<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 JUNE 30, 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: 12,646,521
shares of Common Stock, $0.01 par value per share, as of July 31, 1997.
<PAGE>
CONTROL DATA SYSTEMS, INC.
FORM 10-Q
June 30, 1997
INDEX
Page
Part I - Financial Information:
Consolidated Statements of Operations -
Three and six months ended June 30, 1997 and
June 30, 1996...................................... 2
Consolidated Balance Sheets -
June 30, 1997 and December 31, 1996.................. 3
Consolidated Statements of Cash Flows -
Six months ended June 30, 1997 and June 30, 1996..... 4
Notes to Consolidated Financial Statements............. 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 10
Part II - Other Information............................ 18
Signature.............................................. 19
Exhibit Index.......................................... 20
1
<PAGE>
PART 1
FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONTROL DATA SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
REVENUES:
Software and services.................. $ 35,172 $ 42,908 $ 70,982 $ 82,771
Maintenance and repair................. 12,568 14,208 24,853 29,072
Hardware product....................... 12,538 18,415 25,396 41,942
Total revenues....................... 60,278 75,531 121,231 153,785
COST OF REVENUES:
Software and services.................. 21,610 27,379 43,992 53,729
Maintenance and repair................. 7,457 7,955 15,424 17,150
Hardware products...................... 9,731 13,834 19,182 30,877
Total cost of revenues............... 38,798 49,168 78,598 101,756
Gross profit......................... 21,480 26,363 42,633 52,029
OPERATING EXPENSES:
Selling, general and
administrative........................ 16,421 21,675 34,315 43,084
Technical.............................. 2,812 3,174 6,543 6,434
Total operating expenses............. 19,233 24,849 40,858 49,518
Earnings from operations............. 2,247 1,514 1,775 2,511
NONOPERATING INCOME (EXPENSES):
Interest expense....................... (48) (40) (75) (152)
Interest income........................ 1,474 1,231 2,754 2,438
Gain on sale of business............... - - 15,000 -
Other income........................... 1,271 1,349 2,390 2,535
Total nonoperating income, net....... 2,697 2,540 20,069 4,821
Earnings before income taxes......... 4,944 4,054 21,844 7,332
PROVISION FOR INCOME TAXES.............. 2,250 400 2,550 800
Net earnings......................... $ 2,694 $ 3,654 $ 19,294 $ 6,532
Primary earnings per common share
and common share equivalents......... $ 0.20 $ 0.25 $ 1.42 $ 0.45
Fully diluted earnings per common
share and common share equivalents... $ 0.20 $ 0.25 $ 1.42 $ 0.45
Weighted average common shares
outstanding (in thousands):
Primary.............................. 13,162 14,644 13,546 14,438
Fully diluted........................ 13,178 14,644 13,546 14,452
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
2
<PAGE>
CONTROL DATA SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
ASSETS
June 30, December 31,
1997 1996
(Unaudited)
<S> <C> <C>
Current assets:
Cash and short-term investments................ $ 101,134 $ 84,610
Trade and other receivables.................... 63,694 84,198
Inventories.................................... 13,765 14,511
Prepaid expenses and other current assets...... 3,363 3,809
Total current assets......................... 181,956 187,128
Investments and advances......................... 895 601
Property, plant and equipment, net............... 16,059 17,497
Noncurrent trade and other receivables........... 6,298 4,820
Other noncurrent assets.......................... 3,594 10,251
Total assets................................. $ 208,802 $ 220,297
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Notes payable.................................. $ 3,832 $ 289
Accounts payable............................... 11,702 15,773
Customer advances and deferred income.......... 4,612 6,649
Accrued taxes.................................. 6,989 6,610
Accrued salaries and wages..................... 11,190 11,579
Other accrued expenses......................... 31,459 35,437
Total current liabilities.................... 69,784 76,337
Deferred income taxes............................ 439 469
Restructure reserves, less current portion....... - 3,290
Pension liabilities.............................. 26,164 28,582
Other noncurrent liabilities..................... 2,493 2,599
Total liabilities............................ 98,880 111,277
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
14,963,064 and 14,883,500 shares
as of June 30, 1997 and December 31, 1996,
respectively................................. 150 149
Additional paid-in capital..................... 172,586 171,845
Accumulated deficit............................ (27,101) (46,395)
Minimum pension liability adjustment........... (6,631) (6,631)
Foreign currency translation adjustment........ (1,954) (1,438)
Unearned compensation - restricted stock....... (53) (106)
Unrealized gains (losses) on investments....... (61) 36
Treasury stock, at cost (2,348,123 and
1,203,390 shares as of June 30, 1997 and
December 31, 1996, respectively)............. (27,014) (8,440)
Total stockholders' equity................... 109,922 109,020
Total liabilities and stockholders' equity... $ 208,802 $ 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>
Six Months Ended
June 30, June 30,
1997 1996
<S> <C> <C>
Cash Flows from Operating Activities:
Net earnings ...................................... $ 19,294 $ 6,532
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Gain on sale of business....................... (15,000) -
Gain on pension settlement..................... (3,914) -
Depreciation................................... 3,563 3,534
Amortization................................... 143 184
Foreign currency transaction gain.............. (1,426) (1,181)
Equity in losses of affiliates................. 46 251
Restructure reserves utilized.................. (7,890) (6,987)
Loss on sale of marketable securities
and other assets............................. 32 227
Net change in working capital items............ 6,099 148
Net change in noncurrent trade receivables..... (1,605) 299
Net change in other noncurrent assets.......... (1,121) (691)
Other.......................................... 795 329
Net cash provided by (used in) operating
activities.................................. (984) 2,645
Cash Flows from Investing Activities:
Expended for property, plant and equipment......... (3,055) (4,540)
Investment in affiliates........................... (893) -
Proceeds from sales of property and equipment...... 216 54
Proceeds from divestitures of businesses, net of
cash given....................................... 21,150 9
Proceeds from pension settlement................... 11,074 -
Proceeds from notes receivable..................... 3,600 -
Change in short-term investments................... (12,037) (9,806)
Net cash provided by (used in) investing
activities.................................. 20,055 (14,283)
Cash Flows from Financing Activities:
Borrowings under short-term financing
arrangements, net 3,702 1,643
Proceeds from issuance of common stock, net of
issuance costs................................... 741 5,987
Purchase of treasury stock......................... (18,573) -
Net cash provided by (used in) financing
activities.................................. (14,130) 7,630
Effect of Exchange Rate Changes on Cash.............. (454) (344)
Net change in cash and cash equivalents......... 4,487 (4,352)
Cash and cash equivalents, beginning of period.. 7,649 15,188
Cash and cash equivalents, end of period........ 12,136 10,836
Short-term investments.......................... 88,998 78,652
Cash and short-term investments, end of period....... $101,134 $ 89,488
</TABLE>
(Continued)
4
<PAGE>
CONTROL DATA SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30, June 30,
1997 1996
<S> <C> <C>
Net Change in Working Capital Items:
Trade and other receivables........................ $ 14,032 $ 4,128
Inventories........................................ 76 17
Prepaid expenses and other current assets.......... (317) 1,246
Accounts payable................................... (3,430) (4,622)
Customer advances and deferred income.............. (1,271) (684)
Accrued taxes...................................... 842 (1,611)
Accrued salaries and wages......................... 412 (300)
Other accrued expenses............................. (4,245) 1,974
Net change in working capital items............... $ 6,099 $ 148
Supplemental Disclosures of Cash Flow Information:
Cash paid (received) during the period for:
Interest paid.................................... $ 75 $ 153
Income taxes paid................................ 491 1,741
Income taxes refunded............................ (288) (883)
</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)
JUNE 30, 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 (losses)
on investments.................... - - - - - - (5) (5)
Purchase 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
Issuance of common stock under the
Employee Stock Purchase Plan....... 11 - 11 - 137 - - 137
Exercises of stock options.......... 46 - 46 1 342 - - 343
Foreign currency translation
adjustment......................... - - - - - - (240) (240)
Restricted stock award.............. - - - - - - 27 27
Change in unrealized gains (losses)
on investments.................... - - - - - - (92) (92)
Purchase of treasury stock.......... (241) 241 - - - - (3,712) (3,712)
Net earnings........................ - - - - - 2,694 - 2,694
Balance at June 30, 1997............. 12,615 2,348 14,963 $ 150 $ 172,586 $ (27,101) $ (35,713) $ 109,922
</TABLE>
6
<PAGE>
CONTROL DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
JUNE 30, 1997
<TABLE>
<CAPTION>
*Other Stockholders' Equity Items
Minimum Foreign Unearned Unrealized
Pension Currency Compensation- Gains
Liability Translation Restricted (Losses) 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 (losses)
on investments..................... - - - (5) - (5)
Purchase of treasury stock........... - - - - (14,862) (14,862)
Balance at March 31, 1997............ (6,631) (1,714) (80) 31 (23,302) (31,696)
Foreign currency translation
adjustment......................... - (240) - - - (240)
Restricted stock award............... - - 27 - - 27
Change in unrealized gains (losses)
on investments..................... - - - (92) - (92)
Purchase of treasury stock........... - - - - (3,712) (3,712)
Balance at June 30, 1997............. $ (6,631) $ (1,954) $ (53) $ (61) $ (27,014) $ (35,713)
</TABLE>
7
<PAGE>
CONTROL DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
JUNE 30, 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>
8
<PAGE>
CONTROL DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
JUNE 30, 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. During the second quarter, uses totaled $5.8 million and
consisted of $4.5 million for the settlement of age discrimination
actions and $1.3 million related to severance of 36 employees, in
addition to continuing lease and facility obligations. The remaining
reserve balance of $4.0 million is included in other accruals at June
30, 1997 and 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 and 241,000 shares of common stock during the
second quarter of 1997 for $14.9 million and $3.7 million, respectively.
A total of 1,239,733 shares have been acquired for $20.4 million since
the repurchase program was authorized.
6. SUBSEQUENT EVENTS
In July 1997, the Company announced the signing of a merger agreement
with CDSI Holding Corporation, a company formed at the direction of
Welsh, Carson, Anderson & Stowe, for CDSI Holding Corporation to acquire
all of the outstanding common shares of the Company at a price of $20.25
per share. CDSI Holding Corporation announced the commencement of its
cash tender offer for the outstanding shares of the Company on July 15,
1997. Approximately 89% of the presently outstanding common stock had
been tendered pursuant to the offer, which expired on August 11, 1997.
9
<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 and six months of 1997
compared to the first three and six months of 1996 and changes in
financial condition from December 31, 1996 to June 30, 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 Six Months Ended
June 30, June 30, June 30, June 30,
1997 1996 Change 1997 1996 Change
<S> <C> <C> <C> <C> <C> <C>
Software and services.... $ 35.2 $ 42.9 (17.9)% $ 71.0 $ 82.8 (14.3)%
Maintenance and repair... 12.6 14.2 (11.3)% 24.8 29.1 (14.8)%
Hardware products........ 12.5 18.4 (32.1)% 25.4 41.9 (39.4)%
Total revenues........ $ 60.3 $ 75.5 (20.1)% $121.2 $153.8 (21.2)%
</TABLE>
Revenues by Geography
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
1997 1996 Change 1997 1996 Change
<S> <C> <C> <C> <C> <C> <C>
Americas................. $ 30.2 $ 33.3 (9.3)% $ 60.3 $ 69.6 (13.4)%
Europe................... 23.9 26.3 (9.1)% 45.7 56.8 (19.5)%
Asia..................... 6.2 15.9 (61.0)% 15.2 27.4 (44.5)%
Total revenues........ $ 60.3 $ 75.5 (20.1)% $121.2 $153.8 (21.2)%
</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 second quarter and the first six months of 1997 from
the comparable periods of 1996 in all revenue categories. The largest
percentage decrease was in hardware products revenues. This decrease
reflects the continuing erosion of the Company's installed base of
proprietary hardware and the Company's continuing de-emphasis on low-
margin hardware activity.
10
<PAGE>
CONTROL DATA SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Unaudited) (Continued)
(Dollars in millions)
Software and services revenues decreased on an as reported basis and
on a pro forma basis in the second quarter of 1997 compared to the
second quarter of 1996. In the six months ended June 30, 1997, software
and services revenues decreased on an as reported basis, but increased
slightly on a pro forma basis compared to the first six months of 1996.
Software and services revenues were affected in the second quarter of
1997 by project slippage into future quarters.
Software and services revenues were 58.3% of the Company's total
revenues in the second quarter of 1997, which is an increase from the
1996 as reported and pro forma percentages of total revenues of 56.8%
and 56.4%, respectively. In addition, software and services revenues
for the first six months of 1997 were 58.6% of the Company's total
revenues, an increase from the as reported and pro forma percentages of
53.8% and 51.1%, respectively.
The Americas operations represented 50%, Europe operations
represented 40%, and Asia operations represented 10% of the Company's
total second quarter 1997 revenues. Percentages by geography, as a
percentage of the Company's total revenues, for the first six months of
1997 were similar to the second quarter results. Comparing to the same
periods in 1996, the Americas share of total Company revenues has
increased, the Asia share of the total has decreased and Europe remains
fairly consistent.
Cost of Revenues and Gross Profit
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
1997 1996 Change 1997 1996 Change
<S> <C> <C> <C> <C> <C> <C>
Software and services... $ 21.6 $ 27.4 (21.2)% $ 44.0 $ 53.7 (18.1)%
Maintenance and repair.. 7.5 8.0 (6.3)% 15.4 17.2 (10.5)%
Hardware products....... 9.7 13.8 (29.7)% 19.2 30.9 (37.9)%
Cost of revenues.......... $ 38.8 $ 49.2 (21.1)% $ 78.6 $101.8 (22.8)%
Percentage of revenues.... 64.4% 65.1% 64.8% 66.2%
Gross profit.............. $ 21.5 $ 26.3 (18.3)% $ 42.6 $ 52.0 (18.1)%
Percentage of revenues.... 35.6% 34.9% 35.2% 33.8%
</TABLE>
The primary factor contributing to cost of revenues and gross profit
decreases in the second quarter and first six months of 1997 from 1996,
was the decline in total revenues. Gross profits decreased in all
categories in the second quarter of 1997 versus both the as reported and
the pro forma gross profits of the comparable period in 1996. While all
categories decreased for the first six months of 1997 versus the same
period in 1996 on an as reported basis, software and services gross
profits increased 8% from the pro forma year-to-date gross profits of
$25.0 million.
While total gross profits decreased, total gross margin percentages
increased in the second quarter and first six months of 1997 on an as
reported basis. On a pro forma basis, total margin percentages
increased for the first six month of 1997, however, decreased slightly
in the second quarter compared to the same period in 1996. Despite the
slight decrease in total gross margin percentages in the second quarter
of 1997, software and services margin did increase in the second quarter
versus both the as reported and pro forma basis. Margins continue to
decrease in maintenance and repair and hardware products. On a year-to-
date basis, the majority of the gross margin improvement is within the
Electronic Commerce business of the Company's Enterprise Integration
Services business segment and in the Product Design business segment.
11
<PAGE>
CONTROL DATA SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Unaudited) (Continued)
(Dollars in millions)
On a geography basis, the Americas operations had gross margin
percentage improvement, while both the Europe and Asia operations had
little change in the second quarter of 1997 from the second quarter of
1996. On a year-to-date basis, Europe has gross margin percentage
improvement in 1997 versus the comparable period in 1996, while the
Americas and Asia are relatively unchanged.
Operating Expenses
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
1997 1996 Change 1997 1996 Change
<S> <C> <C> <C> <C> <C> <C>
Selling, general and
administrative........ $ 16.4 $ 21.7 (24.4)% $ 34.3 $ 43.1 (20.4)%
Percentage of revenues.. 27.2% 28.7% 28.3% 28.0%
Technical............... $ 2.8 $ 3.1 (9.7)% $ 6.5 $ 6.4 1.6 %
Percentage of revenues.. 4.6% 4.2 % 5.4% 4.2%
</TABLE>
Selling, general and administrative (SG&A). SG&A expenses have
decreased in the second quarter and the first six months of 1997 versus
both the as reported basis and the pro forma basis of the comparable
periods in 1996 and included a $3.9 million gain for a pension
settlement, a $1.1 million charge for bad debt associated with an Asia
contract, and a $1.3 million charge for write off of a prepaid software
license. The second quarter 1996 pro forma SG&A was $18.7 million or
27.1% of revenues. The first half 1996 pro forma SG&A was $36.9 million
or 26.7% of revenues. This expense decrease in 1997 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 second quarter 1997 technical expense has decreased from
the comparable period in 1996 on an as reported basis, however, is
unchanged on a pro forma basis. Technical expense for the first six
months of 1997 increased versus both the as reported and the pro forma
basis of the comparable periods in 1996. As a percentage of revenues,
technical expense has increased in 1997 due to higher spending on
digital commerce products and services.
Nonoperating Income (Expenses)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
1997 1996 Change 1997 1996 Change
<S> <C> <C> <C> <C> <C> <C>
Interest expense...... (0.1) - (0.1) (0.1)
Interest income....... 1.5 1.2 2.8 2.4
Other income.......... 1.3 1.3 17.4 2.5
Nonoperating income..... $ 2.7 $ 2.5 8.0% $ 20.1 $ 4.8 318.8%
Percentage of revenues.. 4.5% 3.3% 16.6% 3.1%
</TABLE>
Interest expense. Interest expense for the second quarter and the first
six months of 1997 was comparable to the same periods in 1996.
Interest income. Interest income increased in the second quarter and
the first six months of 1997 versus the comparable periods in 1996 due
to higher average interest rate yields.
12
<PAGE>
CONTROL DATA SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Unaudited) (Continued)
(Dollars in millions)
Other income. Other income, which includes such items as rental income
and exchange gain/loss, was comparable in the second quarter of 1997 to
the same period of 1996. Other income increased in the first six months
of 1997 compared to the first six months of 1996 due to the gain of
$15.0 million from the sale of Metaphase and the PDM business in the
first quarter of 1997 (see note 3 of the Notes to Consolidated Financial
Statements).
Provision for Income Taxes
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Provision for Income Taxes.. $ 2.3 $ 0.4 $ 2.6 $ 0.8
Percentage of revenues...... 3.7% 0.5% 2.1% 0.5%
</TABLE>
A tax provision of $1.5 million was recorded in the second quarter of
1997 in association with the pension gain from the termination of a non-
U.S. pension plan. The gain from the Metaphase sale, recorded in the
first quarter of 1997, is sheltered by the Company's U.S. tax loss
carryforwards and, therefore, the remainder of the provision for income
taxes 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 Six Months Ended
(Earnings per share in dollars) June 30, June 30, June 30, June 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Net earnings................ $ 2.7 $ 3.7 $19.3 $ 6.5
Percentage of revenues...... 4.5% 4.8% 15.9% 4.3%
Earnings per share:
Primary.................... $ 0.20 $ 0.25 $ 1.42 $ 0.45
Fully diluted.............. $ 0.20 $ 0.25 $ 1.42 $ 0.45
</TABLE>
Excluding the $15.0 million gain from the sale of Metaphase and the
PDM business in the first quarter of 1997 (see note 3 of the Notes to
Consolidated Financial Statements), net earnings have decreased in the
second quarter and first six months of 1997 versus the comparable
periods of 1996. The decrease is primarily attributable to the increase
in provision for income taxes partially offset by higher nonoperating
income, specifically interest income. The Metaphase transaction
contributed $1.08 per share to the first half 1997 earnings per share of
$1.42. Operating results for the six months ended June 30, 1997 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1997.
13
<PAGE>
CONTROL DATA SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Unaudited) (Continued)
The following tables represent second quarter results for 1997 and
1996 and pro forma results for 1996. The 1996 second 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
2nd Quarter Percentage 2nd Quarter
REVENUES As Reported Change As Reported Pro Forma
<S> <C> <C> <C> <C>
Software and services.... $ 35,172 (9.8)% $ 42,908 $ 38,991
Maintenance and repair... 12,568 (11.5)% 14,208 14,208
Hardware products........ 12,538 (21.2)% 18,415 15,921
Total revenues....... $ 60,278 (12.8)% $ 75,531 $ 69,120
Gross profit............. $ 21,480 (13.8)% $ 26,363 $ 24,906
REVENUE DISTRIBUTION
Software and services.... 58.3% 56.8% 56.4%
Maintenance and repair... 20.9% 18.8% 20.6%
Hardware products........ 20.8% 24.4% 23.0%
Total revenues....... 100.0% 100.0% 100.0%
Gross profit............. 35.6% 34.9% 36.0%
</TABLE>
1997 2nd Quarter 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.... $ 25,190 $ 5,887 $ 4,095 $ 35,172
Maintenance and repair... - - 12,568 12,568
Hardware products........ 9,751 2,353 434 12,538
Total revenues....... $ 34,941 $ 8,240 $ 17,097 $ 60,278
Gross profit............. 27.8% 59.2% 40.2% 35.6%
</TABLE>
1996 2nd Quarter 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.... $ 28,742 $ 6,544 $ 3,705 $ 38,991
Maintenance and repair... - - 14,208 14,208
Hardware products........ 12,325 3,336 260 15,921
Total revenues....... $ 41,067 $ 9,880 $ 18,173 $ 69,120
Gross profit............. 29.3% 58.3% 39.3% 36.0%
</TABLE>
14
<PAGE>
CONTROL DATA SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Unaudited) (Continued)
The following tables represent year-to-date results for 1997 and 1996
and pro forma results for 1996. The 1996 year-to-date 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
Year-to-Date Percentage Year-to-Date
REVENUES As Reported Change As Reported Pro Forma
<S> <C> <C> <C> <C>
Software and services.... $ 70,982 0.5 % $ 82,771 $ 70,652
Maintenance and repair... 24,853 (14.5)% 29,072 29,072
Hardware products........ 25,396 (34.0)% 41,942 38,494
Total revenues....... $ 121,231 (12.3)% $ 153,785 $ 138,218
Gross profit............. $ 42,633 (9.8)% $ 52,029 $ 47,269
REVENUE DISTRIBUTION
Software and services.... 58.6% 53.8% 51.1%
Maintenance and repair... 20.5% 18.9% 21.0%
Hardware products........ 20.9% 27.3% 27.9%
Total revenues....... 100.0% 100.0% 100.0%
Gross profit............. 35.2% 33.8% 34.2%
</TABLE>
1997 Year-to-Date 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.... $ 50,914 $ 12,520 $ 7,548 $ 70,982
Maintenance and repair... - - 24,853 24,853
Hardware products........ 19,190 4,690 1,516 25,396
Total revenues....... $ 70,104 $ 17,210 $ 33,917 $ 121,231
Gross profit............. 28.4% 61.0% 36.1% 35.2%
</TABLE>
1996 Year-to-Date 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.... $ 49,730 $ 13,332 $ 7,590 $ 70,652
Maintenance and repair... - - 29,072 29,072
Hardware products........ 28,866 7,965 1,663 38,494
Total revenues....... $ 78,596 $ 21,297 $ 38,325 $ 138,218
Gross profit............. 26.6% 55.7% 37.9% 34.2%
</TABLE>
15
<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 $101.1 million
at June 30, 1997 representing 48.4% of total assets. The Company has no
long-term debt. Total cash and short-term investment balances increased
by $16.5 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 and $11.1 million from the termination
of a non-U.S. pension plan, $3.6 million from notes receivable from
Metaphase Technology, Inc., $6.1 million from working capital items, net
earnings of $19.3 million, which includes a gain on the sale of
Metaphase and PDM for $15.0 million and a gain on the pension plan
settlement for $3.9 million, depreciation and amortization of $3.7
million and an increase in short term borrowings of $3.7 million
partially offset by the purchase of treasury stock of $18.6 million,
restructuring payments of $7.9 million, capital expenditures of $3.1
million, noncurrent assets of $2.7 million, and a foreign currency
transaction gain of $1.4 million.
Stockholders' equity increased by $0.9 million in the first six
months of 1997. The increase was primarily due to net earnings of $19.3
million and the issuance of Common Stock of $0.7 million, offset in part
by the purchase of treasury stock of $18.6 million and a foreign
currency translation adjustment of $0.5 million.
As of June 30, 1997, the Company had available up to $13.9 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.
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.
16
<PAGE>
CONTROL DATA SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Unaudited) (Continued)
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.
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.
17
<PAGE>
PART II
OTHER INFORMATION
ITEM 4 Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of the Registrant's stockholders was
held on May 14, 1997.
(b) Proxies for the Annual Meeting were solicited pursuant to
Regulation 14A under the Securities Exchange Act of 1934, there
was no solicitation in opposition to management's nominees, and
the following persons were elected directors of the Registrant
to serve until the next annual meeting of stockholders and
until their successors shall have been duly elected and
qualified:
<TABLE>
<CAPTION>
Nominee Number of Votes For Number of Votes Withheld
<S> <C> <C>
W. Donald Bell 11,305,862 105,932
Grant A. Dove 11,303,327 108,467
Marcelo A. Gumucio 11,305,939 105,855
W. Douglas Hajjar 11,307,209 104,585
Keith A. Libbey 11,175,512 236,282
James E. Ousley 11,302,660 109,134
</TABLE>
(c) At the Annual Meeting, the stockholders approved the
appointment of KPMG Peat Marwick LLP as the Company's
independent auditors for the current fiscal year by a vote of
11,290,874 For, 16,423 Against, 104,497 Abstentions and no
broker nonvotes.
ITEM 6 Exhibits and Reports on Form 8-K
(a) Exhibits
11 Computation of Earnings per Common Share
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
18
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned hereunto duly authorized.
CONTROL DATA SYSTEMS, INC.
Registrant
Date: August 11, 1997 /s/ J. F. KILLORAN
J. F. Killoran
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
19
<PAGE>
EXHIBIT INDEX
EXHIBITS FILED AS ITEM 6 TO THE QUARTERLY REPORT OF CONTROL DATA
SYSTEMS, INC. ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1997.
(11) Computation of Earnings Per Common Share
(27) Financial Data Schedule
20
<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 Six Months Ended
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Net earnings applicable to
common shares:
Net earnings $ 2,694 $ 3,654 $ 19,294 $ 6,532
Primary:
Shares for common and common share
equivalent earnings per share (1):
Weighted average number of
common shares outstanding 12,626,673 13,513,692 12,915,743 13,338,753
Dilutive effect of outstanding
stock options and warrants 535,152 1,130,582 629,861 1,099,306
13,161,825 14,644,274 13,545,604 14,438,059
Net earnings per common share
and common share equivalents $ 0.20 $ 0.25 $ 1.42 $ 0.45
Fully Diluted:
Shares for common and common share
equivalent earnings per share (2):
Weighted average number of
common shares outstanding 12,626,673 13,513,692 12,915,743 13,338,753
Dilutive effect of outstanding
stock options and warrants 551,378 1,130,582 629,861 1,113,099
13,178,051 14,644,274 13,545,604 14,451,852
Net earnings per common share
and common share equivalents $ 0.20 $ 0.25 $ 1.42 $ 0.45
<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 SECOND QUARTER
YEAR-TO-DATE OF FISCAL YEAR 1997 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS
<CAPTION>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-END> Jun-30-1997
<CASH> 101,134
<SECURITIES> 0
<RECEIVABLES> 63,694
<ALLOWANCES> 0
<INVENTORY> 13,765
<CURRENT-ASSETS> 181,956
<PP&E> 16,059
<DEPRECIATION> 0
<TOTAL-ASSETS> 208,802
<CURRENT-LIABILITIES> 69,784
<BONDS> 0
<COMMON> 150
0
0
<OTHER-SE> 109,772
<TOTAL-LIABILITY-AND-EQUITY> 208,802
<SALES> 41,900
<TOTAL-REVENUES> 121,231
<CGS> 22,763
<TOTAL-COSTS> 78,598
<OTHER-EXPENSES> 20,714
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 75
<INCOME-PRETAX> 21,844
<INCOME-TAX> 2,550
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,294
<EPS-PRIMARY> 1.42
<EPS-DILUTED> 1.42
</TABLE>
