SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended April 4, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-9487
CORCOM, INC.
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(Exact name of registrant as specified in its charter)
Illinois 36-2307626
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
844 E. Rockland Road, Libertyville, Illinois 60048
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (847) 680-7400
Not Applicable
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Former name, former address and former fiscal year,
if changed since last report.
Indicate by checkmark 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___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practical date.
Common Stock, No Par Value - 3,823,243 Shares as of April 24, 1998
Exhibit Index on Page 9
Page 1 of 12
CORCOM, INC.
INDEX
PART I - FINANCIAL INFORMATION Page No.
Item 1. Financial Statements
Consolidated Balance Sheets - 3
April 4, 1998 (unaudited) and December 31,
1997
Consolidated Statements of Income 4
(unaudited)--for the 13 weeks ended April 4,
1998 and March 29, 1997
Consolidated Statements of Cash Flows 5
(unaudited) - for the 13 weeks ended April 4,
1998 and March 29, 1997
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 7
Condition and Results of Operations
Item 3. Quantitative and qualitative disclosures about N/A
market risk
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 9
Signatures 9
Exhibit 10.1 - Revolving Line of Credit Note 10
Exhibit 27.1 - Financial Data Schedule N/A
(EDGAR ONLY)
Page 2 of 12
PART I. FINANCIAL INFORMATION
CORCOM, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
April 4, 1998 December 31, 1997
(unaudited)
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ASSETS
CURRENT ASSETS
Cash & cash equivalents $ 8,151 $8,232
Accounts receivable (net) 5,250 4,599
Inventories - Note B 5,883 6,192
Deferred income tax benefit, net 760 885
Other current assets 806 596
Total current assets 20,850 20,504
PROPERTY, PLANT & EQUIPMENT - AT COST 19,804 19,323
Less accumulated depreciation & amortization 15,156 14,849
4,648 4,474
TOTAL ASSETS $25,498 $24,978
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 62 $ 62
Accounts payable 1,515 767
Other accrued liabilities 1,133 2,077
Total current liabilities 2,710 2,906
LONG TERM DEBT 25 40
STOCKHOLDERS' EQUITY
Common stock, no par value:
Authorized 10,000,000 shares; issued
3,921,543 shares in 1998 and 3,863,543
shares in 1997 14,217 14,134
Retained Earnings 9,726 9,026
Accumulated exchange rate adjustments (335) (283)
Less cost of common stock in treasury:
98,300 shares in 1998 and 1997 (845) (845)
Total stockholders' equity 22,763 22,032
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $25,498 $24,978
See notes to Consolidated Financial Statements
Page 3 of 12
CORCOM, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except share data)
Thirteen Weeks Ended
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April 4, 1998 March 29, 1997
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Net Sales $9,385 $8,993
Costs and expenses
Cost of sales 5,862 5,624
Engineering expenses 425 338
Selling, administrative and other
expenses 2,042 1,976
Interest expense 2 3
Interest income (114) (49)
8,217 7,892
Income before income tax 1,168 1,101
Income tax provision 468 360
Net income $ 700 $ 741
Weighted avg shares outstanding (Basic) 3,782,425 3,825,708
Weighted avg shares outstanding (Diluted) 3,875,393 3,971,246
Net earnings per share (Basic) - Note C $.19 $.19
Net earnings per share (Diluted) - Note C $.18 $.19
Cash dividends have not been declared in the periods covered by these
statements
See notes to Consolidated Financial Statements
Page 4 of 12
CORCOM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
Thirteen Weeks Ended
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April 4, 1998 March 29, 1997
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OPERATING ACTIVITIES
Net cash flows from operating activities $ 346 $1,556
INVESTING ACTIVITIES
Additions to property, plant, & equipment
(net) (495) (524)
FINANCING ACTIVITIES
Stock options exercised 83 26
Repayments of notes payable and long-term
debt (15) (16)
TOTAL FINANCING ACTIVITIES 68 10
(DECREASE)INCREASE IN CASH AND CASH EQUIVALENTS (81) 1,042
Cash and cash equivalents at beginning of
period 8,232 4,789
CASH AND CASH EQUIVALENTS AT END OF PERIOD $8,151 $5,831
See notes to Consolidated Financial Statements
Page 5 of 12
CORCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information in a format provided by the instructions to Form 10-Q
and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and disclosures 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 thirteen weeks ended April 4, 1998 are not necessarily indicative of
the results that may be expected for the year ending December 31, 1998. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for
the year ended December 31, 1997.
NOTE B - INVENTORIES
Major classes of the Company's inventories are as follows (in thousands):
April 4, 1998 December 31, 1997
Finished products $1,758 $2,188
Materials and work-in-process 4,125 4,004
$5,883 $6,192
NOTE C - EARNINGS PER SHARE
Basic earnings per share are based upon the weighted average number of shares
of common stock outstanding during each period. Diluted earnings per share
are based upon the weighted average number of shares of common stock and
common stock equivalents (dilutive stock options) outstanding during the each
period.
The following is a reconciliation of the numerators and denominators of the
basic and diluted EPS computation for net income:
Weighted Avg
Net Income Shares Per Share
(Numerator) (Denominator) Amounts
Thirteen weeks ended April 4, 1998:
BASIC EPS
Income available to common
shareholders $ 700,000 3,782,425 $.19
Effect of dilutive options 92,968
DILUTED EPS
Income available to common
shareholders plus assumed conversions $ 700,000 3,875,393 $.18
Thirteen weeks ended March 29, 1997:
BASIC EPS
Income available to common
shareholders $ 741,000 3,825,708 $.19
Effect of dilutive options 145,538
DILUTED EPS
Income available to common
shareholders plus assumed conversions $ 741,000 3,971,246 $.19
Page 6 of 12
NOTE D - INCOME TAXES
The components of the net deferred tax asset, tax effected, recognized in the
accompanying balance sheet as of April 4, 1998 and December 31, 1997 are as
follows (in thousands):
April 4, 1998 December 31, 1997
Deferred tax assets $ 1,148 $ 1,273
Less: valuation reserve (388) (388)
Net deferred tax assets $ 760 $ 885
NOTE E - MERGER
On March 10, 1998, the Company entered into an Agreement and Plan of Merger by
and among Communications Instruments, Inc., a North Carolina corporation
("CII"), RF Acquisition Corp., an Illinois corporation and wholly owned
subsidiary of CII ("Merger Sub") and the Company (the "Merger Agreement").
CII is owned by Code Hennessy & Simmons, LLC, a Chicago based private
investment firm, and CII management. Pursuant to the Merger Agreement, (a)
CII will acquire all of the Company's issued and outstanding shares of common
stock for $13.00 per share in cash, or approximately $51.2 million, and (b)
Merger Sub will merge with and into the Company (the "Merger"), with the
Company being the surviving corporation in the Merger.
The closing of the Merger is subject to the satisfaction of certain
conditions, including, among other matters, approval by the holders of two-
thirds of the issued and outstanding shares of common stock of the Company,
certain regulatory approvals and receipt by CII of debt financing necessary to
consummate the Merger, a commitment for which has been provided by Bank of
America National Trust and Savings Association. This financing is subject to
certain conditions, including the execution of a definitive credit agreement
satisfactory to Bank of America.
CII also entered into an agreement with Werner E. Neuman, the President and
Chairman of the Board of Directors of the Company, and James A. Steinback, a
Director of the Company, whereby such individuals agreed to vote in favor of
the Merger. These two individuals hold approximately 31% of the shares
outstanding.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
Results of Operations - First quarter 1998 vs. first quarter 1997
CORCOM's net sales for the first quarter of 1998 were $9,385,000, an increase
of 4.4% from the $8,993,000 reported for the first quarter of 1997. This
increase was the result of volume increases in the Company's North American
commercial filter business. There were no appreciable price changes year to
year.
Cost of sales for the current quarter were 62.5% of net sales, about the same
as the year ago period. A portion of the Company's manufacturing costs are
Mexican peso-based. While this currency has been relatively stable over the
past year versus the US dollar, the Company's manufacturing costs could rise
if the value of the peso increases relative to the dollar, or if inflation in
Mexico escalates.
Engineering expenses, at $425,000 in the first quarter of 1998, were 26%
higher than the $338,000 reported in the first quarter of 1997, the result of
an increased commitment to new product development. Selling, administrative
and other expenses rose in 1998 to $2,042,000 from the $1,976,000 reported in
the first quarter of 1997. The largest component of this increase were higher
commission expenses on the higher level of sales volume.
Page 7 of 12
Interest income in first quarter of 1998 period was $114,000 compared with
$49,000 in the first quarter of 1997. This was the result of higher cash
investments in the 1998 period.
The Company's pre-tax earnings for the first quarter of 1998 were $1,168,000
as compared with $1,101,000 for the first quarter of 1997. The reasons for
the improvement are discussed above.
The Company recorded a provision for income taxes of $468,000, or 40% of
pretax income, in the first quarter of 1998 as compared to a provision of
$360,000, or 33% of pretax income, in the first quarter of 1997.
After tax, the Company's net earnings for the first quarter of 1998 were
$700,000 ($.19 per share basic, $.18 per share diluted). This compares to net
earnings in the year ago period of $741,000 ($.19 per share basic, $.19 per
share diluted).
Liquidity and Capital Resources
As of April 4, 1998, the company had cash reserves on hand of $8,151,000 as
compared to $8,232,000 as of December 31, 1997. In addition to
current cash reserves, the Company's loan agreement with American National
Bank and Trust Company of Chicago is still in place. This agreement is an
unsecured line of credit with maximum borrowings of $4,000,000, or 80%
of eligible accounts receivable, whichever is less. Interest on this loan is
the Company's choice of either LIBOR plus one hundred fifty basis points, or
the Bank's prime rate. This agreement, which was to have expired April 30,
1998, has been extended through June 30, 1998 (see exhibit 10.1). There
were no borrowings against this agreement as of April 4, 1998.
The Company does not believe it will need to identify additional sources of
capital over the next year and feels that current cash reserves, cash provided
by operating activities, and the existing credit facility will be sufficient
to meet its operating needs and capital resource requirements.
Year 2000 Issues
In 1997, the Company began converting its computer systems to be year 2000
compliant. Most of the Company's business software consists of externally
written, generic "packages" which have already been upgraded to be year 2000
compliant by their publishers. These upgraded versions have been made
available to the Company as part of its normal software licensing and/or
maintenance agreements. In certain cases, installation of the upgraded
systems may require additional purchased hardware or software which would be
recorded as assets and amortized. In addition to its main purchased business
software, but to a much lesser extent, the Company also has some internally
developed systems and subsystems which are in the process of being made year
2000 compliant. The company does not believe it will encounter any material
problems with this conversion. Management does not feel that the cost of this
conversion will be material.
Page 8 of 12
PART II. OTHER INFORMATION
CORCOM, INC.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit No. Description Page
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10.1 Revolving Line of Credit Note 10
27.1 Financial Data Schedule (EDGAR only) N/A
(b) The Company filed a Current Report on Form 8-K (date
of report March 10, 1998) during the thirteen week
period ended April 4, 1998, covering items 5 and 7
to report the execution of the Merger Agreement
CORCOM, INC.
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.
Dated: May 4, 1998
Corcom, Inc.
(Registrant)
s/s Thomas J. Buns
By: Thomas J. Buns
Vice President & Treasurer
(Principal Financial Officer)
Page 9 of 12