primarily to additional market development expenditures such
as an addition in the number of sales and administration personnel and the
higher commission expense due to increased sales, partially offset by favorable
experiences with bad debts, health self insurance claims and other miscellaneous
expenses in comparison to the prior year. SG&A expense, as a percentage
of net revenues, decreased to 37.5% in the 1996 period from 38.4% in the 1995
period.
Research and Development. Research and development expenses increased by
$187,000 or 5.5% to $3.6 million in the 1996 period from $3.4 million in the
1995 period, reflecting net additions to the Company's staff in support of a
more diverse product line. As a percentage of net product revenues, research
and development expenses declined to 14.7% in the 1996 period from 15.2% in the
1995 period.
Income from Operations. Income from operations for the 1996 period
increased 41.6% to $3.8 million or 11.3% of net revenue, from $2.7 million, or
9.0% of net revenue, in the 1995 period. Total operating expenses increased by
8.7%.
<PAGE>
Interest Expense/Income. Interest expense decreased from $373,000 in the
1995 period to approximately $2,000 in the 1996 period, primarily as a result of
the retirement of debt and borrowings under the line of credit from the proceeds
of the Company's Initial Public Offering (IPO) in August 1995. Interest income
increased 297.0% in the 1996 period to $385,000 from $97,000 in the 1995 period
due to proceeds from the IPO being invested in short-term government securities
that bear interest at approximately 5% per anum.
Income Taxes. The Company's effective tax rate for the 1995 and 1996
periods was approximately 36%.
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 the first nine months of 1996
increased to $3.5 million from $1.8 million in the first nine months of 1995
primarily due to an increase in net income that reflects the higher level of
business activity and a higher level of deferred revenue that is evidence of the
increased activity in the maintenance contract area. Investing activities
primarily include additions to property, plant and equipment.
On October 28, 1996 the Company acquired Maintenance & Diagnostics, LLC
(M&D) for approximately $7.6 million payable with a combination of cash and
stock. The purchase price consisted of $1.48 million paid to a partial owner
for amounts owed under a line of credit agreement, $1.49 million paid to owners
of the company for their ownership interest, $2.4 million in promissory notes
that mature January 2, 1997 to owners of the company, 73,146 shares of CSI
Common Stock issued to certain owners and a related party at the time of
closing and 27,706 shares of CSI Common Stock to be issued to the owners on
January 2, 1997. In addition to the cash paid and stock issued above, CSI
issued options to the owners of M&D valued at approximately $750,000. M&D is a
research, service and training center which services the electric power
industry.
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.
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
(11) Statement re: computation of per share earnings
(27) Financial data schedule
(b) No reports on Form 8-K were filed for the quarter ended
September 30, 1996.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMPUTATIONAL SYSTEMS, INCORPORATED
Date: November 13, 1996 By: /s/ Ronald G. Canada
-----------------------------------
Ronald G. Canada, Chairman and
Chief Executive Officer
By: /s/ Bryan J. Collier
-----------------------------------
Bryan J. Collier, Vice President of
Finance and Chief Financial Officer
<PAGE>
Exhibit Index
Item Description
-------- -----------------------------------------------
(11) Statement re: computation of per share earnings
(27) Financial data schedule
<PAGE>
EXHIBIT 11 - EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
September 30, September 29, September 30, September 29,
1996 1995 1996 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
PRIMARY:
Weighted average number of common shares
outstanding 4,836,294 3,851,044 4,795,673 3,513,693
Net effect of dilutive stock options based on
the treasury stock method using the average
market price 190,626 286,240 241,841 306,060
---------- ---------- ---------- ----------
Weighted average number of common and common
equivalent shares outstanding 5,026,920 4,137,284 5,037,514 3,819,753
Net income $1,184,536 $642,252 $2,636,529 $1,516,016
Primary net income per common share as reported $0.24 $0.16 $0.52 $0.40
FULLY DILUTED:
Weighted average number of common shares
outstanding 4,836,294 3,851,044 4,795,673 3,513,693
Net effect of dilutive stock options based on
the treasury stock method using the period-end
market price if higher than average price 190,626 299,684 241,841 324,565
---------- ---------- ---------- ----------
Weighted average number of common and common
equivalent shares outstanding 5,026,920 4,150,728 5,037,514 3,838,258
Net income $1,184,536 $642,252 $2,636,529 $1,516,016
Fully diluted net income per common share as
reported $0.24 $0.15 $0.52 $0.39
</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.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> JUL-01-1996 JAN-01-1996
<PERIOD-END> SEP-30-1996 SEP-30-1996
<CASH> 7642238 7642238
<SECURITIES> 0 0
<RECEIVABLES> 10009702 10009702
<ALLOWANCES> 132948 132948
<INVENTORY> 3695237 3695237
<CURRENT-ASSETS> 22374919 22374919
<PP&E> 17282680 17282680
<DEPRECIATION> 5243632 5243632
<TOTAL-ASSETS> 35295724 35295724
<CURRENT-LIABILITIES> 6925177 6925177
<BONDS> 17887 17887
0 0
0 0
<COMMON> 16037270 16037270
<OTHER-SE> 11704785 11704785
<TOTAL-LIABILITY-AND-EQUITY> 35295724 35295724
<SALES> 8097196 24384835
<TOTAL-REVENUES> 11234190 33174875
<CGS> 2012988 6343710
<TOTAL-COSTS> 4601248 13411479
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> (19770) 39160
<INTEREST-EXPENSE> 579 1945
<INCOME-PRETAX> 1850838 4119579
<INCOME-TAX> 666302 1483050
<INCOME-CONTINUING> 1184536 2636529
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1184536 2636529
<EPS-PRIMARY> .24 .52
<EPS-DILUTED> .24 .52
