40
<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, 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: 13,681,943
shares of Common Stock, $0.01 par value per share, as of November 4,
1996.
<PAGE>
CONTROL DATA SYSTEMS, INC.
FORM 10-Q
September 30, 1996
INDEX
Page
Part I - Financial Information:
Consolidated Statements of Operations -
Nine months ended September 30, 1996 and
September 30, 1995 ................................. 2
Consolidated Balance Sheets -
September 30, 1996 and December 31, 1995 ........... 3
Consolidated Statements of Cash Flows -
Nine months ended September 30, 1996 and
September 30, 1995 ................................. 4
Notes to Consolidated Financial Statements ........... 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations ................ 10
Part II - Other Information .......................... 18
Signature ............................................ 19
Exhibit Index ........................................ 20
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 Nine Months Ended
September 30, September 30, September 30, September 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
REVENUES:
Net sales and rentals............. $ 30,358 $ 55,191 $ 96,581 $211,740
Services.......................... 41,702 50,049 129,264 152,652
Total revenues................... 72,060 105,240 225,845 364,392
COST OF REVENUES:
Net sales and rentals............. 15,266 37,163 52,070 150,996
Services.......................... 30,672 38,915 95,624 118,032
Total cost of revenues........... 45,938 76,078 147,694 269,028
Gross profit..................... 26,122 29,162 78,151 95,364
OPERATING EXPENSES:
Selling, general and
administrative................... 21,986 28,261 65,070 88,819
Technical......................... 3,247 2,445 9,681 6,920
Total operating expenses......... 25,233 30,706 74,751 95,739
Earnings (loss) from operations.. 889 (1,544) 3,400 (375)
OTHER INCOME (EXPENSES):
Interest expense.................. (26) (236) (178) (963)
Interest income................... 1,300 1,263 3,738 4,241
Other income, net................. 1,061 1,449 3,596 3,389
Total other income, net.......... 2,335 2,476 7,156 6,667
Earnings before income taxes..... 3,224 932 10,556 6,292
PROVISION FOR INCOME TAXES......... 300 300 1,100 1,200
Net earnings..................... $ 2,924 $ 632 $ 9,456 $ 5,092
Primary earnings per common share
and common share equivalents..... $ 0.20 $ 0.05 $ 0.65 $ 0.40
Fully diluted earnings per common
share and common share
equivalents...................... $ 0.20 $ 0.05 $ 0.65 $ 0.37
Weighted average common shares
outstanding (in thousands):
Primary.......................... 14,586 13,064 14,488 12,897
Fully diluted.................... 14,739 13,487 14,593 13,627
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
2
<PAGE>
CONTROL DATA SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
ASSETS
September 30, December 31,
1996 1995
(Unaudited)
<S> <C> <C>
Current assets:
Cash and short-term investments............... $ 88,728 $ 84,034
Trade and other receivables................... 71,967 85,235
Inventories................................... 16,382 19,381
Prepaid expenses and other current assets..... 4,321 5,893
Total current assets........................ 181,398 194,543
Investments and advances........................ 50 138
Property and equipment, net..................... 17,917 16,788
Leased and data center equipment, net........... 508 693
Noncurrent trade and other receivables.......... 4,561 5,187
Other noncurrent assets......................... 10,569 10,136
Total assets................................ $ 215,003 $ 227,485
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Notes payable................................. $ 427 $ 686
Accounts payable.............................. 10,706 19,934
Customer advances and deferred income......... 6,908 7,707
Accrued taxes................................. 4,858 5,883
Accrued salaries and wages.................... 12,526 12,700
Restructure reserves, current portion......... 9,183 16,704
Other accrued expenses........................ 30,419 32,214
Total current liabilities................... 75,027 95,828
Deferred income taxes........................... 692 452
Restructure reserves, less current portion...... 4,184 6,412
Pension liabilities............................. 34,519 38,944
Other noncurrent liabilities.................... 2,364 2,351
Total liabilities........................... 116,786 143,987
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
14,843,050 and 14,249,986 shares
as of September 30, 1996 and December 31,
1995, respectively.......................... 148 143
Additional paid-in capital.................... 171,435 164,247
Retained earnings............................. (52,917) (62,373)
Minimum pension liability adjustment.......... (11,854) (11,854)
Foreign currency translation adjustment....... (354) 659
Unearned compensation - restricted stock...... (134) (213)
Unrealized gains on investments............... 30 -
Treasury stock, at cost (1,188,390 and
1,185,224 shares as of September 30, 1996
and December 31, 1995, respectively)........ (8,137) (7,111)
Total stockholders' equity.................. 98,217 83,498
Total liabilities and stockholders' equity.. $ 215,003 $ 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>
Nine Months Ended
September 30, September 30,
1996 1995
<S> <C> <C>
Cash Flows from Operating Activities:
Net earnings ...................................... $ 9,456 $ 5,092
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation................................... 5,429 8,626
Amortization................................... 266 1,014
Foreign currency transaction gain.............. (1,527) (524)
Equity in losses (gains) of affiliates......... 251 (832)
Restructure reserves utilized.................. (8,638) (17,380)
Loss (gain) on sale of marketable securities
and other assets............................. 249 (336)
Net change in working capital items............ 4,508 4,444
Net change in noncurrent trade receivables..... 497 2,833
Net change in other noncurrent assets.......... (881) (1,904)
Other.......................................... (1,667) 132
Net cash provided by operating
activities.................................. 7,943 1,165
Cash Flows from Investing Activities:
Expended for property and equipment................ (7,275) (7,601)
Expended for leased and data center equipment...... (327) (1,485)
Investment in affiliates........................... 82 -
Proceeds from sales of property and equipment...... 68 677
Acquisitions of businesses, net of cash provided... - (546)
Divestitures of businesses, net of cash given...... 9 8,139
Change in short-term investments................... (5,024) 1,726
Net cash (used in) provided by investing
activities.................................. (12,467) 910
Cash Flows from Financing Activities:
(Repayments) borrowings under short-term financing
arrangements, net................................ (222) 3,389
Proceeds from issuance of common stock, net of
issuance costs................................... 6,304 1,020
Purchase of treasury stock......................... (1,487) (7,111)
Net cash provided by (used in) financing
activities.................................. 4,595 (2,702)
Effect of Exchange Rate Changes on Cash.............. (401) 580
Net change in cash and cash equivalents......... (330) (47)
Cash and cash equivalents, beginning of period.. 15,188 17,277
Cash and cash equivalents, end of period........ 14,858 17,230
Short-term investments.......................... 73,870 66,412
Cash and short-term investments, end of period....... $ 88,728 $ 83,642
</TABLE>
(Continued)
4
<PAGE>
CONTROL DATA SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, September 30,
1996 1995
<S> <C> <C>
Net Change in Working Capital Items:
Trade and other receivables........................ $ 9,673 $ 9,695
Inventories........................................ 2,051 3,011
Prepaid expenses and other current assets.......... 1,196 (213)
Accounts payable................................... (8,051) 3,759
Customer advances and deferred income.............. (354) (11,064)
Accrued taxes...................................... (817) 4,995
Accrued salaries and wages......................... 730 (295)
Other accrued expenses............................. 80 (5,444)
Net change in working capital items............... $ 4,508 $ 4,444
Supplemental Disclosures of Cash Flow Information:
Cash paid (received) during the period for:
Interest paid.................................... $ 182 $ 968
Income taxes paid................................ 2,761 779
Income taxes refunded............................ (1,211) (7,708)
</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)
SEPTEMBER 30, 1996
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, 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
Issuance of common stock under the
Employee Stock Purchase Plan..... 7 - 7 - 117 - - 117
Exercises of stock options........ 86 - 86 - 732 - - 732
Exercises of stock warrants....... 300 - 300 4 3,855 - - 3,859
Foreign currency translation
adjustment....................... - - - - - - (400) (400)
Restricted stock award............ - - - - - - 26 26
Change in unrealized gains
on investments................... - - - - - - 31 31
Net earnings...................... - - - - - 3,654 - 3,654
Balance at June 30, 1996........... 13,704 1,108 14,812 148 171,118 (55,841) (18,608) 96,817
Issuance of common stock under the
Employee Stock Purchase Plan..... 6 - 6 - 111 - - 111
Exercises of stock options........ 25 - 25 - 206 - - 206
Foreign currency translation
adjustment....................... - - - - - - (352) (352)
Restricted stock award............ - - - - - - 26 26
Change in unrealized gains
on investments................... - - - - - - (28) (28)
Purchase of treasury stock........ (80) 80 - - - - (1,487) (1,487)
Net earnings...................... - - - - - 2,924 - 2,924
Balance at September 30, 1996...... 13,655 1,188 14,843 $ 148 $ 171,435 $ (52,917) $ (20,449) $ 98,217
</TABLE>
6
<PAGE>
CONTROL DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
SEPTEMBER 30, 1996
2. STOCKHOLDERS' EQUITY (Continued)
Common Stock, Additional Paid-In Capital, Retained Earnings, and Other
(Continued)
<TABLE>
<CAPTION>
*Other Stockholders' Equity Items
Minimum Foreign Unearned
Pension Currency Compensation- Unrealized
Liability Translation Restricted Gains on Treasury
(Dollars in thousands) 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)
Foreign currency translation
adjustment....................... - (400) - - - (400)
Restricted stock award............. - - 26 - - 26
Change in unrealized gains
on investments................... - - - 31 - 31
Balance at June 30, 1996........... (11,854) (2) (160) 58 (6,650) (18,608)
Foreign currency translation
adjustment....................... - (352) - - - (352)
Restricted stock award............. - - 26 - - 26
Change in unrealized gains
on investments................... - - - (28) - (28)
Purchase of treasury stock......... - - - - (1,487) (1,487)
Balance at September 30, 1996...... $ (11,854) $ (354) $ (134) $ 30 $ (8,137) $ (20,449)
</TABLE>
3. DIVESTITURES
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 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.
7
<PAGE>
CONTROL DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
SEPTEMBER 30, 1996
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 third quarter 1996
consisted primarily of $1.0 million for severance costs, which includes
the reduction of the worldwide workforce by approximately 38
individuals, and $0.4 million for lease and other facility obligations
related to commitments under leases throughout the United States and
Europe. Cash outlays for the first nine months of 1996 totaled $8.6
million, consisting primarily of $5.0 million for severance costs, which
includes the reduction of the worldwide workforce by approximately 89
individuals, $2.1 million for lease and other facility obligations
related to commitments under leases throughout the United States and
Europe, and other payments of $1.5 million primarily for litigation
matters. 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 nine months of 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 $ 0 $ 3,131 $ 0 $ 4,585 $ 23,116
Noncash items................. 0 (854) 0 (276) (42) (1,172)
Reclassifications
and transfers, net........... (75) 834 (94) 0 (365) 300
Translation................... (224) 20 (51) 276 (21) 0
Cash payments................. (1,870) 0 (812) 0 (196) (2,878)
Balance at March 31, 1996...... 13,231 0 2,174 0 3,961 19,366
Noncash items................. 0 (35) 0 (154) 13 (176)
Reclassifications
and transfers, net........... (235) 35 76 0 124 0
Translation................... (127) 0 (17) 154 (10) 0
Cash payments................. (2,086) 0 (956) 0 (1,067) (4,109)
Balance at June 30, 1996....... 10,783 0 1,277 0 3,021 15,081
Noncash items................. 0 0 0 (62) 0 (62)
Reclassifications
and transfers, net........... (114) 0 281 0 (167) 0
Translation................... (54) 0 (8) 62 0 0
Cash payments................. (1,020) 0 (380) 0 (252) (1,652)
Balance at September 30, 1996.. $ 9,595 $ 0 $ 1,170 $ 0 $ 2,602 $ 13,367
</TABLE>
Future cash outlays for the remaining restructuring reserve of $13.4
million at September 30, 1996 are anticipated to be $2.5 million for the
remainder of 1996 and $10.9 million for 1997.
8
<PAGE>
CONTROL DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
SEPTEMBER 30, 1996
5. INVESTMENT IN METAPHASE TECHNOLOGY, INC.
In 1992, the Company and Structural Dynamics Research Corporation
("SDRC") 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 Nine Months Ended
September 30, September 30, September 30, September 30,
(Dollars in thousands) 1996 1995 1996 1995
<S> <C> <C> <C> <C>
Net sales................ $ 2,247 $ 5,649 $ 8,966 $ 10,098
(Loss) earnings before
income taxes........... (1,440) 2,534 (1,953) 978
Net (loss) earnings...... (1,440) 2,534 (1,941) 966
September 30, December 31,
1996 1995
Current assets........... $ 1,842 $ 3,304
Noncurrent assets........ 1,152 825
Current liabilities...... 7,087 4,811
Noncurrent liabilities... 2,060 3,530
</TABLE>
Commencing in June 1996, the Company engaged in formal discussions
with SDRC to evaluate alternatives to create greater shareholder value,
better customer service and greater employee focus with the Metaphase
joint venture. As a result of these discussions, the Company did not
anticipate funding Metaphase losses. Accordingly, the Company did not
accrue its share of Metaphase losses during the third quarter. In the
future, the Company will continue to evaluate its anticipated funding of
Metaphase.
9
<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 Nine Months Ended
September 30, September 30, September 30, September 30,
1996 1995 Change 1996 1995 Change
<S> <C> <C> <C> <C> <C> <C>
Software and services.... $ 41.6 $ 43.0 (3.2) % $ 124.3 $ 129.4 (3.9) %
Maintenance and support.. 13.6 18.7 (27.2) % 42.7 59.5 (28.2) %
Hardware products........ 16.9 43.5 (61.3) % 58.8 175.5 (66.5) %
Total revenues........ $ 72.1 $ 105.2 (31.5) % $ 225.8 $ 364.4 (38.0) %
</TABLE>
Revenues by Geography
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
1996 1995 Change 1996 1995 Change
<S> <C> <C> <C> <C> <C> <C>
Americas............ $ 37.4 $ 40.7 (8.1) % $ 106.9 $ 134.2 (20.3) %
Europe.............. 24.9 53.5 (53.5) % 81.7 193.3 (57.8) %
Asia................ 9.8 11.0 (11.3) % 37.2 36.9 0.8 %
Total revenues... $ 72.1 $ 105.2 (31.5) % $ 225.8 $ 364.4 (38.0) %
</TABLE>
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
10
<PAGE>
CONTROL DATA SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Unaudited) (Continued)
(Dollars in millions)
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 third quarter 1996 of $72.1 million decreased 31.5% from
third quarter 1995 revenues of $105.2 million. Revenues for the first
nine months of 1996 totaled $225.8 million, a decrease of 38.0% from the
$364.4 million of revenues in the first nine months of 1995. The
revenue decline in the third quarter and the first nine months of 1996
was due primarily to decreases in hardware products and maintenance
support sales, resulting in part from the AmeriData Divestitures. 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 third quarter of 1996 of $72.1
million decreased 3.4% from 1995 third quarter revenues of $74.6
million. Revenues for the first nine months of 1996 of $225.8 million
decreased 0.4% from 1995 revenues for the comparable nine month period
of $226.8 million. The revenue decrease was due to a decline in
maintenance and support and hardware product sales, offset in part by an
increase in software and services. 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 Nine Months Ended
September 30, September 30, September 30, September 30,
1996 1995 Change 1996 1995 Change
<S> <C> <C> <C> <C> <C> <C>
Cost of revenues........ $ 45.9 $ 76.1 (39.6) % $ 147.7 $ 269.0 (45.1) %
Percentage of revenues.. 63.7 % 72.3 % 65.4 % 73.8 %
Gross profit............ $ 26.1 $ 29.2 (10.4) % $ 78.2 $ 95.4 (18.0) %
Percentage of revenues.. 36.3 % 27.7 % 34.6 % 26.2 %
</TABLE>
Cost of revenues for third quarter 1996 decreased by 39.6% over the
comparable period in 1995. Cost of revenues for the first nine months
of 1996 decreased by 45.1% compared to the same period in 1995. Gross
profit margins for third quarter 1996 decreased by 10.4% as compared to
the third quarter 1995. Gross profit margins for the first nine months
of 1996 decreased by 18.0% as compared to 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 36.3% in third quarter 1996 from 27.7% in third
quarter 1995. Gross profit margins increased to 34.6% for the first
nine months of 1996 from 26.2% in the comparable period in 1995. The
increases in gross margins primarily reflect the exclusion of lower
profit margin hardware product sales associated with the
11
<PAGE>
CONTROL DATA SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Unaudited) (Continued)
(Dollars in millions)
AmeriData Divestitures. On a pro forma basis, gross profit margins
increased to 36.3% in third quarter 1996 from 33.8% in the comparable
period in 1995. Gross profit margins increased to 34.6% for the first
nine months of 1996 from 32.1% for the comparable nine month period of
1995.
Operating Expenses
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
1996 1995 Change 1996 1995 Change
<S> <C> <C> <C> <C> <C> <C>
Selling, general and
administrative........ $ 22.0 $ 28.3 (22.2) % $ 65.1 $ 88.8 (26.7) %
Percentage of revenues.. 30.5 % 26.9 % 28.8 % 24.4 %
Technical............... $ 3.2 $ 2.4 32.8 % $ 9.7 $ 6.9 39.9 %
Percentage of revenues.. 4.5 % 2.3 % 4.3 % 1.9 %
</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 Nine Months Ended
September 30, September 30, September 30, September 30,
1996 1995 Change 1996 1995 Change
<S> <C> <C> <C> <C> <C> <C>
Nonoperating income.... $ 2.3 $ 2.5 (5.7) % $ 7.2 $ 6.7 7.3 %
Percentage of revenues. 3.2 % 2.4 % 3.2 % 1.8 %
</TABLE>
Interest expense. Interest expense decreased in third quarter and the
first nine months of 1996 from the same periods in 1995 primarily as a
result of lower average daily short-term borrowings due in part to the
AmeriData Divestitures.
Interest income. Interest income increased slightly in third quarter
and decreased in the first nine months of 1996 versus the comparable
periods in 1995 due to lower average interest rate yields.
Other income, net. Other income decreased by $0.4 million and increased
by $0.2 million, respectively, in the third quarter 1996 and the first
nine months of 1996 versus the comparable periods in 1995. The decrease
in the third quarter is attributable to an affiliate gain of zero versus
a $1.3 million gain in the comparable period in 1995, offset in part by
slight increases in rent income and foreign currency exchange. The
increase in the first nine months of 1996 is due to a favorable foreign
currency exchange gain of $1.5 million in the first nine months of 1996
versus a $0.2 million gain in the comparable period in 1995, an
affiliate loss of $0.3 million in the first nine months of 1996 versus
an affiliate gain of $0.8 million in the comparable period in 1995, an
increase of $0.5 million in rent income in 1996 versus 1995, and a gain
of $0.4 million in 1995 for the sale of land versus none in the
comparable period in 1996. See note 5 of the Notes to Consolidated
Financial Statements for additional information regarding the affiliate
transaction.
12
<PAGE>
CONTROL DATA SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Unaudited) (Continued)
(Dollars in millions)
Provision for Income Taxes
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Provision for Income Taxes.. $ 0.3 $ 0.3 $ 1.1 $ 1.2
Percentage of revenues...... 0.4 % 0.3 % 0.5 % 0.3 %
</TABLE>
The provision for income taxes in third quarter and the first nine
months of 1996 and the comparable periods 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.
Net Earnings and Earnings Per Share
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
(Earnings per share in dollars) September 30, September 30, September 30, September 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Net earnings............. $ 2.9 $ 0.6 $ 9.5 $ 5.1
Percentage of revenues... 4.1 % 0.6 % 4.2 % 1.4 %
Earnings per share:
Primary................. $ 0.20 $ 0.05 $ 0.65 $ 0.40
Fully diluted........... $ 0.20 $ 0.05 $ 0.65 $ 0.37
</TABLE>
Net earnings for third quarter and the first nine months of 1996
increased by $2.3 million and $4.4 million, respectively, from the
comparable periods 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 third quarter and the first nine months of 1996 versus the
comparable periods of 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 nine months ended September 30, 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. 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.
13
<PAGE>
CONTROL DATA SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Unaudited) (Continued)
(Dollars in millions)
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. Software and services revenues are expected to
increase in 1996 over 1995 revenues on a pro forma basis. However,
hardware products and maintenance support revenues are expected to
decrease. As a result, 1996 revenues will be comparable with 1995
revenues on a pro forma basis. 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.
Cost of revenues. The Company's cost of revenues as a percentage of
total revenues decreased in the third quarter and first nine months of
1996 from the comparable periods in 1995. Gross profit margins as a
percentage of total revenues increased in the third quarter and first
nine months of 1996 from the comparable periods 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
the third quarter and first nine months of 1996 from the comparable
periods 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
businesses.
Technical expenses. Technical spending increased in the third quarter
and first nine months of 1996 versus the comparable periods in 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 had $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 operations 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.
14
<PAGE>
CONTROL DATA SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Unaudited) (Continued)
(Dollars in millions)
Financial Condition
The Company's cash and short-term investments totaled $88.7 million
at September 30, 1996 representing 41.3% of total assets. Total cash
and short-term investment balances increased by $4.7 million from the
corresponding December 31, 1995 balances. The primary factors for the
increase were positive net cash flow of $9.5 million for net earnings,
which reflects earnings after depreciation and amortization of $5.7
million, the issuance of Common Stock of $6.3 million, and working
capital items of $4.5 million, partially offset by restructuring
payments of $8.6 million, capital expenditures of $7.6 million, and the
purchase of treasury stock of $1.5 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.
Stockholders' equity increased by $14.7 million in the first nine
months of 1996. The increase is primarily due to net earnings of $9.5
million, the issuance of Common Stock and treasury stock of $6.3 million
and $1.4 million, respectively, offset in part by the purchase of
treasury stock of $1.5 million and a foreign currency translation
adjustment of $1.0 million.
As of September 30, 1996, the Company has available up to $16.8
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 $13.4 million of restructure obligations as of
September 30, 1996, $2.5 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, and its borrowing
capacity.
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 as expectations, plans, future estimates and the
like are forward looking statements that involve risks and uncertainties
including, but not limited to: 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.
15
<PAGE>
CONTROL DATA SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Unaudited) (Continued)
The following tables represent pro forma results for the third
quarter and first nine months of 1996 and 1995. The 1995 third quarter
and first nine months 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).
1996/1995 Pro Forma Revenues and Gross Profits for 3rd Quarter
<TABLE>
<CAPTION>
(Dollars in thousands) 1996 Pro Forma 1995
3rd Quarter Percentage 3rd Quarter
REVENUES As Reported Change As Reported Pro Forma
<S> <C> <C> <C> <C>
Software and services.... $ 41,604 12.6 % $ 43,037 $ 36,957
Maintenance and support.. 13,615 (11.9)% 18,703 15,447
Hardware products........ 16,841 (24.1)% 43,500 22,194
Total revenues....... $ 72,060 (3.4)% $ 105,240 $ 74,598
Gross profit............. $ 26,122 3.6 % $ 29,162 $ 25,213
REVENUE DISTRIBUTION
Software and services.... 57.7% 40.9% 49.5%
Maintenance and support.. 18.9% 17.8% 20.7%
Hardware products........ 23.4% 41.3% 29.8%
Total revenues....... 100.0% 100.0% 100.0%
Gross profit............. 36.3% 27.7% 33.8%
</TABLE>
1996/1995 Pro Forma Revenues and Gross Profits Year-to-Date
<TABLE>
<CAPTION>
(Dollars in thousands) 1996 Pro Forma 1995
Year-to-Date Percentage Year-to-Date
REVENUES As Reported Change As Reported Pro Forma
<S> <C> <C> <C> <C>
Software and services.... $ 124,375 18.1 % $ 129,439 $ 105,307
Maintenance and support.. 42,687 (9.3)% 59,481 47,063
Hardware products........ 58,783 (21.1)% 175,472 74,466
Total revenues....... $ 225,845 (0.4)% $ 364,392 $ 226,836
Gross profit............. $ 78,151 7.2 % $ 95,364 $ 72,906
REVENUE DISTRIBUTION
Software and services.... 55.1% 35.5% 46.4%
Maintenance and support.. 18.9% 16.3% 20.8%
Hardware products........ 26.0% 48.2% 32.8%
Total revenues....... 100.0% 100.0% 100.0%
Gross profit............. 34.6% 26.2% 32.1%
</TABLE>
16
<PAGE>
CONTROL DATA SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Unaudited) (Continued)
1996 3rd Quarter 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.... $ 22,115 $ 14,239 $ 5,250 $ 41,604
Maintenance and support.. - - 13,615 13,615
Hardware products........ 12,557 3,801 483 16,841
Total revenues....... $ 34,672 $ 18,040 $ 19,348 $ 72,060
Gross profit............. 27.0% 54.0% 36.3% 36.3%
</TABLE>
1995 3rd Quarter 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.... $ 21,617 $ 10,883 $ 4,457 $ 36,957
Maintenance and support.. - - 15,447 15,447
Hardware products........ 14,639 6,969 483 22,194
Total revenues....... $ 36,256 $ 17,852 $ 20,490 $ 74,598
Gross profit............. 28.1% 42.1% 36.7% 33.8%
</TABLE>
1996 Year-to-Date 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.... $ 71,845 $ 39,690 $ 12,840 $ 124,375
Maintenance and support.. - - 42,687 42,687
Hardware products........ 41,424 15,213 2,146 58,783
Total revenues....... $ 113,269 $ 54,903 $ 57,673 $ 225,845
Gross profit............. 26.7% 48.0% 37.3% 34.6%
</TABLE>
1995 Year-to-Date 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.... $ 61,975 $ 28,359 $ 14,973 $ 105,307
Maintenance and support.. - - 47,063 47,063
Hardware products........ 52,951 19,574 1,941 74,466
Total revenues....... $ 114,926 $ 47,933 $ 63,977 $ 226,836
Gross profit............. 25.2% 44.7% 35.2% 32.1%
</TABLE>
17
<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.
18
<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 8, 1996 /s/ J. F. KILLORAN
J. F. Killoran
Vice President and Chief Financial Officer
(Principal Accounting Officer)
19
<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, 1996.
(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, September 30, September 30, September 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Net earnings applicable to
common shares:
Net earnings $ 2,924 $ 632 $ 9,456 $ 5,092
Primary:
Shares for common and common share
equivalent earnings per share (1):
Weighted average number of
common shares outstanding 13,682,251 12,762,272 13,454,088 12,896,545
Dilutive effect of outstanding
stock options and warrants 903,700 302,003 1,033,938 0
14,585,951 13,064,275 14,488,026 12,896,545
Net earnings per common share
and common share equivalents $ 0.20 $ 0.05 $ 0.65 $ 0.40
Fully Diluted:
Shares for common and common share
equivalent earnings per share (2):
Weighted average number of
common shares outstanding 13,682,251 12,762,272 13,454,088 12,896,545
Dilutive effect of outstanding
stock options and warrants 1,056,565 724,345 1,139,221 730,409
14,738,816 13,486,617 14,593,309 13,626,954
Net earnings per common share
and common share equivalents $ 0.20 $ 0.05 $ 0.65 $ 0.37
<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 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS
<CAPTION>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-END> Sep-30-1996
<CASH> 88,728
<SECURITIES> 0
<RECEIVABLES> 71,967
<ALLOWANCES> 0
<INVENTORY> 16,382
<CURRENT-ASSETS> 181,398
<PP&E> 18,425
<DEPRECIATION> 0
<TOTAL-ASSETS> 215,003
<CURRENT-LIABILITIES> 75,027
<BONDS> 0
<COMMON> 148
0
0
<OTHER-SE> 98,069
<TOTAL-LIABILITY-AND-EQUITY> 215,003
<SALES> 96,581
<TOTAL-REVENUES> 225,845
<CGS> 52,070
<TOTAL-COSTS> 147,694
<OTHER-EXPENSES> 67,417
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 178
<INCOME-PRETAX> 10,556
<INCOME-TAX> 1,100
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,456
<EPS-PRIMARY> 0.65
<EPS-DILUTED> 0.65
</TABLE>
