<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
------------------------
(Mark one)
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JULY 2, 1994
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
AND EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-20252
CONTROL DATA SYSTEMS, INC.
(Exact name of Registrant as Specified in Charter)
DELAWARE 41-1718075
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
------------------------
4201 LEXINGTON AVENUE NORTH
ARDEN HILLS, MINNESOTA 55126-6198
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (612) 482-2401
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. __X__Yes _____No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. _____Yes _____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: 13,780,132 shares of Common Stock,
$0.01 par value per share, as of August 12, 1994.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CONTROL DATA SYSTEMS, INC.
FORM 10-Q
JULY 2, 1994
INDEX
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
PART I -- FINANCIAL INFORMATION:
Consolidated Statements of Operations --
Three and six months ended July 2, 1994 and July 3, 1993................................................ 2
Consolidated Balance Sheets --
July 2, 1994 and January 1, 1994........................................................................ 3
Consolidated Statements of Cash Flows --
Three and six months ended July 2, 1994 and July 3, 1993................................................ 4
Notes to Consolidated Financial Statements............................................................... 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................................................... 7
PART II -- OTHER INFORMATION............................................................................... 12
SIGNATURE.................................................................................................. 13
EXHIBIT INDEX.............................................................................................. 14
</TABLE>
1
<PAGE>
PART 1
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONTROL DATA SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------ ------------------------
JULY 2, JULY 3, JULY 2, JULY 3,
1994 1993 1994 1993
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Net sales and rentals.................................... $ 81,071 $ 59,404 $ 177,624 $ 109,063
Services................................................. 50,203 55,497 99,280 108,583
----------- ----------- ----------- -----------
Total revenues......................................... 131,274 114,901 276,904 217,646
COST OF REVENUES:
Net sales and rentals.................................... 55,809 35,092 125,743 62,187
Services................................................. 36,306 36,003 71,986 70,510
----------- ----------- ----------- -----------
Total cost of revenues................................. 92,115 71,095 197,729 132,697
----------- ----------- ----------- -----------
Gross profit........................................... 39,159 43,806 79,175 84,949
OPERATING EXPENSES:
Selling, general and administrative...................... 34,745 34,394 69,916 67,940
Technical................................................ 3,649 7,296 7,230 14,715
----------- ----------- ----------- -----------
Total operating expenses............................... 38,394 41,690 77,146 82,655
----------- ----------- ----------- -----------
Earnings from operations............................... 765 2,116 2,029 2,294
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSES):
Interest expense......................................... (386) (445) (663) (1,133)
Interest income.......................................... 1,088 1,595 2,293 3,389
Other income (expenses), net............................. (283) 2,280 (686) 3,584
----------- ----------- ----------- -----------
Total other income, net................................ 419 3,430 944 5,840
----------- ----------- ----------- -----------
Earnings before income taxes........................... 1,184 5,546 2,973 8,134
PROVISION FOR INCOME TAXES................................. 501 1,229 931 2,479
----------- ----------- ----------- -----------
Net earnings........................................... $ 683 $ 4,317 $ 2,042 $ 5,655
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net earnings per common share and common share
equivalents............................................... $ 0.05 $ 0.32 $ 0.15 $ 0.43
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average common shares outstanding
(in thousands)............................................ 13,904 13,290 13,862 13,299
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
CONTROL DATA SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
JULY 2, JANUARY 1,
1994 1994
----------- -----------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and short-term investments.................................................... $ 73,931 $ 81,635
Trade and other receivables........................................................ 126,767 125,470
Inventories........................................................................ 56,832 56,222
Prepaid expenses and other current assets.......................................... 7,243 7,898
----------- -----------
Total current assets............................................................. 264,773 271,225
Investments and advances........................................................... 623 615
Property and equipment, net........................................................ 29,357 28,058
Leased and data center equipment, net.............................................. 3,142 4,779
Noncurrent trade receivables....................................................... 10,550 11,638
Goodwill, net...................................................................... 34,950 27,842
Other noncurrent assets............................................................ 9,900 8,766
----------- -----------
Total assets..................................................................... $ 353,295 $ 352,923
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable...................................................................... $ 10,421 $ 1,891
Accounts payable................................................................... 34,497 35,212
Customer advances and deferred income.............................................. 15,186 19,665
Accrued taxes...................................................................... 674 4,104
Accrued salaries and wages......................................................... 16,459 16,620
Restructure reserves, current portion.............................................. 13,469 21,722
Other accrued expenses............................................................. 39,623 38,143
----------- -----------
Total current liabilities........................................................ 130,329 137,357
Deferred income taxes................................................................ 1,025 1,123
Restructure reserves, less current portion........................................... 9,501 10,554
Pension liabilities.................................................................. 29,782 27,870
Other noncurrent liabilities......................................................... 5,077 843
----------- -----------
Total liabilities................................................................ 175,714 177,747
----------- -----------
Stockholders' equity:
Preferred stock, par value $.01 per share, authorized
5,000,000 shares; none issued and outstanding..................................... -- --
Common stock, par value $.01 per share, authorized
50,000,000 shares; issued and outstanding
13,780,132 and 13,598,668 shares as of July 2, 1994
and January 1, 1994, respectively................................................. 138 136
Additional paid-in capital........................................................... 160,976 159,683
Retained earnings.................................................................... 25,204 23,162
Minimum pension liability adjustment................................................. (4,722) (4,722)
Foreign currency translation adjustment.............................................. (4,015) (3,083)
----------- -----------
Total stockholders' equity....................................................... 177,581 175,176
----------- -----------
Total liabilities and stockholders' equity....................................... $ 353,295 $ 352,923
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
CONTROL DATA SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------
JULY 2, JULY 3,
1994 1993
--------- -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net earnings........................................................................ $ 2,042 $ 5,655
Adjustments to reconcile net earnings to
net cash used in operating activities:
Depreciation...................................................................... 7,752 8,223
Amortization...................................................................... 2,130 595
Foreign currency transaction gain................................................. (452) (235)
Equity in losses (gains) of affiliates............................................ 745 (708)
Restructure reserves utilized..................................................... (9,786) (14,450)
Loss (gain) on sale of marketable securities and other assets..................... 150 (2,178)
Net change in working capital items............................................... (8,732) (1,186)
Net change in noncurrent trade receivables........................................ (1,274) (3,797)
Other............................................................................. 508 1,135
--------- -----------
Net cash used in operating activities........................................... (6,917) (6,946)
--------- -----------
Cash Flows from Investing Activities:
Expended for property and equipment................................................. (4,148) (5,675)
Expended for leased and data center equipment....................................... (492) (1,187)
Proceeds from sales of property and equipment....................................... 242 1,787
Proceeds from sale of Silicon Graphics, Inc. common stock........................... -- 3,244
Acquisitions of businesses, net of cash provided.................................... (3,844) (10,687)
Change in short-term investments.................................................... 3,651 28,166
--------- -----------
Net cash (used in) provided by investing activities............................. (4,591) 15,648
--------- -----------
Cash Flows from Financing Activities:
Borrowings under short-term financing arrangements, net............................. 6,070 5,705
Repayments of long-term obligations................................................. -- (7,125)
Proceeds from issuance of common stock, net of issuance costs....................... 1,295 635
Proceeds from issuance of nonrefundable equity option in ICEM Systems GmbH.......... -- 2,813
--------- -----------
Net cash provided by financing activities....................................... 7,365 2,028
--------- -----------
Effect of Exchange Rate Changes on Cash............................................... 90 (581)
--------- -----------
Net change in cash and cash equivalents............................................. (4,053) 10,149
Cash and cash equivalents, beginning of period...................................... 19,164 5,142
--------- -----------
Cash and cash equivalents, end of period............................................ 15,111 15,291
Short-term investments.............................................................. 58,820 101,115
--------- -----------
Cash and short-term investments, end of period........................................ $ 73,931 $ 116,406
--------- -----------
--------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
CONTROL DATA SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------
JULY 2, JULY 3,
1994 1993
--------- -----------
<S> <C> <C>
Net Change in Working Capital Items:
Trade and other receivables......................................................... $ 6,833 $ 4,377
Inventories......................................................................... 2,348 (6,068)
Prepaid expenses and other current assets........................................... 853 2,051
Accounts payable.................................................................... (9,491) (471)
Customer advances and deferred income............................................... (5,742) (273)
Accrued taxes....................................................................... (2,968) (1,096)
Accrued salaries and wages.......................................................... (459) (4,719)
Other accrued expenses.............................................................. (106) 5,013
--------- -----------
Net change in working capital items............................................. $ (8,732) $ (1,186)
--------- -----------
--------- -----------
Supplemental Cash Flow Information:
Cash paid (received) during the period for:
Interest paid..................................................................... $ 672 $ 1,133
Income taxes paid................................................................. 1,893 3,244
Income taxes refunded............................................................. (622) (11)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
CONTROL DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JULY 2, 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The financial statements include the accounts of all majority-owned
subsidiaries. All significant intercompany transactions have been eliminated.
NET EARNINGS PER SHARE
The net earnings per common share and common share equivalents is computed
by dividing net earnings by the weighted average number of shares and dilutive
common equivalent shares outstanding during each period. Common stock
equivalents result from dilutive stock options and warrants computed using the
treasury stock method. Fully diluted earnings per share did not differ from
primary earnings per share in the periods presented.
2. STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK MINIMUM FOREIGN
------------------ ADDITIONAL PENSION CURRENCY
NUMBER PAID-IN RETAINED LIABILITY TRANSLATION
OF SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT ADJUSTMENT TOTAL
--------- ------ ---------- -------- ---------- ---------- --------
(DOLLARS AND SHARES IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994.............. 13,599 $136 $ 159,683 $ 23,162 $(4,722) $(3,083) $175,176
Issuance of common stock under the
Employee Stock Purchase Plan......... 42 -- 336 -- -- -- 336
Exercises of stock options............ 48 1 320 -- -- -- 321
Foreign currency translation
adjustment........................... -- -- -- -- -- 32 32
Net earnings.......................... -- -- -- 1,359 -- -- 1,359
--------- ------ ---------- -------- ---------- ---------- --------
Balance at April 2, 1994................ 13,689 137 160,339 24,521 (4,722) (3,051) 177,224
Issuance of common stock under the
Employee Stock Purchase Plan......... 20 -- 137 -- -- -- 137
Exercises of stock options............ 71 1 500 -- -- -- 501
Foreign currency translation
adjustment........................... -- -- -- -- -- (964) (964)
Net earnings.......................... -- -- -- 683 -- -- 683
--------- ------ ---------- -------- ---------- ---------- --------
Balance at July 2, 1994................. 13,780 $138 $ 160,976 $ 25,204 $(4,722) $(4,015) $177,581
--------- ------ ---------- -------- ---------- ---------- --------
--------- ------ ---------- -------- ---------- ---------- --------
</TABLE>
6
<PAGE>
CONTROL DATA SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (UNAUDITED)
(DOLLARS IN MILLIONS)
OVERVIEW. Control Data Systems, Inc. ("Control Data Systems" or the
"Company") is a comprehensive systems integration company that helps businesses
and government institutions provide measurable value to their customers and
constituents by coupling business process improvement with technology
innovation. The Company relies upon its computer professionals to provide the
consulting services required to define, develop, install and maintain
computer-based solutions. The Company has a growing family of open systems
technology partners and suppliers offering a range of hardware platforms and
software products which the Company then customizes for a particular customer
environment. These integration/consulting services -- Control Data Brainware-TM-
- -- are based upon the Company's 37 years of experience in implementing
leading-edge solutions for complex computing environments. The Company serves
customers in technical, government and commercial markets.
REVENUES BY CATEGORY
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- --------------------
JULY 2, JULY 3, JULY 2, JULY 3,
1994 1993 CHANGE 1994 1993 CHANGE
--------- --------- ----------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Software and services.................. $ 36.3 $ 37.0 (1.9)% $ 71.4 $ 70.8 0.8%
Maintenance and support................ 22.7 29.4 (22.8)% 45.4 57.7 (21.3)%
Hardware products...................... 72.3 48.5 49.1% 160.1 89.1 79.7%
--------- --------- ----- --------- --------- -----
Total revenues....................... $ 131.3 $ 114.9 14.3% $ 276.9 $ 217.6 27.3%
--------- --------- ----- --------- --------- -----
--------- --------- ----- --------- --------- -----
</TABLE>
REVENUES BY GEOGRAPHY
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- --------------------
JULY 2, JULY 3, JULY 2, JULY 3,
1994 1993 CHANGE 1994 1993 CHANGE
--------- --------- ----------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Americas................................ $ 56.5 $ 48.6 16.3% $ 130.2 $ 94.4 37.9%
Europe.................................. 57.9 46.1 25.6% 113.3 90.9 24.6%
Asia.................................... 16.9 20.2 (16.3)% 33.4 32.3 3.4%
--------- --------- ----- --------- --------- -----
Total revenues........................ $ 131.3 $ 114.9 14.3% $ 276.9 $ 217.6 27.3%
--------- --------- ----- --------- --------- -----
--------- --------- ----- --------- --------- -----
</TABLE>
Revenues for second quarter 1994 of $131.3 million increased 14.3% from
second quarter 1993 revenues of $114.9 million. Revenues for the first six
months of 1994 totaled $276.9 million, an increase of 27.3% from the $217.6
million of revenue in the first six months of 1993. The increase in both the
second quarter and the first six months of 1994 results from a combination of
the inclusion of revenues from acquired companies and increased revenue levels
resulting from implementing open systems solutions for the Company's customers.
The majority of the increase in hardware products results from the inclusion of
revenue from recent acquisitions that were completed in the second half of 1993
and the first quarter of 1994. The operations of the acquired companies have
been integrated with existing Company operations and now conduct their business
under the name of Control Data Systems in their respective markets.
7
<PAGE>
CONTROL DATA SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (UNAUDITED) (CONTINUED)
(DOLLARS IN MILLIONS)
COST OF REVENUES AND GROSS PROFIT
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------ ------------------------
JULY 2, JULY 3, JULY 2, JULY 3,
1994 1993 CHANGE 1994 1993 CHANGE
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Cost of revenues................. $ 92.1 $ 71.1 29.5% $ 197.7 $ 132.7 49.0%
Percentage of revenues........... 70.1% 61.9% 71.4% 61.0%
Gross profit..................... $ 39.2 $ 43.8 (10.5)% $ 79.2 $ 84.9 (6.7)%
Percentage of revenues........... 29.9% 38.1% 28.6% 39.0%
</TABLE>
A combination of factors contribute to the decrease of gross margin dollars
as a percentage of revenue in the second quarter and first half of 1994 as
compared to the comparable periods of 1993. Revenue mix in terms of higher
quantities of lower margin hardware products, lower quantities of higher margin
hardware maintenance services, and lower margins on software and services
revenues are the primary factors contributing to the decrease. The software and
services gross margin is primarily impacted by the under utilization of the
technical resources due to contract award slippage and the changing skill
requirements of the technical workforce.
OPERATING EXPENSES
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------ ------------------------
JULY 2, JULY 3, JULY 2, JULY 3,
1994 1993 CHANGE 1994 1993 CHANGE
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Selling, general and
administrative..................... $ 34.7 $ 34.4 0.9% $ 69.9 $ 67.9 2.9%
Percentage of revenues.............. 26.4% 29.9% 25.2% 31.2%
Technical........................... $ 3.7 $ 7.3 (49.3)% $ 7.3 $ 14.7 (50.3)%
Percentage of revenues.............. 2.8% 6.4% 2.6% 6.8%
</TABLE>
SELLING, GENERAL AND ADMINISTRATIVE (SG&A). SG&A expense in the second
quarter of 1994 is essentially the same as the comparable quarter in 1993. SG&A
expense for the first six months of 1994 has increased by 2.9% from the
comparable period in 1993. The inclusion of the companies acquired in the second
half of 1993 and the first quarter of 1994 are the primary reason for the
increase.
TECHNICAL. The decrease in technical expense is an ongoing trend as the
Company continues its transition from a provider of proprietary products to a
systems integration company.
NONOPERATING INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- -----------------
JULY 2, JULY 3, JULY 2, JULY 3,
1994 1993 CHANGE 1994 1993 CHANGE
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Nonoperating income..................... $0.4 $3.4 (88.2)% $0.9 $5.8 (84.5)%
Percentage of revenues.................. 0.3% 3.0% 0.3% 2.7%
</TABLE>
INTEREST EXPENSE. Interest expense decreased in the second quarter and
first half of 1994 versus the comparable periods in 1993 due to decreased
average daily short-term borrowings and lower interest rates on the outstanding
borrowings.
INTEREST INCOME. Interest income decreased in the second quarter and the
first half of 1994 versus the comparable periods of 1993 due to lower average
daily cash and short-term investment balances combined with lower interest rates
on the investments.
8
<PAGE>
CONTROL DATA SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (UNAUDITED) (CONTINUED)
(DOLLARS IN MILLIONS)
OTHER INCOME. Other income decreased by $2.6 million and $4.3 million
respectively in the second quarter of 1994 and in the first half of 1994 versus
the comparable periods in 1993. The primary reason for the decrease in the
second quarter relates to the inclusion of $1.5 million of gain on investments
in 1993 arising out of the sale of Silicon Graphics Inc. common stock versus
$0.9 million expense in the second quarter of 1994 resulting from the reduction
in the market value of certain short-term investments due to increases in
interest rates. The decrease for the first half of 1994 versus 1993 is
attributable to the items in the second quarter as described above combined with
a loss in affiliates of $0.7 million in the first half of 1994 versus a gain of
$0.7 million in the first half of 1993. This primarily relates to the Company's
fifty percent interest in Metaphase Technologies Inc.
PROVISION FOR INCOME TAXES
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------ ------------------------
JULY 2, JULY 3, JULY 2, JULY 3,
1994 1993 1994 1993
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Provision for income taxes........................ $ 0.5 $ 1.2 $ 0.9 $ 2.5
Percentage of revenues............................ 0.4% 1.0% 0.3% 1.1%
</TABLE>
The provision for income taxes in second quarter and first half 1994 and the
comparable periods in 1993 relate primarily to foreign income taxes on the
earnings of the Company's foreign subsidiaries and state franchise and foreign
withholding taxes on certain United States income.
NET EARNINGS AND EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------ ------------------------
JULY 2, JULY 3, JULY 2, JULY 3,
1994 1993 1994 1993
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net earnings................................ $ 0.7 $ 4.4 $ 2.1 $ 5.7
Percentage of revenues...................... 0.5% 3.8% 0.8% 2.6%
Earnings per share.......................... $ 0.05 $ 0.32 $ 0.15 $ 0.43
</TABLE>
Net earnings for the second quarter and first half 1994 are lower than the
comparable periods of 1993. The primary factors are the lower gross margins and
the decreased other income in 1994 versus the comparable periods of the prior
year. Operating results for the six months ended July 2,1994 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1994.
OUTLOOK
The following factors, among others, should be considered in evaluating the
Company's outlook.
GENERAL. The Company participates in the systems integration segment of the
information systems and services market. This segment is projected to grow by
more than 15% per year over the next four years. Equipment manufacturers, large
consulting firms and traditional systems integrators also compete in this market
segment. There are many smaller firms also active in this market segment with no
one firm having a dominant position. Many of the companies in this market
segment offer outsourcing and other types of long term agreements with their
customer base. The result of these types of activities is to develop a backlog
of business that creates a certain predictable revenue base in future periods.
The Company has a limited number of these types of arrangements. Therefore,
revenue predictability is currently difficult, which produces additional
volatility of earnings quarter to quarter.
Business activity in selected operations during the first six months of 1994
has fallen below the Company's business plan. The Company's profit levels have
been influenced by difficulties in certain
9
<PAGE>
CONTROL DATA SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (UNAUDITED) (CONTINUED)
(DOLLARS IN MILLIONS)
European countries, the continuing deferral of application development and
systems integration projects in Asia, and the redirection of a few commercial
integration projects in the United States. In addition, demand and pricing for
the Company's proprietary products is decreasing at a rate faster than
originally anticipated. The Company will be conducting a thorough review of its
worldwide business operations and market opportunities. If certain of the
business trends as mentioned above appear to reflect permanent changes in market
conditions, the Company will be required to reduce its worldwide operations and
the geographical dispersion of its business to remain competitive. Accordingly,
the Company may be required to record additional restructuring charges and
revalue certain assets employed in the delivery of its services and products.
REVENUES. The Company expects total revenues to increase in 1994 over 1993
levels due in part to the recent acquisition activity and in part to increased
revenues from providing integration services to its customers. These revenues
are expected to more than offset the continuing decline in the sale and
servicing of proprietary products. Sales of proprietary products were
approximately 30% of the total product revenues in the first half of 1993 versus
approximately 10% in the comparable period in 1994.
COST OF REVENUES. The Company's cost of revenues as a percentage of total
revenues increased in the second quarter and first six months of 1994 from the
comparable periods of the prior year. Gross margins, as a percentage of sales,
for the balance of 1994 are expected to continue at levels lower than comparable
periods of 1993. Due to varying gross margins on different types of product
sales and the varying gross margins of specific large projects quarter to
quarter, total gross margins will be volatile.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses are expected to
decrease as a percentage of revenues in 1994, as revenues are expected to
increase at a faster rate than SG&A expenses, including the expenses of the
acquired businesses.
TECHNICAL EXPENSES. Technical spending declined in the second quarter and
for the first six months of 1994 from the comparable periods in 1993. The
company continues to transition away from being a provider of proprietary
products, which required higher technical spending as a percentage of revenues
than does a systems integration company. Technical spending for the remainder of
the year is expected to be comparable to the first and second quarter of 1994.
INCOME TAX RATE. In total, the Company has $110.0 million of deferred tax
assets at January 1, 1994, which can be used to offset taxes on future earnings.
However, the Company maintains significant operations outside the United States
that, if profitable, will be subject to corporate income taxes in 1994. In
addition certain tax liabilities exist that are attributable to factors other
than profitability. Consequently, the Company's tax rate as a percentage of
earnings before income taxes is volatile.
FOREIGN EXCHANGE. A large percentage of the Company's revenues, costs and
expenses are transacted in local currencies. As a result, the Company's
financial results are subject to foreign exchange rate fluctuations.
ACCOUNTING STANDARDS. Accounting standards promulgated by the Financial
Accounting Standards Board change periodically. Changes in such standards,
including currently proposed changes in accounting for employee stock option
plans, may have a negative impact on the Company's future reported earnings.
FINANCIAL CONDITION
The Company's cash and short-term investments totaled $73.9 million at July
2, 1994 and, represented 20.9% of total assets. The Company has no long term
debt. Stockholders equity at July 2,
10
<PAGE>
CONTROL DATA SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (UNAUDITED) (CONTINUED)
(DOLLARS IN MILLIONS)
1994 was $177.6 million. Total cash and short-term investment balances declined
by $7.7 million from the corresponding January 1, 1994 balances. The primary
factors in the decrease are the acquisition of MICHAEL Business Systems Plc
which totaled $3.8 million in the first quarter of 1994 and restructuring
payments which totaled $9.8 million in the first six months of 1994. Short term
debt has increased $8.5 million in the first six months of 1994. Cash used in
operations totaled $6.9 million for the first six months of 1994. Payments for
restructuring liabilities were the primary factor.
As of July 2, 1994, the Company has available up to $32.2 million under bank
lines of credit in certain international subsidiaries and a U.S. credit
agreement which provides up to $10.0 million in unsecured short-term financing.
The Company has $23.0 million of restructure obligations as of July 2, 1994,
$13.5 million of which are expected to be cash outlays in the next twelve months
primarily for severance costs, lease and other obligations related to excess
facilities, and litigation costs. In addition, pressure on gross margins is
expected to continue, reflecting the shift in revenue mix towards open systems
products and downward price pressures facing resellers of computer equipment.
The Company's operations are highly decentralized and geographically dispersed,
which constrains the ability to quickly reduce certain infrastructure costs if
revenue volumes unexpectedly decline. Additionally, timing of product orders by
customers may cause operating earnings to fluctuate between periods. Despite
these factors, the above-mentioned funds are expected to be sufficient to meet
the Company's operating requirements in 1994. To the extent it may be necessary
to supplement these sources of cash, the Company could seek financing from
strategic investors and through future debt or equity financing in the public or
private markets. The ability of the Company to borrow money or to sell debt or
equity securities will depend on its results of operations, financial condition
and business prospects, as well as on conditions then prevailing in the computer
industry and the relevant capital markets.
11
<PAGE>
PART II
OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
11 Computation of Earnings (Loss) per Common Share
(b) Reports on Form 8-K
No report on Form 8-K has been filed during the fiscal quarter for which
this quarterly report on Form 10-Q is filed.
12
<PAGE>
SIGNATURE
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 hereunto duly authorized.
CONTROL DATA SYSTEMS, INC.
--------------------------------------
Registrant
Date: August 15, 1994 /s/ J. F. KILLORAN
--------------------------------------
J. F. Killoran
VICE PRESIDENT AND CHIEF FINANCIAL
OFFICER
(PRINCIPAL ACCOUNTING OFFICER)
13
<PAGE>
EXHIBIT INDEX
EXHIBITS FILED AS ITEM 6 TO THE QUARTERLY REPORT OF CONTROL DATA SYSTEMS, INC.
ON FORM 10-Q FOR THE QUARTER ENDED JULY 2, 1994.
(11) -- Computation of Earnings Per Common Share
14
<PAGE>
EXHIBIT 11
CONTROL DATA SYSTEMS, INC.
COMPUTATION OF EARNINGS PER COMMON SHARE
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------- ----------------------------
JULY 2, 1994 JULY 3, 1993 JULY 2, 1994 JULY 3, 1993
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net earnings applicable to common shares:
Net earnings............................................. $ 683 $ 4,317 $ 2,042 $ 5,655
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Primary:
Shares for common and common share equivalent earnings
per share (1):
Weighted average number of common shares outstanding... 13,720,058 12,869,873 13,734,123 12,728,767
Dilutive effect of outstanding stock options and
warrants.............................................. 183,784 420,487 127,683 570,731
------------- ------------- ------------- -------------
13,903,842 13,290,360 13,861,806 13,299,498
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Net earnings per common share and common share
equivalents............................................... $ 0.05 $ 0.32 $ 0.15 $ 0.43
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Fully Diluted:
Shares for common and common share equivalent earnings
per share (2):
Weighted average number of common shares outstanding... 13,720,058 12,869,873 13,734,123 12,728,767
Dilutive effect of outstanding stock options and
warrants.............................................. 183,784 420,487 127,683 642,964
------------- ------------- ------------- -------------
13,903,842 13,290,360 13,861,806 13,371,731
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Net earnings per common share and common share
equivalents............................................... $ 0.05 $ 0.32 $ 0.15 $ 0.42
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
<FN>
- ------------------------
(1) Outstanding stock options, warrants and shares issuable under employee
stock purchase plans are converted to common share equivalents by the
treasury stock method using the average market price of the Company's
shares during each period.
(2) Outstanding stock options, warrants and shares issuable under employee
stock purchase plans are converted to common share equivalents by the
treasury stock method using the greater of the average market price or the
period-end market price of the Company's shares during each period.
</TABLE>
