This paper document is being filed pursuent to Rule 902(g) of
Regulation S-T
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 March 31, 1997
Commission file number 0-26596
Computational Systems, Incorporated
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Tennessee 62-1198047
- ------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
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 - 5,003,845 shares at March 31, 1997
Page of pages.
Exhibit Index on page .
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Condensed Balance Sheets
Consolidated Condensed Statements of Operations
Consolidated Condensed Statements of Cash Flows
Notes to Consolidated Condensed Financial Statements
COMPUTATIONAL SYSTEMS, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
(Unaudited) (Audited)
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 692,174 $ 4,576,801
Trade accounts receivable, less
allowance for doubtful accounts 16,062,089 15,656,516
Inventories 3,144,321 3,190,964
Prepaid expenses and other current assets 903,485 906,733
----------- -----------
Total current assets 20,802,069 24,331,014
----------- -----------
Property, plant and equipment:
Land 729,204 729,204
Building and improvements 7,812,000 6,714,979
Equipment and furniture 12,008,329 10,625,614
Construction-in-Progress ------- 1,293,587
----------- -----------
20,549,533 19,363,384
Less accumulated depreciation (6,479,637) (5,879,464)
----------- -----------
Property, plant and equipment, net 14,069,896 13,483,920
----------- -----------
Other assets
Other assets 826,226 552,777
Goodwill 6,194,663 6,292,490
Other intangible assets 664,288 612,646
----------- -----------
Total assets $42,557,142 $45,272,847
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,193,819 $ 2,598,425
Accrued liabilities 3,975,925 7,222,579
Income taxes payable (31,938) 1,026,110
Deferred maintenance contract revenue 2,329,947 2,070,411
Line of credit 519,000 -------
----------- -----------
Total current liabilities 8,986,753 12,917,525
Deferred maintenance contract revenue 612,661 668,862
----------- -----------
Total liabilities 9,599,414 13,586,387
----------- -----------
Shareholders' equity:
Common stock,no par value, 50,000,000 shares authorized, 18,508,561 18,034,208
5,003,845 and 4,991,618 shares issued and outstanding
in 1997 and 1996, respectively
Additional paid-in capital 951,230 865,805
Retained earnings 13,497,937 12,786,447
----------- -----------
Total shareholders' equity 32,957,728 31,686,460
----------- -----------
Total liabilities and shareholders' equity $42,557,142 $45,272,847
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
COMPUTATIONAL SYSTEMS, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
1997 1996
----------- -----------
<S> <C> <C>
Revenues, net:
Product $ 8,721,280 $ 7,932,848
Services 5,753,268 2,798,445
----------- -----------
14,474,548 10,731,293
Cost of revenues:
Product 2,178,165 2,316,055
Services 4,018,907 2,180,255
----------- -----------
6,197,072 4,496,310
Gross margin 8,277,476 6,234,983
Costs and expenses:
Selling, general and administrative 5,634,274 4,355,000
Research & development 1,611,124 1,206,196
----------- -----------
7,245,398 5,561,196
----------- -----------
Income from operations 1,032,078 673,787
Other income (expense)
Interest expense (10,477) (1,146)
Interest income 48,173 117,589
Other income (expense), net 8,242 (5,859)
----------- -----------
45,938 110,584
----------- -----------
Income before taxes 1,078,016 784,371
Provision for income taxes 366,526 282,375
----------- -----------
Income after taxes $711,490 $501,996
=========== ===========
Earnings per share $0.14 $0.10
=========== ===========
Weighted average shares and
equivalents outstanding 5,266,400 5,018,945
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
COMPUTATIONAL SYSTEMS, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
1997 1996
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $711,490 $501,996
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Depreciation and amortization 732,395 403,656
Deferred income taxes 2,000 (176,000)
Changes in operating assets and liabilities:
Accounts receivable (396,535) 553,405
Income taxes (payable) (981,661) (72,073)
Inventories 37,334 (264,864)
Prepaids & other current assets 3,248 71,587
Other assets 5,697 (40,703)
Accounts payable (399,763) (16,760)
Accrued liabilities (428,359) (516,951)
Deferred maintenance contract revenue 203,335 347,497
---------- ----------
Net cash (used) provided by operating activities (510,819) 790,790
---------- ----------
Cash flows from investing activities:
Purchase of property, plant and equipment (1,184,973) (1,108,041)
Purchase of business (2,385,250)
Investment in other assets (359,050) ------
---------- ----------
Net cash used in investing activities (3,929,273) (1,108,041)
---------- ----------
Cash flows from financing activities:
Net borrowings under (repayments on) line of credit 519,000 ------
Repayments of long-term debt (4,843) (5,821)
Proceeds from issuance of common stock 41,308 59,610
---------- ----------
Net cash provided by financing activities 555,465 53,789
---------- ----------
Net (decrease) in cash and cash equivalents (3,884,627) (263,462)
Cash and cash equivalents, at beginning of period 4,576,801 8,824,332
---------- ----------
Cash and cash equivalents, at end of period $692,174 $8,560,870
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
COMPUTATIONAL SYSTEMS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED 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 three
months ended March 31, 1997, are not necessarily indicative of the results
that may be expected for the year ended December 31, 1997. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's Form 10-K for December 31, 1996.
2. INVENTORIES:
Inventories consist of the following:
March 31, December 31,
1997 1996
(Unaudited) (Audited)
----------- -----------
Raw Materials 1,428,088 $1,406,893
Work in-process 574,127 649,589
Finished goods, net 1,142,106 1,134,482
----------- -----------
$3,144,321 $3,190,964
=========== ===========
3. CASH FLOW INFORMATION:
March 31, March 31,
1997 1996
-------- --------
(Unaudited) (Unaudited)
Supplemental disclosures of cash flows:
Interest paid $ 362 $ 1,473
Income taxes paid, net $609,000 $461,899
On January 2, 1997 CSI issued the remaining stock to the former owners of
Maintenance & Diagnostic L.L.C. per the purchase agreement dated October 28,
1996. The value of the stock transferred was $433,045.
4. RESEARCH AND DEVELOPMENT:
The majority of research and development costs are expensed as incurred.
Other research and development costs incurred in developing a product during
the period that begins when the product's prototype 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. Such costs capitalized
in the three months ended March 31, 1997 amounted to $281,146. These costs
will be amortized on a per unit sold basis.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Comparison of Three Months Ended March 31, 1997 and March 31, 1996
Revenues, Net. Net revenues increased 34.9% in the three months ended
March 31, 1997 ("the 1997 quarter") to $14.5 million, compared to $10.7
million during the three months ended March 31, 1996 ("the 1996 quarter").
Revenue from the sale of products increased 9.9% to $8.7 million in the 1997
quarter from $7.9 million in the 1996 quarter. The increase in product
revenues is due primarily to significant increases in the 2120 two channel
vibration analysis product line, the latest version of the Company's original
product line. Service revenues increased 105.6% to $5.8 million in the 1997
quarter from $2.8 million in the 1996 quarter primarily as a result of the
acquisition of Maintenance and Diagnostics LLC ("M&D"), an operator
of research, service and training centers for the electric power industry,
late in 1996 and increases in technical and customer services driven by the
increase in product sales.
Cost of Revenue. Total costs of revenues increased 37.8% to $6.2
million in the 1997 quarter from $4.5 million in the 1996 quarter. As a
percentage of net revenues, total cost of revenue increased from 41.9% in the
1996 quarter to 42.8% in the 1997 quarter due to the increase in the level of
services activity which has a lower gross margin than product revenues.
Product costs decreased 6.0% to $2.2 million in the 1997 quarter from $2.3
million in the 1996 quarter primarily due to favorable pricing that resulted
from purchasing negotiations and improved efficiencies in the
manufacturing process. Service costs increased 84.3% to $4.0 million in the
1997 quarter from $2.2 million in the 1996 quarter primarily due to the
acquisition of M&D as well as the increase in activity associated with the
overall increase in services revenues.
Selling, General and Administrative. SG&A expense increased 29.4% to
$5.6 million in the 1997 quarter from $4.4 million in the 1996 quarter. The
increase was due primarily to an increase in investments in market development
related to the corresponding increase in net revenues. SG&A expense, as a
percentage of net revenues, decreased to 38.9% in the 1997 quarter from 40.6%
in the 1996 quarter.
Research and Development. Research and development expenses increased
by $404,928 or 33.6% to $1.6 million in the 1997 quarter from $1.2 million in
the 1996 quarter, reflecting increases in the level of support of a more
diverse product line as well as expenditures for the development of new
products. As a percentage of net product revenues, research and development
expenses increased to 18.5% in the 1997 quarter from 15.2% in the 1996
quarter.
Income from Operations. Income from operations for the 1997 quarter
increased 53.2% to $1.0 million, or 7.1% of net revenue, from $674,000, or
6.3% of net revenue, in the 1996 quarter. Total operating expenses increased
by $1,684,202 or 30.3% to $7.2 million in the 1997 quarter from $5.6 million
in the 1996 quarter.
Interest Expense/Income. Interest expense increased in the 1997
quarter to $10,477 from $1,146 in the 1996 quarter, primarily as a result of
draws on the Company's bank line of credit to finance continuing growth.
Interest income decreased 59.0% in the 1997 quarter to $48,173 from $117,589
in the 1996 quarter due to lower cash levels being available for investment.
Income Taxes. The Company's effective tax rate for the 1997 quarter
was approximately 34% versus the 1996 quarter rate of approximately 36%. The
rate has improved due to the utilization of available research and development
tax credits as well as a foreign sales corporation.
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 utilized by operating activities in the 1997 quarter was
$510,819. Net cash provided by operating activities was $790,790 in the 1996
quarter. The change was caused primarily by the payment of accrued expenses
from the previous year. Investing activities primarily include additions to
property, plant and equipment and cash payments made to close the acquisition
of M&D.
The Company maintains bank lines of credit that provide for borrowings
of up to $12.0 million based on a minimum current ratio of 1.25 or better and
bearing interest at the lender's base rate or the adjusted LIBOR rate plus the
applicable LIBOR margin at the Company's discretion.
The Company's total liabilities decreased to $9.6 million as of March
31,1997 as compared to $13.6 million as of December 31, 1996 reflecting
payments on obligations incurred in connection with the acquisition of M&D as
well as the payment of outstanding tax liabilities.
Although the Company presently has neither 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.
In February 1997, the FASB issued Statement of Accounting Standards No.
128, Earnings Per Share (EPS). The Statement simplifies the standards for
computing earnings per share by replacing the presentation of primary earnings
per share with a presentation of basic earnings per share. Additionally, the
Statement requires dual presentation of basic and diluted EPS on the face of
the income statement and requires a reconciliation of the numerator and
denominator of the diluted EPS calculation. The Company plans to adopt the
provisions of Statement 128 in fiscal year 1997 and the impact on the
Company's financial statements has not been determined.
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
March 31, 1996.
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: May 13, 1997 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
Exhibit Index
Sequential
Item
No. Description
---------- ------------------------------------------------
(11) Statement re: Computation of per share earnings
(27) Financial data schedule
EXHIBIT 11 - EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, MARCH 31,
1997 1996
--------- ---------
<S> <C> <C>
PRIMARY:
Weighted average number of common shares outstanding 5,000,064 4,752,611
Net effect of dilutive stock options based on the treasury
stock method using the average market price 266,336 266,334
--------- ---------
Weighted average number of common and common
equivalent shares outstanding 5,266,400 5,018,945
Net income $711,490 $501,996
--------- ---------
Primary net income per common share as reported $0.14 $0.10
FULLY DILUTED:
Weighted average number of common shares outstanding 5,000,064 4,752,611
Net effect of dilutive stock options based on the treasury
stock method using the period-end market price if higher
than average price 266,336 272,174
--------- ---------
Weighted average number of common and common
equivalent shares outstanding 5,266,400 5,024,785
Net income $711,490 $501,996
--------- ---------
Fully diluted net income per common share as reported $0.14 $0.10
</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>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 692174
<SECURITIES> 0
<RECEIVABLES> 16260565
<ALLOWANCES> 198476
<INVENTORY> 3144321
<CURRENT-ASSETS> 20802069
<PP&E> 20549533
<DEPRECIATION> 6479637
<TOTAL-ASSETS> 42557142
<CURRENT-LIABILITIES> 8986753
<BONDS> 0
0
0
<COMMON> 18508561
<OTHER-SE> 14449167
<TOTAL-LIABILITY-AND-EQUITY> 42557142
<SALES> 8721280
<TOTAL-REVENUES> 14474548
<CGS> 2178165
<TOTAL-COSTS> 6197072
<OTHER-EXPENSES> 7245398
<LOSS-PROVISION> 41132
<INTEREST-EXPENSE> 10477
<INCOME-PRETAX> 1078016
<INCOME-TAX> 366526
<INCOME-CONTINUING> 711490
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 711490
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0.14
</TABLE>
