<PAGE>
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., 20549
(Mark one)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 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 its 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 and zip code)
Registrant's telephone number, including area code: (612) 415-3001
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
(Title of class)
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. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. X
The aggregate market value of the registrant's voting stock held by non-
affiliates of the registrant, based upon the closing sale price of the
Common Stock on March 17, 1997 on the Nasdaq National Market as reported in
The Wall Street Journal, was approximately $160,000,000. Shares of voting
stock held by each executive officer and director and by each person who
owns more than 5% of any class of the registrant's voting stock have been
excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive
determination for other purposes.
As of March 17, 1997, the registrant had outstanding 12,919,468 shares
of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the
registrant's 1997 Annual Meeting of Stockholders are incorporated by
reference into Part III, and portions of the registrant's Annual Report to
Stockholders for the fiscal year ended December 31, 1996 are incorporated
by reference into Parts II and IV.
<PAGE>
PART I
ITEM 1. BUSINESS
Background. Control Data Systems, Inc. (Control Data or the Company) is a
global software and services company dedicated to helping organizations
develop the enterprise-wide systems required to create, transmit, access
and control business information. With its Rialto brand of directory-
enabled software tools and services, the Company is focused on the
architecture, implementation and lifetime support of digital commerce and
enterprise-wide client-server solutions for business and government.
The Company provides Enterprise Integration software and service
solutions that include network design, installation and maintenance;
application re-hosting to client-server architectures; the integration of
disparate electronic messaging systems; and corporate directory design and
implementation. Its Technical Services offerings include hardware and
software maintenance services; rapid technology deployment in distributed
environments; and customer service hotline support. The Company's Product
Design software provides computer-aided design (CAD) software and services,
primarily to the discrete manufacturing industry.
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.
The Company invests in four major areas:
o Development of software products and tools associated with digital
commerce and CAD.
o Training and development of its technical workforce.
o Marketing and sales of its products and services.
o Marketing and sales support for its service provider partners.
The Company was established through Ceridian Corporation's (Ceridian)
transfer of its Computer Products business to the Company and Ceridian's
subsequent distribution, in July of 1992, of the Company's stock as a
dividend to Ceridian's stockholders.
The Company's principal offices are located at 4201 Lexington Avenue
North, Arden Hills, Minnesota 55126-6198.
Industry Background and Business Transition
The excitement over the information superhighway and other
manifestations of Internet activity obscure the more significant forces at
work below the surface of the emerging electronic marketplace. The
introduction of inexpensive, easy-to-use browser technology is helping to
popularize the medium, but this technology alone is not driving this trend.
Global competitive forces, combined with continued technology breakthroughs
in hardware, software, and telecommunications, are stimulating
entrepreneurial interest in conducting business electronically - across
both private and public networks - without the traditional limitations of
time and space. While the individual technologies are important, equally
crucial are the skills to align processes and practices through enterprise
networking and applications integration.
2
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Electronic messaging has become the basic transport mechanism for
today's leading business and government institutions. Although there are
already more than 100 million e-mail users worldwide, this electronic
messaging transport mechanism means much more than just e-mail.
Organizations are quickly leveraging this transport infrastructure to
convert traditional paper processes to digital ones or do away with some
processes altogether.
This is the beginning of a new digital commerce era characterized by the
integration of Internet technologies with existing back office
applications. Critical to this integration, both inside a company
(intranet) and outside (Internet), are two areas in which Control Data
excels: messaging and directory services. Messaging expertise is important
because many of the workflow and collaboration applications used by this
new Internet technology are based on messaging protocols. Directories are
important because Internet technologies don't offer the security and
control that used to exist in mainframe environments. Directories bring
about this security and control, while maintaining the advantages of
distributed computing. By focusing on the needs of Global 1000
organizations, Control Data is extending its leadership in messaging and
directory services to this emerging market.
From its history in the pioneering computer environments of the 1950's,
the Company has applied its network integration skills across heterogeneous
computing environments. In the early 1990's, the Company completed its
transition away from the manufacture of proprietary mainframe computers to
that of an open systems integration company. In 1994, the Company recorded
a restructuring charge and goodwill write-off of $95.0 million. The
restructuring charge and goodwill write-off included expenses for reducing
the worldwide employee population, consolidating operations in selected
locations, and revaluing certain intangible assets associated with prior
acquisitions. In 1995 and early 1996, Control Data took further steps to
focus its business for growth in the markets for our enterprise network
integration software and services with the sale of certain of its
international product fulfillment operations to AmeriData Technologies,
Inc. (AmeriData). In late 1996, the Company signed a definitive agreement
to sell its 50-percent interest in Metaphase Technology, Inc. to its
partner in the joint venture, Structural Dynamics Research Corporation. The
sale was completed in January 1997, thus ending Control Data's
participation in the product data management integration market and
providing greater focus on the digital commerce integration business.
For additional information regarding the divestiture to AmeriData and
the restructuring charges, see notes 3 and 18 of the Notes to Consolidated
Financial Statements incorporated herein by reference to the Company's
Annual Report to Stockholders for the fiscal year ended December 31, 1996.
Products and Services
The following table sets forth revenues for the Company's major product
and service offerings for the periods indicated:
<TABLE>
Years Ended
December 31, December 31, December 31,
1996 1995 1994
(Dollars in thousands)
<S> <C> <C> <C>
Software and services........ 170,332 174,080 154,275
Maintenance and support...... 56,046 75,452 92,785
Hardware products............ 79,318 205,283 277,167
Total revenues............. 305,696 454,815 524,227
</TABLE>
Excluding the international operations sold to AmeriData, pro forma
total revenues were $313,964 and $336,402 for 1995 and 1994, respectively.
3
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Software and Services
In 1996, the Company took an aggressive step to meet the growing demand
for digital commerce technologies with the launch of the Rialto suite of
products. Rialto brings together four of the most fundamental building
blocks of a digital commerce infrastructure: messaging, security,
information access, and directories.
Rialto includes a series of solutions designed to help large
organizations build and manage enterprise-wide communications networks, or
intranets. The objective is to provide three key benefits:
o Enable desktop users to more easily locate information within their
enterprise, including the ad hoc materials now being proliferated by
intranet and messaging technology, as well as highly structured data that
currently resides in legacy information systems.
o Enable institutions to secure their communications infrastructures and
protect their resources so they can pursue new business objectives and
initiate new processes outside their organizational borders.
o Enable institutions to cost effectively manage their infrastructure so
that economies of scale can be leveraged across an entire enterprise.
Software
Rialto Directories. This solution set includes a more powerful
version of Control Data's Global Directory Server, one of the industry's
leading implementations of the international X.500 standard for directory
services, and a new Global Naming Administration offering. This offering
enables organizations with distributed and disparate Information Technology
(IT) infrastructures to have one management environment for user
attributes. The major benefit is the scalability and dramatically reduced
cost of administering multiple networks from a central point, as well as
more timely updates of changes to user attributes.
Rialto Security. This solution set includes a set of services and
products that links security enforcement policies and technologies into an
integrated program driven from an enterprise directory. Security policies
are entered as rules into the directory. Designated enforcement
technologies use the directory information to enforce the security policy.
The primary benefit is the universal deployment, monitoring, and
enforcement of an organizational security policy from a central point,
which improves security effectiveness and reduces security costs.
Rialto Information Access. This solution set includes new solutions
that dramatically improve access, communication, and control of information
across enterprise intranets. Any user, with appropriate access privileges
obtained through the enterprise directory, can access information using an
easy-to-use web browser regardless of system type or location. One
solution, called I*Hub, creates an enterprise-level digital library for
transitory data such as electronic mail messages and their attachments.
Rialto Messaging. This solution set includes a new client-server
messaging solution, IntraStore Server, designed to support corporate
intranets and the Internet. IntraStore Server allows individual users to
integrate Internet messaging clients while preserving centralized
administration and management. Rialto Messaging also includes Mail*Hub,
Control Data's existing message integration solution for connecting complex
heterogeneous messaging environments.
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<PAGE>
As a state of the art implementation of X.500 directory technology,
Mail*Hub is the Company's leading network integration software product. It
is packaged with services that include network analysis, configuration,
installation, training, network monitoring, maintenance, and hotline
support.
CAD/CAM/CAE Application Software Products. The Company offers computer-
aided design, manufacturing and engineering (CAD/CAM/CAE) software
applications packages that provide simultaneous engineering, or automated
merging of engineering analysis, design, drafting, and manufacturing
functions. This eliminates separate data entry operations, reducing the
chance of errors and shortening the time to produce a product.
The Company's most important CAD/CAM/CAE offering is its Integrated
Computer-aided Engineering and Manufacturing (ICEM) series of CAD/CAM/CAE
software modules for the manufacturing industry, specifically for
automotive companies and their suppliers, airplane and aerospace companies
and their suppliers, and machinery companies. ICEM software packages
include surface modeling, computational fluid dynamics, surface milling,
and solid modeling packages.
Additionally, the Company resells software products from a wide range of
third party standards-based suppliers, including Oracle, Informix, Sybase,
OpenVision, 3Com, Wellfleet, Banyan, Novell, and Wingra.
Services
The Company has a heritage of managing large programs requiring complex
systems integration. Previously such projects centered on use of the
Company's proprietary products. In the networked systems environment, the
Company is increasingly involved in digital commerce integration activities
that require a diverse set of products and services selected from the
Rialto suite of solutions as well as other sources. Integral to this
business are the many professional services analysts whose knowledge and
skills are required to assist in systems design and implementation.
The Company's digital commerce integration services are designed to
assist customers in the selection and creation of computer systems tailored
to solve business-specific information management and networking problems
or to automate system activities. In creating these customized systems,
the Company incorporates selected hardware and software products it has
developed or obtained from its suppliers.
Client/Server Services. For customers that are downsizing or
reengineering their computing systems through the application of client-
server technology, the Company offers the following specialized services:
o Program management, design/development of user interfaces, database
design, solution connectivity, system administration, and the
implementation of application functionality.
o Evaluation and implementation of operating environments required by the
customer's application software. The Company offers experience in both
enhanced and conventional versions of UNIX, desktop systems (MS-DOS,
Microsoft Windows, and Windows NT), and high performance I/O
extensions.
o Evaluation and implementation of the most appropriate, cost effective
computer hardware and software for a customer's client/server
environment. The Company offers a range of open systems platforms based
on its marketing relationships with leading industry platform and
peripheral suppliers, including Sun Microsystems, Inc. (Sun), Hewlett-
Packard Company (Hewlett-Packard), and Silicon Graphics, Inc. (SGI).
5
<PAGE>
Networking Solutions. As computer users take advantage of downsized
computer platforms, decentralized organizational processes, and open
systems technology, their computing environment's basic networking
structure must also be evaluated in terms of its capabilities, performance,
and cost. When these changes take place, users often need to find new
solutions for interconnecting dissimilar computer systems, finding cost-
effective ways to manage complex networks on a daily basis, and improving
the productivity of their business processes. The Company's networking
experts provide solutions in the following areas:
o E-Mail Integration. The Company's Mail*Hub product allows disparate E-
Mail systems from mainframes, PC's and workstation/servers to
communicate in a transparent manner.
o Directory Synchronization. The Company's X.500 technology enables the
consolidation of e-mail directories and other basic organizational
information in a central, updatable corporate repository.
o Security Services. The Company provides network analysis, penetration
testing, security system design, and implementation.
o EDI Solutions. Standards-based electronic data interchange (EDI)
capabilities, enabling organizations to expedite their daily business
processes.
o Network Integration Services. Requirements analysis, configuration
design, installation, performance assessment, and ongoing maintenance.
o Enterprise Management Center. Remote management, monitoring, and
troubleshooting support for computer networks and systems, worldwide,
24 hours a day, 7 days a week.
o Help Desk Hotline. Provides answers to questions on operating systems,
networks, applications, and general computing problems. Engineers are
trained to solve problems by phone or via dispatched on-site support.
Managed Services. In 1995, the Company introduced a full range of
services designed for customers who want to outsource the management and
control of their messaging and directory network operations.
o Enterprise Networking. Remote monitoring and management of wide-area
network hardware and software solutions that integrate local-area
resources into enterprise networks.
o Intercompany Messaging. Commercial service that offers business-ready
features to clients that require enterprise and intercompany messaging,
global directory services, and electronic commerce capabilities.
Working with a variety of regional telecommunications providers around
the world, who market the service and provide the network connections
required by clients, the Company provides the message and directory
integration technology, integration expertise, and operations support.
o Enterprise Information Management. Administration, daily operation,
maintenance, and support of client/server solutions required to integrate
locally managed data bases and other information resources into enterprise
solutions.
The Company's integration services are carried out primarily by its
professional services staff, which includes approximately 750 systems
analysts serving customers worldwide from regional centers in the United
States, Europe, and Asia. To meet the unique needs or preferences of
customers in specific geographic markets, the Company selects the most
suitable and cost effective hardware platforms currently available from
marketing partners and third-party networking products, industry standard
applications, and other local products such as microcomputers and
terminals.
6
<PAGE>
Revenues from software and services were $170.3 million in 1996, $174.1
million in 1995, and $154.3 million in 1994, representing 55.7%, 38.3%, and
29.4%, respectively, of the Company's total revenues. Excluding the
international operations sold to AmeriData, total pro forma revenues from
software and services were $148.0 million in 1995 and $125.4 million in
1994, representing 47.1% and 37.3%, respectively, of the Company's total
pro forma revenues.
Maintenance and Support
The Company provides hardware and software maintenance services for both
its Cyber and open systems products through engineers located throughout
the United States and in many foreign countries. A central support
organization provides technical planning and support, including a worldwide
logistics operation for spare parts, a 24-hour hotline and an on-line
diagnostic system accessible through Cyber mainframes.
Maintenance and support revenues were $56.1 million in 1996, $75.4
million in 1995, and $92.8 million in 1994, representing 18.3%, 16.6%, and
17.7%, respectively, of the Company's total revenues. Excluding the
international operations sold to AmeriData, total pro forma revenues from
maintenance and support were $62.5 million in 1995 and $72.7 million in
1994, representing 19.9% and 21.6%, respectively, of the Company's total
pro forma revenues.
Hardware Products
The Company is differentiated from many other integrators because it is
not captive to a particular product set or technology. This independence
allows it to work in a multivendor environment without bias. Beginning in
1989 with its relationship with SGI, the Company began integrating UNIX-
based open system products into its customer solutions. Systems based on
UNIX and Intel/Microsoft technologies can support the industry's migration
from centralized computing, which was dependent on mainframes, to a
networked and distributed client-server environment, in which application
processing and data are spread across many networked computing resources.
To expand the range of platform options available to its customers, the
Company signed remarketing agreements with Sun and Hewlett-Packard in 1993.
As a Sun integrator, the Company remarkets Sun's complete line of
workstations, servers, and software worldwide as a part of the Company's
systems integration solutions for the commercial marketplace, particularly
in the financial services, healthcare, telecommunications, and
manufacturing markets. As a Hewlett-Packard integrator, the Company
remarkets HP Apollo 9000 Series 700 workstations and HP 9000 Series 800
business server hardware and software, integrating the equipment and
applications into solutions for customers in the aerospace, automotive,
manufacturing, government, and commercial markets.
Revenues from the sale and lease of hardware products were $79.3 million
in 1996, $205.3 million in 1995, and $277.1 million in 1994, representing
26.0%, 45.1%, and 52.9%, respectively, of the Company's total revenues.
Excluding the international operations sold to AmeriData, total pro forma
revenues from hardware products were $103.5 million in 1995 and $138.3
million in 1994, representing 33.0% and 41.1%, respectively, of the
Company's total pro forma revenues.
7
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Sales
Worldwide Business
The Company markets its products and services principally through its
direct sales force located in the United States and 12 other countries.
The Company's major international operations are in France, Germany, Korea,
China, Taiwan, and the United Kingdom. In 1995, the Company sold seven of
its international product distribution operations in Austria, Canada,
Greece, Mexico, Norway, Portugal, and the United Kingdom to AmeriData. In
1996, the Company sold its product distribution operations in Denmark to
AmeriData.
The Company also markets its products and services through subsidiaries
and distributors located in countries representing smaller markets. The
Company believes that one of its strengths is its long-standing presence
and name recognition in various foreign countries.
Revenues from the Company's non-U.S. operations were approximately
52.3%, 69.2%, and 71.5%, of the Company's total revenues in 1996, 1995, and
1994, respectively. For further information regarding the Company's U.S.
and international operations, see note 17 of the Notes to Consolidated
Financial Statements incorporated herein by reference to the Company's
Annual Report to Stockholders for the fiscal year ended December 31, 1996.
The Company's sales and support operations are organized into three
regions (Americas, Europe, and Asia), each with its own marketing, sales
and sales support professionals providing consulting and engineering
services. Centralized technology support services are provided to the
sales regions from the Company's headquarters in Arden Hills, Minnesota.
These resources are available to assist field organizations in
understanding technology trends, formulate technology strategies, and
provide pre-sales consulting and post-sales implementation expertise. The
Company also provides essential system integration services including
customer hot-line support, program/project management, customized training
systems, engineering analysis, and custom software development.
Customers
The Company's products and services are used in a wide variety of
applications for customers in government, financial services,
telecommunications, and manufacturing. The Company believes that its
worldwide sales and support organization enables it to better understand
the markets in which it competes, to focus its sales efforts effectively,
and to develop long-term relationships with its customers.
The U.S. Government was the only customer of the Company accounting for
more than 10% of total revenues in fiscal years 1996, 1995, or 1994.
Contracts with the U.S. government represented approximately 19.5%, 13.6%,
and 12.0% of the Company's total revenue in fiscal years 1996, 1995, and
1994, respectively. Generally, the Company's contracts with the U.S.
Government contain provisions to the effect that they may be terminated at
the convenience of the customer, and that in the event of such termination,
the Company would be entitled to receive payment based on the cost incurred
and the anticipated profit on the work completed prior to termination.
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Research and Development
The Company's research and development efforts are primarily oriented
toward digital commerce, CAD/CAM/CAE products, and client/server solutions.
In 1994, the Company formed a new business unit dedicated to the
development of products and services related to messaging and information
infrastructures. Research and development efforts directed toward
enhancing the Company's ICEM application software product line occur
through the Company's ICEM Technologies division.
Company-sponsored research and development expenses related to new
products or services and the improvement of existing products totaled $12.5
million, $9.7 million, and $10.1 million, for 1996, 1995, and 1994,
respectively. The increase in research and development expenses primarily
relates to the Company's continuing investment in digital commerce products
and services.
Competition
The market for the Company's products and services is highly competitive
and is characterized by rapid technological advances in both hardware and
software development. These advances result in shorter product life cycles
and enhanced product capabilities, typically at significantly better price
and performance levels. At the same time, these advances have also created
increased demand for the skills of knowledgeable systems integrators who
can help customers make the best use of the available technology.
Competition in the digital commerce integration market is intense and is
based on a variety of factors including customer satisfaction, reputation,
price, performance, product quality, software availability, connectivity,
networking, compatibility with industry standards, marketing and
distribution capability, customer support, name recognition, and financial
strength. The Company competes throughout the world with numerous local,
regional, national, and international systems integrators. Several of the
Company's competitors have significantly greater financial and operational
resources than the Company.
Backlog
The backlog of the Company's orders believed to be firm is estimated to
have been approximately $19 million as of December 31, 1996, most of which
is expected to be reflected in revenues during 1997. At December 31, 1995,
the backlog was approximately $23 million. The decrease in the 1996
backlog from 1995 is primarily due to the operations sold to AmeriData.
No backlog amount is determinable for a large portion of the Company's
revenues. In addition, customers may elect to accelerate or delay the
delivery of products, and delivery of large orders may be spread over a
period of time and may be subject to modification from time to time.
Consequently, the Company believes that backlog information does not
necessarily provide a meaningful indication of its future business volume.
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<PAGE>
Environmental Matters
In connection with the Company's spin-off from Ceridian, Ceridian agreed
to retain responsibility for and indemnify the Company against
environmental liabilities relating to: 1) facilities formerly operated by
the Computer Products business, 2) third-party disposal or treatment sites
as to which Ceridian has been or is in the future identified as a
potentially responsible party because of past operations of the Computer
Products business at its former facilities, and 3) certain other known
environmental matters related to past operations of the Computer Products
business. These facilities and sites constitute all matters which, at the
present time, are known to present potential environmental liabilities
related to the operation of the Computer Products business. The Company
has generally agreed to indemnify Ceridian against future environmental
claims that relate to current and future facilities and operations of the
Company.
Compliance by the Company with federal, state, and local environmental
protection laws during 1996 had no material effect upon capital
expenditures, earnings or competitive position, and is expected to have
none in the foreseeable future.
Patents
The Company owns or is licensed under a number of patents which relate
to some of its products. The Company believes that its business as a whole
is not materially dependent upon any particular patent or license, or any
particular group of patents or licenses. Instead, the Company believes
that its success and growth are more dependent, among other things, on the
quality of its services and products and its reputation with its customers.
Employees
As of December 31, 1996, the Company had approximately 1,750 full-time
employees.
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<PAGE>
ITEM 2. PROPERTIES
The Company's corporate headquarters and U.S. field operations
headquarters are located in Arden Hills, Minnesota. Facilities located
elsewhere are primarily sales and service locations, and include
significant office facilities in Atlanta, Georgia; Sunnyvale and Anaheim,
California; Rockville, Maryland; Frankfurt, Germany; Paris, France; Delft,
Netherlands; and Taipei, Taiwan. The Company owns a significant office
facility in Mexico, which is leased to AmeriData.
The following table summarizes the usage and location of the Company's
facilities as of January 1, 1997.
<TABLE>
Facilities
Type of Property Interest U.S. Non-U.S. Worldwide
(In Thousands of Square Feet)
<S> <C> <C> <C>
Owned............................. 325.5 179.2 504.7
Leased............................ 588.6 231.9 820.5
Total square feet.............. 914.1 411.1 1,325.2
Utilization
Warehousing....................... 74.7 35.6 110.3
Office, computer center and other. 551.9 196.5 748.4
Vacant............................ 21.1 69.5 90.6
Leased or subleased to others..... 266.4 109.5 375.9
Total square feet.............. 914.1 411.1 1,325.2
</TABLE>
No facilities owned by the Company are subject to any major
encumbrances. The Company believes that all of the facilities currently
utilized in its ongoing business operations meet their intended purposes
and are adequately maintained. As a result of the Company's continuing
business transition, leased property decreased during fiscal 1996 by
approximately 200,000 square feet, a reduction of 19.8%. The number of
facilities also decreased from 90 at the end of 1995 to 78 at year end
1996, a net decrease of 12 locations. This substantial reduction was
primarily attributable to the consolidation of locations in the U.S. field
operations and the sale of certain international operations to AmeriData.
Restructuring charges recorded in fiscal year ended December 31, 1994,
included provisions of approximately $9.7 million for lease and other
obligations related to excess facilities.
ITEM 3. LEGAL PROCEEDINGS
There are no legal proceedings pending against or involving the Company
which, in the opinion of management, will have a material adverse effect
upon its consolidated financial position or results of operations.
In connection with the Company's spin-off from Ceridian, the Company has
agreed to assume responsibility for, and indemnify Ceridian Corporation
against, liability in connection with judicial and administrative claims
and proceedings relating to the Computer Products business prior to August
1, 1992. Although occasional adverse decisions (or settlements) may occur,
management believes that the final disposition of such matters will not
have a material adverse effect on the Company's financial position. Pending
age discrimination actions against Ceridian and the Company were settled in
March 1997. The Company's aggregate liability for such actions was
approximately $4.5 million. The Company has adequate reserves to cover
this amount.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders during
the quarter ended December 31, 1996.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
James E. Ousley 51 President and Chief Executive
Officer
Joseph F. Killoran 56 Vice President and Chief Financial
Officer
Ruth A. Rich 53 Vice President, Human Resources/
Administration and Secretary
Dieter Porzel 60 Vice President, Europe/Middle
East/Africa Region
Michael G. Eleftheriou 51 Vice President, Technical Services
David B. Folsom 49 Vice President, Electronic Commerce
Solutions and Chief Technology Officer
Arnold (Nol) Rutgers 55 Vice President, Sales and
Operations, U.S. and Asia
</TABLE>
Executive officers of the Company are elected by the Board of Directors
and serve at the Board's discretion. There are no family relationships
among any directors or executive officers of the Company.
James E. Ousley has been President and Chief Executive Officer of
Control Data since August 1992. Mr. Ousley was President of Ceridian's
Computer Products business from April 1989 to July 1992; and Executive Vice
President of Ceridian from February 1990 to July 1992.
Joseph F. Killoran has been Vice President and Chief Financial Officer
of Control Data since February 1994. Mr. Killoran was Vice President and
Controller of Control Data from August 1992 to January 1994; and Vice
President and Controller for Ceridian's Computer Products business from
1989 to July 1992.
Ruth A. Rich has been Vice President, Human Resources/Administration of
Control Data since August 1992 and Secretary since March 1997. Ms. Rich
was Vice President, Human Resources/Administration for Ceridian's Computer
Products business from November 1990 to July 1992; and Vice President,
Human Resources/Administration for Ceridian's Information Services Group
from May 1986 to November 1990.
Dieter Porzel has been Vice President, Europe/Middle East/Africa Region
of Control Data since February 1993. Mr. Porzel was Vice President,
Central Europe Region for Control Data from August 1992 to January 1993;
and Vice President, Central Europe Region of Ceridian's Computer Products
business from 1987 to 1992.
Michael G. Eleftheriou has been Vice President, Technical Services of
Control Data since January 1996. Mr. Eleftheriou was Vice President of
Assessment and Planning for Control Data from October 1994 to December
1995; General Manager of United States Systems Integration Operations from
May 1994 to September 1994; General Manager of Control Data Mexico from
October 1992 to April 1994; General Manager of Worldwide Sales and Services
from August 1992 to September 1992; General Manager, Worldwide Sales and
Services of Ceridian's Computer Products business from December 1991 to
July 1992; and General Manager of Ceridian's Cyber Marketing business from
April 1990 to November 1991.
12
<PAGE>
David B. Folsom has been Vice President, Electronic Commerce Solutions
of Control Data since October 1994. In addition, in March 1997, Mr. Folsom
assumed the role of Chief Technology Officer. Mr. Folsom was General
Manager of Networking Competency Centers of Control Data from August 1992
to September 1994; and Director of Software Development for Ceridian's
Computer Products business from 1990 to July 1992.
Arnold (Nol) Rutgers has been Vice President, Sales and Operations, U.S.
and Asia of Control Data since October 1996. Mr. Rutgers was Vice
President, Asia/Pacific Region from June 1995 to September 1996; Vice
President, Marketing from October 1994 to May 1995; General Manager of
Strategic Planning for Control Data from August 1992 to September 1994; and
General Manager of Strategic Planning for Ceridian's Computer Products
business from September 1989 to July 1992.
13
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
"Price Range of Common Stock," appearing on page 31 of the Company's
1996 Annual Report to Stockholders, is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
"Selected Consolidated Financial Data," appearing on inside cover page
of the Company's 1996 Annual Report to Stockholders, is incorporated herein
by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
"Management's Discussion and Analysis of Financial Condition and
Results of Operations," appearing on pages 8 through 12 of the Company's
1996 Annual Report to Stockholders, is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated balance sheets of the Company and its subsidiaries as
of December 31, 1996 and 1995, the related consolidated statements of
operations, stockholders' equity and cash flows for each of the years in
the three-year period ended December 31, 1996, and the notes to
consolidated financial statements, together with report therein of KPMG
Peat Marwick LLP dated January 22, 1997, appearing on pages 13 through 30
of the Company's 1996 Annual Report to Stockholders, are incorporated
herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
IDENTIFICATION OF DIRECTORS
"Election of Directors" in the Company's Proxy Statement for the 1997
Annual Meeting of Stockholders to be held on May 14, 1997 (hereinafter the
"Proxy Statement") is incorporated herein by reference.
IDENTIFICATION OF EXECUTIVE OFFICERS
Information regarding executive officers of the Company is contained
in Part I of this Report on page 12 and is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
"Executive Compensation" in the Proxy Statement is incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
"Stockholdings of Certain Owners and Management" in the Proxy
Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
"Election of Directors-Certain Business Relationships" in the Proxy
Statement is incorporated herein by reference.
14
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Financial Statements
Incorporated by reference into Part II, Item 8 of this report.
<TABLE>
<CAPTION>
Page in
1996 Annual
Report to
Stockholders
<S> <C>
Independent Auditors' Report.................................. 13
Consolidated Statements of Operations - Years Ended
December 31, 1996, December 31, 1995, and December 31, 1994.. 14
Consolidated Balance Sheets - December 31, 1995 and
December 31, 1994............................................ 15
Consolidated Statements of Stockholders' Equity -
Years Ended December 31, 1996, December 31, 1995, and
and December 31, 1994........................................ 16
Consolidated Statements of Cash Flows - Years Ended
December 31, 1996, December 31, 1995, and December 31, 1994.. 17
Notes to Consolidated Financial Statements.................... 18
</TABLE>
Financial Statement Schedules
<TABLE>
<CAPTION>
Page in this
Form 10-K
<S> <C>
Independent Auditors' Report on Financial Statement Schedule... 18
Schedule II - Valuation and Qualifying Accounts................ 19
</TABLE>
All other schedules are omitted because they are not applicable, or
not required, or because the required information is included in the
consolidated financial statements or notes thereto.
Reports on Form 8-K
None.
15
<PAGE>
Exhibits
<TABLE>
<CAPTION>
Exhibit
No. Description
<C> <S>
2.1* Amended and Restated Purchase Agreement, dated August 31, 1995,
between the Registrant and AmeriData Technologies, Inc. --
incorporated by reference to Exhibit 2.1 to the Registrant's
Current Report on Form 8-K dated September 13, 1995.
3.1* Restated Certificate of Incorporation of the Registrant --
incorporated by reference to Exhibit 3.1, filed under cover of
Form SE dated July 9, 1992, to the Form 8.(1)
3.2* Restated Bylaws of the Registrant, as amended -- incorporated by
reference to Exhibit 99 to the Registrant's Quarterly Report on
Form 10-Q for the fiscal quarter ended July 3, 1993.
10.1* Transfer Agreement between Ceridian and the Registrant --
incorporated by reference to Exhibit 10.1, filed under cover of
Form SE dated July 9, 1992, to the Form 8.
10.2* Intercompany Services Agreement between Ceridian and the
Registrant -- incorporated by reference to Exhibit 10.3, filed
under cover of Form SE dated July 9, 1992, to the Form 8.
10.3* Environmental Matters Agreement between Ceridian and the
Registrant -- incorporated by reference to Exhibit 10.5, filed
under cover of Form SE dated July 9, 1992, to the Form 8.
10.4* Intellectual Property Agreement between Ceridian and the
Registrant -- incorporated by reference to Exhibit 10.6, filed
under cover of Form SE dated July 9, 1992, to the Form 8.
10.5* Tax Matters Agreement between Ceridian and the Registrant --
incorporated by reference to Exhibit 10.7, filed under cover of
Form SE dated July 9, 1992, to the Form 8.
10.6* Value-Added Remarketing Agreement between Ceridian and the
Registrant regarding Ceridian's Government Systems division --
incorporated by reference to Exhibit 10.9, filed under cover of
Form SE dated July 9, 1992, to the Form 8.
10.7* Master Purchase Option Agreement between Ceridian and the
Registrant --incorporated by reference to Exhibit 10.12, filed
under cover of Form SE dated July 9, 1992, to the Form 8.
10.8* (2) Form of Indemnification Agreement between the Registrant and its
directors and executive officers -- incorporated by reference to
Exhibit 10.14, filed under cover of Form SE dated July 9, 1992,
to the Form 8.
10.9* (2) The Registrant's 1992 Equity Incentive Plan -- incorporated by
reference to Exhibit 10.15, filed under cover of Form SE dated
July 9, 1992, to the Form 8.
10.10*(2) February 1994 Amendments to 1992 Equity Incentive Plan -
incorporated by reference to Exhibit 10.16 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended January 1,
1994.
</TABLE>
(Schedules to the foregoing exhibits have not been included but will be
submitted supplementary to the Commission upon request)
* - Incorporated by reference to other filing.
(1) - Form 8 and Form 10 refer, respectively, to the
Registrant's Form 8 Amendment No. 1 dated July 10, 1992 (the
"Form 8") to its Registration Statement on Form 10 dated May 27,
1992 and declared effective July 16, 1992 (the "Form 10").
(2) - Indicates a management contract or compensatory plan or
arrangement required to be filed as an exhibit to Form 10-K.
16
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
<C> <S>
10.11*(2) February 1995 Amendments to 1992 Equity Incentive Plan -
incorporated by reference to Exhibit 10.17 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
1994.
10.12*(2) May 1996 Amendments to 1992 Equity Incentive Plan - incorporated
by reference to Exhibit 10.1 to the Registrant's Quarterly Report
on Form 10-Q for the fiscal quarter ended June 30, 1996.
10.13*(2) The Registrant's Executive Incentive Plan -- incorporated by
reference to the description of such plan under "Executive
Compensation" in the Registrant's definitive Proxy Statement for
its 1997 Annual Meeting of Stockholders.
10.14*(2) The Registrant's 1993 Employee Stock Purchase Plan - incorporated
by reference to Exhibit 10.17 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended January 2, 1993.
10.15* Software Distribution License Agreement between Intergraph and
the Registrant - incorporated by reference to Exhibit 10.21 to
the Registrant's Annual Report on Form 10-K for the fiscal year
ended January 2, 1993.
10.16*(2) Contract for the "Vorsitzender der Geschaeftsfuehrung" of Control
Data GmbH - incorporated by reference to Exhibit 10.23 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
January 1, 1994.
10.17*(2) Severance Agreement, dated January 4, 1995, between the
Registrant and James E. Ousley - incorporated by reference to
Exhibit 10.26 to the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994.
10.18*(2) Severance Agreement, dated January 4, 1995, between the
Registrant and Joseph F. Killoran - incorporated by reference to
Exhibit 10.27 to the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994.
10.19*(2) Compensation arrangement between the Registrant and its Chairman
-- incorporated by reference to the description of such
arrangement under "Director Compensation" in the Registrant's
definitive Proxy Statement for its 1997 Annual Meeting of
Stockholders.
11.0 Computation of Earnings (Loss) per Common Share.
13.0 The portions of the Registrant's 1996 Annual Report to
Stockholders that are incorporated in this Form 10-K by
reference.
21.0 Subsidiaries of the Registrant.
23.0 Consent of Independent Auditors.
24.0 Power of Attorney -- included on Signatures page hereto.
27.0 Financial Data Schedule.
</TABLE>
(Schedules to the foregoing exhibits have not been included but will be
submitted supplementary to the Commission upon request)
* - Incorporated by reference to other filing.
(1) - Form 8 and Form 10 refer, respectively, to the
Registrant's Form 8 Amendment No. 1 dated July 10, 1992 (the
"Form 8") to its Registration Statement on Form 10 dated May 27,
1992 and declared effective July 16, 1992 (the "Form 10").
(2) - Indicates a management contract or compensatory plan or
arrangement required to be filed as an exhibit to Form 10-K.
17
<PAGE>
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE
The Board of Directors and Stockholders
of Control Data Systems, Inc.:
Under date of January 22, 1997, we reported on the consolidated balance
sheets of Control Data Systems, Inc. and subsidiaries as of December 31,
1996 and 1995, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1996, as contained in the 1996 annual report to
stockholders. These consolidated financial statements and our report
thereon are incorporated by reference in the annual report on Form 10-K for
the year 1996. In connection with our audits of the aforementioned
consolidated financial statements, we also have audited the related
financial statement schedule as listed in the accompanying index. This
financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth
therein.
/s/ KPMG Peat Marwick LLP
Minneapolis, Minnesota
January 22, 1997
18
<PAGE>
Schedule II
CONTROL DATA SYSTEMS, INC.
Valuation and Qualifying Accounts
Allowance for Doubtful Accounts Receivable:
<TABLE>
<CAPTION>
Years Ended
December 31, December 31, December 31,
1996 1995 1994
(Dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of year....... $ 4,794 $ 6,844 $10,063
Additions charged to costs
and expenses................... 1,127 1,384 1,906
Write-offs and other adjustments. (2,182) (3,434) (5,125)
Balance at end of year............. $ 3,739 $ 4,794 $ 6,844
</TABLE>
19
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
CONTROL DATA SYSTEMS, INC.
By: /s/ JAMES E. OUSLEY
James E. Ousley
President and Chief Executive Officer
Dated: March 24, 1997
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears above or below constitutes and appoints James E. Ousley and Joseph
F. Killoran, or either of them, his true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities, to sign any and all
amendments to this Report, and to file the same, with all exhibits thereto
and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, full
power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or
their substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<C> <S> <C>
/s/ JAMES E. OUSLEY President and March 24, 1997
James E. Ousley Chief Executive Officer
(principal executive officer)
/s/ JOSEPH F. KILLORAN Vice President and Chief March 24, 1997
Joseph F. Killoran Financial Officer
(principal financial and
accounting officer)
/s/ W. DONALD BELL Director March 24, 1997
W. Donald Bell
/s/ GRANT A. DOVE Director March 24, 1997
Grant A. Dove
/s/ MARCELO A. GUMUCIO Director March 24, 1997
Marcelo A. Gumucio
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
<C> <S> <C>
/s/ W. DOUGLAS HAJJAR Director March 24, 1997
W. Douglas Hajjar
/s/ KEITH A. LIBBEY Director March 24, 1997
Keith A. Libbey
</TABLE>
21
<PAGE>
CONTROL DATA SYSTEMS, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
<C> <S>
2.1* Amended and Restated Purchase Agreement, dated August 31, 1995,
between the Registrant and AmeriData Technologies
3.1* Restated Certificate of Incorporation of the Registrant
3.2* Restated Bylaws of the Registrant, as amended
10.1* Transfer Agreement between Ceridian and the Registrant
10.2* Intercompany Services Agreement between Ceridian and the
Registrant
10.3* Environmental Matters Agreement between Ceridian and the
Registrant
10.4* Intellectual Property Agreement between Ceridian and the
Registrant
10.5* Tax Matters Agreement between Ceridian and the Registrant
10.6* Value-Added Remarketing Agreement between Ceridian and the
Registrant regarding Ceridian's Government Systems division
10.7* Master Purchase Option Agreement between Ceridian and the
Registrant
10.8* (2) Form of Indemnification Agreement between the Registrant and
its directors and executive officers
10.9* (2) The Registrant's 1992 Equity Incentive
10.10*(2) February 1994 Amendments to 1992 Equity Incentive Plan
10.11*(2) February 1995 Amendments to 1992 Equity Incentive Plan
10.12*(2) May 1996 Amendments to 1992 Equity Incentive Plan
10.13*(2) The Registrant's Executive Incentive Plan
10.14*(2) The Registrant's 1993 Employee Stock Purchase Plan
10.15* Software Distribution License Agreement between Intergraph and
the Registrant
10.16*(2) Contract for the "Vorsitzender der Geschaeftsfuehrung" of
Control Data GmbH
10.17*(2) Severance Agreement, dated January 4, 1995, between the
Registrant and James E. Ousley
10.18*(2) Severance Agreement, dated January 4, 1995, between the
Registrant and Joseph F. Killoran
10.19*(2) Compensation arrangement between the Registrant and its
Chairman
11.0 Computation of Earnings (Loss) per Common Share
13.0 The portions of the Registrant's 1996 Annual Report to
Stockholders that are incorporated in this Form 10-K by
reference
21.0 Subsidiaries of the Registrant
23.0 Consent of Independent Auditors
24.0 Power of Attorney
27.0 Financial Data Schedule
</TABLE>
(Schedules to the foregoing exhibits have not been included but will be
submitted supplementary to the Commission upon request)
* - Incorporated by reference to other filing.
(1) - Form 8 and Form 10 refer, respectively, to the
Registrant's Form 8 Amendment No. 1 dated July 10, 1992 (the
"Form 8") to its Registration Statement on Form 10 dated May 27,
1992 and declared effective July 16, 1992 (the "Form 10").
(2) - Indicates a management contract or compensatory plan or
arrangement required to be filed as an exhibit to Form 10-K.
<PAGE>
EXHIBIT 11.0
CONTROL DATA SYSTEMS, INC.
Computation of Earnings (Loss) Per Common Share
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended
December 31, December 31, December 31,
1996 1995 1994
<S> <C> <C> <C>
Net earnings (loss) applicable to
common shares:
Net earnings (loss).................... $ 15,978 $ 8,868 $ (94,403)
Primary:
Shares for common and common share
equivalent earnings (loss) per share (1):
Weighted average number of
common shares outstanding............ 13,510,021 12,947,890 13,739,725
Dilutive effect of outstanding
stock options and warrants........... 1,113,039 345,689 -
14,623,060 13,293,579 13,739,725
Net earnings (loss) per common share
and common share equivalents............. $ 1.09 $ 0.67 $ (6.87)
Fully Diluted:
Shares for common and common share
equivalent earnings (loss) per share (2):
Weighted average number of
common shares outstanding............ 13,510,021 12,947,890 13,739,725
Dilutive effect of outstanding
stock options and warrants........... 1,113,039 1,350,511 -
14,623,060 14,298,401 13,739,725
Net earnings (loss) per common share
and common share equivalents............. $ 1.09 $ 0.62 $ (6.87)
<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>
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollars in thousands, except employee and per share data)
<TABLE>
<CAPTION>
Years Ended
December 31, December 31, December 31, January 1, January 2,
OPERATING DATA 1996 1995 1994 1994 1993
<S> <C> <C> <C> <C> <C>
REVENUES $305,696 $454,815 $524,227 $451,835 $ 516,979
COST OF REVENUES 201,369 330,380 382,528 285,448 320,728*
Gross profit 104,327 124,435 141,699 166,387 196,251
OPERATING EXPENSES:
Selling, general and
administrative 86,860 113,047 129,491 139,467 164,312
Technical 12,483 9,673 14,241 23,782 39,953*
Restructuring - - 70,100 - 114,900
Goodwill write-off - - 24,900 - -
Change in the valuation of spare
parts inventory - - - - 14,900
Total operating expenses 99,343 122,720 238,732 163,249 334,065
Earnings (loss) from operations 4,984 1,715 (97,033) 3,138 (137,814)
NONOPERATING INCOME, NET 12,094 8,353 3,630 7,832 5,338
Earnings (loss) before
income taxes 17,078 10,068 (93,403) 10,970 (132,476)
PROVISION FOR INCOME TAXES 1,100 1,200 1,000 1,850 1,558
Net earnings (loss) $ 15,978 $ 8,868 $(94,403) $ 9,120 $(134,034)
Primary earnings (loss) per common share
and common share equivalents $ 1.09 $ 0.67 $ (6.87) $ 0.66 $ (12.03)
Fully diluted earnings (loss) per common
share and common share equivalents $ 1.09 $ 0.62 $ (6.87) $ 0.66 $ (12.03)
Weighted average common shares
outstanding (in thousands):
Primary 14,623 13,294 13,740 13,764 11,138
Fully diluted 14,623 14,298 13,740 13,764 11,138
</TABLE>
<TABLE>
<CAPTION>
December 31, December 31, December 31, January 1, January 2,
BALANCE SHEET DATA 1996 1995 1994 1994 1993
<S> <C> <C> <C> <C> <C>
Cash and short-term investments $ 84,610 $ 84,034 $ 85,415 $ 81,635 $ 134,423
Total assets 220,297 227,485 300,568 352,923 373,522
Working capital 110,791 98,715 93,341 133,868 160,816
Debt obligations 289 686 2,933 1,891 9,768
Stockholders' equity 109,020 83,498 82,306 175,176 159,207
STATISTICAL DATA
Current ratio 2.45 2.03 1.59 1.97 2.13
Capital expenditures $ 9,116 $ 11,971 $ 9,047 $ 11,355 $ 16,983
Number of employees 1,752 1,829 2,890 3,142 3,285
Revenue/employee
(average; in thousands) $ 169 $ 187 $ 165 $ 142 $ 144
<FN>
*Technical expenses of $10.5 million was reclassified to cost of revenues
in 1992.
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (IN MILLIONS)
Overview
Control Data Systems, Inc. (Control Data or the Company) is a global
software and services company dedicated to helping organizations develop
the enterprise-wide systems required to create, transmit, access and
control business information. With its Rialto brand of directory-enabled
software tools and services, the Company is focused on the architecture,
implementation and lifetime support of digital commerce and enterprise-wide
client-server solutions for business and government.
The Company provides Enterprise Integration software and service solutions
that include network design, installation and maintenance; application re-
hosting to client-server architectures; the integration of disparate
electronic messaging systems; and corporate directory design and
implementation. Its Technical Services offerings include hardware and
software maintenance services; rapid technology deployment in distributed
environments; and customer service hotline support. The Company's Product
Design software provides computer-aided design (CAD) software and services,
primarily to the discrete manufacturing industry.
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.
The Company invests in four major areas:
o Development of software products and tools associated with digital
commerce and CAD.
o Training and development of its technical workforce.
o Marketing and sales of its products and services.
o Marketing and sales support for its service provider partners.
The Company was established through Ceridian Corporation's (Ceridian)
transfer of its Computer Products business to the Company and Ceridian's
subsequent distribution, in July 1992, of the Company's stock as a dividend
to Ceridian's stockholders.
Revenues
<TABLE>
<CAPTION>
Revenues by Category
1996 Change 1995 Change 1994
<S> <C> <C> <C> <C> <C>
Software and services $170.3 (2.2%) $174.1 12.8% $154.3
Maintenance and support 56.1 (25.6%) 75.4 (18.8%) 92.8
Hardware products 79.3 (61.4%) 205.3 (25.9%) 277.1
Total revenues $305.7 (32.8%) $454.8 (13.2%) $524.2
</TABLE>
<TABLE>
<CAPTION>
Revenues by Geography
1996 Change 1995 Change 1994
<S> <C> <C> <C> <C> <C>
Americas $146.3 (15.6%) $173.4 (26.2%) $235.1
Europe 113.1 (50.3%) 227.5 (1.1%) 230.1
Asia 46.3 (14.1%) 53.9 (8.6%) 59.0
Total revenues $305.7 (32.8%) $454.8 (13.2%) $524.2
</TABLE>
The Company entered into a transaction with AmeriData Technologies, Inc.
(AmeriData) during 1995 to divest seven of its international subsidiary
operations. The effect of this transaction 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 and the exclusion of the last two months of results for the
two international operations sold on October 31, 1995. In addition, on
March 25, 1996, the Company completed the sale to AmeriData of the Control
Data operations in Denmark. See note 3 of the Notes to Consolidated
Financial Statements for additional information regarding the AmeriData
divestitures. The pro forma results discussed below reflect the exclusion
of the operating results of the divested operations for fiscal years 1995
and 1994.
Revenues for 1996 of $305.7 million decreased 32.8% from 1995 revenues of
$454.8 million. The revenue decline was due to a 61.4% decrease in hardware
products sales and a 25.6% decrease in maintenance and support. The
majority of the decrease in hardware products sales and maintenance and
support was attributable to the AmeriData divestitures. The maintenance
and support revenues decline was also due to the decrease in the number of
proprietary systems under maintenance contracts.
Revenues for 1995 of $454.8 million decreased 13.2% from 1994 revenues of
$524.2 million. The revenue decline was due to a 25.9% decrease in
hardware products sales and an 18.8% decrease in maintenance and support,
offset by a 12.8% increase in software and services revenues. The majority
of the decrease in hardware products sales and hardware maintenance and
support was attributable to lower revenues in the Americas and Asia. In
addition, a portion of the revenue decline for 1995 can be attributed to
the AmeriData divestitures. The maintenance and support revenues decline
was also due to the decrease in the number of proprietary systems under
maintenance contracts. The growth in software and services sales was
primarily associated with the Company's digital commerce and product data
management/computer-aided design (PDM/CAD) projects.
8
<PAGE>
On a pro forma basis, excluding the results of operations of the AmeriData
divestitures for the years 1995 and 1994, 1996 revenues of $305.7 million
decreased 2.6% from 1995 revenues of $314.0 million. The revenue decline
was due to a decrease in hardware products sales of 23.4% and a 10.2%
decline in maintenance and support, offset by a 15.1% increase in software
and services revenues. 1995 revenues of $314.0 million decreased 6.7% from
1994 revenues of $336.4 million. The revenue decline was due to a decrease
in hardware products sales of 25.2% and a 14.2% decline in maintenance and
support, offset by an 18.0% increase in software and services revenues.
The increase in software and services and the decrease in hardware products
sales reflects the Company's continuing emphasis on the digital commerce
market.
Revenues from the Americas operations represented 48% of the Company's
total revenues in 1996; European operations represented 37%, and Asia
operations represented 15%. A slight increase in software and services
revenue in the Americas of 4.6% was offset by a decrease in software and
services revenues in Europe and Asia of 10.1% and 1.4%, respectively.
Maintenance and support revenues decreased in the Americas, Europe, and
Asia by 17.8%, 40.8%, and 2.7%, respectively. Similarly, hardware products
sales decreased in the Americas, Europe, and Asia by 44.6%, 75.6%, and
27.7%, respectively. The majority of the decrease in revenues, in the
Americas and Europe, was attributable to the AmeriData divestitures.
Revenues from European operations represented 50% of the Company's total
revenues in 1995; the Americas operations represented 38%, and Asia
operations represented 12%. The increase in software and services revenues
in Asia, the Americas, and Europe of 37.5%, 11.3%, and 8.8%, respectively,
was offset in part by a decrease in hardware products sales of 28.9%,
51.5%, and 2.7%, respectively. The decrease in hardware products sales in
the Americas was due primarily to lower sales in Canada and Mexico in
addition to the AmeriData divestitures. On a pro forma basis, European
operations represented 38% of the Company's total revenues in 1995; the
Americas operations represented 45%, and Asia operations represented 17%.
Certain revenues have been reclassified in selected categories to conform
with the Company's standard presentation.
<TABLE>
<CAPTION>
Cost of Revenues and Gross Profit
1996 Change 1995 Change 1994
<S> <C> <C> <C> <C> <C>
Cost of revenues $201.4 (39.0%) $330.4 (13.6%) $382.5
Percentage of revenues 65.9% 72.6% 73.0%
Gross profit $104.3 (16.2%) $124.4 (12.2%) $141.7
Percentage of revenues 34.1% 27.4% 27.0%
</TABLE>
Cost of revenues decreased by 39.0% and gross profit decreased by 16.2% in
1996. The primary factor contributing to the cost of revenues and gross
profit decreases was the decline in total revenues, primarily in hardware
products sales. Gross profit margins increased to 34.1% in 1996 from 27.4%
in 1995, as the result of increased margins on software and services sales
and the exclusion of lower profit margin hardware product sales associated
with the AmeriData divestitures. On a pro forma basis, gross profit
margins increased to 34.1% in 1996 from 32.5% in 1995 as the result of
increased margins on software and services sales.
Cost of revenues decreased by 13.6% and gross profit decreased by 12.2% in
1995. The primary factor contributing to the cost of revenues and gross
profit decreases was the decline in total revenues, primarily in hardware
products sales, offset in part by an increase in software and services
sales. Gross profit margins increased slightly to 27.4% in 1995 from 27.0%
in 1994, primarily reflecting the exclusion of lower profit margin hardware
products sales associated with the AmeriData divestitures. On a pro forma
basis, gross margins increased to 32.5% in 1995 from 30.9% in 1994,
primarily as the result of increased margins on maintenance and support
sales.
<TABLE>
<CAPTION>
Operating Expenses
1996 Change 1995 Change 1994
<S> <C> <C> <C> <C> <C>
Selling, general
and administrative $ 86.9 (23.1%) $113.0 (12.7%) $129.5
Percentage of revenues 28.4% 24.8% 24.7%
Technical $ 12.5 28.9% $ 9.7 (31.7%) $ 14.2
Percentage of revenues 4.1% 2.1% 2.7%
Restructuring - - - (100.0%) $ 70.1
Percentage of revenues - - 13.4%
Goodwill write-off - - - (100.0%) $ 24.9
Percentage of revenues - - 4.8%
</TABLE>
Selling, general and administrative (SG&A). The decrease in SG&A expense
was a result of downsizing actions taken by the Company over the past
several years and the exclusion of operating expenses associated with the
operations sold in the AmeriData divestitures. As a percentage of revenue,
SG&A expenses increased in 1996 as a result of investments made in support
of service provider partners. On a pro forma
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - CONT'D (IN MILLIONS)
basis, the divested operations had lower SG&A expense to revenue levels and
the exclusion of these operations would raise the Company's SG&A expense to
revenue percentage.
Technical. The increase in technical expense was the result of higher
spending on digital commerce products and services. The AmeriData
divestitures had no effect on technical expenses.
Restructuring charges. During the fourth quarter of 1994, the Company
completed a thorough review of its worldwide business operations and market
opportunities. The results of this review indicated that certain actions
were needed to further reduce the geographic scope of operations, downsize
employment levels worldwide, and revalue selected assets in order to remain
competitive in the future. Based on this review, the Company adopted a
formal restructuring plan resulting in a pre-tax restructuring charge of
$70.1 million.
Under the 1994 restructuring plan, the Company planned to reduce its pre-
restructure workforce by approximately 600 individuals, thereby reducing
annualized payroll, labor, and benefit costs by approximately $38 million
per year and reduce annual rent expense by approximately $3 million, offset
in part by workforce additions and other expenditures associated with
expansion of its core business.
In 1995, the Company entered into an agreement with AmeriData to sell
certain of its international operations to AmeriData. The restructuring
effect of the AmeriData divestitures has been to replace certain employee
severance and lease related cash charges with noncash asset revaluations
and write-downs. As a result of this transaction, the reduction in
workforce related to the Company's restructuring charge will total
approximately 475 individuals versus the original estimate of 600
individuals.
See note 18 of the Notes to Consolidated Financial Statements which sets
forth the Company's restructuring activities and the reserve balances as of
December 31, 1996, December 31, 1995, and December 31, 1994.
Future cash outlays under the restructuring plan are anticipated to be $8.9
million and $3.3 million in 1997 and 1998, respectively.
Goodwill write-off. During the fourth quarter of 1994, the Company
concluded that the carrying values of the Evernet Systems, Inc. and
Dataselskapet A/S goodwill balances were fully impaired and the remaining
unamortized balances of $24.9 million were charged to earnings. The
primary reasons for these write-offs included significant reductions in the
employee and customer bases and a refocusing of the Company's overall
systems integration strategy. For additional information regarding this
charge, see note 19 of Notes to Consolidated Financial Statements.
<TABLE>
<CAPTION>
Nonoperating Income (Expenses)
1996 Change 1995 Change 1994
<S> <C> <C> <C> <C> <C>
Interest expense $ (0.2) $ (1.0) $ (1.3)
Interest income 5.1 5.7 4.8
Other income 7.2 3.7 0.1
Nonoperating income, net $ 12.1 44.0% $ 8.4 133.3% $ 3.6
Percentage of revenues 4.0% 1.8% 0.7%
</TABLE>
Interest expense. Interest expense decreased in 1996 primarily due to
lower average daily short-term borrowings.
Interest income. Interest income decreased in 1996 due to lower average
interest rate yields.
Other income. Other income increased in 1996 primarily due to a gain of
$2.0 million versus a gain of $0.4 million in 1995 from the sale of land,
an exchange gain of $2.6 million in 1996 versus a gain of $0.2 million in
1995, rental income of $0.7 million in 1996 versus $0.2 million in 1995,
offset in part by a loss in affiliates, primarily related to the Company's
50% interest in Metaphase Technology, Inc. of $0.3 million in 1996 versus a
gain of $0.9 million in 1995.
The increase in nonoperating income, net, in 1995 was primarily due to a
gain of $0.8 million for the increase in market value of certain short-term
marketable securities versus a $1.2 million loss in 1994, a gain in
affiliates of $0.9 million primarily related to the Company's 50% interest
in Metaphase Technology, Inc. versus a $0.4 million loss in 1994, and a
gain of $0.4 million from the sale of land.
<TABLE>
<CAPTION>
Provision for Income Taxes
1996 Change 1995 Change 1994
<S> <C> <C> <C> <C> <C>
Provision for income taxes $ 1.1 (8.3%) $ 1.2 20.0% $ 1.0
Percentage of revenues 0.4% 0.3% 0.2%
</TABLE>
The provisions for income taxes in 1996, 1995, and 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. See note 9
of Notes to Consolidated Financial Statements which describes the
differences between the U.S. statutory and effective income tax rates.
10
<PAGE>
<TABLE>
<CAPTION>
Net Earnings (Loss) and Earnings (Loss) Per Share
1996 Change 1995 Change 1994
<S> <C> <C> <C> <C> <C>
Net earnings (loss) $ 16.0 79.8% $ 8.9 109.4% $(94.4)
Percentage of revenues 5.2% 2.0% (18.0%)
Earnings (loss) per share
Primary $ 1.09 $ 0.67 $(6.87)
Fully diluted $ 1.09 $ 0.62 $(6.87)
</TABLE>
Net earnings (loss). The net earnings for 1996 were $16.0 million compared
to net earnings for 1995 of $8.9 million and net loss for 1994 of $94.4
million.
The 1996 net earnings were primarily attributable to lower operating
expenses and higher nonoperating income. The 1995 net earnings were
similarly attributable to lower operating expenses and higher nonoperating
income. Also contributing to higher earnings in 1995 was the exclusion of
operating expenses and interest expense associated with the operations sold
in the AmeriData divestitures. The 1994 net loss was primarily
attributable to the $70.1 million restructuring charge and $24.9 million
goodwill write-off recorded in the fourth quarter of 1994 and lower gross
profit margins on hardware products sales.
Outlook
The following factors, among others, should be considered in evaluating the
Company's outlook.
General. The Company participates in the global market for enterprise
network communications and has begun to focus its expertise in messaging
and directory services on the emerging market for digital commerce.
Specialized software vendors, large consulting firms, and systems
integrators also compete in these market segments. There are many smaller
firms also active in these market segments with no one firm having a
dominant position.
Certain of the firms in these markets offer outsourcing and other types of
long-term agreements with their customer base. The result of these
activities is to develop a backlog of business that provides a more
predictable future revenue base. Because the majority of the Company's
core business activities will continue to be project-based, revenue
predictability is difficult and quarterly volatility of earnings can be
expected.
The Company entered into a transaction with Structural Dynamics Research
Corporation (SDRC) in December 1996 to sell its 50-percent interest in
Metaphase Technology, Inc. and certain assets of the Company's product data
management (PDM) business. The transaction, valued at $31 million,
consists of cash and a warrant to purchase SDRC stock. The sale will
produce a gain, in the first quarter of 1997, for the Company of
approximately $1.00 per share. The Company has used a portion of the cash
received from the sale to repurchase 766,833 shares of common stock in
1997.
Revenues. The Company expects total revenues to decline from 1996 to 1997
due to the sale of the PDM business, the continuing erosion of the
Company's installed base of proprietary hardware and software maintenance
revenues, and continuing de-emphasis on hardware reselling. Software and
services growth in Enterprise Integration Services is expected to nearly
offset these decreases.
Cost of revenues. The Company's cost of revenues as a percentage of
revenues is expected to decrease and gross margins as a percentage of
revenues are expected to increase in 1997. Primary factors contributing to
these changes include the de-emphasis of low margin hardware sales and
expected cost improvements associated with software and services revenue.
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 1997 could be volatile.
Selling, general and administrative expenses. SG&A expenses are expected
to decrease in 1997 from 1996, primarily due to the divestiture of the PDM
business. This decrease will be somewhat offset by increases in SG&A
expenses associated with planned marketing activities and the support of
service provider partners in the digital commerce market.
Technical expenses. Technical spending is expected to increase slightly in
1997, as the Company continues its investment in digital commerce products.
Income tax rate. In total, the Company has $100.5 million of gross
deferred tax assets at December 31, 1996, 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, 1996 resulting from lower than expected 1994
earnings, caused in part by the
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - CONT'D (IN MILLIONS)
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 AmeriData divestitures did not have a material impact on
deferred tax assets.
Foreign exchange. A large percentage of the Company's business is
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 $84.6 million at
December 31, 1996 representing 38.4% of total assets. The Company has no
long-term debt. Total cash and short-term investment balances increased by
$0.6 million in 1996. The primary factors in the increase were net
earnings of $16.0 million which includes depreciation and amortization of
$7.9 million, foreign currency transaction gain of $2.6 million, proceeds
from the sale of land of $2.3 million, and the issuance of Common Stock of
$6.7 million. Partially offsetting the increase was $3.1 million from
working capital items, the purchase of treasury stock of $1.8 million,
restructuring payments of $11.0 million, capital expenditures of $9.1
million, and net pension activity of $3.1 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 $25.5 million in 1996. The increase was
primarily due to net earnings of $16.0 million, the issuance of Common
Stock of $6.7 million, the issuance of treasury stock of $1.4 million, and
a minimum pension liability adjustment of $5.2 million, offset in part by
the purchase of treasury stock of $1.8 million and a foreign currency
translation adjustment of $2.1 million.
As of December 31, 1996, the Company had available up to $15.5 million in
credit facilities, primarily short-term notes and overdraft facilities
under bank lines of credit in certain international subsidiaries, as well
as a domestic credit arrangement which provides up to $10.0 million in
unsecured short-term credit.
The Company had $12.2 million of restructure obligations as of December 31,
1996, $8.9 million of which are expected to be cash outlays in 1997,
primarily for severance costs, lease and other obligations related to
excess facilities, and litigation costs. Restructuring payments will
extend into 1998 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 discussed within this annual
report are forward looking statements that involve risks and uncertainties
including: business conditions and growth in the general economy and
electronic messaging; 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 and directory solutions, 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.
12
<PAGE>
MANAGEMENT'S REPORT
The accompanying consolidated financial statements, including the notes
thereto, and other financial information presented in this report were
prepared by management, which is responsible for their integrity and
objectivity. The financial statements have been prepared in accordance
with generally accepted accounting principles and include amounts that are
based upon our best estimates and judgments.
Control Data Systems, Inc. maintains an effective system of internal
accounting control. We believe this system provides reasonable assurance
that transactions are executed in accordance with management authorization
and are appropriately recorded in order to permit preparation of financial
statements in conformity with generally accepted accounting principles and
to adequately safeguard, verify, and maintain accountability of assets.
The concept of reasonable assurance is based on the recognition that the
cost of a system of internal control should not exceed the benefits
derived.
KPMG Peat Marwick LLP, independent certified public accountants, are
retained to audit the Company's financial statements. Their accompanying
report is based on an audit conducted in accordance with generally accepted
auditing standards. The audit includes a review of the internal accounting
control structure to gain a basic understanding of the accounting system in
order to design an effective and efficient audit approach and not for the
purpose of providing assurance on the system of internal control.
The Audit Committee of the Board of Directors is composed of two outside
directors and is responsible for recommending the independent accounting
firm to be retained for the coming year, subject to stockholder approval.
The Audit Committee meets periodically and privately with the independent
accountants, as well as with management, to review accounting, auditing,
internal accounting controls, and financial reporting matters.
(SIGNATURE) (SIGNATURE)
James E. Ousley Joseph F. Killoran
President and Vice President and
Chief Executive Officer Chief Financial Officer
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Control Data Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Control
Data Systems, Inc. and subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of operations, stockholders' equity and
cash flows for each of the years in the three-year period ended December
31, 1996. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion
on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Control
Data Systems, Inc. and subsidiaries as of December 31, 1996 and 1995, and
the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1996 in conformity with
generally accepted accounting principles.
(SIGNATURE)
Minneapolis, Minnesota
January 22, 1997
13
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended
December 31, December 31, December 31,
1996 1995 1994
<S> <C> <C> <C>
REVENUES:
Net sales and rentals $130,585 $253,921 $319,302
Services 175,111 200,894 204,925
Total revenues 305,696 454,815 524,227
COST OF REVENUES:
Net sales and rentals 70,619 175,471 232,650
Services 130,750 154,909 149,878
Total cost of revenues 201,369 330,380 382,528
Gross profit 104,327 124,435 141,699
OPERATING EXPENSES:
Selling, general and administrative 86,860 113,047 129,491
Technical 12,483 9,673 14,241
Restructuring - - 70,100
Goodwill write-off - - 24,900
Total operating expenses 99,343 122,720 238,732
Earnings (loss) from operations 4,984 1,715 (97,033)
NONOPERATING INCOME (EXPENSES):
Interest expense (205) (1,033) (1,282)
Interest income 5,112 5,719 4,786
Other income, net 7,187 3,667 126
Total nonoperating income, net 12,094 8,353 3,630
Earnings (loss) before income taxes 17,078 10,068 (93,403)
PROVISION FOR INCOME TAXES 1,100 1,200 1,000
Net earnings (loss) $ 15,978 $ 8,868 $(94,403)
Primary earnings (loss) per common share
and common share equivalents $ 1.09 $ 0.67 $ (6.87)
Fully diluted earnings (loss) per common
share and common share equivalents $ 1.09 $ 0.62 $ (6.87)
Weighted average common shares
outstanding (in thousands):
Primary 14,623 13,294 13,740
Fully diluted 14,623 14,298 13,740
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
14
<PAGE>
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
December 31, December 31,
ASSETS 1996 1995
<S> <C> <C>
Current assets:
Cash and short-term investments $ 84,610 $ 84,034
Trade and other receivables 84,198 85,235
Inventories 14,511 19,381
Prepaid expenses and other current assets 3,809 5,893
Total current assets 187,128 194,543
Investments and advances 601 138
Property and equipment, net 17,107 16,788
Leased and data center equipment, net 390 693
Noncurrent trade receivables 4,820 5,187
Other noncurrent assets 10,251 10,136
Total assets $220,297 $227,485
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Notes payable $ 289 $ 686
Accounts payable 15,773 19,934
Customer advances and deferred income 6,649 7,707
Accrued taxes 6,610 5,883
Accrued salaries and wages 11,579 12,700
Restructure reserves, current portion 8,932 16,704
Other accrued expenses 26,505 32,214
Total current liabilities 76,337 95,828
Deferred income taxes 469 452
Restructure reserves, less current portion 3,290 6,412
Pension liabilities 28,582 38,944
Other noncurrent liabilities 2,599 2,351
Total liabilities 111,277 143,987
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 14,883,500 and
14,249,986 shares as of December 31, 1996
and December 31, 1995, respectively 149 143
Additional paid-in capital 171,845 164,247
Accumulated deficit (46,395) (62,373)
Minimum pension liability adjustment (6,631) (11,854)
Foreign currency translation adjustment (1,438) 659
Unearned compensation-restricted stock (106) (213)
Unrealized gains on investments 36 -
Treasury stock, at cost (1,203,390 and 1,185,224 shares
as of December 31, 1996 and December 31, 1995,
respectively) (8,440) (7,111)
Total stockholders' equity 109,020 83,498
Total liabilities and stockholders' equity $220,297 $227,485
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
15
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars and shares in thousands)
<TABLE>
<CAPTION>
Retained
Shares Additional Earnings
Outstand- Treasury Common Paid-In (Accumulated
ing Stock Issued Stock Capital Deficit) Other* Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994 13,599 - 13,599 $ 136 $159,683 $ 23,162 $ (7,805) $175,176
Issuance of common stock under the
Employee Stock Purchase Plan 84 - 84 - 595 - - 595
Exercises of stock options 120 - 120 2 827 - - 829
Minimum pension liability adjustment - - - - - - (2,235) (2,235)
Foreign currency translation
adjustment - - - - - - 2,344 2,344
Net loss - - - - - (94,403) - (94,403)
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 57 - 57 - 344 - - 344
Exercises of stock options 340 - 340 4 2,480 - - 2,484
Minimum pension liability adjustment - - - - - - (4,897) (4,897)
Foreign currency translation
adjustment - - - - - - 1,398 1,398
Restricted stock award 50 - 50 1 318 - (213) 106
Purchase of treasury stock, at cost (1,185) 1,185 - - - - (7,111) (7,111)
Net earnings - - - - - 8,868 - 8,868
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 28 - 28 - 442 - - 442
Exercises of stock options 305 - 305 3 2,411 - - 2,414
Exercises of stock warrants 300 - 300 3 3,856 - - 3,859
Minimum pension liability adjustment - - - - - - 5,223 5,223
Foreign currency translation
adjustment - - - - - - (2,097) (2,097)
Restricted stock award - - - - - - 107 107
Change in unrealized gains on
investments - - - - - - 36 36
Issuance of treasury stock for
Personal Investment Plan 77 (77) - - 889 - 461 1,350
Purchase of treasury stock, at cost (95) 95 - - - - (1,790) (1,790)
Net earnings - - - - - 15,978 - 15,978
Balance at December 31, 1996 13,680 1,203 14,883 $ 149 $171,845 $(46,395)$(16,579) $109,020
</TABLE>
<TABLE>
<CAPTION>
Minimum Foreign Unearned
Pension Currency Compensation Unrealized
Liability Translation Restricted Gains on Treasury
*Other Stockholders' Equity Items Adjustment Adjustment Stock Investments Stock Total
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994 $(4,722) $(3,083) $ - $ - $ - $ (7,805)
Minimum pension liability adjustment (2,235) - - - - (2,235)
Foreign currency translation
adjustment - 2,344 - - - 2,344
Balance at December 31, 1994 (6,957) (739) - - - (7,696)
Minimum pension liability adjustment (4,897) - - - - (4,897)
Foreign currency translation
adjustment - 1,398 - - - 1,398
Restricted stock award - - (213) - - (213)
Purchase of treasury stock,
at cost - - - - (7,111) (7,111)
Balance at December 31, 1995 (11,854) 659 (213) - (7,111) (18,519)
Minimum pension liability adjustment 5,223 - - - - 5,223
Foreign currency translation
adjustment - (2,097) - - - (2,097)
Restricted stock award - - 107 - - 107
Change in unrealized gains
on investments - - - 36 - 36
Issuance of treasury stock for
Personal Investment Plan - - - - 461 461
Purchase of treasury stock, at cost - - - - (1,790) (1,790)
Balance at December 31, 1996 $(6,631) $(1,438) $ (106) $ 36 $(8,440) $(16,579)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
16
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Years Ended
December 31, December 31, December 31,
1996 1995 1994
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net earnings (loss) $ 15,978 $ 8,868 $ (94,403)
Adjustments to reconcile net earnings
(loss) to net cash provided by
operating activities:
Depreciation 7,605 10,955 14,349
Amortization 308 1,090 3,624
Foreign currency transaction gain (2,571) (190) (563)
Equity in losses (gains) of affiliates 299 (922) 429
Restructuring - - 70,100
Goodwill write-off - - 24,900
Restructure reserves utilized (10,968) (22,833) (22,854)
(Gain) loss on sale of marketable
securities and other assets (1,706) 431 (1,140)
Net change in working capital items (3,064) 9,191 21,983
Net change in noncurrent trade receivables 161 2,297 3,787
Net change in other noncurrent assets (611) (2,681) (2,343)
Other (1,705) (4,379) (2,419)
Net cash provided by operating
activities 3,726 1,827 15,450
Cash Flows from Investing Activities:
Expended for property and equipment (8,600) (10,353) (7,679)
Expended for leased and data center equipment (516) (1,618) (1,368)
Investment in affiliates (469) - (8)
Proceeds from sale of property and equipment 2,306 706 1,919
Acquisitions of businesses, net of cash
provided - (546) (3,844)
Dispositions of businesses, net of cash
given 9 9,036 -
Change in short-term investments (8,115) (708) (5,667)
Net cash used in investing
activities (15,385) (3,483) (16,647)
Cash Flows from Financing Activities:
(Repayments) borrowings under short-term
financing arrangements, net (362) 3,221 (1,604)
Proceeds from issuance of common stock,
net of issuance costs 6,715 2,828 1,424
Purchase of treasury stock (1,790) (7,111) -
Net cash provided by (used in) financing
activities 4,563 (1,062) (180)
Effect of Exchange Rate Changes on Cash (443) 629 (510)
Net change in cash and equivalents (7,539) (2,089) (1,887)
Cash and cash equivalents, beginning of year 15,188 17,277 19,164
Cash and cash equivalents, end of year 7,649 15,188 17,277
Short-term investments 76,961 68,846 68,138
Cash and short-term investments, end of year $ 84,610 $ 84,034 $ 85,415
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation
The consolidated financial statements include the accounts of all majority-
owned subsidiaries of the Company. All significant intercompany
investments, accounts, and transactions have been eliminated.
The investments in and the operating results of companies in which the
Company has an ownership of 50% or less are included in the financial
statements on the basis of the equity method of accounting.
On August 31, 1995, the Company completed the sale of five international
product distribution operations to 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 of all 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 of all the issued and outstanding capital
stock of the Control Data operations in Denmark. Results of operations,
assets, and liabilities for the operations sold are included in the
Company's consolidated financial statements through the effective date of
divestitures.
(b) Revenue Recognition
Revenues from sales of hardware and software products are recognized upon
shipment, installation, or acceptance, based on the particular product and
contract terms. Revenues from rental and maintenance contracts are
recognized over the period of the agreement. Services revenues consist of
consulting and maintenance services and are recognized when the services
are performed.
(c) Stock-Based Compensation
Compensation expense for stock option grants is recognized in accordance
with Accounting Principles Board (APB) Opinion 25, "Accounting for Stock
Issued to Employees." Pro forma effects on net income and earnings per
share are provided as if the fair value based method defined in Statement
of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-
Based Compensation," had been applied.
(d) Cash and Short-term Investments
Highly liquid investments with a maturity of three months or less when
purchased are classified in the balance sheet as cash equivalents.
Marketable equity and debt securities are classified in the balance sheet
as short-term investments. In accordance with the provisions of SFAS No.
115, "Accounting for Certain Instruments in Debt and Equity Securities,"
marketable equity and debt securities have been categorized as available-
for-sale and are stated at fair value. Prior to December 1995, marketable
equity and debt securities were classified as trading securities. The
aggregate fair value of the Company's marketable equity and debt securities
at December 31, 1996 and 1995 totaled $37.5 million and $41.6 million,
respectively.
(e) Inventories
Inventories are stated at cost not in excess of realizable values. Costs
are based on actual or average methods. Inventories include maintenance
service parts, purchased hardware and software products, and costs incurred
for projects in process.
(f) Property and Equipment
Property and equipment are stated at cost. Depreciation on property and
equipment is calculated using straight-line and accelerated methods at
rates based on the estimated lives of the assets, which are generally as
follows:
Buildings and improvements 10-40 years
Machinery and equipment 3-8 years
Leased and data center equipment 3-6 years
Leasehold improvements are amortized on a straight-line basis over the
shorter of the lease term or estimated useful life of the asset. Repairs
and maintenance are expensed as incurred. Gains or losses on dispositions
are included in results of operations.
(g) Other Noncurrent Assets
Other noncurrent assets consist principally of prepaid pension costs.
(h) Foreign Currency Translation
The assets and liabilities for the Company's international subsidiaries are
translated into U.S. dollars using current exchange rates. The resulting
translation adjustments are recorded in the foreign currency translation
adjustment account in equity. Statement of operations items are translated
at average exchange rates prevailing during the period. Foreign currency
transaction gains or losses are included in net earnings (loss).
18
<PAGE>
(i) Research and Development
Under the criteria set forth in SFAS No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed," capitalization
of software development costs begins upon the establishment of
technological feasibility of the product. The establishment of
technological feasibility and the ongoing assessment of the recoverability
of these costs require considerable judgment by management with respect to
certain external factors, including, but not limited to, anticipated future
gross product revenues, estimated economic life, and changes in software
and hardware technology. Amounts that could have been capitalized under
this statement after consideration of the above factors were immaterial,
and therefore, no software development costs have been capitalized by the
Company to date. Research and development costs are expensed as incurred.
(j) Income Taxes
The Company accounts for income taxes under SFAS No. 109, "Accounting for
Income Taxes." Under the asset and liability method, deferred tax assets
and liabilities are recognized for the future tax consequences attributable
to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates which are expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. Under SFAS No. 109, the effect on
deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.
Except for selective dividends, the Company intends to reinvest the
unremitted earnings of its non-U.S. subsidiaries and postpone their
remittance indefinitely. Accordingly, no provision for U.S. income taxes
or foreign withholding taxes was required on such earnings during the three
years ended December 31, 1996.
(k) 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.
(l) Presentations
Beginning in the first quarter of 1994, certain cash flow activities were
reclassified to conform to the current year's presentation. All financial
information has been restated to conform to this method of presentation.
(m) Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these
estimates.
(n) Fiscal Year End
In 1995, the Company changed its fiscal year end to a calendar year end.
Prior to this change the Company had adopted a 52/53 week fiscal year,
which ended on the Saturday closest to December 31. Fiscal year 1994
comprised 52 weeks and ended on December 31, 1994.
(o) Fair Value of Financial Instruments
The following methods and assumptions were used in accordance with SFAS No.
107, "Disclosure About Fair Value of Financial Instruments," to estimate
the fair value of financial instruments:
Cash and Cash Equivalents. The carrying amount approximates fair value
because of the short maturity of those instruments.
Marketable Securities. The fair values of marketable securities are
based on quoted market prices.
2. ACQUISITIONS
On January 4, 1994, the Company acquired all of the outstanding capital
stock of MICHAEL Business Systems Plc which was engaged in providing
microcomputer-based products and network integration services. The
acquisition was accounted for as a purchase and the net assets and results
of operations have been included in the Company's consolidated financial
statements from the acquisition date through the date of divestiture. The
total consideration paid for this acquisition was $5.0 million in cash.
Net identifiable liabilities acquired of $4.9 million consisted of $12.3
million of assets acquired and $17.2 million of liabilities assumed.
Goodwill from this acquisition of $9.9 million was amortized on a straight-
line basis over a period of ten years. In the third quarter of 1995, this
operation was sold as part of the AmeriData divestitures (see note 3) and
the unamortized goodwill balance was charged to earnings (see note 19).
19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONT'D
3. DIVESTITURES
On August 31, 1995, the Company completed the sale of five international
product distribution operations to 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 of 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 of all 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 effective date of the
divestitures.
The following pro forma information represents the results of operations
assuming that the divestitures described above occurred as of the beginning
of the period. The pro forma financial statement is for informational
purposes only to illustrate the estimated effects of the divestitures of
these eight operations on Control Data on a stand-alone basis and may not
be indicative of the results of operations that would have occurred had
these divestitures taken place at the beginning of the period presented or
of future results of operations.
Pro Forma Condensed Statement of Income (Unaudited)
<TABLE>
<CAPTION>
(Dollars in thousands, Year Ended
except per share data) December 31, 1995
Historical Adjustments Pro Forma
<S> <C> <C> <C>
Revenues $ 454,815 $(140,851) $ 313,964
Earnings from operations 1,715 1,083 2,798
Net earnings 8,868 1,535 10,403
Primary earnings per common
share and common share equivalents 0.67 0.78
Fully diluted earnings per common
share and common share equivalents 0.62 0.73
</TABLE>
Pro Forma Revenues by Category and Gross Profit (Unaudited)
<TABLE>
<CAPTION>
(Dollars in thousands) Year Ended
December 31, 1995
Revenues Historical Adjustments Pro Forma
<S> <C> <C> <C>
Software and services $ 174,080 $ (26,056) $ 148,024
Maintenance and support 75,452 (13,019) 62,433
Hardware products 205,283 (101,776) 103,507
Total revenues $ 454,815 $(140,851) $ 313,964
Gross profit $ 124,435 $ (22,478) $ 101,957
Gross profit % 27.4% 32.5%
</TABLE>
Pro Forma Revenues by Geography (Unaudited)
<TABLE>
<CAPTION>
(Dollars in thousands) Year Ended
December 31, 1995
Revenues Historical Adjustments Pro Forma
<S> <C> <C> <C>
Americas $ 173,401 $ (33,410) $ 139,991
Europe 227,538 (107,441) 120,097
Asia 53,876 - 53,876
Total revenues $ 454,815 $(140,851) $ 313,964
</TABLE>
20
<PAGE>
4. TRADE AND OTHER RECEIVABLES
<TABLE>
<CAPTION>
December 31, December 31,
(Dollars in thousands) 1996 1995
<S> <C> <C>
Trade receivables $81,433 $80,675
Other 6,504 9,354
Allowance for doubtful accounts (3,739) (4,794)
Total $84,198 $85,235
</TABLE>
5. OTHER ACCRUED EXPENSES
<TABLE>
<CAPTION>
December 31, December 31,
(Dollars in thousands) 1996 1995
<S> <C> <C>
Accrued warranty, support
and maintenance costs $10,135 $10,130
Bonuses and commissions 1,927 1,866
Royalties 961 1,051
Insurance 1,364 1,360
Other 12,118 17,807
Total $26,505 $32,214
</TABLE>
6. STOCKHOLDERS' EQUITY
Stock Options
Under the 1992 Equity Incentive Plan (the "Plan"), the Compensation
Committee may award stock options, restricted stock, and performance units
("Units") to those officers and employees of the Company whose performance,
in the judgment of the Compensation Committee, can have a significant
effect on the success of the Company. In addition, provisions of the Plan
provide for the award of stock options, as specified in such provisions, to
the directors of the Company who are not employees.
As of December 31, 1996, the Company has reserved 3.2 million shares of the
Company's Common Stock for issuance pursuant to awards under the Plan. This
includes shares of replacement options provided to optionees pursuant to
the provisions of the spin-off of the Company from Ceridian to replace and
preserve the value of Ceridian stock options held by such optionees at the
time of the spin-off. If an award under the Plan expires or terminates
without being exercised in full or is forfeited, the shares subject thereto
are generally available for new awards.
The exercise price for stock options granted under the Plan (other than the
replacement options) may not be less than the fair market value of a share
of the underlying Common Stock on the date the option is granted and must
be paid in cash unless the Compensation Committee permits payment in shares
of the Company's stock. An option will generally expire ten years after the
date it is granted and will ordinarily become exercisable as to one third
of the shares subject to the option on each of the three succeeding
anniversaries of the grant. The Compensation Committee may modify the
exercisability of an option at its discretion.
The Plan also provides for shares of the Company's Common Stock to be
issued to employees in the form of restricted stock grants. Plan
participants are entitled to cash dividends and to vote their respective
shares from the date of grant. The value of such stock is established by
the market price on the date of the grant. In 1995, 50,000 shares of
restricted stock were issued under the Plan. Prior to 1995 no restricted
stock had been granted. Unearned compensation is charged for the market
value of the restricted shares as these shares are issued in accordance
with the Plan. The unearned compensation is amortized ratably over the
restricted period. The unamortized unearned compensation value is shown as
a reduction of stockholders' equity in the accompanying consolidated
balance sheets.
Following a "change of control termination," all options granted under the
Plan will become immediately exercisable, and all restrictions on
restricted stock awarded under the Plan will immediately lapse.
The Plan also provides recipients with the opportunity to receive cash or
stock awards if the Company's financial goals or other business objectives
are achieved over a longer-term performance period. The cost of these
awards is charged to expense. The Compensation Committee will determine the
performance goals, the performance period, the vesting of Units, and how
Units will be valued. No Units had been issued as of December 31, 1996.
21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONT'D
<TABLE>
<CAPTION>
Weighted Average
of Exercise
Shares of Common Stock Price
Stock Options Available Under of Shares
for Grant Plan Under Plan
<S> <C> <C> <C>
Balance at January 1, 1994 59,443 2,063,799 $ 8.38
Authorized for issuance 500,000 - -
Granted (754,899) 754,899 $ 7.69
Exercised - (121,050) $ 6.84
Canceled 506,499 (506,499) $ 9.77
Balance at December 31, 1994 311,043 2,191,149 $ 7.89
Granted (480,500) 480,500 $10.99
Exercised - (389,861) $ 7.30
Canceled 326,257 (326,257) $ 8.54
Balance at December 31, 1995 156,800 1,955,531 $ 8.57
Authorized for issuance 300,000 - -
Granted (245,500) 245,500 $19.98
Exercised - (304,816) $ 7.92
Canceled 94,003 (94,003) $13.20
Balance at December 31, 1996 305,303 1,802,212 $10.05
</TABLE>
The following table summarizes information concerning outstanding and
exercisable options as of December 31, 1996:
<TABLE>
<CAPTION>
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
<S> <C> <C> <C> <C> <C>
$ 4.73-$ 7.63 434,598 6.99 $ 6.61 290,408 $ 6.29
$ 8.25-$ 8.25 582,273 5.66 $ 8.25 578,939 $ 8.25
$ 9.00-$10.00 399,174 7.31 $ 9.72 209,150 $ 9.81
$10.25-$22.50 371,167 8.81 $16.62 91,318 $12.01
$25.69-$25.69 15,000 9.81 $25.69 - -
1,802,212 1,169,815
</TABLE>
The Company applies APB No. 25, and related interpretations, which require
compensation expense for options to be recognized only if the market price
of the underlying stock exceeds the exercise price on the date of grant.
Accordingly, no compensation expense has been recognized, except for
restricted stock awards, for options granted in 1995 and 1996. The Company
will continue to apply the existing accounting rules under APB No. 25 and
provide pro forma net income and pro forma earnings per share disclosures
for employee stock option grants made in 1995 and future years as if the
fair-value-based method defined in SFAS No. 123 had been applied.
Had compensation expense for stock options granted in 1996 and 1995 been
recorded, the Company's net income and earnings per share would have been
reduced to the pro forma amounts indicated below. The pro forma impact on
net income and earnings per share assumes no options will be forfeited.
The per-share weighted average fair value of stock options granted in 1996
and 1995 was $8.02 and $4.28, respectively. The fair value of the options
granted is estimated on the grant date using the Black-Scholes option
pricing model with the following assumptions: dividend yield of 0.0%,
volatility of 45.0%, risk-free interest rate of 6.5%, and expected life of
4 years.
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data) 1996 1995
<S> <C> <C> <C>
Net income As reported $15,978 $8,868
Pro forma 15,110 8,584
Primary earnings per As reported $ 1.09 $ 0.67
share
Pro forma 1.03 0.65
Fully diluted earnings As reported $ 1.09 $ 0.62
per share
Pro forma 1.03 0.60
</TABLE>
Pro forma net income reflects only options granted in 1996 and 1995.
Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net income
amounts presented because compensation cost is reflected over the option's
vesting period and compensation cost for options granted prior to January
1, 1995 is not considered.
Stock Warrants
In connection with the acquisition of Evernet Systems, Inc., the Company
issued warrants granting the holders the right and option to purchase
300,000 shares of the Company's Common Stock at an exercise price of $12.86
per share, which were exercised in 1996.
Employee Stock Purchase Plan
Under the 1993 Employee Stock Purchase Plan (the "Purchase Plan") the
Company has reserved 400,000 shares of Common Stock for issuance pursuant
to the Purchase Plan. The primary purpose of the Purchase Plan is to
provide an opportunity for eligible employees to become stockholders of the
Company. Eligible employees may contribute up to 10%
22
<PAGE>
of their compensation toward the purchase of the Company's Common Stock.
The Purchase Plan operates in phases of three months each, generally
beginning on January 1, April 1, July 1, and October 1 of each year. At the
end of each phase, an employee who elects to participate in the Purchase
Plan can purchase up to 500 shares of Common Stock with his or her
accumulated payroll deductions. The purchase price for those shares of
Common Stock will be either 85% of the market price at the beginning of the
phase or 85% of the market price at the end of the phase, whichever is
less. As of December 31, 1996, shares purchased under the Purchase Plan
totaled 198,692.
Personal Investment Plan
The Personal Investment Plan (the "Investment Plan") is a defined
contribution plan with funding coming from participant contributions and
Company profit sharing contributions. All United States employees with
nine hundred hours or more of service are eligible to participate.
Eligible employees may elect to contribute on a pretax basis, through
payroll deductions, from one to seventeen percent of their annual
compensation. Participant contributions are fully vested. Contributions
are invested by the trustee in accordance with participant elections, in
one or more of nine investment options. Participant contributions are
subject to an Internal Revenue Service maximum annual limit. Participants
may borrow up to fifty percent of their accumulated participant
contributions and while employed by the Company and prior to age 59 1/2,
withdrawals may be made only for "financial hardships."
Company contributions to the Investment Plan amounted to $1,386,475 and
$1,349,896 in 1996 and 1995, respectively. The 1995 contribution was made
through the issuance of 76,834 shares of the Company's Treasury Stock. No
contribution was made in 1994.
7. INVESTMENT IN METAPHASE TECHNOLOGY, INC.
In 1992, the Company and Structural Dynamics Research Corporation (SDRC)
established a joint venture company, Metaphase, to develop and market PDM
software worldwide. As of December 31, 1996, the Company owned 50% of
Metaphase.
During the second half of 1996, the Company was in discussions with SDRC
about 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 the Metaphase losses during the second
half of 1996.
On December 16, 1996, the Company signed a definitive agreement to sell its
50-percent interest in Metaphase and certain assets of the Company's PDM
business to SDRC. The transaction closed on January 22, 1997, effective as
of January 1, 1997.
8. FINANCING ARRANGEMENTS
As of December 31, 1996, the Company's international subsidiaries have
arranged with local banks up to $15.5 million for financing, primarily
short-term notes and foreign overdraft facilities. Debt outstanding under
these arrangements amounted to $0.3 million and $0.7 million at December
31, 1996 and December 31, 1995, respectively. There were no outstanding
letters of credit at December 31, 1996. The average amount of short-term
debt outstanding for 1996 was $1.0 million.
The Company has a U.S. bank line of credit which provides for borrowings of
up to $10.0 million, none of which was outstanding at December 31, 1996.
The line of credit bears interest at prime plus two percent and expires on
April 12, 1997.
9. INCOME TAXES
As discussed in note 1(j), the Company adopted SFAS No. 109, as of January
3, 1993. This change in accounting for income taxes had no significant
impact on the consolidated financial statements of the Company.
23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONT'D
The components of earnings (loss) before income taxes and the provision
(benefit) for income taxes are included in the following table:
<TABLE>
<CAPTION>
Components of Earnings and Taxes Years Ended
December 31, December 31, December 31,
(Dollars in thousands) 1996 1995 1994
<S> <C> <C> <C>
Earnings (loss) before income taxes:
Domestic $13,362 $ 8,280 $(75,093)
Foreign 3,716 1,788 (18,310)
Total $17,078 $10,068 $(93,403)
Income tax provision (benefit):
Current:
Domestic $ 159 $ 134 $ 325
Foreign 924 1,231 1,059
Deferred:
Domestic - - -
Foreign 17 (165) (384)
Total $ 1,100 $ 1,200 $ 1,000
</TABLE>
Reconciliation of estimated income taxes at United States statutory tax
rate to the income taxes provision is reported as follows:
<TABLE>
<CAPTION>
Effective Rate Reconciliation Years Ended
December 31, December 31, December 31,
(Dollars in thousands) 1996 1995 1994
<S> <C> <C> <C>
U.S. federal statutory rate 35% 35% 35%
Income tax provision (benefit)
at U.S. statutory rat $ 5,977 $ 3,524 $(32,691)
International rate differences,
credits, translation, dividends,
and other offsets 3,776 10,840 1,650
Non-deductible goodwill - 1,562 10,121
Change in valuation reserve (6,168) (24,821) 20,717
Valuation reserve attributable
to sold subsidiaries (695) 5,417 -
Losses for which no tax
benefit was provided - - 903
U.S. state income and franchise taxes - - 300
Other (1,790) 4,678 -
Provision for income taxes $ 1,100 $ 1,200 $ 1,000
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1996 and December 31, 1995 are presented below:
<TABLE>
<CAPTION>
December 31, December 31,
(Dollars in thousands) 1996 1995
<S> <C> <C>
Deferred Tax Assets
Depreciation and amortization $ 4,808 $ 5,878
Inventory valuation 11,575 16,372
Pension plans 374 936
Deferred revenues 599 1,455
Allowance for doubtful accounts 2,946 2,898
Restructuring and other accruals 10,998 13,688
Net operating loss carryforwards 56,961 55,508
Tax credit carryforwards 7,845 4,000
Other 4,401 5,527
Total gross deferred tax assets 100,507 106,262
Less valuation allowance (94,720) (100,888)
Net deferred tax assets 5,787 5,374
Deferred Tax Liabilities
Depreciation and amortization (225) (323)
Inventory valuation (310) (220)
Pension plans (5,176) (5,165)
Other (545) (118)
Total deferred tax liabilities (6,256) (5,826)
Net deferred income taxes $ (469) $ (452)
</TABLE>
Although the Company has available gross deferred tax assets in the amount
of $100.5 million which can be used to offset taxes on future earnings, the
Company currently maintains sizable operations in several foreign countries
whose tax on future earnings cannot be offset by these deferred tax assets.
Included in the gross deferred tax assets and the valuation reserve is $6.2
million for U.S. net operating losses subject to limitation under Section
382 of the Internal Revenue Code. Additionally, the remainder of the
Company's U.S. deferred tax assets may become subject to limitation or
permanent loss if certain changes in ownership, as defined by U.S. tax
rules, occur in the future.
24
<PAGE>
<TABLE>
<CAPTION>
U.S. and Foreign Income Tax Carryforwards at December 31, 1996
Expiration
(Dollars in thousands) Amount Dates
<S> <C> <C>
U.S. Federal net operating loss carryforwards: $77,401 2000-2010
U.S. Federal capital loss carryforward: 22,907 2001
Foreign net operating loss carryforwards: 12,436 1997-2006
41,887 None
Tax credit carryforwards of foreign operations: 1,784 2000-2006
5,922 None
</TABLE>
Earnings of foreign subsidiaries considered to be reinvested for an
indefinite period at December 31, 1996 total approximately $25.0 million.
If those earnings were remitted, estimated withholding taxes of $3.2
million would be currently payable.
It is impracticable to compute the deferred tax asset or liability on the
Company's investments in its foreign subsidiaries.
10. COMMITMENTS AND CONTINGENCIES
Largely as a result of divestitures and other downsizing actions and the
formation of certain cooperative ventures in recent years, the Company has
agreed to incur or retain a variety of contingent liabilities. Generally,
these liabilities include requirements for performance of various
obligations assumed in some manner by the acquirer, such as customer
contracts and leases of facilities and equipment; commitments to purchase
products or services; commitments to invest or advance funds; and potential
liabilities relating to the downsizing actions, such as litigation arising
from workforce reductions, purchase price adjustments, or representation
and warranty obligations.
The Company monitors such contingent liabilities and has established
reserves for those which it believes are probable of payment. Management
believes that in the aggregate the contingent liabilities will not have a
materially adverse impact on the financial position of the Company.
11. RELATED PARTY TRANSACTIONS
Silicon Graphics, Inc.
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.
The Company purchased a total of approximately $17.7 million of SGI
products in 1996, $33.0 million in 1995, and $39.7 million in 1994.
Ceridian
Computing Devices International (CDI), a subsidiary of Ceridian, has been
contracted to manufacture certain proprietary products for the Company.
The Company purchased a total of approximately $3.5 million of CDI products
in 1996, $2.3 million in 1995, and $6.5 million in 1994.
12. LEASES
As Lessor: The Company leases equipment to others through operating leases
with lease terms of one to five years. The Company pays taxes, licenses,
and insurance associated with the equipment under lease. The Company's net
investment in equipment needed to support leasing operations, included in
lease and data center equipment, was as follows:
<TABLE>
<CAPTION>
December 31, December 31,
(Dollars in thousands) 1996 1995
<S> <C> <C>
Equipment $ 18,663 $ 29,160
Less accumulated amortization 18,274 28,481
Net investment $ 389 $ 679
</TABLE>
The minimum future rentals on noncancelable leases with lease terms of one
to five years existing as of December 31, 1996 are $0.9 million in 1997,
$0.5 million in 1998, $0.4 million in 1999, $0.3 million in 2000, and $0.2
million in 2001.
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONT'D
As Lessee: The Company leases certain property and equipment under
operating leases. Most of these operating leases contain renewal options
and require payments for taxes, insurance, and maintenance. Although, in
most cases management expects that leases will be renewed or replaced by
other leases in the normal course of business, downsizing activities in
recent years have diminished the need for such renewals and replacements
and increased subletting of leased facilities.
The rental payments under these leases are charged to operations as
incurred. The amounts of rental expense and sublease income for each of
the years in the three year period ended December 31, 1996 appear in the
following table.
<TABLE>
<CAPTION>
Years Ended
December 31, December 31, December 31,
(Dollars in thousands) 1996 1995 1994
<S> <C> <C> <C>
Rental expense $ 10,901 $ 16,785 $ 23,693
Sublease rental income (2,840) (3,072) (4,296)
Net rental expense $ 8,061 $ 13,713 $ 19,397
</TABLE>
Future minimum payments under noncancelable operating leases and related
sublease income, on operating leases with initial or remaining lease terms
in excess of one year as of December 31, 1996 are described in the table
below. These amounts do not include obligations which have been recorded
as restructure liabilities, or amounts relating to leasing activity of the
Company-owned headquarters facility, which have been recorded in
nonoperating income.
<TABLE>
<CAPTION>
Sublease
Lease Rental
(Dollars in thousands) Payments Income Net
<S> <C> <C> <C>
1997 $7,227 $1,557 $5,670
1998 5,878 588 5,290
1999 3,917 403 3,514
2000 2,931 150 2,781
2001 2,417 79 2,338
Thereafter 2,567 47 2,520
</TABLE>
13. SUPPLEMENTARY DATA TO CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nonoperating Income (Expense)
Years Ended
December 31, December 31, December 31,
(Dollars in thousands) 1996 1995 1994
<S> <C> <C> <C>
Foreign currency transaction
gain $ 2,571 $ 190 $ 351
Asset sales 2,843 1,197 345
Equity in (losses) earnings
of affiliates (299) 922 (429)
Other income (expense) 2,072 1,358 (141)
Total $ 7,187 $ 3,667 $ 126
Other Data
Provisions for doubtful accounts $ 1,127 $ 1,384 $ 1,906
Research and development* 12,483 9,657 10,127
Maintenance and repairs 6,703 6,473 7,245
Royalties 2,795 5,293 2,245
Advertising 1,817 1,937 2,656
</TABLE>
* Included in technical expenses in the consolidated financial statements.
14. RETIREMENT BENEFITS AND OTHER POST RETIREMENT BENEFITS
Prior to January 1, 1992, substantially all the U.S. employees of the
Company were eligible to participate in the Retirement Plan, a defined-
benefit, salary-reduction plan available to most Ceridian and Company U.S.
employees.
Effective January 1, 1992, Ceridian established a separate pension plan for
the Company's U.S. employees (the "Retirement Plan"). Effective December
20, 1992, the Company froze the benefits under the Retirement Plan, meaning
such benefits are computed only on the basis of compensation and service up
to that date.
Certain major international subsidiaries of the Company also offer defined
benefit pension plans to their employees. Benefits under these plans are
calculated on maximum or career-average earnings and years of participation
in the plans. Funding amounts are based on determinations by independent
consulting actuaries of requirements of the Employee Retirement Income
Security Act of 1974 ("ERISA") in the U.S. and local statutory requirements
in other countries.
26
<PAGE>
The net periodic pension cost (credit) and related assumptions for all
defined benefit plans appear in an accompanying table, as does a
description of the funded status of those plans.
<TABLE>
<CAPTION>
Net Periodic Pension Cost (Credit)
Years Ended
December 31, December 31, December 31,
(Dollars in thousands) 1996 1995 1994
<S> <C> <C> <C>
Service cost $ 725 $ 882 $ 967
Interest cost on projected benefit
obligation 8,177 8,942 9,079
Actual return on plan assets (9,582) (12,841) (5,197)
Net amortization and deferral 3,108 5,270 (4,341)
Total $ 2,428 $ 2,253 $ 508
Rate Assumptions
Discount rate 7.3% 7.3% 8.3%
Rate of salary progression 4.3% 4.4% 5.1%
Long-term rate of return on assets 7.8% 7.7% 8.1%
</TABLE>
1995 pension expense was reduced by a curtailment/settlement gain of $0.3
million related to a non-U.S. plan. Retirement expense for all other plans
amounted to $0.4 million in 1996, $0.3 million in 1995, and $0.5 million in
1994.
Funded Status of Defined Benefit Retirement Plans at Measurement Date
<TABLE>
<CAPTION>
Plans in Which Asset Value Exceeds
Accumulated Benefit Obligation
December 31, December 31,
(Dollars in thousands) 1996 1995
<S> <C> <C>
Actuarial present value of obligation:
Vested benefit obligation $ 22,189 $ 23,933
Accumulated benefit obligation $ 22,729 $ 24,546
Projected benefit obligation $ 23,685 $ 25,570
Plan assets at fair value 49,106 46,857
Plan assets in excess of
projected benefit obligation 25,421 21,287
Unrecognized net gain (6,745) (4,332)
Unrecognized net asset (8,859) (7,804)
Net pension asset recognized
in the consolidated balance sheet $ 9,817 $ 9,151
</TABLE>
<TABLE>
<CAPTION>
Plans in Which Accumulated Benefit
Obligation Exceeds Asset Value
December 31, December 31,
(Dollars in thousands) 1996 1995
<S> <C> <C>
Actuarial present value of obligation:
Vested benefit obligation $ 103,116 $ 104,382
Accumulated benefit obligation $ 103,541 $ 104,768
Projected benefit obligation $ 104,571 $ 105,869
Plan assets at fair value 72,634 65,522
Projected benefit obligation in excess of
plan assets 31,937 40,347
Unrecognized net gain (11,215) (15,053)
Unrecognized prior service cost (1,529) (1,498)
Unrecognized liability for defined
benefit plans 282 66
Fiscal 1997 settlement reserve 987 1,639
Adjustment to recognize minimum
pension liability 6,631 11,854
Net pension liability for defined
benefit plans 27,093 37,355
Other non-defined benefit plans'
obligations 1,489 1,589
Net pension liability recognized in
the consolidated balance sheet $ 28,582 $ 38,944
</TABLE>
Other Post-Retirement Benefits
Substantially all retired U.S. employees of the Company prior to July 31,
1992, participate in post-retirement health insurance benefits provided by
Ceridian. Non-U.S. plans are not significant. Ceridian assumed all future
obligations related to all of the Company's retired employees as of July
31, 1992. The Company has no post-retirement benefits committed to
retirees since July 31, 1992.
15. Capital Assets
<TABLE>
<CAPTION>
Capital Assets
December 31, December 31,
(Dollars in thousands) 1996 1995
<S> <C> <C>
Property and equipment, at cost
Land $ 1,216 $ 1,254
Buildings and improvements 31,914 32,996
Machinery and equipment 47,493 52,999
Total 80,623 87,249
Accumulated depreciation 63,516 70,461
Property and equipment, net $ 17,107 $ 16,788
Leased and data center equipment,
at cost $ 18,918 $ 30,809
Accumulated depreciation 18,528 30,116
Leased and data center
equipment, net $ 390 $ 693
</TABLE>
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONT'D
16. STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Net Change in Working Capital Items
Years Ended
December 31, December 31, December 31,
(Dollars in thousands) 1996 1995 1994
<S> <C> <C> <C>
Trade and other receivables $ (2,921) $ 7,599 $ 13,917
Inventories 3,905 5,323 12,721
Prepaid expenses and other current
assets 1,696 (28) 1,130
Accounts payable (2,839) 6,645 (3,743)
Customer advances and
deferred income (515) (11,883) 3,164
Accrued taxes 1,220 3,919 1,016
Accrued salaries and wages (179) (1,207) (2,700)
Other accrued expenses (3,431) (1,177) (3,522)
Net change in working
capital items $ (3,064) $ 9,191 $ 21,983
</TABLE>
<TABLE>
<CAPTION>
Noncash Operating, Investing, and Financing Activities
Years Ended
December 31, December 31, December 31,
(Dollars in thousands) 1996 1995 1994
<S> <C> <C> <C>
Noncash utilization of restructure
reserves $ (1,398) $(22,390) $(24,584)
Goodwill write-off - - (24,900)
</TABLE>
<TABLE>
<CAPTION>
Supplemental Disclosures of Cash Flow Information
Years Ended
December 31, December 31, December 31,
(Dollars in thousands) 1996 1995 1994
<S> <C> <C> <C>
Cash paid (received) during year for:
Interest paid $ 208 $ 1,038 $ 1,426
Income taxes paid 3,638 1,856 6,325
Income taxes refunded (1,590) (8,063) (6,866)
</TABLE>
17. GEOGRAPHIC SEGMENT AND MAJOR CUSTOMER DATA
Information concerning United States and International operations appears
in the accompanying Geographic Segment Data table. Information is presented
on the same basis as utilized by the Company to manage the business.
Export sales and certain income and expense items are reported in the
geographic segment where the final sale is made rather than where the
transaction originates. All inter-company profit has been eliminated. The
amounts of the parent company's equity in net assets of and advances to
international subsidiaries and branches were $383.3 million and $382.9
million at December 31, 1996 and December 31, 1995, respectively.
In 1995 and early 1996, the Company completed the sale of eight
international product distribution operations to AmeriData. Results of
operations, assets, and liabilities for the operations sold are included
through the effective date of divestitures (see note 1(a)).
<TABLE>
<CAPTION>
Geographic Segment Data
International (2)
United(1) Pan
(Dollars in thousands) States American Europe Asia Total Consolidated
<S> <C> <C> <C> <C> <C> <C>
1996 Revenues $145,954 $ 357 $113,129 $ 46,256 $159,742 $305,696
Earnings (loss) from operations 2,654 (311) 843 1,798 2,330 4,984
Identifiable assets 129,665 8,389 48,352 33,891 90,632 220,297
1995 Revenues 139,863 33,538 227,538 53,876 314,952 454,815
Earnings (loss) from operations 1,125 1,415 (925) 100 590 1,715
Identifiable assets 116,615 9,165 62,686 39,019 110,870 227,485
1994 Revenues 149,517 85,615 230,131 58,964 374,710 524,227
Earnings (loss) from operations (78,020) 5,658 (25,081) 410 (19,013) (97,033)
Identifiable assets 112,939 32,507 115,847 39,275 187,629 300,568
<FN>
(1) United States earnings (loss) from operations include substantially
all technical expenses, marketing expenses, and other corporate support and
administrative costs.
(2) Pan American includes primarily the operations in Canada and Mexico.
Europe includes primarily the operations in Denmark, France, Germany, and
United Kingdom. Asia includes primarily the operations in Korea and
Taiwan.
</TABLE>
28
<PAGE>
Major Customers
The Company's customers are located throughout the world. No single
customer accounted for more than ten percent of the Company's revenues in
1996, 1995, or 1994, except for revenue from sales to various U.S.
government agencies which amounted to approximately 19.5% in 1996, 13.6% in
1995, and 12.0% in 1994.
18. RESTRUCTURING RESERVES, CURRENT AND NONCURRENT
During the fourth quarter of 1994, the Company completed a thorough review
of its worldwide business operations and market opportunities. The Company
concluded it was necessary to further reduce the geographic scope of
operations, downsize employment levels worldwide, and revalue selected
assets. As a result, the Company adopted a formal restructuring plan
resulting in a pre-tax restructuring charge of $70.1 million.
Under the 1994 restructuring plan, the Company took a $34.0 million charge
to reduce the worldwide workforce. During 1995, severance cost activity
included cash payments of $11.5 million related to the reduction of the
worldwide workforce by approximately 230 individuals and a reclassification
of $7.6 million of severance accrual which was no longer required primarily
as a direct result of the divestiture activities discussed in note 3. This
accrual was reclassified to other restructuring accruals to offset the cash
and noncash activity associated with the AmeriData divestitures. As a
result of these divestitures, the reduction in workforce related to the
Company's restructuring charge will total approximately 475 individuals
versus the original estimate of 600 individuals. Cash outlays for 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. During 1996, severance cost
activity included cash payments of $6.8 million related to the reduction of
the worldwide workforce by approximately 115 individuals.
Asset revaluations and write-offs accounted for $14.3 million of the 1994
restructuring charge. This charge reduced certain assets to their net
realizable value and was a direct result of the Company refocusing its
business strategy including discontinuance of marketing efforts related to
proprietary systems. Both 1995 and 1996 activity included the write down
of assets directly related to the AmeriData divestitures discussed in note
3.
Lease and other facility obligations accounted for $9.7 million of the 1994
restructuring charge. This charge was comprised of lease buyouts for
facilities and other commitments under leases resulting from the Company's
plan to reduce its geographic dispersion by consolidating sales and
services offices into more central operations. During 1995, lease and
other facility obligations activity included cash payments of $8.5 million
related to commitments under leases throughout the United States, Canada,
and Europe and a reclassification of a $2.5 million lease and other
facility obligations accrual which was no longer required primarily as a
direct result of the divestiture activity discussed in note 3. This
accrual was classified to other restructuring accruals to offset the cash
and noncash activity associated with the AmeriData divestitures. During
1996, lease and other facility obligations activity included cash payments
of $2.5 million related to commitments under leases throughout the United
States and Europe and reclassification that increased the accrual by $1.0
million for a change in estimate relating to facility issues in Europe.
This increase was funded in part by the cash proceeds from the favorable
settlement of a restructure-related pension asset and other miscellaneous
reclassifications. The majority of the remaining lease obligations of $1.6
million relates to lease commitments in Europe.
Other charges accounted for $6.5 million of the 1994 restructuring charge
and consisted of $3.5 million for pension accruals resulting from lump sum
payments, $1.1 million for litigation matters, and several less significant
items. During 1995, other activity included cash payments of $2.8 million
for litigation and other less significant items and noncash activity
primarily associated with the AmeriData divestitures including the write-
off of goodwill of $9.3 million and net book value of operations sold of
$10.1 million. During 1996, other activity included cash payments of $1.7
million for litigation matters associated with Europe and the AmeriData
divestitures and several less significant items. The majority of the
remaining accrual of $2.8 million relates to litigation matters.
Future cash outlays for the remaining restructuring reserve of $12.2
million at December 31, 1996 are anticipated to be $8.9 million and $3.3
million in 1997 and 1998, respectively.
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONT'D
The following represents the Company's restructuring activities for the
periods indicated:
<TABLE>
<CAPTION>
Lease Foreign
Asset and Other Currency
Severance Revaluations Facility Translation
(Dollars in thousands) Costs and Write-offs Obligations Adjustment Other Total
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994 $17,229 $ - $10,880 $ - $ 4,167 $32,276
Restructuring charge 33,963 14,330 9,686 5,630 6,491 70,100
Noncash items - (14,330) (337) (5,630) (4,287) (24,584)
Cash payments/refunds, net (17,863) - (6,389) - 1,398 (22,854)
Balance at December 31, 1994 33,329 - 13,840 - 7,769 54,938
Noncash items - (836) - (1,515) (20,039) (22,390)
Reclassifications and transfers, net (7,619) 812 (2,534) 3,208 19,534 13,401
Translation 1,186 24 340 (1,693) 143 -
Cash payments (11,496) - (8,515) - (2,822) (22,833)
Balance at December 31, 1995 15,400 - 3,131 - 4,585 23,116
Noncash items - (889) - (480) (29) (1,398)
Reclassifications and transfers, net (422) 869 1,024 - 1 1,472
Translation (396) 20 (71) 480 (33) -
Cash payments (6,768) - (2,511) - (1,689) (10,968)
Balance at December 31, 1996 $ 7,814 $ - $ 1,573 $ - $ 2,835 $12,222
</TABLE>
19. GOODWILL
Prior to 1995, the Company acquired several companies which were engaged in
the computer systems and network integration business. The Company
classified the excess of the purchase price over the fair value of net
assets acquired as goodwill.
In the third quarter of 1995, unamortized goodwill, related to MICHAEL
Business Systems Plc and Antares Electronics, Inc., was written off as part
of the AmeriData divestitures (see note 3).
During the fourth quarter of 1994, the Company concluded that the carrying
values of the Evernet Systems, Inc. and Dataselskapet A/S goodwill balances
were fully impaired and the remaining unamortized balances of $24.9 million
were charged to earnings. The primary reasons for these write-offs included
significant reduction in the employee and customer bases and a refocusing
of the Company's overall business strategy. At the time the write-off was
taken, there were no other noncurrent assets remaining from these
acquisitions.
Changes in the goodwill balances are summarized as follows:
<TABLE>
<CAPTION>
Foreign
Currency
Accumulated Translation
(Dollars in thousands) Gross Amortization Adjustment Net
<S> <C> <C> <C> <C>
Balance at January 1, 1994 $29,589 $(1,742) $ (5) $27,842
Acquisition of businesses 9,911 - - 9,911
Foreign currency
translation adjustment - - 511 511
Amortization of goodwill - (3,177) - (3,177)
Goodwill write-off (28,683) 3,783 - (24,900)
Balance at December 31, 1994 10,817 (1,136) 506 10,187
Foreign currency
translation adjustment - - (129) (129)
Amortization of goodwill - (770) - (770)
Goodwill write-off (10,817) 1,906 (377) (9,288)
Balance at December 31, 1995 $ - $ - $ - $ -
</TABLE>
The Company did not make any significant business acquisitions during 1996
or 1995.
30
<PAGE>
SUPPLEMENTARY QUARTERLY DATA (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
1996 1995
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES $79,852 $72,060 $75,531 $78,254 $90,423 $105,240 $129,088 $130,064
COST OF REVENUES 53,676 45,938 49,168 52,588 61,352 76,078 96,483 96,467
Gross profit 26,176 26,122 26,363 25,666 29,071 29,162 32,605 33,597
OPERATING EXPENSES:
Selling, general and
administrative 21,791 21,986 21,675 21,409 24,228 28,261 30,386 30,172
Technical 2,801 3,247 3,174 3,260 2,753 2,445 2,137 2,338
Total operating expenses 24,592 25,233 24,849 24,669 26,981 30,706 32,523 32,510
Earnings (loss) from
operations 1,584 889 1,514 997 2,090 (1,544) 82 1,087
NONOPERATING INCOME (EXPENSES):
Interest expense (26) (26) (40) (112) (70) (236) (453) (274)
Interest income 1,375 1,300 1,231 1,207 1,478 1,263 1,592 1,386
Other income, net 3,590 1,061 1,349 1,186 278 1,449 1,240 700
Total nonoperating
income, net 4,939 2,335 2,540 2,281 1,686 2,476 2,379 1,812
Earnings before
income taxes 6,523 3,224 4,054 3,278 3,776 932 2,461 2,899
PROVISION FOR INCOME TAXES - 300 400 400 - 300 200 700
Net earnings $ 6,523 $ 2,924 $ 3,654 $ 2,878 $ 3,776 $ 632 $ 2,261 $ 2,199
</TABLE>
PRICE RANGE OF COMMON STOCK
The Company's stock is traded on the Nasdaq National Market Tier of the
Nasdaq stock market under the symbol CDAT. The following table sets forth,
for the quarterly periods indicated, the high and low prices for the Common
Stock.
<TABLE>
<CAPTION>
Market price 1996 1995
ranges (1) Fourth Third Second First Fourth Third Second First
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High $28.63 $24.00 $27.50 $26.13 $21.38 $12.13 $10.75 $ 7.25
Low $19.13 $12.75 $18.00 $14.25 $10.13 $ 8.63 $ 6.63 $ 5.88
<FN>
(1) Source: Nasdaq National Market Tier of the Nasdaq stock market under
the symbol CDAT.
</TABLE>
As of December 31, 1996, the Company's Common Stock was held by
approximately 14,630 stockholders of record or through nominee or street
name accounts with brokers. The Company has not paid any dividends on its
Common Stock. The Company currently intends to retain earnings for use in
its business and does not anticipate paying cash dividends in the
foreseeable future to common stockholders.
31
<PAGE>
EXHIBIT 21.0
CONTROL DATA SYSTEMS, INC.
Subsidiaries of the Registrant
<TABLE>
<CAPTION>
STATE/COUNTRY OF % OF
SUBSIDIARIES INCORPORATION OWNERSHIP
<S> <C> <C>
CD Iberica, S.A. Spain 100%
Control Data A/S Denmark 100%
Control Data AB Sweden 100%
Control Data Asia, Inc. Delaware 100%
Control Data Systems (Malaysia) SDN BHD Malaysia 100%
Control Data BV Netherlands 100%
Control Data IM BV Netherlands 100%
Control Data Belgium, Inc. Delaware 100%
Control Data China, Inc. Delaware 100%
Control Data do Brasil Computadores, LTDA. Brazil 100%
Control Data Far East, Inc. Delaware 100%
Control Data Korea Inc. Korea 100%
Control Data Taiwan Inc. Taiwan 100%
Control Data France S.A. France 100%
Control Data Holding AG Switzerland 100%
Control Data (Schweiz) AG Switzerland 100%
Control Data GmbH Germany 100%
ICEM Systems GmbH Germany 100%
ICEM Systems, Inc. Delaware 100%
Control Data India, Inc. Delaware 100%
Control Data Indo-Asia Company Delaware 100%
Control Data International Employment, Inc. Delaware 100%
Control Data International Trading, Inc. Delaware 100%
Control Data (Ireland) Limited Ireland 100%
Control Data Italia S.p.A. Italy 100%
Control Data Japan, Ltd. Japan 100%
Control Data Limited United Kingdom 100%
Binary Systems Limited United Kingdom 100%
Systime Holdings Ltd. United Kingdom 98.6%
Systime Computers Limited United Kingdom 100%
Systime (Ireland) Ltd. (shell) Ireland 100%
Control Data Overseas Finance Corporation N.V. Netherlands
Antilles 100%
</TABLE>
<PAGE>
EXHIBIT 21.0
CONTROL DATA SYSTEMS, INC.
Subsidiaries of the Registrant
<TABLE>
<CAPTION>
STATE/COUNTRY OF % OF
SUBSIDIARIES INCORPORATION OWNERSHIP
<S> <C> <C>
Control Data Pan American Corporation Delaware 100%
Control Data de Mexico S.A. de C.V. Mexico 100%
Control Data Real Estate, Inc. Delaware 100%
Control Data Systems Canada, Ltd. Canada 100%
Control Data Systems (Beijing) Co., Ltd. China 100%
Control Data Systems (Singapore) Pte Ltd. Singapore 100%
Control Data Systems (Thailand) Limited Thailand 100%
Inter-American Control Data Corporation Delaware 100%
Meridian Environmental Technologies, Inc. Delaware 100%
</TABLE>
Investments in Unconsolidated Affiliates
<TABLE>
<CAPTION>
STATE/COUNTRY OF % OF
INVESTMENTS INCORPORATION OWNERSHIP
<S> <C> <C>
Beijing RIAMB Information Technology Co., Ltd. China 14.2%
Circuitos Impresos de Alta Technologia
S.A. de C.V. Mexico 30%
Societe de Creation D'Activities
Nouvelles (SOCRAN) Belgium 9.9%
</TABLE>
<PAGE>
EXHIBIT 23.0
[Letterhead]
Board of Directors
Control Data Systems, Inc.
We consent to incorporation by reference in the registration
statements (No. 33-49027, No. 33-49029, No. 33-49379, No. 33-54461, and No.
333-773) on Form S-8 of Control Data Systems, Inc. of our report dated
January 22, 1997, relating to the consolidated balance sheets of Control
Data Systems, Inc. and subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of the operations, stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1996, and all related schedules, which report appears in the
December 31, 1996 annual report on Form 10-K of Control Data Systems, Inc.
/s/ KPMG Peat Marwick LLP
Minneapolis, Minnesota
March 25, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> This Schedule Contains Summary Financial
Information Extracted from the Registrant's
Financial Statements for its 1996 Fiscal Year
and is Qualified in its Entirety by Reference
to Such Financial Statements
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 84,610
<SECURITIES> 0
<RECEIVABLES> 84,198
<ALLOWANCES> 0
<INVENTORY> 14,511
<CURRENT-ASSETS> 187,128
<PP&E> 17,497
<DEPRECIATION> 0
<TOTAL-ASSETS> 220,297
<CURRENT-LIABILITIES> 76,337
<BONDS> 0
<COMMON> 149
0
0
<OTHER-SE> 108,871
<TOTAL-LIABILITY-AND-EQUITY> 220,297
<SALES> 130,585
<TOTAL-REVENUES> 305,696
<CGS> 70,619
<TOTAL-COSTS> 300,712
<OTHER-EXPENSES> (12,299)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 205
<INCOME-PRETAX> 17,078
<INCOME-TAX> 1,100
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,978
<EPS-PRIMARY> 1.09
<EPS-DILUTED> 1.09
</TABLE>
