<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 SEPTEMBER 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: 12,880,154 shares of
Common Stock, $0.01 par value per share, as of November 7, 1995.
<PAGE>
CONTROL DATA SYSTEMS, INC.
FORM 10-Q
September 30, 1995
INDEX
Page
Part I - Financial Information:
Consolidated Statements of Operations -
Three and nine months ended September 30, 1995
and October 1, 1994....................................... 2
Consolidated Balance Sheets -
September 30, 1995 and December 31, 1994.................. 3
Consolidated Statements of Cash Flows -
Nine months ended September 30, 1995 and October 1, 1994.. 4
Notes to Consolidated Financial Statements................ 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 10
Part II - Other Information............................... 17
Signature................................................. 18
Exhibit Index............................................. 19
<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 Nine Months Ended
September 30, October 1, September 30, October 1,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
REVENUES:
Net sales and rentals.................. $ 55,191 $ 63,693 $ 211,740 $ 239,347
Services............................... 50,049 49,953 152,652 151,203
Total revenues....................... 105,240 113,646 364,392 390,550
COST OF REVENUES:
Net sales and rentals.................. 37,163 47,585 150,996 175,050
Services............................... 38,915 38,088 118,032 111,577
Total cost of revenues............... 76,078 85,673 269,028 286,627
Gross profit......................... 29,162 27,973 95,364 103,923
OPERATING EXPENSES:
Selling, general and
administrative........................ 28,261 30,741 88,819 97,432
Technical.............................. 2,445 3,190 6,920 10,420
Total operating expenses............. 30,706 33,931 95,739 107,852
Loss from operations................. (1,544) (5,958) (375) (3,929)
OTHER INCOME (EXPENSES):
Interest expense....................... (236) (316) (963) (979)
Interest income........................ 1,263 1,058 4,241 3,351
Other income, net...................... 1,449 790 3,389 104
Total other income, net.............. 2,476 1,532 6,667 2,476
Earnings (loss) before income taxes.. 932 (4,426) 6,292 (1,453)
PROVISION FOR INCOME TAXES.............. 300 549 1,200 1,480
Net earnings (loss).................. $ 632 $ (4,975) $ 5,092 $ (2,933)
Primary earnings (loss) per common share
and common share equivalents......... $ 0.05 $ (0.36) $ 0.40 $ (0.21)
Fully diluted earnings (loss) per common
share and common share equivalents... $ 0.05 $ (0.36) $ 0.37 $ (0.21)
Weighted average common shares
outstanding (in thousands)
Primary.............................. 13,064 13,780 12,897 13,734
Fully diluted........................ 13,487 13,780 13,627 13,734
</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
September 30, December 31,
1995 1994
(Unaudited)
<S> <C> <C>
Current assets:
Cash and short-term investments................ $ 83,642 $ 85,415
Trade and other receivables.................... 87,488 121,829
Inventories.................................... 23,329 38,241
Prepaid expenses and other current assets...... 6,277 6,756
Total current assets......................... 200,736 252,241
Investments and advances......................... 975 133
Property and equipment, net...................... 17,367 20,727
Leased and data center equipment, net............ 1,047 1,901
Noncurrent trade and other receivables........... 4,536 7,330
Goodwill, net.................................... - 10,187
Other noncurrent assets.......................... 9,647 8,049
Total assets................................. $ 234,308 $ 300,568
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Notes payable.................................. $ 1,073 $ 2,933
Accounts payable............................... 18,589 41,004
Customer advances and deferred income.......... 10,376 24,254
Accrued taxes.................................. 6,854 4,515
Accrued salaries and wages..................... 14,062 14,320
Restructure reserves, current portion.......... 23,457 36,698
Other accrued expenses......................... 27,675 35,176
Total current liabilities.................... 102,086 158,900
Deferred income taxes............................ 643 616
Restructure reserves, less current portion....... 7,519 18,240
Pension liabilities.............................. 36,081 34,019
Other noncurrent liabilities..................... 5,152 6,487
Total liabilities............................ 151,481 218,262
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 12,801,058 and 13,803,492
shares as of September 30, 1995 and
December 31, 1994, respectively.............. 140 138
Additional paid-in capital..................... 162,123 161,105
Retained earnings.............................. (66,149) (71,241)
Minimum pension liability adjustment........... (6,957) (6,957)
Foreign currency translation adjustment........ 781 (739)
Treasury stock, at cost........................ (7,111) -
Total stockholders' equity................... 82,827 82,306
Total liabilities and stockholders' equity... $ 234,308 $ 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>
Nine Months Ended
September 30, October 1,
1995 1994
<S> <C> <C>
Cash Flows from Operating Activities:
Net earnings (loss)................................ $ 5,092 $ (2,933)
Adjustments to reconcile net earnings (loss) to net
cash provided by (used in) operating activities:
Depreciation................................... 8,626 11,251
Amortization................................... 1,014 3,437
Foreign currency transaction (gain) loss....... (524) (798)
Equity in (gains) losses of affiliates......... (832) 714
Restructure reserves utilized.................. (17,380) (16,276)
(Gain) loss on sale of marketable securities
and other assets............................. (336) 342
Net change in working capital items............ 4,444 3,967
Net change in noncurrent trade receivables..... 2,833 2,964
Net change in other noncurrent assets.......... (1,904) (1,920)
Other.......................................... 112 (791)
Net cash provided by (used in) operating
activities.................................. 1,145 (43)
Cash Flows from Investing Activities:
Expended for property and equipment................ (7,601) (5,956)
Expended for leased and data center equipment...... (1,485) (769)
Investment in affiliates........................... - (518)
Proceeds from sales of property and equipment...... 677 795
Acquisitions of businesses, net of cash provided... (546) (3,844)
Dispostions of businesses, net of cash given....... 8,139 -
Change in short-term investments................... 1,726 1,679
Net cash provided by (used in) investing
activities.................................. 910 (8,613)
Cash Flows from Financing Activities:
Borrowings under short-term financing
arrangements, net 3,389 3,732
Proceeds from issuance of common stock, net of
issuance costs................................... 1,020 1,296
Purchase of treasury stock......................... (7,111) -
Net cash (used in) provided by financing
activities.................................. (2,702) 5,028
Effect of Exchange Rate Changes on Cash.............. 580 322
Net change in cash and cash equivalents......... (67) (3,306)
Cash and cash equivalents, beginning of period.. 17,277 19,164
Cash and cash equivalents, end of period........ 17,210 15,858
Short-term investments.......................... 66,412 60,792
Cash and short-term investments, end of period....... $ 83,622 $ 76,650
</TABLE>
(Continued)
<PAGE>
CONTROL DATA SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, October 1,
1995 1994
<S> <C> <C>
Net Change in Working Capital Items:
Trade and other receivables........................ $ 9,695 $ 22,677
Inventories........................................ 3,011 12,106
Prepaid expenses and other current assets.......... (213) 294
Accounts payable................................... 3,759 (16,614)
Customer advances and deferred income.............. (11,064) (6,410)
Accrued taxes...................................... 4,995 (2,420)
Accrued salaries and wages......................... (295) 947
Other accrued expenses............................. (5,444) (6,613)
Net change in working capital items............... $ 4,444 $ 3,967
Supplemental Disclosures of Cash Flow Information:
Cash paid (received) during the period for:
Interest paid.................................... $ 968 $ 989
Income taxes paid................................ 779 2,330
Income taxes refunded............................ (7,708) (646)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
CONTROL DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
SEPTEMBER 30, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The financial statements of Control Data Systems, Inc. (the
"Company") include the accounts of all majority-owned subsidiaries. All
significant intercompany transactions have been eliminated.
Net Earnings (Loss) Per Share
The net earnings (loss) per common share and common share equivalents
is computed by dividing net earnings (loss) 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
Issuance of common stock under the
Employee Stock Purchase Plan..... 13 - 13 - 77 - - 77
Exercises of stock options........ 72 - 72 1 403 - - 404
Foreign currency translation
adjustment....................... - - - - - - 2,710 2,710
Net earnings...................... - - - - - 632 - 632
Balance at September 30, 1995...... 12,801 1,185 13,986 $ 140 $ 162,123 $ (66,149) $ (13,287) $ 82,827
</TABLE>
<PAGE>
CONTROL DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
SEPTEMBER 30, 1995
2. STOCKHOLDERS' EQUITY (Continued)
<TABLE>
<CAPTION>
*Other Stockholders' Equity Items
Minimum Foreign
Pension Currency
Liability Translation Treasury
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)
Foreign currency translation
adjustment....................... - 2,710 - 2,710
Balance at September 30, 1995...... $ (6,957) $ 781 $ (7,111) $(13,287)
</TABLE>
3. INVESTMENT IN METAPHASE TECHNOLOGY, INC.
In 1992, the Company and Structural Dynamics Research Corporation
("SDRC") established a joint venture company, Metaphase Technology, Inc.
("Metaphase" or the "joint venture"), to develop and market product data
management software worldwide. The Company owns 50% of Metaphase and
accounts for this investment on the equity basis. Following are
condensed financial data for Metaphase for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
(Dollars in thousands) 1995 1994 1995 1994
<S> <C> <C> <C> <C>
Net sales................... $ 5,649 $ 2,030 $ 10,098 $ 4,344
Earnings (loss) before
income taxes.............. 2,534 65 978 (1,420)
Net earnings (loss)......... 2,534 63 966 (1,427)
</TABLE>
<TABLE>
<CAPTION>
September 30, December 31,
(Dollars in thousands) 1995 1994
<S> <C> <C>
Current assets.............. $ 5,093 $ 3,177
Noncurrent assets........... 749 551
Current liabilities......... 1,263 2,244
Noncurrent liabilities...... 8,834 6,760
</TABLE>
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
SEPTEMBER 30, 1995
5. DISPOSITIONS
On August 31, 1995, the Company completed the sale of five
international product distribution operations to AmeriData Technologies,
Inc. ("AmeriData"). The Company sold to AmeriData all of the issued and
outstanding capital stock of Control Data operations in Austria,
Norway, and United Kingdom (Plc). Additionally, the Company sold to
AmeriData certain assets and the assumption of certain liabilities of
Control Data operations in Mexico, Canada, and United Kingdom (Ltd).
The total consideration received for this disposition was $11.2 million
in cash, subject to adjustment, when the August 31, 1995 book value of
the applicable assets and liabilities were agreed upon by the parties
following the closing. Net identifiable assets and liabilities
transferred to AmeriData were $47.2 million and $41.6 million,
respectively. On October 31, 1995, post-closing adjustments of $1.5
million, to reduce the proceeds received by the Company, were agreed
upon by the parties. These adjustments will be reflected in the
Company's consolidated financial statements in fourth quarter 1995.
Results of operations, assets, and liabilities for the operations sold
are included in the Company's consolidated financial statements through
the effective date of disposition.
Also included in the August 31, 1995 sale agreement was a provision
for the sale of international product distribution operations in Greece
and Portugal to AmeriData. On October 31, 1995, the Company completed
the sale to AmeriData all of the issued and outstanding capital stock of
the Control Data operation in Portugal. The total consideration
received for this disposition was approximately $1.0 million in cash,
which amount is subject to adjustment, if needed, when the October 31,
1995 book value of the applicable assets and liabilities are agreed upon
by the parties following the closing. The sale of operations in Greece
is anticipated to close in November 1995, with an effective closing date
expected to be October 31, 1995.
The following represents the unaudited pro forma results of operations
and assumes that the August 31, 1995, and October 31, 1995, dispositions
described above occurred as of the beginning of the respective periods.
<TABLE>
<CAPTION>
Nine Months
Ended Year Ended
September 30, December 31,
(Dollars in thousands, except per share data) 1995 1994
<S> <C> <C>
Revenues........................... $ 235,626 $ 336,402
Net earnings (loss)................ 9,424 (91,478)
Net earnings (loss) per share...... $ 0.73 $ (6.66)
Weighted average common shares
outstanding (in thousands)....... 12,897 13,740
</TABLE>
6. RESTRUCTURING RESERVES, CURRENT AND NONCURRENT
Over the past several years, 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. Noncash items and net
reclassifications and transfers in the third quarter 1995 consisted
primarily of activities associated with the dispositions discussed in
footnote 5. The combination of proceeds on the dispositions of $11.2
million and the reclassification of other cash items of $9.5 million,
mainly severance actions planned in the sold international operations
which were no longer necessary given the sale, offset the noncash
activity associated with the transaction. Noncash activity in the third
quarter 1995 included the write-off of goodwill of $9.8 million, net
book value of operations sold to AmeriData on August 31, 1995, of $5.6
million, foreign currency translation balances of $4.0 million, and
other net book value
<PAGE>
CONTROL DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
SEPTEMBER 30, 1995
6. RESTRUCTURING RESERVES, CURRENT AND NONCURRENT (Continued)
adjustments of $0.5 million. Restructuring related cash payments for
the AmeriData transaction totalled approximately $0.8 million in the
third quarter 1995.
Cash outlays in the third quarter 1995 consisted primarily of $3.4
million for severance costs related to the reduction of the worldwide
workforce by approximately 90 individuals and $4.7 million for lease and
other facility obligations related to commitments under leases
throughout the United States, Canada, and Europe. Cash outlays for the
first nine months of 1995 totaled $17.4 million, consisting primarily of
$9.3 million for severance costs related to the reduction of the
worldwide workforce by approximately 200 individuals and $6.7 million
for lease and other facility obligations related to commitments under
leases throughout the United States, Canada, and Europe. Cash outlays
for the third quarter and the first nine months 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 the
AmeriData transaction discussed in note 5 was negotiated.
The following table represents the Company's restructuring activities
for the first nine months 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
Noncash items................ - (576) - (3,953) (15,398) (19,927)
Reclassifications
and transfers, net.......... (6,802) 576 (3,089) 3,642 16,873 11,200
Foreign currency
translation adjustment...... (258) - (55) 311 2 -
Cash payments................ (3,435) - (4,665) - (567) (8,667)
Balance at September 30, 1995. $ 18,646 $ - $ 4,547 $ - $ 7,783 $ 30,976
</TABLE>
The remaining restructuring reserve balance of $31.0 million
primarily consists of cash items. It is estimated that the Company will
utilize approximately $5 to $6 million of these reserves by year end
1995.
<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 Nine Months Ended
September 30, October 1, September 30, October 1,
1995 1994 Change 1995 1994 Change
<S> <C> <C> <C> <C> <C> <C>
Software and services.... $ 43.0 $ 35.8 20.1 % $ 129.4 $ 109.9 17.7 %
Maintenance and support.. 18.7 22.7 (17.6)% 59.5 70.2 (15.2)%
Hardware products........ 43.5 55.1 (21.1)% 175.5 210.4 (16.6)%
Total revenues........ $ 105.2 $ 113.6 (7.4)% $ 364.4 $ 390.5 (6.7)%
</TABLE>
Revenues by Geography
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, October 1, September 30, October 1,
1995 1994 Change 1995 1994 Change
<S> <C> <C> <C> <C> <C> <C>
Americas................. $ 40.7 $ 48.3 (15.7)% $ 134.2 $ 178.4 (24.8)%
Europe................... 53.5 53.3 0.4 % 193.3 166.7 16.0 %
Asia..................... 11.0 12.0 (8.3)% 36.9 45.4 (18.7)%
Total revenues........ $ 105.2 $ 113.6 (7.4)% $ 364.4 $ 390.5 (6.7)%
</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 third quarter 1995 of $105.2 million decreased 7.4% from
third quarter 1994 revenues of $113.6 million. Revenues for the first
nine months of 1995 totaled $364.4 million, a decrease of 6.7% from the
$390.5 million of revenues in the first nine months of 1994. The
revenue decline in the third quarter and the first nine 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 and
hardware maintenance support was attributable to lower revenues in the
Americas and Asia. In addition, a portion of the revenue decline in the
third quarter and the first nine months of 1995 can be attributed to the
exclusion of the September results of the five international operations
sold to AmeriData on August 31, 1995, which month's results are
traditionally the strongest of the quarter. The increase in software
and services revenues was evident in all three geographical areas.
Cost of Revenues and Gross Profit
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, October 1, September 30, October 1,
1995 1994 Change 1995 1994 Change
<S> <C> <C> <C> <C> <C> <C>
Cost of revenues........ $ 76.0 $ 85.6 (11.2) % $ 269.0 $ 286.6 (6.1)%
Percentage of revenues.. 72.2 % 75.4 % 73.8 % 73.4 %
Gross profit............ $ 29.2 $ 28.0 4.3 % $ 95.4 $ 103.9 (8.2)%
Percentage of revenues.. 27.8 % 24.6 % 26.2 % 26.6 %
</TABLE>
Cost of revenues for third quarter 1995 decreased by 11.2% over the
comparable period in 1994. Cost of revenues for the first nine months
of 1995 decreased by 6.1% compared to the same period in 1994. Gross
profit margins for third quarter 1995 increased by 4.3% as compared to
the third quarter 1994. Gross profit margins for the first nine months
of 1995 decreased by 8.2% as compared to the same period in 1994. The
primary factor contributing to the cost of revenues and gross margins
decreases in the first nine months of 1995 was the decline in total
revenues, primarily in hardware products sales, offset in part by an
increase in software and services sales and the exclusion from the
September results of lower profit margin hardware product sales
associated with the five international operations sold to AmeriData.
Operating Expenses
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, October 1, September 30, October 1,
1995 1994 Change 1995 1994 Change
<S> <C> <C> <C> <C> <C> <C>
Selling, general and
administrative........ $ 28.3 $ 30.7 (7.8)% $ 88.8 $ 97.4 (8.8)%
Percentage of revenues.. 26.9 % 27.0 % 24.4 % 24.9 %
Technical............... $ 2.5 $ 3.2 (21.9)% $ 7.0 $ 10.4 (32.7)%
Percentage of revenues.. 2.4 % 2.8 % 1.9 % 2.7 %
</TABLE>
Selling, general and administrative (SG&A). The decrease in SG&A
expense for third quarter and the first nine 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, the recovery of $0.7 million of
accounts receivable which had previously been written-off, and the
exclusion of September operating expenses associated with the five
international operations sold to AmeriData.
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 Nine Months Ended
September 30, October 1, September 30, October 1,
1995 1994 Change 1995 1994 Change
<S> <C> <C> <C> <C> <C> <C>
Nonoperating income.... $ 2.5 $ 1.6 56.3 % $ 6.7 $ 2.5 168.0 %
Percentage of revenues. 2.4 % 1.4 % 1.8 % 0.6 %
</TABLE>
Interest expense. Interest expense decreased in third quarter and the
first nine months of 1995 versus the comparable periods in 1994. The
decrease is primarily the result of lower average daily short-term
borrowings due in part to the sale of five international operations to
AmeriData.
Interest income. Interest income increased in third quarter and the
first nine months 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 $.7 million and $3.3
million, respectively in third quarter 1995 and the first nine months of
1995 versus the comparable periods in 1994. The primary factors for the
increase in third quarter relates to a gain in Metaphase of $1.3 million
in third quarter 1995 and a favorable foreign currency exchange gain of
$0.7 million in third quarter 1994 versus none in third quarter 1995.
The increase in the first nine months of 1995 is attributable to a gain
of $0.8 million in 1995 for the increase in the market value of certain
short-term investments versus a $1.0 million loss in the comparable
period in 1994, a gain of $0.4 million in 1995 for the sale of land, a
gain in affiliates of $0.7 in the first nine months of 1995 versus a
loss of $0.7 million in the first nine months of 1994, and a favorable
foreign currency exchange gain of $0.2 million in the first nine months
of 1995 versus a $0.8 million gain in the comparable period in 1994.
Provision for Income Taxes
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, October 1, September 30, October 1,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Provision for Income Taxes.. $ 0.3 $ 0.6 $ 1.2 $ 1.5
Percentage of revenues...... 0.3 % 0.5 % 0.3 % 0.4 %
</TABLE>
The provision for income taxes in third quarter and the first nine
months 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 Nine Months Ended
September 30, October 1, September 30, October 1,
(Earnings per share in dollars) 1995 1994 1995 1994
<S> <C> <C> <C> <C>
Net earnings (loss)......... $ 0.6 $ (5.0) $ 5.1 $ (2.9)
Percentage of revenues...... 0.6 % (4.4)% 1.4 % (0.7)%
Earnings (loss) per share...
Primary.................. $ 0.05 $ (0.36) $ 0.40 $ (0.21)
Fully diluted............ $ 0.05 $ (0.36) $ 0.37 $ (0.21)
</TABLE>
<PAGE>
CONTROL DATA SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Unaudited) (Continued)
(Dollars in millions)
Net earnings for third quarter and the first nine months of 1995 are
higher than the comparable periods in 1994. The primary factors for the
increase in third quarter 1995 were higher gross margins, lower
operating expenses, and higher nonoperating income versus the comparable
period in 1994. The increase in the first nine months of 1995 versus
1994 is attributable to lower operating expenses and higher nonoperating
income. Also contributing to higher earnings for the third quarter and
the first nine months of 1995 versus the comparable period in 1994 is
the exclusion of September operating expenses and interest expense
associated with the five international operations sold to AmeriData.
Operating results for the nine months ended September 30, 1995 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1995.
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 disposition of certain international operations.
For additional information regarding this disposition, see footnote
5 of the Notes to Consolidated Financial Statements and 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 decreased in the third quarter of 1995 from the
comparable period in 1994 and were relatively unchanged for the first
nine months of 1995 from the same period in 1994. Gross profit margins,
as a percentage of sales, increased in the third quarter of 1995 from
the comparable period in 1994. Gross profit margins, as a percentage of
sales, were relatively unchanged for the first nine months of 1995
from the same period in 1994. Gross profit margins as a percentage
of revenues have increased as expected following the 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 third quarter and first nine months of 1995 from the year ago
periods. SG&A expenses are expected to decline in 1995 due to
restructuring actions taken in the fourth quarter of 1994 and the
disposition of certain international operations.
Technical expenses. Technical spending declined in the third quarter
and first nine months 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.
<PAGE>
CONTROL DATA SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Unaudited) (Continued)
(Dollars in millions)
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
disposition of certain international operations. The AmeriData
transaction did not have a material impact on deferred tax assets.
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 $83.6 million at
September 30, 1995 and represented 35.7% of total assets. The Company
has no long-term debt. Stockholders' equity at September 30, 1995 was
$82.8 million. Total cash and short-term investment balances decreased
by $1.8 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 $17.4 million, capital
expenditures of $9.1 million, the acquisition of Binary Systems Limited
of $0.5 million, partially offset by a positive cash flow of $8.1
million from the disposition of certain international operations to
AmeriData, $4.4 million from working capital items, depreciation and
amortization of $9.6 million, net earnings of $5.1 million, and an
increase in short-term borrowings of $3.4 million. Stockholders' equity
increased by $0.5 million in the first nine months of 1995. The
increase is primarily due to the purchase of treasury stock of $7.1
million, offset in part by a foreign currency translation adjustment of
$1.5 million, net earnings of $5.1 million, and common stock purchases
of $1.0 million.
As of September 30, 1995, the Company has available up to $20.7
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 $31.0 million of restructuring obligations as of
September 30, 1995, $23.5 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. Restructuring payments will extend into 1997 to satisfy various
long-term real estate obligations. 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.
<PAGE>
CONTROL DATA SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Unaudited) (Continued)
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 has sold international product integration and
maintenance operations to AmeriData, a leading U.S.-based integrator.
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, steps
will be taken to 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 AmeriData transaction did not result in a
significant gain or loss to the Company.
The following tables represent the pro forma results for the first
three quarters and first nine months of 1995 and 1994, respectively,
based on the elimination of certain international operations defined in
the contract between the Company and AmeriData located in Austria,
Canada, Greece, Mexico, Norway, Portugal, and United Kingdom
(unaudited):
1995 Pro Forma Revenues and Gross Profits
<TABLE>
<CAPTION>
(Dollars in thousands) 1st Quarter 2nd Quarter
As As
REVENUES Reported Pro Forma Reported Pro Forma
<S> <C> <C> <C> <C>
Software and services.... $ 39,464 $ 30,621 $ 46,938 $ 41,086
Maintenance and support.. 20,272 16,478 20,506 16,087
Hardware products........ 70,328 26,727 61,644 26,270
Total revenues....... $ 130,064 $ 73,826 $ 129,088 $ 83,443
Gross profit............. $ 33,597 $ 24,028 $ 32,605 $ 25,988
REVENUE DISTRIBUTION
Software and services.... 30.3% 41.5% 36.4% 49.2%
Maintenance and support.. 15.6% 22.3% 15.9% 19.3%
Hardware products........ 54.1% 36.2% 47.7% 31.5%
Total revenues....... 100.0% 100.0% 100.0% 100.0%
Gross profit............. 25.8% 32.5% 25.3% 31.1%
</TABLE>
<TABLE>
<CAPTION>
(Dollars in thousands) 3rd Quarter Year-to-Date
As As
REVENUES Reported Pro Forma Reported Pro Forma
<S> <C> <C> <C> <C>
Software and services.... $ 43,037 $ 39,135 $ 129,439 $ 110,842
Maintenance and support.. 18,703 15,996 59,481 48,561
Hardware products........ 43,500 23,226 175,472 76,223
Total revenues....... $ 105,240 $ 78,357 $ 364,392 $ 235,626
Gross profit............. $ 29,162 $ 26,337 $ 95,364 $ 76,353
REVENUE DISTRIBUTION
Software and services.... 40.9% 50.0% 35.5% 47.0%
Maintenance and support.. 17.8% 20.4% 16.3% 20.6%
Hardware products........ 41.3% 29.6% 48.2% 32.4%
Total revenues....... 100.0% 100.0% 100.0% 100.0%
Gross profit............. 27.7% 33.6% 26.2% 32.4%
</TABLE>
<PAGE>
CONTROL DATA SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Unaudited) (Continued)
1994 Pro Forma Revenues and Gross Profits
<TABLE>
<CAPTION>
(Dollars in thousands) 1st Quarter 2nd Quarter
As As
REVENUES Reported Pro Forma Reported Pro Forma
<S> <C> <C> <C> <C>
Software and services.... $ 36,139 $ 28,082 $ 37,968 $ 31,090
Maintenance and support.. 23,753 19,248 23,713 18,906
Hardware products........ 85,738 38,782 69,593 39,248
Total revenues....... $ 145,630 $ 86,112 $ 131,274 $ 89,244
Gross profit............. $ 38,605 $ 26,557 $ 37,345 $ 28,685
REVENUE DISTRIBUTION
Software and services.... 24.8% 32.6% 28.9% 34.8%
Maintenance and support.. 16.3% 22.4% 18.1% 21.2%
Hardware products........ 58.9% 45.0% 53.0% 44.0%
Total revenues....... 100.0% 100.0% 100.0% 100.0%
Gross profit............. 26.5% 30.8% 28.4% 32.1%
</TABLE>
<TABLE>
<CAPTION>
(Dollars in thousands) 3rd Quarter Year-to-Date
As As
REVENUES Reported Pro Forma Reported Pro Forma
<S> <C> <C> <C> <C>
Software and services.... $ 35,830 $ 30,228 $ 109,937 $ 89,400
Maintenance and support.. 22,694 16,581 70,160 54,735
Hardware products........ 55,122 25,644 210,453 103,674
Total revenues....... $ 113,646 $ 72,453 $ 390,550 $ 247,809
Gross profit............. $ 27,973 $ 20,489 $ 103,923 $ 75,731
REVENUE DISTRIBUTION
Software and services.... 31.5% 41.7% 28.1% 36.1%
Maintenance and support.. 20.0% 22.9% 18.0% 22.1%
Hardware products........ 48.5% 35.4% 53.9% 41.8%
Total revenues....... 100.0% 100.0% 100.0% 100.0%
Gross profit............. 24.6% 28.3% 26.6% 30.6%
</TABLE>
<PAGE>
PART II
OTHER INFORMATION
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 "Date of Report: August 31, 1995" was
filed in the Registrant's fiscal quarter ended September 30,
1995 reporting under Item 2-Acquisition or Disposition of
Assets the disposition of certain international product
integration and maintenance operations to AmeriData
Technologies, Inc.
<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: November 14, 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 SEPTEMBER 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 Nine Months Ended
September 30, October 1, September 30, October 1,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Net earnings (loss) applicable to
common shares:
Net earnings (loss) $ 632 $ (4,975) $ 5,092 $ (2,933)
Primary:
Shares for common and common share
equivalent earnings (loss) per
share (1):
Weighted average number of
common shares outstanding 12,762,272 13,780,379 12,896,545 13,734,254
Dilutive effect of outstanding
stock options and warrants 302,003 - - -
13,064,275 13,780,379 12,896,545 13,734,254
Net earnings (loss) per common share
and common share equivalents $ 0.05 $ (0.36) $ 0.40 $ (0.21)
Fully Diluted:
Shares for common and common share
equivalent earnings (loss) per
share (2):
Weighted average number of
common shares outstanding 12,762,272 13,780,379 12,896,545 13,734,254
Dilutive effect of outstanding
stock options and warrants 724,345 - 730,409 -
13,486,617 13,780,379 13,626,954 13,734,254
Net earnings (loss) per common share
and common share equivalents $ 0.05 $ (0.36) $ 0.37 $ (0.21)
<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 THIRD QUARTER OF
FISCAL YEAR 1995 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS
<CAPTION>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Dec-31-1995
<PERIOD-END> Sep-30-1995
<CASH> 83,642
<SECURITIES> 0
<RECEIVABLES> 87,488
<ALLOWANCES> 0
<INVENTORY> 23,329
<CURRENT-ASSETS> 200,736
<PP&E> 18,414
<DEPRECIATION> 0
<TOTAL-ASSETS> 234,308
<CURRENT-LIABILITIES> 102,086
<BONDS> 0
<COMMON> 140
0
0
<OTHER-SE> 82,687
<TOTAL-LIABILITY-AND-EQUITY> 234,308
<SALES> 211,740
<TOTAL-REVENUES> 364,392
<CGS> 150,996
<TOTAL-COSTS> 364,767
<OTHER-EXPENSES> (7,630)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 963
<INCOME-PRETAX> 6,292
<INCOME-TAX> 1,200
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,092
<EPS-PRIMARY> 0.40
<EPS-DILUTED> 0.37
</TABLE>
