As filed with the Securities and Exchange Commission on May 15, 1997
1
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 March 31, 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
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
1997 1996
---------------- ---------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,247,607 $ 3,915,578
Cash - restricted 400,000 -
Accounts receivable 2,968,367 1,219,809
Net investment in sales-type leases - current 107,565 94,610
Inventory - resale 219,800 -
Parts and supplies 772,587 666,275
Prepaid income taxes 27,544 115,418
Prepaid expenses 113,534 107,215
---------------- ---------------
Total current assets 6,857,004 6,118,905
---------------- ---------------
PROPERTY AND EQUIPMENT - AT COST 1,476,200 1,384,012
Less accumulated depreciation 916,904 898,352
---------------- ---------------
559,296 485,660
---------------- ---------------
OTHER ASSETS
Goodwill (Net of accumulated amortization) 1,957,778 747,569
Net investment in sales-type leases - non-current 116,958 62,268
Other assets 37,653 53,501
---------------- ---------------
2,112,389 863,338
---------------- ---------------
$ 9,528,689 $ 7,467,903
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable 1,339,511 337,054
Accrued expenses 149,940 140,395
Revolving line of credit 544,000 -
Current maturities of long term debt 5,753 5,753
Customer deposits 4,173 73,929
Deferred income taxes payable 270,848 267,898
---------------- ---------------
Total current liabilities 2,314,225 825,029
---------------- ---------------
LONG-TERM DEBT, less current maturities 23,351 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, 3,966,226 and 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 1,559,958 1,404,875
---------------- ---------------
Total stockholders' equity 7,191,113 6,636,030
---------------- ---------------
$ 9,528,689 $ 7,467,903
================ ===============
<PAGE>
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
March 31,
1997 1996
----------------- -----------------
Revenues
Maintenance services $ 2,235,632 $ 1,820,006
Parts and equipment sales 3,028,099 1,126,088
----------------- -----------------
5,263,731 2,946,094
Costs and expenses
Cost of maintenance services 1,806,526 1,051,816
Cost of parts and equipment sales 1,929,981 996,197
Selling, general and administrative 1,309,794 746,803
----------------- -----------------
5,046,301 2,794,816
----------------- -----------------
Operating profit 217,430 151,278
Other deductions
Interest income, net of interest expense 35,053 52,059
----------------- -----------------
Earnings before income taxes 252,483 203,337
Income taxes
Currently payable 94,450 205,800
Deferred 2,950 (127,800)
----------------- -----------------
97,400 78,000
----------------- -----------------
NET EARNINGS 155,083 125,337
================= =================
Per share amounts
Net earnings per share $ 0.04 $ 0.03
================= =================
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)
Three Months Ended
March 31,
1997 1996
-------------- --------------
Net cash flows from operating activities $ 111,661 $ (13,434)
-------------- --------------
Cash flows used in investing activities
Net cash transferred - acquisition of subsidiary 13,907 -
Payment of subsidiary acquisition costs (1,134,653) (499,494)
Acquisition of property and equipment (89,393) (61,721)
-------------- --------------
Net cash used in investing activities (1,210,139) (561,215)
-------------- --------------
Cash flows used in financing activities
Payments on long-term debts (493) (850)
Decrease in revolving line of credit (169,000) -
-------------- --------------
Net cash used in financing activities (169,493) (850)
-------------- --------------
NET INCREASE (DECREASE) IN CASH (1,267,971) (575,499)
Cash at beginning of period 3,915,578 4,576,095
-------------- --------------
Cash at end of period $ 2,647,607 $ 4,000,596
============== ==============
Supplemental disclosure of cash flow information
Cash paid through March 31, 1997 and 1996 for:
Interest 14,095 258
Income taxes 5,180 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 March 31, 1997 and for the three
month periods ended March 31, 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 March 31, 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 Operations
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 Jersy, New York 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. This fluctuation is expected to
decrease 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 salespersons to Cintronix's existing
customer base. In addition, 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 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 is expected to be 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.
<PAGE>
RESULTS OF OPERATIONS
The Company's first quarter net revenues of $5,263,731 was an increase
of 79 percent over first quarter net revenues in the prior fiscal year of
$2,946,094. 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 first quarter of 1997 increased approximately 23 percent over the first
quarter of 1996, primarily from expansion of the Company's book of business.
Equipment sales for the first quarter of 1997 increased 169% over the same
period of 1996, with the Company increasing its sales by approximately 60
percent and the balance of 119 percent 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 42 and 62 percent, respectively, of the
Company's consolidated revenues for the first quarters of 1997 and 1996.
The Company's cost of sales as a percentage of revenues was 71 percent
in the first quarter of 1997 compared to 70 percent in the same period of 1996.
A small decrease in the costs of maintenance services as a percentage of
maintenance service income was offset partially with a small decrease in the
profit margin percentages on the equipment sales. Increased costs of emergency
replacement parts was partially offset by a lessened reliance on subcontracted
services. 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 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. But the increased
personal computer sales generated by Cintronix is expected to stabilize
fluctuations in the margins on equipment sales.
Selling, general and administrative expenses as a percentage of net
revenues were 25 percent for the first quarters of both 1996 and 1995. 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.
Net interest income decreased to $35,053 for the first quarter of 1997,
compared with $52,059 for the same period 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. The Company expects that net interest income will
decrease as the remaining proceeds from the Company's initial public offering
are utilized as projected in the Company's registration statement.
Net income increased 24 percent to $155,083 for the first quarter of
1997 from $125,337 in the first quarter of the prior year. The increase for the
quarter is primarily attributable to less reliance on subcontractors for
maintenance services when compared to the prior year, as well as the margins
generated by the increase in parts and equipment sales. Subcontractor costs
could continue to 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 Richmond operations' revenues will cover its
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 has also been and may continue to 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 acquisitions of CCS Systems, Cintronix and ANS.
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 relationship. 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 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.
However, results could be negatively affected by the start-up costs related to
expansion of operations to equipment not previously serviced or to geographic
areas not previously supported.
LIQUIDITY AND CAPITAL RESOURCES
Working capital, which consists principally of cash and investments in
government securities for terms of three months or less, was $2,247,607 at March
31, 1997, compared to $3,915,578 at December 31, 1996. The ratio of current
assets to current liabilities decreased to 3.0:1 from 7.5:1 at December 31,
1996. Cash flows from operations during the first three months of 1997 totaled
$111,661, resulting primarily from a decrease in accounts receivable, and
partially offset by the decrease in accounts payable and accrued expenses that
were part of the acquisition of Cintronix. The decrease in the current ratio was
due chiefly to the $1.1 million in cash spent for the acquisitions of Cintronix,
Inc. and Advanced Network Systems. The Company believes that its existing cash,
as supplemented by cash flow from operations, is sufficient to satisfy its
currently anticipated working capital needs.
Effective August 1, 1996, the Company's $750,000 revolving line of
credit with Citizens Bank of Maryland was renewed to continue until May 31,
1997. There is presently no balance owed on this line of credit. In addition,
upon completing 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 line of credit bears interest at prime plus 1%, making the
rate 9.75% at March 31, and the balance owed at March 31 was $713,000.
The Company's principal commitments at March 31, 1997 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 5. Other Information
The Company completed the acquisition of Advanced Network Systems
("ANS") on February 28, 1997, for $200,000 cash. ANS was a division of American
Bankers Association Service Corporation, and provides network integration
service and sales to over three hundred companies and associations in the
Washington, D. C.
metropolitan area.
Item 6. Exhibits and Reports on Form 8-K
1. Current Report dated January 10, 1997 - reported acquisition of
Cintronix, Inc.
<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.
May 14, 1997 By: James D. Boccabella
Date James D. Boccabella, Chief Financial
Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 2,647,607
<SECURITIES> 0
<RECEIVABLES> 2,968,367
<ALLOWANCES> 177,500
<INVENTORY> 992,387
<CURRENT-ASSETS> 6,857,004
<PP&E> 1,476,200
<DEPRECIATION> 916,904
<TOTAL-ASSETS> 9,528,689
<CURRENT-LIABILITIES> 2,314,225
<BONDS> 0
0
0
<COMMON> 3,966
<OTHER-SE> 7,187,147
<TOTAL-LIABILITY-AND-EQUITY> 9,528,689
<SALES> 5,263,731
<TOTAL-REVENUES> 5,312,419
<CGS> 3,736,507
<TOTAL-COSTS> 5,046,301
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 7,500
<INTEREST-EXPENSE> 14,095
<INCOME-PRETAX> 252,483
<INCOME-TAX> 97,400
<INCOME-CONTINUING> 155,083
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 155,083
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.04
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