As filed with the Securities and Exchange Commission on August 15, 1997
FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1997
OR
|_|TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 0-26464
CSI Computer Specialists, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 52-1599610
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2275 Research Boulevard Suite 430
Rockville, Maryland 20850
(Address of principal executive offices) (Zip code)
301-921-8860
(Registrant's telephone number including area code)
Not applicable
(Former name, former address, and former fiscal year, if changed since last
report)
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No ____
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Check whether the registrant has filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court.
Yes ____ No ____
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
State the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Title Outstanding
Class A 3,966,226
Transitional Small Business Disclosure Format (check one);
Yes___ No X
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
1997 1996
---------------- ---------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 585,533 $ 3,915,578
Accounts receivable 2,943,973 1,219,809
Net investment in sales-type leases - current 203,714 94,610
Parts and supplies 1,449,702 666,275
Prepaid income taxes 70,802 115,418
Prepaid expenses 167,459 107,215
---------------- ---------------
Total current assets 5,421,183 6,118,905
---------------- ---------------
PROPERTY AND EQUIPMENT - AT COST 1,512,794 1,384,012
Less accumulated depreciation 914,019 898,352
---------------- ---------------
598,775 485,660
---------------- ---------------
OTHER ASSETS
Goodwill (Net of accumulated amortization) 2,493,552 747,569
Cash - restricted 410,438 -
Net investment in sales-type leases - non-current 99,068 62,268
Other assets 37,448 53,501
---------------- ---------------
3,040,506 863,338
---------------- ---------------
$ 9,060,464 $ 7,467,903
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable 1,059,839 337,054
Accrued expenses 196,128 140,395
Revolving line of credit 385,000 -
Current maturities of long term debt 5,753 5,753
Customer deposits 5,952 73,929
Deferred income taxes payable 272,994 267,898
---------------- ---------------
Total current liabilities 1,925,666 825,029
---------------- ---------------
LONG-TERM DEBT, less current maturities 18,833 6,844
---------------- ---------------
COMMITMENTS
STOCKHOLDERS' EQUITY
Preferred stock - authorized, 10,000,000
shares of $.001 par value $ - $ -
Common stock - authorized, 25,000,000
shares of $.001 par value; issued and
outstanding, 3,652,500 shares 3,966 3,652
Common stock - $.001 par value, stock subscribed and
unissued - 75,000 shares 75 75
Paid-in capital 5,627,114 5,227,428
Retained earnings 1,484,810 1,404,875
---------------- ---------------
Total stockholders' equity 7,115,965 6,636,030
---------------- ---------------
$ 9,060,464 $ 7,467,903
---------------- ---------------
<PAGE>
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
June 30,
1997 1996
----------------- -----------------
Revenues
Maintenance services 2,204,769 1,849,496
Parts and equipment sales 3,211,225 936,677
----------------- -----------------
5,415,994 2,786,173
Costs and expenses
Cost of maintenance services 1,758,174 1,243,606
Cost of parts and equipment sales 2,706,769 713,301
Selling, general and administrative 1,088,964 776,635
----------------- -----------------
5,553,907 2,733,542
----------------- -----------------
Operating profit (loss) (137,913) 52,631
Other income (deductions)
Interest income, net of interest expense 15,565 49,046
----------------- -----------------
Earnings (loss) before income taxes (122,348) 101,677
Income taxes (benefit)
Currently payable (47,200) 39,200
Deferred -0- -0-
----------------- -----------------
(47,200) 39,200
NET EARNINGS (LOSS) (75,148) 62,477
================= =================
Per share amounts
Net earnings (loss) per share (0.02) 0.02
================= =================
Weighted average number of shares
outstanding 3,966,226 3,652,500
================= =================
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Six Months Ended
June 30,
1997 1996
----------------- -----------------
Revenues
Maintenance services 4,440,401 3,655,445
Parts and equipment sales 6,239,325 2,074,822
----------------- -----------------
10,679,726 5,730,267
Costs and expenses
Cost of maintenance services 3,017,772 2,295,422
Cost of parts and equipment sales 5,183,679 1,709,498
Selling, general and administrative 2,398,758 1,521,438
----------------- -----------------
10,600,209 5,526,358
----------------- -----------------
Operating profit (loss) 79,517 203,909
Other income (deductions)
Interest income, net of interest expense 50,618 101,105
----------------- -----------------
Earnings (loss) before income taxes 130,135 305,014
Income taxes (benefit)
Currently payable 50,200 117,200
Deferred -0- -0-
----------------- -----------------
50,200 117,200
NET EARNINGS (LOSS) 79,935 187,814
================= =================
Per share amounts
Net earnings (loss) per share 0.02 0.05
================= =================
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)
Six Months Ended
June 30,
1997 1996
-------------- --------------
Net cash flows from operating activities $ (503,844) $ (169,881)
-------------- --------------
Cash flows used in investing activities
Net cash transferred - acquisition of subsidiary 13,907 -
Payment of subsidiary acquisition costs (1,960,642) (499,494)
Cash - restricted (400,000) -
Acquisition of property and equipment (146,455) (103,226)
-------------- --------------
Net cash used in investing activities (2,493,190) (602,720)
-------------- --------------
Cash flows used in financing activities
Payments on long-term debts (5,011) (2,150)
Decrease in revolving line of credit (328,000) -
-------------- --------------
Net cash used in financing activities (333,011) (2,150)
-------------- --------------
NET INCREASE (DECREASE) IN CASH (3,330,045) (774,751)
Cash at beginning of period 3,915,578 4,576,095
-------------- --------------
Cash at end of period 585,533 3,801,344
============== ==============
Supplemental disclosure of cash flow information
Cash paid through June 30, 1997 and 1996 for:
Interest 26,527 364
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 June 30, 1997 and for the three
and six month periods ended June 30, 1997 and 1996 are unaudited and reflect all
adjustments (consisting only of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of the financial
position and operating results for the interim periods. The condensed financial
statements have been prepared in accordance with the rules and regulations of
the Securities and Exchange Commission, and therefore omit certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles. The Company believes
that the disclosures contained in the condensed financial statements are
adequate to make the information presented not misleading. The financial
statements should be read in conjunction with the financial statements and notes
thereto, together with management's discussion and analysis of financial
condition and results of operations, contained in the Company's Annual Report on
Form 10-KSB.
The results of operations for the three months ended June 30, 1997 are
not necessarily indicative of the results for the entire fiscal year ending
December 31, 1997.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation
GENERAL
The Company provides a full range of computer hardware services,
including sales and maintenance of mainframe and midrange computer equipment and
parts, network design and installation, computer upgrades, and installation and
de-installation of equipment. These services are provided to commercial
customers, agencies of federal, state and local governments, universities,
associations and hospitals primarily in the Mid-Atlantic region of the United
States, including West Virginia, Virginia, Maryland, the District of Columbia,
New Jersey, New York and Pennsylvania, but also, through the May, 1997
acquisition of the assets of Phoenix Service, Inc., in Illinois and California..
The Company's principal business is providing computer maintenance and
repair services, which are provided under both fixed fee and time and materials
arrangements. Under the fixed fee arrangement, which is the primary method of
service, a customer pays a fixed monthly fee for the term of the agreement,
generally one to two years, for which the Company provides the parts and labor
for both scheduled preventative maintenance and emergency repairs. The Company
records the revenue from fixed fee contracts ratably over the term of the
contract, while the costs the Company incurs to provide the maintenance and
emergency repairs are charged to expense as incurred. Accordingly, the
profitability of the Company's maintenance and repair services can and will be
affected by period to period fluctuations in the number and severity of the
emergency repairs required by its customers, which the Company cannot predict or
control. Additionally, in certain circumstances the Company will choose to
provide the contracted-for services by subcontracting with others, particularly
when the equipment covered by the agreement is extremely expensive, difficult to
repair or replace, or requires unique engineering expertise that is not
applicable to equipment utilized by a significant number of customers. The
Company obtains such subcontracting services through short-term agreements, and
its profit margin will generally be lower than if the work was not
subcontracted. Accordingly, operating results may fluctuate from period to
period as the result of changes in the level and nature of subcontracted
services.
The sale of computer equipment accounts for a rapidly expanding portion
of the Company's business, and, as a result, revenues therefrom have and will
continue to fluctuate from period to period. This fluctuation is expected to
decrease due to 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 maintenance 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 based on 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 being facilitated by the acquisition in February, 1997 of
Advanced Network Systems ("ANS"). ANS provides network integration service and
sales to over three hundred companies and associations in the Washington, D.C.
metropolitan area. Further expansion into new geographic markets has been
achieved through the May, 1997 acquisition of the assets of Phoenix Service,
Inc. Phoenix provides mainframe sales and maintenance services on the Eastern
region of the country as well as outside Chicago, Illinois and San Francisco,
California. It is hoped that by introduction of the full line of products and
services that the Company can offer into these new geographic regions, further
revenue growth can be achieved.
RESULTS OF OPERATIONS
The Company's second quarter net revenues of $5,415,994 was an increase
of 94 percent over second quarter net revenues in the prior fiscal year of
$2,786,173, and the six month revenues of $10,679,726 represent a 86 percent
increase over the $5,730,267 achieved in the first six months of the prior year.
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 second
quarter and for the first six months of 1997 increased approximately 19 and 21
percent, respectively, over the second quarter and first six months of 1996,
primarily from expansion of the Company's book of business. Equipment sales for
the second quarter and first six months of 1997 increased 243% and 201%,
respectively, over the same periods of 1996, with the Company increasing its
sales by approximately 21 percent for the quarter and 36 percent for the first
six months and the balance of 222 percent for the quarter and 165 percent for
the first six months 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 the
Company and each of the subsidiaries will be able to cross-promote the other
companies' primary areas of expertise. Maintenance services accounted for
approximately 41 and 64 percent, respectively, of the Company's consolidated
revenues for the first six months of 1997 and 1996.
The Company's cost of sales as a percentage of second quarter and
six-month revenues was 82 and 77 percent, respectively, compared to 70 percent
in the same periods of 1996. An increase in the costs of maintenance services as
a percentage of maintenance service income combined with a small decrease in the
profit margin percentages on the equipment sales. The increase in the cost of
maintenance services primarily resulted from increased costs of emergency
replacement parts and greater reliance on subcontracted services for newer
technology being serviced by the Company. Additionally, gross margins in fiscal
1997 are adversely affected by the continued development of the Company's
Richmond operations and the integration of the acquired companies. The Company
expects that the costs of maintenance services as a percentage of maintenance
service income to possibly increase in future quarters as the Company expands
the mix of hardware which will be maintained under contracts and until the
Richmond operation is self-sufficient. But the Company hopes to partially offset
these costs by reducing subcontract expense as it develops additional in-house
expertise in the newer technologies, and by increasing both the book of fixed
fee agreements and the parts and equipment sales. As the Company expands its
equipment sales operations, gross margins will also drop as a percentage of
overall sales, due to the lower gross margins on equipment sales when compared
to maintenance sales. Margins on equipment sales decreased from 24 percent and
18 percent for the second quarter and the first two quarters, respectively, of
1996 to 16 and 17 percent, respectively, for the same periods of 1997. This is
seen as a direct result of the equipment sales generated by Cintronix, due to
the lower margins on those types of sales. The expected overall effect of the
increased volume of personal computer sales generated by Cintronix is to
stabilize fluctuations in the margins on equipment sales.
Selling, general and administrative expenses as a percentage of net
revenues were 20 and 22 percent for the second quarter and the first six months,
respectively, of 1997 , down from 28 and 27 percent, respectively, of 1996. This
is seen as being directly attributable to the larger increase of revenues when
compared to the increase in selling, general and administrative costs.. The
Company expects short-term fluctuations in this percentage in the future as it
adds to its technical support, marketing staff and other administrative
personnel in order to expand its customer base and increase equipment sales, but
also expects some stabilization as the Company is able to take advantage of
economies of scale and eliminate duplication from the combined Company
operations.
Net interest income decreased to $15,565 and $49,046 for the second
quarter and first six months of 1997, compared with $50,618 and $101,105 for the
same periods of the prior year. This is primarily due to the use by the Company
of the proceeds of its public offering to complete the acquisitions of
Cintronix, Inc. in January, 1997, Advanced Network Systems in February, 1997,
and the assets of Phoenix Service, Inc. in May, 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 of $62,477 and $187,814 for the second quarter and first six
months of 1996 decreased 220 and 57 percent, respectively, to a loss of $75,148
for the second quarter and net income of $79,935 for the first six months of
1997. The decrease for the quarter is primarily attributable to greater reliance
on subcontractors for newer technology for which the Company is providing
maintenance services when compared to the prior year, as well as the greater
cost of parts associated with that newer technology. Subcontractor costs could
decrease as the necessary expertise is developed in-house to service the newer
technology; however, as the Company signs contracts on even more recent
technology, the services of subcontractors will probably still be required. The
Company is now evaluating whether continuation of the Richmond operation is
justified, and an appropriate decision should be reached in the near future.
Expansion into other new geographic regions can be expected to adversely affect
overall results until the newly established operation obtains maintenance
contracts sufficient to cover minimum fixed operating costs, but further
expansion will probably be accomplished by the acquisition of existing
operations, as in the acquisition of the assets of Phoenix Service. In these
cases operating results may not be affected by such start-up losses, but will
instead reflect the impact of the amortization of any goodwill paid in the
acquisition, as occurred with the each of the acquisitions completed by the
Company.
The consistency of the Company's results of operations has been
significantly affected by the costs of geographic expansion and changes in the
computer market, as well as by the acquisitions which have changed the mix of
the Company's sales. The Company believes that in the future its results of
operations in a quarterly period could be impacted by factors such as increased
competition in a mainframe market that has been shrinking due to site
consolidations and conversions to mid-range network installations (which is a
more competitive market). The companies acquired are part of the plan to
position the Company to effectively compete in the mid-range network market. The
Company hopes to offer existing mid-range networks the expanded capabilities of
the mainframe technology available, as well as offer services connected with the
conversion of mainframe installations to mid-range, thus assuring continuity of
customer relationships. In addition, expansion of the maintenance services to
include the newer mainframe technology and laser printers, as well as expansion
of software support and help desk services will provide for continued growth of
the Company. The coordination of the marketing staffs of each of the
subsidiaries with that of the Company to cross-market each other's primary
expertise and to provide additional services to the combined list of customers
is also expected to increase the performance of the Company in the future.
LIQUIDITY AND CAPITAL RESOURCES
Working capital, which consists principally of cash and investments in
government securities for terms of three months or less, was $585,533 at June
30, 1997, compared to $3,915,578 at December 31, 1996. The ratio of current
assets to current liabilities decreased from 7.4:1 at December 31, 1996 to 2.8:1
at June 30, 1997. These decreases are primarily attributed to completion of the
acquisitions of Cintronix, Inc., Advanced Network Systems, and the assets of
Phoenix Service, Inc. in the first six months of 1997. In addition, working
capital was negatively impacted by a $400,000 escrow that was part of the
Cintronix acquisition and which is to be released in January of 1999. The
Company believes that its existing cash, as supplemented by cash flow from
operations and its existing credit facilities, is sufficient to satisfy its
current working capital needs.
The Company's existing $750,000 line of credit with Crestar Bank was extended to
August 31, 1997 and is presently being negotiated for renewal to May, 1998. In
addition, upon completion of the acquisition of Cintronix, Inc., the Company
guaranteed Cintronix's $1.3 million revolving line of credit with First Union
National Bank of Virginia. This credit line bears interest at prime plus 1%,
making the rate 9.75% at June 30, 1997, and the balance owed at June 30 was
$385,000.
The Company's other principal commitments at June 30, 1997 consisted of
obligations under operating leases for facilities.
Part II. Other Information
Item 1. Legal Proceedings
Item 5. Other Information
The Company completed the acquisition of the assets of Phoenix Service,
Inc. ("PSI") on May 30, 1997. Phoenix was a subsidiary of Phoenix American, Inc.
of San Rafael, CA, and provided computer maintenance services for Phoenix
Leasing, another subsidiary of Phoenix American, as well as its own list of
customers from its locations in New Jersey, Illinois and California. The
purchase price was $775,000, and this amount was paid in cash upon closing.
Item 6. Exhibits and Reports on Form 8-K
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CSI Computer Specialists, Inc.
August 15, 1997 By: James D. Boccabella
Date James D. Boccabella
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> JUN-30-1997
<CASH> 585,533
<SECURITIES> 0
<RECEIVABLES> 3,129,473
<ALLOWANCES> 185,500
<INVENTORY> 1,449,702
<CURRENT-ASSETS> 5,421,183
<PP&E> 1,512,794
<DEPRECIATION> 914,019
<TOTAL-ASSETS> 9,060,464
<CURRENT-LIABILITIES> 1,925,666
<BONDS> 0
0
0
<COMMON> 3,966
<OTHER-SE> 7,111,999
<TOTAL-LIABILITY-AND-EQUITY> 9,060,464
<SALES> 10,679,726
<TOTAL-REVENUES> 10,730,344
<CGS> 8,201,451
<TOTAL-COSTS> 10,600,209
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 15,500
<INTEREST-EXPENSE> 26,527
<INCOME-PRETAX> 130,135
<INCOME-TAX> 50,200
<INCOME-CONTINUING> 79,935
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 79,935
<EPS-PRIMARY> 0.02
<EPS-DILUTED> 0.02
</TABLE>
