As filed with the Securities and Exchange Commission on __________, 1996
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
Commission File No. 0-26464
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CSI COMPUTER SPECIALISTS, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 52-1599610
(State or other (I.R.S. Employer
jurisdiction Identification Number)
of incorporation or
organization)
2275 Research Boulevard, Suite 430, Rockville, Maryland 20850 (301) 921-8860
(Address and telephone number of registrant's principal executive offices)
----------------------
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
As of April 30, 1996 the Registrant had outstanding 3,652,500 shares of common
stock.
<PAGE>
CSI COMPUTER SPECIALISTS, INC.
FORM 10 - QSB
FOR THE QUARTER ENDED MARCH 31, 1996
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets at March 31, 1996
and December 31, 1995 3
Condensed Statements of Income for the three months
ended March 31, 1996 and 1995 4
Condensed Statements of Cash Flows for the three months
ended March 31, 1996 and 1995 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 2. Changes in Securities 10
Item 3. Defaults Upon Senior Securities 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 5. Other Information and Subsequent Events 10
Item 6. Listing of Exhibits and Reports on Form 8-K 10
Signature Page 11
<PAGE>
PART 1. FINANCIAL INFORMATION
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
1996 1995
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 4,000,596 $ 4,576,095
Accounts receivable, net of allowance
for doubtful receivables of $189,000
and $180,000 1,929,798 1,303,754
Parts and supplies 377,073 359,345
Prepaid income taxes 34,610 163,443
Prepaid expenses 47,169 102,148
Miscellaneous receivables 6,675 8,529
------------ ------------
Total current assets 6,395,921 6,513,314
PROPERTY AND EQUIPMENT - AT COST 1,295,358 1,216,201
Less accumulated depreciation 729,846 652,977
------------ ------------
565,512 563,224
OTHER ASSETS
Goodwill (Net of accumulated
amortization) 802,113 800,969
Other assets 27,558 52,281
------------ ------------
829,671 853,250
------------ ------------
$7,791,104 $7,929,788
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ $ 485,000
Current maturities of long term debt 4,839 --
Accounts payable 567,852 347,297
Accrued expenses 259,758 154,906
Customer deposits 83,487 73,929
Deferred income taxes payable 204,315 334,872
------------ ------------
Total current liabilities 1,120,251 1,396,004
LONG-TERM DEBT, less current maturities 11,747 --
COMMITMENTS
STOCKHOLDERS' EQUITY
Preferred stock - authorized, 10,000,000
shares of $.001 par value $ $
Common stock - authorized, 25,000,000 shares
of $.001 par value; ssued and outstanding,
2,100,000 shares 3,652 3,652
Common stock - $.001 par value, stock
subscribed and unissued - 75,000 shares 75 75
Paid-in capital 5,227,428 5,227,428
Retained earnings 1,427,951 1,302,629
------------ ------------
Total stockholders' equity 6,659,106 6,533,784
------------ ------------
7,791,104 7,929,788
============ ============
See Notes to Condensed Financial Statements.
<PAGE>
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARY
STATEMENT OF INCOME
(Unaudited)
Three Months Ended
March 31, March 31, Year Ended
1996 1995 December 31,
1995
------------ ------------ ------------
Revenues
Maintenance services $1,820,006 $1,398,974 $5,910,702
Parts and equipment sales 1,126,088 203,356 934,020
----------- ------------ ------------
2,946,094 1,602,330 6,844,722
Costs and expenses
Cost of maintenance services 1,051,816 852,524 3,692,243
Cost of parts and equipment 996,197 60,487 621,137
Selling, general and administrative 746,803 453,785 2,040,683
---------- ------------ ------------
2,794,816 1,366,796 6,354,063
---------- ------------ ------------
Operating profit 151,278 235,534 490,659
Other deductions
Interest income, net of
interest expense 52,059 (15,387) 78,406
---------- ------------ ------------
Earnings before income
taxes 203,337 220,147 569,065
Income taxes
Currently payable
205,800 200,223 5,537
Deferred
(127,800) (114,823) 213,963
---------- ------------ ------------
78,000 85,400 219,500
NET EARNINGS 125,337 134,747 349,565
========== ============ ============
Per share amounts
Net earnings per share 0.02 0.06 0.12
========== ============ ============
Average number of shares and
share equivalents outstanding 5,147,008 2,100,000 2,796,956
========== ============ ============
See Notes to Condensed Financial Statements.
<PAGE>
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARY
STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
1996 1995
------------ ------------
Net cash flows from operating activities $ (13,434) $ 586,148
------------ ------------
Cash flows used in investing activities
Payment of subsidiary acquisition costs (499,494) --
Acquisition of property and equipment (61,721) (89,541)
------------ ------------
Net cash used in investing activities (561,215) (89,541)
------------ ------------
Cash flows used in financing activities
Payments on long-term debts (850) (1,120)
Deferred registration costs -- (8,365)
------------ ------------
Net cash used in financing activities (850) (9,485)
------------ ------------
NET INCREASE (DECREASE) IN CASH (575,499) 487,122
Cash at beginning of period 4,576,095 78,686
------------ ------------
Cash at end of period $ 4,000,596 $ 565,808
============ ============
Supplemental disclosure of cash flow
information
Cash paid through March 31, 1996 and 1995 for:
Interest 36,459 5,247
Income taxes 359,690 178,698
See Notes to Condensed Financial Statements.
<PAGE>
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARY
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
The condensed financial statements at March 31, 1996 and for the three
month periods ended March 31, 1996 and 1995 are unaudited and reflect all
adjustments (consisting only of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of the financial
position and operating results for the interim periods. The condensed financial
statements have been prepared in accordance with the rules and regulations of
the Securities and Exchange Commission, and therefore omit certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles. The Company believes
that the disclosures contained in the condensed financial statements are
adequate to make the information presented not misleading. The financial
statements should be read in conjunction with the financial statements and notes
thereto, together with management's discussion and analysis of financial
condition and results of operations, contained in the Company's Annual Report on
Form 10-KSB.
The results of operations for the three months ended March 31, 1996 are
not necessarily indicative of the results for the entire fiscal year ending
December 31, 1996.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company provides computer hardware services, including installation
and de-installation of equipment, computer upgrades, computer maintenance and
repair, and the sale of computer parts and equipment. These services are
provided to agencies of the federal government, state and local governments,
universities and commercial customers in the Mid-Atlantic region of the United
States, including West Virginia, Virginia, Maryland, the District of Columbia,
and Pennsylvania.
The Company's principal business is providing computer maintenance and
repair services, which are provided under both fixed fee and time and materials
arrangements. Under the fixed fee arrangement, which is the primary method of
service, a customer pays a fixed monthly fee for the term of the agreement,
generally one to two years, for which the Company provides the parts and labor
for both scheduled preventative maintenance and emergency repairs. The Company
records the revenue from fixed fee contracts ratably over the term of the
contract, while the costs the Company incurs to provide the maintenance and
emergency repairs are charged to expense as incurred. Accordingly, the
profitability of the Company's maintenance and repair services can and will be
affected by period to period fluctuations in the number and severity of the
emergency repairs required by its customers, which the Company cannot predict or
control. Additionally, in certain circumstances the Company will choose to
provide the contracted-for services by subcontracting with others, particularly
when the equipment covered by the agreement is extremely expensive, difficult to
repair or replace, or requires unique engineering expertise that is not
applicable to equipment utilized by a significant number of customers. The
Company obtains such subcontracting services through short-term agreements, and
its profit margin will generally be lower than if the work was not
subcontracted. Accordingly, operating results may fluctuate from period to
period as the result of changes in the level and nature of subcontracted
services.
The sale of computer equipment accounts for a rapidly expanding portion of
the Company's business, and, as a result, revenues therefrom have and will
continue to fluctuate from period to period. The extent of such changes will
decrease as the sales in this area stabilize. In addition, equipment sales are
entered into more commonly to secure contracts for the maintenance thereof than
for the profit on the equipment sale itself, and the margins on the sale of
equipment are subject to market conditions. Consequently, operating profits as a
percentage of gross sales are subject to fluctuation due to the volume of
equipment sales. Other areas of expansion are in the areas of servicing laser
printers, providing help desk support services, and expanding the Company's
technical capabilities to maintain the more current mainframe technology.
RESULTS OF OPERATIONS
The Company's first quarter net revenues of $2,946,094 increased 84
percent over first quarter net revenues in the prior fiscal year. This increase
in net revenues resulted from sales growth in both maintenance services and
equipment sales, with the primary increase in revenues generated by inclusion of
revenues from CCS Systems, Inc., the acquisition of which was completed by the
Company in December, 1995. Maintenance revenues for the first quarter of 1996
increased approximately 30 percent over the first quarter of 1995, with 7
percent provided from expansion of the Company's book of business and the other
23 percent provided by CCS Systems. Equipment sales for the first quarter of
1996 increased over four and one-half times over .the same period of 1995, with
the Company increasing its sales by approximately 33 percent and the balance of
420 percent being provided by revenues generated by CCS Systems. Management
intends to increase marketing efforts to promote continued growth in both of
these areas of revenues, and anticipate that the marketing staffs of both
companies will be able to cross-promote the other company's primary areas of
expertise. Maintenance services accounted for approximately 62 and 87 percent,
respectively, of the Company's consolidated revenues for the first quarters of
1996 and 1995.
The Company's cost of sales as a percentage of revenues was 70 percent in
the first quarter of 1996 compared to 57 percent in the same period of 1995. An
increase in the costs of maintenance services as a percentage of maintenance
service income was combined with lower profit margin percentages on the
equipment sales. The increased costs of maintenance service resulted primarily
from increased costs of emergency replacement parts and increased reliance on
subcontracted services. Additionally, gross margins in fiscal 1996 are adversely
affected by the continued development of the Company's Philadelphia and Richmond
operations. The Company expects that the costs of maintenance services as a
percentage of maintenance service income to increase in future quarters as the
Company expands the mix of hardware which will be maintained under contracts and
until the Philadelphia and Richmond operations are self-sufficient, but hopes to
partially offset these costs by reducing subcontract expense as the Company
develops the additional in-house expertise, and by increasing both the book of
fixed fee agreements and the parts and equipment sales. As the Company expands
its equipment sales operations, gross margins will also drop as a percentage of
overall sales, due to the lower gross margins on equipment sales when compared
to maintenance sales.
Selling, general and administrative expenses as a percentage of net
revenues were 25 and 28 percent for the first quarters, respectively, of 1996
and 1995. The decrease was primarily a result of the 65 percent increase in
selling, general and administrative costs as compared to a 84 percent increase
in revenues. The Company expects short-term fluctuations in this percentage in
the future as it adds to its technical support, marketing staff and other
administrative personnel in order to expand its customer base and increase
equipment sales.
The Company generated net interest income during the first quarter of
fiscal 1996 as the result of the use of the proceeds from the public offering
completed in July of 1995 to retire short-term debt and investment of the
remainder in short-term investments, pending application of the funds as
disclosed in the Company's registration statement. Net interest income increased
to $52,059 for the first quarter of 1996, compared with net interest expense of
$15,387 for the same period of the prior year. The Company expects that net
interest income will decrease as the proceeds from the Company's initial public
offering are utilized as projected in the Company's registration statement.
Net income decreased 7 percent to $125,337 for the first quarter of 1996
from $134,747 in the first quarter of the prior year. The decrease for the
quarter is primarily attributable to increased subcontractor costs for
maintenance services when compared to the prior year, as well as costs incurred
in expanding the Philadelphia and Richmond operations and also coordinating the
operations of the CCS Systems with the Company. Subcontractor costs could
decrease as the necessary expertise is developed in-house to service the newer
technology; however, as the Company signs contracts on even more recent
technology, the services of subcontractors may still be required. The Company
expects that the Philadelphia and Richmond operations' revenues will cover their
expenses in the near future. However, internal expansion into other new
geographic regions can be expected to adversely affect overall results until the
newly established operation obtains maintenance contracts sufficient to cover
minimum fixed operating costs. Expansion may also be accomplished by the
acquisition of existing operations, in which case operating results may not be
affected by such start-up losses, but may instead reflect the impact of the
amortization of any goodwill paid in the acquisition, as occurred with the
acquisition of CCS Systems.
With the exception of the impact of the geographic expansion into the
Philadelphia and Richmond markets discussed above, the Company's results of
operations have been materially consistent. However, the Company believes that
in the future its results of operations in a quarterly period could be impacted
by factors such as increased competition in a mainframe market that has been
shrinking due to site consolidations and conversions to mid-range network
installations (which is a more competitive market). Results could also be
affected by the start-up costs related to expansion of operations to equipment
not previously serviced or to geographic areas not previously supported. The
Company's plans to offset these factors include expansion of the mid-range
network support and maintenance division of operations, and offering services
connected with the conversions themselves that would help assure continuity of
the maintenance contracts. In addition, expansion of the maintenance services to
include the newer mainframe technology and laser printers, as well as expansion
of software support and help desk services will provide for continued growth of
the Company. The coordination of the marketing staff of CCS Systems with that of
the Company to cross-market each other's primary expertise and to provide
additional services to the combined list of customers is also expected to
increase the performance of the Company in the future.
LIQUIDITY AND CAPITAL RESOURCES
Working capital, which consists principally of cash and investments in
government securities for terms of three months or less, was $4,000,596 at March
31, 1996, compared to $4,576,095 at December 31, 1995. The ratio of current
assets to current liabilities increased to 5.7:1 from 4.7:1 at December 31,
1995. Cash flows used in operations during the first three months of 1996
totaled $13,434, resulting primarily from an increase in accounts receivable due
to large equipment sales at the end of the quarter, and partially offset by the
increase in accounts payable for the costs of those sales, which will be paid
upon collection of the receivables. The increase in the current ratio was due
chiefly to the increase in accounts receivable relative to accounts payable,
offset partially by the payment of the remainder of the cash portion of the
purchase price of CCS Systems, which amounted to $485,000. The Company believes
that its existing cash, is sufficient to satisfy its currently anticipated
working capital needs.
Effective August 1, 1995, the Company's $750,000 revolving line of credit
with Citizens Bank of Maryland was renewed to continue until May 31, 1996. There
is presently no balance owed on this line of credit.
The Company's principal commitments at March 31, 1996 consisted of
obligations under operating leases for facilities.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not a party to any pending or ongoing litigation.
Item 2. Changes in Securities
There have been no changes in the securities of the Company required
to be disclosed pursuant to this item.
Item 3. Defaults Upon Senior Securities
There has been no material default with respect to any indebtedness
of the Company required to be disclosed pursuant to this item.
Item 4. Submission of Matters to a Vote of Security Holders
There have been no matters submitted to a vote of security holders
during the three months ended March 31, 1996.
Item 5. Other Information and Subsequent Events
Item 6. Exhibits and Reports on Form 8 - K
A. Exhibits.
None.
B. Forms 8 -K.
A report on Form 8-K was filed on January 11, 1996, and an
amendment to that Form 8-K on Form 8-K/A was filed on March
12, 1996, and are incorporated herein by reference. The
contents of the reports are summarized below:
In a Form 8-K filed on January 11, 1996, the Registrant
reported that it had acquired the outstanding stock of Capitol
Computer Services, Inc., T/A CCS Systems, Inc., from the
stockholders of CCS Systems for a combination of cash and
stock. In addition, certain of the principal shareholders and
key employees of CCS Systems entered into employment
agreements with CCS Systems. The amendment to the Form 8-K
provided the audited financial statements of CCS Systems as of
March 31, 1996 and for the fiscal years ended March 31, 1996
and 1994, and Pro Forma Condensed Consolidated Financial
Statements as of March 31, 1996.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, hereunto duly authorized.
CSI COMPUTER SPECIALISTS, INC.
Dated: May 28, 1996 By: /S/ William F.Pershin
------------------------------
William F. Pershin
President
Dated: May, 28, 1996 By: /S/ James D. Boccabella
-------------------------------
James D. Boccabella
Chief Financial Officer
