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, 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)
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. $18,360,010
As of February 23, 2000, the aggregate market value of Common Stock
outstanding held by non-affiliates of the issuer was $3,195,565
(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 Companys 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.
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 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
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, Inc. 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 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. The Company also provides parts and services for
computer mainframes manufactured by Digital Equipment Corporation
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 new and refurbished computer
equipment in 1993. The Company sells computer equipment pursuant to
equipment sales agreements. Pursuant to such agreements, customers
pay for the computer equipment that they purchase from the Company
upon delivery. Given the Company's large existing customer base, the
addition of equipment sales 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 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 an additional product line.
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.
IBM manufactures most of the mainframe computers maintained and
serviced by the Company, although the Company also provides such
services for computers manufactured by other companies, including
Memorex, Storage Technology, and DEC. Numerous companies manufacture
the personal computers and peripheral equipment currently serviced by
the Company. 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 sales and
servicing capabilities in the mid-range computer area with the
acquisition of 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 canceled 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 most 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. , By employing subcontractors,
the Company has the ability to service all of its customer computer
equipment (notwithstanding the manufacturer or the model), rather
than the customer relying on the services which may be provided
individually by each vendor with respect to its own manufactured
product or model. Either party may terminate most subcontracting
agreements 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 that 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 an 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. Due to recent decisions by
manufacturers to develop direct channels to end user customers, and
changes in the buying patterns of the federal government, the
reseller market for personal computers has substantially decreased
with accompanying decreased margins. As a result of these changes
management decided to significantly reduce the sale of personal
computers, except to customers where other Company services might be
leveraged by the sale of equipment.
Sales and Marketing
The Company currently employs twelve 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 service/product specific
databases for telemarketing and direct contact by the sales force.
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 subsidiarys
and divisions 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 that 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 revenue is derived
from services performed through maintenance agreements. The
percentage of commercial customers serviced by the Company pursuant
to maintenance agreements for the fiscal years ended December 31,
1999 and 1998 equaled approximately 85% and 82%, respectively, of all
customers serviced by the Company pursuant to maintenance
agreements. Federal government agencies serviced pursuant to
maintenance agreements accounted for approximately 19% and 18%,
respectively, of the Companys customers for the fiscal years ended
December 31, 1999 and 1998. Revenues derived from time and materials
agreements approximated 3% and 5%, respectively, of the Company's
gross revenues for the fiscal years ended December 31, 1999 and
1998. Revenues generated by parts and equipment sales represented
approximately 30% and 31%, respectively, of gross revenues for the
fiscal years ended December 31, 1999 and 1998.
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 5% 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., ACS, Amdahl, INOVA
Health System and Medlantic Health Care System, Inc.
Business Strategy
The objectives of the Company are to increase its customer base
while expanding product offering to existing customers. 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 Companys designation as a Value Added
Reseller of computer equipment produced by various manufacturers. By
combining equipment offerings with network design and integration
services the Company is in a position to provide a more complete
infrastructure to new and existing customers. Additionally,
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 thus increasing overall profit
on each sale.
Acquisitions
The Company's long-term plan has been to pursue its growth and
acquisition strategy on both a regional and national level. Entering
a new geographic area on a cost effect basis is greatly facilitated
through acquisition of a local service company. The Company
implemented this strategy in 1997 when 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.
Management had hoped that the acquisition of Cintronix, Inc. and
Advanced Network Systems in early 1997 would further the Companys
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. The Company
has fully assimilated the remaining acquisitions and returned to
profitability during the second half of 1999.
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
Companys avoidance of any such liabilities, which could have a
material adverse effect on the Companys financial condition.
Employees
The Company has reduced total full-time employees from 160 on
December 31, 1998 to 129 as of December 31, 1999. Employees are
located at the Companys headquarters in Gaithersburg, Maryland and
in eight 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 are located in Towson, Maryland ("the Towson
facility"), Fairfield, New Jersey (the "Fairfield facility"), and
Addison, Illinois (the "Addison facility"). The Company has sales
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 Companys Gaithersburg and
Beltsville facilities
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 31,680 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 March, 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
in April, 2001. The Sunnyvale facility consists of approximately
14,875 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
$7,884 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
in December, 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.
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 Companys 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 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
3rd Quarter 1999 High 7/8 Low 9/16
4th Quarter 1999 High 1 Low 9/16
As of February 1, 2000, the Companys Common Stock was held by
approximately 290 beneficial holders of record. 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 Companys 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 Companys
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. Subcontractors are used when the equipment covered by the
agreement cannot be serviced by the Company 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 Companys other customers. The Company
obtains such subcontracting services through short-term agreements.
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, and the
sale of Cintronix in June of 1999, revenues from equipment sales
decreased significantly during the second half of 1999 and will
continue at the lower level in the future. Mainframe equipment sales
are entered into more commonly to secure contracts for the
maintenance thereof than for the profit on the equipment sale.
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 Companys technical capabilities to maintain the more
current mainframe technology.
RESULTS OF OPERATIONS
Revenues from continuing operations for the fiscal year ended
December 31, 1999 decreased to $18,360,010 compared to revenues of
$18,598,620 for the fiscal year ended December 31, 1998. This
decrease in annual revenues resulted from the reduction of sales of
personal computers and related equipment and software. Maintenance
revenues for 1999 increased to $12,901,125 compared to maintenance
revenues of $12,788,646 for 1998. Maintenance services accounted for
approximately 70% of the Companys continuing revenues for 1999
compared to 69% for 1998. Equipment and parts sales decreased to
$5,458,885 for 1999 compared with $5,809,974 for 1998, comprising 30%
of continuing sales in 1999 and 31% of continuing sales in 1998.
As a result of Cintronix, Incs operations performing poorly and
increased competition in the personal computer equipment business,
the Company sold a majority of its operating assets and liabilities
to Interactive Systems, Inc., a corporation owned by the Companys
majority stockholder. The transaction resulted in the Company
realizing cash proceeds of $200,000 and a gain on the sale of these
discontinued operations, approximating $67,000. Accordingly, results
from Cintronix, Inc. are shown as discontinued operations with prior
years restated. Revenues from discontinued operations for the fiscal
year ended December 31, 1999 decreased to $5,368,345 compared to
revenues of $10,356,219. The discontinued operations cost of sales
as a percentage of net discontinuing revenues were 99% in 1999
compared to 92% in 1998. Selling, general and administrative
expenses as a percentage of net discontinuing revenues were 11% and
2%, respectively, for 1999 and 1998.
The Company's cost of sales as a percentage of revenues were
82% in 1999 compared to 82% in 1998. The 3rd and 4th Quarters of
1999 show a lower percentage of cost of sales as a result of a higher
percentage of revenues comprised of maintenance services, which have
a higher profit margin than that available on equipment sales. The
costs of maintenance services has remained basically steady, with an
increase in subcontract costs offset by a current decrease in the
need for emergency replacement parts. Subcontractor costs could
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 increased slightly during the third and fourth quarters of the
year, primarily as a result of the mix change to more mainframe and
used equipment sales, which carry higher margins. As revenues from
sales of personal computer and mid-range network computers continue
to decrease, the margins on these equipment sales will show some
increase based on the mix between the mid-range and personal computer
sales and the mainframe computer sales, which usually carry higher
margins.
Selling, general and administrative expenses as a percentage of
net continuing revenues were 18% and 35%, respectively, for 1999 and
1998. 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 49% to $3,325,332 in 1999
compared to $6,484,247 for 1998. The reduction resulted from the
reduction of sales in the personal computer product area, reductions
in overhead and support staff, and the fact that a significant
write-down for uncollectable debt and goodwill was required at the
close of 1998.
The Company's operating loss from continuing operations for the
fiscal year ended December 31, 1999 decreased to a loss of $98,282
compared to a loss of $3,994,936 for 1998. The 1999 net loss
includes $500,804 loss attributable to a discontinued business (sale
of assets and book of business of Cintronix, Inc).
Net interest expense increased to $71,998 for 1999, compared
to net interest expense of $8,899 for 1998. The increase was due to
a reduction of interest income. The Company expects that net
interest expense reduce as the Company starts generating additional
cash from operations.
Net loss decreased to a loss of $743,084 for 1999 from a loss
of $3,986,475 for the prior year as a result of operating adjustments
outlined in the above paragraphs.
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 $152,322 at December 31, 1999, compared to
$410,848 at December 31, 1998. Cash flows provided by operations for
1999 totaled $665,525. The decrease in working capital resulted
primarily from a reduction in the revolving credit line made
available by Crestar Bank. The ratio of current assets to current
liabilities decreased slightly to 1.04:1 at December 31, 1999 from
1.08:1 at December 31, 1998.
The Company has a line of credit with Crestar Bank that 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 the Company
has acquired alternative financing. The bank reduced the credit line
from $2,000,000 to $1,750,000 in September of 1999 and increased the
interest rate being charged to 3% over prime. At December 31, 1999,
the balance owed on this line of credit was $1,595,672.
Effective March 6, 2000, the bank has notified the Company that
further reductions will be made to the maximum outstanding amount
under the line of credit. From March 6, 2000 until March 16, 2000,
the maximum outstanding amount under the line will remain at
$1,750,000. For the period from March 17, 2000 to March 23, 2000,
the maximum outstanding amount under the line will be reduced to
$1,500,000. Finally, beginning March 24, 2000, the maximum
outstanding amount under the line will decrease by $100,000 per week.
The Companys principal commitments at December 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 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
The Company has not been adversely affected in any material
respect because of Year 2000 issues.
F-1
Item 7. Financial Statements and Supplementary Data
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARIES
INDEX
Page
Independent Auditor's Report ................................... F-2
Consolidated Balance Sheet as of December 31, 1999 ............. F-3.F-4
Consolidated Statements of Operations for the years ended
December 31, 1999 and 1998...................................... F-5
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1999 and 1998...................................... F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1999 and 1998...................................... F-7.F-8
Notes to Consolidated Financial Statements ..................... F-9.F-18
F-8
INDEPENDENT AUDITORS REPORT
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, 1999, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the two
years in the period 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 audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether
the 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 audits provide 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, 1999, and the results of their operations and their cash
flows for each of the two years in the period 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
February 11, 2000, except for Note 4,
as to which the date is March 6, 2000
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1999
Assets:
Current Assets:
Cash and cash equivalents $ 151,717
Accounts Receivable 2,124,120
Accounts Receivable - Related Party 170,400
Net Investment in Sales-Type Leases - Current 47,161
Resale Inventory 68,437
Parts and Supplies 865,961
Prepaid Income Taxes 440,000
Prepaid Expenses 159,664
Miscellaneous Receivables 69,398
Total Current Assets 4,096,858
Property and Equipment:
Vehicles 80,832
Furniture and Fixtures 253,761
Equipment 1,251,073
Leasehold Improvements 141,593
Totals - At Cost 1,727,259
Less Accumulated Depreciation and Amortization 1,287,783
Property and Equipment - Net 439,476
Other Assets:
Goodwill 462,972
Deferred Tax Asset (net of valuation allowance of $156,000) 73,000
Net Investment in Sales-Type Leases - Noncurrent 25,199
Other Assets 95,516
Total Other Assets 656,687
Total AssetS $ 5,193,021
The accompanying notes and independent auditor's report should be
read in conjunction with the consolidated financial statements.
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1999
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable $ 1,656,132
Accounts Payable - Related Party 274,723
Accrued Expenses 418,009
Bank Revolving Line of Credit 1,595,672
Total Current Liabilities 3,944,536
Commitments
--
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 4,029,614 Shares, Outstanding 3,715,888 Shares 3,716
Paid-in Capital 5,182,739
Accumulated Deficit (3,894,124)
1,292,331
Less: treasury stock, 313,726 shares at cost (43,846)
Total Stockholders' Equity 1,248,485
Total Liabilities and Stockholders' Equity $ 5,193,021
The accompanying notes and independent auditor's report should be
read in conjunction with the consolidated financial statements.
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended
December 31,
1 9 9 9 1 9 9 8
Revenue $18,360,010 $18,598,620
Costs and Expenses:
Cost of Sales 15,132,960 15,274,669
Selling, General and Administrative 3,325,332 6,484,247
Asset Impairment -- 834,640
Total Costs and Expenses 18,458,292 22,593,556
Operating [Loss] (98,282) (3,994,936)
Other Income [Expense]:
Interest Income 69,876 99,108
Interest Expense (141,874) (108,007)
Total Other Income [Expense] (71,998) (8,899)
[Loss] Before Provision [Benefit] for Income Taxes (170,280) (4,003,835)
Provision [Benefit] for Income Taxes:
Current (9,019)
Deferred 72,000 (322,419)
Total Provision [Benefit] for Income Taxes 72,000 (331,438)
[Loss] from Continuing Operations (242,280) (3,672,397)
Discontinued Operations, Net of Income Taxes:
Loss from Operations (567,355)
(314,078)
Gain on Sale of Discontinued Operations, net of tax 66,551 --
Total [Loss] from Discontinued Operations (500,804) (314,078)
Net [Loss] $ (743,084)
$ (3,986,475)
Earnings per Share:
[Loss] from Continuing Operations per Share $ (0.07)
$ (0.91)
[Loss] from Discontinued Operations per Share $ (0.15)
$ (0.08)
Gain on Sale of Discontinued Operations per Share $ 0.02
$ --
Net [Loss] per Share $ (0.20)
$ (0.99)
Weighted-Average Number of Shares Outstanding 3,715,888 4,029,614
The accompanying notes and independent auditor's report should be
read in conjunction with the consolidated financial statements.
- -----------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------
Retained
Earnings Total
Common Stock Paid-in(Accumulated Treasury Stock Stockholders'
Shares Amount Capital Deficit) Shares Amount Equity
Balance - December 31, 1997
4,041,126 $4,041 $5,627,114 $835,435 - 0 - - 0 - $ 6,466,590
Issuance Pursuant to Stock
Purchase Agreement -
December 28, 1995
75,000 75 (75) -- -- -- --
Redemption of Stock
(86,512) (86) (109,914) -- -- -- (110,000)
Reclassification of
Redeemable Common Stock
(313,726) (314) (399,686) -- -- -- (400,000)
Net [Loss] -- (3,986,475) -- (3,986,475)
Balance - December 31, 1998
3,715,888 3,716 5,117,439 (3,151,040) -- -- 1,970,115
Purchase of treasury stock-- -- 313,726 (43,846) (43,846)
Fair Value of Options Issued
to Nonemployee -- 65,300 -- -- 65,300
Net [Loss] -- -- (743,084) -- --(743,084)
Balance - December 31, 1999
3,715,888 $3,716 $5,182,739 $(3,894,124) 313,726 $ (43,846) $ 1,248,485
The accompanying notes and independent auditor's report should be
read in conjunction with the consolidated financial statements.
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended
December 31,
1 9 9 9 1 9 9 8
Cash Flows from Operating Activities:
Net [Loss] $ (743,084)$ (3,986,475)
Adjustments to Reconcile Net Loss to
Net Cash Provided by Operating Activities:
Depreciation and Amortization 293,701 436,389
Gain on Sale of Discontinued Operations (66,551)
- --
Fair Value of Options Issued to Nonemployee 65,300 --
Asset Impairment -- 1,721,154
Amortization of Parts and Supplies 875,767 1,086,313
Provision for Bad Debts 36,000 310,747
Deferred Income Taxes 72,000 (327,835)
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable & Net Investment Sales-Type Leases 1,410,416 (196,249)
Resale Inventory 444,742 (128,938)
Parts and Supplies (815,684) (979,289)
Prepaid Income Taxes (96,338) (20,118)
Prepaid Expenses (55,237) 68,604
Miscellaneous Receivables (44,200) (12,246)
Other Assets (2,433) 170
Increase [Decrease] in:
Accounts Payable and Accrued Expenses (708,874) 1,065,177
Total Adjustments 1,408,609 3,023,879
Net Cash Provided by [Used in] Operating Activities 665,525 (962,596)
Cash Flows from Investing Activities:
(Increase) Decrease in Cash - Restricted 443,846 (26,949)
Acquisition of Property and Equipment (37,685) (198,621)
Proceeds from Sale of Discontinued Operations 200,000 --
Net Cash Provided by [Used in] Investing Activities 606,161 (225,570)
Cash Flows from Financing Activities:
Payments on Long-Term Debt (12,174) (7,672)
Redemption of Common Stock (443,846) (110,000)
(Payments) Proceeds on Revolving Line of Credit (712,984) 1,161,817
Net Cash [Used in] Provided by Financing Activities (1,169,004) 1,044,145
Net Increase [Decrease] in Cash and Cash Equivalents 102,682 (144,021)
Cash and Cash Equivalents - Beginning of Year 49,035 193,056
Cash and Cash Equivalents - End of Year $ 151,717 $ 49,035
The accompanying notes and independent auditor's report should be
read in conjunction with the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended
December 31,
1 9 9 9 1 9 9 8
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $192,924 174,752
Income Taxes $ 6,045 $ 10,394
The accompanying notes and independent auditor's report should be
read in conjunction with the consolidated financial statements.
F-24
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 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 Maryland, Virginia, District
of Columbia, Delaware, Pennsylvania, New Jersey, New York,
Connecticut, Illinois, and California. 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 18 to 24 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, 1999 and 1998 was
$255,784 and $262,068, 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 2002.
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, 1999 are:
Year ending
December 31,
2000 $ 88,820
2001 31,129
Total 119,949
Less: Interest Portion (47,589)
Total $ 72,360
Current $ 47,161
Noncurrent $ 25,199
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 7].
Goodwill Policy - Amortization is provided on a straight-line basis
over 15 years. Goodwill, net of accumulated amortization of
approximately $463,000, represents the excess of cost over the fair
value of net assets acquired. Accumulated amortization at December
31, 1999 was approximately $98,000.
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. In 1998, it was determined
that the estimated future cash flows were below the carrying value of
the Companys 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).
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 financial
reporting purposes.
Advertising Costs - Advertising costs are expensed when incurred.
Advertising expense was $22,562 and $50,841 for the years ended
December 31, 1999 and 1998, respectively.
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 revenue 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, 1999 and 1998.
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, 1999 consist of:
Receivables Under U. S. Government Contracts and Subcontracts: 232,732
Total Commercial & Other Receivables 2,364,720
2,597,452
Less: Allowance for Doubtful Receivables 233,534
Total $ 2,363,918
[4] Revolving Line of Credit
The Company has a line of credit with a bank. The line bears
interest at the rate of 3.0% over prime. The prime rate at December
31, 1999 was 8.5%. 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 or the tangible net worth requirements at
December 31, 1999, and is currently in a workout arrangement with the
lender. The balance due on the line of credit at December 31, 1999
was $1,595,672. 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 currently using the line to fund its
operations until a new source of financing can be obtained. From
March 6, 2000 until March 16, 2000, the maximum amount outstanding
under the line was $1,750,000. From March 17, 2000 to March 23,
2000, the maximum amount outstanding under the line was $1,500,000.
Beginning March 24, 2000 the maximum amount outstanding under the
line will decrease by $100,000 per week.
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4
[5] Fair Value of Financial Instruments
SFAS No. 107, "Disclosure about Fair Value of Financial Instruments"
requires the disclosure of the fair value of financial instruments.
The carrying amount of the revolving line of credit is estimated to
approximate fair value because of the short maturities of those
instruments.
[6] 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
2000 $ 713,576
2001 566,209
2002 519,621
2003 356,930
2004 231,978
Thereafter 439,878
Total $2,828,192
Total rent expense for the years ended December 31, 1999 and 1998
approximated $807,700 and $860,100, respectively.
In April 1995, the Company entered into employment agreements with
its Chief Executive Officer, Chief Financial Officer, and its
President for an initial period through 1999 with automatic renewals
for successive one-year periods, unless terminated by the Company or
the executive. The Chief Financial Officer left the Company during
1999. His successor is under a one-year consulting agreement that
expires August 15, 2000. The remaining agreements provide for base
compensation aggregating $443,000 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. [See Note 11].
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5
[7] Income Taxes
The components of provision [benefit] for income taxes are as follows:
December 31,
1 9 9 9 1 9 9 8
Current:
Federal $ - 0 - $116,385
State - 0 - (132,679)
Total Current Provision [Benefit] - 0 - (16,294)
Deferred:
Federal 57,744 (298,504)
State 14,256 (29,331)
Total Deferred Provision [Benefit] 72,000 (327,835)
Total $ 72,000 $(344,129)
The following table reconciles the U.S. federal income tax rate to
the Company's effective tax rate:
1 9 9 9 1 9 9 8
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 nondeductible goodwill expense 28.0 %
Valuation allowance 78.0 %
Totals 42.0 % (8.0)%
The tax effects of temporary differences, loss carryforwards and the
valuation allowance that gives rise to deferred tax assets at
December 31, 1999 were as follows:
Temporary Difference - Inventory Adjustment $ 73,000
Net Operating Losses 1,160,000
Less: Valuation Allowance (1,160,000)
Deferred Tax Asset $ 73,000
The Company has approximately $2,976,000 of loss carryforwards that
may be offset against future taxable income. If not used, the
carryforwards will expire in 2019.
[8] Related Party Transactions
For the years ended December 31, 1999 and 1998, the Company
recognized revenue approximating $1,165,000 [including equipment
sales of $52,000], and $1,061,000 [including equipment sales of
$518,400], respectively, from a corporation owned by the Company's
majority stockholder. At December 31, 1999, accounts receivable and
accounts payable include $170,400 and $274,723, respectively, from
the related party.
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6
[9] Major Customers
Revenue under U. S. government contracts approximated 19% and 18%,
respectively, of total maintenance contract revenue for the years
ended December 31, 1999 and 1998.
[10] 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 $74,000 in financial institutions which
are subject to such risk.
[11] 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.
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, a majority of the assets and liabilities of
Cintronix, Inc. were sold to Interactive Systems, Inc.
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7
[11] Acquisition of Subsidiary and Divisions [Continued]
["ISI"], a corporation owned by the Company's majority stockholder,
for $200,000. 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.
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.
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.
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #8
[12] Discontinued Operations
On June 30, 1999, the Company sold a majority of the operating assets
and liabilities of Cintronix, Inc., a wholly owned subsidiary to
Interactive Systems, Inc. ["ISI"], a corporation owned by the
Company's majority stockholder. Cintronix, Inc.'s operations
involved the sale and service of computer equipment. The transaction
resulted in the Company realizing cash proceeds of $200,000 and a
gain on the sale of the discontinued operations, approximating
$67,000. No significant income taxes resulted from the gain on the
sale of the Company's discontinued operations. Accordingly, results
from Cintronix, Inc. are shown as discontinued operations with the
prior year restated. Components of amounts reflected in the income
statements are presented in the following table:
Year ended
December 31,
1 9 9 9 1 9 9 8
Revenue $5,368,345 $10,356,219
Costs and Expenses 5,918,049 10,609,417
Loss before Other Expense and Income Taxes (549,704) (253,198)
Other Expense (17,651) (73,571)
Income Taxes -- 12,691
Gain on Sale of Discontinued Operations, Net of Tax 66,551
- --
Total $(500,804) $ (314,078)
[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, 1999:
Exercisable
Outstanding Stock Options Stock Options
Weighted-Average
Range of Remaining Weighted-Average Weighted-Average
Exercise Prices Shares Contractual Life Exercise Price Shares Exercise Price
$0.87 - $1.50 11,050 6 $0.93 11,050 $0.93
$5.38 119,750 6 $5.38 119,750 $5.38
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 9 1 9 9 8
Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price
Outstanding - January 1, 130,800 $ 5.00 139,350 $4.99
Granted -- -- -- --
Exercised -- -- -- --
Forfeited/Expired -- -- (8,550) (4.69)
Outstanding - December 31, 130,800 $ 5.00 130,800 $ 5.00
Exercisable - December 31, 130,800 $ 5.00 130,800 $ 5.00
Shares Available on December 31,
for Options that May Be Granted 169,200 169,200
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.
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.
CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #11
[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, 1999 Services Equipment Sales Total
- -----------------------------------------------------------------------
Revenue 12,901,125 5,458,885 18,360,010
Cost of Goods Sold and Services
Performed 10,288,414 4,844,546 15,132,960
Maintenance Parts And Consolidated
Year Ended December 31, 1998 Services Equipment Sales Total
- -----------------------------------------------------------------------
Revenue 12,788,646 5,809,974 18,598,620
Cost of Goods Sold and Services
Performed 10,011,107 5,263,560 15,274,669
Asset Impairment 834,640 -- 834,640
Segment information on the Company's interest expense, depreciation
and amortization expense, income tax expense, fixed asset
acquisitions, goodwill and deferred tax asset is unavailable.
[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.
[16] Effect of Year-end Adjustments
In the financial statements included in the Company's quarterly
filings on Form 10QSB for the year ended December 31, 1999, the
Company did not account for its inventory and allowance for doubtful
accounts properly. The fourth quarter includes an additional expense
of approximately $275,000 related to the Company's inventory
valuation and approximately $200,000 related to the Company's
write-offs of doubtful accounts.
The Company is in the process of determining the impact on the
previous quarters and amending the quarterly filings.
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: 55
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: 45
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: 45
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 Companys 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, 1999, the 1999
fiscal year and representations by reporting persons that no other
reports were required for the 1999 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 Companys executive officers:
Annual Compensation Awards
_______________________________________________________________________________
Name Other Number of
and Annual Under-
Principal Comp. lying
Position Year Salary Bonus Options Options
_______________________________________________________________________________
Donald C. 1999 $191,439 0 0 0
Weymer
Chief
Executive
Officer,
Chairman of
the Board,
Secretary
1998 $180152 0 0 0
1997 $178,464 0 0
William F. 1999 $159,527 0 0 0
Pershin
President
and Director
1998 $150,122 0 0 0
1997 $142,974 0 0 0
Item 11. Security Ownership of Certain Beneficial Owners and
Management
The following table sets forth, as of December 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 1,165,000 31.3%
1013 Parrs Ridge Road
Spencerville,
Maryland 20868
William F Pershin 640,000 17.2%
11616 Morning Star Drive
Germantown,
Maryland 20876
All executive 1,805,,000 48.5%
officers and
directors as a group
(2 persons)
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. For the years
ended December 31, 1999 and 1998, the Company recognized revenue
approximating $1,571,690 [including equipment sales of $52,087], and
$1,571,690 [including equipment sales of $669,700], respectively,
from a corporation owned by the Company's majority stockholder. 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 Underwriters 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
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.
March 28, 2000 By: /s/ Donald C. Weymer
Date Donald C. Weymer
Chief Executive Officer
March 28, 2000 By: /s/ William F. Pershin
Date William F. Pershin
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.
March 28, 2000 By: /s/ Donald C. Weymer
Date Donald C. Weymer
Chairman of the Board, Chief Executive
Officer and Director
March 28, 2000 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
