<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 JUNE 30, 1995
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: 12,763,190 shares
of Common Stock, $0.01 par value per share, as of August 7, 1995.
<PAGE>
CONTROL DATA SYSTEMS, INC.
FORM 10-Q
June 30, 1995
INDEX
Page
Part I - Financial Information:
Consolidated Statements of Operations -
Six months ended June 30, 1995 and July 2, 1994..... 2
Consolidated Balance Sheets -
June 30, 1995 and December 31, 1994 .. ............. 3
Consolidated Statements of Cash Flows -
Six months ended June 30, 1995 and July 2, 1994..... 4
Notes to Consolidated Financial Statements ............. 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations ................ 8
Part II - Other Information ............................ 14
Signature .............................................. 15
Exhibit Index .......................................... 16
<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
June 30, July 2, June 30, July 2,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
REVENUES:
Net sales and rentals.................. $ 74,992 $ 80,015 $ 156,549 $ 175,654
Services............................... 54,096 51,259 102,603 101,250
Total revenues....................... 129,088 131,274 259,152 276,904
COST OF REVENUES:
Net sales and rentals.................. 54,581 56,788 113,833 127,465
Services............................... 41,902 37,141 79,117 73,489
Total cost of revenues............... 96,483 93,929 192,950 200,954
Gross profit......................... 32,605 37,345 66,202 75,950
OPERATING EXPENSES:
Selling, general and
administrative........................ 30,386 32,931 60,558 66,691
Technical.............................. 2,137 3,649 4,475 7,230
Total operating expenses............. 32,523 36,580 65,033 73,921
Earnings from operations............. 82 765 1,169 2,029
OTHER INCOME (EXPENSES):
Interest expense....................... (453) (386) (727) (663)
Interest income........................ 1,592 1,088 2,978 2,293
Other income (expenses), net........... 1,240 (283) 1,940 (686)
Total other income, net.............. 2,379 419 4,191 944
Earnings before income taxes......... 2,461 1,184 5,360 2,973
PROVISION FOR INCOME TAXES.............. 200 501 900 931
Net earnings......................... $ 2,261 $ 683 $ 4,460 $ 2,042
Net earnings per common share
and common share equivalents......... $ 0.18 $ 0.05 $ 0.35 $ 0.15
Weighted average common shares
outstanding (in thousands)........... 12,878 13,904 12,965 13,862
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
CONTROL DATA SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
ASSETS
June 30, December 31,
1995 1994
(Unaudited)
<S> <C> <C>
Current assets:
Cash and short-term investments................ $ 83,304 $ 85,415
Trade and other receivables.................... 121,521 121,829
Inventories.................................... 39,602 38,241
Prepaid expenses and other current assets...... 6,640 6,756
Total current assets......................... 251,067 252,241
Investments and advances......................... 150 133
Property and equipment, net...................... 21,779 20,727
Leased and data center equipment, net............ 1,749 1,901
Noncurrent trade and other receivables........... 6,786 7,330
Goodwill, net.................................... 10,245 10,187
Other noncurrent assets.......................... 9,035 8,049
Total assets................................. $ 300,811 $ 300,568
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Notes payable.................................. $ 4,935 $ 2,933
Accounts payable............................... 49,274 41,004
Customer advances and deferred income.......... 16,658 24,254
Accrued taxes.................................. 5,860 4,515
Accrued salaries and wages..................... 16,433 14,320
Restructure reserves, current portion.......... 30,950 36,698
Other accrued expenses......................... 36,534 35,176
Total current liabilities.................... 160,644 158,900
Deferred income taxes............................ 630 616
Restructure reserves, less current portion....... 17,420 18,240
Pension liabilities.............................. 37,537 34,019
Other noncurrent liabilities..................... 5,576 6,487
Total liabilities............................ 221,807 218,262
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 12,716,473 and 13,803,492
shares as of June 30, 1995 and
December 31, 1994, respectively.............. 139 138
Additional paid-in capital..................... 161,643 161,105
Retained earnings.............................. (66,781) (71,241)
Minimum pension liability adjustment........... (6,957) (6,957)
Foreign currency translation adjustment........ (1,929) (739)
Treasury stock, at cost........................ (7,111) -
Total stockholders' equity................... 79,004 82,306
Total liabilities and stockholders' equity... $ 300,811 $ 300,568
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
CONTROL DATA SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30, July 2,
1995 1994
<S> <C> <C>
Cash Flows from Operating Activities:
Net earnings ...................................... $ 4,460 $ 2,042
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Depreciation................................... 6,057 7,752
Amortization................................... 770 2,130
Foreign currency transaction (gain) loss....... (392) (452)
Equity in losses of affiliates................. 476 745
Restructure reserves utilized.................. (8,713) (9,786)
(Gain) loss on sale of marketable securities
and other assets............................. (777) 150
Net change in working capital items............ 6,744 (8,732)
Net change in noncurrent trade receivables..... 910 445
Net change in other noncurrent assets.......... (1,462) (1,294)
Other.......................................... (171) 83
Net cash provided by (used in) operating
activities.................................. 7,902 (6,917)
Cash Flows from Investing Activities:
Expended for property and equipment................ (5,608) (4,148)
Expended for leased and data center equipment...... (646) (492)
Proceeds from sales of property and equipment...... 626 242
Acquisitions of businesses, net of cash provided... (546) (3,844)
Change in short-term investments................... 4,178 3,651
Net cash used in investing
activities.................................. (1,996) (4,591)
Cash Flows from Financing Activities:
Borrowings under short-term financing
arrangements, net................................ 1,695 6,070
Proceeds from issuance of common stock, net of
issuance costs................................... 539 1,295
Purchase of treasury stock......................... (7,111) -
Net cash (used in) provided by financing
activities.................................. (4,877) 7,365
Effect of Exchange Rate Changes on Cash.............. 1,038 90
Net change in cash and cash equivalents......... 2,067 (4,053)
Cash and cash equivalents, beginning of period.. 17,277 19,164
Cash and cash equivalents, end of period........ 19,344 15,111
Short-term investments.......................... 63,960 58,820
Cash and short-term investments, end of period....... $ 83,304 $ 73,931
</TABLE>
(Continued)
<PAGE>
CONTROL DATA SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30, July 2,
1995 1994
<S> <C> <C>
Net Change in Working Capital Items:
Trade and other receivables........................ $ 4,952 $ 6,833
Inventories........................................ 435 2,348
Prepaid expenses and other current assets.......... 782 853
Accounts payable................................... 8,562 (9,491)
Customer advances and deferred income.............. (8,763) (5,742)
Accrued taxes...................................... 4,203 (2,968)
Accrued salaries and wages......................... 179 (459)
Other accrued expenses............................. (3,606) (106)
Net change in working capital items............... $ 6,744 $ (8,732)
Supplemental Disclosures of Cash Flow Information:
Cash paid (received) during the period for:
Interest paid.................................... $ 731 $ 672
Income taxes paid................................ 569 1,893
Income taxes refunded............................ (6,580) (622)
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
CONTROL DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 1995
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 share equivalents outstanding during each
period. Common stock equivalents result from dilutive stock options and
warrants computed using the treasury stock method.
2. STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock, Additional Paid-In Capital, Retained Earnings, and Other
Shares Additional
Outstand- Treasury Common Paid-In Retained
(Dollars and shares in thousands) ing Stock Issued Stock Capital Earnings Other* Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994....... 13,803 - 13,803 $ 138 $ 161,105 $ (71,241) $ (7,696) $ 82,306
Issuance of common stock under the
Employee Stock Purchase Plan..... 15 - 15 - 81 - - 81
Exercises of stock options........ 34 - 34 - 165 - - 165
Foreign currency translation
adjustment....................... - - - - - - (1,902) (1,902)
Purchase of treasury stock,
at cost.......................... (1,185) 1,185 - - - - (7,111) (7,111)
Net earnings...................... - - - - - 2,199 - 2,199
Balance at March 31, 1995.......... 12,667 1,185 13,852 138 161,351 (69,042) (16,709) 75,738
Issuance of common stock under the
Employee Stock Purchase Plan..... 16 - 16 - 91 - - 91
Exercises of stock options........ 33 - 33 1 201 - - 202
Foreign currency translation
adjustment....................... - - - - - - 712 712
Net earnings...................... - - - - - 2,261 - 2,261
Balance at June 30, 1995........... 12,716 1,185 13,901 $ 139 $ 161,643 $ (66,781) $ (15,997) $ 79,004
</TABLE>
<TABLE>
<CAPTION>
*Other Stockholders' Equity Items
Minimum Foreign
Pension Currency
Liability Translation Treasury
(Dollars in thousands) Adjustment Adjustment Stock Total
<S> <C> <C> <C> <C>
Balance at December 31, 1994....... $ (6,957) $ (739) $ - $ (7,696)
Foreign currency translation
adjustment....................... - (1,902) - (1,902)
Purchase of treasury stock,
at cost.......................... - - (7,111) (7,111)
Balance at March 31, 1995.......... (6,957) (2,641) (7,111) (16,709)
Foreign currency translation
adjustment....................... - 712 - 712
Balance at June 30, 1995........... $ (6,957) $ (1,929) $ (7,111) $ (15,997)
</TABLE>
<PAGE>
CONTROL DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
JUNE 30, 1995
3. RESTRUCTURING RESERVES, CURRENT AND NONCURRENT
Over the past several years, Control Data Systems, Inc. (the
"Company") has focused its core business through a series of
initiatives. The Company continues its transition from a developer and
manufacturer of proprietary mainframe computer systems to the marketing
and integration of open systems hardware, software, and consulting
services.
Cash outlays in the second quarter 1995 consisted primarily of $2.1
million for severance costs related to the reduction of the worldwide
workforce by approximately 30 individuals, and $1.2 million for lease
and other facility obligations related to commitments under leases
throughout the United States, Canada, and Europe. Cash outlays for the
first six months of 1995 totaled $8.7 million, consisting primarily of
$5.9 million for severance costs related to the reduction of the
worldwide workforce by approximately 110 individuals and $2.0 million
for lease and other facility obligations related to commitments under
leases throughout the United States, Canada, and Europe. Cash outlays
for the second quarter and the first half of 1995 were below Company
expectations due in part to lower than planned severance activity in its
international operations because of delays in legally required
procedures for such activities. In addition, restructure activities in
certain international locations were delayed while a divestiture
activity was explored. For additional information regarding this
divestiture, see the Financial Condition section of the Management's
Discussion and Analysis of Financial Condition and Results of
Operations.
The following table represents the Company's restructuring activities
for the first half of 1995:
<TABLE>
<CAPTION>
Asset Lease Foreign
Revaluations and Other Currency
Severance and Facility Translation
(Dollars in thousands) Costs Write-offs Obligations Adjustment Other Total
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994.. $ 33,329 $ - $ 13,840 $ - $ 7,769 $ 54,938
Noncash items................ - (10) - 2,156 - 2,146
Reclassifications
and transfers, net.......... 456 (4) 19 (155) (316) -
Foreign currency
translation adjustment...... 1,473 14 360 (2,001) 154 -
Cash payments................ (3,731) - (725) - (350) (4,806)
Balance at March 31, 1995..... 31,527 - 13,494 - 7,257 52,278
Noncash items................ - (200) - 199 - (1)
Reclassifications
and transfers, net.......... (181) 190 55 (235) 171 -
Foreign currency
translation adjustment...... (81) 10 48 36 (13) -
Cash payments................ (2,124) - (1,241) - (542) (3,907)
Balance at June 30, 1995...... $ 29,141 $ - $ 12,356 $ - $ 6,873 $ 48,370
</TABLE>
The remaining restructuring reserve balance of $48.4 million consists
of a combination of cash and noncash items. It is estimated that the
Company will utilize approximately half of these reserves by year end
1995. Subsequently, future utilization of the remaining reserves will
primarily involve cash outlays.
4. RELATED PARTY TRANSACTION
In August 1992, an agreement was signed between Silicon Graphics,
Inc. ("SGI") and the Company to purchase 1,185,224 shares of the
Company's Common Stock for an aggregate amount of $14.4 million. On
February 14, 1995, the Company repurchased 1,185,224 shares of its
common stock from SGI for an aggregate purchase price of $7.1 million.
<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. is a global systems integrator,
developing and implementing open systems solutions for the operational
problems of customers worldwide. It focuses on the architecture,
implementation, lifetime support, and outsourcing of electronic
commerce, product data management, and client-server solutions for
government, financial services, telecommunications, and manufacturing
organizations. The Company helps its customers implement business-
related solutions by providing a range of services that include:
o Technology consulting
o Program management
o Software development
o Infrastructure integration
o Solution support
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
are based upon the Company's 38 years of experience in implementing
leading-edge solutions for complex computing environments.
For the first 32 years of its history, the Company developed,
manufactured, and integrated its own proprietary brand of computers. In
1989 it began a transition from the development, manufacture and
marketing of its own computers to the remarketing of standard UNIX
and/or Intel-based computer systems. Coupled with networking and
distributed applications, these systems form what is often referred to
as the client-server computing environment. Today the CompanyOs
integration services include network design, installation and
maintenance; application design and deployment, particularly for
electronic commerce projects; remote and on-site systems management;
electronic mail integration; and for the discrete manufacturing
industry, computer-aided design and product data management systems.
Revenues by Category
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, July 2, June 30, July 2,
1995 1994 Change 1995 1994 Change
<S> <C> <C> <C> <C> <C> <C>
Software and services.... $ 46.9 $ 38.0 23.4 % $ 86.4 $ 74.1 16.6 %
Maintenance and support.. 20.5 23.7 (13.5) % 40.8 47.5 (14.1) %
Hardware products........ 61.7 69.6 (11.4) % 132.0 155.3 (15.0) %
Total revenues........ $ 129.1 $ 131.3 (1.7) % $ 259.2 $ 276.9 (6.4) %
</TABLE>
Revenues by Geography
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, July 2, June 30, July 2,
1995 1994 Change 1995 1994 Change
<S> <C> <C> <C> <C> <C> <C>
Americas................. $ 43.7 $ 56.6 (22.8) % $ 93.5 $ 130.1 (28.1) %
Europe................... 70.0 57.8 21.1 % 139.8 113.4 23.3 %
Asia..................... 15.4 16.9 (8.9) % 25.9 33.4 (22.5) %
Total revenues........ $ 129.1 $ 131.3 (1.7) % $ 259.2 $ 276.9 (6.4) %
</TABLE>
<PAGE>
CONTROL DATA SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Unaudited) (Continued)
(Dollars in millions)
Revenues for second quarter 1995 of $129.1 million decreased 1.7%
from second quarter 1994 revenues of $131.3 million. Revenues for the
first six months of 1995 totaled $259.2 million, a decrease of 6.4% from
the $276.9 million of revenues in the first six months of 1994. The
revenue decline in the second quarter and the first six months of 1995
was due primarily to decreases in hardware products and maintenance
support sales offset in part by an increase in software and services
sales. The majority of the decrease in hardware products sales was
attributable to lower revenues in the Americas and Asia, offset by an
increase in revenues in Europe. The decrease in hardware maintenance
support sales was primarily due to lower revenues in the Americas. The
increase in software and services revenues was due to an increase in
sales in all three geographical areas.
Cost of Revenues and Gross Profit
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, July 2, June 30, July 2,
1995 1994 Change 1995 1994 Change
<S> <C> <C> <C> <C> <C> <C>
Cost of revenues........ $ 96.5 $ 94.0 2.7 % $ 193.0 $ 201.0 (4.0) %
Percentage of revenues.. 74.7 % 71.6 % 74.5 % 72.6 %
Gross profit............ $ 32.6 $ 37.3 (12.6) % $ 66.2 $ 75.9 (12.8) %
Percentage of revenues.. 25.3 % 28.4 % 25.5 % 27.4 %
</TABLE>
Cost of revenues for second quarter 1995 increased by 2.7% over the
comparable period in 1994. Cost of revenues for the first six months of
1995 decreased by 4.0% compared to the same period in 1994. Gross
profit margins for second quarter 1995 decreased by 12.6% as compared to
the second quarter 1994. Gross profit margins for the first six months
of 1995 decreased by 12.8% as compared to the same period in 1994. The
primary factor contributing to the cost of revenues and gross profit
margins decreases in the first half of 1995 was the decline in total
revenues, primarily in hardware products sales.
Operating Expenses
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, July 2, June 30, July 2,
1995 1994 Change 1995 1994 Change
<S> <C> <C> <C> <C> <C> <C>
Selling, general and
administrative........ $ 30.3 $ 32.9 (7.9) % $ 60.5 $ 66.7 (9.3) %
Percentage of revenues.. 23.5 % 25.1 % 23.3 % 24.1 %
Technical............... $ 2.2 $ 3.6 (38.9) % $ 4.5 $ 7.2 (37.5) %
Percentage of revenues.. 1.7 % 2.7 % 1.7 % 2.6 %
</TABLE>
Selling, general and administrative (SG&A). The decrease in SG&A
expense for second quarter and the first six months of 1995 as compared
to the comparable periods in 1994 is due to the downsizing actions taken
by the Company over the past year and recovery of $0.7 million of
accounts receivable which had previously been written-off.
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.
<PAGE>
CONTROL DATA SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Unaudited) (Continued)
(Dollars in millions)
Nonoperating Income
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, July 2, June 30, July 2,
1995 1994 Change 1995 1994 Change
<S> <C> <C> <C> <C> <C> <C>
Nonoperating income.... $ 2.4 $ 0.4 500.0 % $ 4.2 $ 0.9 366.7 %
Percentage of revenues. 1.9 % 0.3 % 1.6 % 0.3 %
</TABLE>
Interest expense. Interest expense increased in second quarter and the
first half of 1995 versus the comparable periods in 1994 due to
increased average daily short-term borrowings and higher interest rates
on the outstanding borrowings.
Interest income. Interest income increased in second quarter and the
first half of 1995 versus the comparable periods in 1994 due to higher
average daily cash and short-term investment balances.
Other income, net. Other income increased by $1.5 million and $2.6
million, respectively in second quarter 1995 and the first half of 1995
versus the comparable periods in 1994. The primary factors for the
increase in second quarter relates to a gain of $0.4 million for the
increase in the market value of certain short-term investments versus a
$0.9 million loss in the comparable quarter in 1994, and a gain of $0.4
million in second quarter 1995 for the sale of land. The increase in
the first half of 1995 versus 1994 is attributable to a gain of $0.7
million for the increase in the market value of certain short-term
investments versus a $0.9 million loss in the comparable period in 1994,
a gain of $0.4 million in 1995 for the sale of land, and a loss in
affiliates of $0.5 in the first half of 1995 versus a loss of $0.7
million in the first half of 1994.
Provision for Income Taxes
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, July 2, June 30, July 2,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Provision for Income Taxes.. $ 0.2 $ 0.5 $ 0.9 $ 0.9
Percentage of revenues...... 0.2 % 0.4 % 0.3 % 0.3 %
</TABLE>
The provision for income taxes in second quarter and the first half
of 1995 and the comparable periods in 1994 relate primarily to foreign
income taxes on the earnings of the Company's foreign subsidiaries and
foreign withholding taxes on certain United States income.
Net Earnings and Earnings Per Share
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
(Earnings per share in dollars) June 30, July 2, June 30, July 2,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Net earnings................ $ 2.3 $ 0.7 $ 4.5 $ 2.1
Percentage of revenues...... 1.8 % 0.5 % 1.7 % 0.8 %
Earnings per share.......... $ 0.18 $ 0.05 $ 0.35 $ 0.15
</TABLE>
Net earnings for second quarter and the first half of 1995 are higher
than the comparable periods in 1994. The primary factors were lower
operating expenses, which offset the lower gross profit margins, and
higher nonoperating income. Operating results for the six months ended
June 30, 1995 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1995.
<PAGE>
CONTROL DATA SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Unaudited) (Continued)
(Dollars in millions)
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,
and continuing quarterly volatility of earnings can be expected.
Revenues. The Company expects total revenues to decrease in 1995 from
1994 due in part to the recently announced proposed disposition of
certain international operations. The decrease in revenues could be
offset in part by the acquisition of additional strategic businesses.
For additional information regarding this disposition, see the Financial
Condition section of the Management's Discussion and Analysis of
Financial Condition and Results of Operations.
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
1995 from the comparable periods in 1994. Gross profit margins, as a
percentage of sales, decreased in the second quarter and first six
months of 1995 from the comparable periods in 1994. Gross profit
margins as a percentage of revenues are expected to increase following
the proposed disposition of certain international operations, as noted
above, whose revenue mix primarily consists of lower profit margin
hardware products. However, due to varying gross profit margins of
different types of product sales and varying gross profit margins of
specific large projects quarter to quarter, total gross profit margins
will be volatile.
Selling, general and administrative expenses. SG&A expenses decreased
in the second quarter and first half of 1995 from the year ago periods.
SG&A expenses are expected to decline in 1995 due to the proposed
disposition of certain international operations and restructuring
actions taken in the fourth quarter of 1994.
Technical expenses. Technical spending declined in the second quarter
and first half of 1995 from the comparable periods in 1994. Technical
spending is expected to continue to decline in 1995 as the majority of
the technical spending for proprietary products was completed in 1994.
Some of this decline will be offset by higher spending on electronic
commerce products and services, one of the Company's primary targeted
markets.
Income tax rate. In total, the Company has $131.2 million of deferred
tax assets at December 31, 1994, which can be used to offset taxes on
future earnings. While the Company maintains significant operations
outside the United States, the majority of these operations also have
deferred tax assets as of December 31, 1994, resulting from lower than
expected 1994 earnings, caused in part by the planned worldwide
restructuring activity. In the long-term this will significantly reduce
the Company's tax expense. However, given the wide geographical
dispersion of the Company's operations the tax rate will be volatile.
Additionally, there will be volatility in the tax rate due to the
proposed disposition of certain international operations.
<PAGE>
CONTROL DATA SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Unaudited) (Continued)
(Dollars in millions)
Foreign exchange. A large percentage of the Company's revenues, costs,
and expenses are transacted in currencies other than the U.S. dollar.
As a result, the Company's financial results are subject to foreign
exchange rate fluctuations.
Other. See Notes to Consolidated Financial Statements regarding other
factors concerning the Company.
Financial Condition
The Company's cash and short-term investments totaled $83.3 million
at June 30, 1995 and represented 27.7% of total assets. The Company has
no long-term debt. Stockholders' equity at June 30, 1995 was $79.0
million. Total cash and short-term investment balances decreased by
$2.1 million from the corresponding December 31, 1994 balances. The
primary factors in the decrease were the purchase of treasury stock of
$7.1 million, restructuring payments of $8.7 million, capital
expenditures of $6.3 million, the acquisition of Binary Systems Limited
of $0.5 million, partially offset by a positive cash flow of $6.7
million from working capital items, depreciation and amortization of
$6.8 million, net earnings of $4.5 million, and an increase in short-
term borrowings of $1.7 million. Stockholders' equity decreased by $3.3
million in the first six months of 1995. The decrease is primarily due
to the purchase of treasury stock of $7.1 million and a foreign currency
translation adjustment of $1.2 million, offset in part by net earnings
of $4.5 million.
As of June 30, 1995, the Company has available up to $29.8 million,
primarily short-term notes and overdraft facilities, under bank lines of
credit in certain international subsidiaries. The Company has a
domestic credit arrangement which provides up to $10.0 million in
unsecured short-term credit.
The Company has $48.4 million of restructuring obligations as of June
30, 1995. Settlement of these obligations will involve a combination
of cash outlays and asset revaluations primarily associated with the
contemplated closing of the first group of operations proposed to be
sold to AmeriData Technologies, Inc. ("AmeriData"). It is currently
estimated that year end 1995 restructuring reserves will be less than
half the June 30, 1995 balance and will primarily involve cash outlays.
The majority of the cash outlays will be made during 1996, with the
remainder extending into 1997 as various long-term real estate
obligations are concluded. The Company believes it can finance this
additional cash requirement through a combination of existing cash
reserves, cash flow from operations, asset sales, and its borrowing
capacity. 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 conditions then prevailing
in the computer industry and the relevant capital markets.
The Company will continue to explore ways to accomplish its
business objectives through the acquisition of strategic businesses or
the divestiture of non-strategic operations. In line with this business
objective the Company announced on April 13, 1995, that it proposed to
sell a number of its international product integration and maintenance
operations to AmeriData, a leading U.S.-based integrator. While the
terms of the agreement remain to be finalized, it is estimated that
AmeriData will pay approximately $25 to $30 million for these
operations. The purchase is expected to be concluded in the second half
of 1995. The Company believes this sale is an integral part of its
strategy to focus on its core competencies in electronic commerce,
product data management, and client-server solutions. As a result of
this proposed disposition, steps will be taken to
<PAGE>
CONTROL DATA SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Unaudited) (Continued)
reduce certain headquarters, administrative, and technical support costs
to align with the reduced revenue base going forward. It is not
expected that this activity will require additional restructuring
charges. The net cash received by the Company is estimated to be
approximately $15 to $20 million. It is expected that the AmeriData
transaction will not result in a significant gain or loss to the
Company.
The following tables represent the proforma results for the second
quarter and first six months of 1995 and 1994, respectively, based on
the elimination of operations proposed to be sold by the Company to
AmeriData (unaudited):
1995 Proforma Revenues and Gross Profits
<TABLE>
<CAPTION>
(Dollars in thousands) 2nd Quarter Year-to-Date
As As
REVENUES Reported Proforma Reported Proforma
<S> <C> <C> <C> <C>
Software and services.... $ 46,938 $ 38,292 $ 86,402 $ 67,882
Maintenance and support.. 20,506 15,399 40,778 31,166
Hardware products........ 61,644 24,278 131,972 48,056
Total revenues....... $ 129,088 $ 77,969 $ 259,152 $ 147,104
Gross profit............. $ 32,605 $ 24,620 $ 66,202 $ 47,089
REVENUE DISTRIBUTION
Software and services.... 36.4% 49.1% 33.4% 46.1%
Maintenance and support.. 15.9% 19.8% 15.7% 21.2%
Hardware products........ 47.7% 31.1% 50.9% 32.7%
Total revenues....... 100.0% 100.0% 100.0% 100.0%
Gross profit............. 25.3% 31.6% 25.5% 32.0%
</TABLE>
1994 Proforma Revenues and Gross Profits
<TABLE>
<CAPTION>
(Dollars in thousands) 2nd Quarter Year-to-Date
As As
REVENUES Reported Proforma Reported Proforma
<S> <C> <C> <C> <C>
Software and services.... $ 37,968 $ 29,173 $ 74,107 $ 56,372
Maintenance and support.. 23,713 18,080 47,466 36,733
Hardware products........ 69,593 36,536 155,331 72,868
Total revenues....... $ 131,274 $ 83,789 $ 276,904 $ 165,973
Gross profit............. $ 37,345 $ 27,293 $ 75,950 $ 52,303
REVENUE DISTRIBUTION
Software and services.... 28.9% 34.8% 26.8% 34.0%
Maintenance and support.. 18.1% 21.6% 17.1% 22.1%
Hardware products........ 53.0% 43.6% 56.1% 43.9%
Total revenues....... 100.0% 100.0% 100.0% 100.0%
Gross profit............. 28.4% 32.6% 27.4% 31.5%
</TABLE>
<PAGE>
PART II
OTHER INFORMATION
ITEM 4 Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of the Registrant's stockholders was
held on May 12, 1995.
(b) Proxies for the Annual Meeting were solicited pursuant to
Regulation 14A under the Securities Exchange Act of 1934, there
was no solicitation in opposition to management's nominees, and
the following persons were elected directors of the Registrant
to serve until the next annual meeting of stockholders and
until their successors shall have been duly elected and
qualified:
<TABLE>
<CAPTION>
Nominee Number of Votes For Number of Votes Withheld
<S> <C> <C>
W. Donald Bell 10,620,710 188,048
Grant A. Dove 10,620,522 188,236
Marcelo A. Gumucio 10,620,637 188,121
W. Douglas Hajjar 10,621,386 187,372
Keith A. Libbey 10,621,590 187,168
James E. Ousley 10,619,073 189,685
</TABLE>
(c) At the Annual Meeting, the stockholders approved the
appointment of KPMG Peat Marwick LLP as the Company's
independent auditors for the current fiscal year by a vote of
10,765,059 For, 23,765 Against, 19,934 Abstentions and no
broker nonvotes.
ITEM 6 Exhibits and Reports on Form 8-K
(a) Exhibits
11 Computation of Earnings per Common Share
27 Financial Data Schedule
(b) Reports on Form 8-K
A report on Form 8-K dated April 25, 1995 was filed in the
Registrant's fiscal quarter ended June 30, 1995 reporting under
Item 8-Change in Fiscal Year a change in its fiscal year end
from the Saturday closest to December 31 to a calendar fiscal
year ending December 31.
<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 10, 1995 /s/ J. F. KILLORAN
J. F. Killoran
Vice President and Chief Financial Officer
(Principal Accounting Officer)
<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 JUNE 30, 1995.
(11) - Computation of Earnings Per Common Share
(27) - Financial Data Schedule
<PAGE>
EXHIBIT 11.0
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
June 30, July 2, June 30, July 2,
1995 1994 1995 1994
<S> <C> <C> <C>
Net earnings applicable to
common shares:
Net earnings $ 2,261 $ 683 $ 4,460 $ 2,042
Primary:
Shares for common and common share
equivalent earnings per share (1):
Weighted average number of
common shares outstanding 12,695,134 13,720,058 12,964,795 13,734,123
Dilutive effect of outstanding
stock options and warrants 182,542 183,784 0 127,683
12,877,676 13,903,842 12,964,795 13,861,806
Net earnings per common share
and common share equivalents $ 0.18 $ 0.05 $ 0.35 $ 0.15
Fully Diluted:
Shares for common and common share
equivalent earnings per share (2):
Weighted average number of
common shares outstanding 12,695,134 13,720,058 12,964,795 13,734,123
Dilutive effect of outstanding
stock options and warrants 182,542 183,784 117,627 127,683
12,877,676 13,903,842 13,082,422 13,861,806
Net earnings per common share
and common share equivalents $ 0.18 $ 0.05 $ 0.34 $ 0.15
<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>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM THE REGISTRANT'S
FINANCIAL STATEMENTS FOR ITS SECOND QUARTER OF
FISCAL YEAR 1995 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS
<CAPTION>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Dec-31-1995
<PERIOD-END> Jun-30-1995
<CASH> 83,304
<SECURITIES> 0
<RECEIVABLES> 121,521
<ALLOWANCES> 0
<INVENTORY> 39,602
<CURRENT-ASSETS> 251,067
<PP&E> 23,528
<DEPRECIATION> 0
<TOTAL-ASSETS> 300,811
<CURRENT-LIABILITIES> 160,644
<BONDS> 0
<COMMON> 139
0
0
<OTHER-SE> 78,865
<TOTAL-LIABILITY-AND-EQUITY> 300,811
<SALES> 156,549
<TOTAL-REVENUES> 259,152
<CGS> 113,833
<TOTAL-COSTS> 257,983
<OTHER-EXPENSES> (4,918)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 727
<INCOME-PRETAX> 5,360
<INCOME-TAX> 900
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,460
<EPS-PRIMARY> 0.35
<EPS-DILUTED> 0.34
</TABLE>
