<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 0-14932
SCS/Compute, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 431228297
(State or Other Jurisdiction (IRS Employer Identification
of Incorporation or Organization) No.)
12444 Powerscourt Drive, Suite 400, St. Louis, MO 63131
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (314) 966-1040
Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report
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 .
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: Par value $0.10 per share,
on September 8, 1995: 2,563,977
<PAGE> 2
SCS/COMPUTE, INC.
CONDENSED BALANCE SHEETS
(Amounts in Thousands)
<TABLE>
<CAPTION>
July 31, January 31,
ASSETS 1995 1995
---- ----
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 2,256 $ 1,844
Accounts receivable, less allowance for
doubtful accounts; July 1995-$377,
January 1995-$338 1,943 1,625
Deferred income taxes 2,861 600
Inventory 56 85
Prepaid expenses 772 129
-------- --------
Total current assets 7,888 4,283
PROPERTY AND EQUIPMENT-Net of accumulated
depreciation of $4,599 and $4,230, respectively 990 1,175
DEFERRED INCOME TAXES 3,050 3,050
OTHER ASSETS
Software development costs (net) 4,921 4,329
Purchased customer contracts (net) 199 310
Excess cost over net assets acquired (net) 4,025 4,237
Other 307 327
-------- --------
Total other assets 9,452 9,203
TOTAL ASSETS $ 21,380 $ 17,711
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 1,250 $ 1,250
Accounts payable 674 1,271
Accrued wages and commissions 288 832
Sales tax payable 564 772
Other accrued expenses 169 154
Deferred revenue 10,494 465
-------- --------
Total current liabilities 13,439 4,744
LONG-TERM DEBT 7,500 8,750
STOCKHOLDERS' EQUITY 441 4,217
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 21,380 $ 17,711
======== ========
</TABLE>
See Notes to Condensed Financial Statements
2
<PAGE> 3
See Statement of Operations in Lotus spreadsheet, named IS.
3
<PAGE> 4
SCS/COMPUTE, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Amounts in Thousands Except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
July 31, July 31,
---------------------- Percent ------------------- Percent
1995 1994 Change 1995 1994 Change
--------- --------- -------- --------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
REVENUES............................... $ 496 $ 328 51.2% $ 1,598 1,534 4.2%
COST OF REVENUES
Cost of software revenues............. 134 106 26.4% 271 228 18.9%
Selling commissions................... 24 31 -22.6% 81 97 -16.5%
Amortization of software development
costs .............................. 218 284 -23.2% 438 566 -22.6%
----- ----- ----- -----
Total cost of revenues............... 376 421 -10.7% 790 891 -11.3%
GROSS INCOME........................... 120 (93) 229.0% 808 643 25.7%
OPERATING EXPENSES
Selling, general and administrative
expenses ........................... 1,800 1,506 19.5% 3,301 2,784 18.6%
Software update and maintenance
expenses ........................... 825 851 -3.1% 1,965 1,939 1.3%
Provision for doubtful accounts....... 86 140 -38.6% 192 250 -23.2%
Amortization and depreciation......... 352 377 -6.6% 697 772 -9.7%
------ ------ ------ ------
Total operating expenses............. 3,063 2,874 6.6% 6,155 5,745 7.1%
OPERATING LOSS (2,943) (2,967) -0.8% (5,347) (5,102) 4.8%
Interest income....................... (50) (17) 194.1% (63) (19) 231.6%
Interest expense...................... 253 265 -4.5% 512 705 -27.4%
------ ------ ------ ------
Net interest expense................. 203 248 -18.1% 449 686 -34.5%
LOSS BEFORE INCOME TAXES............... (3,146) (3,215) -2.1% (5,796) (5,788) 0.1%
CREDIT FOR INCOME TAXES................ (1,227) (1,254) -2.2% (2,261) (2,257) 0.2%
------ ------ ------ ------
NET LOSS............................... (1,919) (1,961) -2.1% (3,535) (3,531) 0.1%
====== ====== ====== ======
LOSS PER SHARE
Net loss.............................. $ (0.77) $ (0.79) -2.5% $ (1.43) (1.40) 2.1%
===== ===== ===== =====
AVERAGE SHARES OUTSTANDING............. 2,564 2,564 0.0% 2,564 2,564 0.0%
===== ===== ===== =====
</TABLE>
3
<PAGE> 5
SCS/COMPUTE, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
<TABLE>
<CAPTION>
Six Months Ended
July 31,
-----------------------
1995 1994
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (3,535) $ (3,531)
Items not requiring (providing) cash
Depreciation 375 454
Amortization 762 884
Deferred income taxes (2,261) (2,257)
Loss on disposal of fixed and intangible
assets 0 (16)
Changes in:
Accounts receivable (318) 413
Prepaid expenses (643) (660)
Inventory 29 66
Accounts payable and accrued expenses (1,334) (1,770)
Deferred revenue 10,029 8,991
Other 20 (12)
------ -------
Net cash provided by operations 3,124 2,562
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment (190) (61)
Proceeds from sale of fixed assets 0 16
Acquisition of software (5) 0
Software development costs (1,026) (580)
------- -----
Net cash used in investing activities (1,221) (625)
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of debt (1,250) (999)
Payment of cash dividends (241) 0
Additional borrowings 0 700
Debt restructuring costs 0 (162)
------ -------
Net cash used in financing activities (1,491) (461)
INCREASE IN CASH AND CASH EQUIVALENTS 412 1,476
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD 1,844 855
------- -------
CASH AND CASH EQUIVALENTS, END
OF PERIOD $ 2,256 $ 2,331
======= =======
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
As more full discussed in Note 4, On April 30, 1994 the Company converted
$3.5 million in outstanding principal balance on its senior secured note to
100,000 shares of preferred stock.
See Notes to Condensed Financial Statements
4
<PAGE> 6
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1: General
In the opinion of management, the accompanying unaudited condensed
financial statements contain all adjustments necessary to present fairly the
results of operations and cash flows for the three and six months ended July
31, 1995 and 1994, and the financial position at July 31, 1995 and January 31,
1995. Unless otherwise noted, all interim adjustments included in the above
referenced financial statements are of a normal recurring nature.
These condensed financial statements should be read in conjunction with the
financial statements and notes thereto for the fiscal years ended January 31,
1995, 1994, and 1993 included in the registrant's Form 10-K.
NOTE 2: Line of credit
The Company has an unsecured demand $1.0 million line of credit that bears
an interest rate of 9.0% per annum and matures on June 1, 1996. The line of
credit may be canceled by either party at any time. As of September 8, 1995,
no draws had been made on the line of credit.
NOTE 3: Long-term debt
Long-term debt consists of:
<TABLE>
<CAPTION>
JULY 31, 1995 JAN 31, 1995
<S> <C> <C>
10.0% senior note $ 8,750,000 $10,000,000
Less current maturities (1,250,000) (1,250,000)
----------- -----------
$ 7,500,000 $ 8,750,000
=========== ===========
</TABLE>
On July 31, 1995, the Company had $8,750,000 outstanding under a senior note
agreement that carries an interest rate of 10.0% per annum. The senior note is
secured by all of the assets of the Company. The terms of the note require
monthly interest payments, permit prepayments at a premium, and provide for
covenants and restrictions on operating performance, investments, acquisitions,
mergers, leases and dividends. The first note payment was made July 10, 1995.
The remaining note balance is scheduled to be repaid according to the following
schedule:
<TABLE>
<S> <C>
July 10, 1996 $ 1,250,000
July 10, 1997 $ 1,250,000
July 10, 1998 $ 1,250,000
July 1, 1999 $ 5,000,000
</TABLE>
5
<PAGE> 7
NOTE 4: Preferred stock
On April 30, 1994, the Company converted $3.5 million in outstanding
principal on its senior note into 100,000 shares of preferred stock with a par
value of $.10 per share and a cumulative 7% dividend. On July 31, 1995,
cumulative dividends in arrears were approximately $54,000. Pursuant to the
terms of the agreement, the Company made the first cumulative dividend payment
on May 10, 1995. Subsequent to that date, dividends are due quarterly. The
dividends may be paid in cash, additional shares of preferred stock, or a
combination of cash and preferred stock.
Upon any liquidation of the Company, the preferred stock carries preference
over common stock at a rate of $35 per share. The lender has the right at any
time to convert the preferred stock to 33% of the then outstanding shares of
common stock of the Company. The Company has the right to redeem the preferred
stock until July 1, 1999 at a premium of 18% per annum over its liquidation
value, and if converted to common stock, at a premium of 25% per annum after
the date of conversion.
NOTE 5: Stockholders' equity
Stockholders' equity consists of:
<TABLE>
<CAPTION>
JULY 31, 1995 JAN 31, 1995
<S> <C> <C>
Preferred stock $ 10,000 $ 10,000
Common stock 308,000 308,000
Additional paid-in
capital 9,845,000 9,845,000
Accumulated deficit (7,283,000) (3,507,000)
---------- -----------
2,880,000 6,656,000
Treasury stock (2,439,000) (2,439,000)
---------- -----------
$ 441,000 $4,217,000
========== ===========
</TABLE>
NOTE 6: Income taxes
For the quarter and six months ended July 31, 1995, a credit for income
taxes has been recorded at statutory rates. Pursuant to the guidance of
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes," on July 31, 1995 the Company has recorded a net deferred tax
asset of $5.9 million, including $2.3 million that represents the credit for
income taxes recognized for the six months ended July 31, 1995. The Company's
ability to realize the net deferred tax asset depends upon the Company's
ability to meet management's projected operating results. At this time,
management believes that the Company is more likely than not
6
<PAGE> 8
to meet or exceed these projections. If at any time management believes that
the projections are unattainable, the valuation reserve for the Company's net
deferred tax asset will be adjusted accordingly.
NOTE 7: Earnings per share
Earnings per share are computed based upon the weighted average number of
shares of common stock and common stock equivalents outstanding during the
period, except when antidilutive. For the three and six month periods ended
July 31, 1995, the net loss has been increased by approximately $61,000 and
$122,000 respectively, representing dividends earned on the Company's preferred
stock. For the three and six months ended July 31, 1994 the net loss was
increased by approximately $51,000 in each period, representing cumulative
dividends earned on the Company's preferred stock.
7
<PAGE> 9
PART I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
SCS/Compute, Inc. ("SCS" or "the Company") provides integrated software
solutions and associated services designed to improve the productivity of its
customers, approximately 10,000 firms of accounting and tax professionals. The
Company's tax products, Tax Machine(R) and LMS/Tax, offer systems that integrate
tax preparation, tax planning, depreciation and client management into one
software product. Both products support a wide range of customers with
capabilities to handle extremely complex individual and business tax returns,
and can be used in either single or multi-user configurations. The Company
also offers a line of accounting products. Datawrite(R) is a client accounting
general ledger and financial statement reporting software product designed to
produce financial statements and specialized management reports for an
unlimited number of diversified client businesses. The Datawrite product
family includes add-on modules for payroll processing, fixed asset management,
business ratio analysis, remote data entry, and file importation with full
integration to the SCS tax products.
INTERIM RESULTS VS. THE SCS BUSINESS CYCLE
During interim quarters, SCS's results as reported on its statements of
operations and balance sheets do not accurately portray its business cycle.
Although tax software orders and payments are received throughout the year,
generally accepted accounting principles require that the related revenues be
deferred until the software is shipped. Since the Company began offering its
tax software products, shipments of these products have consistently occurred
during the Company's fourth quarter ending January 31. Accordingly, the
Company has historically recorded more than 80% of its annual software revenues
in its fourth quarter. Most of SCS's expenses, however, are incurred ratably
throughout the year and must be recorded as period costs. As a result of this
timing of revenue and expense recognition, SCS has historically recognized net
losses in interim quarters and net income in its fourth quarter.
Therefore, reported results from operations during interim quarters are not
necessarily indicative of operations for an entire year. Based upon the
Company's current tax software revenue and expense recognition policies,
management expects this accounting cycle to continue into the future.
8
<PAGE> 10
As a result of the Company's revenue and expense recognition policies, it is
beneficial in interim quarters to analyze results from operations on a trailing
twelve month basis. The table below presents trailing twelve month information
for the twelve months ended July 31, 1995 and 1994 (Unaudited in 000):
<TABLE>
<CAPTION>
JULY 31, 1995 JULY 31, 1994 CHANGE
<S> <C> <C> <C>
Revenues $ 18,273 $ 17,072 $ 1,201
Gross income 14,245 13,056 1,189
Operating income (loss) 1,263 (863) 2,126
Pretax income (loss) 335 (2,366) 2,701
</TABLE>
OPERATING RESULTS
For the quarter and six months ended July 31, 1995, recognized revenues
increased 51.2% to $496,000, and 4.2% to $1.6 million respectively, from prior
year levels. Total software orders received in the six month period, including
deferred tax software orders, increased by 10.5% to $11.6 million from $10.5
million last year. Deferred revenues as of July 31, 1995, which consist
primarily of orders and prepayments from tax software customers that will be
recognized as revenues when the products are shipped in the fourth quarter,
were $10.1 million compared with $9.3 million a year earlier. Management
expects interim deferred revenues and full year recognized revenues in fiscal
1995 to exceed prior year levels due to the Company's consistency in developing
and delivering high quality tax software and support, continuing annual renewal
rates in excess of 90%, an expanding tax revenue base which grew 7.0% last year
and anticipated increases in accounting product sales.
Cost of revenues for the quarter and six month periods declined by 10.7% to
$376,000, and 11.3% to $790,000 respectively, with the reduction attributable
to lower amortization of software development costs. Approximately $3.0
million of software costs capitalized by the Company in a 1988 acquisition
became fully amortized during the prior year.
Total operating expenses for the quarter and six month periods increased 6.6%
to $3.1 million, and 7.1% to $6.2 million respectively. Increased professional
fees and sales and marketing expenses were only partially offset by a decline
in bad debt, amortization and depreciation expenses.
9
<PAGE> 11
During the six month period, the Company capitalized $1,026,000 in accordance
with SFAS No. 86 "Accounting for Costs of Computer Software to be Sold or
Otherwise Marketed," compared to $580,000 in the comparable period of the prior
year. Increased capitalization in the current period reflects the Company's
commitment to expanding its core DOS-based products and to developing new
Windows(TM) based tax and accounting software for the professional accounting
firm market.
Lower debt levels and interest rates, and increased cash balances invested in
both the current quarter and six month period contributed to an 18.1% and 34.5%
decline in net interest expense comparisons. The Company restructured its
senior note agreement effective April 30, 1994 (See Notes 3 and 4).
As more fully discussed in Note 6, a credit for income taxes was recorded at
statutory rates for the quarters and six month periods ended July 31, 1995 and
1994. The net loss was virtually unchanged from prior year levels at $1.9
million for the quarter and $3.5 million for the six month period.
LIQUIDITY AND CAPITAL RESOURCES
On July 31, 1995, cash and cash equivalents were $2.3 million, virtually
unchanged from last year. In line with prior year interim quarters, the
Company had a negative working capital position at July 31, 1995. Current
assets included the $2.3 million credit for income taxes resulting from this
year's seasonal six month loss while current liabilities included $10.5 million
in deferred revenues, the majority of which will be recognized as revenues in
this year's fourth quarter when tax software is shipped. Management expects
that the Company's working capital position will remain negative during interim
quarters due to the continued growth of current liabilities resulting from the
receipt of orders and prepayments for tax products that have historically been
recorded as deferred revenues until the products are shipped in SCS's fourth
quarter.
During the six month period, the Company generated $3.1 million in cash from
operations compared to $2.6 million in the prior year. Increased software
orders (deferred revenues) and reduced payments for accounts payable more than
offset lower depreciation and amortization and higher accounts receivable
balances. Cash used in investing activities increased to $1.2 million from
$625,000 in the prior year reflecting an increase in the acquisition of
property and equipment and capitalization of software development costs as
discussed above. Cash used in financing activities in this year's second
quarter included a scheduled $1,250,000 payment on long-term debt and $241,000
in dividends paid to the Company's
10
<PAGE> 12
preferred stockholder. In the prior year period, the Company made $700,000 in
draws and $1.0 million in payments on its line of credit, and incurred $162,000
in direct costs related to the issuance of preferred stock in conjunction with
the restructuring of its senior note agreement.
Historically, the Company has financed its working capital and capital
expenditure requirements from operating cash flow, trade credit and borrowings
from lending institutions. As more fully discussed in Note 2, the Company has
an unsecured demand $1.0 million line of credit.
OUTLOOK
Results for the first six months were ahead of management's expectations.
Management believes that its existing resources and infrastructure, customer
base and product line can produce revenue growth in fiscal 1995 at the 5.6%
rate achieved in fiscal 1994. Management further believes that fiscal 1995
investments made in sales and marketing and in product line expansion can
create the opportunity to exceed this revenue growth rate. Increases in
operating expenses in fiscal 1995 will be partially offset by fiscal 1995
reductions in amortization, depreciation and net interest expense of
approximately $700,000. Given these factors, the Company expects earnings per
share in fiscal 1995 to be higher than the $0.14 per share reported in fiscal
1994.
Item 4. Submission of Matters to a Vote of Security Holders
On June 7, 1995 the Company held its Annual Meeting of Shareholders at which
the only items voted on was the election of one Director to the Company's four
member Board of Directors and the ratification of the Board's appointment of
Price Waterhouse LLP as the independent auditors of the Company for its fiscal
year ending January 31, 1996.
Dr. Irwin M. Jarett was nominated by the Board (and was the only nominee) and
was elected as Director. The results of the shareholder voting with respect to
the election of this Director was as follows: 2,115,986 votes for the election
of Nominee and 19,542 votes withheld.
The shareholder of the Company ratified the Board's appointment of Price
Waterhouse LLP as the Company's independent auditors. Set forth are the result
of the shareholder voting with respect to the ratification:
<TABLE>
<CAPTION>
Broker
Votes for Votes Against Abstentions Nonvotes
--------- ------------- ----------- --------
<S> <C> <C> <C>
2,126,718 4,550 4,260 0
</TABLE>
11
<PAGE> 13
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Financial Data Schedule p. 14
(b) No reports on Form 8-K were filed by the Company during the
quarter ended July 31, 1995.
12
<PAGE> 14
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.
SCS/Compute, Inc.
-----------------
(Registrant)
September 8, 1995
--------------------- --------------------
(Date) Robert W. Nolan, Sr.
Chairman
September 8, 1995
--------------------- --------------------------
(Date) Charles G. Wilson
Executive Vice President,
Finance and Administration
13
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1996
<PERIOD-END> JUL-31-1995
<CASH> 2,256
<SECURITIES> 0
<RECEIVABLES> 2,320
<ALLOWANCES> 377
<INVENTORY> 56
<CURRENT-ASSETS> 7,888
<PP&E> 5,589
<DEPRECIATION> 4,599
<TOTAL-ASSETS> 21,380
<CURRENT-LIABILITIES> 13,439
<BONDS> 7,500
<COMMON> 308
0
10
<OTHER-SE> 123
<TOTAL-LIABILITY-AND-EQUITY> 21,380
<SALES> 1,598
<TOTAL-REVENUES> 1,598
<CGS> 790
<TOTAL-COSTS> 790
<OTHER-EXPENSES> 5,963<F1>
<LOSS-PROVISION> 192
<INTEREST-EXPENSE> 449
<INCOME-PRETAX> (5,796)
<INCOME-TAX> (2,261)
<INCOME-CONTINUING> (3,535)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,535)
<EPS-PRIMARY> (1.43)
<EPS-DILUTED> (1.43)
<FN>
<F1> Includes SG&A, software update and maintenance expenses,
and amortization and depreciation.
</FN>
</TABLE>
