----------------------
See accompanying notes to condensed financial statements.
As filed with the Securities and Exchange Commission on __________, 1996
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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FORM 10-QSB
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 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 October 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 SEPTEMBER 30, 1996
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets at September 30, 1996
and December 31, 1995 3
Condensed Statements of Income for the three months
and nine months ended September 30, 1996 and 1995 4
Condensed Statements of Cash Flows for the nine months
ended September 30, 1996 and 1995 6
Notes to Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 11
Item 3. Defaults Upon Senior Securities 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 5. Other Information and Subsequent Events 11
Item 6. Listing of Exhibits and Reports on Form 8-K 11
Signature Page 12
<PAGE>
PART 1. FINANCIAL INFORMATION
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARY
CONDENSE CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
1996 1995
---------------- ---------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $4,136,035 $4,576,095
Accounts receivable, net of allowance for doubtful
receivables of $161,000 and $162,000 1,706,106 1,303,754
Parts and supplies 566,536 359,345
Prepaid income taxes 161,685 163,443
Prepaid expenses 89,852 102,148
Miscellaneous receivables 6,167 8,529
---------------- ---------------
Total current assets 6,666,381 6,513,314
PROPERTY AND EQUIPMENT - AT COST 1,346,516 1,216,201
Less accumulated depreciation 849,561 652,977
---------------- ---------------
496,955 563,224
OTHER ASSETS
Goodwill (Net of accumulated amortization) 775,413 800,969
Other assets 29,098 52,281
---------------- ---------------
804,511 853,250
---------------- ---------------
$7,967,847 $7,929,788
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ - $ 485,000
Current maturities of long term debt 4,839 -
Accounts payable 449,308 347,297
Accrued expenses 107,779 154,906
Customer deposits 258,106 73,929
Deferred income taxes payable 377,715 334,872
---------------- ---------------
Total current liabilities 1,197,747 1,396,004
LONG-TERM DEBT, less current maturities 9,118 -
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 1,529,827 1,302,629
---------------- ---------------
Total stockholders' equity 6,760,982 6,533,784
---------------- ---------------
$7,967,847 $7,929,788
================ ===============
<PAGE>
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
September 30,
1996 1995
----------------- -----------------
Revenues
Maintenance services $1,919,225 $1,395,839
Parts and equipment sales 636,546 583,808
----------------- -----------------
2,555,771 1,979,647
Costs and expenses
Cost of maintenance services 1,169,138 915,429
Cost of parts and equipment sales 527,714 399,871
Selling, general and administrative 842,632 493,823
----------------- -----------------
2,539,484 1,809,123
----------------- -----------------
Operating profit 16,287 170,524
Other deductions
Interest income, net of interest expense 52,813 42,033
----------------- -----------------
Earnings before income taxes 69,100 212,557
Income taxes
Currently payable 27,200 (84,701)
Deferred - 166,901
----------------- -----------------
27,200 82,200
NET EARNINGS $41,900 $130,357
================= =================
Per share amounts
Net earnings per share $ 0.01 $ 0.04
================= =================
Weighted average number of shares
outstanding 3,652,500 2,511,774
================= =================
<PAGE>
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Nine Months Ended
September 30,
1996 1995
----------------- -----------------
Revenues
Maintenance services $5,574,670 $4,282,871
Parts and equipment sales 2,711,368 940,535
----------------- -----------------
8,286,038 5,223,406
Costs and expenses
Cost of maintenance services 3,464,560 2,705,119
Cost of parts and equipment sales 2,237,212 530,372
Selling, general and administrative 2,364,070 1,419,829
----------------- -----------------
8,065,842 4,655,320
----------------- -----------------
Operating profit 220,196 568,086
Other deductions
Interest income, net of interest expense 153,918 14,382
----------------- -----------------
Earnings before income taxes 374,114 582,468
Income taxes
Currently payable 139,200 117,100
Deferred - 107,700
----------------- -----------------
139,200 224,800
NET EARNINGS $234,914 $357,668
================= =================
Per share amounts
Net earnings per share $ 0.06 $ 0.13
================= =================
Weighted average number of shares
outstanding 3,652,500 2,511,774
================= =================
<PAGE>
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
1996 1995
-------------- --------------
Net cash flows from operating activities $ 175,792 $255,504
-------------- --------------
Cash flows used in investing activities
Payment of subsidiary acquisition costs (499,494) -
Acquisition of property and equipment (112,879) (231,149)
-------------- --------------
Net cash used in investing activities (612,373) (231,149)
-------------- --------------
Cash flows used in financing activities
Payments on long-term debts (3,479) (3,218)
Decrease in note payable-officer - (368,754)
Deferred registration costs - (1,046,561)
Decrease in revolving line of credit - (200,000)
Proceeds from stock offering - 6,210,000
-------------- --------------
Net cash used in financing activities (3,479) 4,591,467
-------------- --------------
NET INCREASE (DECREASE) IN CASH (440,060) 4,615,822
Cash at beginning of period 4,576,095 78,686
-------------- --------------
Cash at end of period $4,136,035 $4,694,508
============== ==============
Supplemental disclosure of cash flow information
Cash paid through September 30, 1996 and 1995 for:
Interest 956 36,459
Income taxes 41,863 359,690
<PAGE>
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARY
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
The condensed financial statements at September 30, 1996 and for the
three and nine month periods ended September 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 September 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 third quarter net revenues of $2,555,771 increased 29
percent over third quarter net revenues in the prior fiscal year, and the net
revenues for the nine months ended September 30, 1996 increased 59 percent to
$8,286,038 from $5,223,406 in the period ended September 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 nine months
ended September 30, 1996 increased approximately 37 percent and 30 percent,
respectively, over the three and nine months ended September 30, 1995, with 15
percent and 8 percent, respectively, provided from expansion of the Company's
book of business and the other 22 percent for each period provided by CCS
Systems. Equipment sales for the third quarter of 1996 increased 9 percent over
the same quarter of 1995, caused by a decrease in the Company's sales of
approximately 44 percent, but offset by the sales provided by CCS Systems, Inc.
, which netted a 9 percent increase. Equipment sales for the nine months ended
September 30, 1996 increased 188 percent over .the same period of 1995, with the
Company's sales increasing 19 percent and the balance of 169 percent 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 75 and 70 percent, respectively, of the
Company's consolidated revenues for the third quarters of 1996 and 1995, and 67
and 82 percent, respectively, for the first nine months of 1996 and 1995.
The Company's cost of sales as a percentage of revenues was 66 percent
in the third quarters of 1996 and 1995, and 69 percent for the first nine months
of 1996 compared to 62 percent for the first nine 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 increased 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 more slowly in future
quarters as the Company expands the mix of hardware which will be maintained
under contracts and as the Philadelphia and Richmond operations become
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 33 and 25 percent for the third quarters, respectively, of 1996
and 1995, and 29 and 27 percent for the first nine months of 1996 and 1995,
respectively. The increase was primarily a result of the hiring of additional
salespeople and administrative staff to expand the customer base and to handle
the additional administrative requirements brought about by the increased number
of customers. 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.
<PAGE>
The Company generated net interest income during the third 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 $52,813 for the third quarter of 1996, compared with $42,033 for the same
period of the prior year, and $153,918 net interest income for the first nine
months of 1996 compared to $14,382 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 66 percent to $41,900 for the third quarter of
1996 from $130,357 in the third quarter of the prior year, and decreased 38
percent to $139,200 for the first nine months of 1996 from $357,668 for the
first nine 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.
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.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Working capital, which consists principally of cash and investments in
government securities for terms of three months or less, was $4,136,035 at
September 30, 1996, compared to $4,576,095 at December 31, 1995. The ratio of
current assets to current liabilities increased to 5.6:1 from 4.7:1 at December
31, 1995. Cash flows provided by operations during the first nine months of 1996
totaled $175,792, resulting primarily from a decrease in accounts receivable due
to collections on large equipment sales, and partially offset by the decrease in
accounts payable from payment of the costs of those sales, which were 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 October 4, 1996, the Company's $750,000 revolving line of
credit with Citizens Bank of Maryland was renewed to continue until May 31,
19976. There is presently no balance owed on this line of credit.
The Company's principal commitments at September 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 September 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: November 15, 1996 By: William F Pershin
-----------------
William F. Pershin
President
Dated: November 15, 1996 By: James D. Boccabella
-------------------
James D. Boccabella
Chief Financial Officer
