<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 April 30, 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
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (314) 966-1040
-------------------------
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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 May 30, 1995: 2,563,977
- ------------------------------------------------------
<PAGE> 2
SCS/COMPUTE, INC.
CONDENSED BALANCE SHEETS
(Amounts in Thousands)
<TABLE>
<CAPTION>
April 30, January 31,
ASSETS 1995 1995
---- ----
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 2,164 $ 1,844
Accounts receivable, less allowance for
doubtful accounts; April 1995-$344,
January 1995-$338 1,622 1,625
Deferred income taxes 1,634 600
Inventory 67 85
Prepaid expenses 290 129
-------- --------
Total current assets 5,777 4,283
PROPERTY AND EQUIPMENT-Net of accumulated
depreciation of $4,408 and $4,230, respectively 1,084 1,175
DEFERRED INCOME TAXES 3,050 3,050
OTHER ASSETS
Software development costs (net) 4,439 4,329
Purchased customer contracts (net) 255 310
Excess cost over net assets acquired (net) 4,131 4,237
Other 317 327
-------- --------
Total other assets 9,142 9,203
TOTAL ASSETS $ 19,053 $ 17,711
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 1,250 $ 1,250
Accounts payable 952 1,271
Accrued wages and commissions 660 832
Sales tax payable 969 772
Other accrued expenses 141 154
Deferred revenue 3,730 465
-------- -------
Total current liabilities 7,702 4,744
LONG-TERM DEBT 8,750 8,750
STOCKHOLDERS' EQUITY 2,601 4,217
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 19,053 $ 17,711
======== ========
</TABLE>
See Notes to Condensed Financial Statements
2
<PAGE> 3
SCS/COMPUTE, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Amounts in Thousands Except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Ended
April 30,
---------
Percent
1995 1994 Change
---- ---- ------
<S> <C> <C> <C>
REVENUES $ 1,102 $ 1,206 -8.6%
COST OF REVENUES
Cost of software revenues 137 122 12.3%
Selling commissions 57 66 -13.6%
Amortization of software development costs 220 282 -22.0%
---- ----
Total cost of revenues 414 470 -11.9%
GROSS INCOME 688 736 -6.5%
OPERATING EXPENSES
Selling, general and administrative exp. 1,501 1,278 17.4%
Software update and maintenance exp. 1,140 1,088 4.8%
Provision for doubtful accounts 106 110 -3.6%
Amortization and depreciation 345 395 -12.7%
------ ------
Total operating expenses 3,092 2,871 7.7%
OPERATING LOSS (2,404) (2,135) 12.6%
Interest income (13) (2) 550.0%
Interest expense 259 440 -41.1%
------ ------
Net interest expense 246 438 -43.8%
LOSS BEFORE INCOME TAXES (2,650) (2,573) 3.0%
CREDIT FOR INCOME TAXES (1,034) (1,003) 3.1%
------ ------
NET LOSS (1,616) (1,570) 2.9%
====== ======
LOSS PER SHARE
Net loss $ (0.65) $(0.61) 6.6%
======= ======
AVERAGE SHARES OUTSTANDING 2,564 2,564 0.0%
======= =======
</TABLE>
See Notes to Condensed Financial Statements
3
<PAGE> 4
SCS/COMPUTE, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
<TABLE>
<CAPTION>
Three Months Ended
April 30,
-----------------------------
1995 1994
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,616) $ (1,570)
Items not requiring (providing) cash
Depreciation 184 236
Amortization 381 440
Deferred income taxes (1,034) (1,003)
Loss on disposal of fixes and intangible
assets 0 (15)
Changes in:
Accounts receivable 3 (305)
Prepaid expenses (161) (168)
Inventory 18 45
Accounts payable and accrued expenses (307) (143)
Deferred revenue 3,265 2,729
Other 10 (4)
------ -------
Net cash provided by operations 743 242
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment (93) (16)
Proceeds from sale of fixed assets 0 15
Acquisition of software (30) 0
Software development costs (300) (254)
------- -------
Net cash used in investing activities (423) (255)
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of debt 0 (36)
Additional borrowings 0 700
Debt restructuring costs 0 (162)
------ -------
Net cash provided by financing activities 0 502
INCREASE IN CASH AND CASH EQUIVALENTS 320 489
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD 1,844 855
------- -------
CASH AND CASH EQUIVALENTS, END
OF PERIOD $ 2,164 $ 1,344
======= =======
</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
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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 months ended April 30, 1995
and 1994, and the financial position at April 30, 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, 1995. The line of
credit may be canceled by either party at any time. As of May 31, 1995, no
draws had been made on the line of credit. It has been the practice of the
Company to renew its line of credit annually.
NOTE 3: Long-term debt
Long-term debt consists of:
<TABLE>
<CAPTION>
APR 30, 1995 JAN 31, 1995
<S> <C> <C>
10.0% senior note $10,000,000 $10,000,000
Less current maturities 1,250,000 1,250,000
----------- -----------
$ 8,750,000 $ 8,750,000
=========== ===========
</TABLE>
On April 30, 1995, the Company had $10,000,000 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 note is scheduled to be repaid according to the following
schedule:
<TABLE>
<S> <C>
July 10, 1995 $ 1,250,000
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>
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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 April 30, 1995, cumulative
dividends in arrears were approximately $235,000. 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>
APR 30, 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 (5,123,000) (3,507,000)
----------- -----------
5,040,000 6,656,000
Treasury stock (2,439,000) (2,439,000)
----------- -----------
$2,601,000 $4,217,000
=========== ===========
</TABLE>
NOTE 6: Income taxes
For the quarter ended April 30, 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 April 30, 1995 the Company has recorded a net deferred tax asset of $4.7
million, including $1.0 million that represents the credit for income taxes
recognized for the quarter ended April 30, 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 to
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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
Earning 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 month period ended April 30, 1995, the
net loss has been increased by approximately $61,000, representing dividends in
arrears on the Company's preferred stock for the first quarter.
7
<PAGE> 8
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.
As a result of the Company's revenue and expense recognition policies, it is
beneficial in interim quarters to analyze results
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from operations on a trailing twelve month basis. The table below presents
trailing twelve month information for the twelve months ended April 30, 1995
and 1994 (Unaudited in 000):
<TABLE>
<CAPTION>
APR 30, 1995 APR 30, 1994 CHANGE
<S> <C> <C> <C>
Revenues $ 18,105 $ 17,326 $ 779
Gross income 14,032 13,212 820
Pretax income 266 (3,412) 3,678
</TABLE>
OPERATING RESULTS
First quarter recognized revenues declined slightly from prior year levels to
$1.1 million, but total software orders received, including deferred tax
software orders, increased by 11.0% to $4.4 million from $3.9 million last
year. Deferred revenues as of April 30, 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 $3.7 million
compared with $3.4 million a year earlier. Management expects interim deferred
revenues in fiscal 1995 to exceed prior year levels due to the Company's
consistency in developing high quality tax software and support, continuing
annual renewal rates in excess of 90% and an expanding tax revenue base which
grew 7.0% last year.
Cost of revenues for the quarter declined by 11.9% to $414,000 with the
reduction primarily 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 increased 7.7% to $3.1 million from
$2.9 million last year. Increased professional fees, sales and marketing
expenses, and product line enhancement and maintenance costs were only
partially offset by a decline in amortization and depreciation expense.
During the first quarter, the Company capitalized $300,000 in accordance with
SFAS No. 86 "Accounting for Costs of Computer Software to be Sold or Otherwise
Marketed," compared to $254,000 in the first quarter of the prior year.
Increased capitalization in the current quarter 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.
9
<PAGE> 10
Lower debt levels and interest rates in the current quarter contributed to a
decline in net interest expense of $192,000, or 43.8%. 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 ended April 30, 1995 and 1994. The net loss
was virtually unchanged from prior year levels at $1.6 million.
LIQUIDITY AND CAPITAL RESOURCES
On April 30, 1995, cash and cash equivalents were $2.2 million compared to $1.3
million a year earlier. The Company's working capital position improved to
negative $1.9 million from negative $2.9 million a year earlier. Current assets
on April 30, 1995, specifically deferred income taxes, included the $1.0
million credit for income taxes resulting from this year's first quarter loss.
Current liabilities on April 30, 1995 included $3.7 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 quarter, the Company generated $743,000 in cash from operations
compared to $242,000 in the prior year. Lower depreciation, amortization, and
accounts payable were more than offset by higher software orders (deferred
revenues) and improved accounts receivable management. Cash used in investing
activities increased to $423,000 from $255,000 in the prior year reflecting an
increase in the acquisition of property and equipment and capitalization of
software development costs as discussed above. In the prior year, the Company
made $700,000 in draws on its line of credit during the first quarter and
incurred $162,000 in direct costs related to the issuance of preferred stock in
conjunction with the restructuring of its senior note agreement. There were no
financing activities during the first quarter of the current year.
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.
10
<PAGE> 11
OUTLOOK
First quarter results were in line with management's expectations. Management
believes that its financial resources, existing 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 the sales and marketing department and in product line
expansion can create the opportunity to exceed this revenue growth rate. The
anticipated increase in operating expenses in fiscal 1995 will be partially
offset by reductions in amortization, depreciation and net interest expense of
approximately $700,000 in the prior year. 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.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Financial Data Schedule p. 13
(b) No reports on Form 8-K were filed by the Company during
the quarter ended April 30, 1995.
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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)
June 5, 1995 /s/ Robert W. Nolan, Sr.
----------------------- ---------------------------
(Date) Robert W. Nolan, Sr.
Chairman
June 5, 1995 /s/ Charles G. Wilson
----------------------- ---------------------------
(Date) Charles G. Wilson
Executive Vice President,
Finance and Administration
12
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1996
<PERIOD-END> APR-30-1995
<CASH> 2,164
<SECURITIES> 0
<RECEIVABLES> 1,966
<ALLOWANCES> 344
<INVENTORY> 67
<CURRENT-ASSETS> 5,777
<PP&E> 5,492
<DEPRECIATION> 4,408
<TOTAL-ASSETS> 19,053
<CURRENT-LIABILITIES> 7,702
<BONDS> 8,750
<COMMON> 308
0
10
<OTHER-SE> 2,283
<TOTAL-LIABILITY-AND-EQUITY> 19,053
<SALES> 1,102
<TOTAL-REVENUES> 1,102
<CGS> 414
<TOTAL-COSTS> 414
<OTHER-EXPENSES> 2,986<F1>
<LOSS-PROVISION> 106
<INTEREST-EXPENSE> 246
<INCOME-PRETAX> (2,650)
<INCOME-TAX> (1,034)
<INCOME-CONTINUING> (1,616)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,616)
<EPS-PRIMARY> (0.65)
<EPS-DILUTED> (0.65)
<FN>
<F1>Includes SG&A, software update and maintenance expenses, and amortization and
depreciation.
</FN>
</TABLE>
