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 JUNE 30, 1996
Commission File No. 0-26464
----------------------
CSI COMPUTER SPECIALISTS, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 52-1599610
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
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 July 31, 1996 the Registrant had outstanding 3,652,500
shares of common stock.
<PAGE>
CSI COMPUTER SPECIALISTS, INC.
FORM 10 - QSB
FOR THE QUARTER ENDED JUNE 30, 1996
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets at June 30, 1996
and December 31, 1995 3
Condensed Statements of Income for the three months
and six months ended June 30, 1996 and 1995 4
Condensed Statements of Cash Flows for the three months
and six months ended June 30, 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
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
1996 1995
---------------- ---------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $3,801,344 $4,576,095
Accounts receivable, net of allowance for doubtful
receivables of $152,000 and $180,000 2,121,197 1,303,754
Parts and supplies 452,669 359,345
Prepaid income taxes 161,194 163,443
Prepaid expenses 136,831 102,148
Miscellaneous receivables 7,322 8,529
---------- ----------
Total current assets 6,680,557 6,513,314
PROPERTY AND EQUIPMENT - AT COST 1,319,427 1,216,201
Less accumulated depreciation 765,683 652,977
---------- ----------
553,744 563,224
OTHER ASSETS
Goodwill (Net of accumulated amortization) 788,763 800,969
Other assets 29,098 52,281
---------- ----------
817,861 853,250
$8,052,162 $7,929,788
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ - $ 485,000
Current maturities of long term debt 4,839 -
Accounts payable 731,292 347,297
Accrued expenses 138,757 154,906
Customer deposits 73,929 73,929
Deferred income taxes payable 371,315 334,872
---------- ----------
Total current liabilities 1,320,132 1,396,004
LONG-TERM DEBT, less current maturities 10,447 -
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; issued and
outstanding, 3,652,500 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 1,490,428 1,302,629
--------- ---------
Total stockholders' equity 6,721,583 6,533,784
--------- ---------
$8,052,162 $7,929,788
========== ==========
<PAGE>
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
June 30,
1996 1995
----------------- -----------------
Revenues
Maintenance services $1,849,496 $1,460,497
Parts and equipment sales 936,677 180,933
---------- ----------
2,786,173 1,641,430
Costs and expenses
Cost of maintenance services 1,243,606 917,458
Cost of parts and equipment sales 713,301 89,722
Selling, general and administrative 776,635 472,221
---------- ----------
2,733,542 1,479,401
---------- ----------
Operating profit 52,631 162,029
Other deductions
Interest income, net of interest expense 49,046 (12,264)
----------- ---------
Earnings before income taxes 101,677 149,765
Income taxes
Currently payable 39,200 1,578
Deferred - 55,622
---------- ---------
39,200 57,200
NET EARNINGS $ 62,477 $ 92,565
=========== ============
Per share amounts
Net earnings per share $ 0.02 $ 0.05
=========== ============
Average number of shares and share
equivalents outstanding 6,427,000 2,100,000
========== ==========
<PAGE>
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Six Months Ended
June 30,
1996 1995
-------------- -----------------
Revenues
Maintenance services $3,655,445 $2,887,032
Parts and equipment sales
2,074,822 356,728
---------- -----------
$5,730,267 $3,243,760
Costs and expenses
Cost of maintenance services 2,295,422 1,789,690
Cost of parts and equipment sales 1,709,498 130,501
Selling, general and administrative 1,521,438 926,006
---------- ----------
5,526,358 2,846,197
----------- ----------
Operating profit 203,909 397,563
Other deductions
Interest income, net of interest expense 101,105 (27,651)
----------- ----------
Earnings before income taxes 305,014 369,912
Income taxes
Currently payable 117,200 201,801
Deferred - (59,201)
---------- ----------
117,200 142,600
NET EARNINGS $ 187,814 $ 227,312
========== ==========
Per share amounts
Net earnings per share $ 0.05 $ 0.11
========== ==========
Average number of shares and share
equivalents outstanding 6,427,000 2,100,000
========== ==========
<PAGE>
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
1996 1995
-------------- --------------
Net cash flows from operating activities $ (169,881) $ 586,148
-------------- --------------
Cash flows used in investing activities
Payment of subsidiary acquisition costs (499,494) -
Acquisition of property and equipment (103,226) (89,541)
-------------- --------------
Net cash used in investing activities (602,720) (89,541)
-------------- ---------------
Cash flows used in financing activities
Payments on long-term debts (2,150) (1,120)
Deferred registration costs - (8,365)
-------------- --------------
Net cash used in financing activities (2,150) (9,485)
-------------- --------------
NET INCREASE (DECREASE) IN CASH (774,751) 487,122
Cash at beginning of period 4,576,095 78,686
-------------- --------------
Cash at end of period $ 3,801,344 $ 565,808
============== ==============
Supplemental disclosure of cash flow information
Cash paid through June 30, 1996 and 1995 for:
Interest 364 5,247
Income taxes 41,863 178,698
<PAGE>
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARY
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
The condensed financial statements at June 30, 1996 and for the three
month periods ended June 30, 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 June 30, 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, design and installation of
local-area network (LAN) and wide-area network (WAN) systems and expanding the
Company's technical capabilities to maintain the more current mainframe and
midrange technology.
RESULTS OF OPERATIONS
The Company's second quarter net revenues of $2,786,173 increased 70
percent over second quarter net revenues in the prior fiscal year, and the net
revenues for the six months ended June 30, 1996 increased 77 percent to
$5,730,267 from $3,243,760 in the period ended June 30, 1995. 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 three and six months
ended June 30, 1996 increased approximately 27 percent over the three and six
months ended June 30, 1995, with 6 percent and 5 percent, respectively, provided
from expansion of the Company's book of business and the other 21 percent and 22
percent provided by CCS Systems. Equipment sales for the second quarter and
first half of 1996 increased more than four times over .the same periods of
1995, with the Company increasing its sales by approximately 181 percent and 123
percent, respectively, and the balance of 236 percent and 359 percent,
respectively, being provided by revenues generated by CCS Systems. Management
has increased marketing efforts to promote continued growth in both of these
areas of revenues, and are directing the marketing staffs of both companies
toward cross-promoting the other company's primary areas of expertise.
Maintenance services accounted for approximately 66 and 89 percent,
respectively, of the Company's consolidated revenues for the second quarters of
1996 and 1995, and 64 and 89 percent, respectively, for the first six months of
1996 and 1995.
<PAGE>
The Company's cost of sales as a percentage of revenues was 70 percent
in the second quarter of 1996 compared to 60 percent in the same period of 1995,
and 70 percent for the first six months of 1996 compared to 59 percent for the
first six months 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 28 and 29 percent for the second quarters, respectively, of 1996
and 1995, and 27 and 29 percent for the first six months of 1996 and 1995,
respectively. The decrease was primarily a result of the 64 percent increase in
selling, general and administrative costs for both the three and six months of
1996 over comparable periods of 1995, as compared to a 70 percent and 77 percent
increase in revenues for the same periods. 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 second 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 $49,046 for the second quarter of 1996, compared with net interest expense of
$12,264 for the same period of the prior year, and $101,105 net interest income
for the first six months of 1996 compared to $27,651 of net interest expense for
the same period of 1995. The Company expects that net interest income will
decrease as the proceeds from the Company's initial public offering continue to
be utilized as projected in the Company's registration statement.
Net income decreased 32 percent to $62,477 for the second quarter of
1996 from $92,565 in the second quarter of the prior year, and decreased 17
percent to $187,814 for the first six months of 1996 from $227,312 for the first
six months of 1995. 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.
<PAGE>
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 $3,801,344 at June
30, 1996, compared to $4,576,095 at December 31, 1995. The ratio of current
assets to current liabilities increased to 4.9:1 from 4.7:1 at December 31,
1995. Cash flows used in operations during the first six months of 1996 totaled
$169,881, resulting primarily from an increase in accounts receivable due to
large equipment sales, 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 June 1, 1996, the Company's $750,000 revolving line of credit
with Citizens Bank of Maryland was renewed to continue until August 31, 1996.
There is presently no balance owed on this line of credit.
The Company's principal commitments at June 30, 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 June 30, 1996.
Item 5. Other Information and Subsequent Events
Item 6. Exhibits and Reports on Form 8 - K
A. Exhibits.
None.
B. Forms 8 -K.
None.
<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: August 9, 1996 By: William F Pershin
----------------- -----------------
William F. Pershin
President
Dated: August 9, 1996 By: James D. Boccabella
-------- ---------------------
James D. Boccabella
Chief Financial Officer
