FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
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)
Securities registered pursuant to Section 12(b) of the Act:
Title of Securities Exchanges on which Registered
Class A common NASDAQ Small Cap
Securities registered pursuant to section 12(g) of the Act:
N/A
Check whether the issuer (1) 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 ____
Check if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.
State issuer's revenues for its most recent fiscal year. $10,836,000
(ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PAST FIVE YEARS:
Check whether the issuer 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)
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Title Outstanding
Class A 3966226
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference
and the Part of the Form 10-KSB (e.g., Part I, Part II, etc.) into which the
document is incorporated: (1) Any annual report to security holders; (2) Any
proxy or information statement; and (3) Any prospectus filed pursuant to Rule
424(b) or (c) under the Securities Act of 1933. The listed documents should be
clearly described for identification purposes (e.g., annual report to security
holders for fiscal year ended December 24, 1990).
none
Transitional Small Business Disclosure Format (check one):
Yes ___; No X____
<PAGE>
Item 1. Business
The Company was incorporated pursuant to the laws of the State of Delaware
on February 22, 1994. The Company is the successor to CSI-Maryland.
CSI-Maryland was incorporated pursuant to the laws of the State of Maryland
in October 1988 for the purpose of providing computer hardware
services, including installation and de-installation of equipment, computer
upgrades, computer maintenance and repair, and the sale of computer parts and
equipment. The Company was organized by CSI-Maryland to enable CSI-Maryland to
merge with and into the Company on March 31, 1994 in order to effectuate a
reincorporation in the State of Delaware.
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. The Company provides its services to commercial
accounts, agencies of federal, state and local governments, and universities,
hospitals, and associations in the Mid-Atlantic region of the United States,
including West Virginia, Virginia, Maryland, the District of Columbia, New
Jersey, New York and Pennsylvania.
In pursuit of the its plans for geographic expansion, the Company
opened offices in the Philadelphia, Pennsylvania area in January of 1995 and in
Richmond, Virginia in December of 1995. In addition, as part of the Company's
efforts to expand its technological expertise and customer base, the Company
completed its acquisition of Capitol Computer Systems, Inc., T/A CCS Systems,
Inc. in December, 1995. CCS Systems, Inc. is a Lanham, Maryland value added
reseller specializing in equipment sales and computer hardware maintenance.
Furthering the expansion efforts, the Company acquired Cintronix, Inc., which
specializes in the sales and service of personal computers, in January, 1997,
and Advanced Network Systems, which provides network integration service and
sales to over three hundred companies and associations in the Washington, D. C.
metropolitan area, in February, 1997.
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. Initially, the Company's business was limited to
providing service for computer mainframes manufactured by IBM and peripheral
equipment, such as printers, disk drives, tape drives and computer controllers.
The Company has broadened its peripheral support to included the provision of
service for products manufactured by Memorex, Storage Technology and various
other original equipment manufacturers of input/output products. In the
following years, the Company began offering maintenance services for personal
computers and associated peripheral equipment produced by several major
manufacturers such as IBM, Compaq, NEC, Epson and Hewlett-Packard, as well as
providing parts and services for computer mainframes manufactured by Digital
Equipment Corporation (DEC), such as DEC/VAX platforms and peripheral equipment.
The Company provides its services to customers pursuant to
maintenance agreements. Substantially all of the Company's maintenance
agreements are fixed-fee agreements for terms of one or more years. Pursuant to
such an agreement, a customer agrees to pay a fixed amount, payable monthly, in
exchange for the Company's agreement to provide all parts (other than expendable
parts) and labor necessary to maintain or repair the equipment during the term
of such agreement. The Company occasionally provides services on a
"time-and-materials" basis pursuant to which a customer agrees to pay a
specified rate for each particular service to be performed by the Company and to
purchase any replacement parts used in connection therewith.
<PAGE>
The Company began actively selling computer equipment in 1993, and
management of the Company believes that current market conditions afford the
Company strong potential for growth for the remainder of the 1990s. The Company
sells computer equipment pursuant to equipment sales agreements. Pursuant to
such agreements, customers pay for the computer equipment which they purchase
from the Company upon delivery thereof. Given the Company's large existing
customer base, the Company has what management believes to be a "niche market
audience" which will enable the Company to "bundle" its services to include the
sale of equipment to a customer, the installation of such equipment and the
maintenance thereof on a continuing basis.
Management of the Company believes that the Company has been able to
compete successfully because of the high quality of service the Company provides
and the competitive pricing it is able to offer to its customers. As a result,
since its inception, the Company has been able to attract and maintain long-term
relationships with its existing customers and to expand its customer base
consistently and effectively.
The industry in which the Company operates has been characterized by
rapid and continuous technological advances, permitting cost reduction,
increased computer processing capacities and broadened equipment platforms.
Users frequently upgrade or replace equipment and also use multi-manufactured
equipment (mainframes and peripheral equipment which are manufactured by various
manufacturers) to take advantage of technological innovations. As a result,
equipment which is replaced by different or newer models becomes available to
the resale or secondary market. This enables the Company to purchase this
equipment and support additional product lines.
Based on a survey conducted by International Data Corporation in
February 1994 (the "IDC Government Survey"), the combined federal and commercial
market for computer maintenance services totals $20.6 billion with a projected
increase of 3.6% over the next three years.
Given the Company's diversification into equipment sales, which
according to information released by the Computer Dealers and Lessors
Association is a $21.4 billion industry, management of the Company believes
that, because of its large existing customer base, the Company is uniquely
positioned to capture a growing segment of the equipment sales market.
Maintenance Services
The Company provides third-party, multi-vendor computer hardware and
peripheral equipment maintenance services to commercial accounts, agencies of
federal, state and local governments, universities, hospitals, associations and
other organizations located primarily in the Mid-Atlantic region of the United
States. The equipment currently maintained and serviced by the Company consists
of a wide range of peripheral subsystems, including terminals, disk drives, tape
drives, printers and computer controllers, and also includes the mainframes,
midrange minicomputers and personal computers on which such peripheral
subsystems are dependent. The equipment serviced or maintained by the Company
varies from customer to customer and ranges from providing service for
individual computers or pieces of equipment to providing service for many
computers and pieces of equipment located in a customer's mainframe computer
room. Services provided by the Company consist primarily of scheduled
preventative maintenance and emergency remedial services. Preventative
maintenance includes inspections, diagnostic analysis, cleaning, adjustments,
and replacement of components and parts. In addition, the Company conducts
inspections for certification of equipment in connection with determining
whether mainframes and peripheral equipment meet original equipment manufacturer
maintenance standards.
<PAGE>
Most of the computers maintained and serviced by the Company are
manufactured by IBM, although the Company also provides such services for
computers manufactured by other companies including Memorex, Storage Technology,
and DEC. The personal computers and peripheral equipment currently serviced by
the Company are manufactured by numerous companies. The Company in 1995 expanded
its business to include sales and service of IBM RISC System/6000, IBM AS/400
and IBM ES/9000. In addition, the Company greatly expanded its sales and service
capabilities in the midrange area with the acquisitions of Cintronix, Inc. and
Advanced Network Systems in the beginning of 1997.
Maintenance Agreements
The Company provides most of its services pursuant to maintenance
agreements having terms of one or more years. Pursuant to such agreements, a
customer agrees to pay a fixed amount, payable monthly, in exchange for the
Company's agreement to provide all parts (other than expendable parts) and labor
necessary to maintain or repair the equipment subject to the agreement during
the term of the agreement. Additionally, the Company occasionally provides
services on a "time-and-materials" basis pursuant to which a customer agrees to
pay a specified rate for each particular service to be performed by the Company
and to purchase any replacement parts used in connection therewith. The
Company's standard maintenance agreement provides that upon expiration of the
initial term thereof, such agreement still continue on a month-to-month basis
until such time as either party thereto terminates the agreement. It has been
the Company's experience that very few of its maintenance agreements with its
customers are canceled or discontinued upon expiration of their initial terms
given that such agreements by their terms provide for continuation on a
month-to-month basis unless expressly terminated.
Most of the Company's maintenance agreements with agencies of the
federal government are entered into for terms of three to five years. However,
since the procuring governmental agencies are only funded on a year-to-year
basis, all such maintenance agreements expire each year unless renewed at the
agency's option. Prospective revenues from such agencies for future periods are
therefore dependent upon the renewal of such agreements. Although such
government agreements expire annually by their terms, the Company's past
experience with such agreements expire annually until the expiration of the
specified term (three to five years) and are thereafter continued on a
year-to-year basis.
Subcontracting
The Company has entered into subcontracting agreements with several
of its vendors pursuant to which such vendors perform certain services which the
Company has agreed to provide to customers pursuant to maintenance agreements
with such customers. In such cases, the Company acts as the "prime contractor"
for the provisions of computer maintenance services and the vendor acts as the
"subcontractor." The Company enters into these types of agreements for several
reasons. The Company may elect to enter into subcontracting agreements when the
equipment that is subject to a maintenance agreement is extremely expensive or
is otherwise difficult for the Company to obtain or replace. Similarly, such
subcontracting agreements have been advantageous to the Company when the
services required by a maintenance agreement have been of a particular level of
engineering expertise that the Company does not otherwise provide. The Company
also enters into subcontracting agreements because customers sometimes prefer to
be provided services by one entity, such as the Company, which has the ability
to service all of its computer equipment (notwithstanding the manufacturer
thereof or the model), rather than rely on the services which may be provided
individually by each vendor with respect to its own manufactured product or
model. Such agreements may be terminated by either party at any time upon
delivery of written notice 30 days in advance of such termination. Several
companies offer the services and expertise for which the Company enters into
subcontracting agreements. Therefore, management of the Company believes that
the loss of the services of any one subcontractor would not have a material
adverse effect on the Company's business or operation.
Equipment Sales
The Company sells computer equipment pursuant to equipment sales
agreements. Pursuant to such agreements, customers pay for the computer
equipment which they purchase from the Company upon delivery thereof. Generally,
the Company takes an order for equipment from a customer, contacts its sources
of equipment to ascertain the availability thereof, provides the customer with a
quoted price for the same and then executes an agreement therefor upon the
customer's affirmation of interest in purchasing the specified computer
equipment from the Company. The Company does not, therefore, currently maintain
an extensive inventory of equipment specifically to support potential equipment
sales agreements. Revenues derived from the sales of equipment are increasing
and the Company intends to continue to increase its sales of computer equipment
in the future. Sales of midrange and personal computer equipment have expanded
in the last year, and the terms are similar to those of previous mainframe
equipment and parts. Due to the ready availability of midrange and personal
computer equipment from Company vendors, the Company does not maintain an
extensive inventory of this equipment, either.
Sales and Marketing
The Company currently employs seventeen full-time marketing
representatives. Eleven of such representatives directs their efforts to
promoting the Company's sales and services to commercial accounts, universities,
hospitals and associations in West Virginia, Virginia, Maryland, the District of
Columbia, New Jersey, New York and Pennsylvania. The remaining representatives
market the Company's services primarily to federal government agencies. The
majority of the marketing leads pursued by the Company's marketing
representatives are generated by existing customers and referrals from various
vendors. To date, the Company has done very little advertising. In addition, the
Company utilizes the services of several contract marketing representatives, who
provide marketing services. The Company is in the process of developing an
effective marketing and advertising program, as well as hiring additional
marketing personnel. With the acquisition of Cintronix, Inc. and Advanced
Network Systems in early 1997, the Company obtained seven full-time marketing
representatives to expand the promotion of the Company's services in the
Mid-Atlantic region of the United States.
Principal Suppliers and Subcontractors
The Company acquires a significant part of the equipment and parts
which it uses in connection with providing maintenance services from IBM. The
Company also relies on IBM to provide subcontracting services (as described
above). See Note 10 to the Financial Statements included elsewhere herein.
Payments made by the Company to IBM equaled in the aggregate $221,000 and
$414,000, respectively, during the fiscal years ended December 31, 1996 and
1995. The Company also subscribes to a service called "CDLANET" which provides
the Company with access to an "on-line" nationwide database of equipment offered
for sale by various vendors and distributors. The Company frequently acquires
equipment from several different vendors through this resource.
Customers
As noted above, most of the Company's revenues are derived from
services performed through maintenance agreements. The percentage of commercial
customers serviced by the Company pursuant to maintenance agreements for the
fiscal years ended December 31, 1996 and 1995 equaled approximately 79% and 75%,
respectively, of all customers serviced by the Company pursuant to maintenance
agreements compared to approximately 21% and 25%, respectively, for the fiscal
years ended December 31, 1996 and 1995 for federal and local government
agencies. Revenues derived from time and materials agreements approximate 5% and
8%, respectively, of the Company's gross revenues for the fiscal years ended
December 31, 1996 and 1995. Revenues generated by parts and equipment sales
represented approximately 30% and 14%, respectively, of gross revenues for the
fiscal years ended December 31, 1996 and 1995.
The Company's customers tend to be very loyal. It has been the
Company's experience that very few of its maintenance agreements with its
customers are canceled or discontinued upon expiration of their initial terms,
given that the terms of such agreements provide for continuation on a
month-to-month basis unless expressly terminated. As of December 31, 1996, the
Company had maintenance agreements with approximately 140 customers. Currently,
no one customer represents more than 7% of the total revenue of the Company. The
Company's commercial customers include American Management Systems, Inc.,
Hechinger Company, IBM, ISI, CDSI, and Medlantic Health Care System, Inc.
Business Strategy
The objective of the Company is to increase both its maintenance
customer base and equipment sales. Management of the Company believes that
increasing the Company's customer base will be achieved by broadening the
Company's business to include sales and servicing of additional mainframe
computers such as AMDAHL, IBM RISC/6000, IBM AS/400, and IBM ES/9000, and
expanding its business to provide sales and service outside of the Mid-Atlantic
Region into other geographical locations. Management of the Company also
believes that it will be able to increase its sales of parts and equipment by
establishing the Company as what is known as a "Value Added Reseller" of
computer equipment produced by various manufacturers, and providing network
design and integration services to new and existing customers. Designation as a
"Value Added Reseller" enables the Company to acquire computer equipment
directly from manufacturers at discounts based upon the volume of its purchases.
Cintronix, Inc., the company acquired by the Company in January, 1997, is a
MicroAge franchisee, and as such greatly increases the Company's expansion in
this area.
Acquisitions
The Company intends to pursue its growth and acquisition strategy on
both a national and regional level. On a national level, the Company intends to
acquire and develop businesses in major population areas where it is not now
represented. The Company also intends to acquire businesses and create regional
clusters of sales and service representatives to increase its geographic market
area, to improve its service to customers and to gain greater market
penetration. Management of the Company believes that the businesses so acquired
will be able to draw on the operational and management expertise of the Company.
In addition to the foregoing, management of the Company will seek and evaluate
acquisition opportunities whereby related synergistic products can be acquired.
It is anticipated that such opportunities would include acquisitions of
distributors and vendors of products which the Company's marketing
representatives can sell to the Company's existing customer base and continue to
service thereafter. The Company intends to target companies for acquisition that
are profitable and well-positioned in their local markets and have will
established customer bases. The Company intends to acquire such additional
companies using a combination of cash, equity securities (such as common or
preferred stock) and debt instruments. Pursuant to the terms of its agreement
with the Underwriter, the Company's ability to issue equity securities in
connection with such acquisitions may be subject, until July, 1997, to the
Underwriter's prior written consent. To the extent that the Company issues
equity securities in connection with acquisitions, the equity interest of its
then current stockholders will be diluted.
<PAGE>
The Company could be subject to liabilities arising from an
acquisition in the event the Company assumes unknown or contingent liabilities
or in the event such liabilities are imposed on the Company under theories of
successor liability. Prior to making acquisitions, the Company will conduct a
due diligence investigation of acquisition candidates. In addition, the Company
may seek to avoid assuming or incurring liabilities by purchasing only selected
assets and assuming selected liabilities of an acquisition candidate. The
Company may also seek to obtain indemnification from selling parties. However,
if the Company became subject to such a liability of sufficient magnitude and
was unable to enforce its rights of indemnification against the acquired
companies or selling parties, such liability could have a material adverse
effect on the Company's financial condition and results of operations.
Management intends to integrate the companies it has acquired or may
acquire in the future on a national and regional level, to bring controls,
economies of scale and standardized policies and procedures to all of its
offices, and to centralize finance, cash management, inventory management,
accounting, insurance, marketing, purchasing and human resources functions.
Item 2. Properties
The Company's headquarters are located in Rockville, Maryland
(the "Rockville facility"). In addition to the Rockville facility, the
Company maintains its National Support Center in Beltsville, Maryland (the
"Beltsville facility"), a sales and marketing office in Towson, Maryland ("the
Towson facility"), office and warehouse space in Warminster, Pennsylvania (the
"Pennsylvania facility") and office and warehouse space in Richmond, Virginia
(the "Virginia facility"). In addition, the CCS Systems, Inc., a wholly-owned
subsidiary of the Company, maintains its offices and service facilities in
Lanham, Maryland (the "Lanham facility").
The Rockville facility is leased by the Company pursuant to a lease
having a term of ten years, which term expires on October 1, 2002. The Rockville
facility consists of 3,300 square feet and is used by the Company as general
office space. The monthly rental payment for such space is approximately $5,165
and is subject to annual increases.
The Beltsville facility is leased by the Company pursuant to a lease
having a term of five years, which term is scheduled to expire on February 27,
1997, subject to the Company's option to renew such lease for an additional term
of five years. The monthly rental payment for such space is $10,691 and is
subject to annual increases. The Beltsville facility currently consists of
31,000 square feet and is used by the Company to house the Company's technical
support staff, in-house training instructors and logistical personnel for parts
support, and for the storage and warehousing of the bulk of the Company's
equipment, parts and supply inventories.
The Towson facility is used by marketing personnel of the Company and
is leased by the Company on a month-to-month basis. The monthly rental payment
for such space is $995.
The Pennsylvania facility is leased by the Company pursuant to a
lease having a term of three years, which term is scheduled to expire on January
30, 1998, subject to automatic annual renewals in the absence by either party to
terminate the lease. The Pennsylvania facility consists of approximately 6,000
square feet and is used by the Company for storage and warehousing of equipment,
parts and supplies for accounts in its service area, as well as office space for
the computer engineers assigned to that area. The monthly rental payment for
such space is $4,937 per month.
The Virginia facility is leased by the Company pursuant to a lease
having a term of five years, which term is scheduled to expire on December 31,
2000. The Virginia facility consists of approximately 5,900 square feet and is
used by the Company for storage and warehousing of equipment, parts and supplies
for accounts in its service area, as well as office space for the computer
engineers assigned to that area. The monthly rental payment for such space is
$4,316 and is subject to annual increases.
The Lanham facility is leased by CCS Systems, Inc., a wholly-owned
subsidiary of the Company, pursuant to a lease having a term expiring in
December, 1998. The Lanham facility consists of approximately 8,000 square feet
and is used for storage and warehousing of equipment, parts and supplies for
service of CCS Systems, Inc.'s customers, as well as housing the sales,
administrative and service personnel of the company. The monthly rental payment
for such space is $5,668 and is subject to annual increases.
In addition to the foregoing facilities, the Company maintains a
local parts storage facility in Falls Church, Virginia to provide local support
to area accounts. The monthly rental for the storage center is $198. The
facility is leased pursuant to a month-to-month lease. In the event that the
lease is terminated or not otherwise renewed, management believes that the
Company would be able to lease adequate space elsewhere upon terms comparable to
or as favorable as those in the current lease.
The Company does not intend to invest in real estate or interests in
real estate, real estate mortgages, or securities of or interests in persons
primarily engaged in real estate activities for the foreseeable future.
Item 3. Legal Proceedings
none
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted during the fourth quarter of the fiscal year covered
by this report to a vote of security holders, through the solicitation of
proxies or otherwise.
Item 5. Market for Common Equity and Related Stockholder Matters
NASDAQ Small Cap
1st Quarter 1995 High N/A Low N/A
2nd Quarter 1995 High N/A Low N/A
3rd Quarter 1995 High 7 5/8 Low 5
4th Quarter 1995 High 6 5/8 Low 4 3/8
1st Quarter 1996 High 7 1/8 Low 4 5/8
2nd Quarter 1996 High 6 1/4 Low 5
3rd Quarter 1996 High 5 7/8 Low 2 3/4
4th Quarter 1996 High 3 5/8 Low 1 1/8 300 None
***
Item 6. 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 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, 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 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. Sales of midrange and personal computer equipment will expand due to
the acquisitions completed in early 1997, and these sales are normally subject
to seasonal fluctuations.
RESULTS OF OPERATIONS
Revenues for the fiscal year ended December 31, 1996 increased by 58
percent to $10,835,678 compared to revenues of $6,844,722 for the fiscal year
ended December 31, 1995. This increase in annual net revenues resulted from
sales growth in both maintenance services and equipment sales, notably with the
increased revenues generated by CCS Systems, Inc., a wholly-owned subsidiary
acquired in December, 1995. Maintenance revenues increased principally due to
growth in the Company's and its subsidiary's book of fixed fee agreements, both
in number and dollar amount of the agreements. Maintenance revenues for 1996
increased by 29 percent to $7,536,634 compared to maintenance revenues of
$5,861,543 for 1995. Maintenance services accounted for approximately 70 percent
of the Company's revenues for 1996 compared to 86 percent for 1995. Equipment
and parts sales increased 235 percent to $3,299,044 for 1996 compared with
$983,179 for 1995, comprising 30 percent of sales in 1996 and 14 percent of
sales in 1995.
The Company's cost of sales as a percentage of revenues was 68
percent in 1996 compared to 63 percent in 1995. An increase in the costs of
maintenance services as a percentage of maintenance service income was combined
with the higher level of equipment sales, on which profit margins percentages
are traditionally lower. The increased costs of maintenance service resulted
primarily from increased costs of emergency replacement parts and increased
reliance on subcontracted services. 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. Additionally, gross margins in
fiscal 1996 have been adversely affected by the costs associated with
stabilizing 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 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.
Selling, general and administrative expenses as a percentage of net
revenues were 32 percent and 30 percent, respectively, for 1996 and 1995. These
costs increased 71 percent to $3,487,760 for 1996 compared to $2,040,683 for
1995, the increase primarily attributable to hiring additional marketing and
office personnel to support the increased revenue base, as well as the
administrative costs of the Philadelphia and Richmond offices. 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's operating profit for the fiscal year ended December 31,
1996 decreased 108 percent to a loss of $41,469 compared to a profit of $490,659
for 1995. The decrease in operating profit was primarily attributable to the
overall increase in costs of sales as discussed above compared with the increase
in revenues, as well as the increase selling and administrative costs related to
building up the sales staff.
Net interest income increased to 163 percent to $206,460, compared to
$78,406 for 1995, primarily as a result of investment earnings on the remaining
proceeds of the Company's initial public offering in July, 1995, for a full year
in 1996 as opposed to a partial year in 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 70 percent to $106,491 for 1996 from $349,565
for the prior year, primarily as a result of the higher costs of sales, the
increased selling and administrative costs outlined above, and the stabilization
of the Philadelphia and Richmond offices. The Company notes that the
Philadelphia office is now generating net income for the Company, and expects
that the Richmond operation's 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 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.
The consistency of the Company's results of operations has been
significantly affected in the last year by the costs of the geographic expansion
and changes in the computer market. The Company believes that in the future its
results of operations could continue to 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. Part
of this plan is evidenced by the Company's acquisitions of Cintronix, Inc., in
January of 1997 and Advanced Network Systems in February, 1997. 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.
<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 $3,915,578 at
December 31, 1996, compared to $4,576,095 at December 31, 1995. The ratio of
current assets to current liabilities increased to 7.5:1 from 4.7:1 at December
31, 1995. Cash flows from operations for 1996 totaled $34,586, resulting
primarily from operations and partially offset by an increase in the parts and
supply inventories necessary to support service contracts on newer technologies.
The increase in the current ratio was due chiefly to the payment in January,
1996, of the short-term note payable issued by the Company in its acquisition of
CCS Systems, Inc. in December, 1995. 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, 1996, the Company's $750,000 revolving line of
credit with Citizens Bank of Maryland was renewed to continue until May, 1997.
There is presently no balance owed on this line of credit.
The Company's principal commitments at December 31, 1996 consisted of
obligations under operating leases for facilities.
<PAGE>
F-8
Item 7. Financial Statements and Supplementary Data
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARY
INDEX
Page
Report of Independent Auditors............................. F-2..........
Consolidated Balance Sheet as of December 31, 1996 ........ F-3..........F-4
Consolidated Statements of Operations for the years ended
December 31, 1996 and 1995................................. F-5..........
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1996 and 1995................................. F-6..........
Consolidated Statements of Cash Flows for the years ended
December 31, 1996 and 1995................................. F-7..........F-8
Notes to Consolidated Financial Statements ............... F-9..........F-17
. . . . . . . . . . . .
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
CSI Computer Specialists, Inc.
Rockville, Maryland
We have audited the accompanying consolidated balance sheet of
CSI Computer Specialists, Inc. and its subsidiary as of December 31,
1996, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the two years in the period ended December
31, 1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the consolidated
financial position of CSI Computer Specialists, Inc. and its subsidiary as of
December 31, 1996, and the consolidated results of their operations and their
cash flows for each of the two years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
MOORE STEPHENS, P. C.
Certified Public Accountants.
Cranford, New Jersey
February 7, 1997
<PAGE>
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1996.
Assets:
Current Assets:
Cash and Cash Equivalents $ 3,915,578
Accounts Receivable 1,082,056
Accounts Receivable - Related Party 130,771
Net Investment in Sales Type Leases - Current 94,610
Parts and Supplies 666,275
Prepaid Income Taxes 115,418
Prepaid Expenses 107,215
Miscellaneous Receivables 6,982
------------------
Total Current Assets 6,118,905
Property and Equipment:
Vehicles 69,920
Furniture and Fixtures 246,684
Equipment 666,196
Equipment Under Operating Leases 401,212
------------------
Totals - At Cost 1,384,012
Less: Accumulated Depreciation 898,352
------------------
Property and Equipment - Net 485,660
------------------
Other Assets:
Goodwill [Net of Accumulated Amortization of $53,400] 747,569
Net Investment in Sales Type Leases - Non-Current 62,268
Other Assets 53,501
-----------------
Total Other Assets 863,338
-----------------
Total Assets $ 7,467,903
==================
See Notes to Consolidated Financial Statements.
<PAGE>
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1996.
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable $ 337,054
Accrued Expenses 140,395
Deferred Income Taxes Payable 267,898
Customer Deposits 73,929
Current Maturities of Long-Term Debt 5,753
------------------
Total Current Liabilities 825,029
Long-Term Debt - Net of Current Maturities 6,844
------------------
Commitments and Contingencies --
Stockholders' Equity:
Preferred Stock - Authorized, 10,000,000 Shares of $.001 Par Value;
Issued and Outstanding, None --
Common Stock - Authorized, 25,000,000 Shares of $.001 Par Value;
Issued and Outstanding, 3,652,500 Shares 3,652
Common Stock - $.001 Par Value, Stock Subscribed and
Unissued - 75,000 Shares 75
Paid-in Capital 5,227,428
Retained Earnings 1,404,875
------------------
Total Stockholders' Equity 6,636,030
------------------
Total Liabilities and Stockholders' Equity $ 7,467,903
==================
See Notes to Consolidated Financial Statements.
<PAGE>
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended
December 31,
------------
1 9 9 6 1 9 9 5
------- -------
Revenues $ 10,835,678 $ 6,844,722
------------------ ------------------
Costs and Expenses:
Cost of Sales 7,389,387 4,313,380
Selling, General and Administrative 3,487,760 2,040,683
------------------ ------------------
Total Costs and Expenses 10,877,147 6,354,063
------------------ ------------------
Operating [Loss] Profit (41,469) 490,659
------------------ ------------------
Other Income [Expenses]:
Interest Income 207,720 114,438
Interest Expense (1,260) (36,032)
------------------ ------------------
Total Other Income 206,460 78,406
------------------ ------------------
Income Before Provision for Income Taxes 164,991 569,065
------------------ ------------------
Provision for Income Taxes:
Current 129,719 5,537
Deferred (66,974) 213,963
------------------ ------------------
Total Provision for Income Taxes 62,745 219,500
------------------ ------------------
Net Income $ 102,246 $ 349,565
================== ==================
Net Income Per Share $ .03 $ .12
================== ==================
Weighted Average Number of Shares
Outstanding 3,652,500 2,796,956
================== ==================
See Notes to Consolidated Financial Statements.
<PAGE>
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Total
Stock-
Common Stock Paid-in Retained holders'
Shares Amount Capital Earnings Equity
Balance - December 31, 1994 2,100,000 $2,100 $ -- $ 953,064 $ 955,164
Initial Public Offering 1,552,500 1,552 4,683,753 -- 4,685,305
Issuance Pursuant to Stock
Purchase Agreement -
December 28, 1995 75,000 75 543,675 -- 543,750
Net Income -- -- -- 349,565 349,565
--------- ------ ---------- --------- ---------
Balance - December 31, 1995 3,727,500 3,727 5,227,428 1,302,629 6,533,784
Net Income -- -- -- 102,246 102,246
--------- ------ ---------- ---------- ---------
Balance - December 31, 1996 3,727,500 $3,727 $5,227,428 $1,404,875 $6,636,030
========= ======= ========== ========== ==========
See Notes to Consolidated Financial Statements.
<PAGE>
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended
December 31,
------------
1 9 9 6 1 9 9 5
------- -------
Operating Activities:
Net Income $ 102,246 $ 349,565
------------- -------------
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation and Amortization 339,170 193,501
Amortization of Parts and Supplies 446,122 315,961
Provision for Bad Debts 35,926 40,000
Deferred Income Taxes (66,974) 213,963
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable 55,001 (214,545)
Net Investment in Sales-Type Leases (156,878) --
Parts and Supplies (753,052) (444,535)
Prepaid Income Taxes 48,025 --
Prepaid Expenses (5,067) (39,854)
Miscellaneous Receivables 1,547 (8,529)
Other Assets 13,274 (740)
Increase [Decrease] in:
Accounts Payable and Accrued Expenses (24,754) 86,261
Income Taxes Payable -- (364,373)
------------- -------------
Total Adjustments (67,660) (222,890)
------------- -------------
Net Cash - Operating Activities 34,586 126,675
------------- -------------
Investing Activities:
Net Cash Transferred - Acquisition of Subsidiary -- 258,699
Payment of Acquisition Costs (499,494) (38,807)
Acquisition of Property and Equipment (190,770) (340,569)
------------- -------------
Net Cash - Investing Activities (690,264) (120,677)
------------- -------------
Financing Activities:
Payments on Long-Term Debt (4,839) (9,905)
Payments on Note Payable - Officer -- (368,754)
Registration Costs -- (1,139,930)
Payments on Revolving Line of Credit -- (200,000)
Proceeds from Stock Offering -- 6,210,000
------------- -------------
Net Cash - Financing Activities (4,839) 4,491,411
------------- --------------
Net [Decrease] Increase in Cash and
Cash Equivalents (660,517) 4,497,409
Cash and Cash Equivalents - Beginning of Years 4,576,095 78,686
-------------- -------------
Cash and Cash Equivalents - End of
Years $ 3,915,578 $ 4,576,095
============= =============
See Notes to Consolidated Financial Statements.
<PAGE>
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended
December 31,
------------
1 9 9 6 1 9 9 5
------- -------
Supplemental Disclosures of Cash Flow Information:
Cash paid during the years for:
Interest $ 1,407 $ 36,032
Income Taxes $ 120,251 $ 390,641
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
On December 28, 1995, the Company purchased all of the issued and outstanding
shares of Capitol Computer Services, Inc. T/A CCS Systems for a total purchase
price of $1,128,750. On this date, $100,000 was paid with $485,000 payable in
January of 1996. The remaining $543,750 is payable in January 1998 in shares of
the Company's common stock based on a formula providing for the issuance of a
minimum of 75,000 shares and a maximum of 150,000 shares and calculated using
the then-closing bid price of the common stock.
See Notes to Consolidated Financial Statements.
<PAGE>
F-17
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[1] Corporate Organization and Principles of Consolidation
The consolidated financial statements include the accounts of CSI Computer
Specialists, Inc. and its wholly-owned subsidiary Capitol Computer Services,
Inc. T/A CCS Systems [the "Company"]. All intercompany balances and transactions
have been eliminated.
CSI Computer Specialists, Inc., a Delaware corporation, is the successor to
Computer Specialists, Inc., a Maryland corporation ["CSI-Maryland"], which was
incorporated in 1988. The Company was organized by CSI-Maryland to enable
CSI-Maryland to merge with and into the Company in March 1994, in order to
effectuate a reincorporation in the State of Delaware.
The Company, which operates primarily from Maryland, provides computer hardware
services, which primarily consist of maintenance and repair along with
installation and deinstallation of equipment, and sales of parts and equipment
to governmental and commercial entities in the Mid-Atlantic region of the United
States. The Company provides its services to customers primarily pursuant to
maintenance agreements for terms of one to three years.
[2] Summary of Significant Accounting Policies
A summary of the significant accounting policies in the preparation of the
accompanying consolidated financial statements follows:
Cash and Cash Equivalents - Cash equivalents are comprised of certain highly
liquid investments with a maturity of three months or less when purchased.
Parts and Supplies - Bulk purchases of spare parts and supplies which are
utilized to support maintenance contracts are recorded at cost and are amortized
to operations on a straight-line basis over a period ranging from eighteen to
twenty-four months. The Company also purchases certain parts for immediate use
which are charged to expense as incurred. Management estimates that this
methodology approximates a lower of cost or market inventory valuation on an
average cost basis. Actual results could differ from those estimates.
Property and Equipment and Depreciation - Property and equipment is recorded at
cost. Depreciation is provided for using declining balance methods based on
estimated useful lives of five to seven years. Equipment under operating leases
are depreciated over the terms of the respective leases, usually two to three
years. Expenditures for normal repairs and maintenance are charged against
income as incurred. Depreciation for the years ended December 31, 1996 and 1995
was $285,770 and $193,501, respectively.
Income Taxes - The provision for income taxes includes federal and state income
taxes currently payable and those deferred because of temporary differences
between the financial statement and tax bases of assets and liabilities. In 1996
the Company elected to change its method of reporting income for tax purposes to
the accrual method. Temporary differences between financial reporting and tax
reporting existing as of January 1, 1996 are being recognized over the next
five-year period [See Note 8].
Goodwill Policy - Amortization is provided on a straight-line basis over 15
years. Goodwill represents the excess of cost over the fair value of net assets
acquired.
Impairment - Management evaluates the period of amortization of intangible
assets to determine whether events and circumstances warrant revised estimates
of useful lives. Additionally, management reviews long-lived assets including
intangible assets for impairment whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. As of December 31,
1996, management expects these assets to be fully recoverable.
<PAGE>
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
[2] Summary of Significant Accounting Policies [Continued]
Stock Options Issued to Employees - The Company adopted Statement of Financial
Accounting Standards ["SFAS"] No. 123, "Accounting for Stock-Based
Compensation," on January 1, 1996 for financial note disclosure purposes and
applies the intrinsic value method of Accounting Principles Board ["APB"]
Opinion No. 25, "Accounting for Stock Issued to Employees," for financial
reporting purposes.
Advertising Costs - Advertising costs are expensed when incurred. Advertising
expense was $35,534 and $8,900 for the years ended December 31, 1996 and 1995,
respectively.
Revenue Recognition - The Company derives its revenue principally from fixed
price maintenance contracts, which it recognizes ratably over the term of the
contract. Revenue from computer equipment sales and performance under time and
materials contracts are recognized upon product shipment or the performance of
the related work.
The Company leases computer equipment under operating and sales type leases. The
determination of whether a computer lease is treated as an operating or sales
type lease is dependent on the terms of the lease and management's judgment as
to the collectibility of the lease payments.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Earnings Per Share - Earnings per share are calculated by dividing net earnings
by the weighted average common shares outstanding during 1996 and 1995
[3,652,500 and 2,796,956, respectively]. Options and warrants did not result in
dilution for the years ended December 31, 1996 and 1995.
[3] Accounts Receivable
Accounts receivable at December 31, 1996 consist of:
Receivables Under U. S. Government Contracts and Subcontracts:
Amounts Billed $ 144,635
Unbilled Amounts 146,822
Commercial and Other Receivables 1,117,477
---------------
Total 1,408,934
Less: Allowance for Doubtful Receivables 170,000
---------------
Total $ 1,238,934
----- ===============
[4] Leasing Activities
The Company's leasing operations consist principally of the leasing of computer
equipment to existing monthly maintenance customers. A number of the leases are
for terms of two to three years, and are cancelable at any time by the lessee.
If the lease goes to term, ownership of the equipment passes to the lessee. When
collectibility of lease payments is uncertain due to the cancelable terms of the
lease, and because of uncertainties regarding unreimburseable costs to the
Company, such leases are classified as operating leases. The Company also leases
equipment under sale-type leases. A summary of the Company's leasing activities
is as follows:
Sales Type Leases - Beginning January of 1996, the Company's leasing operations
consist principally of leasing computer equipment under sales-type leases
expiring in various years through 1999.
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3
[4] Leasing Activities [Continued]
Sales Type Leases [Continued] - Minimum lease payments to be received as of
December 31, 1996 are as follows:
Year ended Amount
---------- ------
December 31,
- ------------
1997 $ 112,488
1998 57,336
1999 9,428
2000 --
2001 --
---------
Total 179,252
Less: Interest Portion (22,374)
---------
Total $ 156,878
=========
Current Portion $ 94,610
Non-Current Portion $ 62,268
Operating Leases - The following summarizes equipment under operating leases at
December 31, 1996:
Computer Equipment $ 401,212
Accumulated Depreciation (285,274)
---------
Total $ 115,938
----- =========
Minimum future rentals to be received on operating leases as of December 31,
1996 are as follows:
Year ended Amount
---------- ------
December 31,
- -----------
1997 $ 121,880
1998 32,430
1999 --
2000 --
2001 --
---------
Total $ 154,310
----- =========
[5] Notes Payable
The Company has a note payable to General Motors Financing with an interest
rate of 9% and maturity date of January 11, 1998. The note payable was used to
finance the purchase of a vehicle.
December 31,
1 9 9 6
Note Payable to General Motors Financing $ 12,597
Less: Current Maturities 5,753
--------------
Long-Term Debt $ 6,844
-------------- ==============
<PAGE>
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4
[5] Notes Payable [Continued}
Maturities of long-term debt at December 31, 1996 is as follows:
1997 $ 5,753
1998 6,844
--------------
Total $ 12,597
----- ==============
[6] Revolving Line of Credit
The Company arranged for a bank line of credit with a maximum amount of
$750,000. The line bears interest at the rate of 1.0% over prime. The prime rate
at December 31, 1996 was 8.25%. The line is secured by accounts receivable,
general intangibles and parts and supplies, and is personally guaranteed by the
officers of the Company. The Company is required to maintain certain ratios and
$650,000 in tangible net worth. The Company was in compliance with the ratio and
tangible net worth requirements at December 31, 1996. There was no balance due
on the line of credit at December 31, 1996.
[7] Fair Value of Financial Instruments
Effective December 31, 1995, the Company adopted Statement of Financial
Accounting Standards ["SFAS"] No. 107, "Disclosure about Fair Value of Financial
Instruments," which requires the disclosure of the fair value of off- and
on-balance sheet financial instruments. The carrying amounts of cash and cash
equivalents, accounts receivable, accounts payable and notes payable are
estimated to approximate fair value because of the short maturities of those
instruments.
[8] Commitments
The Company leases facilities and vehicles under operating leases which expire
at various dates through 2002. Facility lease agreements provide for rent
increases based on changes in the Consumer Price Index and adjustments for a
proportionate share of real estate taxes and operating expenses. Minimum rental
commitments under all noncancelable operating leases with a remaining term in
excess of one year are as follows:
Year Amount
1997 $ 233,985
1998 207,683
1999 145,998
2000 128,407
2001 71,863
Thereafter 73,664
--------------
Total $ 861,600
----- ==============
Total rent expense for the years ended December 31, 1996 and 1995 approximated
$423,400 and $271,000, respectively.
In April 1995, the Company entered into employment agreements with its Chief
Executive Officer, Chief Financial Officer, and its President for an initial
period through 1999 with automatic renewals for successive one-year periods,
unless terminated by the Company or the executive. The agreements provide for
initial base compensation aggregating $378,250 subject to annual cost of living
increases, as well as a bonus to the Chief Executive Officer equal to 5.5% of
the Company's earnings before income taxes. Additional employment agreements
were entered into as part of the acquisition of Capitol Computer Services, Inc.
T/A CCS Systems [See Note 12].
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5
[9] Income Taxes
The components of income tax expenses are as follows:
December 31,
------------
1 9 9 6 1 9 9 5
------- -------
Current:
Federal $ 109,282 $ 5,537
State 20,437 --
--------------- -------------
Total Current 129,719 5,537
--------------- --------------
Deferred:
Federal (58,937) 182,938
State (8,037) 31,025
---------------- --------------
Total Deferred [Benefit] Expense (66,974) 213,963
--------------- --------------
Totals $ 62,745 $ 219,500
------ =============== ==============
The major components of deferred income tax assets and liabilities are as
follows:
December 31,
------------
1996
----
Deferred Tax Liability:
Effect of the Change from a Cash Basis of Income
Tax Reporting to an Accrual Basis $ (323,482)
Deferred Tax Asset:
Reserves 55,584
------------
Net Deferred Tax Liability $ (267,898)
============
The following table reconciles the U.S. federal income tax rate to the Company's
effective tax rate:
1 9 9 6 1 9 9 5
------- -------
U.S. Statutory Rate 34.0% 34.0%
Increases [Decreases] Resulting from:
State Income Taxes 7.0% 5.6%
Surtax Exemption (3.0)% (1.0)%
------------ ------------
Totals 38.0% 38.6%
------ =========== ============
[10] Related Party Transactions
For the years ended December 31, 1996 and 1995, the Company recognized revenue
approximating $490,000 [including equipment sales of $107,000], and $375,000
[including equipment sales of $86,000], respectively, from a corporation owned
by the Company's majority stockholder. At December 31, 1996, accounts receivable
include $130,771 from the related party.
<PAGE>
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6
[11] Major Vendors/Customers
The Company paid approximately $221,200 and $414,000 in 1996 and 1995,
respectively, to one vendor for subcontract services and the purchase of parts
and supplies. Management believes that there are alternative competitive sources
within the industry.
Revenue under U. S. Government contracts approximated 21% and 25%, respectively,
of total revenues for the years ended December 31, 1996 and 1995.
[12] Concentrations of Credit Risk
Financial instruments which potentially subject the Company to concentrations of
credit risk consist of cash and cash equivalents and accounts receivable.
Concentrations of credit risk with respect to accounts receivable are limited as
a result of the dispersion of the Company's customer base among both
governmental and commercial entities in the Mid-Atlantic area. Generally, the
Company does not require collateral or other security to support customer
receivables. The Company routinely assesses the financial strength of its
customers and based upon factors surrounding the credit risk of its customers
establishes an allowance for uncollectible accounts receivable and, as a
consequence, believes that its accounts receivable credit risk exposure beyond
such allowances is limited. The Company places its cash with high credit quality
financial institutions. The amount on deposit in any one institution that
exceeds federally insured limits is subject to credit risk. The Company
currently maintains cash of approximately $3,450,000 in financial institutions
which are subject to such risk.
[13] Acquisition of Subsidiary
The Company acquired 100% of the outstanding capital stock of Capitol Computer
Services, Inc. T/A CCS Systems, on December 28, 1995 for $1,128,750 in a
business combination accounted for under the purchase method of accounting. The
Company paid $100,000 of the purchase price at closing with $485,000 of the cash
purchase price due on January 6, 1996. The balance of the purchase price,
$543,750, is payable in January 1998 in shares of the Company's common stock
based on a formula providing for the issuance of a minimum of 75,000 shares and
a maximum of 150,000 shares and calculated using the then-closing bid price of
the common stock.
The purchase price of this acquisition exceeded the fair value of the net
assets of CCS Systems by $800,969 which is being amortized over 15 years under
the straight-line method.
Certain principal stockholders of CCS Systems and certain key employees entered
into employment agreements with CCS Systems in conjunction with the closing on
December 31, 1995. The employment agreements provide that CCS Systems will
employ each of such persons for varying terms of two, three, and five years at
salaries commensurate with their positions and duties. Each of the employment
agreements contain non-compete and confidentiality provisions.
The following pro forma unaudited results assume the above acquisition had
occurred at January 1, 1995:
December 31,
-----------
1 9 9 5
-------
Net Revenues $10,562,935
Net Income $ 330,701
Income Per Share $ .08
The pro forma information is not necessarily indicative of either the results of
operations that would have occurred had the acquisition been effective at the
beginning of the year or of the future results of operations.
<PAGE>
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7
[14] Initial Public Offering
During 1995, the Company completed an initial public offering of 1,552,500 units
at $4.00 per share, each consisting of one share of common stock and two Class A
common stock warrants exercisable at $4.50 per share from July 1996 through July
2000. The net proceeds to the Company were approximately $4.7 million.
[15] Stock Options
The Company adopted the CSI Computer Specialists, Inc. 1994 Stock Option Plan in
1994 which provides for the grant of both qualified and nonqualified stock
options to officers, directors, employees and consultants. The Stock Option Plan
has authorized the granting, in the aggregate, of options to purchase up to
200,000 shares of stock. Options granted under the Plan vest immediately.
The Company also adopted an incentive compensation plan in 1995, for the
majority stockholder whereby the stockholder has been granted a ten year option
to purchase up to 200,000 shares of common stock at an exercise price of $1.95
per share. The options are exercisable if the Company achieves certain earnings
levels as follows:
Earnings Before
Interest and Taxes Number of Shares
$ 1,200,000 100,000
$ 2,000,000 100,000
If it becomes probable that the above earnings levels will be achieved, the
Company will recognize compensation expense equal to the difference between the
fair market value and the exercise price pursuant to APB Opinion No. 25.
Achievement of the above earnings levels is likely to result in substantial
compensation expense to the Company in future years.
A summary of stock options activity under all plans is as follows:
1 9 9 6 1 9 9 5
------- -------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
Outstanding - January 1, 134,750 5.38 -- --
Granted 2,000 3.81 134,750 5.38
Exercised -- -- -- --
Forfeited/Expired (7,250) (5.38) -- --
-------- ------ -------- ------
Outstanding - December 31, 129,500 5.35 134,750 5.38
-------------------------- ======== ====== ======= ======
Exercisable - December 31, 129,500 5.35 134,750 5.38
-------------------------- ======== ====== ======= ======
Shares Available on December 31,
For Options that may be Granted 270,500 265,250
------------------------------- ======== =======
The Company applies APB Opinion No. 25 for stock options issued to employees in
accounting for its stock option plans for financial reporting purposes. The
exercise price for all stock options issued to employees during 1996 and 1995
was equal to the market price of the Company's stock at the date of grant.
Accordingly, no compensation expense has been recognized for the Company's
stock-based compensation plans.
<PAGE>
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #8
[15] Stock Options [Continued]
Had compensation cost for the Company's stock options issued to employees been
determined based upon the fair value at the grant date for stock options issued
under these plans pursuant to the methodology prescribed under Statement of
Financial Accounting Standards ["SFAS"] No. 123, "Accounting for Stock-Based
Compensation," the Company's net income and earnings per share would have been
increased, on a pro forma basis, by approximately $5,781, or $.0 per share for
the year ended December 31, 1996 because forfeitures exceeded grants of stock
options and reduced by approximately $173,892 or $.06 per share for the year
ended December 31, 1995. The weighted-average fair value of stock options
granted to employees used in determining the pro forma amounts is estimated at
$2.90 and $2.08, during 1996 and 1995, respectively, using the Black-Scholes
option-pricing model for the pro forma amounts with the following weighted
average assumptions:
December 31,
------------
1 9 9 6 1 9 9 5
------- -------
Risk-free Interest Rate 6.20% 5.89%
Expected Life 4 Years 4 Years
Expected Volatility 109.9% 39.01%
Expected Dividends N/A N/A
Net income and income per share as reported, and on a pro forma basis as if
compensation cost had been determined on the basis of fair value pursuant to
SFAS No. 123 is as follows:
December 31,
------------
1 9 9 6 1 9 9 5
------- -------
Net Income:
As Reported $ 102,246 $ 349,565
------------- --------------
Pro Forma $ 108,027 $ 175,673
------------- --------------
Income Per Share:
As Reported $ .03 $ .12
------------- --------------
Pro Forma $ .03 $ .06
-------------- --------------
[16] New Authoritative Pronouncements
The Financial Accounting Standards Board ["FASB"] issued Statement of Financial
Accounting Standards ["SFAS"] No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities." SFAS No. 125 is
effective for transfers and servicing of financial assets and extinguishment of
liabilities occurring after December 31, 1996. Earlier application is not
allowed. The provisions of SFAS No. 125 must be applied prospectively;
retroactive application is prohibited. Adoption on January 1, 1997 is not
expected to have a material impact on the Company. Some provisions of SFAS
No. 125, which are unlikely to apply to the Company, have been deferred by the
FASB.
The FASB has also issued SFAS No. 128, "Earnings per Share," and SFAS No. 129,
"Disclosure of Information about Capital Structure," in February 1997.
<PAGE>
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #9
[15] New Authoritative Pronouncements [Continued]
SFAS No. 128 simplifies the earnings per share ["EPS"] calculations required by
Accounting Principles Board ["APB"] Opinion No. 15, and related interpretations,
by replacing the presentation of primary EPS with a presentation of basic EPS.
SFAS No. 128 requires dual presentation of basic and diluted EPS by entities
with complex capital structures. Basic EPS includes no dilution and is computed
by dividing income available to common stockholders by the weighted-average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution of securities that could share in the earnings of an entity,
similar to the fully diluted EPS of APB Opinion No. 15. SFAS No. 128 is
effective for financial statements issued for periods ending after December 15,
1997, including interim periods; earlier application is not permitted. When
adopted, SFAS No. 128 will require restatement of all prior-period EPS data
presented; however, the Company has not sufficiently analyzed SFAS No. 128 to
determine what effect SFAS No. 128 will have on its historically reported EPS
amounts.
SFAS No. 129 does not change any previous disclosure requirements, but rather
consolidates existing disclosure requirements for ease of retrieval.
[17] Subsequent Events
The Company acquired 100% of the outstanding capital stock of Cintronix, Inc. on
January 10, 1997 for $1,300,000 in a business combination accounted for under
the purchase method of accounting. The Company paid $900,000 in cash and issued
313,726 shares of common stock having a value of $400,000 for the balance of the
purchase price. In addition, the Company placed $400,000 in an escrow account to
be held for two years in the event the existing shareholders elect to have the
stock issued redeemed for cash.
In addition, the Company acquired the business assets of Advanced Network
Systems, a subsidiary of American Bankers Association Service Corporation for
$200,000 in February 1997 in a business combination accounted for under the
purchase method of accounting.
The purchase price of these acquisitions exceeded the fair market value of the
net assets of Cintronix, Inc. and Advanced Network Systems by $950,000 and
$200,000, respectively, which will be amortized over 15 years under the straight
line method commencing in February and March 1997, respectively. For financial
reporting purposes, the results of operations of Cintronix, Inc., and Advanced
Network Systems will be included with the results of the Company beginning with
the relative acquisition dates.
Certain of the principal stockholders of Cintronix, Inc. and certain key
employees of both Cintronix, Inc. and Advanced Network Systems entered into
employment agreements with their respective companies in conjunction with the
closings of each acquisition. The employment agreements provide that each of the
Companies will employ each of such persons for varying terms of two to three
years at salaries commensurate with their positions and duties. Each of the
employment agreements contain non-compete and confidentiality provisions.
. . . . . . . . .
<PAGE>
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
n/a
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
Directors of Registrant
Donald C. Weymer
Chairman of the Board of Directors
Chief Executive Officer
Corporate Secretary
Donald C. Weymer has been the Chief Executive Officer and a director of the
Company since 1989 and has been the Corporate Secretary of the Company since
March, 1994, and was the Chief Financial Officer from March, 1994 until October,
1995. In 1991 Mr. Weymer founded Interactive Systems, Inc., ("ISI"), a
Virginia corporation, which is a data processing company which provides
outsourcing, timesharing and fundraising assistance to agencies of the federal
government, non-profit organizations and commercial clients. Mr. Weymer has
served as the Chief Executive Officer and the President of ISI from 1991 to the
present.
Term of Office: Mr. Weymer's term of office as director is three years expiring
June 14, 1998.
Age: 52
William F Pershin
Director
President
Chief Accounting Officer
William F. Pershin has been the President and a director of the Company since
December 1, 1988 and has been the Chief Accounting Officer of the Company since
March, 1994.
Term of Office: Mr. Pershin's current term as director is three years expiring
June 14, 1999.
Age: 42
Executive Officers of Registrant
Donald C Weymer
See Directors of Registrant.
William F Pershin
See Directors of Registrant.
James D Boccabella
Chief Financial Officer
Mr. Boccabella has been the Chief Financial Officer of the Company since October
of 1995. For the five years prior to that he owned and operated a public
accounting practice, James D. Boccabella, CPA, CFP
Term of Office: Unlimited until terminated by the Board of Directors.
Age: 43
Nominees For Director
N/A
Item 10. Executive Compensation
SUMMARY COMPENSATION TABLE
Annual Compensation
- --------------------------------------------------------------------------------
Other
Name Annual
and Compen-
Principal Salary Bonus sation
Position Year ($) ($) ($)
- --------------------------------------------------------------------------------
Donald C. Weymer: 1996 $163,404 $9,600 --
Chief Executive
Officer, Chairman
of the Board,
Secretary
1995 $155,625 $33,100 --
1994 $112,500 $55,000 $30,000(1)
William F.Pershin:1996 $136,168 -- --
President and
Director
1995 $129,688 -- --
1994 $125,000 $25,000 --
James D. 1996 $96,842 -- --
Boccabella:
Chief Financial
Officer
1995 $39,400 -- $18,355(2)
(1) Represents payment by the Company to Mr. Weymer for marketing and
management consulting services provided to the Company by Mr. Weymer.
(2) Represents payment by the Company to Mr. Boccabella for accounting and
management consulting services provided to the Company by Mr. Boccabella.
SUMMARY COMPENSATION TABLE
Long-Term Compensation
Awards Payouts
- --------------------------------------------------------------------------------
Name Restricted Under- All Other
and Stock lying LTIP Compen-
Principal Award(s) Options/ Payouts sation
Position Year ($)(#)SARS ($) ($)
- --------------------------------------------------------------------------------
Donald C. Weymer: 1996 none none none none
Chief Executive
Officer, Chairman
of the Board,
Secretary
1995 none none none none
1994 none none none none
William F.Pershin:1996 none none none none
President and
Director
1995 none none none none
1994 none none none none
James D. 1996 none none none none
Boccabella:
Chief Financial
Officer
1995 none Options to none none
acquire
25,000
shares of
class A
common
stock
Item 11. Security Ownership of Certain Beneficial Owners and Management
Security Ownership of Certain Beneficial Owners
Name and Address Amount and
Title of Class of Beneficial Owner Nature of Percent
Beneficial Owner of Class
- --------------------------------------------------------------------------------
Class A common stock Donald C Weymer 960,000 24.2%
common stock 2275 Research Boulevard
Suite 430
Rockville, Maryland 20850
Class A common stock William F Pershin 640,000 16.1%
common stock 2275 Research Boulevard
Suite 430
Rockville, Maryland 20850
Security Ownership of Management
Name and Address Amount and
Title of Class of Beneficial Owner Nature of Percent
Beneficial Owner of Class
- --------------------------------------------------------------------------------
See "Security Ownership of Certain Beneficial Owners" table above.
Item 12. Certain Relationships and Related Transactions
Donald C. Weymer
The Company provides computer maintenance services to Interactive Systems,
Inc., ("ISI") a Maryland corporation owned by Donald C. Weymer, a stockholder,
director and officer of the Company, pursuant to the terms of maintenance
agreements. Mr. Weymer is also the owner and chief executive officer of ISI.
During the fiscal years ended December 31, 1996 and 1995, approximately $490,000
(including equipment sales of $107,000) and $375,000 (including equipment sales
of $86,000) of the Company's revenues were generated by services rendered and
equipment sold to ISI by the Company. See Note 9 of the Financial Statements
included elsewhere within . Item 13. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K
No report on Form 8-K was filed during the final quarter of the year ended
December 31, 1996.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 8, 1997 By: Donald C. Weymer
- ---------------- ----------------
Date Donald C. Weymer, Chief Executive
Officer
May 8, 1997 By: James D. Boccabella
- ---------------- -------------------
Date James D. Boccabella, Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
May 8, 1997 By: Donald C. Weymer
- ----------- ----------------
Date Donald C. Weymer, Chairman of the
Board, Chief Executive Officer
and Director
May 8, 1997 By: William F. Pershin
- ----------- ------------------
Date William F. Pershin, President and
Director
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1996
<CASH> 3,915,578
<SECURITIES> 0
<RECEIVABLES> 1,408,934
<ALLOWANCES> 170,000
<INVENTORY> 666,275
<CURRENT-ASSETS> 6,118,905
<PP&E> 1,384,012
<DEPRECIATION> 898,352
<TOTAL-ASSETS> 7,467,903
<CURRENT-LIABILITIES> 825,029
<BONDS> 0
0
0
<COMMON> 3,652
<OTHER-SE> 6,632,378
<TOTAL-LIABILITY-AND-EQUITY> 7,467,903
<SALES> 10,835,678
<TOTAL-REVENUES> 11,043,398
<CGS> 7,389,387
<TOTAL-COSTS> 7,389,387
<OTHER-EXPENSES> 3,487,760
<LOSS-PROVISION> 35,926
<INTEREST-EXPENSE> 1,260
<INCOME-PRETAX> 164,991
<INCOME-TAX> 62,745
<INCOME-CONTINUING> 102,246
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 102,246
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
