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 June 30, 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 (I.R.S. Employer Identification No.)
of Incorporation or Organization)
835 Innovation Drive
Knoxville, Tennessee 37932
- --------------------------------------- -----------------
(Address of Principal Executive Office) (Zip Code)
Registrants 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 - 5,023,023 shares at June 30, 1997
Page 1 of 14 pages.
Exhibit Index on page 13 .
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
JUNE 30, DECEMBER 31,
1997 1996
---------- ----------
(Unaudited) (Audited)
ASSETS
Current assets:
Cash and cash equivalents $ 816,516 $ 4,576,801
Trade accounts receivable,
less allowance for doubtful acccounts 15,399,795 15,656,516
Inventories 3,504,918 3,190,964
Prepaid expenses and other current assets 935,326 906,733
---------- ----------
Total current assets 20,656,555 24,331,014
---------- ----------
Property, plant and equipment:
Land 729,204 729,204
Building and improvements 7,829,143 6,714,979
Equipment and furniture 13,071,978 10,625,614
Construction-in-Progress ------- 1,293,587
---------- ----------
21,630,325 19,363,384
Less accumulated depreciation (7,061,724) (5,879,464)
---------- ----------
Property, plant and equipment, net 14,568,601 13,483,920
---------- ----------
Other assets
Capitalized R&D and other assets 1,187,226 552,777
Goodwill 6,109,847 6,292,490
Other intangible assets 646,480 612,646
---------- ----------
Total assets $43,168,709 $45,272,847
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,522,471 $ 2,598,425
Accrued liabilities 4,219,207 7,222,579
Income taxes payable (415,536) 1,026,110
Deferred maintenance contract revenue 2,337,362 2,070,411
Line of credit 1,438,000 -------
---------- ----------
Total current liabilities 9,101,504 12,917,525
Deferred maintenance contract revenue 694,090 668,862
---------- ----------
Total liabilities 9,795,594 13,586,387
---------- ----------
Shareholders' equity:
Common stock,no par value, 50,000,000
shares authorized, 5,023,023 and
4,991,618 shares issued and outstanding
in 1997 and 1996, respectively 18,639,006 18,034,208
Additional paid-in capital 951,230 865,805
Retained earnings 13,782,879 12,786,447
---------- ----------
Total shareholders' equity 33,373,115 31,686,460
---------- ----------
Total liabilities and shareholders' equity $43,168,709 $45,272,847
========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
<TABLE>
<CAPTION>
COMPUTATIONAL SYSTEMS, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues, net:
Product $9,035,800 $8,354,790 $17,757,080 $16,287,638
Services 5,411,240 2,854,602 11,164,508 5,653,047
----------- ----------- ----------- -----------
14,447,040 11,209,392 28,921,588 21,940,685
Cost of revenues:
Product 2,254,134 2,014,666 4,432,299 4,330,721
Services 4,188,659 2,299,255 8,207,566 4,479,510
----------- ----------- ----------- -----------
6,442,793 4,313,921 12,639,865 8,810,231
Gross margin 8,004,247 6,895,471 16,281,723 13,130,454
----------- ----------- ----------- -----------
Costs and expenses:
Selling, general and administrative 5,888,239 4,224,642 11,522,513 8,579,642
Research & development 1,640,549 1,325,457 3,251,673 2,531,653
----------- ----------- ----------- -----------
7,528,788 5,550,099 14,774,186 11,111,295
----------- ----------- ----------- -----------
Income from operations 475,459 1,345,372 1,507,537 2,019,159
----------- ----------- ----------- -----------
Other income (expense)
Interest expense (41,345) (221) (51,822) (1,366)
Interest income (9,488) 134,872 38,685 252,460
Other income (expense), net 7,053 4,347 15,295 (1,512)
----------- ----------- ----------- -----------
(43,780) 138,998 2,158 249,582
----------- ----------- ----------- -----------
Income before taxes 431,679 1,484,370 1,509,695 2,268,741
Provision for income taxes 146,736 534,374 513,262 816,749
----------- ----------- ----------- -----------
Income after taxes $284,943 $949,996 $996,433 $1,451,992
----------- ----------- ----------- -----------
Earnings per share $0.06 $0.19 $0.19 $0.29
Weighted average shares and equivalents outstanding 5,169,688 5,068,388 5,191,375 5,047,363
----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
COMPUTATIONAL SYSTEMS, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
-------------------------
June 30, June 30,
1997 1996
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $996,433 $1,451,992
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 1,484,383 1,120,084
Deferred income taxes ----- (176,000)
Changes in operating assets and liabilities:
Accounts receivable 265,759 701,078
Income taxes refundable (payable) (1,365,259) 66,306
Inventories (327,394) (374,029)
Prepaids (28,593) 32,587
Other assets 4,410 (170,062)
Accounts payable (1,067,802) (323,789)
Accrued liabilities (185,077) (68,756)
Deferred maintenance contract revenue 292,179 477,876
---------- ----------
Net cash provided by operating activities 69,039 2,737,287
---------- ----------
Cash flows from investing activities:
Purchase of property, plant and equipment (2,301,956) (2,965,297)
Purchase of business (2,385,250)
Investment in other assets (743,719) ------
---------- ----------
Net cash used in investing activities (5,430,925) (2,965,297)
---------- ----------
Cash flows from financing activities:
Net borrowings under line of credit 1,438,000 ------
Repayments of long-term debt (8,152) (8,994)
Proceeds from issuance of common stock 171,753 279,757
---------- ----------
Net cash provided by financing activities 1,601,601 270,763
---------- ----------
Net increase (decrease) in cash and cash equivalents (3,760,285) 42,753
Cash and cash equivalents, at beginning of period 4,576,801 8,824,332
---------- ----------
Cash and cash equivalents, at end of period $816,516 $8,867,085
---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
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
six months ended June 30, 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:
June 30, December 31,
1997 1996
(Unaudited) (Audited)
----------- ----------
Raw Materials $1,561,539 $1,406,893
Work-in-process 748,962 649,589
Finished goods, net 1,194,417 1,134,482
----------- ----------
$3,504,918 $3,190,964
=========== ==========
3. CASH FLOW INFORMATION:
June 30, June 30,
1997 1996
----------- -----------
(Unaudited) (Unaudited)
Supplemental disclosures of cash flows:
Interest paid $ 38,638 $ 1,693
Income taxes paid, net $904,000 $857,894
The Company entered into the following noncash transaction
to purchase M&D: common stock valued at $433,045.
4. RESEARCH AND DEVELOPMENT:
The majority of research and development costs are
expensed as incurred. 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 six months ended June 30, 1997
amounted to $638,860. 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 June 30, 1997 and June 30, 1996
Revenues, Net. Net revenues increased 28.9% in the three
months ended June 30, 1997 (the 1997 quarter) to $14.4 million,
compared to $11.2 million during the three months ended June 30,
1996 (the 1996 quarter). Revenue from the sale of products
increased 8.2% to $9.0 million in the 1997 quarter from $8.4
million in the 1996 quarter. The increase in product revenues is
due primarily to significant increases in the vibration analysis,
motor, and corrective product lines offset slightly by sales
decreases in other operating divisions. Service revenues
increased 89.6% to $5.4 million in the 1997 quarter from $2.9
million in the 1996 quarter primarily as a result of a fourth
quarter, 1996, acquisition of a services company based in
Philadelphia, Pennsylvania as well as increases in other services
driven by continuing investments in sales and marketing. Although
net revenues increased significantly, the level of net revenues reached
was not sufficient to support investments made to increase revenues.
Cost of Revenue. Total costs of revenues increased 49.3%
to $6.4 million in the 1997 quarter from $4.3 million in the 1996
quarter. As a percentage of net revenues, total cost of revenue
increased from 38.5% in the 1996 quarter to 44.6% in the 1997
quarter due to the increase in the level of services activity
that has a lower gross margin than product revenues. Product
costs increased 11.9% to $2.3 million in the 1997 quarter from
$2.0 million in the 1996 quarter primarily due to the increased
level of product sales. Service costs increased 82.2% to $4.2
million in the 1997 quarter from $2.3 million in the 1996 quarter
primarily due to the aforementioned acquisition as well as the
increase in activity associated with the overall increase in
services revenues.
Selling, General and Administrative. SG&A expense
increased 39.4% to $5.9 million in the 1997 quarter from $4.2
million in the 1996 quarter. The increase was due primarily to
an increase in investments in market development as well as the
cost of administrative support related to the corresponding
increase in net revenues. Also, the company completed a staff
restructuring late in the second quarter which generated
additional severance costs. SG&A expense, as a percentage of net
revenues, increased to 40.8% in the 1997 quarter from 37.7% in
the 1996 quarter.
Research and Development. Research and development
expenses increased by 23.8% to $1.6 million in the 1997 quarter
from $1.3 million in the 1996 quarter, reflecting increases in
the required level of support of a more diverse product line as
well as continued expenditures for the development of new
products. As a percentage of net product revenues, research and
development expenses increased to 18.2% in the 1997 quarter from
15.9% in the 1996 quarter.
Income from Operations. Income from operations for the
1997 quarter decreased 64.7% to $475,000, or 3.3% of net revenue,
from $1.3 million, or 12.0% of net revenue, in the 1996 quarter.
As stated in the net revenues section above, investments were made
early in the year to attain a higher level of sales throughout the
Company. Due to net revenues falling short of those levels, operating
income was negatively impacted when compared to the second quarter of
1996. In an effort to improve operating income, the Company has taken a
number of steps including the following: total staffing was reduced by
approximately 10% in an effort to reduce overall costs and, in divisions
where sales were below expectations, management has taken corrective
actions to bring costs in line with sales, as well as, to grow sales.
Other Expense/Income. Other expense increased in the 1997
quarter to $43,000 compared to other income of $139,000 in the
1996 quarter due to the use of available cash and draws made on the
Company's bank line of credit to finance continuing growth.
Income Taxes. The Company's effective tax rate for the
1997 quarter was approximately 34% compared to the 1996 quarter
rate of approximately 36%. The rate has improved due to the
utilization of available research and development tax credits,
the establishment of a foreign sales corporation, and the completion
of an internal analysis of the appropriate tax levels.
Comparison of Six Months Ended June 30, 1997 and June 30, 1996
Revenues, Net. Net revenues increased 31.8% in the six
months ended June 30, 1997 (the 1997 period) to $28.9 million,
compared to $21.9 million during the six months ended June 30,
1996 (the 1996 period). Revenue from the sale of products
increased 9.0% to $17.8 million in the 1997 period from $16.3
million in the 1996 period. The increase in product revenues is
due primarily to significant increases in the vibration analysis,
motor, and corrective product lines offset by sales decreases in
certain other operating divisions. Service revenues increased
97.5% to $11.2 million in the 1997 period from $5.7 million in
the 1996 period primarily as a result of a fourth quarter, 1996,
acquisition of a services company based in Philadelphia,
Pennsylvania as well as increases in other services driven by
continuing investments in sales and marketing. Although net
revenues increased significantly, the level of net revenues reached
was not sufficient to support investments made to increase revenues.
Specific measures are being taken to address the aforementioned
challenges as stated in the applicable sections covering the three
months ended June 30, 1997.
Cost of Revenue. Total costs of revenues increased 43.5%
to $12.6 million in the 1997 period from $8.8 million in the 1996
period. As a percentage of net revenues, total cost of revenue
increased from 40.2% in the 1996 period to 43.7% in the 1997
period due to the increase in the level of services activity
which has a lower gross margin than product revenues as well as
lower than desired margins on certain services business lines.
Product costs increased 2.3% to $4.4 million in the 1997 period
from $4.3 million in the 1996 period due to the increased level
of product sales offset by higher margins on certain product
lines and a favorable sales mix towards higher margin products.
Service costs increased 83.2% to $8.2 million in the 1997 period
from $4.5 million in the 1996 period primarily due to the
aforementioned 1996 fourth quarter acquisition and the cost
associated with the overall increase in services revenues.
Selling, General and Administrative. SG&A expense
increased 34.3% to $11.5 million in the 1997 period from $8.6
million in the 1996 period. The increase was due primarily to an
increase in investments in market development as well as the cost
of administrative support related to the corresponding increase
in net revenues. Also, the Company incurred severance costs in
conjunction with a staff restructuring late in the second
quarter. SG&A expense, as a percentage of net revenues,
increased to 39.8% in the 1997 period from 39.1% in the 1996
period.
Research and Development. Research and development
expenses increased by 28.4% to $3.3 million in the 1997 period
from $2.5 million in the 1996 period. This increase reflects
changes in the required level of support of a more diverse
product line as well as expenditures for the development of new
products, some of which are scheduled for release during the
third and fourth quarters of 1997. As a percentage of net
product revenues, research and development expenses increased to
18.3% in the 1997 period from 15.5% in the 1996 period.
Income from Operations. Income from operations for the
1997 period decreased 25.3% to $1.5 million, or 5.2% of net
revenue, from $2.0 million, or 9.2% of net revenue, in the 1996
period. Operating income decreased due to the aforementioned
problems noted in the discussion on the three months ended June
30, 1997.
Other Expense/Income. Other income in the 1997 period was
$2,000 versus other income of $249,000 in the 1996 period due to
the use of available cash balances and draws made on the
Company's line of credit to finance continuing growth.
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, the
establishment of a foreign sales corporation, and the completion of
an internal analysis of appropriate tax levels.
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 during the first
six months of 1997 was $69,000 while net cash provided by
operating activities during the first six months of 1996 was $2.7
million. The decrease in net cash provided by operating
activities was caused by decreases in the level of net income,
refunds due from the recognition and payment of estimated income
tax liabilities, and a decrease in accounts payable.
Net cash used by investing activities increased from $2.9
million for the six months ended June 30, 1996 to $5.4 million
for the six months ended June 30, 1997. Capital expenditures
during the first six months of 1997 included final payments to
complete a fourth quarter 1996 services business acquisition and
the capitalization of certain types of research and development
costs which did not occur during the same period in 1996.
The Company maintains bank lines of credit that provide for
borrowings of up to $12.0 million based on a borrowing formula
and a minimum current ratio of 1.25 or better. The bank lines of credit
bear 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 $9.8 million as
of June 30, 1997 as compared to $13.6 million as of December 31,
1996 due to payments made in the first half of 1997 to close a
fourth quarter acquisition, a decrease in the level of income
taxes payable due to payments made for prior year tax
liabilities, and refunds due from the recognition and payment of
estimated tax liabilities.
Although the Company has presently 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.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
(11) Statement re: computation of per share earnings
(b) No reports on Form 8-K were filed for the quarter ended June 30, 1997.
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: August 11, 1997 By: /s/ Ronald G. Canada
--------------------------------------
Ronald G. Canada, Chairman and
Chief Executive Officer
By: /s/ Tomas A. Valunas
--------------------------------------
Tomas A. Valunas, Vice President of
Finance and Chief Financial Officer
Exhibit Index
Item Description
---------- ----------------------------------------------
(11) Statement re: Computation of per share earnings
EXHIBIT 11 - EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------- -----------------------
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
PRIMARY:
Weighted average number of
common shares outstanding 5,015,466 4,798,001 5,007,429 4,781,501
Net effect of dilutive stock
options based on the treasury
stock method using the average
market price 154,222 270,387 183,946 265,862
--------- --------- --------- ---------
Weighted average number of common
and common equivalent shares
outstanding 5,169,688 5,068,388 5,191,375 5,047,363
--------- --------- --------- ---------
Net income $284,943 $949,996 $996,433 $1,451,992
Primary net income per common
share as reported $0.06 $0.19 $0.19 $0.29
FULLY DILUTED:
Weighted average number of
common shares outstanding 5,015,466 4,798,001 5,007,429 4,781,501
Net effect of dilutive stock
options based on the treasury
stock method using the period-end
market price if higher than
average price 154,222 270,387 183,946 284,453
--------- --------- --------- ---------
Weighted average number of common
and common equivalent shares
outstanding 5,169,688 5,068,388 5,191,375 5,065,954
--------- --------- --------- ---------
Net income $284,943 $949,996 $996,433 $1,451,992
Fully diluted net income per common
share as reported $0.06 $0.19 $0.19 $0.29
</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
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF COMPUTATIONAL SYSTEMS INCORPORATED
FOR THE QUARTER ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 816,516
<SECURITIES> 0
<RECEIVABLES> 15,599,795
<ALLOWANCES> 200,000
<INVENTORY> 3,504,918
<CURRENT-ASSETS> 20,656,555
<PP&E> 21,630,325
<DEPRECIATION> 7,061,724
<TOTAL-ASSETS> 43,168,709
<CURRENT-LIABILITIES> 9,101,504
<BONDS> 0
0
0
<COMMON> 18,639,006
<OTHER-SE> 14,734,109
<TOTAL-LIABILITY-AND-EQUITY> 43,168,709
<SALES> 17,757,080
<TOTAL-REVENUES> 28,921,588
<CGS> 4,432,299
<TOTAL-COSTS> 12,639,865
<OTHER-EXPENSES> 14,774,186
<LOSS-PROVISION> 95,056
<INTEREST-EXPENSE> 51,822
<INCOME-PRETAX> 1,509,695
<INCOME-TAX> 513,262
<INCOME-CONTINUING> 996,433
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 996,433
<EPS-PRIMARY> 0.19
<EPS-DILUTED> 0.19
</TABLE>
