FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO 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 EXCHANGE
ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 0-26464
CSI Computer Specialists, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 52-1599610
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2275 Research Boulevard Suite 430
Rockville, Maryland 20850
(Address of principal executive offices) (Zip code)
301-921-8860
(Registrant's telephone number including area code)
Not applicable
(Former name, former address, and former fiscal year, if changed since last
report)
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 ____
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Check whether the registrant has filed all documents and reports
required to be filed by Section 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 REGISTRANTS)
State the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Title Outstanding
Class A 3,966,226
Transitional Small Business Disclosure Format (check one);
Yes___ No X
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
1997 1996
------------- ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 118,237 $ 3,915,578
Accounts receivable 4,497,404 1,219,809
Net investment in sales-type leases - current 208,702 94,610
Parts and supplies 1,947,114 666,275
Prepaid income taxes 201,982 115,418
Prepaid expenses 235,353 107,215
---------------- ---------------
Total current assets 7,208,792 6,118,905
---------------- ---------------
PROPERTY AND EQUIPMENT - AT COST 1,513,558 1,384,012
Less accumulated depreciation 979,153 898,352
---------------- ---------------
534,405 485,660
---------------- ---------------
OTHER ASSETS
Goodwill (Net of accumulated amortization) 2,454,794 747,569
Cash - restricted 416,054 -
Net investment in sales-type leases - non-current 118,015 62,268
Other assets 97,448 53,501
---------------- ---------------
3,086,311 863,338
---------------- ---------------
$ 10,829,508 $ 7,467,903
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable 2,195,193 337,054
Accrued expenses 514,880 140,395
Revolving lines of credit 868,839 -
Current maturities of long term debt 6,154 5,753
Customer deposits 44,407 73,929
Deferred income taxes payable 272,994 267,898
---------------- ---------------
Total current liabilities 3,902,467 825,029
---------------- ---------------
LONG-TERM DEBT, less current maturities 16,009 6,844
---------------- ---------------
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 3,966 3,652
Common stock - $.001 par value, stock subscribed and
unissued - 75,000 shares 75 75
Paid-in capital 5,627,114 5,227,428
Retained earnings 1,279,877 1,404,875
---------------- ---------------
Total stockholders' equity 6,911,032 6,636,030
---------------- ---------------
$ 10,829,508 $ 7,467,903
================ ===============
<PAGE>
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
September 30,
1997 1996
----------------- -----------------
Revenues
Maintenance services 2,772,454 1,919,225
Parts and equipment sales 4,038,121 636,546
----------------- -----------------
6,810,575 2,555,771
Costs and expenses
Cost of maintenance services 2,168,076 1,169,138
Cost of parts and equipment sales 3,582,424 527,714
Selling, general and administrative 1,403,899 842,632
----------------- -----------------
7,154,399 2,539,484
----------------- -----------------
Operating profit (loss) (343,824) 16,287
Other deductions
Interest income, net of interest expense 10,091 52,813
----------------- -----------------
Earnings (loss) before income taxes (333,733) 69,100
Income taxes (benefit)
Currently payable (128,800) 27,200
Deferred -0- -0-
----------------- -----------------
(128,800) 27,200
NET EARNINGS (LOSS) (204,933) 41,900
================= =================
Per share amounts
Net earnings (loss) per share $ (.05) $ 0.01
================= =================
Weighted average number of shares
outstanding 3,966,226 3,652,500
================= =================
<PAGE>
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Nine Months Ended
September 30,
1997 1996
----------------- -----------------
Revenues
Maintenance services 7,212,855 5,574,670
Parts and equipment sales 10,277,446 2,711,368
----------------- -----------------
17,490,301 8,286,038
Costs and expenses
Cost of maintenance services 5,185,848 3,464,560
Cost of parts and equipment sales 8,766,103 2,237,212
Selling, general and administrative 3,802,657 2,364,070
----------------- -----------------
17,754,608 8,065,842
----------------- -----------------
Operating profit (loss) (264,307) 220,196
Other deductions
Interest income, net of interest expense 60,709 153,918
----------------- -----------------
Earnings (loss) before income taxes (203,598) 374,114
Income taxes (benefit)
Currently payable (78,600) 139,200
Deferred -0- -0-
----------------- -----------------
(78,600) 139,200
NET EARNINGS (LOSS) (124,998) 234,914
================= =================
Per share amounts
Net earnings (loss) per share $ (0.03) $ 0.06
================= =================
Weighted average number of shares
outstanding 3,966,226 3,652,500
================= =================
<PAGE>
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
1997 1996
-------------- --------------
Net cash flows from operating activities $(1,441,182) $ 175,792
-------------- --------------
Cash flows used in investing activities
Net cash transferred - acquisition of subsidiary 13,907 -
Payment of subsidiary acquisition costs (1,965,411) (499,494)
Cash - restricted (400,000) -
Acquisition of property and equipment (153,060) (112,879)
-------------- --------------
Net cash used in investing activities (2,504,564) (612,373)
-------------- --------------
Cash flows used in financing activities
Payments on long-term debts (7,434) (3,479)
Proceeds from revolving line of credit 155,839 -
-------------- --------------
Net cash used in financing activities 148,405 (3,479)
-------------- --------------
NET INCREASE (DECREASE) IN CASH (3,797,341) (440,060)
Cash at beginning of period 3,915,578 4,576,095
-------------- --------------
Cash at end of period $ 118,237 $ 4,136,035
============== ==============
Supplemental disclosure of cash flow information
Cash paid through September 30, 1997 and 1996 for:
Interest 6,866 956
Income taxes 7,460 41,863
<PAGE>
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
The condensed financial statements at September 30, 1997 and for the
three and nine month periods ended September 30, 1997 and 1996 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, 1997
are not necessarily indicative of the results for the entire fiscal year ending
December 31, 1997.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation
GENERAL
The Company provides a full range of computer hardware services,
including sales and maintenance of mainframe and midrange computer equipment and
parts, network design and installation, computer upgrades, and installation and
de-installation of equipment. These services are provided to commercial
customers, agencies of federal, state and local governments, universities,
associations and hospitals primarily in the Mid-Atlantic region of the United
States, including West Virginia, Virginia, Maryland, the District of Columbia,
New Jersey, New York, Connecticut and Pennsylvania, but also, through the May,
1997 acquisition of the assets of Phoenix Service, Inc., in Illinois and
California.
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. This fluctuation has decreased
somewhat with the acquisition of Cintronix, Inc., ("Cintronix") in January,
1997. Cintronix, Inc. is a MicroAge franchisee specializing in the sales and
service of personal computers. It is hoped that cross-marketing between the
Company and Cintronix will stabilize the seasonal nature of Cintronix's sales as
well as introduce the Company's equipment and maintenance salespersons to
Cintronix's existing customer base. Mainframe 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 all sales 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
mainframe 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. Expansion of the network design and installation capabilities has
been facilitated by the acquisition in February, 1997 of Advanced Network
Systems ("ANS"). ANS provides network integration service and sales to over
three hundred companies and associations in the Washington, D.C. metropolitan
area. Further expansion into new geographic markets has been achieved through
the May, 1997 acquisition of the assets of Phoenix Service, Inc. Phoenix
provides mainframe sales and maintenance services in the Eastern region of the
country as well as outside Chicago, Illinois and San Francisco, California. It
is hoped that by introduction of the full line of products and services that the
Company can offer into these new geographic regions, further revenue growth can
be achieved.
RESULTS OF OPERATIONS
The Company's third quarter net revenues of $6,810,575 was an increase
of 166 percent over third quarter net revenues in the prior fiscal year of
$2,255,771, and the nine month revenues of $17,490,301 represent a 111 percent
increase over the $8,286,038 achieved in the third nine months of 1996. 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 Cintronix, Inc., the acquisition of which was
completed by the Company in January, 1997. Maintenance revenues for the third
quarter and first nine months of 1997 increased approximately 44 and 29 percent,
respectively, over the same periods 1996, primarily from expansion of the
Company's book of business. Equipment sales for the third and first three
quarters of 1997 increased 534 percent and 279 percent, respectively, over the
same periods of 1996, with the Company increasing its sales by approximately 69
and 44 percent and the balance of 465 and 235 percent, respectively, being
provided by revenues generated by Cintronix, Inc. 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 the Company and each
of the subsidiaries will be able to cross-promote the other companies' primary
areas of expertise. Maintenance services accounted for approximately 41 and 66
percent, respectively, of the Company's consolidated revenues for the first
three quarters of 1997 and 1996.
The Company's cost of sales as a percentage of third quarter and
nine-month revenues was 84 and 80 percent, respectively, compared to 66 and 68
percent for the same periods of 1996. An increase in the costs of maintenance
services as a percentage of maintenance service income combined with a decrease
in the profit margin percentages on the equipment sales. The increase in the
cost of maintenance services primarily resulted from increased costs of
emergency replacement parts and greater reliance on subcontracted services for
newer technology being serviced by the Company, as well as higher costs of parts
associated with network and personal computer maintenance. Additionally, gross
margins in fiscal 1997 are adversely affected by the continued development of
the Company's Richmond operations and the integration of the acquired companies.
The Company expects that the costs of maintenance services as a percentage of
maintenance service income to possibly increase in future quarters as the
Company expands the mix of hardware which will be maintained under contracts and
until the Richmond operation is self-sufficient. But the Company hopes to
partially offset these costs by reducing subcontract expense as the Company
develops the additional in-house expertise in the newer technologies, 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. Margins on equipment sales
decreased from 17 percent for the third quarter and the first nine months of
1996 to 11 and 14 percent for the same quarters of 1997. This is seen as a
direct result of the equipment sales generated by Cintronix, due to the lower
margins on personal computer sales. The expected overall effect of the increased
volume of personal computer sales generated by Cintronix is to stabilize
fluctuations in the margins on equipment sales.
Selling, general and administrative expenses as a percentage of net
revenues was 21 and 22 percent for the third quarter and first nine months of
1997, respectively, as compared to 33 and 29 percent for the same periods of
1996. This is seen as being directly attributable to the larger increase in
revenues when compared to the increase in selling, general and administrative
expenses. 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, but also expects some stabilization as the Company is able to
take advantage of economies of scale and eliminate duplication from combined
Company operations..
Net interest income decreased to $10,091 and $60,709 for the third
quarter and first nine months of 1997, compared with $52,813 and $153,918 for
the same periods of the prior year. This is primarily due to the use by the
Company of the proceeds of its public offering to complete the acquisitions of
Cintronix, Inc. in January, 1997 and Advanced Network Systems in February, 1997,
and the assets of Phoenix Service, Inc. in May, 1997. The Company expects that
net interest income will stabilize, as none of the proceeds from the Company's
initial public offering are now available for investment, but have been utilized
as projected in the Company's registration statement.
Net losses incurred of $204,933 and $124,998 for the third quarter and
first nine months of 1997 represent a 589 and 153 percent decrease from 1996 net
income of $41,900 and $234,914, respectively. The decrease for the quarter and
year to date is primarily attributable to greater reliance on subcontractors for
newer technology for which the Company is providing maintenance services when
compared to the prior year, as well as the higher cost of parts associated with
that newer technology. 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 will probably still be required. The Company is evaluating
whether continuation of the Richmond operations is justified, but it is expected
that a change in marketing efforts could make the operations able to support
itself in the near future. 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, but further expansion will probably be accomplished by the
acquisition of existing operations, as in the acquisition of the assets of
Phoenix Service, Inc. In these cases 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 each of the acquisitions
completed by the Company.
The consistency of the Company's results of operations has been
significantly affected by the costs of geographic expansion and changes in the
computer market, as well as by the acquisitions which have changed the mix of
the Company's sales. 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). The companies acquired are part of the plan to
position the Company to effectively compete in the mid-range network market. The
Company hopes to offer existing mid-range networks the expanded capabilities of
the mainframe technology available, as well as offer services connected with the
conversion of mainframe installations to mid-range, thus assuring continuity of
the customer relationships. 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 the
continued growth of the Company. The coordination of the marketing staffs of
each of the subsidiaries 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 $118,237 at
September 30, 1997, compared to $3,915,578 at December 31, 1996. The ratio of
current assets to current liabilities decreased from 7.4:1 at December 31, 1996
to 1.8:1 at September 30, 1997. These decreases are primarily attributed to the
three acquisitions completed this year. In addition, working capital was
negatively impacted by a $400,000 escrow that was part of the Cintronix
acquisition and which is to be released in January, 1999. The Company believes
that its existing cash, as supplemented by cash flow from operations and its
existing credit facilities, is sufficient to satisfy its current working capital
needs.
The Company's existing $750,000 line of credit with Crestar Bank has been
extended until completion of the current negotiations to increase the line to
fit future growth needs. In addition, upon completion of the acquisition of
Cintronix, Inc., the Company guaranteed Cintronix's $1.3 million revolving line
of credit with First Union National Bank of Virginia. This credit line bears
interest at prime plus 1%, making the rate 9.5% at September 30, 1997. The
balances owed as of September 30, 1997, were $350,000 on the Crestar line and
$518,839 on the First Union line.
The Company's other principal commitments at September 30, 1997 consisted of
obligations under operating leases for facilities.
Part II. Other Information
Item 1. Legal Proceedings
none
Item 6. Exhibits and Reports on Form 8-K
none
<PAGE>
SIGNATURES
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, thereunto duly authorized.
CSI Computer Specialists, Inc.
November 15, 1997 By: James D. Boccabella
- ------------------- -----------------------
Date James D. Boccabella
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> SEP-30-1997
<CASH> 118,237
<SECURITIES> 0
<RECEIVABLES> 4,497,404
<ALLOWANCES> 163,253
<INVENTORY> 1,947,114
<CURRENT-ASSETS> 7,208,792
<PP&E> 1,513,558
<DEPRECIATION> 979,153
<TOTAL-ASSETS> 10,829,508
<CURRENT-LIABILITIES> 2,195,193
<BONDS> 0
0
0
<COMMON> 3,966
<OTHER-SE> 6,907,066
<TOTAL-LIABILITY-AND-EQUITY> 10,829,508
<SALES> 17,490,301
<TOTAL-REVENUES> 17,547,785
<CGS> 13,951,951
<TOTAL-COSTS> 17,754,608
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 33,828
<INTEREST-EXPENSE> 33,393
<INCOME-PRETAX> (203,598)
<INCOME-TAX> (78,600)
<INCOME-CONTINUING> (124,998)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (124,998)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
