1
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
X QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
OR
_ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
AND EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
Commission File Number 0-20252
Control Data Systems, Inc.
(Exact name of Registrant as Specified in Charter)
Delaware 41-1718075
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
___________
4201 Lexington Avenue North
Arden Hills, Minnesota 55126-6198
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612) 415-3001
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90
days. X Yes No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Sections 12, 13 or 15(d)
of the Securities Exchange Act of 1934 subsequent to the distribution of
securities under a plan confirmed by a court. Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date: 12,603,942
shares of Common Stock, $0.01 par value per share, as of May 5, 1997.
<PAGE>
CONTROL DATA SYSTEMS, INC.
FORM 10-Q
March 31, 1997
INDEX
Page
Part I - Financial Information:
Consolidated Statements of Operations -
Three months ended March 31, 1997 and
March 31, 1996 ..................................... 2
Consolidated Balance Sheets -
March 31, 1997 and December 31, 1996 ............... 3
Consolidated Statements of Cash Flows -
Three months ended March 31, 1997 and
March 31, 1996 ..................................... 4
Notes to Consolidated Financial Statements ............. 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations ................ 9
Part II - Other Information ............................ 17
Signature .............................................. 18
Exhibit Index .......................................... 19
1
<PAGE>
PART 1
FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONTROL DATA SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
1997 1996
<S> <C> <C>
REVENUES:
Software and services................. $ 35,810 $ 39,863
Maintenance and repair................ 12,285 14,864
Hardware products..................... 12,858 23,527
Total revenues....................... 60,953 78,254
COST OF REVENUES:
Sotware and services.................. 22,382 26,350
Maintenance and repair................ 7,967 9,195
Hardware products..................... 9,451 17,043
Total cost of revenues............... 39,800 52,588
Gross profit......................... 21,153 25,666
OPERATING EXPENSES:
Selling, general and
administrative....................... 17,893 21,409
Technical............................. 3,732 3,260
Total operating expenses............. 21,625 24,669
Earnings (loss) from operations...... (472) 997
NONOPERATING INCOME (EXPENSES):
Interest expense...................... (27) (112)
Interest income....................... 1,280 1,207
Gain on sale of business.............. 15,000 -
Other income.......................... 1,119 1,186
Total nonoperating income, net....... 17,372 2,281
Earnings before income taxes......... 16,900 3,278
PROVISION FOR INCOME TAXES............. 300 400
Net earnings......................... $ 16,600 $ 2,878
Primary earnings per common share
and common share equivalents......... $ 1.19 $ 0.20
Fully diluted earnings per common
share and common share equivalents... $ 1.19 $ 0.20
Weighted average common shares
outstanding (in thousands):
Primary.............................. 13,950 14,287
Fully diluted........................ 13,950 14,310
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
2
<PAGE>
CONTROL DATA SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
ASSETS
March 31, December 31,
1997 1996
<S> <C> <C>
Current assets:
Cash and short-term investments............... $ 94,655 $ 84,610
Trade and other receivables................... 70,456 84,198
Inventories................................... 13,598 14,511
Prepaid expenses and other current assets..... 4,883 3,809
Total current assets........................ 183,592 187,128
Investments and advances........................ 554 601
Property, plant and equipment, net.............. 16,399 17,497
Noncurrent trade and other receivables.......... 5,615 4,820
Other noncurrent assets......................... 10,626 10,251
Total assets................................ $216,786 $220,297
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Notes payable................................. $ 1,818 $ 289
Accounts payable.............................. 10,851 15,773
Customer advances and deferred income......... 6,962 6,649
Accrued taxes................................. 5,509 6,610
Accrued salaries and wages.................... 11,385 11,579
Restructure reserves, current portion......... 9,785 8,932
Other accrued expenses........................ 29,788 26,505
Total current liabilities................... 76,098 76,337
Deferred income taxes........................... 477 469
Restructure reserves, less current portion...... - 3,290
Pension liabilities............................. 27,013 28,582
Other noncurrent liabilities.................... 2,433 2,599
Total liabilities........................... 106,021 111,277
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
14,905,859 and 14,883,500 shares
as of March 31, 1997 and December 31,
1996, respectively.......................... 149 149
Additional paid-in capital.................... 172,107 171,845
Accumulated deficit........................... (29,795) (46,395)
Minimum pension liability adjustment.......... (6,631) (6,631)
Foreign currency translation adjustment....... (1,714) (1,438)
Unearned compensation - restricted stock...... (80) (106)
Unrealized gains on investments............... 31 36
Treasury stock, at cost (2,107,123 and
1,203,390 shares as of March 31, 1997
and December 31, 1996, respectively)........ (23,302) (8,440)
Total stockholders' equity.................. 110,765 109,020
Total liabilities and stockholders' equity.. $216,786 $220,297
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE>
CONTROL DATA SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
1997 1996
<S> <C> <C>
Cash Flows from Operating Activities:
Net earnings ...................................... $ 16,600 $ 2,878
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Gain on sale of business....................... (15,000) -
Depreciation................................... 1,746 1,760
Amortization................................... 73 92
Foreign currency transaction gain.............. (713) (502)
Equity in earnings of affiliates............... (12) (337)
Restructure reserves utilized.................. (2,200) (2,878)
Loss (gain) on sale of marketable securities
and other assets............................. (63) 117
Net change in working capital items............ 1,281 (4,896)
Net change in noncurrent trade receivables..... (850) (217)
Net change in other noncurrent assets.......... (673) (358)
Other.......................................... 424 488
Net cash provided by (used in) operating
activities.................................. 613 (3,853)
Cash Flows from Investing Activities:
Expended for property, plant and equipment......... (1,398) (2,082)
Investment in affiliates........................... (552) -
Proceeds from sales of property and equipment...... 121 56
Proceeds from divestitures of businesses,
net of cash given................................ 21,150 9
Proceeds from notes receivable..................... 3,600 -
Change in short-term investments................... (3,868) 1,855
Net cash provided by (used in) investing
activities.................................. 19,053 (162)
Cash Flows from Financing Activities:
Borrowings under short-term financing
arrangements, net................................ 1,570 203
Proceeds from issuance of common stock, net of
issuance costs................................... 262 1,279
Purchase of treasury stock......................... (14,862) -
Net cash provided by (used in) financing
activities.................................. (13,030) 1,482
Effect of Exchange Rate Changes on Cash.............. (459) (171)
Net change in cash and cash equivalents......... 6,177 (2,704)
Cash and cash equivalents, beginning of period.. 7,649 15,188
Cash and cash equivalents, end of period........ 13,826 12,484
Short-term investments.......................... 80,829 66,991
Cash and short-term investments, end of period....... $ 94,655 $ 79,475
</TABLE>
(Continued)
4
<PAGE>
CONTROL DATA SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
1997 1996
<S> <C> <C>
Net Change in Working Capital Items:
Trade and other receivables........................ $ 7,903 $ 515
Inventories........................................ 451 1,030
Prepaid expenses and other current assets.......... (1,793) (387)
Accounts payable................................... (4,424) (8,068)
Customer advances and deferred income.............. 1,010 2,623
Accrued taxes...................................... (744) (10)
Accrued salaries and wages......................... 491 (628)
Other accrued expenses............................. (1,613) 29
Net change in working capital items............... $ 1,281 $(4,896)
Supplemental Disclosures of Cash Flow Information:
Cash paid (received) during the period for:
Interest paid.................................... $ 27 $ 114
Income taxes paid................................ 96 105
Income taxes refunded............................ (65) (607)
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
5
<PAGE>
CONTROL DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidated Financial Statements
The financial statements of Control Data Systems, Inc. ("Control
Data" or the "Company") include the accounts of all majority-owned
subsidiaries. All significant intercompany transactions have been
eliminated.
In the opinion of the Company, the consolidated financial statements
reflect all adjustments (consisting only of normal recurring
adjustments, except as set forth in the Notes to Consolidated Financial
Statements) necessary to present fairly the financial position for the
interim periods presented.
Presentations
Certain prior period amounts have been reclassified to conform to the
current year's presentation.
Net Earnings Per Share
The net earnings per common share and common share equivalents is
computed by dividing net earnings by the weighted average number of
shares and dilutive common share equivalents outstanding during each
period. Common stock equivalents result from dilutive stock options and
warrants computed using the treasury stock method.
2. STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock, Additional Paid-In Capital, Retained Earnings, and Other
Retained
Shares Additional Earnings
Outstand- Treasury Common Paid-In (Accumulated)
(Dollars and shares in thousands) ing Stock Issued Stock Capital Deficit) Other* Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996....... 13,680 1,203 14,883 $ 149 $ 171,845 $ (46,395) $ (16,579) $ 109,020
Issuance of common stock under the
Employee Stock Purchase Plan..... 7 - 7 - 125 - - 125
Exercises of stock options........ 16 - 16 - 137 - - 137
Foreign currency translation
adjustment....................... - - - - - - (276) (276)
Restricted stock award............ - - - - - - 26 26
Change in unrealized gains
on investments................... - - - - - - (5) (5)
Issuance of treasury stock........ (904) 904 - - - - (14,862) (14,862)
Net earnings...................... - - - - - 16,600 - 16,600
Balance at March 31, 1997.......... 12,799 2,107 14,906 $ 149 $ 172,107 $ (29,795) $ (31,696) $ 110,765
</TABLE>
<TABLE>
<CAPTION>
*Other Stockholders' Equity Items
Minimum Foreign Unearned
Pension Currency Compensation- Unrealized
Liability Translation Restricted Gains on Treasury
(Dollars in thousands) Adjustment Adjustment Stock Investments Stock Total
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996....... $ (6,631) $ (1,438) $ (106) $ 36 $ (8,440) $ (16,579)
Foreign currency translation
adjustment....................... - (276) - - - (276)
Restricted stock award............. - - 26 - - 26
Change in unrealized gains
on investments................... - - - (5) - (5)
Issuance of treasury stock......... - - - - (14,862) (14,862)
Balance at March 31, 1997.......... $ (6,631) $ (1,714) $ (80) $ 31 $(23,302) $ (31,696)
</TABLE>
6
<PAGE>
CONTROL DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
MARCH 31, 1997
3. DIVESTITURES
The Company entered into a transaction with Structural Dynamics
Research Corporation ("SDRC") in December 1996 to sell its 50% interest
in Metaphase Technology, Inc. and certain assets of the Company's
Product Data Management ("PDM") business. The transaction, effective
January 1, 1997, produced a gain in the first quarter of $15.0 million
or $1.08 per share. The following table represents the Company's 1996
pro forma results, excluding the divested PDM segment:
<TABLE>
<CAPTION>
Enterprise
Integration Technical Product
(Dollars in thousands) Services Services Design Total
<S> <C> <C> <C> <C>
1st Quarter:
Software and Services.......... $ 20,988 $ 3,885 $ 6,788 $ 31,661
Maintenance and Repair......... - 14,864 - 14,864
Hardware Products.............. 16,541 1,403 4,629 22,573
Total Revenues.............. $ 37,529 $ 20,152 $ 11,417 $ 69,098
Gross Profit % 23.6% 36.8% 53.4% 32.4%
2nd Quarter:
Software and Services.......... $ 28,742 $ 3,705 $ 6,544 $ 38,991
Maintenance and Repair......... - 14,208 - 14,208
Hardware Products.............. 12,325 260 3,336 15,921
Total Revenues.............. $ 41,067 $ 18,173 $ 9,880 $ 69,120
Gross Profit % 29.3% 39.3% 58.3% 36.0%
3rd Quarter:
Software and Services.......... $ 22,114 $ 5,250 $ 7,229 $ 34,593
Maintenance and Repair......... - 13,615 - 13,615
Hardware Products.............. 12,558 483 2,814 15,855
Total Revenues.............. $ 34,672 $ 19,348 $ 10,043 $ 64,063
Gross Profit % 27.0% 36.3% 56.8% 34.5%
4th Quarter:
Software and Services.......... $ 24,944 $ 6,734 $ 9,023 $ 40,701
Maintenance and Repair......... - 13,359 - 13,359
Hardware Products.............. 16,144 363 3,802 20,309
Total Revenues.............. $ 41,088 $ 20,456 $ 12,825 $ 74,369
Gross Profit % 26.5% 30.5% 53.2% 32.6%
Total Year:
Software and Services.......... $ 96,788 $ 19,574 $ 29,584 $145,946
Maintenance and Repair......... - 56,046 - 56,046
Hardware Products.............. 57,568 2,509 14,581 74,658
Total Revenues.............. $154,356 $ 78,129 $ 44,165 $276,650
Gross Profit % 26.8% 35.6% 55.2% 33.8%
</TABLE>
7
<PAGE>
CONTROL DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
MARCH 31, 1997
4. RESTRUCTURING RESERVES, CURRENT AND NONCURRENT
During the fourth quarter of 1994, the Company adopted a formal
restructuring plan resulting in a pre-tax restructuring charge of $70.1
million. At the end of fiscal year 1996, the remaining restructure
reserve associated with this plan totaled $12.2 million. During the
first quarter of 1997, uses totaling $2.4 million reduced this balance
to $9.8 million. First quarter 1997 uses were mainly attributable to
severance of 28 employees, in addition to continuing lease and facility
obligations. Also during the first quarter of 1997, the Company
announced the settlement of pending age discrimination actions against
Ceridian Corporation (the Company's former parent) and the Company. The
Company's aggregate liability for such actions totaled $4.5 million.
While the settlement was determined in the first quarter, the actual
payment of this liability was not made until April 1, 1997, thus
reducing the restructure reserve balance of $9.8 million to $5.3 million
at the start of the second quarter. The remaining reserve balance
primarily represents severance and facility and lease obligations
expected to be satisfied within the next year.
5. REPURCHASE OF STOCK
Under a program approved by the Board of Directors and announced in
July 1996, the Company repurchased 903,733 shares of common stock during
the first quarter of 1997 for $14.9 million. A total of 1,239,733
shares have been acquired for $20.4 million, which includes purchases
made in April 1997, since the repurchase program was authorized.
8
<PAGE>
CONTROL DATA SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Unaudited)
(Dollars in millions)
The following discussion presents management's analysis of the
results of operations for the first three months of 1997 compared to the
first three months of 1996 and changes in financial condition from
December 31, 1996 to March 31, 1997.
RESULTS OF OPERATIONS
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; complex circuit board repair; 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 has a number of suppliers and partners providing a range
of hardware and software platforms, complementary products and services,
and sales and marketing activities.
Revenues by Category
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
1997 1996 Change
<S> <C> <C> <C>
Software and services..... $ 35.8 $ 39.9 (10.3)%
Maintenance and repair.... 12.3 14.9 (17.4)%
Hardware products......... 12.9 23.5 (45.1)%
Total revenues.......... $ 61.0 $ 78.3 (22.1)%
</TABLE>
Revenues by Geography
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
1997 1996 Change
<S> <C> <C> <C>
Americas.................. $ 30.2 $ 36.3 (16.8)%
Europe.................... 21.8 30.5 (28.5)%
Asia...................... 9.0 11.5 (21.7)%
Total revenues.......... $ 61.0 $ 78.3 (22.1)%
</TABLE>
As a result of the divested PDM business (see note 3 of the Notes to
Consolidated Financial Statements), the Company expects total revenues
to decline from 1996 to 1997 on an as reported basis. Revenues
decreased in the first quarter of 1997 from the first quarter of 1996 in
all revenue categories. The largest percentage decreases were in
maintenance and repair and hardware products revenues. These decreases
reflect the continuing erosion of the Company's installed base of
proprietary hardware and software and the Company's continuing de-
emphasis on low-margin hardware activity.
9
<PAGE>
CONTROL DATA SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Unaudited) (Continued)
(Dollars in millions)
While software and services revenues decreased on an as reported
basis in the first quarter of 1997, on a pro forma basis, total software
and services revenues grew 13% as compared to the first quarter of 1996.
The majority of this growth was in the Company's Enterprise Integration
Services business segment which reported a 23% increase in software and
services revenues on a pro forma basis.
Software and services revenues were 59% of the Company's total
revenues in the first quarter of 1997. This percentage has grown;
software and services revenues were 51% and 46% of the Company's total
revenues in the first quarter of 1996 on an as reported and pro forma
basis, respectively.
Revenues by geography, as a percentage of the Company's total
revenues, have remained fairly consistent in the first quarter of 1997
compared to the first quarter of 1996. The Americas operations
represented 49%, Europe operations represented 36%, and Asia operations
represented 15% of the Company's total first quarter 1997 revenues.
First quarter 1996 revenues, as a percentage of the Company's total
revenues, on an as reported and pro forma basis were: Americas 46% and
44%, Europe 39% and 39%, and Asia 15% and 17%, respectively.
Cost of Revenues and Gross Profit
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
1997 1996 Change
<S> <C> <C> <C>
Software and services..... $ 22.4 $ 26.4 (15.2)%
Maintenance and repair.... 8.0 9.2 (13.0)%
Hardware products......... 9.4 17.0 (44.7)%
Total cost of revenues.. $ 39.8 $ 52.6 (24.3)%
Percentage of revenues.. 65.2% 67.2%
Total gross profit...... $ 21.2 $ 25.7 (17.5)%
Percentage of revenues.. 34.8% 32.8%
</TABLE>
The primary factor contributing to cost of revenues and gross profit
decreases in the first quarter of 1997 from 1996, was the decline in
total revenues. Total maintenance and repair and hardware products
gross profits decreased in the first quarter of 1997 versus both the as
reported and the pro forma gross profits of the comparable period in
1996. There was little change in the software and services gross
profits of $13.4 million from the as reported gross profits of the first
quarter in 1996. However, software and services gross profits increased
27% from the pro forma first quarter 1996 gross profits of $10.6
million.
While total gross profits decreased, the total gross margins
increased in the first quarter of 1997 versus both the as reported and
the pro forma margins of the comparable period in 1996. Margins
decreased in maintenance and repair and hardware products, but increased
in software and services with continued improvement in consulting
margins. The majority of the gross margin improvement is within the
Electronic Commerce business of the Company's Enterprise Integration
Services business segment. Hardware products sales constitute low-
margin activity, and as the Company continues to de-emphasize this
business, total margins should increase. On a geography basis, the
Europe operations had significant total gross margin improvement, while
both the Americas and Asia operations had little change in the first
quarter of 1997 from the first quarter of 1996.
10
<PAGE>
CONTROL DATA SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Unaudited) (Continued)
(Dollars in millions)
Operating Expenses
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
1997 1996 Change
<S> <C> <C> <C>
Selling, general and
administrative.......... $ 17.9 $ 21.4 (16.4)%
Percentage of revenues.... 29.3% 27.3%
Technical................. $ 3.7 $ 3.3 12.1 %
Percentage of revenues.... 6.1% 4.2%
</TABLE>
Selling, general and administrative (SG&A). SG&A expenses have
decreased in the first quarter of 1997 versus both the as reported basis
and the pro forma basis of the comparable period in 1996. SG&A on a pro
forma basis was $18.2 million or 26.4% of revenues. This decrease is
the result of downsizing actions taken by the Company and the
divestiture of the PDM business. As a percentage of revenues, SG&A
expenses increased in 1997 as a result of investments made in support of
service provider partners.
Technical. The increase in technical expense is the result of higher
spending on digital commerce products and services.
Nonoperating Income (Expenses)
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
1997 1996 Change
<S> <C> <C> <C>
Interest expense.......... - (0.1)
Interest income........... 1.3 1.2
Other income.............. 16.1 1.2
Nonoperating income, net $ 17.4 $ 2.3 656.5%
Percentage of revenues.. 28.5% 2.9%
</TABLE>
Interest expense. Interest expense increased slightly due to higher
average daily short-term borrowings.
Interest income. Interest income increased slightly due to higher
average interest rate yields.
Other income. Included in the first quarter 1997 is the gain of $15.0
million from the sale of Metaphase and the PDM business (see note 3 of
the Notes to Consolidated Financial Statements). This transaction was
the primary factor for the increase from the first quarter of 1996.
There was little difference between comparable quarters for other
items, such as rental income and exchange gain/loss.
11
<PAGE>
CONTROL DATA SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Unaudited) (Continued)
(Dollars in millions)
Provision for Income Taxes
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
1997 1996
<S> <C> <C>
Provision for Income Taxes.. $ 0.3 $ 0.4
Percentage of revenues...... 0.5% 0.5%
</TABLE>
The gain from the Metaphase sale is sheltered by the Company's U.S.
tax loss carryforwards and, therefore, the provision for income taxes in
the first quarter of 1997 and the comparable period in 1996 relates
primarily to foreign income taxes on the earnings of the Company's
foreign subsidiaries and foreign withholding taxes on certain United
States income.
Net Earnings and Earnings Per Share
<TABLE>
<CAPTION>
Three Months Ended
(Earnings per share in dollars) March 31, March 31,
1997 1996
<S> <C> <C>
Net earnings................ $ 16.6 $ 2.9
Percentage of revenues...... 27.2% 3.7%
Earnings per share:
Primary.................... $ 1.19 $ 0.20
Fully diluted.............. $ 1.19 $ 0.20
</TABLE>
The net earnings increase is primarily attributable to higher
nonoperating income, and, more specifically, the $15.0 million gain from
the sale of Metaphase and the PDM business (see note 3 of the Notes to
Consolidated Financial Statements). This transaction contributed $1.08
per share to the total first quarter 1997 earnings per share of $1.19.
Lower operating expenses also contributed to higher earnings in the
first quarter of 1997. Operating results for the three months ended
March 31, 1997 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1997.
12
<PAGE>
CONTROL DATA SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Unaudited) (Continued)
The following tables represent first quarter results for 1997 and
1996 and pro forma results for 1996. The 1996 first quarter pro forma
results are based on the exclusion of the Product Data Management
business segment (see note 3 of the Notes to Consolidated Financial
Statements).
1997/1996 Pro Forma Revenues and Gross Profits
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 Pro Forma 1996
1st Quarter Percentage 1st Quarter
REVENUES As Reported Change As Reported Pro Forma
<S> <C> <C> <C> <C>
Software and services.... $ 35,810 13.1 % $ 39,863 $ 31,661
Maintenance and repair... 12,285 (17.4)% 14,864 14,864
Hardware products........ 12,858 (43.0)% 23,527 22,573
Total revenues....... $ 60,953 (11.8)% $ 78,254 $ 69,098
Gross profit............. $ 21,153 (5.4)% $ 25,666 $ 22,363
REVENUE DISTRIBUTION
Software and services.... 58.8% 50.9% 45.8%
Maintenance and repair... 20.1% 19.0% 21.5%
Hardware products........ 21.1% 30.1% 32.7%
Total revenues....... 100.0% 100.0% 100.0%
Gross profit............. 34.7% 32.8% 32.4%
</TABLE>
1997 Revenues and Gross Profits by Business Type
<TABLE>
<CAPTION>
(Dollars in thousands) Enterprise
Integration Product Technical
REVENUES Services Design Services Total
<S> <C> <C> <C> <C>
Software and services.... $ 25,723 $ 6,633 $ 3,454 $ 35,810
Maintenance and repair... - - 12,285 12,285
Hardware products........ 9,439 2,337 1,082 12,858
Total revenues....... $ 35,162 $ 8,970 $ 16,821 $ 60,953
Gross profit............. 28.7% 62.6% 32.3% 34.7%
</TABLE>
1996 Pro Forma Revenues and Gross Profits by Business Type
<TABLE>
<CAPTION>
(Dollars in thousands) Enterprise
Integration Product Technical
REVENUES Services Design Services Total
<S> <C> <C> <C> <C>
Software and services.... $ 20,988 $ 6,788 $ 3,885 $ 31,661
Maintenance and repair... - - 14,864 14,864
Hardware products........ 16,541 4,629 1,403 22,573
Total revenues....... $ 37,529 $ 11,417 $ 20,152 $ 69,098
Gross profit............. 23.6% 53.4% 36.8% 32.4%
</TABLE>
13
<PAGE>
CONTROL DATA SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Unaudited) (Continued)
FINANCIAL CONDITION
The Company's cash and short-term investments totaled $94.7 million
at March 31, 1997 representing 43.7% of total assets. The Company has
no long-term debt. Total cash and short-term investment balances
increased by $10.0 million from the corresponding December 31, 1996
balances. The primary factors in the increase were positive cash flow
of $21.1 million from the Metaphase and PDM sale, $3.6 million from
notes receivable from Metaphase Technology, Inc., $1.3 million from
working capital items, net earnings of $16.6 million, which includes a
gain on the sale of Metaphase and PDM for $15.0 million, depreciation
and amortization of $1.8 million and an increase in short term
borrowings of $1.6 million partially offset by the purchase of treasury
stock of $14.9 million, restructuring payments of $2.2 million, capital
expenditures of $1.4 million, and noncurrent trade receivables of $0.9
million.
Stockholders' equity increased by $1.7 million in the first three
months of 1997. The increase was primarily due to net earnings of $16.6
million, offset in part by the purchase of treasury stock of $14.9
million.
As of March 31, 1997, the Company had available up to $14.2 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.
14
<PAGE>
CONTROL DATA SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Unaudited) (Continued)
Outlook
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 quarterly report regarding the outlook for Control Data are
forward-looking statements based on current expectations that involve
risks and uncertainties that could cause actual results to differ
materially from those expressed in such forward-looking statements.
Such risks and uncertainties include, but are not limited to: 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.
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 focuses 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.
Revenues. The Company expects total revenues to decline in 1997 from
1996 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 revenues are expected to grow in 1997 in the
Company's Enterprise Integration Services business on a pro forma basis
as compared to 1996.
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.
15
<PAGE>
CONTROL DATA SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Unaudited) (Continued)
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 had $100.5 million of gross
deferred tax assets at December 31, 1996, which can be used to offset
taxes on future earnings. The Company maintains significant operations
outside the United States. Some, but not all, of these operations have
deferred tax assets as of December 31, 1996 resulting from lower than
expected 1994 earnings, caused in part by the worldwide restructuring
activity. In the long term this will significantly reduce the Company's
tax expense. However, given the wide geographical dispersion of the
Company's operations, the overall effective tax rate will be volatile.
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.
16
<PAGE>
PART II
OTHER INFORMATION
ITEM 6 Exhibits and Reports on Form 8-K
(a) Exhibits
11 Computation of Earnings per Common Share
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned hereunto duly authorized.
CONTROL DATA SYSTEMS, INC.
Registrant
Date: May 9, 1997 /s/ J. F. KILLORAN
J. F. Killoran
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
18
<PAGE>
EXHIBIT INDEX
EXHIBITS FILED AS ITEM 6 TO THE QUARTERLY REPORT OF CONTROL DATA
SYSTEMS, INC. ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1997.
(11) Computation of Earnings Per Common Share
(27) Financial Data Schedule
19
<PAGE>
EXHIBIT 11.0
CONTROL DATA SYSTEMS, INC.
Computation of Earnings Per Common Share
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
1997 1996
<S> <C> <C>
Net earnings applicable to
common shares:
Net earnings $ 16,600 $ 2,878
Primary:
Shares for common and common share
equivalent earnings per share (1):
Weighted average number of
common shares outstanding 13,208,026 13,130,885
Dilutive effect of outstanding
stock options and warrants 742,124 1,156,463
13,950,150 14,287,348
Net earnings per common share
and common share equivalents $ 1.19 $ 0.20
Fully Diluted:
Shares for common and common share
equivalent earnings per share (2):
Weighted average number of
common shares outstanding 13,208,026 13,130,885
Dilutive effect of outstanding
stock options and warrants 742,124 1,178,848
13,950,150 14,309,733
Net earnings per common share
and common share equivalents $ 1.19 $ 0.20
<FN>
(1) Outstanding stock options, warrants, and shares
issuable under employee stock purchase plans
are converted to common share equivalents by
the treasury stock method using the average
market price of the Company's shares during
each period.
(2) Outstanding stock options, warrants, and shares
issuable under employee stock purchase plans
are converted to common share equivalents by
the treasury stock method using the greater of
the average market price or the period-end
market price of the Company's shares during
each period.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM THE REGISTRANT'S
FINANCIAL STATEMENTS FOR ITS FIRST QUARTER OF
FISCAL YEAR 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS
<CAPTION>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-END> Mar-31-1997
<CASH> 94,655
<SECURITIES> 0
<RECEIVABLES> 70,456
<ALLOWANCES> 0
<INVENTORY> 13,598
<CURRENT-ASSETS> 183,592
<PP&E> 16,399
<DEPRECIATION> 0
<TOTAL-ASSETS> 216,786
<CURRENT-LIABILITIES> 76,098
<BONDS> 0
<COMMON> 149
0
0
<OTHER-SE> 110,616
<TOTAL-LIABILITY-AND-EQUITY> 216,786
<SALES> 22,374
<TOTAL-REVENUES> 60,953
<CGS> 11,687
<TOTAL-COSTS> 61,425
<OTHER-EXPENSES> (17,399)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27
<INCOME-PRETAX> 16,900
<INCOME-TAX> 300
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,600
<EPS-PRIMARY> 1.19
<EPS-DILUTED> 1.19
</TABLE>
