SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 0-26464
CSI Computer Specialists, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 52-1599610
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
904 Wind River Lane Suite 100
Gaithersburg, Maryland 20878
(Address of principal executive offices) (Zip code)
301-921-8860
(Registrant's telephone number including area code)
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No ____
State the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Title Outstanding
Common Stock, par value $0.001 per share 3,715,888 shares at August 31, 1999
Transitional Small Business Disclosure Format (check one);
Yes___ No X
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
1999 1998
---------------- ---------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 170,036 $ 49,035
Accounts receivable 3,867,539 3,647,632
Net investment in sales-type leases - current 118,502 118,502
Inventory for resale 413,880 513,179
Parts and supplies 933,204 926,044
Prepaid income taxes 343,662 343,662
Prepaid expenses 94,047 104,427
----------- -----------
Total current assets 5,940,870 5,702,481
----------- -----------
PROPERTY AND EQUIPMENT - AT COST 1,840,868 1,836,732
Less accumulated depreciation 1,194,318 1,131,490
----------- -----------
646,550 705,242
----------- -----------
OTHER ASSETS
Goodwill (Net of accumulated amortization) 491,410 500,890
Net investment in sales-type leases - non-current 25,928 72,360
Deferred tax asset 128,600 145,000
Cash - restricted - 443,846
Other assets 96,683 96,403
----------- -----------
742,621 1,258,499
----------- -----------
$ 7,330,041 $ 7,666,222
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable 3,519,638 2,713,031
Accrued expenses 202,740 262,246
Revolving line of credit 1,643,656 2,308,656
Current maturities of long term debt 3,024 7,700
Deferred income taxes payable - -
----------- -----------
Total current liabilities 5,369,058 5,291,633
----------- -----------
LONG-TERM DEBT, less current maturities 4,474 4,474
----------- -----------
COMMITMENTS
REDEEMABLE COMMON STOCK - 313,726 SHARES - 400,000
STOCKHOLDERS' EQUITY
Preferred stock - authorized, 10,000,000
shares of $.001 par value $ - $ -
Common stock - authorized, 25,000,000
shares of $.001 par value;
issued and outstanding, 3,715,888 shares 3,716 3,716
Paid-in capital 5,073,593 5,117,439
Retained earnings (3,120,800) (3,151,040)
----------- -----------
Total stockholders' equity 1,956,509 1,970,115
----------- -----------
$ 7,330,041 $ 7,666,222
=========== ===========
See accompanying notes to condensed financial statements.
<PAGE>
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
March 31,
1999 1998
----------------- -----------------
Revenues
Maintenance services $ 3,401,849 $ 3,076,332
Parts and equipment sales 4,304,362 3,515,575
----------------- -----------------
$ 7,706,211 $ 6,591,907
Costs and expenses
Cost of maintenance services 2,458,735 2,214,180
Cost of parts and equipment sales 3,851,251 3,050,760
Selling, general and administrative 1,326,073 1,543,699
----------------- -----------------
7,636,059 6,808,639
----------------- -----------------
Operating profit 70,152 (216,732)
Other deductions
Net interest income (expense) (23,512) (12,753)
----------------- -----------------
Earnings before income taxes 46,640 (229,485)
Income taxes
Currently payable 16,400 (105,796)
Deferred - 24,788
----------------- -----------------
16,400 (81,008)
NET EARNINGS $ 30,240 $ (148,477)
================= =================
Per share amounts
Net earnings per share $ 0.01 $ (0.04)
================= =================
Weighted average number of shares
outstanding 3,820,497 4,029,212
================= =================
See accompanying notes to condensed financial statements
<PAGE>
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
1999 1998
--------------- --------------
Net cash flows from operating activities $ 794,813 $ (464,556)
--------------- --------------
Cash flows used in investing activities
(Increase) decrease in restricted cash 443,846 -
Acquisition of property and equipment (4,136) (82,610)
--------------- --------------
Net cash used in investing activities 439,710 (82,610)
--------------- --------------
Cash flows used in financing activities
Payments on long-term debts (4,676) (2,502)
Acquisition of treasury stock (443,846) (110,000)
Increase (Decrease) in revolving line of credit (665,000) 507,000
--------------- --------------
Net cash used in financing activities (1,113,522) 394,498
--------------- --------------
NET INCREASE (DECREASE) IN CASH 121,001 (152,668)
Cash at beginning of period 49,035 193,056
--------------- --------------
Cash at end of period $ 170,036 $ 40,388
=============== ==============
Supplemental disclosure of cash flow information
Cash paid through March 31, 1999 and 1998 for:
Interest 21,419 28,465
Income taxes - -
See accompanying notes to condensed financial statements
<PAGE>
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARY
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
The condensed financial statements at March 31, 1999 and for the three
month periods ended March 31, 1999 and 1998 are unaudited and reflect all
adjustments (consisting only of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of the financial
position and operating results for the interim periods. The condensed financial
statements have been prepared in accordance with the rules and regulations of
the Securities and Exchange Commission, and therefore omit certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles. The Company believes
that the disclosures contained in the condensed financial statements are
adequate to make the information presented therein not misleading. The financial
statements should be read in conjunction with the financial statements and notes
thereto, together with management's discussion and analysis of financial
condition and results of operations, contained in the Company's Annual Report on
Form 10-KSB for the fiscal year ending December 31, 1998.
The results of operations for the three months ended March 31, 1999 are
not necessarily indicative of the results that may be expected for the entire
fiscal year ending December 31, 1999.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation
Certain statements made in this Quarterly Report on Form 10-QSB are
"forward-looking" statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements involve known and unknown risks,
uncertainties, and other factors that may cause actual results, performance, or
achievements of the Company to be materially different from any future results,
performance, or achievements expressed or implied by such forward-looking
statements. Although the Company believes that the expectations reflected in
such forward-looking statements are based upon reasonable assumptions, the
Company's actual results could differ materially from those set forth in the
forward-looking statements. Certain factors that might cause such a difference
include, but are not limited to, the timing of revenues, rapid technological
change, the demand for services for computer hardware systems and computer
equipment, the timing and amount of capital expenditures and other risks
detailed herein.
GENERAL
The Company provides a full range of computer hardware services,
including sales and maintenance of mainframe and mid-range computer equipment
and parts, network design and installation, computer upgrades, and installation
and de-installation of equipment. These services are provided to commercial
customers, agencies of federal, state and local governments, universities,
associations and hospitals primarily in the Mid-Atlantic region of the United
States, including West Virginia, Virginia, Maryland, the District of Columbia,
New Jersey, New York, Connecticut and Pennsylvania, and also in Illinois and
California.
The Company's principal business is providing computer maintenance and
repair services, which are provided under both fixed fee and time and materials
arrangements. Under the fixed fee arrangement, which is the primary method of
service, a customer pays a fixed monthly fee for the term of the agreement,
generally one to two years, for which the Company provides the parts and labor
for both scheduled preventative maintenance and emergency repairs. The Company
records the revenue from fixed fee contracts ratably over the term of the
contract, while the costs the Company incurs to provide the maintenance and
emergency repairs are charged to expense as incurred. Accordingly, the
profitability of the Company's maintenance and repair services can and will be
affected by period to period fluctuations in the number and severity of the
emergency repairs required by its customers, which the Company cannot predict or
control. Additionally, in certain circumstances the Company will choose to
provide the contracted-for services by subcontracting with others, particularly
when the equipment covered by the agreement cannot be serviced in a cost
effective manner, is difficult to repair or replace, or requires unique
engineering expertise that is not applicable to equipment utilized by a
significant number of Company's other customers. The Company obtains such
subcontracting services through short-term agreements, and its profit margin
will generally be lower than if the work were not subcontracted. Accordingly,
operating results may fluctuate from period to period as a result of changes in
the level and nature of subcontracted services.
The sale of computer equipment 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
The Company's first quarter revenues of $7,706,211 was an increase of
17 % over the first quarter revenues of the prior year of $6,591,907. The
increase in net revenues resulted from sales growth in both maintenance services
and equipment sales. Maintenance revenues for the first quarter of 1999
increased approximately 11% over the first quarter of 1998, primarily from
expansion of the Company's book of business. Equipment sales for the first
quarter of 1999 increased 22% over the same period of 1998. Management intends
to increase marketing efforts to promote continued growth in both of these
areas, and anticipates that the marketing staffs of the Company and each of its
subsidiaries will be able to cross promote products and services. Maintenance
revenues accounted for approximately 44% and 47%, respectively, of the Company's
consolidated revenues for the first quarters of 1999 and 1998.
The Company's cost of sales as a percentage of revenues was 82%in the
first quarter of 1999 compared to 80% for the same period in 1998. A small
decrease in the costs of maintenance services as a percentage of maintenance
service income was offset by a decrease in the profit margins on equipment
sales. The decreased costs of maintenance services resulted primarily from a
current decrease in the need for emergency replacement parts and decreased
reliance on subcontracted services. Subcontractor costs could continue to
decrease as the necessary expertise is further developed in-house to service
newer technology; however, as the Company enters into contracts on even more
recent technology, the services of subcontractors may still be required. Gross
margins on equipment sales dropped primarily due to the mix of equipment sold.
As personal computer and mid-range network computer sales increase, the normally
lower margin on these sales will offset the higher margins on mainframe computer
sales, and decrease the overall profit percentages.
Selling, general and administrative expenses as a percentage of net
revenues were 17% and 24% respectively, for the first quarter of 1999 and 1998.
The decrease in the percentage is primarily due efforts by management to
eliminate duplication of administrative functions by the Company and each of its
subsidiaries. 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 decreased 14%
to $1,326,073 for the first three months of 1999 compared to $1,543,699 for the
same period of 1998.
The Company showed operating profit of $70,152 for the first quarter of
1999 compared to an operating loss of $216,732 for the first quarter of 1998.
The increase in profitability was primarily attributable to the overall decrease
in selling, general and administrative costs, achieved as a result of
consolidating administrative functions to eliminate duplication of services.
Net interest expense increased to $23,512 for the first three months of
1999 compared to $12,753 for the same period of 1998, primarily as a result of
the increased use of the bank revolving line of credit to provide working
capital, especially after last year's losses. The Company expects that net
interest expense will continue to increase until the Company starts generating
additional cash from operations on a consistent basis.
Net income increased from a loss of $148,477 for the first quarter of
1998 to a profit of $30,240 for the same period of 1999, again primarily as a
result of the decrease in the selling, general and administrative expenses,
partially offset by an increase in costs of sales. The Company expects that its
cross marketing efforts, as well as cost-cutting efforts to further reduce
duplication of administrative expenses, will improve its performance in the
future.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $571,812 at March 31,1999 compared to $410,848 at
December 31, 1998. Cash flows provided by operations for the first quarter of
1999 totaled $794,813, resulting primarily from operations and increased due to
an increase in accounts payable. The ratio of current assets to current
liabilities held steady at 1.1:1 at March 31, 1999 and at December 31, 1998.
The Company has a $2.5 million revolving line of credit with Crestar
Bank which expired in October, 1998 and continued under a forbearance agreement
until May, 1999, at which time 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 March, 31, 1999, the balance owed
on this line of credit was $1,643,656.
The Company's principal commitments at March 31, 1999 consisted of
obligations under operating leases for facilities.
The Company believes that its existing cash, as supplemented by expected cash
flow from operations and existing credit facility, is sufficient to satisfy its
currently anticipated working capital needs. Management acknowledges that
failure to renew the line of credit with Crestar Bank or find alternative
financing could significantly affect the ability of the Company to meet
short-term working capital requirements, and is vigorously exploring other
options to obtain the required 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, to date, has not been confronted with Year 2000 issues in
providing such services. Further, the Company has surveyed all of its internal
business systems and software applications and determined that they are Year
2000 compliant. Consequently, the Company does not expect its business to be
adversely affected in any material respect because of Year 2000 issues.
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(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 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/ William F. Pershin
- --------------- -----------------------
Date William F. Pershin
Chief Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 170,036
<SECURITIES> 0
<RECEIVABLES> 4,359,539
<ALLOWANCES> 492,000
<INVENTORY> 1,292,815
<CURRENT-ASSETS> 5,940,870
<PP&E> 1,840,868
<DEPRECIATION> 1,194,318
<TOTAL-ASSETS> 7,330,041
<CURRENT-LIABILITIES> 5,369,058
<BONDS> 0
0
0
<COMMON> 3,716
<OTHER-SE> 1,952,793
<TOTAL-LIABILITY-AND-EQUITY> 7,330,041
<SALES> 7,706,211
<TOTAL-REVENUES> 7,732,318
<CGS> 6,309,986
<TOTAL-COSTS> 6,309,986
<OTHER-EXPENSES> 1,326,073
<LOSS-PROVISION> 9,000
<INTEREST-EXPENSE> 49,619
<INCOME-PRETAX> 46,640
<INCOME-TAX> 16,400
<INCOME-CONTINUING> 30,240
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30,240
<EPS-BASIC> 0.01
<EPS-DILUTED> 0.01
</TABLE>
