SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1998
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.)
904 Wind River Lane Suite 100
Gaithersburg, Maryland 20878
(Address of principal executive offices) (Zip code)
301-921-8860
(Registrant's telephone number including area code)
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 ____
State the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Title Outstanding
Common Stock, par value $0.001 per share 4,116,226 shares at May 18, 1998
Transitional Small Business Disclosure Format (check one);
Yes___ No X
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
1998 1997
---------------- ---------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents 40,388 193,056
Accounts receivable 4,132,665 3,647,857
Net investment in sales-type leases - current 153,086 215,618
Inventory for resale 513,160 384,241
Parts and supplies 1,170,774 1,033,068
Prepaid income taxes 429,372 323,544
Prepaid expenses 94,279 173,031
---------------- ---------------
Total current assets 6,533,724 5,970,415
---------------- ---------------
PROPERTY AND EQUIPMENT - AT COST 1,784,985 1,702,375
Less accumulated depreciation 984,456 933,686
---------------- ---------------
800,529 768,689
---------------- ---------------
OTHER ASSETS
Goodwill (Net of accumulated amortization) 2,358,031 2,396,365
Net investment in sales-type leases - non-current 77,271 77,271
Cash - restricted 422,390 416,897
Other assets 87,081 96,573
---------------- ---------------
2,944,773 2,987,106
---------------- ---------------
10,279,026 9,726,210
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable 2,075,115 1,764,012
Accrued expenses 116,992 146,088
Revolving line of credit 1,653,839 1,146,839
Current maturities of long term debt 4,769 11,401
Deferred income taxes payable 207,623 182,835
---------------- ---------------
Total current liabilities 4,058,338 3,251,175
---------------- ---------------
LONG-TERM DEBT, less current maturities 12,575 8,445
---------------- ---------------
COMMITMENTS
SHAREHOLDERS' 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, 4,029,212 shares 4,030 3,966
Common stock - $0.001 par value, stock
subscribed and Unissued - 75,000 shares - 75
Paid-in capital 5,517,125 5,627,114
Retained earnin 686,958 835,435
---------------- ---------------
Total stockholders' equity 6,208,113 6,466,590
---------------- ---------------
10,279,026 9,726,210
================ ===============
See accompanying notes to condensed financial statements.
3
<PAGE>
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
March 31,
1998 1997
----------------- -----------------
Revenues
Maintenance services 3,076,332 2,235,632
Parts and equipment sales 3,515,575 3,028,099
----------------- -----------------
6,591,907 5,263,731
Costs and expenses
Cost of maintenance services 2,214,180 1,806,526
Cost of parts and equipment sales 3,050,760 1,929,981
Selling, general and administrative 1,543,699 1,309,794
----------------- -----------------
6,808,639 5,046,301
----------------- -----------------
Operating (loss)profit (216,732) 217,430
Other deductions
Net interest income (expense) (12,753) 35,053
----------------- -----------------
(Loss) Income before (benefit)
provision for income taxes (229,485) 252,483
Income taxes
Currently payable (105,796) 94,450
Deferred 24,788 2,950
----------------- -----------------
Total (benefit) provision for
income taxes (81,008) 97,400
----------------- -----------------
NET (LOSS) INCOME (148,477) 155,083
================= =================
Per share amounts
Net earnings per share (0.04) 0.04
================= =================
Weighted average number of shares
outstanding 4,029,212 3,966,226
================= =================
See accompanying notes to condensed financial statements.
4
<PAGE>
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
1998 1997
-------------- --------------
Net cash flows from operating activities $ (464,556) $ 111,661
-------------- --------------
Cash flows used in investing activities
Net cash transferred - acquisition of subsidiary - 13,907
Payment of subsidiary acquisition costs - (1,134,653)
Acquisition of property and equipment (82,610) (89,393)
-------------- --------------
Net cash used in investing activities (82,610) (1,210,139)
-------------- --------------
Cash flows used in financing activities
Payments on long-term debts (2,502) (493)
Acquisition of treasury stock (110,000) -
Increase in revolving line of credit 507,000 (169,000)
-------------- --------------
Net cash provided by (used in)
financing activities 394,498 (169,493)
-------------- --------------
NET INCREASE (DECREASE) IN CASH (152,668) (1,267,971)
Cash at beginning of period 193,056 3,915,578
-------------- --------------
Cash at end of period 40,388 2,647,607
============== ==============
Supplemental disclosure of cash flow information
Cash paid through March 31, 1998 and 1997 for:
Interest 14,095 28,465
Income taxes - 5,180
See accompanying notes to condensed financial statements
6
<PAGE>
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARY
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
The condensed financial statements at March 31, 1998 and for the three
month periods ended March 31, 1998 and 1997 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 therein 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 for the fiscal year ending December 31, 1997.
The results of operations for the three months ended March 31, 1998 are
not necessarily indicative of the results that may be expected for the entire
fiscal year ending December 31, 1998.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation
Certain statements made in this Quarterly Report on Form 10-QSB are
"forward-looking" statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements involve known and unknown risks,
uncertainties, and other factors that may cause actual results, performance, or
achievements of the Company to be materially different from any future results,
performance, or achievements expressed or implied by such forward-looking
statements. Although the Company believes that the expectations reflected in
such forward-looking statements are based upon reasonable assumptions, the
Company's actual results could differ materially from those set forth in the
forward-looking statements. Certain factors that might cause such a difference
include, but are not limited to, the timing of revenues, rapid technological
change, the demand for services for computer hardware systems and computer
equipment, the timing and amount of capital expenditures and other risks
detailed herein.
GENERAL
The Company provides a full range of computer hardware services,
including sales and maintenance of mainframe and mid-range computer equipment
and parts, network design and installation, computer upgrades, and installation
and de-installation of equipment. These services are provided to commercial
customers, agencies of federal, state and local governments, universities,
associations and hospitals primarily in the Mid-Atlantic region of the United
States, including West Virginia, Virginia, Maryland, the District of Columbia,
New Jersey, New York, Connecticut and Pennsylvania, and also 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 cannot be serviced in a cost
effective manner, is difficult to repair or replace, or requires unique
engineering expertise that is not applicable to equipment utilized by a
significant number of Company's other customers. The Company obtains such
subcontracting services through short-term agreements, and its profit margin
will generally be lower than if the work were not subcontracted. Accordingly,
operating results may fluctuate from period to period as a result of changes in
the level and nature of subcontracted services.
The sale of computer equipment accounts for a rapidly expanding portion
of the Company's business, and, as a result, revenues therefrom have and will
continue to fluctuate from period to period. This fluctuation has stabilized
somewhat with the acquisition of Cintronix, Inc., whose business is primarily
equipment sales, but which sales are also somewhat seasonal. Cross marketing
among the Company's subsidiaries and divisions should decrease these
fluctuations over time. 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 these sales of equipment are subject
to market conditions. Consequently, operating profits as a percentage of gross
sales are subject to fluctuation due to the volume and the makeup 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.
<PAGE>
RESULTS OF OPERATIONS
The Company's first quarter revenues of $6,591,907 was an increase of
25 % over the first quarter revenues of the prior year of $5,263,731. The
increase in net revenues resulted from sales growth in both maintenance services
and equipment sales. Maintenance revenues for the first quarter of 1998
increased approximately 38% over the first quarter of 1997, primarily from
expansion of the Company's book of business. Equipment sales for the first
quarter of 1998 increased 16% over the same period of 1997. Management intends
to increase marketing efforts to promote continued growth in both of these
areas, and anticipates that the marketing staffs of the Company and each of its
subsidiaries will be able to cross promote products and services. Maintenance
revenues accounted for approximately 47% and 43%, respectively, of the Company's
consolidated revenues for the first quarters of 1998 and 1997.
The Company's cost of sales as a percentage of revenues was 80%in the
first quarter of 1998 compared to 71% for the same period in 1997. A decrease in
the costs of maintenance services as a percentage of maintenance service income
was offset by a decrease in the profit margins on equipment sales. The decreased
costs of maintenance services resulted primarily from a current decrease in the
need for emergency replacement parts and decreased reliance on subcontracted
services. Subcontractor costs could continue to decrease as the necessary
expertise is further developed in-house to service newer technology; however, as
the Company enters into contracts on even more recent technology, the services
of subcontractors may still be required. Gross margins on equipment sales
dropped primarily due to the mix of equipment sold. As personal computer and
mid-range network computer sales increase, the normally lower margin on these
sales will offset the higher margins on mainframe computer sales, and decrease
the overall profit percentages.
Selling, general and administrative expenses as a percentage of net
revenues were 24% and 25% respectively, for the first quarter of 1998 and 1997.
The decrease in the percentage is primarily due to the larger base of the
increased sales . 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 selling, general and administrative expenses increased 18%
to $1,543,699 for the first three months of 1998 compared to $1,309,794 for the
same period of 1997. The increase is primarily attributable to hiring additional
marketing and office personnel to support the increased revenue base, as well as
the administrative costs of integrating the companies acquired in 1997.
The Company's operating loss of $216,732 for the first quarter of 1998
represents a 200% decrease in operating profits from an operating profit of
$217,430 for the first quarter of 1997. The decrease in operating profit was
primarily attributable to the overall increase in costs of sales compared to the
increase in revenues, as well as the increase in selling and administrative
costs related to building up sales staff and integrating the combined operations
of each of the Company's newly acquired businesses.
Net interest decreased 136% to a net expense for the first three months
of 1998 of $12,753 compared to net interest income of $35,053 for the same
period of 1997, primarily as a result of the decrease in investment earnings as
the remaining proceeds of the Company's 1995 initial public offering were
utilized for the 1997 acquisitions. The Company expects that net interest income
will continue to decrease until the Company starts generating additional cash
from operations.
Net income decreased 196% to a loss of $148,477 for the first quarter
of 1998 from a profit of $155,083 for the same period of the prior year,
primarily as a result of the high costs of sales, the increased selling and
administrative costs and the integration of the acquired businesses. The Company
expects that its cross marketing efforts, as well as cost-cutting efforts to
reduce duplication of administrative expenses, will improve its performance in
the future.
LIQUIDITY AND CAPITAL RESOURCES
Working capital, which consists principally of cash was $40,388 at
March 31,1998 compared to $193,056 at December 31, 1997. Cash flows used in
operations for the first quarter of 1998 totaled $464,556, resulting primarily
from operations and increased due to an increase in accounts receivable and the
parts and supply inventories necessary to support service contracts on newer
technologies. The ratio of current assets to current liabilities decreased to
1.6:1 from 1.8:1 at December 31, 1997. The decrease in the current ratio was due
chiefly to the use of Company cash to fund operations while the integration of
the Company's divisions and subsidiaries continues.
The Company has a $2.5 million revolving line of credit with Crestar
Bank which will expire in March, 1999. This line was acquired to replace the
separate lines held by the Company and Cintronix, Inc. At March, 31, 1998, the
balance owed on this line of credit was $1,653,839.
The Company's principal commitments at March 31, 1998 consisted of
obligations under operating leases for facilities.
The Company believes that its existing cash, as supplemented by expected cash
flow from operations and existing credit facility, is sufficient to satisfy its
currently anticipated working capital needs.
Year 2000 Issues
Year 2000 Compliance means the ability of software and other processing
capabilities to interpret and manipulate correctly all data that includes the
Year 2000 and dates thereafter. The Company principally sells and services
computer hardware and, to date, has not been confronted with Year 2000 issues in
providing such services. Further, the Company has surveyed all of its internal
business systems and software applications and determined that they are Year
2000 compliant. Consequently, the Company does not expect its business to be
adversely affected in any material respect because of Year 2000 issues.
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
1
(a) Exhibits
Exhibit
Number Title of Exhibit
3.4 ** Agreement and Plan of Merger between CSI Computer Specialists,
Inc. (Delaware) and Computer Specialists, Inc. (Maryland)
filed with the Securities and Exchange Commission as an
exhibit to the Registration Statement filed on July 19, 1995
(the "Registration Statement") and incorporated herein by
reference.
3.5 ** Bylaws of CSI Computer Specialists, Inc. (Registrant) filed
with the Securities and Exchange Commission as an exhibit to
the Registration Statement and incorporated herein by
reference.
3.7 ** Certificate of Amendment of Certificate of Incorporation of
CSI Computer Specialists, Inc. (Delaware) as filed with the
Secretary of State of the State of Delaware on August 5, 1994,
filed with the Securities and Exchange Commission as an
exhibit to the Registration Statement and incorporated herein
by reference.
4.1** Specimen Common Stock Certificate, filed with the
Securities and Exchange Commission as an exhibit to the
Registration Statement and incorporated herein by reference.
4.2 ** Specimen Warrant Certificate, filed with the Securities and
Exchange Commission as an exhibit to the Registration
Statement and incorporated herein by reference.
4.3 ** Form of Underwriter's Unit Purchase Option, filed with the
Securities and Exchange Commission as an exhibit to the
Registration Statement and incorporated herein by reference.
4.4 ** Form of Warrant Agreement by and among the Company, Biltmore
Securities, Inc. and Continental Stock Transfer & Trust
Company, amended from that which was filed with the Securities
and Exchange Commission as an exhibit to the Registration
Statement and incorporated herein by reference.
10.1 ** Form of Maintenance Agreement filed with the Securities and
Exchange Commission as an exhibit to the Registration
Statement and incorporated herein by reference.
10.2 ** Form of Subcontracting (Microcomputer Service) Agreement
filed with the Securities and Exchange Commission as an
exhibit to the Registration Statement and incorporated herein
by reference.
10.3 ** Form of Equipment Sales Agreement filed with the Securities
and Exchange Commission as an exhibit to the Registration
Statement and incorporated herein by reference.
10.6 ** Employment Agreement, dated April 7, 1994, by and between the
Company and Donald C. Weymer filed with the Securities and
Exchange Commission as an exhibit to the Registration
Statement and incorporated herein by reference.
10.7 ** Employment Agreement, dated April 7, 1994, by and between the
Company and William Pershin filed with the Securities and
Exchange Commission as an exhibit to the Registration
Statement and incorporated herein by reference.
10.8 ** CSI Computer Specialists, Inc. 1994 Stock Option Plan filed
with the Securities and Exchange Commission as an exhibit to
the Registration Statement and incorporated herein by
reference.
10.9 ** Plan for Incentive Compensation of Donald C. Weymer filed
with the Securities and Exchange Commission as an exhibit to
the Registration Statement and incorporated herein by
reference.
10.10 ** Revolving Commercial Loan Note, dated May 27, 1994, in
favor of Citizens Bank of Maryland in the principal amount of
$750,000 filed with the Securities and Exchange Commission as
an exhibit to the Registration Statement and incorporated
herein by reference.
10.11 ** Security Agreement, dated May 27, 1994, in favor of
Citizens Bank of Maryland and corresponding Financing
Statement filed with the Securities and Exchange Commission as
an exhibit to the Registration Statement and incorporated
herein by reference.
27. Financial Data Schedule.
** Previously filed as noted.
(b) 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.
May 19, 1998 By: /s/ James D. Boccabella
- ------------ --------------------------
Date James D. Boccabella, CPA
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 40,388
<SECURITIES> 0
<RECEIVABLES> 4,313,918
<ALLOWANCES> 181,253
<INVENTORY> 1,683,934
<CURRENT-ASSETS> 6,533,724
<PP&E> 1,784,985
<DEPRECIATION> 984,456
<TOTAL-ASSETS> 10,279,026
<CURRENT-LIABILITIES> 4,058,338
<BONDS> 0
0
0
<COMMON> 4,030
<OTHER-SE> 6,204,083
<TOTAL-LIABILITY-AND-EQUITY> 10,279,026
<SALES> 6,591,907
<TOTAL-REVENUES> 6,599,074
<CGS> 5,264,940
<TOTAL-COSTS> 5,264,940
<OTHER-EXPENSES> 1,543,699
<LOSS-PROVISION> 9,000
<INTEREST-EXPENSE> 19,920
<INCOME-PRETAX> (229,485)
<INCOME-TAX> (81,008)
<INCOME-CONTINUING> (148,477)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (148,477)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
