SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------
FORM 10-KSB
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 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)
Securities registered pursuant to Section 12(b) of the Act:
Title of Securities Exchanges on which Registered
Common Stock, par value $0.001 per share OTB Bulletin Board
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 there is no 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. $28,954,839
As of July 31, 1999, the aggregate market value of Common Stock outstanding held
by non-affiliates of the issuer was $2,786,916 (computed by reference to the
average bid and asked price of the Common Stock) and the total number of shares
of Common Stock outstanding was 3,715,888.
Transitional Small Business Disclosure Format (check one):
Yes ___; No X
Certain statements made in this Annual Report on Form 10-KSB 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.
<PAGE>
CONTENTS
Page
Part I Item 1 Description of Business 4
Item 2 Description of Property 8
Item 3 Legal Proceedings 9
Item 4 Submission of Matters to a Vote of Security Holders 9
Part II Item 5 Market for Common Equity and Related Stockholder Matters 9
Item 6 Management's Discussion and Analysis 9
Item 7 Financial Statements F-1
Item 8 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 12
Part III Item 9 Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) 12
Item 10 Executive Compensation 13
Item 11 Security Ownership of Certain Beneficial Owners and
Management 14
Item 12 Certain Relationships and Related Transactions 15
Item 13 Exhibits List and Reports on Form 8-K 15
<PAGE>
PART 1
Item 1. Description of Business
General
CSI Computer Specialists, Inc. (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 mid-range computer equipment
and parts, network design and installation, computer upgrades, and installation
and de-installation of equipment. The Company provides its services to
commercial customers, 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, Connecticut, Pennsylvania, and in Illinois and
California.
In pursuit of its plans for geographic expansion, the Company opened
offices near Philadelphia, Pennsylvania in January, 1995 and in Richmond,
Virginia in December, 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., doing business as 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 its expansion efforts, the Company acquired Cintronix, Inc., which
specializes in the sale and servicing of personal computers, in January, 1997,
and Advanced Network Systems, which provides network integration service and
sales to companies and associations in the Washington, DC metropolitan area, in
February, 1997. The Company acquired the assets of Phoenix Service, Inc. in May,
1997. Phoenix Service provides mainframe sales and maintenance services in the
Eastern region of the country, as well as outside Chicago, Illinois and San
Francisco, California. The Company sold the assets of Cintronix, Inc., on June
30, 1999, pursuant to poor performance as discussed later in this Form 10-K.
Initially, the Company's business was limited to providing service for
computer mainframes manufactured by International Business Machines ("IBM") and
peripheral equipment, such as printers, disk drives, tape drives and computer
controllers. The Company has broadened its peripheral support to include
servicing for products manufactured by Memorex, Storage Technology and various
other original equipment manufacturers of input/output products. In addition,
the Company offers 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 provides 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.
The Company began actively selling computer equipment in 1993, and
management believes that current market conditions have afforded the Company
strong potential for growth. 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. Given the
Company's large existing customer base, the Company has what management believes
to be a "niche market audience," which enables the Company to "bundle" its
services to include the sale of equipment to a customer, the installation of
such equipment and the maintenance of the installed equipment on a continuing
basis. The acquisition of Cintronix, Inc. has enabled the Company to expand its
sales of mid-range and personal computer products, bringing purchasing volume to
levels that provide more competitive pricing from suppliers and distributors.
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.
Customers frequently upgrade or replace equipment and also use mainframes and
peripheral equipment manufactured by various vendors 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.
Management 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.
Maintenance Services
The Company provides third-party, multi-vendor computer hardware and
peripheral equipment maintenance services to commercial customers, 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,
mid-range 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 services for
individual computers or peripherals to providing services for many computers and
peripherals located in a customer's mainframe computer room. Services provided
by the Company consist primarily of scheduled preventive maintenance and
emergency remedial services. Preventive 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.
Most of the mainframe 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 the sale and servicing of IBM RISC
System/6000, IBM AS/400 and IBM ES/9000. In addition, the Company greatly
expanded its sale and servicing capabilities in the mid-range computer area with
the acquisitions of Cintronix, Inc.
and Advanced Network Systems in early 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 is obligated to pay a fixed amount on a monthly basis 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 will continue on a month-to-month basis
until such time as either party terminates the agreement. It has been the
Company's experience that very few of its maintenance agreements with its
customers are cancelled or discontinued upon expiration of their initial terms
given the monthly renewal provisions.
Most of the Company's maintenance agreements with agencies of the
federal government are entered into for terms of three to five years. However,
such maintenance agreements provide agencies an annual right to terminate the
contract in the event that the agencies do not receive the requisite
governmental funding. Revenues from such contracts are, therefore, dependent
upon annual governmental funding. Such termination rights have seldom been
exercised, however, and such maintenance agreements have terminated upon
expiration of their specified terms and, in some cases, have been renewed for
one-year periods.
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 existing maintenance
agreements. In such cases, the Company acts as the "prime contractor" for the
provision of computer maintenance services and the vendor acts as the
"subcontractor." The Company enters into such agreements for several reasons.
The Company may elect to enter into subcontracting agreements when the equipment
that is subject to a maintenance agreement is 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 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 believes that the loss of the services of any one
subcontractor would not have a material adverse effect on the Company's
business.
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. Generally, the
Company takes an order for equipment from a customer, contacts its suppliers to
ascertain the availability of the equipment, provides the customer with a quoted
price for the equipment and executes an agreement upon the customer's acceptance
of the terms. The Company does not, therefore, maintain a large inventory of
computer equipment, particularly mid-range and personal computer equipment,
which is readily available. Revenues from the sale of computer equipment have
steadily increased during recent years, with the largest increase resulting from
the sale of mid-range and personal computer equipment. The acquisition of
Cintronix, Inc. in 1997 significantly increased revenues from the sale of
mid-range and personal computer equipment, and the Company intends to continue
to expand this area of its business during the next few years. But affecting the
expansion of sales in this area are the increase in competition, especially from
the manufacturers, and changes in the buying patterns of the federal government.
Sales and Marketing
The Company currently employs approximately twenty-five full-time
marketing representatives. Most representatives direct their efforts to
promoting the Company's sales and services to commercial accounts, universities,
hospitals and associations in the Mid-Atlantic region, Illinois and California.
The remaining representatives market the Company's services primarily to federal
government agencies. The majority of the leads pursued by the marketing
representatives are generated by existing customers and by referrals from
various vendors. In addition, the Company utilizes the services of several
contract marketing representatives, who provide marketing services. To date, the
Company has done little advertising. However, the Company is in the process of
developing an effective marketing and advertising program, a primary part of
which will be the integration and cross-education of sales personnel to market
each subsidiary's and division's products and services to the others' customer
base.
Principal Suppliers and Subcontractors
The Company acquires from IBM a significant part of the equipment and
parts which it uses in connection with providing maintenance services. The
Company also relies on IBM to provide subcontracting services. Acquisitions of
parts and equipment for resale, especially personal computer and network
equipment, are purchased from a variety of suppliers, including Ingram Micro,
Pinacor, Merisel and Tech Data. 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 various vendors identified using this
service. Due to the significant number of comparable vendors of these products,
the Company does not feel that the loss of any one supplier would have a
material adverse effect on the Company's business.
Customers
Historically, most of the Company's direct revenues are derived from
services performed through maintenance agreements. However, with the acquisition
of Cintronix, Inc., equipment and parts sales accounted a larger part of the
Company's combined revenues. The percentage of commercial customers serviced by
the Company pursuant to maintenance agreements for the fiscal years ended
December 31, 1998 and 1997 equaled approximately 82% and 79%, respectively, of
all customers serviced by the Company pursuant to maintenance agreements.
Federal government agencies serviced pursuant to maintenance agreements
accounted for approximately 18% and 21%, respectively, of the Company's
customers for the fiscal years ended December 31, 1998 and 1997. Revenues
derived from time and materials agreements approximated 5% and 7%, respectively,
of the Company's gross revenues for the fiscal years ended December 31, 1998 and
1997. Revenues generated by parts and equipment sales, represented approximately
55% and 58%, respectively, of gross revenues for the fiscal years ended December
31, 1998 and 1997.
The Company's customers generally have been loyal. It has been the
Company's experience that most of its maintenance agreements are renewed.
Currently, no one customer represents more than 7% of the total revenues of the
Company. The Company's commercial customers include American Management Systems,
Inc., Lockheed Martin, Northrop Grumman, IBM, Interactive Systems, Inc. ("ISI"),
ACS, Amdahl, Blue Cross/Blue Shield of Washington, INOVA Health System and
Medlantic Health Care System, Inc.
Business Strategy
The objectives of the Company are, through the provision of currently
offered and new services, to increase its customer base and to also increase
equipment sales. Management believes that increasing the Company's customer base
can be achieved by the cross marketing of products and services between the
Company and its acquired subsidiaries and divisions, as well as the expansion of
sales and servicing of additional mainframe and mid-range computers. The Company
can also realize these objectives by expanding its business to provide sales and
service outside of the Mid-Atlantic region into other geographical locations.
Management also believes that it can continue to increase its sales of parts and
equipment as a result of the Company's designation as a "Value Added Reseller"
of computer equipment produced by various manufacturers, and through the
provision of 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. The acquisition of Cintronix, Inc., resulted in
increased parts and equipment sales. Changes in the mid-range computer parts and
equipment sales are expected in the future as competition increases and as
profit margins decrease, and the Company sold certain assets of Cintronix, Inc.,
in June, 1999, in response to these changes.
Acquisitions
The Company's long-term plan has been to pursue its growth and
acquisition strategy on both a national and regional level. The Company
implemented this plan on a national level in 1997when it acquired the assets of
Phoenix Service, Inc., which gives the Company the ability to develop business
in major population areas in California and Illinois where it had not previously
been represented. Management had hoped that the acquisitions of Cintronix, Inc.
and Advanced Network Systems in early 1997 would further the Company's goal of
developing regional clusters of sales and service representatives to improve
customer service and to gain greater market penetration, but the expected
integration of these acquisitions and the projected increase in marketing and
decrease in costs due to economies of scale failed to materialize in 1998. Only
the Phoenix Service division of the Company provided significant expansion in
growing the customer base profitably. The disappointing performance of these
acquisitions caused the Company to take a one-time charge of approximately $1.7
million to write down the carrying value of these companies due to the
impairment of the related assets, primarily goodwill. In addition, the Company
sold certain of the assets of Cintronix, Inc. in June, 1999, in response to the
poor performance, and in an effort to stem the losses generated by changes in
the personal computer equipment and sales market. The Company now plans to focus
its efforts on the core business of mainframe computer maintenance and sales,
and to take advantage of opportunities for expanding national accounts in this
segment of operations. The Company does not presently anticipate any further
acquisitions until it has sufficiently recovered from the disappointing
performance in 1998 of the acquired companies and the overall effect on the
combined operations of the Company, and its plans to accomplish this include
more aggressive integration of the companies into the parent's operations.
The Company could be subject to liabilities arising from an acquisition
in the event the Company has assumed unknown or contingent liabilities or in the
event such liabilities are imposed on the Company. In an effort to minimize such
risks, prior to making acquisitions, the Company has conducted due diligence
investigations of its targets. In addition, the Company has sought to avoid such
liabilities by purchasing only selected assets and assuming selected liabilities
of certain acquirees and seeking indemnification. There can be no assurance,
however, that these efforts will result in the Company's avoidance of any such
liabilities, which could have a material adverse effect on the Company's
financial condition.
Employees
The Company has approximately 160 full-time employees who are located
at the Company's headquarters in Gaithersburg, Maryland and in nine cities in
the Mid-Atlantic region, Illinois and California.
Item 2. Description of Property
The Company's headquarters are located in Gaithersburg,
Maryland (the "Gaithersburg facility"). In addition to the Gaithersburg
facility, the Company maintains its National Support Center in Beltsville,
Maryland (the "Beltsville facility"); sales and marketing offices in Towson,
Maryland ("the Towson facility"), Fairfield, New Jersey (the "Fairfield
facility"), and Addison, Illinois (the "Addison facility"); and office and
warehouse space in Moorestown, New Jersey (the "Moorestown facility"),
Sunnyvale, California (the "Sunnyvale facility") and Richmond, Virginia (the
"Virginia facility"). In addition, CCS Systems, Inc., a wholly-owned subsidiary
of the Company, maintains its offices and service facilities in the Company's
Gaithersburg and Beltsville facilities, and Cintronix, Inc., the other
wholly-owned subsidiary of the Company, maintains its offices in Annapolis,
Maryland (the "Annapolis facility").
The Gaithersburg facility is leased by the Company pursuant to a lease
having a term of ten years, which term expires in November, 2007. The
Gaithersburg facility consists of 12,566 square feet and is used by the Company
primarily as general office space. The monthly rental payment for such space is
approximately $13,350 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 in October, 2002.
The monthly rental payment for such space is $13,912 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, 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 Fairfield facility is used by marketing personnel of the Company.
The lease is for a five year period and expires in September, 2003. The monthly
rental payment for such space is $2,600.
The Addison facility is used by marketing personnel of the Company and
includes some warehouse space. The lease is for a five-year period and expires
in February, 2001. The monthly rental payment for such space is $2,604.
The Moorestown facility is leased by the Company pursuant to a lease
having a term of five years, which term is scheduled to expire in February,
2004. The Moorestown facility consists of approximately 19,200 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 $10,160 per month.
The Sunnyvale facility is leased by the Company pursuant to a lease
having a term of two years, which term is scheduled to expire on June 22, 1999.
The Sunnyvale facility consists of approximately 3,726 square feet and is used
by the Company for storage and warehousing of equipment, parts and supplies for
accounts in that service area, as well as office space for the computer
engineers assigned to that area. The monthly rental payment for such space is
$5,384 and is subject to annual increases.
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 that 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 Annapolis facility is leased by Cintronix, Inc. pursuant to a lease
having a term expiring in October, 1999. The Annapolis facility consists of
approximately 6,000 square feet and is used primarily for housing the sales,
administrative and service personnel of such company, and for storage and
warehousing of equipment, parts and supplies en route to customers under sales
agreements. The monthly rental payment for such space is $4,377 and is subject
to annual increases.
In addition to the foregoing facilities, the Company maintains local
parts storage facilities in various locations throughout the Mid-Atlantic region
of the United States and in Illinois to provide local support to area accounts.
The monthly rental for these storage centers is less than $100 each. The
facilities are leased pursuant to month-to-month leases. In the event that any
lease is terminated or not otherwise renewed, management believes that the
Company would be able to lease adequate space elsewhere on terms comparable to
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 in the foreseeable future.
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The Company's Common Stock trades on the OTC Bulletin Board under the symbol
"CSIS". The following table sets forth the range of high and low trade price
information for the periods indicated:
1st Quarter 1997 High 2 5/8 Low 1 3/16
2nd Quarter 1997 High 2 5/8 Low 1 13/16
3rd Quarter 1997 High 1 15/16 Low 1
4th Quarter 1997 High 1 9/16 Low 25/32
1st Quarter 1998 High 1 1/2 Low 3/4
2nd Quarter 1998 High 1 1/16 Low 9/16
3rd Quarter 1998 High 1 Low 13/32
4th Quarter 1998 High 1 Low 21/64
1st Quarter 1999 High 3/4 Low 1/2
2nd Quarter 1999 High 7/8 Low 7/16
As of June 13, 1998, the Company's Common Stock was held by approximately 40
holders of record. As of June 1, 1997, the Company's Common Stock was held by
approximately 35 holders of record and approximately 732 beneficial holders. The
Company believes that it continues to have in excess of 700 beneficial holders.
The Company has never declared or paid a cash dividend and has no present plan
to do so in the foreseeable future. The Company currently intends to retain its
future earnings, if any, to fund the development and finance the growth of its
business. The amount and timing of any future dividends will depend on general
business conditions encountered by the Company, as well as the financial
condition, earnings and capital requirements of the Company, and such other
factors as the Board of Directors of the Company may deem relevant.
***
Item 6. Management's Discussion and Analysis
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 the 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 expanded rapidly in 1997 and
leveled out in 1998, but, due to increased competition, decreases in profit
margins and changes in purchasers' buying patterns, revenues therefrom are
likely to show some fluctuation from period to period. 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.
RESULTS OF OPERATIONS
Revenues for the fiscal year ended December 31, 1998 increased by 20%
to $28,954,839 compared to revenues of $24,185,609 for the fiscal year ended
December 31, 1997. This increase in annual net revenues resulted from sales
growth in both maintenance services and equipment sales. Maintenance revenues
increased principally due to growth in the Company's book of fixed fee
agreements, both in number and dollar amount of the agreements. Maintenance
revenues for 1998 increased by 28% to $12,965,040 compared to maintenance
revenues of $10,111,099 for 1997. Maintenance services accounted for
approximately 45% of the Company's revenues for 1998 compared to 42% for 1997.
Equipment and parts sales increased 13% to $15,989,799 for 1998 compared with
$14,074,510 for 1997, comprising 55% of sales in 1998 and 58% of sales in 1997.
The Company's cost of sales as a percentage of revenues was 86% in 1998
compared to 82% in 1997. An increase in the costs of maintenance services as a
percentage of maintenance service income was combined with an increase in
equipment sales on which profit margins percentages are lower. The increased
costs of maintenance services 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 newer technology; however, as the Company enters into
contracts on even more recent technology, the services of subcontractors may
still be required. Additionally, gross margins in fiscal 1998 have been
adversely affected by the costs associated with difficulties encountered in
integrating the Company's subsidiaries with parent company 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 that will be maintained under contracts and as the
competition based on pricing results in lower margins. The Company expects 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 23% and 22%, respectively, for 1998 and 1997. 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 25% to $6,655,829 for 1998 compared to
$5,331,448 for 1997. The increase in amount and the percentage is primarily
attributable to charges for uncollectible debts, increases in utility and
occupancy charges for new facilities, and increases in professional fees, as
well as costs attributable to trying to integrate the subsidiaries' operations
with the parent company.
The Company took a one-time charge to operations of approximately $1.7
million in writing off the goodwill attributable to several of the acquisitions
the Company made in 1995 and 1997. This charge was taken because the expected
cash flows from these operations were less than the carrying value of the
investment in these companies. The Company has taken steps to recover the
expected earning capacity that existed at the time that the acquisitions took
place, primarily by changes in management and consolidation of certain of the
companies with the parent company operations.
The Company's operating loss for the fiscal year ended December 31,
1998 increased to a loss of $4,248,134 compared to a loss of $919,378 for 1997.
The increase in operating loss was primarily attributable to the overall
increase in costs of sales compared to the increase in revenues, increase in
selling and administrative costs related to building up sales staff and
integrating the combined operations of each of the newly acquired businesses and
certain increased charges, and finally by the one-time charge for decreasing the
carrying value of certain of the subsidiaries.
Net interest expense increased to net interest expense of $82,470,
compared to net interest income of $39,317 for 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 and the
Company made more use of its revolving line of credit to provide working
capital. The Company expects that net interest expense will continue to increase
until the Company starts generating additional cash from operations.
Net loss increased to a loss of $3,986,475 for 1998 from a loss of
$569,440 for the prior year, primarily as a result of the higher costs of sales,
the increase in selling and administrative costs and the integration of the
acquired companies, and the one-time charge for the writedown of the carrying
value of several of the Company's acquisitions. The Company expects that its
cross marketing efforts, as well as cost-cutting efforts to reduce duplication
of administrative expenses, and the steps taken to effect control over the
operations of several of the subsidiaries will improve its performance in the
future.
The Company's results of operations have been adversely affected in the
last year by increased competition in the computer market, as well as management
time and expenses associated with integrating the Company's acquisitions.
Management is now focused on the expansion of the core business of the Company,
primarily maintenance services, and taking advantage of what are perceived to be
favorable conditions for expansion in this industry.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $410,848 at December 31, 1998, compared to
$2,719,240 at December 31, 1997. Cash flows used in operations for 1998 totaled
$962,596, resulting primarily from operations and by an increase in accounts
receivable and the parts and supply inventories necessary to support service
contracts on newer technologies, and partially offset by an increase in accounts
payable and accrued expenses. The ratio of current assets to current liabilities
decreased to 1.1:1 from 1.8:1 at December 31, 1997. The decrease in the current
ratio was due chiefly to the use of the Company's line of credit to fund
operating losses.
The Company has a $2,500,000 revolving line of credit with Crestar Bank
which expired in October, 1998 and continued under a forbearance agreement until
May, 1999, until the financial operations of the Company could be reevaluated by
the bank. The bank has since rejected extending this line for another year, but
has extended the line until August, 31, 1999, or until the Company has acquired
alternative financing. At December 31, 1998, the balance owed on this line of
credit was $2,308,656.
The Company's principal commitments at December 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 facilities, will be
sufficient to satisfy its currently anticipated working capital needs.
Management acknowledges that failure to renew the line of credit with Crestar
Bank could significantly affect the ability of the Company to meet short-term
working capital requirements, and is exploring other options to provide
alternative financing.
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 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>
Item 7. Financial Statements and Supplementary Data
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARIES
INDEX
Page
Reports of Independent Auditors ............................. F-2........F-3
Consolidated Balance Sheet as of December 31, 1998 .......... F-4........F-5
Consolidated Statements of Operations for the years ended
December 31, 1998 and 1997................................... F-6
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1998 and 1997................................... F-7
Consolidated Statements of Cash Flows for the years ended
December 31, 1998 and 1997................................... F-8........F-9
Notes to Consolidated Financial Statements .................. F-10.......F-20
. . . . . . . . . . . .
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
CSI Computer Specialists, Inc.
We have audited the accompanying consolidated balance sheet of
CSI Computer Specialists, Inc. and Subsidiaries as of December 31, 1998, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of CSI Computer
Specialists, Inc. and Subsidiaries as of December 31, 1998, and the results of
their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared
assuming the Company will continue as a going concern. As discussed in Note 2 to
the financial statements, the Company has suffered recurring losses from
operations that raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to this matter are also described in Note
2. The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
May 28, 1999, except for the fourth paragraph of Note 12, as to which the date
is June 30, 1999
<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 statements of
operations, stockholders' equity, and cash flows of CSI Computer Specialists,
Inc. and subsidiaries for the year ended December 31, 1997. 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 audit.
We conducted our audit 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 audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the consolidated results of
their operations and their cash flows of CSI Computer Specialists, Inc. and
subsidiaries for the year ended December 31, 1997, in conformity with generally
accepted accounting principles.
MOORE STEPHENS, P. C.
Certified Public Accountants.
Cranford, New Jersey
April 8, 1998
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation in this annual report on Form 10-KSB of our
report dated April 8, 1998, on our audit of the consolidated financial
statements of CSI Computer Specialists, Inc. and its subsidiaries as of December
31, 1997 and for the two years in the period ended December 31, 1997.
MOORE STEPHENS, P. C.
Certified Public Accountants.
Cranford, New Jersey
August 31, 1999
<PAGE>
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998
Assets:
Current Assets:
Cash $ 49,035
Accounts Receivable 3,483,934
Accounts Receivable - Related Party 138,500
Net Investment in Sales Type Leases - Current 118,502
Resale Inventory 513,179
Parts and Supplies 926,044
Prepaid Income Taxes 343,662
Prepaid Expenses 104,427
Miscellaneous Receivables 25,198
---------------
Total Current Assets 5,702,481
Property and Equipment:
Vehicles 122,787
Furniture and Fixtures 284,434
Equipment 1,286,318
Leasehold Improvements 143,193
---------------
Totals - At Cost 1,836,732
Less: Accumulated Depreciation 1,131,490
Property and Equipment - Net 705,242
---------------
Other Assets:
Cash - Restricted 443,846
Goodwill 500,890
Deferred Tax Asset (net of valuation allowance of $300,000) 145,000
Net Investment in Sales-Type Leases - Noncurrent 72,360
Other Assets 96,403
---------------
Total Other Assets 1,258,499
Total Assets $ 7,666,222
===============
The accompanying notes and independent auditors' reports should be read in
conjunction with the consolidated financial statements.
<PAGE>
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable $ 2,713,031
Accrued Expenses 262,246
Bank Revolving Lines of Credit 2,308,656
Current Maturities of Long-Term Debt 7,700
--------------
Total Current Liabilities 5,291,633
Long-Term Debt - Net of Current Maturities 4,474
--------------
Total Liabilities 5,296,107
Commitments --
Redeemable Common Stock - 313,726 shares 400,000
--------------
Stockholders' Equity:
Preferred Stock - Authorized, 10,000,000 Shares of $.001 Par Value;
Issued, None --
Common Stock - Authorized, 25,000,000 Shares of $.001 Par Value;
Issued and Outstanding, 3,715,888 Shares 3,716
Paid-in Capital 5,117,439
Accumulated Deficit (3,151,040)
Total Stockholders' Equity 1,970,115
Total Liabilities and Stockholders' Equity $ 7,666,222
==============
The accompanying notes and independent auditors' reports should be read in
conjunction with the consolidated financial statements.
<PAGE>
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended
December 31,
1 9 9 8 1 9 9 7
Revenues $28,954,839 $24,185,609
----------- -----------
Costs and Expenses:
Cost of Sales 24,825,990 19,773,539
Selling, General and Administrative 6,655,829 5,331,448
Asset Impairment 1,721,154 --
----------- -----------
Total Costs and Expenses 33,202,973 25,104,987
----------- -----------
Operating [Loss] (4,248,134) (919,378)
----------- -----------
Other Income [Expense]:
Interest Income 104,082 114,318
Interest Expense (186,552) (75,001)
----------- -----------
Total Other Income [Expense] (82,470) 39,317
----------- -----------
[Loss] Before Benefit for Income Taxes (4,330,604) (880,061)
----------- -----------
[Benefit] for Income Taxes:
Current (16,294) (225,558)
Deferred (327,835) (85,063)
----------- -----------
Total [Benefit] for Income Taxes (344,129) (310,621)
----------- -----------
Net [Loss] $ (3,986,475) $ (569,440)
============ ============
Net [Loss] Per Share $ (0.99) $ (0.14)
============ ============
Weighted Average Number of Shares Outstanding 4,029,614 3,966,126
=========== ============
The accompanying notes and independent auditors' reports should be read in
conjunction with the consolidated financial statements.
<PAGE>
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Paid-in
Shares Amount Capital
Balance - December 31, 1996 3,727,500 $ 3,727 $ 5,227,428
Issuance Pursuant to Stock
Purchase Agreement -
January 10, 1997 313,626 314 399,686
Net [Loss] -- -- --
---------- -------- ------------
Balance - December 31, 1997 4,041,126 4,041 5,627,114
Issuance Pursuant to Stock
Purchase Agreement -
December 28, 1995 75,000 75 (75)
Redemption of Stock (86,512) (86) (109,914)
Reclassification of
Redeemable Common Stock (313,726) (314) (399,686)
Net [Loss] -- -- --
--------- -------- -------------
Balance - December 31, 1998 3,715,888 $ 3,716 $ 5,117,439
========== ======== =============
The accompanying notes and independent auditors' reports should be read in
conjunction with the consolidated financial statements.
<PAGE>
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Retained
Earnings Total
(Accumulated Stockholders'
Deficit) Equity
Balance - December 31, 1996 $ 1,404,875 $ 6,636,030
Issuance Pursuant to Stock
Purchase Agreement -
January 10, 1997 -- 400,000
Net [Loss] (569,440) (569,440)
--------------- --------------
Balance - December 31, 1997 835,435 6,466,590
Issuance Pursuant to Stock
Purchase Agreement -
December 28, 1995 -- --
Redemption of Stock -- (110,000)
Reclassification of
Redeemable Common Stock -- (400,000)
Net [Loss] (3,986,475) (3,986,475)
--------------- -------------
Balance - December 31, 1998 $ (3,151,040) $ 1,970,115
=============== =============
The accompanying notes and independent auditors' reports should be read in
conjunction with the consolidated financial statements.
<PAGE>
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended
December 31,
1 9 9 8 1 9 9 7
Cash Flows from Operating Activities:
Net [Loss] $ (3,986,475) $ (569,440)
---------------- ----------------
Adjustments to Reconcile Net Loss to
Net Cash Used in Operating Activities:
Depreciation and Amortization 436,389 463,433
Asset Impairment 1,721,154 --
Amortization of Parts and Supplies 1,086,313 727,311
Provision for Bad Debts 310,747 42,829
Deferred Income Taxes (327,835) (85,063)
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable (196,249) (351,306)
Resale Inventory (128,938) (214,025)
Parts and Supplies (979,289) (905,609)
Prepaid Income Taxes (20,118) (208,126)
Prepaid Expenses 68,604 (62,615)
Miscellaneous Receivables (12,246) (5,970)
Other Assets 170 (15,427)
Increase [Decrease] in:
Accounts Payable and Accrued Expenses 1,065,177 15,137
Income Taxes Payable -- (73,929)
---------------- ---------------
Total Adjustments 3,023,879 (673,360)
---------------- ---------------
Net Cash Used in Operating Activities (962,596) (1,242,800)
---------------- ---------------
Cash Flows from Investing Activities:
Net Cash Transferred - Acquisition of Subsidiaries -- 13,907
Cash - Restricted (26,949) (400,000)
Payment of Acquisition Costs -- (1,968,549)
Acquisition of Property and Equipment (198,621) (549,168)
---------------- --------------
Net Cash Used in Investing Activities (225,570) (2,903,810)
---------------- --------------
Cash Flows from Financing Activities:
Payments on Long-Term Debt (7,672) (9,751)
Redemption of Common Stock (110,000) --
Net Proceeds from Revolving Line of Credit 1,161,817 433,839
---------------- --------------
Net Cash Provided by Financing Activities 1,044,145 424,088
---------------- ---------------
Net [Decrease] in Cash and Cash Equivalents (144,021) (3,722,522)
Cash and Cash Equivalents - Beginning of Years 193,056 3,915,578
---------------- ---------------
Cash and Cash Equivalents - End of Years $ 49,035 $ 193,056
================ ===============
The accompanying notes and independent auditors' reports should be read in
conjunction with the consolidated financial statements.
<PAGE>
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended
December 31,
1 9 9 8 1 9 9 7
Supplemental Disclosures of Cash Flow Information:
Cash paid during the years for:
Interest $ 174,752 $ 72,383
Income Taxes $ 10,394 $ 14,300
Supplemental Disclosure of Noncash Investing and Financing Activities:
On January 10, 1997, the Company purchased all of the issued and outstanding
shares of Cintronix, Inc. for a total purchase price of $1,300,000. On this
date, $900,000 was paid, and the remaining $400,000 was paid on January 10,
1997 with 313,726 shares of the Company's common stock, calculated using the
then closing bid price of the common stock.
The accompanying notes and independent auditors' reports should be read in
conjunction with the consolidated financial statements.
<PAGE>
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARIES
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 subsidiaries, Capitol Computer Services,
Inc. D/B/A CCS Systems, Inc., and Cintronix, Inc. [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 de-installation 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.
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.
Depreciation for the years ended December 31, 1998 and 1997 was $262,068 and
$300,502, respectively.
Expenditures for normal repairs and maintenance are charged against income as
incurred.
Net Investment in Sales-Type Leases - The Company's leasing operations consist
principally of the leasing of computer equipment to existing monthly maintenance
customers. 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. The Company's leasing operations consist principally of
leasing computer equipment under sales-type leases expiring in various years
through 2001.
<PAGE>
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
[2] Summary of Significant Accounting Policies [Continued]
Minimum lease payments to be received as of December 31, 1998 are:
Year ended
December 31,
1999 $ 186,140
2000 87,968
2001 31,057
----------------------------------------------------
Total 305,165
Less: Interest Portion (114,303)
Total $ 190,862
----- ==============
Current $ 118,502
Noncurrent $ 72,360
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
1997, 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 fifteen
years. Goodwill of $568,797 represents the excess of cost over the fair value of
net assets acquired. Accumulated amortization at December 31, 1998 was
approximately $68,000.
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. Concurrent with
management's annual planning process, it was determined that at December 31,
1998 the estimated future cash flows were below the carrying value of the
Company's goodwill. Accordingly, the Company adjusted the carrying value of
goodwill to the estimated value of approximately $500,000 resulting in a noncash
impairment loss of approximately $1,721,000 ($0.43 per share) for the year ended
December 31, 1998.
Stock Options Issued to Employees - The Company adopted Statement of Financial
Accounting Standards ["SFAS"] No. 123, "Accounting for Stock-Based
Compensation," for disclosure purposes and applies the intrinsic value method of
Accounting Principles Board ["APB"] Opinion No. 25, "Accounting for Stock Issued
to Employees," for accounting purposes.
Advertising Costs - Advertising costs are expensed when incurred. Advertising
expense was $50,841 and $31,339 for the years ended December 31, 1998 and 1997,
respectively.
<PAGE>
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3
[2] Summary of Significant Accounting Policies [Continued]
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.
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 periods. 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. Options and warrants did not
result in dilution for the years ended December 31, 1998 and 1997.
Going Concern - The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern. The Company has
suffered recurring losses from its operations and, effective October 31, 1998,
the Company's line of credit expired. The lender has decided not to renew the
line of credit with the Company (see Note 5) and the Company is currently using
the line to fund its operations until it can secure a new source of financing.
There is no assurance that the Company will be able to secure a new source of
financing, but its management is aggressively exploring a number of
alternatives. The financial statements do not include any adjustments relating
to the recoverability and classification of recorded assets, or the amounts and
classification of liabilities that might be necessary in the event the Company
cannot continue as a going concern.
[3] Accounts Receivable
Accounts receivable at December 31, 1998 consist of:
Receivables Under U. S. Government Contracts and Subcontracts: $ 1,190,860
Commercial and Other Receivables 2,939,772
----------------
Total 4,130,632
Less: Allowance for Doubtful Receivables 483,000
Total $ 3,647,632
----- ================
[4] Notes Payable
The Company has a note payable to General Motors Acceptance Corp. with an
interest rate of 9% and maturity date of January 11, 1999. The note payable was
used to finance the purchase of a vehicle. The Company also has a note payable
through its subsidiary, Cintronix, Inc. to First Union Bank with an interest
rate of 8.5% and a maturity date of November 2000. This note payable was also
used to finance the purchase of a vehicle.
December 31,
1 9 9 8
Notes Payable $ 12,174
Less: Current Maturities 7,700
-----------------
Long-Term Debt $ 4,474
-------------- =================
<PAGE>
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4
[4] Notes Payable [Continued]
Maturities of long-term debt at December 31, 1998 is as follows:
1999 $ 7,700
2000 4,474
-----------------
Total $ 12,174
----- =================
[5] Revolving Lines of Credit
The Company arranged for a bank line of credit with a maximum amount of
$2,500,000. The line bears interest at the rate of 0.25% over prime. The prime
rate at December 31, 1998 was 7.75%. The line is secured by substantially all of
the Company's assets. The Company is required to maintain certain ratios and
$4,400,000 in tangible net worth. The Company was not in compliance with the
ratios and tangible net worth requirements at December 31, 1998, and is
currently in a workout arrangement with the lender. The balance due on the line
of credit at December 31, 1998 was $2,308,656. The line of credit expired on
October 31, 1998 and the lender has decided not to renew the line of credit with
the Company. The Company is using the line to fund its operations until a new
source of financing can be obtained.
[6] Fair Value of Financial Instruments
Statement of Financial Accounting Standards ["SFAS"] No. 107, "Disclosure about
Fair Value of Financial Instruments," requires the disclosure of the fair value
of 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.
[7] Commitments
The Company leases facilities and vehicles under operating leases which expire
at various dates through 2007. 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
1999 $ 691,134
2000 617,781
2001 534,079
2002 488,421
2003 333,530
Thereafter 671,856
---------------
Total $ 3,336,801
----- ===============
Total rent expense for the years ended December 31, 1998 and 1997 approximated
$860,100 and $423,400, respectively.
<PAGE>
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5
[7] Commitments [Continued]
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 approximately $444,000 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 Cintronix,
Inc. [See Note 12].
[8] Income Taxes
The component of benefit for income taxes are as follows:
December 31,
------------
1 9 9 8 1 9 9 7
------- -------
Current:
Federal $ 116,385 $ (184,658)
State (132,679) (40,900)
------------- ------------
Total Current Benefit (16,294) (225,558)
------------- ------------
Deferred:
Federal (298,504) (69,637)
State (29,331) (15,426)
------------- ------------
Total Deferred Benefit (327,835) (85,063)
------------- ------------
Total $ (344,129) $ (310,621)
----- ============= ============
The following table reconciles the U.S. federal income tax rate to the Company's
effective tax rate:
1 9 9 8 1 9 9 7
------- -------
U.S. Statutory Rate (34.0)% (34.0)%
Increases [Decreases] Resulting from:
State Income Taxes (7.0)% (7.0)%
Surtax Exemption 5.0 % 5.0 %
Adjustment for non-deductible goodwill expense 28.0 % 0.0 %
----------- ------------
Totals (8.0)% (35.0)%
------ =========== ===========
The tax effects of temporary differences, loss carryforwards and the valuation
allowance that gives rise to deferred tax assets at December 31, 1998 were as
follows:
Temporary Difference - Inventory Adjustment $ 145,000
Net Operating Losses 300,000
Less: Valuation Allowance (300,000)
---------------
Deferred Tax Asset $ 145,000
===============
<PAGE>
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6
[8] Income Taxes [Continued]
The Company has approximately $840,000 of loss carryforwards that may be offset
against future taxable income. If not used, the carryforward will expire in
2018.
[9] Related Party Transactions
For the years ended December 31, 1998 and 1997, the Company recognized revenue
approximating $1,061,000 [including equipment sales of $518,400], and $490,000
[including equipment sales of $107,000], respectively, from a corporation owned
by the Company's majority stockholder. At December 31, 1998, accounts receivable
include $138,500 from the related party.
[10] Major Customers
Revenue under U. S. Government contracts approximated 18% and 21%, respectively,
of total maintenance contract revenues for the years ended December 31, 1998 and
1997.
[11] 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 what it believes
are 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 has $344,000 in financial institutions which are subject to such risk.
[12] Acquisition of Subsidiary and Divisions
The Company acquired 100% of the outstanding capital stock of Capitol Computer
Services, Inc. D/B/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 $585,000 in cash. The balance of the purchase price, $543,750, was
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. In January 1998, the Company issued 75,000 shares of common stock
pursuant to this agreement. The issuance of the shares did not change the
recorded amount of the acquired company.
The purchase price of this acquisition exceeded the fair value of the net assets
of CCS Systems by $800,969 which was being amortized over fifteen years under
the straight-line method. As a result of severe changes in market conditions,
Capitol Computer Services, Inc. has continued to operate at a loss and is
expected to operate at a loss in the future. This has triggered an impairment of
the goodwill (see Note 2). The Company prepared revised projections by product
line which provided the basis for measurement of the asset impairment charge.
Accordingly, the Company has charged operations for the remaining balance of
goodwill of $652,371 during the fourth quarter of 1998.
<PAGE>
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7
[12] Acquisition of Subsidiary and Divisions [Continued]
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 the purchase price at
closing with $900,000 cash and the balance of the purchase price, $400,000, was
paid with 313,726 shares of the Company's common stock calculated using the
then-closing bid price of the common stock. The Company set up a $400,000 escrow
account to redeem these shares at the seller's option. This option was exercised
in January 1999, at which time these shares were redeemed by the Company in
exchange for the balance of the escrow account which included accrued interest
of $43,846.
The purchase price of this acquisition exceeded the fair value of the net assets
of Cintronix, Inc. by $1,022,901 which was being amortized over fifteen years
under the straight-line method. As a result of severe changes in market
conditions, Cintronix, Inc. has continued to operate at a loss and is expected
to operate at a loss in the future. This has triggered an impairment of the
goodwill (see Note 2). The Company prepared revised projections by product line
which provided the basis for measurement of the asset impairment charge.
Accordingly, the Company has charged operations for the remaining balance of
goodwill of $886,514, during the fourth quarter of 1998. On June 30, 1999,
certain assets and liabilities of Cintronix, Inc. were sold to Interactive
Systems, Inc. ["ISI"], a corporation owned by the Company's majority
stockholder, for $200,000. The book value of these assets and liabilities did
not differ materially from the purchase price. ISI also has the option to
purchase the common stock of Cintronix, Inc. for the sum of $10. In addition,
ISI will assume responsibility of Cintronix, Inc.'s office sublease and
employment agreements.
Certain principal stockholders of Cintronix, Inc. and certain key employees
entered into employment agreements with Cintronix, Inc. in conjunction with the
closing on January 10, 1997. The employment agreements provide that Cintronix,
Inc. will employ each of such persons for varying terms of two or three years at
salaries commensurate with their positions and duties. Each of the employment
agreements contain noncompete and confidentiality provisions.
The Company acquired the book of business of Advanced Network Systems, a
division of American Bankers Corporation Service Corporation, on February 28,
1997 for $200,000 in a business combination accounted for under the purchase
method of accounting. The acquired business is operated as a division of the
Company. The Company paid the purchase price at closing with $200,000 cash.
The purchase price of this acquisition was recorded as goodwill and was being
amortized over fifteen years under the straight-line method. As a result of
severe changes in market conditions, Advanced Network Systems has continued to
operate at a loss and is expected to operate at a loss in the future. This
triggered an impairment of the goodwill (see Note 2). The Company prepared
revised projections by product line which provided the basis for measurement of
the asset impairment charge. Accordingly, the Company has charged operations for
the remaining balance of goodwill of $182,269 during the fourth quarter of 1998.
Certain key employees entered into employment agreements with the Company in
conjunction with the closing on February 28, 1997. The employment agreements
provide that the Company will employ each of such persons for varying terms of
two or three years at salaries commensurate with their positions and duties.
Each of the employment agreements contain noncompete and confidentiality
provisions.
<PAGE>
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #8
[12] Acquisition of Subsidiary and Divisions [Continued]
The Company acquired 100% of the business assets of Phoenix Service, Inc., on
May 28, 1997 for $793,579 in a business combination accounted for under the
purchase method of accounting. The acquisition is operated as a division of the
Company. The Company paid the purchase price at closing in cash.
The purchase price of this acquisition exceeded the fair value of the net assets
of Phoenix Service, Inc. by $568,797 which is being amortized over fifteen years
under the straight-line method.
Certain key employees of Phoenix Service, Inc. entered into employment
agreements with the Company in conjunction with the closing on May 28, 1997. The
employment agreements provide that the Company will employ each of such persons
for varying terms of two or three years at salaries commensurate with their
positions and duties. Each of the employment agreements contain noncompete and
confidentiality provisions.
All results have been included from the date acquired. The following pro forma
[unaudited] information assumes the acquisitions occurred on January 1, 1997:
Year ended
December 31,
1 9 9 7
Revenues $ 25,150,216
Net [Loss] $ (547,838)
Earnings Per Share:
Net [Loss] $ (0.13)
[13] 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.
Following is a summary of the status of fixed options outstanding at December
31, 1998:
Outstanding Stock Options
Weighted-Average
Range of Remaining Weighted-Average
Exercise Prices Shares Contractual Life Exercise Price
$0.87 - $1.50 11,050 7 $0.93
$5.38 119,750 7 $5.38
Exercisable
Stock Options
Weighted-Average
Exercise Prices Shares Shares Exercise Price
$0.87 - $1.50 11,050 11,050 $0.93
$5.38 119,750 119,750 $5.38
<PAGE>
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #9
[13] Stock Options [Continued]
A summary of stock options activity under all plans is as follows:
1 9 9 8
-------
Weighted-Average
Shares Exercise Price
Outstanding - January 1, 139,350 4.99
Granted -- --
Exercised -- --
Forfeited/Expired (8,550) (4.69)
------------ ---------------
Outstanding - December 31, 130,800 5.00
-------------------------- ============ ===============
Exercisable - December 31, 130,800 5.00
-------------------------- ============ ===============
Shares Available on December 31,
For Options that may be Granted 269,200
------------------------------- ============
1 9 9 7
-------
Weighted-Average
Shares Exercise Price
Outstanding - January 1, 129,500 5.35
Granted 11,850 .93
Exercised -- --
Forfeited/Expired (2,000) (3.81)
------------ -------------
Outstanding - December 31, 139,350 4.99
-------------------------- =========== ============
Exercisable - December 31, 139,350 4.99
-------------------------- =========== ============
Shares Available on December 31,
For Options that may be Granted 260,650
------------------------------- ===========
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 at the grant date 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.
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 1997 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.
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 loss and loss per share would have been
unchanged, on a pro forma basis, for the year ended December 31, 1998 and
increased by approximately $6,570 or $0.00 per share for the year ended December
31, 1997. The weighted-average fair value of stock options granted to employees
used in determining the pro forma amounts
<PAGE>
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #10
[13] Stock Options [Continued]
is estimated at $.55 during 1998 and 1997, using the Black-Scholes
option-pricing model for the pro forma amounts with the following weighted
average assumptions:
December 31,
1 9 9 7
Risk-free Interest Rate 6.18%
Expected Life 4 Years
Expected Volatility 65.20%
Expected Dividends N/A
Net loss and loss 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 8 1 9 9 7
Net Loss:
As Reported $ (3,986,475) $ (569,440)
---------------- ----------------
Pro Forma $ (3,986,475) $ (576,010)
----------------- ----------------
Loss Per Share:
As Reported $ (.99) $ (.14)
---------------- ----------------
Pro Forma $ (.99) $ (.14)
---------------- ----------------
[14] Segment Information
In 1998, the Company adopted SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information." The Company evaluates performance of its
segments and allocates resources to them based on sales and operating
profit/(loss). The Company operates primarily in two industry segments,
Maintenance Services and Parts and Equipment Sales. The tables below present
information about reported segments:
Maintenance Parts And Consolidated
Year Ended December 31, 1998 Services Equipment Sales Total
- --------------------------------------------------------------------------------
Revenues 12,965,040 15,989,799 28,954,839
Cost of Goods Sold and Services
Performed 10,156,641 14,669,349 24,825,990
Asset Impairment 834,640 886,514 1,721,154
Maintenance Parts And Consolidated
Year Ended December 31, 1997 Services Equipment Sales Total
- --------------------------------------------------------------------------------
Revenues 10,111,099 14,074,510 24,185,609
Cost of Goods Sold and Services
Performed 7,498,705 12,274,834 19,773,539
<PAGE>
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #11
[15] New Authoritative Pronouncements
Management does not believe that any recently issued, but not yet effective,
accounting standards if currently adopted would have a material effect on the
accompanying financial statements.
<PAGE>
PART III
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
Directors and Executive Officers of Registrant
Donald C. Weymer
Chairman of the Board of Directors
Chief Executive Officer
Secretary
Donald C. Weymer has been the Chief Executive Officer and Chairman of the Board
of Directors of the Company since 1988 and has been the Secretary of the Company
since March, 1994. He was the Chief Financial Officer from March, 1994 until
October, 1995. In 1991 Mr. Weymer founded ISI, a Virginia corporation which
provides data processing 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 since 1991.
Term of Office: Mr. Weymer's term as director is three years, expiring
in 2000 or until a successor is elected and qualified.
Age: 54
William F. Pershin
Director
President
Chief Accounting Officer
William F. Pershin has been the President and a director of the Company since
1988 and has been the Chief Accounting Officer of the Company since March, 1994.
Term of Office: Mr. Pershin's term as director is three years, expiring
in 1999 or until a successor is elected and qualified.
Age: 44
Herbert H. Derian
Director
Herbert H. Derian has been the president and a director since 1985 of Cintronix,
Inc., which is a MicroAge franchisee specializing in the sale and servicing of
personal computers. Cintronix, Inc. is a wholly-owned subsidiary of the Company.
Mr. Derian was appointed to the Board of Directors in January, 1997 to fill a
vacancy.
Term of Office: Mr. Derian's term as director expires in 2001 or until
a successor is elected and qualified.
Age: 69
C. A. Miller, III
Director
C. A. Miller III has been employed with Southern States Cooperative, Inc., of
Richmond, Virginia since 1979, and currently serves as Vice President of
Information Systems. Mr. Miller was appointed to the Board of Directors in
March, 1998 to fill a vacancy.
Term of Office: Mr. Miller's term as director expires in 1999 or until
a successor is elected and qualified.
Age: 59
David A. Chappell
Director
David A. Chappell has been an insurance agent with Northwestern Mutual Life
since 1984. In addition, he has been an account representative with Jacksonville
Specialty Advertising since 1997. Mr. Chappell was appointed to the Board of
Directors in March, 1998 to fill a vacancy.
Term of Office: Mr. Chappell's term as director expires in 2001 or
until a successor is elected and qualified.
Age: 44
James D. Boccabella
Chief Financial Officer
James D. Boccabella, age 45, has been the Chief Financial Officer of the Company
since October, 1995. For the five years prior to that, he owned and operated a
public accounting practice, James D. Boccabella, CPA, CFP.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, (the "Exchange
Act"), requires that the Company's directors, executive officers, and persons
who own more than 10% of a registered class of the equity securities of the
Company ("reporting persons") file with the Securities and Exchange Commission
(the "Commission") initial reports of ownership, and reports of changes in
ownership, of shares of stock, and options to purchase such shares, of the
Company. Reporting persons are required by Commission rules to furnish the
Company with copies of all Section 16(a) reports they file.
Based solely on a review of Section 16(a) reports furnished to the Company for
the fiscal year ended December 31, 1998, (the "1998 fiscal year") and
representations by reporting persons that no other reports were required for the
1998 fiscal year, all Section 16(a) reporting requirements were met.
Item 10. Executive Compensation
SUMMARY COMPENSATION TABLE
The following table summarizes the compensation paid or accrued by the Company
during the three fiscal years ended December 31, 1998, to the Company's
executive officers:
Annual Compensation Awards
- -------------------------------------------------------------------------------
Name Other Number of
and Annual Under-
Principal Compen- lying
Position Year Salary Bonus sation Options
- -------------------------------------------------------------------------------
Donald C. Weymer 1998 $180,152 0 0 0
Chief Executive
Officer,
Chairman of the
Board, Secretary
1997 $178,464 0 0 0
1996 $163,404 $9,600 0 0
William F. 1998 $150,122 0 0 0
Pershin
President and
Director
1997 $142,974 0 0 0
1996 $136,168 0 0 0
James D. 1998 $104,279 0 0 0
Boccabella
Chief Financial
Officer
1997 $101,333 0 0 0
1996 $96,842 0 0 0
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of May 31, 1999, the number and percentage of
outstanding shares of Common Stock beneficially owned by (i) all persons known
by the Company to own more than 5% of such shares, (ii) each director, (iii)
each executive officer, and (iv) all executive officers and directors as a
group. Unless otherwise noted below, each person named in the table has sole
voting and sole investment power with respect to each of the shares beneficially
owned by such person.
Name and Address Amount of
of Beneficial Owner Beneficial
Ownership Percent
- --------------------------------------------------------------------------------
Donald C Weymer 1,060,000 28.5%
1013 Parrs Ridge Road
Spencerville, Maryland 20868
William F Pershin 640,000 17.2%
11616 Morning Star Drive
Germantown, Maryland 20876
James D. Boccabella 25,000 (1) 0.7%
P O Box 399
Olney, Maryland 20830
All executive officers and 1,725,000 46.4%
directors as a group (3
persons)
(1) Consists of stock options granted to Mr. Boccabella which have vested.
Item 12. Certain Relationships and Related Transactions
Donald C. Weymer
The Company provides computer maintenance services to ISI, which is 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, 1998 and
1997, approximately $1,061,000 (including equipment sales of $518,400) and
$490,000 (including equipment sales of $107,000), respectively, 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 in Item 7 hereof.
Item 13. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(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.
11. Computation of Net Income per Common Share (included in the Financial
Statements in Item 7).
21. Subsidiaries of the Company
27. Financial Data Schedule.
** Previously filed as noted.
(b) Reports on Form 8-K
None.
<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.
August 31, 1999 By: /s/ Donald C. Weymer
- -------------------- --------------------------
Date Donald C. Weymer
Chief Executive Officer
August 31, 1999 By: /s/ William F. Pershin
- --------------- ------------------------
Date William F. Pershin
Chief Accounting 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.
August 15, 1999 By: /s/ Donald C. Weymer
- --------------- ------------------------
Date Donald C. Weymer
Chairman of the Board, Chief Executive
Officer and Director
August 15, 1999 By: /s/ William F. Pershin
- --------------- --------------------------
Date William F. Pershin
President and Director
Exhibit 21
Subsidiaries of the Company
Subsidiary (Year Acquired) State of Incorporation
CCS Systems, Inc. 1995 Virginia
Cintronix, Inc. 1997 Maryland
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> year
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-01-1998
<CASH> 49,035
<SECURITIES> 0
<RECEIVABLES> 4,130,632
<ALLOWANCES> 483,000
<INVENTORY> 1,439,223
<CURRENT-ASSETS> 5,702,481
<PP&E> 1,836,732
<DEPRECIATION> 1,131,490
<TOTAL-ASSETS> 7,666,222
<CURRENT-LIABILITIES> 5,291,633
<BONDS> 0
0
0
<COMMON> 3,716
<OTHER-SE> 1,966,399
<TOTAL-LIABILITY-AND-EQUITY> 7,666,222
<SALES> 28,954,839
<TOTAL-REVENUES> 29,058,921
<CGS> 24,825,990
<TOTAL-COSTS> 24,825,990
<OTHER-EXPENSES> 8,376,983
<LOSS-PROVISION> 314,097
<INTEREST-EXPENSE> 186,552
<INCOME-PRETAX> (4,330,604)
<INCOME-TAX> (344,129)
<INCOME-CONTINUING> (3,986,475)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,986,475)
<EPS-BASIC> (0.99)
<EPS-DILUTED> (0.99)
</TABLE>
