<PAGE> 1
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 September 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)
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 - 5,070,767 shares at November 10, 1997
Page 1 of 14 pages.
Exhibit Index on page 13 .
<PAGE> 2
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements.
- ---------------------------------------------------------
Consolidated Condensed Balance Sheets 3
Consolidated Condensed Statements of Operations 4
Consolidated Condensed Statements of Cash Flows 5
Notes to Consolidated Condensed Financial Statements 6
<PAGE> 3
COMPUTATIONAL SYSTEMS, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
September 30, December 31,
1997 1996
---------- ----------
(Unaudited) (Audited)
ASSETS
Current assets:
Cash and cash equivalents $ 521,156 $ 4,576,801
Trade accounts receivable, less
allowance for doubtful accounts 17,611,150 15,656,516
Inventories 3,745,943 3,190,964
Prepaid expenses and other current assets 867,371 906,733
---------- ----------
Total current assets 22,745,620 24,331,014
---------- ----------
Property, plant and equipment:
Land 729,204 729,204
Building and improvements 7,853,771 6,714,979
Equipment and furniture 13,274,656 10,625,614
Construction-in-Progress 882,472 1,293,587
---------- ----------
22,740,103 19,363,384
Less accumulated depreciation (7,683,609) (5,879,464)
---------- ----------
Property, plant and equipment, net 15,056,494 13,483,920
---------- ----------
Other assets
Capitalized R&D and other assets 1,532,581 552,777
Goodwill 6,060,121 6,292,490
Other intangible assets 737,313 612,646
---------- ----------
Total assets $46,132,129 $45,272,847
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,719,355 $ 2,598,425
Accrued liabilities 4,939,716 7,222,579
Income taxes payable 134,428 1,026,110
Deferred maintenance contract revenue 2,288,335 2,070,411
Line of credit 1,500,000 -------
---------- ----------
Total current liabilities 10,581,834 12,917,525
Deferred maintenance contract revenue 864,438 668,862
---------- ----------
Total liabilities 11,446,272 13,586,387
---------- ----------
Shareholders' equity:
Common stock,no par value,
50,000,000 shares authorized,
5,051,673 and 4,991,618 shares issued and
outstanding in 1997 and 1996, respectively 18,735,221 18,034,208
Additional paid-in capital 951,230 865,805
Retained earnings 14,999,406 12,786,447
---------- ----------
Total shareholders' equity 34,685,857 31,686,460
---------- ----------
Total liabilities and shareholders' equity $46,132,129 $45,272,847
========== ==========
The accompanying notes are an integral part of these consolidated condensed
financial statements.
<PAGE> 4
COMPUTATIONAL SYSTEMS, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Revenues, net:
Product $11,015,364 $8,097,196 $28,772,444 $24,384,835
Services 5,439,168 3,136,994 16,603,676 8,790,040
----------- ---------- ---------- ----------
16,454,532 11,234,190 45,376,120 33,174,875
Cost of revenues:
Product 2,611,263 2,012,988 7,043,562 6,343,710
Services 3,884,132 2,588,260 12,091,698 7,067,769
---------- ---------- ---------- ----------
6,495,395 4,601,248 19,135,260 13,411,479
Gross margin 9,959,137 6,632,942 26,240,860 19,763,396
Costs and expenses:
Selling, general and administrative 6,625,545 3,830,679 18,148,058 12,410,321
Research & development 1,515,941 1,062,254 4,767,614 3,593,907
--------- --------- ---------- ----------
8,141,486 4,892,933 22,915,672 16,004,228
--------- --------- ---------- ----------
Income from operations 1,817,651 1,740,009 3,325,188 3,759,168
Other income (expense)
Interest expense (46,400) (579) (98,222) (1,945)
Interest income 7,226 132,794 45,911 385,254
Other income (expense), net 10,532 (21,386) 25,827 (22,898)
---------- ---------- ---------- ----------
(28,642) 110,829 (26,484) 360,411
---------- --------- ---------- ----------
Income before taxes 1,789,009 1,850,838 3,298,704 4,119,579
Provision for income taxes 572,483 666,302 1,085,745 1,483,050
---------- ---------- ---------- ----------
Income after taxes $1,216,526 $1,184,536 $2,212,959 $2,636,529
---------- ---------- ---------- ----------
Earnings per share $0.24 $0.24 $0.43 $0.52
Weighted average shares and equivalents outstanding 5,174,506 5,026,920 5,188,165 5,061,429
---------- ---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
<PAGE> 5
COMPUTATIONAL SYSTEMS, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------
September 30, September 30,
1997 1996
--------------- -------------
<C> <C>
Cash flows from operating activities:
Net income $2,212,959 $2,636,529
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 2,222,466 1,366,637
Deferred income taxes ------ (176,000)
Changes in operating assets and liabilities:
Accounts receivable (1,945,596) 103,252
Income taxes refundable(payable) (815,295) 447,500
Inventories (574,419) (319,162)
Prepaids 39,362 (56,341)
Other assets (3,067) (315,448)
Accounts payable (865,923) 156,749
Accrued liabilities (1,849,818) (1,142,634)
Deferred maintenance contract revenue 413,500 783,411
------------ -----------
Net cash provided by operating activities (1,165,831) 3,484,493
------------ -----------
Cash flows from investing activities:
Purchase of property, plant and equipment (3,448,013) (5,086,003)
Investment in other assets (1,196,623) ------
----------- -----------
Net cash used in investing activities (4,644,636) (5,086,003)
----------- -----------
Cash flows from financing activities:
Net borrowings under line of credit 1,500,000 ------
Repayments of long-term debt (13,146) (13,662)
Proceeds from issuance of common stock 267,968 433,078
--------- -------
Net cash provided by financing activities 1,754,822 419,416
--------- --------
Net increase (decrease) in cash and cash equivalents (4,055,645) (1,182,094)
Cash and cash equivalents, at beginning of period 4,576,801 8,824,332
--------- ----------
Cash and cash equivalents, at end of period $ 521,156 $7,642,238
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
<PAGE> 6
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, 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:
September 30, 1997 December 31, 1996
(Unaudited) (Audited)
------------------ -----------------
Raw Materials $1,923,319 $1,406,893
Work-in-Process 587,496 649,589
Finished Goods, net 1,235,128 1,134,482
---------- ----------
$3,745,943 $3,190,964
3. CASH FLOW INFORMATION:
September 30, 1997 September 30, 1996
(Unaudited) (Unaudited)
------------------- ------------------
Supplemental disclosures of cash
flows:
Interest Paid $94,419 $2,079
Income taxes paid, net $20,000 $1,293,000
The Company entered into the following noncash transaction: common stock
valued at $433,045 to purchase M&D.
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
<PAGE> 7
4. RESEARCH AND DEVELOPMENT (CONTINUED):
in the nine months ended September 30, 1997 amounted to $1,061,065.
These costs will be amortized on a per unit sold basis.
5. SUBSEQUENT EVENT
On October 17, 1997, the Company announced that it had signed an
agreement and plan of merger with Emerson Electric Co. and upon
completion of the merger will become a wholly owned subsidiary of
Emerson.
The agreement, which is subject to certain conditions, including
regulatory and CSI's stockholders' approval, calls for Emerson to pay
$29.65 a share for each share of CSI's outstanding common stock, of which
$5.93 per share is payable in cash, and the remaining $23.72 per share is
payable in Emerson common stock in a tax free exchange. The Emerson
common stock will be valued based on the average of its closing prices
over the ten trading days ending one day prior to the merger. In
addition, Ronald G. Canada, Chairman and Chief Executive Officer of CSI,
who owns approximately 22% of CSI's outstanding stock, has granted an
option to Emerson relating to his CSI shares.
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Comparison of Three Months Ended September 30, 1997 and September 30, 1996
Revenues, Net. Net revenues increased 46.5% in the three months ended
September 30, 1997 (Athe 1997 period@) to $16.5 million, compared to
$11.2 million during the three months ended September 30, 1996
(Athe 1996 period@). Revenue from the sale of products increased 36.0%
to $11.0 million in the 1997 period from $8.1 million in the 1996 period
due to increases in the vibration and oil product lines, increases in the
domestic and international customer base, and the successful introduction
of the MotorStatus unit. Service revenues increased 73.4% to $5.4 million
in the 1997 period from $3.1 million in the 1996 period primarily as a
result of the fourth quarter, 1996, acquisition of a services company based
in Philadelphia, Pennsylvania.
Cost of Revenue. Total costs of revenues increased 41.2% to $6.5 million in
the 1997 period from $4.6 million in the 1996 period. As a percentage of net
revenues, total cost of revenue decreased from 41.0% in the 1996 period to
39.5% in the 1997 period. Product costs as a percentage of product sales
decreased from 24.9% in the 1996 period to 23.7% in the 1997 period. The
automation of assembly processes has increased efficiency which in turn
has lowered costs. Services costs as a percentage of service revenues
decreased 14.1 basis points from 85.2% in 1996 to 71.1% in 1997. Prior year
costs included a third quarter staff increase which was not duplicated in
the current year.
Selling, General and Administrative. SG&A expense increased 73.0% to $6.6
million in the 1997 period from $3.8 million in the 1996 period while the
<PAGE> 8
year-to-date increase was more consistent with sales increases as outlined
in the nine month comparison on the following page. The increase was due
primarily to the previously mentioned acquisition, increases in commission
costs related to obtaining higher levels of sales, and the amortization of
prior year capitalized costs related to the development of the new MotorStatus
product line. SG&A expenses, as a percentage of net revenues increased to
40.3% in the 1997 period from 34.1% in the 1996 period.
Research and Development. Research and development expenses increased by
$454,000 or 42.7% to $1.5 million in the 1997 period from $1.1 million in the
1996 period. As a percentage of net product revenues, research and development
expenses increased to 13.8% in the 1997 period from 13.1% in the 1996 period.
New product development and existing product support continue to drive the
increase in research and development costs.
Income from Operations. Income from operations for the 1997 period increased
4.5% to $1.8 million or 11.0% of net revenue, from $1.7 million, or 15.5%
of net revenue, in the 1996 period.
Other Expense/Income. Other expense increased to $29,000 in the 1997 period
compared to other income of $111,000 in the 1996 period primarily as a result
of interest expense incurred on draws made on the Company's line of credit
in 1997. The Company internally financed operations in 1996 using available
cash balances which were invested on a short-term basis.
Income Taxes. The Company's effective tax rate for the 1997 period was
approximately 32% versus a rate of 36% in the 1996 period. The rate has
improved due to utilization of available research and development credits,
a foreign sales corporation, and an internal analysis of appropriate tax levels.
Comparison of Nine Months Ended September 30, 1997 and September 30, 1996
Revenues, Net. Net revenues increased 36.8% in the nine months ended
September 30, 1997 (Athe 1997 period@) to $45.4 million compared to $33.2
million during the nine months ended September 30, 1996 (Athe 1996 period@).
Revenue from the sale of products increased 18.0% to $28.8 million in the
1997 period from $24.4 million in the 1996 period. The increase in product
revenues is due primarily to significant increases in the vibration analysis,
motor, and oil product lines as well as the successful introduction of the
new MotorStatus unit. Service revenues increased 88.9% to $16.6 million in
the 1997 period from $8.8 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.
Cost of Revenue. Total costs of revenues increased 42.7% to $19.1 million in
the 1997 period from $13.4 million in the 1996 period. As a percentage of net
revenues, total cost of revenue increased from 40.4% in the 1996 period to 42.2%
in the 1997 period due to the increase in the level of services activity which
has a lower gross margin than product revenues and lower than desired margins
in certain operating divisions. Product costs increased 11.0% to $7.0 million
in the 1997 period from $6.3 million in the 1996 period due to the increased
level of product sales. However, higher margins on certain product lines and
a favorable sales mix towards higher margin products minimized the impact of the
increase in product activity and lead to higher overall product margins.
Service costs increased 71.1% to $12.1 million in the 1997 period from $7.1
million in the 1996 period primarily due to the aforementioned 1996 fourth
<PAGE> 9
quarter acquisition and the cost associated with the overall increase in
services revenues.
Selling, General and Administrative. SG&A expense increased 46.2% to $18.1
million in the 1997 period from $12.4 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 40.0% in the 1997 period from 37.4% in the 1996
period.
Research and Development. Research and development expenses increased by
32.7% to $4.8 million in the 1997 period from $3.6 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. As a percentage of net product revenues, research and development
expenses increased to 16.6% in the 1997 period from 14.7% in the 1996 period.
Income from Operations. Income from operations for the 1997 period decreased
11.5% to $3.3 million, or 7.3% of net revenue, from $3.8 million, or 11.3% of
net revenue, in the 1996 period. Operating income decreased due to an
increasing level of investments required to increase revenues. Operating
income was also negatively impacted by higher growth rates in services business
lines which generate lower gross margin than product lines. During the second
quarter of 1997, net revenues did not reach the required levels needed to
provide a positive return on the investments made to increase sales. Therefore,
the Company was required to take specific steps to improve operating income.
Overall staffing was reduced and, in divisions where sales were below
expectations, management has taken corrective actions to bring costs in line
with sales and to increase sales. These actions enabled the Company to increase
operating income in the third quarter of 1997 when compared to the second
quarter of 1997.
Other Expense/Income. Other expense in the 1997 period was $26,000 versus
other income of $360,000 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 period was
approximately 33% versus the 1996 period rate of approximately 36%. The rate
has improved due to the utilization of available research and development tax
credits, 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. The
Company also makes significant expenditures each year for research and
development and market development.
Net cash used by operating activities during the first nine months of 1997 was
$1.3 million while net cash provided by operating activities during the first
nine months of 1996 was $3.5 million. The decrease in net cash provided by
operating activities was caused by refunds due from the recognition and
payment of estimated income tax liabilities, a decrease in accounts payable,
<PAGE> 10
and an increase in accounts receivable associated with sales increases.
Net cash used by investing activities decreased from $5.1 million for the nine
months ended September 30, 1996 to $4.5 million for the nine months ended
September 30, 1997. Investing activites for the 1996 period included a
significant building addition that was completed late in that year. Capital
expenditures during the first nine 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.
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 $11.4 million as of September 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. Draws were made on the Company's line of credit to finance
continuing operations in 1997.
On October 17, 1997, the Company announced the signing of a merger agreement
with Emerson Electric Company pending regulatory and shareholder approval. For
further information on this agreement, see the Subsequent Event footnote to the
Consolidated Condensed Financial Statements. Although the Company has no other
acquisition or merger agreements, 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.
<PAGE> 11
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 September 31, 1997.
EXHIBIT 11 - EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- ------------------------
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
PRIMARY:
Weighted average number of
common shares outstanding 5,048,261 4,836,294 5,020,126 4,795,673
Net effect of dilutive stock
options based on the treasury
stock method using the average
market price 126,245 190,626 168,039 265,756
---------- --------- --------- ----------
Weighted average number of common
and common equivalent shares
outstanding 5,174,506 5,026,920 5,188,165 5,061,429
---------- ---------- ---------- ----------
Net income $1,216,526 $1,184,536 $2,212,959 $2,636,529
Primary net income per common
share as reported $0.24 $0.24 $0.43 $0.52
FULLY DILUTED:
Weighted average number of
common shares outstanding 5,048,261 4,836,294 5,020,126 4,795,673
Net effect of dilutive stock
options based on the treasury
stock method using the period-end
market price if higher than
average price 146,173 190,626 188,266 265,756
--------- --------- --------- ---------
Weighted average number of common
and common equivalent shares
outstanding 5,194,434 5,026,920 5,208,392 5,061,429
--------- --------- --------- ---------
Net income $1,216,526 $1,184,536 $2,212,959 $2,636,529
<PAGE> 12
Fully diluted net income per
common share as reported $0.23 $0.24 $0.42 $0.52
</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.
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<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 SEPTEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<NAME> COMPUTATIONAL SYSTEMS INCORPORATED
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 521,156
<SECURITIES> 0
<RECEIVABLES> 18,549,626
<ALLOWANCES> 198,476
<INVENTORY> 3,745,943
<CURRENT-ASSETS> 22,745,620
<PP&E> 22,740,103
<DEPRECIATION> 7,683,609
<TOTAL-ASSETS> 46,132,129
<CURRENT-LIABILITIES> 10,581,834
<BONDS> 0
0
0
<COMMON> 18,735,221
<OTHER-SE> 15,950,636
<TOTAL-LIABILITY-AND-EQUITY> 46,132,129
<SALES> 28,626,729
<TOTAL-REVENUES> 45,376,120
<CGS> 6,974,295
<TOTAL-COSTS> 19,135,260
<OTHER-EXPENSES> 24,027,901
<LOSS-PROVISION> 152,374
<INTEREST-EXPENSE> 98,222
<INCOME-PRETAX> 3,298,704
<INCOME-TAX> 1,085,745
<INCOME-CONTINUING> 2,212,959
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,212,959
<EPS-PRIMARY> 0.43
<EPS-DILUTED> 0.43
</TABLE>
