<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 MARCH 31, 1996
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 date: 13,367,520
shares of Common Stock, $0.01 par value per share, as of May 6, 1996.
<PAGE>
CONTROL DATA SYSTEMS, INC.
FORM 10-Q
March 31, 1996
INDEX
Page
Part I - Financial Information:
Consolidated Statements of Operations -
Three months ended March 31, 1996 and March 31, 1995. 2
Consolidated Balance Sheets -
March 31, 1996 and December 31, 1995................. 3
Consolidated Statements of Cash Flows -
Three months ended March 31, 1996 and March 31, 1995. 4
Notes to Consolidated Financial Statements............... 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 9
Part II - Other Information.............................. 16
Signature................................................ 17
Exhibit Index............................................ 18
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
March 31, March 31,
1996 1995
<S> <C> <C>
REVENUES:
Net sales and rentals.................. $ 36,629 $ 81,557
Services............................... 41,625 48,507
Total revenues....................... 78,254 130,064
COST OF REVENUES:
Net sales and rentals.................. 20,764 59,252
Services............................... 31,824 37,215
Total cost of revenues............... 52,588 96,467
Gross profit......................... 25,666 33,597
OPERATING EXPENSES:
Selling, general and
administrative........................ 21,409 30,172
Technical.............................. 3,260 2,338
Total operating expenses............. 24,669 32,510
Earnings from operations............. 997 1,087
OTHER INCOME (EXPENSES):
Interest expense....................... (112) (274)
Interest income........................ 1,207 1,386
Other income, net...................... 1,186 700
Total other income, net.............. 2,281 1,812
Earnings before income taxes......... 3,278 2,899
PROVISION FOR INCOME TAXES.............. 400 700
Net earnings......................... $ 2,878 $ 2,199
Primary earnings per common share
and common share equivalents......... $ 0.20 $ 0.17
Fully diluted earnings per common
share and common share equivalents... $ 0.20 $ 0.17
Weighted average common shares
outstanding (in thousands):..........
Primary.............................. 14,287 13,237
Fully diluted........................ 14,310 13,237
</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 share data)
<TABLE>
<CAPTION>
ASSETS
March 31, December 31,
1996 1995
(Unaudited)
<S> <C> <C>
Current assets:
Cash and short-term investments................ $ 79,475 $ 84,034
Trade and other receivables.................... 81,964 85,235
Inventories.................................... 17,679 19,381
Prepaid expenses and other current assets...... 5,997 5,893
Total current assets......................... 185,115 194,543
Investments and advances......................... 321 138
Property and equipment, net...................... 16,473 16,788
Leased and data center equipment, net............ 431 693
Noncurrent trade and other receivables........... 5,334 5,187
Other noncurrent assets.......................... 10,338 10,136
Total assets................................. $ 218,012 $ 227,485
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Notes payable.................................. $ 891 $ 686
Accounts payable............................... 10,819 19,934
Customer advances and deferred income.......... 9,943 7,707
Accrued taxes.................................. 5,728 5,883
Accrued salaries and wages..................... 11,315 12,700
Restructure reserves, current portion.......... 14,162 16,704
Other accrued expenses......................... 30,117 32,214
Total current liabilities.................... 82,975 95,828
Deferred income taxes............................ 453 452
Restructure reserves, less current portion....... 5,204 6,412
Pension liabilities.............................. 37,953 38,944
Other noncurrent liabilities..................... 2,629 2,351
Total liabilities............................ 129,214 143,987
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
14,418,745 and 14,249,986 shares
as of March 31, 1996 and December 31, 1995,
respectively................................. 144 143
Additional paid-in capital..................... 166,414 164,247
Retained earnings.............................. (59,495) (62,373)
Minimum pension liability adjustment........... (11,854) (11,854)
Foreign currency translation adjustment........ 398 659
Unearned compensation - restricted stock....... (186) (213)
Unrealized gains (losses) on investments....... 27 -
Treasury stock, at cost (1,108,390 and
1,185,224 shares as of March 31, 1996 and
December 31, 1995, respectively.............. (6,650) (7,111)
Total stockholders' equity................... 88,798 83,498
Total liabilities and stockholders' equity... $ 218,012 $ 227,485
</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>
Three Months Ended
March 31, March 31,
1996 1995
<S> <C> <C>
Cash Flows from Operating Activities:
Net earnings ...................................... $ 2,878 $ 2,199
Adjustments to reconcile net earnings to net
cash (used in) provided by operating activities:
Depreciation................................... 1,760 3,336
Amortization................................... 92 377
Foreign currency transaction gain.............. (502) (1,143)
Equity in (gains) losses of affiliates......... (337) 189
Restructure reserves utilized.................. (2,878) (4,806)
Loss (gain) on sale of marketable securities
and other assets............................. 117 (136)
Net change in working capital items............ (4,896) 4,071
Net change in noncurrent trade receivables..... (217) (234)
Net change in other noncurrent assets.......... (358) (453)
Other.......................................... 488 79
Net cash (used in) provided by operating
activities.................................. (3,853) 3,479
Cash Flows from Investing Activities:
Expended for property and equipment................ (2,067) (1,904)
Expended for leased and data center equipment...... (15) (523)
Proceeds from sales of property and equipment...... 56 4
Divestitures of businesses, net of cash given...... 9 -
Change in short-term investments................... 1,855 4,612
Net cash (used in) provided by investing
activities.................................. (162) 2,189
Cash Flows from Financing Activities:
Borrowings under short-term financing
arrangements, net 203 2,030
Proceeds from issuance of common stock, net of
issuance costs................................... 1,279 246
Purchase of treasury stock......................... - (7,111)
Net cash provided by (used in) financing
activities.................................. 1,482 (4,835)
Effect of Exchange Rate Changes on Cash.............. (171) 812
Net change in cash and cash equivalents......... (2,704) 1,645
Cash and cash equivalents, beginning of period.. 15,188 17,277
Cash and cash equivalents, end of period........ 12,484 18,922
Short-term investments.......................... 66,991 63,526
Cash and short-term investments, end of period....... $ 79,475 $ 82,448
</TABLE>
(Continued)
4
<PAGE>
CONTROL DATA SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
1996 1995
<S> <C> <C>
Net Change in Working Capital Items:
Trade and other receivables........................ $ 515 $ 1,077
Inventories........................................ 1,030 (3,513)
Prepaid expenses and other current assets.......... (387) 600
Accounts payable................................... (8,068) 7,581
Customer advances and deferred income.............. 2,623 (4,311)
Accrued taxes...................................... (10) 4,462
Accrued salaries and wages......................... (628) 108
Other accrued expenses............................. 29 (1,933)
Net change in working capital items............... $ (4,896) $ 4,071
Supplemental Disclosures of Cash Flow Information:
Cash paid (received) during the period for:
Interest paid.................................... $ 114 $ 277
Income taxes paid................................ 105 305
Income taxes refunded............................ (607) (6,543)
</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)
MARCH 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The financial statements of Control Data Systems, Inc. ("Control
Data" or the "Company") 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, 1995......... 13,065 1,185 14,250 $ 143 $ 164,247 $ (62,373) $ (18,519) $ 83,498
Issuance of common stock under the
Employee Stock Purchase Plan....... 8 - 8 - 83 - - 83
Exercises of stock options.......... 161 - 161 1 1,195 - - 1,196
Foreign currency translation
adjustment......................... - - - - - - (261) (261)
Restricted stock award.............. - - - - - - 27 27
Change in unrealized gains
on investments.................... - - - - - - 27 27
Issuance of treasury stock.......... 77 (77) - - 889 - 461 1,350
Net earnings........................ - - - - - 2,878 - 2,878
Balance at March 31, 1996............ 13,311 1,108 14,419 $ 144 $ 166,414 $ (59,495) $ (18,265) $ 88,798
</TABLE>
<TABLE>
<CAPTION>
*Other Stockholders' Equity Items
Minimum Foreign Unearned
Pension Currency Compensation- Unrealized
Liability Translation Restricted Gains on Treasury
Adjustment Adjustment Stock Investments Stock Total
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995......... $ (11,854) $ 659 $ (213) $ - $ (7,111) $ (18,519)
Foreign currency translation
adjustment......................... - (261) - - - (261)
Restricted stock award............... - - 27 - - 27
Change in unrealized gains
on investments.................... - - - 27 - 27
Issuance of treasury stock........... - - - - 461 461
Balance at March 31, 1996............ $ (11,854) $ 398 $ (186) $ 27 $ (6,650) $ (18,265)
</TABLE>
6
<PAGE>
CONTROL DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
MARCH 31, 1996
3. DIVESTITURES
On August 31, 1995, the Company completed the sale of five interna-
tional 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 AmeriData assumed certain liabilities, of
Control Data operations in Canada, Mexico, and United Kingdom (Ltd).
Effective October 31, 1995, the Company completed the sale to AmeriData
all of the issued and outstanding capital stock of the Control Data
operations in Greece and Portugal. On March 25, 1996, the Company
completed the sale to AmeriData all of the issued and outstanding
capital stock of the Control Data operations in Denmark. AmeriData
assumed all assets and liabilities of the operations in Denmark as of,
and in the normal course of business since, February 29, 1996. The
total consideration received for these divestitures was $13.7 million in
cash. Net identifiable assets and liabilities transferred to AmeriData
were $59.4 million and $48.5 million, respectively. Results of
operations, assets, and liabilities for the operations sold are included
in the Company's consolidated financial statements through the dates of
the divestitures.
4. RESTRUCTURING RESERVES, CURRENT AND NONCURRENT
Over the past several years the Company has been transitioning from a
developer and manufacturer of proprietary mainframe computer systems to
a software and services provider focused on enterprise integration and
product design and information services.
Cash outlays for restructuring activities in the first quarter 1996
consisted primarily of $1.9 million for severance costs, which includes
the reduction of the worldwide workforce by approximately 17
individuals, and $0.8 million for lease and other facility obligations
related to commitments under leases throughout the United States and
Europe. Noncash activity was associated with the sale of operations in
Denmark to AmeriData and includes the write-off of net book value of
approximately $0.8 million. For additional information regarding this
divestiture, see note 3 and 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 quarter 1996:
<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, 1995.. $ 15,400 $ - $ 3,131 $ - $ 4,585 $ 23,116
Noncash items................ - (854) - (276) (42) (1,172)
Reclassifications
and transfers, net.......... (75) 834 (94) - (365) 300
Translation.................. (224) 20 (51) 276 (21) -
Cash payments................ (1,870) - (812) - (196) (2,878)
Balance at March 31, 1996..... $ 13,231 $ - $ 2,174 $ - $ 3,961 $ 19,366
</TABLE>
Future cash outlays for the remaining restructuring reserve of $19.4
million at March 31, 1996 are anticipated to be $13.0 million for the
remainder of 1996 and $6.4 million for 1997.
7
<PAGE>
CONTROL DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
MARCH 31, 1996
5. INVESTMENT IN METAPHASE TECHNOLOGY, INC.
In 1992, the Company and Structural Dynamics Research Corporation
established a joint venture company, Metaphase Technology, Inc.
("Metaphase"), 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
March 31, March 31,
(Dollars in thousands) 1996 1995
<S> <C> <C>
Net sales.................. $ 4,152 $ 1,813
Earnings (loss) before
income taxes............. 675 (231)
Net earnings (loss)........ 675 (231)
March 31, December 31,
1996 1995
Current assets............. $ 3,801 $ 3,304
Noncurrent assets.......... 783 825
Current liabilities........ 4,591 4,811
Noncurrent liabilities..... 3,530 3,530
</TABLE>
8
<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 software and
services company dedicated to helping large organizations develop the
enterprise-wide information systems required to create, transmit,
access, and control business information. The Company focuses on the
architecture, implementation, and lifetime support of electronic
commerce, product design, and product information solutions. The
Company provides productivity enhancing solutions for customers in
government, financial services, telecommunications, and manufacturing.
The Company's software and services solutions include network design,
installation, and maintenance; application design and deployment,
particularly for electronic commerce projects; remote and on-site
systems management and outsourcing; electronic mail integration; and for
the discrete manufacturing industry, product data management ("PDM")
systems, and computer-aided design ("CAD") products or systems. To
provide its customers with leading-edge solutions the Company invests in
four major areas:
o Development of software products associated with electronic
commerce integration, PDM, and CAD.
o Training and development of its technical workforce.
o Sales and marketing of its products and services.
o Capital and operational expenditures for the fulfillment of
managed services contracts (outsourcing contracts).
The Company also has a number of suppliers and partners providing a
range of hardware and software platforms, complementary products and
services, and sales and marketing activities.
Revenues by Category
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
1996 1995 Change
<S> <C> <C> <C>
Software and services.... $ 39.9 $ 39.5 1.0 %
Maintenance and support.. 14.9 20.3 (26.6) %
Hardware products........ 23.5 70.3 (66.6) %
Total revenues........ $ 78.3 $ 130.1 (39.8) %
</TABLE>
Revenues by Geography
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
1996 1995 Change
<S> <C> <C> <C>
Americas................. $ 36.3 $ 49.8 (27.1) %
Europe................... 30.5 69.8 (56.3) %
Asia..................... 11.5 10.5 9.5 %
Total revenues........ $ 78.3 $ 130.1 (39.8) %
</TABLE>
9
<PAGE>
CONTROL DATA SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Unaudited) (Continued)
(Dollars in millions)
The Company entered into transactions with AmeriData during 1995 and
1996 to divest eight of its international subsidiary operations. The
effect of these transactions on the Company's reported results of
operations is reflected in the exclusion of the last four months of
results for the five international operations sold to AmeriData on
August 31, 1995, the exclusion of the last two months of results for the
two international operations sold on October 31, 1995, and the exclusion
of the results of the month of March 1996 for the international
operation sold on March 25, 1996 (collectively the "AmeriData
Divestitures"). See note 3 of the Notes to Consolidated Financial
Statements for additional information regarding the AmeriData
Divestitures.
Revenues for first quarter 1996 of $78.3 million decreased 39.8% from
first quarter 1995 revenues of $130.1 million. The revenue decline was
due primarily to decreases of 66.6% and 26.6% in hardware products and
maintenance and support sales, respectively, resulting in part from the
AmeriData Divestitures and partially offset by a slight increase of 1.0%
in software and services sales. The majority of the decrease in
hardware products and maintenance and support sales was attributable to
lower revenues in the Americas and Europe, offset by an increase in
revenues in Asia. The maintenance and support revenues decline is also
due to the decrease in the number of proprietary systems under
maintenance contracts.
On a pro forma basis, revenues in the first quarter of 1996 of $78.3
million increased 8.2% from 1995 first quarter revenues of $72.3
million. The revenue increase was due to an increase in software and
services of 33.3%, offset in part by a 7.6% decline in maintenance and
support and a decline in hardware product sales of 10.7%. The increase
in software and services and the decrease in hardware product and
maintenance and support sales reflects the Company's continuing emphasis
on software and services sales related to its target markets of
electronic commerce and PDM/CAD.
Cost of Revenues and Gross Profit
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
1996 1995 Change
<S> <C> <C> <C>
Cost of revenues........ $ 52.6 $ 96.5 (45.5) %
Percentage of revenues.. 67.2 % 74.2 %
Gross profit............ $ 25.7 $ 33.6 (23.5) %
Percentage of revenues.. 32.8 % 25.8 %
</TABLE>
Cost of revenues decreased by 45.5% and gross profit margins
decreased by 23.5% in first quarter 1996 from the same period in 1995.
The primary factor contributing to the cost of revenues and gross profit
margins decreases was the decline in total revenues, primarily in
hardware products and maintenance and support sales. Gross profit
margins increased to 32.8% in first quarter 1996 from 25.8% in first
quarter 1995, primarily reflecting the exclusion of lower profit margin
hardware product sales associated with the AmeriData Divestitures. On a
pro forma basis, gross profit margins increased to 32.8% in first
quarter 1996 from 31.7% in the comparable period in 1995.
10
<PAGE>
CONTROL DATA SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Unaudited) (Continued)
(Dollars in millions)
Operating Expenses
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
1996 1995 Change
<S> <C> <C> <C>
Selling, general and
administrative........ $ 21.4 $ 30.2 (29.1) %
Percentage of revenues.. 27.3 % 23.2 %
Technical............... $ 3.3 $ 2.3 43.5 %
Percentage of revenues.. 4.2 % 1.8 %
</TABLE>
Selling, general and administrative (SG&A). The decrease in SG&A
expense is due to the downsizing actions taken by the Company over the
past year and the exclusion of operating expenses associated with the
operations sold in the AmeriData Divestitures. On a pro forma basis,
the divested operations had lower SG&A expense to revenue ratios and the
exclusion of these operations would raise the Company's SG&A expense to
revenue percentage.
Technical. The increase in technical expense is a result of higher
spending on electronic commerce products and services, one of the
Company's targeted markets.
Nonoperating Income
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
1996 1995 Change
<S> <C> <C> <C>
Nonoperating income.... $ 2.3 $ 1.8 27.8 %
Percentage of revenues. 2.9 % 1.4 %
</TABLE>
Interest expense. Interest expense decreased in first quarter 1996 from
the same period in 1995 primarily as a result of lower average daily
short-term borrowings due in part to the AmeriData Divestitures.
Interest income. Interest income decreased slightly in first quarter
1996 versus the first quarter 1995 due to lower average daily cash and
short-term investment balances.
Other income, net. Other income increased by $0.5 million in first
quarter 1996 versus the first quarter 1995. The primary factor for this
increase relates to Metaphase earnings of which the Company's share was
$0.3 million in the first quarter 1996 versus a loss of $0.2 million in
the first quarter 1995.
Provision for Income Taxes
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
1996 1995
<S> <C> <C>
Provision for Income Taxes.. $ 0.4 $ 0.7
Percentage of revenues...... 0.5 % 0.5 %
</TABLE>
The provision for income taxes in first quarter 1996 and the
comparable period in 1995 relates primarily to foreign income taxes on
the earnings of the Company's foreign subsidiaries and foreign
withholding taxes on certain United States income.
11
<PAGE>
CONTROL DATA SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Unaudited) (Continued)
(Dollars in millions)
Net Earnings and Earnings Per Share
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
(Earnings per share in dollars) 1996 1995
<S> <C> <C>
Net earnings................ $ 2.9 $ 2.2
Percentage of revenues...... 3.7 % 1.7 %
Earnings per share
Primary.................... $ 0.20 $ 0.17
Fully diluted.............. $ 0.20 $ 0.17
</TABLE>
Net earnings for first quarter 1996 increased by $0.7 million from
the comparable period in 1995. The earnings increase is primarily
attributable to lower operating expenses, higher nonoperating income,
and a lower provision for income taxes. Also contributing to higher
earnings in first quarter 1996 versus first quarter 1995 is the
exclusion of lower profit margin hardware product sales, operating
expenses, and interest expenses associated with the operations sold in
the AmeriData Divestitures. Operating results for the three months
ended March 31, 1996 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1996.
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. 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. As the
Company is just beginning to build a base of these types of arrangements
as part of its electronic commerce offerings, revenue predictability is
currently difficult, and continuing quarterly volatility of earnings can
be expected.
Revenues. The Company expects total revenues to decrease in 1996 from
1995 due in part to the divestitures of certain international operations
sold to AmeriData. However, 1996 revenues should increase from 1995
revenues on a pro forma basis. Continued growth in software and
services sales and increased outsourcing revenues associated with its
managed services activities are expected to provide the basis for this
growth. Revenue levels in 1996 could be impacted by the Company's
business transition and narrowed focus, as well as by the acquisition of
additional businesses or divestiture of existing operations.
12
<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. The Company's cost of revenues as a percentage of
total revenues decreased in the first quarter of 1996 from the
comparable period in 1995. Gross profit margins as a percentage of
total revenues increased in the first quarter of 1996 from the
comparable period in 1995. Cost of revenues as a percentage of revenues
is expected to decline in 1996 and gross margins as a percentage of
revenues are expected to increase in 1996 due in part to the
divestitures of certain international operations, whose revenue mix
primarily consisted of lower profit margin hardware products. 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 in 1996 could be volatile.
Selling, general and administrative expenses. SG&A expenses declined in
first quarter 1996 from the comparable period in 1995 due primarily to
restructuring actions taken and the divestitures of certain
international operations. SG&A expenses are expected to decrease in
1996 from 1995. However, on a pro forma basis, SG&A expenses will
likely increase in 1996 as the Company expands its sales activities
related to its PDM/CAD and electronic commerce business.
Technical expenses. Technical spending increased in the first quarter
of 1996 versus the first quarter of 1995. This increase is primarily
attributable to higher spending on electronic commerce products and
services. Technical spending is expected to increase in 1996 from 1995
due primarily to higher spending on electronic commerce products and
services, one of the Company's targeted markets.
Income tax rate. In total, the Company has $106.3 million of gross
deferred tax assets at December 31, 1995 which can be used to offset
taxes on future earnings. While the Company maintains significant
operations outside the United States, a number of these operations also
have deferred tax assets as of December 31, 1995 resulting from lower
than expected 1994 earnings, caused in part by the 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 overall effective tax rate
will be volatile. The gross deferred tax assets of $106.3 million at
December 31, 1995 decreased by $8.4 million in the first quarter of 1996
due to the sale of Denmark to AmeriData.
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 $79.5 million
at March 31, 1996 representing 36.5% of total assets. Total cash and
short-term investment balances decreased by $4.6 million from the
corresponding December 31, 1995 balances. The primary factors for the
decrease were restructuring payments of $2.9 million, capital
expenditures of $2.1 million and working capital items of $4.9 million,
partially offset by a positive net cash flow of $2.9 million for net
earnings, which reflects earnings after depreciation and amortization of
$1.9 million, and the issuance of Common Stock of $1.3 million. The
AmeriData Divestitures, through the elimination of certain hardware
distribution activities, significantly reduced the Company's investment
in inventory and the associated risk of obsolescence associated with
that inventory.
13
<PAGE>
CONTROL DATA SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Unaudited) (Continued)
(Dollars in millions)
Stockholders' equity increased by $5.3 million in the first three
months of 1996. The increase is primarily due to net earnings of $2.9
million, the issuance of Common Stock and treasury stock of $1.3 million
and $1.4 million, respectively, offset in part by a foreign currency
translation adjustment of $0.3 million.
As of December 31, 1995, the Company has available up to $16.4
million in credit facilities in certain international subsidiaries
(primarily short-term notes and overdraft facilities under bank lines of
credit), as well as a domestic credit arrangement which provides up to
$10.0 million in unsecured short-term credit.
The Company has $19.4 million of restructure obligations as of March
31, 1996, $13.0 million of which are expected to be cash outlays for the
remainder of 1996, 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 and severance issues. The Company believes
that it can finance this 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.
Except for the historical information contained within the
Management's Discussion and Analysis of Financial Condition and Results
of Operations, the accompanying consolidated financial statements, and
the Notes to Consolidated Financial Statements, the matters reflected in
this quarterly report such as expectations, plans, future estimates and
the like are forward looking statements that involve risks and
uncertainties including: business conditions and growth in the general
economy and electronic messaging market; volatility in gross margins as
the Company's revenues and product mix change; additional restructuring
actions or charges as the Company continues to evolve in its rapidly
changing industry; competitive factors, such as alternative messaging,
PDM and CAD products and price pressures; availability of skilled
personnel in various geographic areas; acceptance of the outsourcing of
corporate messaging infrastructures; the success of the Company's
business partners in sales and marketing activities; and other factors
discussed herein.
The following tables represent pro forma first quarter results for
1996 and 1995. The 1995 first quarter pro forma results are based on
the elimination of certain international operations, sold to AmeriData,
located in Austria, Canada, Greece, Mexico, Norway, Portugal, and United
Kingdom, and for the period following February 28, 1995, Denmark. The
business type information is presented based on the 1996 organization
structure of the Company. Certain 1995 revenues and costs have been
reclassified to conform to the 1996 structure (unaudited).
14
<PAGE>
CONTROL DATA SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Unaudited) (Continued)
1996/1995 Pro Forma Revenues and Gross Profits
<TABLE>
<CAPTION>
(Dollars in thousands) 1996 Pro Forma 1995
1st Quarter Percentage 1st Quarter
REVENUES As Reported Change As Reported Pro Forma
<S> <C> <C> <C> <C>
Software and services.... $ 39,863 33.3% $ 39,464 $ 29,913
Maintenance and support.. 14,864 (7.6%) 20,272 16,089
Hardware products........ 23,527 (10.7%) 70,328 26,347
Total revenues....... $ 78,254 8.2% $ 130,064 $ 72,349
Gross profit............. $ 25,666 12.0% $ 33,597 $ 22,907
REVENUE DISTRIBUTION
Software and services.... 50.9% 30.3% 41.4%
Maintenance and support.. 19.0% 15.6% 22.2%
Hardware products........ 30.1% 54.1% 36.4%
Total revenues....... 100.0% 100.0% 100.0%
Gross profit............. 32.8% 25.8% 31.7%
</TABLE>
1996 Revenues and Gross Profits by Business Type
<TABLE>
<CAPTION>
(Dollars in thousands) Product
Enterprise Design and
Integration Information Technical
REVENUES Services Services Services Total
<S> <C> <C> <C> <C>
Software and services.... $ 20,988 $ 14,990 $ 3,885 $ 39,863
Maintenance and support.. - - 14,864 14,864
Hardware products........ 16,542 5,582 1,403 23,527
Total revenues....... $ 37,530 $ 20,572 $ 20,152 $ 78,254
Gross profit............. 23.6% 45.7% 36.7% 32.8%
</TABLE>
1995 Pro Forma Revenues and Gross Profits by Business Type
<TABLE>
<CAPTION>
(Dollars in thousands) Product
Enterprise Design and
Integration Information Technical
REVENUES Services Services Services Total
<S> <C> <C> <C> <C>
Software and services.... $ 18,450 $ 7,709 $ 3,754 $ 29,913
Maintenance and support.. - - 16,089 16,089
Hardware products........ 19,697 6,017 633 26,347
Total revenues....... $ 38,147 $ 13,726 $ 20,476 $ 72,349
Gross profit............. 25.7% 43.9% 34.6% 31.7%
</TABLE>
15
<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
None.
16
<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: May 10, 1996 /s/ J. F. KILLORAN
J. F. Killoran
Vice President and Chief Financial Officer
(Principal Accounting Officer)
17
<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 MARCH 31, 1996.
(11) - Computation of Earnings Per Common Share
(27) - Financial Data Schedule
18
<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
March 31, March 31,
1996 1995
<S> <C> <C>
Net earnings applicable to
common shares:
Net earnings $ 2,878 $ 2,199
Primary:
Shares for common and common share
equivalent earnings per share (1):
Weighted average number of
common shares outstanding 13,130,885 13,237,390
Dilutive effect of outstanding
stock options and warrants 1,156,463 -
14,287,348 13,237,390
Net earnings per common share
and common share equivalents $ 0.20 $ 0.17
Fully Diluted:
Shares for common and common share
equivalent earnings per share (2):
Weighted average number of
common shares outstanding 13,130,885 13,237,390
Dilutive effect of outstanding
stock options and warrants 1,178,848 -
14,309,733 13,237,390
Net earnings per common share
and common share equivalents $ 0.20 $ 0.17
<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 FIRST QUARTER OF
FISCAL YEAR 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS
<CAPTION>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1995
<PERIOD-END> Mar-31-1996
<CASH> 79,475
<SECURITIES> 0
<RECEIVABLES> 81,964
<ALLOWANCES> 0
<INVENTORY> 17,679
<CURRENT-ASSETS> 185,115
<PP&E> 16,904
<DEPRECIATION> 0
<TOTAL-ASSETS> 218,012
<CURRENT-LIABILITIES> 82,975
<BONDS> 0
<COMMON> 144
0
0
<OTHER-SE> 88,654
<TOTAL-LIABILITY-AND-EQUITY> 218,012
<SALES> 36,629
<TOTAL-REVENUES> 78,254
<CGS> 20,764
<TOTAL-COSTS> 77,257
<OTHER-EXPENSES> (2,393)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 112
<INCOME-PRETAX> 3,278
<INCOME-TAX> 400
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,878
<EPS-PRIMARY> 0.20
<EPS-DILUTED> 0.20
</TABLE>
