UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(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, 1996
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: 0-26622
COMPUTER MANAGEMENT SCIENCES, INC.
(Exact name of registrant as specified in its charter)
Florida 59-2264633
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
8133 Baymeadows Way, Jacksonville, Florida 32256
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (904) 737-8955
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, $.01 par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of shares of the registrant's common stock held by
non-affiliates of the registrant as of February 28, 1997, was approximately
$157,553,000.
The number of shares of the registrant's common stock issued and outstanding as
of February 28, 1997 was 12,998,451.
Documents Incorporated by Reference: Parts of the Company's definitive proxy
statement for the Annual Meeting of the Company's Shareholders to be held on
June 6, 1997 are incorporated by reference into Part III of this Form.
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COMPUTER MANAGEMENT SCIENCES, INC.
Form 10-K For Fiscal Year Ended December 31, 1996
Table of Contents
Item Number in
Form 10-K Page
PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 11
Item 3. Legal Proceedings........................................... 11
Item 4. Submission of Matters to a Vote of Security Holders......... 11
PART II
Item 5. Market For Registrant's Common Equity and Related Stockholder
Matters.................................................. 12
Item 6. Selected Financial Data..................................... 13
Item 7. Management's Discussion & Analysis of Financial Condition and
Results of Operations.................................... 15
Item 8. Financial Statements and Supplementary Data................. 20
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure................................. 20
PART III
Item 10. Directors and Executive Officers of the Registrant......... 21
Item 11. Executive Compensation..................................... 21
Item 12. Security Ownership of Certain Beneficial Owners and
Management.............................................. 21
Item 13. Certain Relationships and Related Transactions............. 21
PART IV
Item 14. Exhibits, Financial Statements, Schedules, and Reports on
Form 8-K................................................ 22
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COMPUTER MANAGEMENT SCIENCES, INC.
Form 10-K For Fiscal Year Ended December 31, 1996
PART I
Item 1. Business
General
Computer Management Sciences, Inc. ("CMSI" or the "Company") provides
information technology consulting and custom software development services to a
diverse group of clients, primarily Fortune 1000 companies, other large
organizations and state and local governments located throughout the United
States. The Company's services are generally an outside resource supplementing a
client's internal information technology ("IT") capabilities, and include a
broad range of technical services, such as technology support services, IT
solutions services and strategic IT consulting. Technology support services
include systems support and maintenance and contract programming. Solutions
services include software application design, development and implementation, as
well as systems integration. Strategic consulting services include planning and
designing enterprise-wide information systems and business process
re-engineering which allow clients to maximize the strategic value of business
information.
The Company was founded in 1983 as a provider of technology support and
contract programming. In late 1992 and early 1993, in response to industry
trends, the Company decided to seek more profitable and higher value-added
engagements, particularly client/server solutions engagements and strategic IT
consulting. Today, CMSI's services typically are delivered by a "Solutions Team"
consisting of technical professionals having an appropriate combination of
support, solutions and strategic consulting expertise. The Company believes this
Solutions Team approach differentiates CMSI from competitors offering
conventional contract staffing services because this service delivery structure
allows CMSI to cross-market a broader range of skills to existing clients.
Solutions Teams are often organized within the Company's System Outsourcing
Centers and employ the "Software Factory Process" ("SFP"), which is a
standardized process, developed by the Company, for the creation of
documentation and the development of custom software. The SFP utilizes the
Company's proprietary Evolution(R) methodology, which is a structured,
step-by-step approach to application development that facilitates both the
design of systems and the integration of these systems with a client's
organizational objectives. Also, the Company has strategic alliances with a
number of major technology companies, including Logic Works, Inc., Microsoft
Corp., PowerSoft Corporation, Inc. and Texas Instruments Incorporated, which
provide access to technical and marketing information, specialized training and
cooperative marketing efforts.
The Company provides services through its corporate headquarters located
in Jacksonville, Florida and its network of ten branch offices located in
Hartford, Atlanta, Greenville, Boston, Portland (Oregon), Chicago, Cleveland,
Tallahassee, Charlotte and Detroit. Through February 1997, the Company
established three additional branches in Denver, Washington, D.C. (both the
Denver and Washington branches were established through the Company's merger
with Miaco Corporation) and Winston-Salem, North Carolina. At December 31, 1996,
the Jacksonville office, which serves as the prototype for the branches, was
staffed by approximately 155 professional consultants. The number of
professional consultants at the other branches ranged from 2 to 62, and averaged
approximately 31. The Company believes that its branch network of branch offices
provides clients with the local contact and a broad range of skill sets
necessary to establish and maintain long-term client relationships. Each branch
office is managed by a branch manager who reports directly to a Company vice
president.
In October 1995, the Company opened its first System Outsourcing Center
("SOC") in Jacksonville. The Company subsequently opened two additional SOCs;
Atlanta in December 1996 and Tallahassee in February 1997. A SOC is a modern,
highly secure facility equipped with a variety of advanced computer hardware,
software, and networking technologies (Windows N/T) and systems. A SOC is
designed to enable the Company to provide its full range of services in a
state-of-the-art Company facility rather than on-site at the client's facility.
The Company believes that the SOC architecture is a major differentiation among
its competitors and will be an important factor in attracting outsourcing
engagements and marketing its IT consulting services. The Company intends to
open three additional SOCs, in Charlotte, Denver, and Greenville, by year-end
1997.
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Forward Looking Statements
This Annual Report on Form 10-K contains certain information and trend
statements that constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act, which involve risks and
uncertainties. Actual results may differ materially from the results described
in the forward-looking statements. When used in this document, the words
"anticipate", "believe", "estimate", "expect", "intend", "project", "target" and
other similar expressions, as they relate to the Company, are intended to
identify forward-looking statements. Such statements reflect the current views
of the Company with respect to future events and are subject to certain risks,
uncertainties and assumptions that include, but are not limited to, growth
through business combinations and internal expansion, the Company's ability to
attract and retain qualified consultants, dependence on significant
relationships and the absence of long-term contracts, project risk, the
Company's ability to effectively manage a large and rapidly changing business,
pricing and margin pressures, and competition. Please refer to discussions of
these and other factors in this Annual Report and other Company forms on file
with the Securities and Exchange Commission. The Company disclaims any intent or
obligation to update publicly these forward-looking statements, whether as a
result of new information, future events or otherwise.
Acquisitions
CMSI is actively pursuing the acquisitions of companies that offer
synergistic technological capabilities not currently possessed by CMSI or
similar companies in desirable geographic markets.
In December 1995, the Company exchanged approximately 343,991 shares
(adjusted for subsequent stock splits) for all the outstanding common stock of
MIS Software Development, Inc. ("MSD"), a software development company, based in
Tallahassee, Florida, that provides information technology services to state and
local governments in the form of on-line data bases accessed and up-dated
directly by the user through its computer terminals. CMSI has identified the
state and local government market as a growth sector in the process of
converting to client/server technologies. MSD is a wholly-owned subsidiary of
CMSI and its acquisition was accounted for as a pooling-of-interests and,
accordingly, the consolidated financial statements for all periods presented
have been restated to include the accounts and results of operations of MSD. For
1996 and 1995, MSD contributed $4,411,325 and $2,837,617 towards CMSI's total
revenue of $46,095,306 and $31,998,220, respectively.
On January 30, 1996, the Company acquired certain assets, contracts and
personnel of Weldon Systems, Inc., a company located in Springfield,
Massachusetts that develops customized computer software applications for firms
in the financial services and insurance industries. The purchase price was
$225,000 and the acquisition was accounted for under the purchase method.
On April 30, 1996, the Company exchanged approximately 945,907 shares
(adjusted for subsequent stock splits) of its common stock for all of the
outstanding common stock of Summit Computer Services, Inc. ("SCS"), a computer
consulting firm, based in Charlotte, North Carolina, with concentrated expertise
in client/server technology. This business combination has been accounted for as
a pooling-of-interests and, accordingly, the consolidated financial statements
for all periods presented have been restated to include the accounts and results
of operations of SCS. SCS is a wholly-owned subsidiary of CMSI. For 1996 and
1995, SCS contributed $6,720,580 and $4,185,322 towards CMSI's total revenue of
$46,095,306 and $31,998,220, respectively.
On July 31, 1996, the Company acquired all of the assets of Pathways
Consulting, Inc. ("Pathways"), an information technology firm, based in Atlanta,
Georgia, specializing in providing systems integration consulting services to
the public utility industry. The acquisition was accounted for as a purchase,
with a total purchase price of $4.4 million in cash of which $2.3 million was
paid at closing and the balance, $2.1 million, is payable in equal annual
installments over an approximate three year period subject to the achievement of
certain revenue goals. Subsequent to December 31, 1996, Pathways exceeded its
first revenue goal and as a result $700,000 of contingent consideration will be
paid in the first quarter of 1997.
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On January 17, 1997, the Company exchanged 584,080 shares of its common
stock for all of the outstanding common stock of Miaco Corporation ("Miaco"), a
computer consulting firm, based in Denver, Colorado, specializing in relational
database and client/server technologies. Miaco also has an office in Washington,
D.C. This business combination will be accounted for as a pooling-of-interests
and, accordingly, the Company's historical consolidated financial statements
presented in future reports will be restated to include the accounts and results
of operations of Miaco. Miaco will continue to operate as a wholly-owned
subsidiary of the Company.
Industry Background
Historically, computing was conducted on proprietary host-based systems
operating on mainframes or minicomputers supplied by a single vendor. Operation
of these centralized "legacy" systems (i.e., established applications run on
mainframes that require frequent enhancements) typically was managed by a
Management Information Systems ("MIS") department that dictated the data
processing services available to the end-user. In the 1980's, the proliferation
of end-user software, such as financial spreadsheets, databases and word
processing packages, resulted in rapid growth in the numbers of end-users and
other systems, including some local area networks (LANs), not under MIS control.
Accordingly, the demand for more cost-effective, responsive and flexible
computing systems also grew. Organizations began implementing increasingly
varied computing environments made up of personal computers, work stations,
minicomputers and mainframes interconnected in local and wide-area networks.
This move to open, distributed "client/server" systems (i.e., a configuration of
interconnected personal computers or workstations and a server, such as a
minicomputer, which stores data and applications and distributes them across the
network) continues as organizations seek to take advantage of the improvements
in price/performance ratios offered by client/server architectures and enabling
technologies.
The Company believes this technological transition toward client/server
systems and the corresponding expansion of technological options offers
significant opportunities to the Company because, in many cases, clients have
found it prohibitively expensive to maintain an in-house MIS staff sufficiently
well-versed in emerging technologies. Moreover, many organizations are finding
it increasingly difficult and costly to support and maintain their existing
legacy systems because, as providers of IT services focus on the client/server
segment of the market, fewer IT professionals will maintain the skill sets
necessary to support legacy systems.
Strategies
The Company's objective is to be a leading provider of IT consulting and
custom software development services. To achieve this objective, CMSI will
continue to pursue the following strategies:
Provide Differentiated Value-Added Services. The Company is committed to
continuously expanding its services to meet the needs of its clients. In keeping
with this strategy, the Company will continue to provide network maintenance and
support services to its numerous legacy system clients, while increasingly
seeking more value-added IT solutions and strategic IT consulting projects,
which are typically billed at higher rates. The Company intends to continue to
capitalize on its proprietary Evolution(R) methodology to attract additional
high-value business, particularly engagements involving strategic IT consulting
services. In addition, the SOCs will enable the Company to compete for more
lucrative fixed-bid and outsourcing engagements and to demonstrate CMSI's
credentials and solutions capabilities.
Focus on Margins. CMSI seeks to continuously improve its gross margin and
operating margin. One initiative designed to enhance margins is to secure more
high-value IT solutions and strategic IT consulting engagements, such as
client/server projects, which constitute more than one-half of the Company's
current engagements. Another initiative to increase profitability is to obtain
more fixed-bid engagements which offer the opportunity to achieve higher margins
if projects are managed effectively. The Company also considers its current rate
of consultant utilization (99%) and its emphasis on evaluating and compensating
employees on the basis of profitability important components of its strategy to
improve its margins.
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Expand Client Base through Incremental Growth, New Branches and Strategic
Alliances. The Company intends to continue a three-pronged growth strategy to
expand its client base. The Company believes that it can sustain the internal
growth currently underway in its existing branches by establishing and
maintaining long-term client relationships through the continuous delivery of
differentiated value-added services that address a client's IT needs. The
Company also intends to continue to expand horizontally by opening additional
branches in new geographic locations. The Company believes that it has
established a successful operating model for establishing new branches that can
be replicated in other markets. Finally, the Company intends to continue to
expand vertically by acquiring firms that offer synergistic technological
capabilities not currently possessed by CMSI.
Continue Technology Leadership. The Company is determined to continuously
provide state-of-the-art IT solutions to its clients. For instance, the Company
has assisted many of its clients in smoothly making the transition from
legacy-based systems to client/server systems. In addition, the Company has
established strategic alliances with organizations such as Logic Works, Inc.,
Microsoft Corp., PowerSoft Corporation, Sybase, Inc., and Texas Instruments
Incorporated that enable CMSI to implement the latest in advanced hardware and
software technology. The Company believes its strategic alliances with vendors
will be enhanced by the SOCs, which are available to display additional vendor
hardware, utilize tools and profile new applications.
Attract, Develop, Motivate and Retain Quality People. One of the key
elements to the Company's continued success is its ability to hire highly
skilled consultants. Accordingly, CMSI devotes significant resources to
recruiting, maintaining a full-time recruiter in each branch and full-time
recruiting staff at corporate headquarters. To help attract and retain
consultants, the Company has established several employee benefit plans. The
Company's Employee Stock Ownership Plan (ESOP), established in 1989, has enabled
the Company's employees to acquire approximately 1,474,300 shares of Common
Stock of the Company as of December 31, 1996. The Company also motivates
employees by compensating them on the basis of their performance rather than
their position or tenure. For instance, each employee is eligible for a cash
bonus or incentive stock options based on his or her contribution to the
Company's profitability. Development of Company employees is fostered by
in-house peer-to-peer training and mentoring programs that are conducted after
hours in the SOCs. In addition, the Company facilitates development of its
employees' technical skills by providing a low-interest loan program which
allows employees to finance hardware and software purchases for personal use.
Company Services
CMSI provides a broad range of IT consulting services, including (i)
technology support services designed to provide professional personnel to
augment a client's internal information systems management and staff; (ii) IT
solutions services designed to solve a client's complex information systems
problems or to satisfy a client's technological objectives; and (iii) strategic
consulting services targeted at the enterprise-wide or business function level
and designed to enable a client to effectively integrate information systems and
strategic organizational goals. Historically, technology support services were
the Company's primary line of business, accounting for virtually all of the
Company's revenues in 1992. Since 1992, the Company has concentrated on
developing the technical and managerial expertise required to deliver high-level
IT solutions services and strategic IT consulting services to its clients. The
following is a description of the Company's principal services.
Technology Support Services. The Company provides highly skilled
professionals to augment the internal information systems management and staff
of its clients. Increasing costs of MIS personnel and facilities and hardware
constraints are the most significant competitive factors driving this area of
the Company's business. The Company can provide these services either at the
client's site or by outsourcing, in whole or in part, to a Company facility. The
Company believes implementation of SOCs will greatly enhance its ability to
provide cost-effective technology support services. Technology support
engagements, with the exception of some data processing projects, generally are
billed on a time and materials basis. Typical technology support engagements
include the following:
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Systems Support, Maintenance and Contract Programming. The Company
offers a variety of services designed to support and maintain legacy, midrange
(e.g., IBM AS/400), and client/server systems. These services include systems
maintenance and management support, contract programming and applications
enhancement, training and help desk services. The Company generally utilizes a
Service Level Agreement to define the scope of the various support and
maintenance services that will be provided in a client engagement.
Data Processing. The Company offers a diverse set of services to
clients seeking cost reductions and quality improvement in data processing.
Clients typically seek the Company's data processing services because they are
constrained by space or computing asset limitations. The Company can address
these problems by outsourcing a client's in-house data processing operation, in
whole or in part, to one of the Company's facilities. The Company believes the
SOCs have enhanced its ability to compete in the data processing segment of the
IT services market because they enable the Company to efficiently migrate the
client's data processing needs to the SOCs.
Training. The Company offers client/server training encompassing
various programming languages, software applications and methodologies. The goal
of training services is to enhance the client's satisfaction with, and
utilization of, the systems and applications developed for the client through
education in the technologies and methods used to design and to develop those
systems and applications. The Company believes that proper training is critical
to end-user "buy-in" to the Company's work product and the maintenance of
long-term client relationships. The Company currently supports training
activities at the SOCs which has strengthened this aspect of the Company's
services.
IT Solutions Services. The Company provides complex technical solutions to
the information technology needs and goals of its clients. The Company believes
that one of the primary factors behind the growth in the solutions segment of
the IT services market is the continuing migration by large organizations from
centralized, mainframe systems to open, distributed computer networks utilizing
client/server architectures. As a result, demand for the Company's IT solutions
services continues to grow. IT solutions services typically are billed on a time
and material basis, although the number of fixed-bid engagements undertaken by
the Company has recently increased. IT solutions services engagements often
involve one or more of the following services:
Software Application Design. The Company's software application
design services result in a functional and technical blueprint of the software
application to be developed. Such applications allow a client to enhance the
efficiency and functionality of specific business processes, support
organizational goals, and achieve competitive advantage. To enhance the quality
of the design, a Solutions Team identifies all potential business processes
supported by the application and their related functions, prioritizes these
processes, identifies end-user requirements and details the application
specifications. The Solutions Team then delivers a comprehensive plan for
developing and implementing the application. In order to improve the efficiency
and quality of this process, the Company maintains a library of object-oriented
software components to be re-used in software application development. In some
cases, the Solutions Team may employ the Company's Evolution(R) methodology in
applications design, which includes rapid application development techniques
such as parallelism, reusable components repositories, graphical user
interfaces, and time-boxing to enable the Company to design efficient,
cost-effective applications.
Development, Integration and Implementation. These services include
development of the custom application software necessary to operate the
application, integration of the application into the existing information
processing architecture, and testing the functionality of the application. Upon
completion of the development process, the Company helps the client implement
the use of the application by the organization. The Company typically provides
training in advance of each stage of application roll-out so that end-users of
the application have the skills required to utilize the application. This
facilitates acceptance of the application and any new related business
processes, and enhances utilization of the application by client personnel.
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Strategic IT Consulting Services. The Company's strategic IT consulting
services are targeted at either the enterprise-wide or the business function
level, and may include the re-engineering of certain business processes. These
services assist clients in identifying strategic organizational objectives and
in designing an IT infrastructure that will support them. From the Company's
perspective, management consulting firms typically attempt to optimize
performance through improved strategic initiatives, but often fail to integrate
these initiatives with the clients information technology system. Conversely,
systems integrators tend to optimize information systems, but often do not link
the system to the achievement of organizational objectives. CMSI, through the
use of its Evolution(R) methodology, provides an integrated solution by
identifying strategic objectives, either at the organizational or business
function level, and designing a system that enables the end-user to achieve the
defined objectives.
Using its Evolution(R) methodology, the Company delivers its strategic IT
consulting services through a series of phases, each of which begins with a
"facilitated workshop" (a Company term referring to a group discussion designed
to develop ideas), and results in a "deliverable" (a Company term referring to
either a document or prototype that details the results of the last phase and
guides the direction of the next phase). The facilitated workshops are led by a
Company team consisting of a session leader, who focuses and directs the
session, and a scribe, who prepares the current phase's deliverable. Clients
participate in the facilitated workshops through a team of client
representatives, ranging from executive officers to entry-level end-users. At
each phase of the process, the session leader ensures that group consensus is
reached regarding the harmony between the proposed system design and the
organizational objectives by requiring the group to endorse the phase's
deliverable before proceeding to the next phase. This process ensures an
information system design that achieves organizational objectives. Strategic IT
consulting services are billed on both a time and materials and fixed-bid basis.
The various stages of the typical strategic IT consulting project, using the
Evolution(R) methodology, are described below:
Planning and Requirements Analysis. CMSI provides expert analysis of
the potential and limitations of a client's current computing system prior to
beginning design of a new system. A detailed requirements analysis allows a
client to fully understand the capabilities of its current system and enables
the client to determine whether its current configuration will support its IT
needs and goals. Analysis services also include a review and analysis of the
architecture, security, risks and costs of the client's current computing
system.
Project Definition. The focus of the analysis (e.g., a specific
business function, an interrelated set of functions, or an enterprise-wide
system) is addressed at the project definition stage. The parameters of the
project are defined in a facilitated workshop involving high-level executives
and functional end-users who consider the strategic direction of the
organization in conjunction with the scope of the project. Once the boundaries
of the project are defined, the scribe and the session leader produce a system
plan that is endorsed by the project definition stage participants.
Business Process Re-engineering. After completing the project
definition stage previously described, clients sometimes decide that certain
business processes must be completely re-engineered. The Company attributes its
success in re-engineering business processes primarily to two factors: (i) it is
continuously experimenting with leading edge technology that can be implemented
to achieve client goals in an innovative fashion; and (ii) as an unbiased
observer, the Company is not bound by organizational constraints that often
inhibit creative problem solving. The Company utilizes its Evolution(R)
methodology to combine enabling technologies, such as client/server
architectures and graphical user interfaces, with the client's knowledge of its
business to achieve significant, and sometimes breakthrough, improvements of
business processes.
Systems Design. The Company's systems design services assist clients
in identifying and designing a network infrastructure that will support the
interrelated strategic business objectives and information needs identified in
previous stages. Design services include selection of viable systems platforms,
creation of migration plans from the existing to the proposed system,
integration of systems, applications and databases and project management. Once
the system is designed, the Company works with the client to develop plans to
implement and manage the improved system.
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Delivery of Services
Solutions Teams. The organizational structure of the Company has evolved
as the complexity and breadth of the IT consulting services offered by the
Company have expanded. To better serve client needs, the Company's services are
delivered by a Solutions Team consisting of Company professionals who offer
expertise spanning the full range of the Company's services. The Solutions Team
is important because it results in comprehensive, integrated solutions to client
needs, regardless of whether those needs involve a single Company service,
multiple unrelated services or an overlapping series of services. The Solutions
Team is also important because it facilitates cross-marketing of multiple
Company services, which furthers the Company's objective of establishing and
maintaining long-term relationships with its clients. For instance, many of the
Company's current legacy system clients eventually may migrate, in whole or in
part, to client/server systems. Because the Solutions Team already has an
established relationship with the client, it has an advantage in securing the
higher-margin solutions and consulting services resulting from such migration.
The organizational structure of the Company is designed to provide clients
across the United States with a range of responsive, efficient, state-of-the-art
solutions to virtually all of their IT needs.
Systems Outsourcing Centers. CMSI opened its first Systems Outsourcing
Center in Jacksonville during October of 1995 and two additional SOCs were
brought on-line during December 1996 and February 1997 in Atlanta and
Tallahassee, respectively. The SOCs are modern, highly secured facilities
equipped with a variety of advanced computer hardware, software, and networking
technologies and systems, and are designed to enable CMSI to provide its full
range of services in a Company facility rather than on-site at the client's
facility. Because of computing asset and facilities constraints at client's
locations, it is increasingly difficult for the Company to complete large scale
application or systems development using client hardware while the client's old
applications and systems continue to operate. The SOCs address this problem by
enabling CMSI to simulate many hardware environments and thereby to complete
projects at the SOCs before they are implemented at the client's facility. An
added advantage of the SOCs is that they allow the Company to assume project
management responsibility, which can improve the Company's margins if managed
effectively and increases the Company's ability to confidently seek fixed-bid
engagements. Accordingly, the Company is actively pursuing outsourcing
engagements and believes that the SOCs will provide a significant competitive
advantage in securing them.
The SOCs also serve an important marketing function for the Company
because they are visually and technically designed to make an effective first
impression on clients evaluating the Company for a potential engagement. The
client conference and demonstration center is used to introduce CMSI credentials
and, more importantly, exhibit similar solutions previously developed in a
multi-media, high impact presentation. After the demonstration, potential
clients tour the facility, including the multi-seat fully equipped training and
education center, the open, work-flow-oriented office and projects area, and
conference rooms. This escorted tour is designed to highlight that CMSI has (i)
the resources to handle a broad range of projects; (ii) technically similar
solutions already developed; (iii) the infrastructure required for a rapid
response to customer needs; and (iv) the management and technical support
required to effectively implement a potential project. The SOCs also serve as
the backbone of CMSI-NET, a nationwide communications network connecting
multiple Company locations and on-line clients. The Company anticipates opening
three more SOCs in Charlotte, Denver, and Greenville, by year-end 1997.
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Software Factory Process. The Software Factory Process ("SFP") is a
standardized process, developed by the Company, for the creation of
documentation and development of custom software utilizing the Company's
proprietary Evolution(R) methodology within the SOC infrastructure. The SFP is
written to be compliant with International Standards Organization (ISO) 9001
requirements. A standardized product description produced using guidelines from
Evolution(R) is the critical starting point to enable a smooth flow through the
software factory (i.e. SOC). This standardized product description provides a
complete computer-interpretable definition of the product's functional
capabilities. This standard, called the System Job Order (SJO), provides the
complete definition of the product in standard format that is easily read and
comprehended by the factory personnel. The first stop in the manufacturing
process for the SJO is Production Control. The SJO provides a definition that
categorizes the overall product functionality into functional blocks and
potentially some early identification of components. The functional component
descriptions are used by production control to check the component repository to
determine what functional components, if any, match the SJO and can be pulled
from the component inventory warehouse. The component inventories of other SOCs
are also on-line accessible to determine if the required components reside in
another SOC. After component requirements review, Production Control develops
the assembly instructions and/or component development specifications and routes
them to Production Planning to start the resource allocation process. To comply
with ISO 9001 requirements the SFP is the documentation for all procedures
followed in implementing each SJO. The SJO and its updates including actions by
all factory personnel relative to the SJO are tracked in CMSI's electronic
document management system. Additionally, periodic internal audits are performed
to maintain and ensure compliance with the SFP and ISO 9001.
Evolution(R) Methodology. Delivery of many of the IT consulting services
offered by CMSI are supported by the Company's proprietary Evolution(R)
methodology. Evolution(R) methodology is an integrated set of stages, tasks,
work products, techniques, tools and project management guidelines that provide
a standard (reproducible) approach for the planning, development, and
maintenance of systems targeted for the client/server architecture. CMSI
developed the Evolution(R) methodology in response to the computing evolution
from centralized mainframe systems to distributed client/server networks. The
Company recognized that, although a network of personal computers provides great
benefits by putting accessible, understandable and affordable computing power on
the desktop of the end-user, it often results in locally-optimized information
technology decisions (point solutions) that are not optimal for the organization
as a whole. For instance, applications and databases are increasingly built by
paraprofessionals (i.e., end-users programming with spreadsheets and fourth
generation language and who sometimes have little or no training) who make
technical choices only in the context of a particular application, often
resulting in incompatibilities and crippling after-the-fact efforts at
integrating systems across different departments and locations. These poorly
planned decisions often substantially increase the cost to integrate
incompatible systems and reduce overall efficiency and productivity. By
employing its Evolution(R) methodology, CMSI is able to help clients either
avoid or correct these mistakes.
Markets and Clients
CMSI provides services to a diverse group of clients, primarily Fortune
1000 companies, other large organizations and state and local governments
located throughout the United States. Because of the diverse range of industries
in which the Company's clients operate, the Company believes that it is not
dependent upon any single industry or market. Moreover, because many of the
engagements undertaken by the Company are long-term (in excess of one year),
they tend to occur irregularly and the revenue derived from any particular
client engagement can vary from year to year. The broad range of Company
services is demonstrated by the diversity of the Company's client base, which
includes, among many others, the following customers in selected industries
currently engaging the Company's services:
8
<PAGE>
<TABLE>
<CAPTION>
Financial Services Insurance Industrial Transportation
<S> <C> <C> <C>
American Express Company Aetna Life and Casualty Flour Daniel, Inc. CSX Corporation
AT&T Universal Card Services Blue Cross Blue Shield of General Electric Company Landstar Corporate
Merrill Lynch Florida, Inc. (BCBSFL) GE Electrical Distribution Services, Inc.
NationsBank Health Alliance Plan & Control Navistar International
Wachovia Operational Services Westinghouse Group W Corporation
Corporation Information Services
<CAPTION>
State & Local Government Aerospace Various Other Industries
<S> <C> <C>
Florida Department of Transportation Lockheed Aeronautical Systems AT&T American Transtech
Florida Department of Corrections Company Atlanta Gas & Light Company
North Carolina Department of United Technologies Corporation Unisys Corporation
Corrections --Pratt & Whitney Group
--Sikorsky Aircraft Division
</TABLE>
Based on 1996 revenue, the top five Company clients (in terms of
revenue to the Company) accounted for approximately 25% of revenue, with one
client (BCBSFL) accounting for more than 10% of revenue. As is typical in the
industry, most of the Company's contracts governing client engagements are
terminable at will upon two weeks written notice. The Company does not believe
that backlog or any contract or engagement with a single client is material to
its business.
Marketing and Sales
The Company markets its services directly through its professional
staff of consultants operating out of its Jacksonville headquarters and its ten
branches. The Company believes that the key to success in its industry is the
creation of long-term client relationships that are sustained by the delivery of
IT consulting services in an efficient and cost-effective manner.
Relationship-Based Marketing. The Company believes there are two
primary factors which help establish long-term, mutually beneficial client
relationships: (i) motivated personnel, particularly branch managers, who have
established contacts in a market and can offer local support; and (ii) an
organization structure that is sufficiently flexible to enable the resources of
multiple divisions and branches to be combined to provide solutions. The Company
believes it is able to provide the required local contact and support through
its branches, while its Solutions Team approach provides the required
flexibility and resources. Once the Company establishes an initial relationship,
it concentrates on familiarizing itself with all aspects of the client's
business in order to identify and capitalize on additional opportunities
providing the client with IT services and solutions. The Company believes its
Solutions Team approach also enhances this cross-selling process. The success of
this strategy is underscored by the fact that 13 of the Company's top 15
clients, measured in terms of 1996 revenue to the Company, have had an ongoing
relationship with CMSI for over three years.
Strategic Alliances and Promotion. The Company currently maintains
strategic alliances (a term used by the Company to describe the relationships
discussed below) with seven technology companies, Logic Works, Inc., Lotus
Development Corporation, Microsoft Corp., PowerSoft Corporation, Sprint
Communication Company, L.P., Sybase, Inc. and Texas Instruments Incorporated.
These alliances provide the Company with technical and marketing information,
including access to pre-release software and services and cooperative marketing
programs and, in some cases, allow the Company to provide technical education
and training based on the new technologies. The Company believes such alliances
help build the Company's credentials with clients and enhance the Company's
visibility and stature in the IT community. Although each of the strategic
alliances that the Company has entered into is formalized by a written agreement
9
<PAGE>
detailing the kind of information that will be made available and the level of
responsiveness owed to CMSI, such agreements are terminable at will by either
party. The initial fee paid by the Company to establish an alliance ranges from
$5,000 to $15,000, and annual renewals range from $800 to $3,000. During the
past three years, the greatest number of such strategic alliances was seven and
the greatest aggregate amount of fees (both initial fees and renewal fees) paid
in connection with such alliances in any one year was less than $50,000. The
Company does not consider any one of these strategic alliances material to its
business.
Competition
The commercial IT services market is highly competitive and served by
numerous firms, many of which serve only their respective local markets. The
market includes participants in a variety of market segments, including systems
consulting and integration firms, professional services companies, application
software firms, temporary employment agencies, the professional service groups
of companies such as Unisys Corporation and Digital Equipment Corporation,
facilities management and MIS outsourcing companies, certain "Big Six"
accounting firms, and general management consulting firms. The Company's
competitors include a range of companies such as Andersen Consulting, Technology
Solutions Corporation, Cambridge Technology Partners, Inc., Computer Horizons
Corp., Cap Gemini America, Business Systems Group, the consulting division of
Computer Sciences Corporation, Computer Task Group, Inc., Analysts International
Corp. and Keane, Inc.
Many participants in the IT consulting and software solutions market
have significantly greater financial, technical and marketing resources and
generate greater revenue than the Company. The Company believes that the
principal competitive factors in the commercial IT services industry include
responsiveness to client needs, efficiency of delivery of solutions, quality of
service, price, project management capability and technical expertise. Pricing
has its greatest importance as a competitive factor in the area of technology
support services. The Company believes that its ability to compete also depends,
in part, on a number of competitive factors outside its control, including the
ability of its competitors to hire, to retain and to motivate skilled
consultants and management personnel, the price at which others offer comparable
services and the extent of its competitors' responsiveness to customer needs.
Human Resources
As of December 31, 1996, the Company employed approximately 533 people,
of whom approximately 472 were consultants. The Company's continued success is
highly dependent upon its ability to attract and retain highly skilled IT
consultants. Competition for the services of these individuals is intense,
particularly with respect to the limited number of qualified project managers
and professionals with certain "niche" skills. Although the Company generally
has been successful in attracting employees with the skills needed to fulfill
customer engagements, demand for qualified professionals conversant with certain
technologies may outstrip supply as new and additional skill sets are required
to keep pace with evolving computer technology. Accordingly, the Company devotes
significant resources to recruiting by maintaining a full time recruiter in each
branch and a full time recruiting staff at corporate headquarters. To assure
that all candidates meet the expectations of both CMSI and its clients, CMSI is
committed to a Quality Assurance Program that involves, but is not limited to,
identification and qualification of potential candidates, detailed interviews
conducted by CMSI's recruiting personnel, managerial reference checks, technical
interviews conducted by CMSI's professional consultant staff, and an appraisal
by CMSI management.
Because the Company is committed to retaining its professional staff,
it instituted a Nonqualified Stock Option Plan in 1985, an Employee Stock
Ownership Plan and Trust ("ESOP") in 1989, a Profit Sharing 401(k) Plan in 1989,
and an Incentive Stock Option Plan in 1992. In 1995, the Company terminated the
Nonqualified Stock Option Plan and the Incentive Stock Option Plan and adopted a
new Stock Incentive Plan and Non-Employee Director Stock Option Plan. As of
December 31, 1996, the ESOP owned approximately 1,474,300 shares of the
Company's Common Stock. Contributions to the ESOP and Profit Sharing-401(k) Plan
10
<PAGE>
are at the discretion of the Company's Board of Directors and were $1,000,000 in
1996. The Company believes that this commitment to its employees is a
competitive advantage because it facilitates the Company's ability to recruit
and hire qualified consultants and engenders employee loyalty.
Intellectual Property Rights
The Company's success has resulted, in part, from its methodologies and
other proprietary intellectual property rights. The Company relies upon a
combination of trade secrets, nondisclosure and other contractual arrangements
and technical measures to protect its proprietary rights. The Company holds no
patents, but has registered copyrights on each of its Evolution(R) methodology
and its INTELLECT(R) software product. The Company generally enters into
confidentiality and nonsolicitation agreements with its employees, consultants,
clients and potential clients and limits access to and distribution of its
proprietary information. There can be no assurance that the steps taken by the
Company in this regard will be adequate to deter misappropriation of its
proprietary information or that the Company will be able to detect unauthorized
use and take appropriate steps to enforce its intellectual property rights.
The Company's business includes the development of custom software
applications in connection with specific client engagements. Ownership of such
software generally is assigned to the client. In addition, as a residual benefit
of some of the Company's client engagements, object-oriented software components
are created that can be reused in software application development and certain
software products or "tools". Often, such components remain the property of the
Company. Although the Company believes that its services and products do not
infringe on the intellectual property rights of others, there can be no
assurance that such a claim will not be asserted against the Company in the
future.
Item 2. Properties
The Company's headquarters are located in an approximately 11,000
square foot, Company-owned office building in Jacksonville, Florida. This
facility is currently fully utilized and serves as headquarters for senior
management. Also located in Jacksonville is an approximately 7,500 square foot,
company-owned SOC. During 1996, the Company purchased an approximately 8,300
square foot building in Tallahassee and an approximately 15,000 square foot
building in Atlanta, to house SOCs in those cities. The Atlanta property also
has an approximately 35,000 square foot vacant industrial building which is
being held for sale or lease. The remainder of the Company's branch offices are
operated from leased space with lease terms ranging from monthly to five years.
See note 11 of notes to consolidated financial statements for information as to
the Company's annual lease obligations. In January 1997, the Company closed on
an approximately 14,800 square foot building for a SOC in Greenville, South
Carolina. The Company anticipates that additional space will be required as
business expands and believes that it will be able to obtain suitable space as
needed.
Item 3. Legal Proceedings
The Company currently is not a party to any legal proceedings that it
believes could have a material adverse effect upon its operations or financial
condition.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year ended December 31, 1996.
11
<PAGE>
PART II
Item 5. Market For Registrant's Common Equity and Related Stockholder Matters
Market Price of and Dividends on the Company's Common Equity
Since its initial public stock offering on September 29, 1995, the
Company's Common Stock has been traded on the NASDAQ National Market System
under the symbol "CMSX". The following table sets forth, on a per share basis
for the periods shown (as adjusted for stock splits during 1996), the range of
high and low sales prices of the Company's Common Stock as reported by the
Nasdaq.
High Low
Fiscal Year 1996:
First Quarter $ 8.778 $ 6.667
Second Quarter $16.111 $ 7.556
Third Quarter $15.833 $11.833
Fourth Quarter $25.000 $15.333
Fiscal Year 1995:
Third Quarter (from Sept. 29, 1995) $ 7.778 $ 7.111
Fourth Quarter $ 9.889 $ 6.556
The Company has never paid any cash dividends on its Common Stock. The
Company currently intends to retain future earnings for use in its business and,
therefore, does not anticipate paying any cash dividends in the foreseeable
future. The Company's current borrowing arrangements prohibit the payment of
dividends without the lender's prior consent. As of February 28, 1997, there
were approximately 114 stockholders of record.
Recent Sales of Unregistered Securities
The following table shows all sales by the Company of securities during
the past three fiscal years and subsequent thereto that were not registered
under the Securities Act of 1933, as amended (the "Act"). All of such sales were
made for cash to key employees or non-employee directors of the Company,
pursuant to the exercise of stock options or otherwise, or to the Company's
ESOP. The Company claims an exemption from registration under the Act for such
sales in reliance upon the provisions of Section 3(b) or 4(2) of the Act
applicable to certain limited offerings of securities. All shares have been
adjusted for subsequent stock splits.
<TABLE>
<CAPTION>
Number of Shares Aggregate
Date Issued Purchaser of Common Stock Consideration
<S> <C> <C> <C>
3/29/94 Employee Stock Ownership Plan 107,014 shs. $ 165,000
12/28/94 Susan E. Quan 33,466 2,600
12/29/94 Employee Stock Ownership Plan 33,466 51,600
1/27/95 Susan E. Quan 8,365 650
3/6/95 Employee Stock Ownership Plan 156,055 318,000
5/1/96 Paul G. Kahn 1,350 8,400
8/21/96 Ann E. Kofsuske 3,346 5,154
10/29/96 Paul S. Whitman 6,693 4,551
1/7/97 Paul G. Kahn 1,350 8,400
</TABLE>
12
<PAGE>
In addition to the above sales of unregistered securities, the Company
also issued unregistered common shares in connection with the following mergers:
Acquisition of MIS Software Development, Inc. On December 28, 1995, the Company
exchanged approximately 343,991 shares (the "MSD Shares") of its common stock
(adjusted for subsequent stock splits) for all of the outstanding shares of
common stock of MIS Software Development, Inc., a Florida corporation ("MSD"),
in a reverse triangular subsidiary merger (the "MSD Merger"). The MSD shares
were issued pro rata to each of the five shareholders of MSD based on their
respective equity interest in MSD. The issuance of the MSD shares pursuant to
the MSD Merger was exempt from registration under the Act, by virtue of Sections
3(b) and 4(2) of the Act, and Regulation D promulgated by the Securities
Exchange Commission (the "Commission") thereunder, and was exempt from
registration under the laws of the State of Florida by virtue of Section
517.061, Florida Statutes.
Acquisition of Summit Computer Services, Inc. On April 30, 1996, the
Company exchanged approximately 945,907 shares (the "SCS Shares") of its common
stock (adjusted for subsequent stock splits) for all of the outstanding shares
of common stock of Summit Computer Services, Inc., a North Carolina corporation
("SCS"), in a reverse triangular subsidiary merger (the "SCS Merger"). The SCS
shares were issued pro rata to each of the three shareholders of SCS based on
their respective equity interest in SCS. The issuance of the SCS shares pursuant
to the SCS Merger was exempt from registration under the Act by virtue of
Sections 3(b) and 4(2) of the Act, and Regulation D promulgated by the
Commission thereunder, and was exempt from registration under the laws of the
State of North Carolina by virtue of Sections 78A-17(9) and (17) of the North
Carolina Securities Act and Rules .1205 and .1206 promulgated thereunder.
Item 6. Selected Financial Data
The selected financial data presented below as of and for the fiscal
years ended December 31, 1996, 1995, 1994, 1993, and 1992, have been derived
from the Company's consolidated financial statements. All historical data
previously reported has been restated to reflect the combination of the Company
and SCS on April 30, 1996, which has been accounted for as a
pooling-of-interests (see note 2 of the notes to consolidated financial
statements). This data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations," the
Company's consolidated financial statements, including the related notes
thereto, and other financial information appearing elsewhere in this report.
13
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended December 31,
-----------------------------------------------------------------------
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
(In thousands, except per share data)
Consolidated Statement of Operations
Data:
Revenue............................ $ 46,095 $ 31,998 $ 24,935 $ 17,468 $ 16,693
Direct costs....................... 28,451 20,061 15,597 10,964 10,955
-------- -------- -------- -------- --------
Gross profit.................... 17,644 11,937 9,338 6,504 5,738
Selling, general and
administrative expenses......... 8,859 7,440 6,500 5,044 4,994
-------- -------- -------- -------- --------
Income from operations......... 8,785 4,497 2,838 1,460 744
Other income....................... 1,525 533 39 76 41
-------- -------- -------- -------- --------
Income before income
taxes............................ 10,310 5,030 2,877 1,536 785
Provision for income taxes......... 4,091 1,893 1,073 464 305
-------- -------- -------- -------- --------
Net income ........................ $ 6,219 $ 3,137 $ 1,804 $ 1,072 $ 480
======== ======== ======== ======== ========
Unaudited pro forma information:
Net income as reported............. $ 6,219 $ 3,137 $ 1,804 $ 1,072 $ 480
(Benefit) charge in lieu of income
taxes, net (1)................... (114) 76 (23) 101 81
-------- -------- -------- -------- --------
Pro forma net income............... $ 6,333 $ 3,061 $ 1,827 $ 971 $ 399
======== ======== ======== ======== ========
Pro forma net income per share..... $ .44 $ .29 $ .20 $ .11 $ .05
======= ======= ======= ======= =======
Weighted average number of
common and common
equivalent shares outstanding... 14,433 10,550 9,131 8,975 8,710
======== ======== ======== ======== ========
Cash dividends per share........... $ - $ - $ - $ - $ -
======== ======== ======== ======== ========
<FN>
(1) Reflects federal and state income taxes (assuming an effective tax rate
of 39.1%) as if SCS had been a C Corporation for all periods presented,
but excludes the impact of the non-recurring charge relating to the
change in tax status of SCS from an S Corporation to a C Corporation,
which resulted in an increase in income tax expense of $247,000 in 1996
pursuant to the provisions of SFAS No. 109. Pro forma income tax
expense (benefit) for SCS was $133,000, $76,000, ($23,000), $101,000,
and $81,000 in 1996, 1995, 1994, 1993, and 1992, respectively. See note
2 to the consolidated financial statements.
</FN>
<CAPTION>
As of December 31,
------------------------------------------------------------------
---------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(In thousands)
Consolidated Balance Sheet Data:
Working capital $ 26,218 $ 32,842 $ 2,963 $ 2,331 $ 1,345
Total assets 46,330 40,079 8,159 5,440 4,858
Long-term liabilities, less
current portion 216 102 211 317 360
Total shareholders' equity $ 43,343 $ 36,999 $ 5,818 $ 3,771 $ 2,578
</TABLE>
14
<PAGE>
Unaudited Selected Quarterly Operating Results
The following table sets forth certain unaudited quarterly operating
information for the last eight quarters beginning with the quarter ended March
31, 1995, and ending with the quarter ended December 31, 1996. This data has
been prepared on the same basis as the audited financial statements contained
elsewhere herein and includes all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of the information for the
periods presented, when read in conjunction with the Company's financial
statements and notes thereto contained elsewhere herein. The operating results
for any previous quarter are not necessarily indicative of results of any future
period. The Company believes that its business is generally not seasonal, except
for the fourth calendar quarter, in which the number of holidays and employee
vacation days adversely impacts the Company's revenue and profitability in
comparison to preceding quarters.
The five quarters ended March 31, 1996 differ from those amounts previously
reported due to the restatement to reflect the combination of the Company and
SCS on April 30, 1996, which was accounted for as a pooling-of-interests.
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------------------------------------------------
1996 1995
<S> <C> <C> <C> <C> <C> <C> <C> <C>
----------------------------------------- ----------------------------------------
Dec. 31 Sept. 30 June 30 Mar. 31 Dec. 31 Sept. 30 June 30 Mar. 31
------- -------- ------- ------- ------- -------- ------- -------
(In thousands, except per share data)
Revenue $ 12,660 $ 11,782 $ 11,231 $ 10,422 $ 8,931 $ 7,774 $ 7,716 $ 7,577
Income before income taxes 2,827 2,617 2,539 2,327 1,680 1,094 1,119 1,137
Pro forma net income per share $ .12 $ .11 $ .11 $ .10 $ .07 $ .07 $ .07 $ .08
</TABLE>
Item 7. Management's Discussion & Analysis of Financial Condition and Results
of Operations
The following discussion and analysis should be read in conjunction with,
and is qualified in its entirety by, the consolidated financial statements,
including the notes thereto, and selected financial data included elsewhere in
this report. Historical events are not necessarily indicative of trends in
operating results for any future period. Reference is also made to Part I, Item
1 (Forward Looking Statements), with regard to the risks and uncertainties
associated with forward-looking statements.
Overview
The Company was incorporated in 1983 to pursue opportunities in the rapidly
growing information technology consulting services market. The Company provides
IT consulting and custom software development services to a diverse group of
clients, primarily consisting of Fortune 1000 companies, other large
organizations and state and local governments that are located throughout the
United States. The Company's services are generally an outside resource
supplementing a client's internal information technology capabilities, and
include a broad range of technical services, such as technology support
services, IT solutions services and strategic IT consulting. Technology support
services include systems support and maintenance and contract programming.
Solutions services include software application design, development and
implementation, as well as systems integration. Strategic consulting services
include planning and designing enterprise-wide information systems and business
process re-engineering which allow clients to maximize the strategic value of
business information.
15
<PAGE>
Significant Trends and Developments
Recent Growth. The Company has experienced significant growth in revenue
and geographic expansion in the past nine years. The Company established its
first branch in Hartford in 1987, after which it opened or acquired nine
additional branch offices: Atlanta (1990); Greenville, South Carolina (1991);
Boston (1993); Portland, Oregon, Chicago and Cleveland (1994); Tallahassee
(1995); Charlotte and Detroit (1996). A significant portion of the Company's
revenue growth since 1994 is attributable to the incremental revenue growth of
existing branches. For instance, the growth in revenue from 1994 to 1996 for the
branches listed above that began operating prior to January 1, 1994, was greater
than 100%. During the next 24 months, the Company expects to establish an
average of three or four branches per year by new start-up or acquisitions. As a
result of its merger with Miaco, the Company added branches in Denver and
Washington, D.C. in January 1997.
Strategic Shift toward Premium-Billed Services. In late 1992 and early
1993, the Company made a strategic decision to seek more value-added,
premium-billed engagements, particularly those involving complex client/server
solutions and strategic IT consulting. The Company also established strategic
alliances with several major technology companies, which have provided the
Company with access to technical and marketing information and specialized
training for client/server applications. Moreover, the Company continued
developing its Evolution(R) methodology, which has been of competitive value in
securing strategic consulting engagements. As a result of the implementation of
these efforts, in 1993 revenue was essentially flat, but profit margins
increased. Since 1993, revenue has grown rapidly and profit margins have
continued to increase.
Increase in Fixed-Bid Projects. Relying on its Software Factory Process and
Evolution(R) methodology, which enable the Company to better project and manage
its costs in fixed-bid projects, the Company recently has pursued a strategy of
seeking to improve its gross margins by undertaking more fixed-bid engagements.
During 1994, approximately 4% of the Company's revenue was attributable to
fixed-bid projects. Revenue attributable to fixed-bid projects was approximately
9% and 5% in 1996 and 1995, respectively. With recent awards of some significant
fixed-bids, it is anticipated that fixed-bids will represent approximately 12%
of revenue in 1997. The Company's SOC infrastructure has proven to be a viable
model that provides for greater management control of projects, improved
efficiency resulting from access to the latest "state of the art" technologies
and improved profitability resulting from the process and methodology. Although
fixed-bid projects historically have increased the Company's gross margins, the
Company bears the risk of cost over-runs and inflation in connection with such
projects, and there can be no assurance that such risks in the future might not
negatively impact the Company's gross margins.
Revenue Recognition. Revenue earned on time and materials engagements is
recognized as incurred. The Company recognizes revenue attributable to fixed-bid
engagements on the percentage of completion method. Utilization of this method,
which requires the Company's management to estimate the status of each fixed-bid
project at the end of each period, can increase the variability of the Company's
revenue because of the possible necessity from time to time of adjusting
estimates for subsequent developments. Although fixed-bid engagements are a
relatively small component of revenue, as the Company seeks to increase volume
of fixed-bid engagements, such possible variability in revenue recognition may
likewise increase.
ESOP/Profit Sharing Expense. The Company has actively used its profit
sharing plan and its Employee Stock Ownership Plan ("ESOP") to attract, develop,
motivate and retain employees and has made significant contributions to these
plans in recent periods. These contributions are a significant component of
selling, general and administrative expenses. The total cash and stock
contributions to these plans in 1996, 1995 and 1994 were approximately
$1,000,000, $770,000, and $663,000, respectively. Although contributions are
made at the discretion of the Board of Directors, the Company expects that
contributions will continue based on the Company's profitability.
16
<PAGE>
Significant Business Combinations During 1996. On April 30, 1996, the
Company exchanged approximately 945,907 shares (adjusted for subsequent sock
splits) of its common stock for all of the outstanding common stock of Summit
Computer Services, Inc. ("SCS"), a Charlotte, North Carolina based computer
consulting firm with concentrated expertise in client/server technology. This
business combination has been accounted for as a pooling-of-interests. Prior to
the merger, SCS was an S Corporation and therefore the tax liability on SCS's
income before tax was the responsibility of SCS's shareholders. For 1996 and
1995, SCS contributed $6,720,580 and $4,185,322 towards CMSI's total revenue of
$46,095,306 and $31,998,220, respectively. On July 31, 1996, the Company
acquired all of the assets of Pathways Consulting, Inc. (Pathways), an
Atlanta-based information technology firm specializing in providing systems
integration consulting services to the public utility industry. The acquisition
was accounted for under the purchase method.
<TABLE>
Results of Operations
<CAPTION>
The following table sets forth, for the periods indicated, selected
consolidated statement of operations data and the percentage of the Company's
total revenue represented by each line item presented, together with the
percentage increase or (decrease) in each line item between comparative periods:
Percentage of Total Revenue
Percentage
Increase (Decrease)
-----------------------------------------
Year Ended December 31,
----------------------------------------- ---------------------------
1996 1995 1994 1996/1995 1995/1994
---- ---- ---- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenue.............................. 100.0% 100.0% 100.0% 44.1% 28.3%
Direct costs......................... 61.7 62.7 62.6 41.8 28.6
Gross profit......................... 38.3 37.3 37.4 47.8 27.8
Selling, general and administrative
expenses........................... 19.2 23.3 26.1 19.1 14.5
Income from operations............... 19.1 14.0 11.3 95.4 58.4
Other income......................... 3.3 1.7 .2 186.0 1,272.6
Income before income taxes........... 22.4 15.7 8.5 105.0 74.8
Net income........................... 13.5 9.8 11.5 98.3 73.9
Pro forma net income................. 13.7 9.6 7.2 106.9 67.5
Pro forma net income per share....... - - - 51.2 45.0
</TABLE>
1996 Compared To 1995
Revenue. Revenue for 1996 was $46,095,000, a 44.1% increase over revenue of
$31,998,000 recorded in 1995. The increase in revenue was primarily attributable
to an increase in volume of services which was sustained by the growth in the
average billable consultant headcount from approximately 305 in 1995 to
approximately 424 in 1996, a 39.0% increase. Also contributing to the increase
in revenue was a slight change in the mix of services delivered by the Company.
During 1995, the Company's engagements consisted primarily of technology support
and IT solution services billed on a time and material basis. Over the course of
1996, however, the number of strategic IT consulting and outsourcing/fixed bid
projects undertaken by the Company steadily increased and positively impacted
average billing rates. The change in mix of services is primarily due to the
success of the SOC in Jacksonville, which came online in October 1995 and fixed
bid projects in the Greenville branch. Software sales also increased $177,000 or
17.8% over the prior year. The branch offices which significantly contributed to
the above increases were: Atlanta (including the Pathways acquisition, see note
2 to the consolidated financial statements); Charlotte (the business combination
with SCS); Cleveland; Greenville; Jacksonville; and Tallahassee (the business
combination with MSD), which posted revenue increases in 1996 of 60.0%; 60.6%;
66.4%; 127.2%; 46.9%; and 55.5%, respectively, over 1995.
17
<PAGE>
Gross Profit. The 1996 gross profit of $17,644,000 was a $5,707,000, or
47.8%, improvement over 1995. Expressed as a percentage of revenue, gross profit
was 38.3% in 1996 versus 37.3% in 1995. This improvement is attributable to the
delivery of more strategic IT consulting services, a larger percentage of fixed
bid business, and increased software revenue. As mentioned above, the success of
the SOCs has contributed to an increase in outsourced and fixed bid projects,
which generally command higher billing rates than technology support services.
Also contributing to the increased gross profit percentage in 1996, was a slight
increase in consultant utilization from 98% in 1995 to 99% in 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses totaled $8,859,000 in 1996, an increase of $1,419,000
over 1995. Expressed as a percentage of revenue, however, S,G&A expenses
decreased from 23.3% in 1995 to 19.2% for 1996. The improved percentage for 1996
resulted from increased volume and cost containment of marketing and other fixed
expenses. The single largest discretionary expense included in S,G&A was the
ESOP/Profit Sharing Plan contribution, which was 2.2% and 2.4% of revenue in
1996 and 1995, respectively.
Income Before Income Taxes. Income before income taxes increased $5,280,000
to $10,310,000 in 1996, an increase of 105.0%. As a percentage of revenue,
income before income taxes was 22.4% in 1996 compared to 15.7% for the prior
period. This result was driven by increased operating revenue, improved
operating efficiencies and interest income on the proceeds of the Company's
initial public offering, which closed on October 4, 1995. Interest income from
such proceeds amounted to $1,314,000 and $392,000 in 1996 and 1995,
respectively. The business combinations with MSD and SCS, which were accounted
for as poolings-of-interests in 1995 and 1996, contributed significantly to
income from operations during 1996. MSD's and SCS's contribution to income from
operations in 1996 was $1,079,000 and $1,331,000 versus $200,000 and $214,000 in
1995, respectively.
Net Income and Pro Forma Net Income. For 1996, net income was $6,219,000,
an increase of $3,082,000 or 98.3% over 1995. This improvement was a result of
increased revenue, stronger gross margins, cost containment of S,G&A expenses
and investment income earned on funds received from the Company's initial public
offering. For 1996, the effective tax rate was 39.7% versus 37.6% for 1995. The
significant increase in the effective tax rate is due to the business
combination with SCS, an S Corporation acquired by the Company on April 30,
1996. The acquisition of SCS was accounted for as a pooling-of-interests. As an
S Corporation, SCS's tax liability was the responsibility of its stockholders.
To reflect the earnings of SCS on an after-tax basis, a pro forma charge
(benefit) in lieu of income taxes has been included for the periods preceding
the termination of S Corporation status. A pro forma benefit for the impact of a
non-cash, non-recurring net charge for deferred income taxes resulting from the
termination of the S Corporation status has also been included pursuant to the
provisions of SFAS No. 109. On a comparable basis, pro forma net income
expressed as a percentage of revenue was 13.7% in 1996 versus 9.6% for 1995. Pro
forma net income per share increased 51.2% over the prior period.
1995 Compared To 1994
Revenue. Revenue for 1995 was $31,998,000, a 28.3% increase over revenue of
$24,935,000 recorded in 1994. The increase in revenue was primarily attributable
to an increase in volume of services which was sustained by the growth in the
average billable consultant headcount from approximately 257 in 1994 to
approximately 305 in 1995, an 18.7% increase. Management also contributed to the
increase in revenue through a concerted effort to improve billing rates and sell
higher-end IT solution (client/server) engagements. While the percentage of
revenue attributable to fixed bid projects remained relatively consistent with
1994, management's focus on improving profitability and gross margins had a
favorable impact on average billing rates. Software sales also increased
$482,000 or 94.0% over the prior year. The branch offices which significantly
contributed to the above increases were: Atlanta; Charlotte (the business
combination with SCS); Chicago (opened in 1994); Cleveland (opened in 1994); and
Jacksonville, which posted revenue increases in 1995 of 434.5%; 58.8%; 150.7%;
694.1%; and 14.2%, respectively, over 1994.
Gross Profit. The 1995 gross profit of $11,937,000 was a $2,599,000 or
27.8% increase over 1994. The increase in gross profit was attributable to the
increase in revenue discussed above. Expressed as a percentage of revenue,
however, gross profit remained relatively consistent with the prior year.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses totaled $7,440,000 in 1995, an increase of $940,000 over
1994. Expressed as a percentage of revenue, however, S,G&A expenses decreased
from 26.1% in 1994 to 23.3% for 1995. The improved percentage for 1995 resulted
from economies of scale and operating efficiencies. The single largest
discretionary expense included in S,G&A was the ESOP/Profit Sharing Plan
contribution, which was 2.4% and 2.7% of revenue in 1995 and 1994, respectively.
18
<PAGE>
Income Before Income Taxes. Income before income taxes increased $2,153,000
to $5,030,000 in 1995, an increase of 74.8%. As a percentage of revenue, income
before income taxes was 15.7% in 1995 compared to 8.5% for the prior period.
This result was driven by increased operating revenue, improved operating
efficiencies and interest income on the proceeds of the Company's initial public
offering, which closed on October 4, 1995.
Interest income from such proceeds amounted to $392,000.
Net Income and Pro Forma Net Income. For 1995, net income was $3,137,000,
an increase of $1,333,000 or 73.9% over 1994. This improvement resulted from
increased revenue, cost containment of S,G&A expenses and investment income
earned on funds received from the Company's initial public offering. For 1995,
the effective tax rate was 37.6% versus 37.3% for 1994. To reflect the earnings
of SCS on an after tax basis, a pro forma charge (benefit) in lieu of income
taxes has been included for the periods preceding the termination of S
Corporation status. On a comparable basis, pro forma net income expressed as a
percentage of revenue was 9.6% in 1995 versus 7.2% for 1994. Pro forma net
income per share increased 45.0% over the prior period.
Liquidity and Capital Resources
On September 29, 1995, the Company completed its initial public
offering of common stock, in which 4,916,250 shares of common stock were sold at
a price of $6.222 per share (shares and per share amount have been adjusted for
subsequent stock splits). The net proceeds from the sale amounted to $28.4
million. The Company continues to use the proceeds for general corporate
purposes, including establishing additional branch offices and outsourcing
centers, funding increased working capital requirements resulting from the
Company's anticipated growth, and acquisitions of companies in related
businesses.
During 1996, cash decreased $15,877,241 and working capital dropped
$6,624,673. While a number of factors contributed to the change, the main
components were increases in long-term investments, accounts and other
receivables, and property and equipment, as discussed below.
As of December 31, 1995, $28,515,745 was invested in funds with original
maturity of ninety days or less and were classified as cash equivalents. The
drop in interest rates experienced during 1996 required the Company to look for
investments with maturities extending beyond ninety days to increase its yield.
By the end of 1996, $4,895,482 was invested in debt and equity securities that
were classified as current investments and $5,542,369 was invested in various
corporate and governmental bonds with maturities exceeding one year and other
equity securities that were classified as long-term investments.
Accounts receivable increased $3,726,453 during 1996. The number days of
sales outstanding increased 10 days since the end of 1995 to 74 days of sales
outstanding. Therefore, the increase in accounts receivable is a reflection of
increased sales volume and an increase in days of sales outstanding experienced
during the period. The amount of fixed bid business rose during the year by
approximately $2.3 million. Most of this business requires payment after
completion of particular phases of a project or upon completion of the entire
project. The amounts of revenue earned in excess of billings increased
approximately $952,000 since the end of 1995.
During 1996, the Company spent approximately $5.1 million for capital
expenditures and approximately $2.5 million for acquisitions. Of the capital
expenditures, $3.4 million was spent for property and buildings to house the
Atlanta and Tallahassee SOCs and $1.5 million was spent for computer equipment,
software and furniture for the Atlanta and Tallahassee SOCs. Of the
acquisitions, $2.3 million was spent on the July 31, 1996 acquisition of
Pathways Consulting, Inc. and $0.2 million was spent on the January 30, 1996
acquisition of Weldon Systems, Inc.
The Company maintains a revolving credit facility with a commercial bank,
permitting advances equal to the lesser of $750,000 or 75% of "qualified
accounts" (defined as trade accounts receivables less than 90 days old which
approximated $8.1 million as of December 31, 1996). The credit facility has been
inactive during 1996. The Company assumed certain mortgage obligations totaling
$55,321 in connection with its December 28, 1995 merger with MSD, and $221,414
in notes payable in connection with its April 30, 1996 merger with SCS. The
mortgages and notes were paid off during the first half of 1996.
19
<PAGE>
The Company currently anticipates that its existing cash and operating cash
flow are sufficient to meet both the Company's short-term and long-term working
capital requirements and to fund its expansion through the establishment of
additional branches and SOC locations, and possible acquisitions.
Recently Issued Accounting Standards
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
No. 123), in October 1995. SFAS No. 123 requires the Company to estimate the
value of stock-based compensation and either record this value as compensation
expense in the consolidated statements of operations or disclose the amount in
the notes to consolidated financial statements. SFAS No. 123 was effective for
the Company beginning January 1, 1996.
Prior to January 1, 1996, the Company accounted for its stock option
plans in accordance with the provisions of Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. As such, compensation expense would be recorded on the date of
grant only if the current market price of the underlying stock exceeded the
exercise price. On January 1, 1996, the Company adopted SFAS No. 123, which
permits entities to recognize as expense, over the vesting period, the fair
value of all stock-based awards on the date of grant. Alternatively, SFAS No.
123 also allows entities to continue to apply the provisions of APB Opinion No.
25 and provide pro forma net income and pro forma earnings per share disclosures
for employee stock option grants made in 1995 and future years as if the
fair-value-based method defined in SFAS No. 123 had been applied. The Company
has elected to continue to apply the provisions of APB Opinion 25 and provide
the pro forma disclosure provisions of SFAS No. 123 (see note 8 of the
consolidated financial statements).
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements included in this report are listed in
Part IV, Item 14(a). The supplementary data included in this report is presented
in Item 6 under the caption "Unaudited Selected Quarterly Operating Results."
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
20
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
Information required by this Item is incorporated by reference to the
definitive proxy statement to be filed by the Company for the Annual Meeting of
Shareholders to be held June 6, 1997.
Item 11. Executive Compensation
Information required by this Item is incorporated by reference to the
definitive proxy statement to be filed by the Company for the Annual Meeting of
Shareholders to be held June 6, 1997.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information required by this Item is incorporated by reference to the
definitive proxy statement to be filed by the Company for the Annual Meeting of
Shareholders to be held June 6, 1997.
Item 13. Certain Relationships and Related Transactions
Information required by this Item is incorporated by reference to the
definitive proxy statement to be filed by the Company for the Annual Meeting of
Shareholders to be held June 6, 1997.
21
<PAGE>
PART IV
Item 14. Exhibits, Financial Statements, Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of the report:
1. The Company's 1996 consolidated financial statements, including the
report thereon of KPMG Peat Marwick LLP dated January 24, 1997, are
listed on the index immediately preceding the consolidated financial
statements at the end of this report.
2. All financial statement schedules are omitted because they are
inapplicable or the requested information is either immaterial or shown
in the financial statements of the Company or notes thereto.
3. For Exhibits see Item 14(c) below.
(b) The Company filed Form 8-K reports on January 12, 1996, May 3, 1996,
and January 31, 1997, Commission File No. 0-26622.
(c) List of Exhibits:
Exhibit No. Description
2.1** Agreement and Plan of Merger, dated December 28, 1995, by and
among the Company, MSD, MSD Acquisition, Inc., and each of the
shareholders of MSD.
2.3** Agreement and Plan of Merger, dated April 8, 1996, by and among
the Company, SCS, SCS Acquisition, Inc., and each of the
shareholders of SCS.
2.4** Agreement and Plan of Merger, dated January 16, 1997, by and among
the Company, Miaco, Bronco Acquisition, Inc., and each of the
shareholders of Miaco.
3.1* Amended and Restated Articles of Incorporation of the Company
3.2* Bylaws of the Company
4.2* Agreement dated October 15, 1991, between SunBank/North
Florida, N.A., and the Company ("Line of Credit")
4.3* Letter of Amendment to Line of Credit
21.1 Subsidiaries of the Registrant
27.1 Financial Data Schedule
99.3 Report of Williams, Cox, Weidner and Cox, Independent Auditors
for MSD
99.4 Report of Dellinger & Deese, L.L.P., Independent Auditors for SCS
* Filed with Amendment No. 3 to the Company's Registration Statement on
Form S-1, dated September 26, 1995, Registration No. 33-95544, and
incorporated herein by reference.
** Filed with the Company's Current Reports on Form 8-K, dated January 12, 1996,
May 3, 1996, and January 31, 1997.
(d) Financial Statements excluded by Rule 14a-3(b). None
22
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
COMPUTER MANAGMENT SCIENCES, INC.
Date: March 27, 1997 By: /s/ Anthony V. Weight
---------------------------
Anthony V. Weight, Senior Vice
President and Chief Financial Officer
By: /s/ Anthony Colaluca
---------------------------
Anthony Colaluca, Vice President and
Chief Accounting Officer
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed by the following persons on behalf of the
Registrant and in the capacities shown below as of March 27, 1997.
Signature Title
/s/ Jerry W. Davis President, Chief Executive
- --------------------------- Officer and Director
Jerry W. Davis
/s/ Anthony V. Weight Senior Vice President,
- --------------------------- Chief Financial Officer and
Anthony V. Weight Director
/s/ Larry A. Longhi Group Vice President and
- --------------------------- Director
Larry A. Longhi
/s/ David C. Minardi Group Vice President and
- --------------------------- Director
David C. Minardi
/s/ Edward W. Fishback, Jr. Group Vice President and
- --------------------------- Director
Edward W. Fishback, Jr.
/s/ Harry C. Stonecipher Director
- ---------------------------
Harry C. Stonecipher
/s/ Perry E. Esping Director
- ---------------------------
Perry E. Esping
23
<PAGE>
COMPUTER MANAGEMENT SCIENCES, INC.
Index to Consolidated Financial Statements
Page
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995 F-3
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994 F-5
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1996, 1995 and 1994 F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 F-7
Notes to Consolidated Financial Statements F-9
F-1
<PAGE>
Independent Auditors' Report
The Board of Directors and Shareholders
Computer Management Sciences, Inc.
We have audited the accompanying consolidated balance sheets of Computer
Management Sciences, Inc. and subsidiaries as of December 31, 1996 and 1995 and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1996.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We did not audit the financial
statements of MIS Software Development, Inc. and Summit Computer Services, Inc.,
which were acquired by the Company in business combinations accounted for as
poolings of interests, as described in note 2, and whose statements reflect
combined total assets constituting 7.1 percent of the consolidated totals at
December 31, 1995, and combined total revenues constituting 21.9 percent and
21.5 percent in 1995 and 1994, respectively, of the related consolidated totals.
Those statements were audited by other auditors whose reports have been
furnished to us, and in our opinion, insofar as it relates to the amounts
included for MIS Software Development, Inc., and Summit Computer Services, Inc.
are based solely on the reports of the other auditors.
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 and the reports of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Computer Management Sciences, Inc.
and subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Jacksonville, Florida
January 24, 1997
F-2
<PAGE>
<TABLE>
COMPUTER MANAGEMENT SCIENCES, INC.
Consolidated Balance Sheets
December 31, 1996 and 1995
<CAPTION>
Assets 1996 1995
------ ---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 14,191,603 30,068,844
Accounts receivable, net of allowance for
doubtful accounts of $147,000 and $40,000
for 1996 and 1995, respectively (note 6) 7,823,553 5,070,071
Revenue earned in excess of billings 1,485,205 532,707
Investments available for sale, at fair value (note 5) 4,895,482 -
Other receivables 81,516 61,043
Notes receivable (note 3) 425,250 41,609
Other current assets 85,436 46,539
------------- -------------
Total current assets 28,988,045 35,820,813
------------- -------------
Property and equipment:
Land 2,107,000 168,000
Buildings and improvements 3,282,703 1,516,356
Computers and software 1,930,150 1,049,166
Office furniture and equipment 1,191,804 811,400
Vehicles 313,181 169,883
------------- -------------
8,824,838 3,714,805
Less accumulated depreciation 1,481,048 1,126,707
------------- -------------
Net property and equipment 7,343,790 2,588,098
------------- -------------
Other assets:
Intangible assets, net of accumulated
amortization of $310,280 and $88,551
for 1996 and 1995, respectively (note 2) 2,544,604 312,823
Land held for investment (note 4) 424,065 428,465
Investments available for sale, at fair value (note 5) 5,542,369 646,536
Notes receivable, less current portion (note 3) 1,106,284 202,014
Other 380,457 80,551
------------- -------------
Total other assets 9,997,779 1,670,389
------------- -------------
Total assets $ 46,329,614 40,079,300
============= =============
(Continued)
</TABLE>
F-3
<PAGE>
<TABLE>
COMPUTER MANAGEMENT SCIENCES, INC.
Consolidated Balance Sheets (continued)
December 31, 1996 and 1995
<CAPTION>
Liabilities and Shareholders' Equity 1996 1995
------------------------------------ ---- ----
<S> <C> <C>
Current liabilities:
Notes payable (note 6) $ 100 232,396
Accounts payable 68,194 236,278
Accrued expenses (note 9) 2,231,161 1,720,825
Unearned revenue 106,690 531,913
Income taxes payable 312,249 181,760
Deferred income taxes (note 7) 52,108 75,425
------------- -------------
Total current liabilities 2,770,502 2,978,597
------------- -------------
Long-term liabilities:
Notes payable (note 6) - 44,439
Deferred income taxes (note 7) 216,309 57,666
------------- -------------
Total long-term liabilities 216,309 102,105
------------- -------------
Shareholders' equity (note 10):
Common stock, $.01 par value; 20,000,000
shares authorized, 12,413,021 and 5,479,950
shares issued and outstanding in 1996
and 1995, respectively 124,130 54,800
Preferred stock, $.01 par value; 5,000,000 shares
authorized, no shares issued and outstanding - -
Paid-in capital 30,078,816 29,337,969
Retained earnings 13,089,603 7,565,688
Unrealized gain on investments, net of income tax (note 5) 50,254 40,141
------------- -------------
Total shareholders' equity 43,342,803 36,998,598
------------- -------------
Commitments (notes 2 and 11)
Total liabilities and shareholders' equity $ 46,329,614 40,079,300
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
COMPUTER MANAGEMENT SCIENCES, INC.
Consolidated Statements of Operations
Years ended December 31, 1996, 1995 and 1994
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenue $ 46,095,306 31,998,220 24,935,415
Direct costs 28,450,872 20,060,669 15,597,173
--------------- ---------------- ---------------
Gross profit 17,644,434 11,937,551 9,338,242
Selling, general and administrative
expenses (notes 8 and 11) 8,859,077 7,440,408 6,499,983
--------------- ---------------- ---------------
Income from operations 8,785,357 4,497,143 2,838,259
Other income (expense):
Investment and other income (note 5) 1,452,814 542,171 82,567
Interest expense (4,990) (26,032) (30,116)
Other, net 77,046 17,002 (13,610)
--------------- ---------------- ---------------
1,524,870 533,141 38,841
--------------- ---------------- ---------------
Income before income taxes 10,310,227 5,030,284 2,877,100
Provision for income taxes (notes 2 and 7) 4,091,000 1,893,682 1,073,473
--------------- ---------------- ---------------
Net income $ 6,219,227 3,136,602 1,803,627
=============== ================ ===============
Unaudited pro forma information (note 2):
Net income as reported $ 6,219,227 3,136,602 1,803,627
(Benefit) charge in lieu of income taxes, net (114,207) 75,752 (23,561)
--------------- ---------------- ---------------
Pro forma net income $ 6,333,434 3,060,850 1,827,188
=============== ================ ===============
Pro forma net income per share $ .44 .29 .20
=============== ================ ===============
Weighted average number of common and
common equivalent shares outstanding 14,433,172 10,550,039 9,130,518
=============== ================ ===============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
COMPUTER MANAGEMENT SCIENCES, INC.
Consolidated Statements of Shareholders' Equity
Years ended December 31, 1996, 1995 and 1994
<CAPTION>
Unrealized Total
Gain Share-
Common Preferred Paid-in Retained (Loss) on holders'
Stock Stock Capital Earnings Investments Equity
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994 $ 31,698 - 1,030,646 2,683,459 - 3,745,803
Shares issued for exercised stock
options 521 - 20,179 - - 20,700
Shares issued to ESOP 694 - 317,306 - - 318,000
Dividends paid to shareholders of
pooled entities - - - (56,000) - (56,000)
Net income - - - 1,803,627 - 1,803,627
Unrealized loss on investments,
net of income tax (note 5) - - - - (13,640) (13,640)
--------- --------- ------------- ----------- --------- --------------
Balance at December 31, 1994 32,913 - 1,368,131 4,431,086 (13,640) 5,818,490
Shares issued for exercised stock
options 37 - 614 - - 651
Shares issued in initial public
offering 21,850 - 28,426,850 - - 28,448,700
Dividends paid to shareholders of
pooled entities - - - (2,000) - (2,000)
Stock issuance costs - - (457,626) - - (457,626)
Net income - - - 3,136,602 - 3,136,602
Unrealized gain on investments,
net of income tax (note 5) - - - - 53,781 53,781
--------- --------- ------------- ----------- --------- --------------
Balance at December 31, 1995 54,800 - 29,337,969 7,565,688 40,141 36,998,598
Shares issued for exercised stock
options 392 - 114,473 - - 114,865
Stock splits (note 10) 68,938 - (68,938) - - -
Contribution of undistributed
S Corporation earnings of
pooled entity - - 695,312 (695,312) - -
Net income - - - 6,219,227 - 6,219,227
Unrealized gain on investments,
net of income tax (note 5) - - - - 10,113 10,113
--------- --------- ------------- ----------- --------- --------------
Balance at December 31, 1996 $ 124,130 - 30,078,816 13,089,603 50,254 43,342,803
========= ========= ============= =========== ========= ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
<TABLE>
COMPUTER MANAGEMENT SCIENCES, INC.
Consolidated Statements of Cash Flows
Years ended December 31, 1996, 1995 and 1994
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flow from operating activities:
Net income $ 6,219,227 3,136,602 1,803,627
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 599,685 444,176 333,124
Net gain on disposition of property
and equipment (7,631) (1,984) (121)
Net gain on sale of investments (22,852) (25,655) (1,706)
Deferred income tax expense (benefit) 128,909 (3,721) (69,316)
ESOP stock contribution - - 318,000
Change in assets and liabilities:
Increase in accounts and other
receivables (3,726,453) (1,762,446) (1,220,716)
Increase in other current assets (38,897) (40,254) (4,088)
Decrease in refundable income taxes - 23,726 57,690
(Increase) decrease in other assets (299,906) 16,068 (31,036)
Increase in accounts payable and
accrued expenses 342,252 495,490 302,673
(Decrease) increase in unearned revenue (425,223) 262,079 142,186
Increase in income taxes payable 130,489 90,165 66,303
------------- ------------- -------------
Net cash provided by operating
activities 2,899,600 2,634,246 1,696,620
------------- ------------- -------------
Cash flow from investing activities:
Purchases of property and equipment (5,127,475) (1,127,960) (884,941)
Proceeds from the sale of property and equipment 9,610 23,703 32,005
Purchase acquisitions (2,457,262) (30,190) (364,270)
(Increase) decrease in notes receivable (1,287,911) (221,873) 8,250
Purchases of investments (13,490,608) (502,102) (138,332)
Proceeds from sale of investments 3,738,674 303,802 113,596
------------- ------------- -------------
Net cash used in investing activities (18,614,971) (1,554,620) (1,233,692)
------------- ------------- -------------
(Continued)
</TABLE>
F-7
<PAGE>
<TABLE>
COMPUTER MANAGEMENT SCIENCES, INC.
Consolidated Statements of Cash Flows (continued)
Years ended December 31, 1996, 1995 and 1994
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flow from financing activities:
Proceeds from issuance of common stock $ 114,865 28,449,351 20,700
Payment of stock issuance costs - (457,626) -
Dividends paid - (2,000) (56,000)
Proceeds from notes payable - 48,414 358,000
Repayment of notes payable (276,735) (186,578) (311,107)
---------------- --------------- ----------------
Net cash (used in) provided by
financing activities (161,870) 27,851,561 11,593
---------------- --------------- ----------------
Net (decrease) increase in cash
and cash equivalents (15,877,241) 28,931,187 474,521
Cash and cash equivalents at beginning of year 30,068,844 1,137,657 663,136
---------------- --------------- ----------------
Cash and cash equivalents at end of year $ 14,191,603 30,068,844 1,137,657
================ =============== ================
Cash paid for income taxes $ 3,831,602 1,794,867 932,516
================ =============== ================
Cash paid for interest $ 4,990 26,032 30,116
================ =============== ================
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
COMPUTER MANAGEMENT SCIENCES, INC.
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
(1) Summary of Significant Accounting Policies and Operations
Nature of Operations
Computer Management Sciences, Inc. (the Company) is a national consulting
and professional services company providing client/server solutions,
information technology, systems consulting, project management, systems
analysis and design, programming, and information systems outsourcing
services to a broad range of industries and software/hardware platforms.
Basis of Presentation
The accompanying consolidated financial statements include those of the
Company and its wholly owned subsidiaries, after elimination of all
significant intercompany accounts and transactions.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company
considers all short-term investments with an original maturity of ninety
days or less to be cash equivalents. The carrying amount approximates the
fair value because of the short maturity of these investments.
Investments
The Company accounts for its investments in accordance with Statement of
Financial Accounting Standards No. 115 (SFAS No. 115), "Accounting for
Certain Investments in Debt and Equity Securities."
Under SFAS No. 115, the Company has classified all of its investments,
consisting of equity and debt securities and mutual funds, as
available-for-sale which are recorded at fair value. Unrealized holding
gains and losses, net of the related income tax effects, are included as
a separate component of shareholders' equity, until realized. Investments
are categorized as short or long-term based on their stated maturity.
Investments with no stated maturity are categorized based on the
Company's best estimate as to when such investments will be disposed.
F-9
<PAGE>
COMPUTER MANAGEMENT SCIENCES, INC.
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies and Operations, continued
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed on
the straight-line method using estimated useful lives as follows:
Estimated Useful Lives
(in years)
Buildings 31
Building improvements 7 to 27
Computers and software 5
Office furniture and equipment 5 to 7
Vehicles 5
The Company reviews its property and equipment for impairment whenever
events or changes in circumstances indicate the carrying value of an
asset may not be recoverable. Recoverability is measured by comparison of
the carrying amount to the net cash flows expected to be generated by the
asset.
Intangible Assets
Intangible assets primarily consist of goodwill and non-compete
agreements, associated with purchased acquisitions. Goodwill is amortized
over the period estimated to benefit from the acquired assets which is
five to seven years. Non-compete agreements are amortized over the term
of the agreement. Management periodically assesses the recoverability of
intangible assets based on the cash flows from operations of the acquired
entity.
Revenue Recognition
The Company derives substantially all of its revenue from consulting
services provided on both a time-and-materials and fixed fee basis.
Revenue with respect to time-and-material contracts is recognized as
incurred. Revenue with respect to fixed fee contracts is recognized on a
percentage of completion basis and is adjusted monthly for the cumulative
impact of any revision in estimates. The Company recognizes the entire
loss on a fixed fee contract in the period when current estimates
indicate a loss.
Revenue earned in excess of billings and unearned revenue consist
principally of services performed and not yet billed and amounts billed
or received for services not yet performed.
F-10
<PAGE>
COMPUTER MANAGEMENT SCIENCES, INC.
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies and Operations, continued
Income Taxes
The Company follows the asset and liability method of accounting for
income taxes in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." Deferred tax assets and
liabilities are recognized for the future tax consequences attributable
to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred
tax assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Net Income per Common and Common Equivalent Share
Net income per common and common equivalent share is based on the
weighted-average number of common and common equivalent shares
outstanding during all years. Stock options granted with exercise prices
below the initial public offering (the Offering) price during the
twelve-month period preceding the initial filing date of the Offering
have been included in the calculation of common share equivalents, using
the treasury stock method, as if they were outstanding for all periods
presented. All other stock options granted more than twelve months prior
to the Offering and subsequent to the Offering have been included in the
computations since their date of issuance, using the treasury stock
method, only when their effect is dilutive.
Pro forma net income per common and common equivalent share, assuming
full dilution, is equal to that disclosed on the accompanying
consolidated statements of operations and thus is not separately
disclosed. Retroactive recognition has been given in the calculation of
earnings per share to the shares issued in the pooling of interest
mergers discussed in note 2 and the stock splits discussed in note 11.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
F-11
<PAGE>
COMPUTER MANAGEMENT SCIENCES, INC.
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies and Operations, continued
Concentration of Credit Risk
Financial instruments which potentially expose the Company to
concentrations of credit risk consist primarily of trade accounts
receivable. The Company has not experienced significant losses related to
receivables from individual customers or groups of customers in a
particular industry or geographic area. Due to these factors, management
believes no additional credit risk beyond amounts provided for collection
losses is inherent in the Company's accounts receivable
During 1996, the Company earned revenues from one customer that
totaled $4.8 million or 10.4% of total revenue.
Stock Option Plan
Prior to January 1, 1996, the Company accounted for its stock option
plans in accordance with the provisions of Accounting Principles Board
(APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations. As such, compensation expense would be recorded
on the date of grant only if the current market price of the underlying
stock exceeded the exercise price. On January 1, 1996, the Company
adopted SFAS No. 123, "Accounting for Stock-Based Compensation," which
permits entities to recognize as expense over the vesting period the fair
value of all stock-based awards on the date of grant. Alternatively, SFAS
No. 123 also allows entities to continue to apply the provisions of APB
Opinion No. 25 and provide pro forma net income and pro forma earnings
per share disclosures for employee stock option grants made in 1995 and
future years as if the fair-value-based method defined in SFAS No. 123
had been applied. The Company has elected to continue to apply the
provisions of APB Opinion 25 and provide the pro forma disclosure
provisions of SFAS No. 123.
(2) Business Combinations and Acquisitions
Business Combinations
On April 30, 1996, the Company issued approximately 945,907 shares
(adjusted for subsequent stock splits) of its common stock in exchange
for all of the outstanding common stock of Summit Computer Services, Inc.
(SCS), a Charlotte, North Carolina based computer consulting firm with
concentrated expertise in client/server technology. This business
combination has been accounted for as a pooling-of-interests and,
accordingly, the consolidated financial statements for all periods
presented have been restated to include the accounts and results of
operations of SCS. Prior to its acquisition by the Company, SCS had
elected S Corporation status for federal and state income tax purposes.
As an S Corporation, SCS's tax liability was the responsibility of its
stockholders. Included in the provision for income taxes in 1996 is a
non-cash, non-recurring charge of $246,876 for deferred income taxes
resulting from the termination of the S Corporation status.
F-12
<PAGE>
COMPUTER MANAGEMENT SCIENCES, INC.
Notes to Consolidated Financial Statements
(2) Business Combinations and Acquisitions, continued
Business Combinations, continued
To reflect the earnings of SCS on an after tax basis, a pro forma charge
(benefit) in lieu of income taxes of $132,669 in 1996, $75,752 in 1995
and ($23,561) in 1994 has been included, in the accompanying consolidated
statements of operations, for the periods preceding the termination of S
Corporation status. A pro forma benefit for the impact of the non-cash,
non-recurring net charge described above is also included for 1996.
On December 28, 1995, the Company issued approximately 343,991 shares
(adjusted for subsequent stock splits) of its common stock in exchange
for all of the outstanding common stock of MIS Software Development, Inc.
(MSD), an information systems consulting company. This business
combination has been accounted for as a pooling-of-interests combination
and, accordingly, the consolidated financial statements for all periods
presented have been restated to include the accounts and results of
operations of MSD.
The results of operations previously reported by the separate enterprises
and the combined amounts presented in the accompanying consolidated
financial statements for the years ended December 31, 1995 and 1994 are
summarized below:
1995 1994
---- ----
Revenue:
Company ......... $24,975,281 19,571,392
SCS ............. 4,185,322 2,636,081
MSD ............. 2,837,617 2,727,942
----------- -----------
Combined ... $31,998,220 24,935,415
=========== ===========
Net income (loss):
Company ......... $ 2,740,223 1,578,992
SCS ............. 193,740 (60,258)
MSD ............. 202,639 284,893
----------- -----------
Combined ... $ 3,136,602 1,803,627
=========== ===========
There were no significant transactions between the Company and MSD or SCS
prior to the combinations.
F-13
<PAGE>
COMPUTER MANAGEMENT SCIENCES, INC.
Notes to Consolidated Financial Statements
(2) Business Combinations and Acquisitions, continued
Acquisitions
On January 30, 1996, the Company acquired certain assets, contracts and
personnel of Weldon Systems, Inc. (Weldon), a Springfield, Massachusetts
company that develops customized applications for firms in the financial
services and insurance industries for $225,000. Goodwill of $185,000 was
recorded and is being amortized over 7 years.
On July 31, 1996, the Company acquired all of the assets of Pathways
Consulting, Inc. (Pathways), an Atlanta-based information technology firm
specializing in providing systems integration consulting services to the
public utility industry. The acquisition was accounted for as a purchase,
with a price of $4.4 million in cash of which $2.3 million was paid at
closing and $2.1 million of contingent consideration is payable in equal
installments over an approximate three year period if Pathways meets
certain revenue goals. Subsequent to December 31, 1996, Pathways exceeded
its first revenue goal and as a result $700,000 of the contingent
consideration will be paid in the first quarter of 1997, with goodwill
adjusted accordingly. Goodwill of $2,275,425 has been recorded thus far
and is being amortized over 7 years.
On March 18, 1994, the Company purchased certain assets of Symmetry
Systems, Inc. (Symmetry) for $272,086. As part of this transaction,
goodwill of $142,270 was recorded and is being amortized over 5 years.
Additionally, the Company entered into a non-compete agreement with the
President of Symmetry for $10,000. The agreement is for a term of 36
months and expires on March 18, 1997.
On July 28, 1994, the Company purchased Cynosure, Inc. (Cynosure) for
$50,000 and the assumption of certain leases.
The acquisition of Weldon, Pathways, Symmetry, and Cynosure were
accounted for as purchases and as such the results of their operations
are included in the consolidated financial statements from the date of
the acquisition. None of the acquisitions were significant to the
operations of the Company in the year in and they were acquired or the
year preceding the acquisition.
F-14
<PAGE>
COMPUTER MANAGEMENT SCIENCES, INC.
Notes to Consolidated Financial Statements
(3) Notes Receivable
Notes receivables consisted of the following at December 31, 1996 and
1995:
1996 1995
---- ----
Notes receivable from third parties $ 924,197 221,873
Notes receivable from stockholders 273,250 21,750
Notes receivable from an employee . 235,825 -
Notes receivable from an officer .. 98,262 -
---------- ----------
Total ................ $1,531,534 243,623
Less current portion . 425,250 41,609
---------- ----------
Non-current portion .. $1,106,284 202,014
========== ==========
Notes receivable have interest rates ranging from 5% to 9.75% per annum
with maturities beginning in October 1998 through October 2001. The notes
are secured by tangible assets with the exception of the notes from
stockholders which are unsecured. Based on the range of interest rates
and the stated maturities, management believes the fair values of the
notes receivable is not materially different from their carrying amounts.
(4) Land Held for Investment
Land held for investment purposes primarily represents undeveloped land
located in north Georgia. The undeveloped land is recorded at cost, which
is less than net realizable value determined by appraisal.
Annual carrying costs associated with the land are expensed.
F-15
<PAGE>
COMPUTER MANAGEMENT SCIENCES, INC.
Notes to Consolidated Financial Statements
(5) Investments
The cost, gross unrealized holding gains and losses, and estimated fair
value of investments available for sale at December 31, 1996 and 1995 are
as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
1996
Equity securities $ 2,069,528 99,196 (7,578) 2,161,146
Debt securities 8,130,844 5,250 (30,710) 8,105,384
Mutual funds 155,340 15,981 - 171,321
------------- ------------- ---------- -------------
Total $ 10,355,712 120,427 (38,288) 10,437,851
============= ============= ========== =============
1995
Equity securities $ 381,545 56,878 (3,514) 434,909
Mutual funds 199,382 12,245 - 211,627
------------- ------------- ---------- -------------
Total $ 580,927 69,123 (3,514) 646,536
============= ============= ========== =============
<CAPTION>
The cost and estimated fair value of debt securities available for sale
at December 31, 1996, by contractual maturity is as follows:
Estimated
Cost Fair Value
<S> <C> <C>
Due in one year or less $ 3,168,513 3,143,643
Due in one to five years 4,962,331 4,961,741
-------------- -------------
$ 8,130,844 8,105,384
============== =============
</TABLE>
F-16
<PAGE>
COMPUTER MANAGEMENT SCIENCES, INC.
Notes to Consolidated Financial Statements
(5) Investments, continued
Net gain on the sale of investments included gross realized gains of
$32,491, $27,295 and $1,706 and gross realized losses of $9,639, $1,640
and $-0-, for the years ended December 31, 1996, 1995 and 1994,
respectively. For the purpose of determining gross realized gains and
losses, the cost of marketable securities is based on specific
identification.
Net unrealized gains on investments available for sale were $82,139 and
$65,609 at December 31, 1996 and 1995, respectively. The change in
unrealized gains, net of income taxes, have been included as a separate
component of shareholder's equity and amounted to $10,113 and $53,781 for
the years ended December 31, 1996 and 1995, respectively.
(6) Notes Payable
<TABLE>
<CAPTION>
Notes payable consisted of the following at December 31, 1996 and 1995:
1996 1995
---- ----
<S> <C> <C>
Line-of-credit, up to the lesser of $750,000 or 75% of trade
accounts receivable less than 90 days old ($8.1 million at
December 31, 1996), secured by trade accounts receivable, due
on demand, with interest
due at the prime rate $ 100 100
Other notes payable, interest ranging from 8% to 12% per annum,
collateralized by accounts receivable and
real property, paid in full during 1996 - 276,735
----------- -----------
Total 100 276,835
Less current portion 100 232,396
----------- -----------
Non-current portion $ - 44,439
=========== ===========
</TABLE>
F-17
<PAGE>
COMPUTER MANAGEMENT SCIENCES, INC.
Notes to Consolidated Financial Statements
<TABLE>
(7) Income Taxes
<CAPTION>
The income tax expense for the years ended December 31, 1996, 1995 and
1994 was allocated as follows:
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Income from continuing operations $ 4,091,000 1,893,682 1,073,473
Shareholders' equity, for recognition of
unrealized gain (loss) on marketable
equity securities 6,417 34,122 (8,654)
------------- ------------- -------------
$ 4,097,417 1,927,804 1,064,819
============= ============= =============
<CAPTION>
Net income before income taxes is derived solely from domestic
operations. The provision for income tax expense for the years ended
December 31, 1996, 1995 and 1994 consists of the following:
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current tax expense $ 3,962,091 1,897,403 1,142,789
Deferred tax expense (benefit) 128,909 (3,721) (69,316)
------------- ------------- -------------
Total $ 4,091,000 1,893,682 1,073,473
============= ============= =============
</TABLE>
F-18
<PAGE>
COMPUTER MANAGEMENT SCIENCES, INC.
Notes to Consolidated Financial Statements
<TABLE>
(7) Income Taxes, continued
<CAPTION>
Income tax expense attributable to income from continuing operations for
the years ended December 31, 1996, 1995 and 1994, differed from the
amounts computed by applying the U.S. Federal income tax rate of 34% to
income before taxes as follows:
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Computed "expected" tax expense $ 3,505,477 1,710,297 978,214
Increase (decrease) in income taxes resulting
from:
S Corporation (income) loss (115,364) (65,872) 20,488
Tax exempt interest (34,650) (3,772) (7,798)
Non-deductible meals and entertainment 35,420 31,779 52,169
State income tax, net of federal benefit 500,903 238,349 140,441
Dividend income exclusion (25,194) - -
Deferred income taxes resulting from
change in tax status of pooled entity 246,876 - -
Other, net (22,468) (17,099) (110,041)
------------- ------------- -------------
$ 4,091,000 1,893,682 1,073,473
============= ============= =============
<CAPTION>
The effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities as of December 31, 1996
and 1995 are as follows:
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets:
Intangible assets $ - 13,500
Accrued expenses 144,485 19,409
Allowance for doubtful accounts 57,000 14,363
Other 3,284 1,961
------------- -------------
Total deferred tax assets 204,769 49,233
------------- -------------
Deferred tax liabilities:
Change of reporting from the cash basis to the
accrual basis for income tax purposes 193,497 91,750
Property and equipment depreciation 234,147 65,106
Intangible assets 13,657 -
Unrealized gain on investments 31,885 25,468
------------- -------------
Total deferred tax liabilities 473,186 182,324
------------- -------------
Net deferred tax liabilities $ 268,417 133,091
============= =============
</TABLE>
F-19
<PAGE>
COMPUTER MANAGEMENT SCIENCES, INC.
Notes to Consolidated Financial Statements
(7) Income Taxes, continued
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible. Management considers the schedule of reversal of deferred tax
assets, projected future taxable income, and tax planning strategies in
making the assessment. Based upon the above criteria and that the Company
has paid sufficient taxes in prior years which is available for recovery
of deferred tax assets, management believes it is more likely than not
that the Company will realize the benefits of these deductible
differences.
<TABLE>
(8) Benefit Plans
<CAPTION>
The Company provides a 401(k) withholding plan which covers substantially
all employees after sixty days of employment.
The Company maintains an Employee Stock Ownership Plan (ESOP) and a
Profit Sharing Plan (collectively, the Plans) for substantially all of
its employees. Contributions to the Plans are made at the discretion of
the Board of Directors. The Plans may be terminated at any time without
further obligation to the Company. Employee benefit plan expenses are
summarized as follows:
December 31,
1996 1995 1994
---- ---- ----
Cash Stock Cash Stock Cash Stock
<S> <C> <C> <C> <C> <C> <C>
Profit Sharing Plan $ - - 294,929 - 163,284 -
ESOP 1,000,000 - 475,000 - 182,000 318,000
----------- --------- --------- --------- --------- ---------
$ 1,000,000 - 769,929 - 345,284 318,000
=========== ========= ========= ========= ========= =========
</TABLE>
The Company accrues a combined contribution to the Plans throughout the
year and recognizes employee benefit plan expense. Cash is contributed to
the ESOP throughout the year as needed and at year end the Board of
Directors approves the contribution allocation between the Plans and the
payment of cash and/or stock.
F-20
<PAGE>
COMPUTER MANAGEMENT SCIENCES, INC.
Notes to Consolidated Financial Statements
(8) Benefit Plans, continued
The Company also has a nonqualified stock option plan (the Nonqualified
Plan) and an incentive stock option plan (the ISO Plan) under which
certain key employees are granted the option to purchase shares of the
Company's common stock at a price equal to the market price of stock. The
Nonqualified and ISO Plans were terminated on August 31, 1995, with
respect to the issuance of new options under these plans.
The Company has a Stock Incentive Plan and a Non-Employee Director Stock
Option Plan (the Plans) pursuant to which the Company may grant stock
options to officers, directors and key employees. The Plans authorize
grants of options to purchase up to 1,125,000 shares of authorized but
unissued common stock. Stock options are granted with an exercise price
equal to the stock's fair market value at the date of grant. All stock
options generally have 10 year terms and vest and become fully
exercisable after 5 years from the date of grant (20% per year), with the
exception of 397,792 stock options which were issued during 1995 under
the Nonqualified Plan and vested immediately.
At December 31, 1996, there were 758,125 additional shares available for
grant under the Plans. The per share weighted-average fair value of stock
options granted during 1996 and 1995 was $10.26 and $2.23 on the date of
grant using the Black Scholes option-pricing model with the following
weighted-average assumptions: 1996 - no expected dividend yield,
risk-free interest rate of 5.9%, weighted average expected volatility of
53.4% and an expected life of 6 years; 1995 - no expected dividend yield,
risk-free interest rate of 5.4%, weighted average expected volatility of
53.4% and an expected life of 6 years.
The Company applies APB Opinion No. 25 in accounting for its Plans and,
accordingly, no compensation cost has been recognized for its stock
options in the consolidated financial statements. Had the Company
determined compensation cost based on the fair value at the grant date
for its stock options under SFAS No. 123, the Company's net income would
have been reduced to the pro forma amounts indicated below:
1996 1995
---- ----
Net income:
As reported $ 6,333,434 3,060,850
Pro forma 6,195,733 2,674,400
Per share:
As reported $ .44 .29
Pro forma .43 .25
F-21
<PAGE>
COMPUTER MANAGEMENT SCIENCES, INC.
Notes to Consolidated Financial Statements
(8) Benefit Plans, continued
Pro forma net income reflects only options granted in 1996 and 1995.
Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net income
amounts presented above because compensation cost is reflected over the
options' vesting period of 5 years and compensation cost for options
granted prior to January 1, 1995 is not considered.
Stock option activity during the period indicated is as follows:
Weighted-
Number of Average
Shares Exercise Price
Balance at December 31, 1993 1,556,293 $ .081
Granted 147,033 1.542
Exercised (117,139) .078
Forfeited - -
------------- -----------
Balance at December 31, 1994 1,586,187 .167
Granted 882,747 3.917
Exercised (8,368) .078
Forfeited (29,275) 2.578
------------- -----------
Balance at December 31, 1995 2,431,291 1.576
Granted 182,375 17.802
Exercised (83,201) 1.381
Forfeited (69,910) 4.839
------------- -----------
Balance at December 31, 1996 2,460,555 $ 2.649
============= ===========
F-22
<PAGE>
COMPUTER MANAGEMENT SCIENCES, INC.
Notes to Consolidated Financial Statements
(8) Benefit Plans, continued
The following table presents information regarding all options
outstanding at December 31, 1996.
Weighted
Average Weighted
Number of Remaining Range of Average
Options Contractual Exercise Exercise
Outstanding Life Prices Price
1,338,746 1.1 years $ .078 $ .078
83,671 6.6 years .680 .680
672,612 8.3 years 1.542 - 2.578 2.462
192,151 9.0 years 6.222 - 8.167 7.958
173,375 9.9 years 13.000 - 20.750 18.302
------------- -------------- --------------- ---------
2,460,555 4.5 years $ .078 - 20.750 $ 2.649
============= ============== =============== =========
The following table presents information regarding options currently
exercisable at December 31, 1996.
Weighted
Number of Range of Average
Options Exercise Exercise
Exercisable Prices Price
1,338,746 $ .078 $ .078
66,938 .680 .680
467,817 1.542 - 2.578 2.511
38,700 6.222 - 8.167 7.946
------------- ------------------ ---------
1,912,201 $ .078 - .680 $ .853
============= ================== =========
F-23
<PAGE>
COMPUTER MANAGEMENT SCIENCES, INC.
Notes to Consolidated Financial Statements
(9) Accrued Expenses
Accrued expenses at December 31, 1996 and 1995 consist of the following:
1996 1995
---- ----
Salaries and benefits $ 1,286,065 963,389
Employee benefit plan contributions 227,492 351,125
Payroll tax and withholdings 520,866 355,984
Other 196,738 50,327
------------- --------------
$ 2,231,161 1,720,825
============= ==============
(10) Shareholders' Equity
On August 2, 1995, the Board of Directors of the Company amended and
restated the Articles of Incorporation of the Company to, among other
things, divide the capital stock into two classes: twenty million
(20,000,000) shares of common voting stock, having a par value of $.01
per share, and five million (5,000,000) shares of preferred stock, having
a par value of $.01 per share. The amended and restated Articles of
Incorporation were approved by the Company's shareholders on August 3,
1995. The Board of Directors also approved the issuance and sale by the
Company to the public of up to 4,500,000 (adjusted for subsequent stock
splits) shares of the Company's common stock (the issuance of up to
4,916,250 shares was subsequently approved by the Board of Directors on
September 26, 1995).
On August 8, 1995, the Company's Board of Directors declared an
approximate 3.72-for-1 stock split, effected in the form of a stock
dividend, of the Company's common stock.
On October 4, 1995, the Company closed its initial public offering of
4,916,250 shares of common stock for $6.22 (adjusted for subsequent stock
splits) per share. The net proceeds of $28.4 million are currently being
invested in acquisitions, systems outsourcing centers, branch expansion
and marketable securities.
On June 7, 1996, the Company's Board of Directors declared a 3-for-2
stock split, which was effected as a fifty percent dividend, of the
Company's common stock. The common stock dividend was distributed on July
5, 1996 to shareholders of record on June 21, 1996.
F-24
<PAGE>
COMPUTER MANAGEMENT SCIENCES, INC.
Notes to Consolidated Financial Statements
(10) Shareholders' Equity, continued
On October 17, 1996, the Company's Board of Directors declared a 3-for-2
stock split, to be effected as a fifty percent dividend, of the Company's
common stock. The Common stock dividend was distributed on November 21,
1996 to shareholders of record on November 4, 1996.
All share, per share and conversion amounts relating to common stock and
stock options included in the accompanying consolidated financial
statements and notes have been restated to reflect the above stock
splits.
(11) Commitments
The Company leases office space in nine national locations and computer
equipment under non-cancelable agreements which expire at various dates
through 1999. Office rentals are subject to escalations based on
increases in real estate taxes and operating expenses. Aggregate rent
expense under these operating leases was approximately $322,000, $304,000
and $205,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
Future minimum lease payments required under operating leases having
remaining non-cancelable terms in excess of one year as of December 31,
1997 are as follows:
1997 $ 234,661
1998 148,657
1999 65,049
-----------
$ 448,367
(12) Subsequent Event
On January 17, 1997, the Company issued 584,080 shares of its common
stock for all the outstanding common stock of Miaco Corporation (Miaco),
a computer consulting firm specializing in relational database and
client/server technologies. This business combination will be accounted
for as a pooling-of-interests combination and, accordingly, the Company's
historical consolidated financial statements presented in future reports
will be restated to include the accounts and results of operations of
Miaco.
F-25
<PAGE>
COMPUTER MANAGEMENT SCIENCES, INC.
Notes to Consolidated Financial Statements
(12) Subsequent Event, continued
The following unaudited pro forma data summarizes the combined results of
operations of the Company and Miaco as if the combination had been
consummated on December 31, 1996.
Years Ended December 31,
1996 1995 1994
Pro forma revenue $ 57,432,222 41,535,734 31,788,590
=========== =========== ===========
Pro forma net income $ 6,053,326 2,748,264 1,929,482
=========== =========== ===========
Pro forma net income per share $ .40 .25 .20
=========== =========== ===========
F-26
Exhibit 21.1
Subsidiaries of Computer Management Sciences, Inc.
1. Name: MIS Software Development, Inc.
State of Incorporation: Florida
Name Under Which Subsidiary Does Business: MIS Software Development, Inc.
2. Name: Summit Computer Services, Inc.
State of Incorporation: North Carolina
Name Under Which Subsidiary Does Business: Summit Computer Services, Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPUTER
MANAGEMENT SCIENCES, INC. CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT
OF OPERATIONS AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 14,191,603
<SECURITIES> 4,895,482
<RECEIVABLES> 7,823,553
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 28,988,045
<PP&E> 8,824,838
<DEPRECIATION> 1,481,048
<TOTAL-ASSETS> 46,329,614
<CURRENT-LIABILITIES> 2,770,502
<BONDS> 0
0
0
<COMMON> 124,130
<OTHER-SE> 43,218,673
<TOTAL-LIABILITY-AND-EQUITY> 46,329,614
<SALES> 46,095,306
<TOTAL-REVENUES> 46,095,306
<CGS> 28,450,872
<TOTAL-COSTS> 28,450,872
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,990
<INCOME-PRETAX> 10,310,227
<INCOME-TAX> 3,976,793
<INCOME-CONTINUING> 6,333,434
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,333,434
<EPS-PRIMARY> 0.44
<EPS-DILUTED> 0.44
</TABLE>
Exhibit 99.3
Report of Williams, Cox, Weidner and Cox, Independent Auditors of MSD
Board of Directors
MIS Software Development, Inc. (MSD)
Tallahassee, Florida
We have audited the balance sheets of MIS Software Development, Inc., as of
December 27, 1995, and the related statements of operations and retained
earnings, and cash flows for the period from January 1, 1995 through December
27, 1995 and for the year ended December 31, 1994 (not presented separately
herein). 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 MIS Software Development, Inc.
as of December 27, 1995, and the results of its operations and its cash flows
for the period from January 1, 1995 through December 27, 1995 and for the year
ended December 31, 1994 in accordance with generally accepted accounting
principles
Williams, Cox, Weidner and Cox
Tallahassee, Florida
January 22, 1996
Exhibit 99.4
Report of Dellinger & Deese, L.L.P., Independent Auditors of SCS
Board of Directors
Summit Computer Services, Inc. (SCS)
Charlotte, North Carolina
We have audited the balance sheet of Summit Computer Services, Inc. (the
Company) as of December 31, 1995, and the related statements of operations,
shareholders' investment and cash flows for each of the years in the two-year
period ended December 31, 1995 (not presented separately herein). 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 in the first paragraph
present fairly, in all material respects, the financial position of Summit
Computer Services, Inc. as of December 31, 1995, and the results of its
operations and its cash flows for each of the years in the two-year period ended
December 31, 1995, in conformity with generally accepted accounting principles
Dellinger & Deese, L.L.P.
Charlotte, North Carolina
March 28, 1996
