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, 1997
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, $0.01 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, 1998, was approximately
$225,209,000.
The number of shares of the registrant's common stock issued and outstanding as
of February 28, 1998 was 14,567,468.
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 19, 1998 are incorporated by reference into Part III of this Form.
<PAGE>
COMPUTER MANAGEMENT SCIENCES, INC.
Form 10-K For Fiscal Year Ended December 31, 1997
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............................................. 14
Item 7. Management's Discussion & Analysis of Financial Condition and
Results of Operations............................................... 16
Item 8. Financial Statements and Supplementary Data......................... 22
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure................................................ 22
PART III
Item 10. Directors and Executive Officers of the Registrant................. 23
Item 11. Executive Compensation............................................. 23
Item 12. Security Ownership of Certain Beneficial Owners and Management..... 23
Item 13. Certain Relationships and Related Transactions..................... 23
PART IV
Item 14. Exhibits, Financial Statements, Schedules, and Reports on
Form 8-K........................................................... 24
<PAGE>
COMPUTER MANAGEMENT SCIENCES, INC.
Form 10-K For Fiscal Year Ended December 31, 1997
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 ("SOCs") 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 DBStar, Inc., Logic Works, Inc.,
Lotus Development Corporation, MatriDigm Corporation, MicroFocus Corporation,
Microsoft Corp., Oracle Corporation, Proforma, Inc. and Sybase, Inc., 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 six SOCs and eight branch offices
located in Jacksonville, Hartford, Atlanta, Greenville, Boston, Portland
(Oregon), Chicago, Cleveland, Tallahassee, Charlotte, Detroit, Denver,
Washington, D.C. and Winston-Salem (North Carolina). At December 31, 1997, the
Jacksonville SOC, which serves as the prototype for the other locations, was
staffed by approximately 184 professional consultants. The number of
professional consultants at the other branches ranged from 3 to 108, and
averaged approximately 47. The Company believes that its network of SOCs and
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 or business unit manager who reports
directly to a Company Vice President.
In October 1995, the Company opened its first SOC in Jacksonville. The
Company subsequently opened five additional SOCs; Atlanta in December 1996,
Tallahassee in February 1997, Greenville in April 1997, Charlotte in August 1997
and Denver in December 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 differentiating asset among its competitors and will be
an important factor in attracting outsourcing engagements and marketing its IT
consulting services. The Company intends to open additional SOCs during 1998.
1
<PAGE>
COMPUTER MANAGEMENT SCIENCES, INC.
Form 10-K For Fiscal Year Ended December 31, 1997
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.
Mergers and Acquisitions
CMSI is actively pursuing mergers or 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.
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.
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 two revenue goals and as a result $700,000 of contingent consideration was
paid in the first quarter of 1997 and an additional payment $700,000 will be
made in the first quarter of 1998.
2
<PAGE>
COMPUTER MANAGEMENT SCIENCES, INC.
Form 10-K For Fiscal Year Ended December 31, 1997
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 was accounted for as a pooling-of-interests and,
accordingly, the Company's historical consolidated financial statements have
been restated to include the accounts and results of operations of Miaco for all
periods presented. Miaco will continue to operate as a wholly-owned subsidiary
of the Company. For 1996 and 1995, Miaco contributed $11.3 and $9.5 million
towards CMSI's total revenue of $57.4 and $41.5 million, respectively.
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 and
operating margins. 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.
3
<PAGE>
COMPUTER MANAGEMENT SCIENCES, INC.
Form 10-K For Fiscal Year Ended December 31, 1997
Exploit Middle Market Project Focus. The Company intends to continue to
focus on becoming the dominant IT services firm dedicated to middle market
projects ranging in size from $250 thousand to $10 million. While many
competitors claim to target the middle market, most competitors define the
middle market based on the size of the client's revenue. The Company believes
that the most relevant competitive delineation occurs on the project size
dimension and not the client size. The Company believes that its ability to
deploy it resources in a flexible manner (time & materials or fixed bid, client
site or Company SOC) combined with the cost advantages provided via its SOC
model allow the Company to provide high quality work at significantly lower
rates than many of its competitors. All of the Company's strategic initiatives
are directed toward becoming the dominant IT firm serving middle market
projects.
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 as well as marketing vertical
industry/technology expertise to prospective clients.
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 DBStar, Inc., Logic
Works, Inc., Lotus Development Corporation, MatriDigm Corporation, MicroFocus
Corporation, Microsoft Corp., Oracle Corporation, Proforma, Inc. and Sybase,
Inc. 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 at least one 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 1,494,000 shares of Common
Stock of the Company as of December 31, 1997. 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 and
provides free internet computer based training to employees. In response to the
industry shortage of qualified technology consultants, the Company established a
Resource Development Program ("RDP"), which is an intensive, ten week training
program that targets liberal arts candidates who possess the appropriate
analytical ability and aptitude to become computer programmers. The Company
utilizes its SOCs for the RDP and develops consultants in the languages/skills
that is currently in demand in the particular location that hosts the class. Via
the RDP, the Company developed twelve new consultants in 1997 and anticipates on
graduating approximately one hundred students during 1998.
4
<PAGE>
COMPUTER MANAGEMENT SCIENCES, INC.
Form 10-K For Fiscal Year Ended December 31, 1997
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:
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:
5
<PAGE>
COMPUTER MANAGEMENT SCIENCES, INC.
Form 10-K For Fiscal Year Ended December 31, 1997
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.
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 and
buy-in 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.
6
<PAGE>
COMPUTER MANAGEMENT SCIENCES, INC.
Form 10-K For Fiscal Year Ended December 31, 1997
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.
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 five additional SOCs were
brought on-line during December 1996, February, April, August and December 1997
in Atlanta, Tallahassee, Greenville, Charlotte and Denver, 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.
7
<PAGE>
COMPUTER MANAGEMENT SCIENCES, INC.
Form 10-K For Fiscal Year Ended December 31, 1997
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
additional SOCs during 1998.
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 used in the creation of 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.
8
<PAGE>
COMPUTER MANAGEMENT SCIENCES, INC.
Form 10-K For Fiscal Year Ended December 31, 1997
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. CMSI intends to continue to
differentiate by focusing on middle market projects ($250 thousand to $10
million) because competitive boundaries exist mainly on the project size rather
than on client size. CMSI's business model is designed to execute middle market
projects for clients of any size. 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:
<TABLE>
<S> <C> <C> <C>
Financial Services Insurance Industrial Transportation
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 & Co., Inc. Florida, Inc. GE Electrical Distribution Services, Inc.
Wachovia Operational Services Health Alliance Plan & Control The Graebel
Corporation The Hartford Financial Westinghouse Group W Companies, Inc.
Services Group, Inc. Information Services
State & Local Government Utilities Communications Other Industries
Florida Department of Atlanta Gas & Light Bell Atlantic Corporation Lockheed Aeronautical
Transportation Company BellSouth Corporation Systems Company
Florida Department of Central Illinois Light Sprint Corporation Unisys Corporation
Corrections Company US WEST, Inc. MATRIXX Marketing,
North Carolina Department of The Detroit Edison Inc. (formerly AT&T
Corrections Company American Transtech)
</TABLE>
Based on 1997 revenue, the top five Company clients (in terms of
revenue to the Company) accounted for approximately 27% of revenue, with no one
client 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
fourteen 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 1997 revenue to the Company, have had an ongoing
relationship with CMSI for over three years.
9
<PAGE>
COMPUTER MANAGEMENT SCIENCES, INC.
Form 10-K For Fiscal Year Ended December 31, 1997
Strategic Alliances and Promotion. The Company currently maintains
strategic alliances (a term used by the Company to describe the relationships
discussed below) with eight technology companies, DBStar, Inc., Logic Works,
Inc., Lotus Development Corporation, MatriDigm Corporation, MicroFocus
Corporation, Microsoft Corp., Oracle Corporation, Proforma, Inc. and Sybase,
Inc. 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 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., IBM Global Services, Cap Gemini America, Business Systems Group, the
consulting division of Computer Sciences Corporation, Computer Task Group, Inc.,
Analysts International Corp. and Keane, Inc., among others.
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, 1997, the Company employed approximately 736 people,
of whom approximately 652 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.
10
<PAGE>
COMPUTER MANAGEMENT SCIENCES, INC.
Form 10-K For Fiscal Year Ended December 31, 1997
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, 1997, the ESOP owned approximately 1,494,000 shares of the
Company's Common Stock. Contributions to the ESOP and Profit Sharing-401(k) Plan
are at the discretion of the Company's Board of Directors. In 1997, the Company
contributed $1,250,000 to the ESOP. 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 22,800 square foot
building in Atlanta, to house SOCs in those cities. The Atlanta property also
has an approximately 27,200 square foot vacant industrial building which is
being held for future expansion, lease or sale. In 1997, the Company purchased
three additional buildings for SOCs as follows; Greenville, South Carolina
(approximately 14,800 square feet), Charlotte (approximately 21,600 square
feet), and Denver (approximately 24,250 square feet). Also during 1997, the
Company purchased an approximate 10,000 square foot building for purposes of
housing a second SOC in Jacksonville and is currently in the process renovating
and expanding it to 34,700 square feet. The remainder of the Company's branch
offices are operated from leased space with lease terms ranging from monthly to
three years. See note 11 of notes to consolidated financial statements for
information as to the Company's annual lease obligations. 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, 1997.
11
<PAGE>
COMPUTER MANAGEMENT SCIENCES, INC.
Form 10-K For Fiscal Year Ended December 31, 1997
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 1997:
First Quarter $25.000 $14.000
Second Quarter $21.250 $12.750
Third Quarter $23.250 $17.250
Fourth Quarter $23.500 $14.875
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
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. As of February 28, 1998, there were approximately 131 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.
Number of Shares Aggregate
Date Issued Purchaser of Common Stock Consideration
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
12
<PAGE>
COMPUTER MANAGEMENT SCIENCES, INC.
Form 10-K For Fiscal Year Ended December 31, 1997
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 Company believes that 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 applicable laws of the State of
Florida.
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 Company believes that 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 applicable laws of the State of North Carolina.
Acquisition of Miaco Corporaton. On January 17, 1997, the Company
exchanged approximately 584,080 shares (the "Miaco Shares") of its common stock
for all of the outstanding shares of common stock of Miaco Corporation, a
Colorado corporation ("Miaco"), in a reverse triangular subsidiary merger (the
"Miaco Merger"). The Miaco shares were issued pro rata to each of the five
shareholders of Miaco based on their respective equity interest in Miaco. The
Company believes that the issuance of the Miaco Shares pursuant to the Miaco
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 applicable laws of the State of Colorado.
Changes in Securities and Use of Proceeds
(a) Changes in Securities - None
(b) Use of Proceeds - In accordance with the provision of Rule 463 (17 CFR
230.463), the following is a report of the use of proceeds from the
Company's initial public offering on September 29, 1995:
(1) The effective date of the Securities Act registration statement on
Form S-1 was September 27, 1995, Commission file number 33-95544.
(2) The offering commenced on September 29, 1995.
(3) Not applicable.
(4) (i) Not applicable.
(ii) The managing underwriters for the offering were The
Robinson-Humphrey Company,Inc.and Raymond James & Associates, Inc.
(iii) The class of stock registered by the Company was Common
Stock, par value $0.01 per share.
13
<PAGE>
COMPUTER MANAGEMENT SCIENCES, INC.
Form 10-K For Fiscal Year Ended December 31, 1997
(iv) The Company registered and sold 2,185,000 shares of Common
Stock at an aggregate offering price of $30,590,000.
(v) The actual direct or indirect payments to others in connection
with the issuance and distribution for the securities registered
were as follows:
Underwriters discounts and commissions - $2,141,300
Other expenses - 457,626
-----------
Total expenses - $2,598,926
==========
(vi) The net offering proceeds to the Company after deducting the
total expenses in (4)(v) above was $27,991,074.
(vii) From the effective date of the registration statement
through September 30, 1997, the Company used the net proceeds from
the offering for (all of which were direct payments to others):
<TABLE>
<S> <C>
Construction of plant, building and facilities $2,132,650
Purchase and installation of machinery and equipment 3,677,021
Purchases of real estate 8,406,650
Acquisition of other businesses 4,739,192
Repayment of indebtedness 1,030,467
Short term investment securities 8,005,094
------------
$27,991,074
</TABLE>
(viii) Not applicable.
Item 6. Selected Financial Data
The selected financial data presented below as of and for the fiscal
years ended December 31, 1997, 1996, 1995, 1994, and 1993, 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 Miaco on January 17, 1997, 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.
14
<PAGE>
COMPUTER MANAGEMENT SCIENCES, INC.
Form 10-K For Fiscal Year Ended December 31, 1997
<TABLE>
<CAPTION>
Fiscal Year Ended December 31,
-----------------------------------------------------------------------
1997 1996 1995 1994 1993
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations
Data:
Revenue............................ $ 71,163 $ 57,432 $ 41,536 $ 31,789 $ 22,222
Direct costs....................... 43,343 35,273 25,686 19,024 13,602
-------- -------- -------- -------- --------
Gross profit.................... 27,820 22,159 15,850 12,765 8,620
Selling, general and
administrative expenses......... 14,537 13,463 11,642 9,713 7,167
-------- -------- -------- -------- --------
Income from operations......... 13,283 8,696 4,208 3,052 1,453
Other income, net.................. 1,656 1,414 432 (33) 16
-------- -------- -------- --------- --------
Income before income
taxes............................ 14,939 10,110 4,640 3,019 1,469
Provision for income taxes......... 5,670 4,184 1,816 1,113 451
-------- -------- -------- -------- --------
Net income ........................ $ 9,269 $ 5,926 $ 2,824 $ 1,906 $ 1,018
======== ======== ======== ======== ========
Unaudited pro forma information:
Net income as reported............. $ 9,269 $ 5,926 $ 2,824 $ 1,906 $ 1,018
(Benefit) charge in lieu of income
taxes, net (1)................... - (114) 76 (23) 101
-------- --------- -------- --------- --------
Pro forma net income............... $ 9,269 $ 6,040 $ 2,748 $ 1,929 $ 917
======== ======== ======== ======== ========
Pro forma net income
per share - basic................ $ 0.69 $ 0.47 $ 0.30 $ 0.25 $ 0.12
======== ======== ======= ======= =======
Weighted average number of
common shares
outstanding - basic.............. 13,494 12,982 9,286 7,857 7,651
======== ======== ======== ======== ========
Pro forma net income
per share - diluted.............. $ 0.61 $ 0.40 $ 0.25 $ 0.20 $ 0.10
======= ======= ======= ======= =======
Weighted average number of
common and common equivalent
shares outstanding - diluted..... 15,165 15,051 11,148 9,729 9,573
======== ======== ======== ======== ========
Cash dividends per share........... $ - $ - $ - $ - $ -
======== ======== ======== ======== ========
</TABLE>
(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), and
$101,000 in 1996, 1995, 1994, and 1993, respectively. See note 2 to the
consolidated financial statements.
15
<PAGE>
COMPUTER MANAGEMENT SCIENCES, INC.
Form 10-K For Fiscal Year Ended December 31, 1997
<TABLE>
<CAPTION>
As of December 31,
------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Working capital $ 32,018 $ 26,027 $ 32,477 $ 2,973 $ 2,043
Total assets 66,123 48,370 42,498 9,927 7,157
Long-term liabilities, less
current portion 285 501 315 366 485
Total shareholders' equity $ 60,963 $ 43,256 $ 37,119 $ 6,221 $ 3,989
</TABLE>
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, 1996, and ending with the quarter ended December 31, 1997. 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 four quarters ended December 31, 1996 differ from those amounts
previously reported due to the restatement to reflect the combination of the
Company and Miaco on January 17, 1997, which was accounted for as a
pooling-of-interests.
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------------------------------------------------
1997 1996
----------------------------------------- ----------------------------------------
Dec. 31 Sept. 30 June 30 Mar. 31 Dec. 31 Sept. 30 June 30 Mar. 31
------- -------- ------- ------- ------- -------- ------- -------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $ 19,229 $ 18,160 $ 17,545 $ 16,229 $ 15,993 $ 14,544 $ 13,822 $ 13,073
Income before income taxes 4,261 3,886 3,683 3,109 2,506 2,764 2,553 2,286
Pro forma net income
per share - diluted $ 0.18 $ 0.16 $ 0.15 $ 0.13 $ 0.09 $ 0.11 $ 0.10 $ 0.09
</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.
16
<PAGE>
COMPUTER MANAGEMENT SCIENCES, INC.
Form 10-K For Fiscal Year Ended December 31, 1997
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.
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 twelve
additional branch offices: Atlanta (1990); Greenville, South Carolina (1991);
Boston (1993); Portland, Oregon, Chicago and Cleveland (1994); Tallahassee
(1995); Charlotte and Detroit (1996); Winston-Salem, North Carolina, Denver and
Washington, D.C. (1997). 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 1997 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.
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 1995, approximately 4% of the Company's revenue was attributable to
fixed-bid projects. Revenue attributable to fixed-bid projects was approximately
9% and 7% in 1997 and 1996, respectively. With recent awards of some significant
fixed-bids, it is anticipated that fixed-bids will represent approximately
15-20% of revenue in 1998. 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.
17
<PAGE>
COMPUTER MANAGEMENT SCIENCES, INC.
Form 10-K For Fiscal Year Ended December 31, 1997
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 contributions to these
plans in 1997, 1996 and 1995 were approximately $1,250,000, $1,000,000, and
$770,000, 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.
Significant Business Combination During 1997. 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 was accounted for as a pooling-of-interests and, accordingly, the
Company's historical consolidated financial statements have been restated to
include the accounts and results of operations of Miaco for all periods
presented. Miaco will continue to operate as a wholly-owned subsidiary of the
Company. For 1996 and 1995, Miaco contributed $11.3 and $9.5 million towards
CMSI's total revenue of $57.4 and $41.5 million, respectively.
Results of Operations
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:
<TABLE>
<CAPTION>
Percentage of Total Revenue Percentage
-----------------------------------------
Year Ended December 31, Increase (Decrease)
----------------------------------------- ---------------------------
1997 1996 1995 1997/1996 1996/1995
---- ---- ---- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenue.............................. 100.0% 100.0% 100.0% 23.9% 38.3%
Direct costs......................... 60.9 61.4 61.8 22.9 37.3
Gross profit......................... 39.1 38.6 38.2 25.5 39.8
Selling, general and administrative
expenses........................... 20.4 23.5 28.0 8.0 15.6
Income from operations............... 18.7 15.1 10.2 52.7 106.6
Other income......................... 2.3 2.5 1.0 17.1 227.6
Income before income taxes........... 21.0 17.6 11.2 47.8 117.9
Net income........................... 13.0 10.3 6.8 56.4 109.8
Pro forma net income................. 13.0 10.5 6.6 53.5 119.8
Pro forma net income
per share - diluted................ - - - 52.3 62.8
</TABLE>
18
<PAGE>
COMPUTER MANAGEMENT SCIENCES, INC.
Form 10-K For Fiscal Year Ended December 31, 1997
1997 Compared To 1996
Revenue. Revenue for 1997 was $71,163,000, a 23.9% increase over revenue of
$57,432,000 recorded in 1996. Consulting service revenue, which represents 98%
of total revenue for the year, increased 28.6% to $69,502,000 in 1997, versus
$54,045,000 in 1996. 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 489 in 1996 to approximately
595 in 1997, a 21.7% increase. Also contributing to the increase in revenue was
an increase in the number and value of IT solution fixed bid projects undertaken
by the Company, which positively impacted average billing rates and enhanced the
Company's ability to leverage its SOC model. During 1997, the Company signed its
largest fixed bid contract, which generated nearly $4,000,000 during the year.
As a percentage of revenue, fixed bid projects increased to 9% of total revenue
as compared to 7% in 1996. The ability to win and manage significant fixed bid
projects is primarily due to the success of the Atlanta and Charlotte SOCs,
which came online during the year. Partially offsetting these increases in
revenue was a decline in education fees and software sales of 51.9% during the
year, which were historically generated by Miaco and SCS and are not a
significant source of revenue for the Company. Management made a conscious
decision to exit public training at the beginning of 1997 due to historical
losses that were incurred by the education division. Also, with respect to
software sales, the Company redirected its resources to consulting services in
the Charlotte SOC.
Gross Profit. The 1997 gross profit of $27,820,000 was a $5,661,000, or
25.5%, improvement over 1996. Expressed as a percentage of revenue, gross profit
was 39.1% in 1997 versus 38.6% in 1996. This improvement is attributable to the
increase in IT solution fixed bid projects, which generally results in the
realization of stronger margins when compared to technology support time and
materials engagements. As mentioned above, the success and leverage of the SOCs
has contributed to an increase in outsourced and fixed bid projects, which
improved the gross profit percentage. This has also resulted in an increase in
average hourly billing rates during the year of approximately 9% over 1996.
Selling, General and Administrative Expenses ("S,G&A"). Selling, general
and administrative expenses totaled $14,537,000 in 1997, an increase of
$1,074,000, or 8.0%, over 1996. Expressed as a percentage of revenue, however,
S,G&A expenses decreased from 23.5% in 1996 to 20.4% for 1997. The improved
percentage for 1997 resulted from increased volume and cost containment of
marketing and other fixed expenses. The cost containment during 1997 was
primarily achieved with the assimilation of the January 1997 Miaco merger.
Historically, Miaco's S,G&A expenses as a percentage of revenue were higher than
the Company's and the Company's ability to assimilate this merger into its
infrastructure as well as adopt its culture has resulted in a reduction of S,G&A
as a percentage of revenue. Partially offsetting the percentage decline was a
$300,000 expense for the Resource Development Program, an internal technical
training program, which was a new initiative in 1997. The single largest
discretionary expense included in S,G&A was the ESOP/Profit Sharing Plan
contribution, which was 1.8% and 1.7% of revenue in 1997 and 1996, respectively.
Income Before Income Taxes. Income before income taxes increased $4,829,000
to $14,939,000 in 1997, an increase of 47.8%. As a percentage of revenue, income
before income taxes was 21.0% in 1997 compared to 17.6% for the prior period.
This result was driven by increased revenue, improved gross profit and a
reduction of S,G&A as a percentage of revenue, as discussed above. Also, other
income, net increased to $1,656,000 in 1997, from $1,414,000 in 1996, a 17.1%
increase. Other income, net primarily consists of investment and lease income
and the increase was the result of improved investment yields in 1997 as well as
lease income received from the Denver building prior to converting it to a SOC.
Net Income and Pro Forma Net Income. For 1997, net income was $9,269,000,
an increase of $3,229,000 or 53.5% over 1996 pro forma net income. This
improvement was a result of increased revenue, stronger gross margins, cost
containment of S,G&A expenses, the increase in other income, net, as discussed
above, and an improvement in the effective income tax rate. For 1997, the
effective tax rate was 38.0% versus 40.3% for the comparable 1996 amount
(adjusted for pro forma credit). The decrease in the effective tax rate is due
to a state and local tax minimization strategy that was implemented in the
fourth quarter of 1997 and a favorable provision to return variance from 1996,
which was recorded in the third quarter of 1997. On a comparable basis, pro
forma net income expressed as a percentage of revenue was 13.0% in 1997 versus
10.5% for 1996. Pro forma net income per diluted share increased 52.3% over the
prior period.
19
<PAGE>
COMPUTER MANAGEMENT SCIENCES, INC.
Form 10-K For Fiscal Year Ended December 31, 1997
1996 Compared To 1995
Revenue. Revenue for 1996 was $57,432,000, a 38.3% increase over revenue of
$41,536,000 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 360 in 1995 to
approximately 489 in 1996, a 35.8% 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.
Gross Profit. The 1996 gross profit of $22,159,000 was a $6,309,000, or
39.8%, improvement over 1995. Expressed as a percentage of revenue, gross profit
was 38.6% in 1996 versus 38.2% 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 $13,463,000 in 1996, an increase of $1,821,000
over 1995. Expressed as a percentage of revenue, however, S,G&A expenses
decreased from 28.0% in 1995 to 23.4% 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 1.7% and 1.9% of revenue in
1996 and 1995, respectively.
Income Before Income Taxes. Income before income taxes increased $5,470,000
to $10,110,000 in 1996, an increase of 117.9%. As a percentage of revenue,
income before income taxes was 17.6% in 1996 compared to 11.2% 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 $5,926,000,
an increase of $3,102,000 or 109.8% 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 41.4% versus 39.1% for 1995. The
significant increase in the effective tax rate is due to the business
combinations with SCS, an S Corporation, and Miaco acquired by the Company on
April 30, 1996 and January 17, 1997, respectively. The acquisitions of SCS and
Miaco were accounted for as 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. With respect to Miaco, there was a charge to deferred taxes in 1996 to
establish deferred tax liabilities at the statutory rates that such timing
difference will reverse as part of the Company's consolidated tax return. On a
comparable basis, pro forma net income expressed as a percentage of revenue was
10.5% in 1996 versus 6.6% for 1995. Pro forma net income per diluted share
increased 62.8% over the prior period.
20
<PAGE>
COMPUTER MANAGEMENT SCIENCES, INC.
Form 10-K For Fiscal Year Ended December 31, 1997
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 1997, cash and working capital increased $349,000 and $5,991,000,
respectively. While a number of factors contributed to the increase in cash, the
main components were cash generated from operations of $10,996,000, offset by
cash used by investing and financing activities of $10,647,000. Cash from
operations increased from income tax benefits resulting from nonqualified stock
option exercises which allowed the Company to forego its estimated tax payments
in the third and fourth quarters of 1997. Significant components of cash used by
investing and financing activities were property and equipment purchases related
to SOC acquisitions, increases in intangible assets due to non-compete
agreements and contingent consideration payments for the Pathways acquisition
and repayment of notes acquired from the Miaco merger. Working capital increased
primarily due to increases in accounts receivable and revenue earned in excess
of billings and refundable income taxes due to tax benefits resulting from
nonqualified stock option exercises.
As of December 31, 1996, $12,800,000 was invested in funds with original
maturity of ninety days or less and were classified as cash equivalents, versus
$9,822,000 at December 31, 1997. In an effort to increase the return on
investments, the Company acquired investments with maturities extending beyond
ninety days during the current year. By the end of 1997, $2,805,000 was invested
in current securities and $8,137,000 was invested in various corporate and
governmental bonds with maturities exceeding one year and other securities which
are classified as long term.
Accounts receivable increased $2,345,000 during 1997. The number days of
sales outstanding were 61 days at the end of 1997 and 1996. Therefore, the
increase in accounts receivable is a reflection of increased sales volume during
the period. The amount of fixed bid business rose during the year by
approximately $2,120,000, or 53%. 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 $976,000 since the end of 1996.
During 1997, the Company spent approximately $8,869,000 for capital
expenditures and approximately $1,450,000 related to acquisitions. Of the
capital expenditures, $6,231,000 was spent for property, buildings and
improvements to house the Greenville, Denver, Charlotte and second Jacksonville
SOCs and $2,444,000 was spent for computer equipment, software and furniture for
the Tallahassee, Greenville, Charlotte and Denver SOCs. The acquisition costs
related to non-compete agreements with former shareholders of Miaco as well as
contingent consideration payments under the Pathways acquisition agreement.
The Company maintains a $4 million line of credit with a commercial bank.
The line of credit is unsecured, but is contingent on meeting certain financial
covenants measured on a quarterly basis. The Company is currently in compliance
with such covenants and management expects that the Company will continue to
meet such covenants in future periods. The credit facility has been inactive
during 1997. The Company assumed certain debt obligations totaling $944,000 in
connection with its January 1997 merger with Miaco, which were paid off during
the first quarter of 1997.
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.
21
<PAGE>
COMPUTER MANAGEMENT SCIENCES, INC.
Form 10-K For Fiscal Year Ended December 31, 1997
Recently Issued Accounting Standards
During February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 128, (SFAS 128) "Earnings Per
Share". SFAS 128 governs the computation, presentation and disclosure
requirements for earnings per share (EPS) for entities with publicly held common
stock. SFAS 128 was issued to simplify the computation of EPS and replaces the
Primary and Fully diluted EPS calculations currently in use with calculations of
Basic and Diluted EPS. SFAS 128 is effective for both interim and annual
financial statements ending after December 15, 1997, and earlier application is
not permitted. The Company began to calculate EPS in compliance with SFAS 128
for the fourth quarter and year ended December 31, 1997. All prior period EPS
data presented has been restated to conform to SFAS 128.
Year 2000 System Conversion
The Company has conducted a comprehensive review of its computer systems to
identify the systems that could be affected by the "Year 2000" problem and is in
the process of resolving the issue. The Year 2000 problem is the result of
computer programs being written using two digits rather than four to define the
applicable year. Any of the Company's programs that have time sensitive software
may recognize a date using "00" as the year 1900 rather than 2000. This could
result in major system failure and miscalculations. During 1997, the Company
commenced implementation of a new enterprise wide packaged financial software
system, which is Year 2000 compliant. The supplier of the software has received
ITAA 2000 certification from The Information Technology Association of America,
the industry's century date change certification program. The Company will
continue to assess its other internal systems and reprogram or upgrade as
necessary. The Company is also reviewing the Year 2000 system conversions of
other companies with which it does business in order to determine their
compliance.
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.
22
<PAGE>
COMPUTER MANAGEMENT SCIENCES, INC.
Form 10-K For Fiscal Year Ended December 31, 1997
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 19, 1998.
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 19, 1998.
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 19, 1998.
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 19, 1998.
23
<PAGE>
COMPUTER MANAGEMENT SCIENCES, INC.
Form 10-K For Fiscal Year Ended December 31, 1997
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 1997 consolidated financial statements, including the
report thereon of KPMG Peat Marwick LLP dated January 22, 1998, 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 a Form 8-K report on 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
27.0 Financial Data Schedule - 1997
27.1 Restated Financial Data Schedule - 1996
27.2 Restated Financial Data Schedule - 1995
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
99.5 Report of Ehrhardt,Keefe,Steiner & Hottman PC,Independent Auditors
for Miaco
* 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
24
<PAGE>
COMPUTER MANAGEMENT SCIENCES, INC.
Form 10-K For Fiscal Year Ended December 31, 1997
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 30, 1998 By: /s/ Anthony Colaluca
--------------------------
Anthony Colaluca, Vice President and
Chief Financial 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 30, 1998.
Signature Title
/s/ Jerry W. Davis Chief Executive Officer and Director
Jerry W. Davis
/s/ R. Halsey Wise President and Chief Operating Officer
R. Halsey Wise
/s/ Anthony V. Weight Senior Vice President, Secretary and
Anthony V. Weight Director
/s/ Larry A. Longhi Senior Vice President and Director
Larry A. Longhi
/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
25
<PAGE>
COMPUTER MANAGEMENT SCIENCES, INC.
Index to Consolidated Financial Statements
Page
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996 F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995 F-5
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1997, 1996 and 1995 F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 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, 1997 and 1996 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, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We did not audit the 1995 financial
statements of Miaco Corporation, 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 revenues constituting 39.9 percent in
1995 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 Miaco Corporation, 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Jacksonville, Florida
January 22, 1998
F-2
<PAGE>
COMPUTER MANAGEMENT SCIENCES, INC.
Consolidated Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
Assets 1997 1996
------ ---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 14,550,323 14,201,624
Accounts receivable, net of allowance for
doubtful accounts of $208,000 and $179,000
for 1997 and 1996, respectively (note 6) 11,720,377 9,375,005
Revenue earned in excess of billings 2,461,228 1,485,205
Refundable income taxes 4,358,250 -
Investments available for sale, at fair value (note 5) 2,805,072 4,895,482
Other receivables 251,407 81,516
Notes receivable (note 3) 619,328 465,250
Deferred income taxes (note 7) - 14,312
Other current assets 127,289 122,069
------------- -------------
Total current assets 36,893,274 30,640,463
------------- -------------
Property and equipment:
Land 2,562,000 2,107,000
Buildings and improvements 9,100,902 3,309,151
Computers and software 3,934,806 2,656,423
Office furniture and equipment 2,586,417 1,435,101
Vehicles 391,750 331,435
--------- -----------
18,575,875 9,839,110
Less accumulated depreciation 3,077,243 2,248,972
------------- -------------
Net property and equipment 15,498,632 7,590,138
------------- -------------
Other assets:
Intangible assets, net of accumulated
amortization of $872,230 and $310,280
for 1997 and 1996, respectively (note 2) 3,516,531 2,628,664
Land held for investment (note 4) 424,065 424,065
Investments available for sale, at fair value (note 5) 8,137,146 5,542,369
Notes receivable, less current portion (note 3) 829,792 1,135,092
Other 823,830 409,699
------------- -------------
Total other assets 13,731,364 10,139,889
------------- -------------
Total assets $ 66,123,270 48,370,490
============= =============
(Continued)
</TABLE>
F-3
<PAGE>
COMPUTER MANAGEMENT SCIENCES, INC.
Consolidated Balance Sheets (continued)
December 31, 1997 and 1996
<TABLE>
<CAPTION>
Liabilities and Shareholders' Equity 1997 1996
------------------------------------ ---- ----
<S> <C> <C>
Current liabilities:
Notes payable (note 6) $ - 864,411
Accounts payable 106,320 282,275
Accrued expenses (note 9) 4,341,936 2,824,711
Unearned revenue 376,556 330,291
Income taxes payable - 312,249
Deferred income taxes (note 7) 50,623 -
------------- -------------
Total current liabilities 4,875,435 4,613,937
------------- -------------
Long-term liabilities:
Deferred income taxes (note 7) 249,553 385,774
Other 35,594 114,814
------------- -------------
Total long-term liabilities 285,147 500,588
------------- -------------
Shareholders' equity (note 10):
Preferred stock, $.01 par value; 5,000,000 shares
authorized, no shares issued and outstanding - -
Common stock, $.01 par value; 40,000,000
shares authorized, 14,455,337 and 12,997,101
shares issued and outstanding in 1997
and 1996, respectively 144,554 129,971
Paid-in capital 38,605,137 30,290,455
Retained earnings 22,054,155 12,785,285
Unrealized gain on investments, net of income tax (note 5) 158,842 50,254
------------- -------------
Total shareholders' equity 60,962,688 43,255,965
------------- -------------
Commitments (notes 2 and 11)
Total liabilities and shareholders' equity $ 66,123,270 48,370,490
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
COMPUTER MANAGEMENT SCIENCES, INC.
Consolidated Statements of Operations
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenue $ 71,162,549 57,432,222 41,535,734
Direct costs 43,342,847 35,272,809 25,685,857
--------------- ---------------- ---------------
Gross profit 27,819,702 22,159,413 15,849,877
Selling, general and administrative
expenses (notes 8 and 11) 14,536,459 13,463,021 11,641,479
--------------- ---------------- ---------------
Income from operations 13,283,243 8,696,392 4,208,398
Other income (expense):
Investment and other income (note 5) 1,617,040 1,452,814 542,171
Interest expense (12,800) (116,132) (127,573)
Other, net 51,387 77,046 17,002
--------------- ---------------- ---------------
1,655,627 1,413,728 431,600
--------------- ---------------- ---------------
Income before income taxes 14,938,870 10,110,120 4,639,998
Provision for income taxes (notes 2 and 7) 5,670,000 4,184,045 1,815,982
--------------- ---------------- ---------------
Net income $ 9,268,870 5,926,075 2,824,016
=============== ================ ===============
Unaudited pro forma information (note 2):
Net income as reported $ 9,268,870 5,926,075 2,824,016
(Benefit) charge in lieu of income taxes, net - (114,207) 75,752
--------------- ----------------- ---------------
Pro forma net income $ 9,268,870 6,040,282 2,748,264
=============== ================ ===============
Pro forma net income per share - basic $ 0.69 0.47 0.30
=============== ================ ===============
Weighted average number of common
shares outstanding - basic 13,493,759 12,982,061 9,286,493
=============== ================ ===============
Pro forma net income per share - diluted $ 0.61 0.40 0.25
=============== ================ ===============
Weighted average number of common and
common equivalent shares outstanding - diluted 15,164,975 15,050,671 11,148,039
=============== ================ ===============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
COMPUTER MANAGEMENT SCIENCES, INC.
Consolidated Statements of Shareholders' Equity
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<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, 1995 $ 35,447 - 1,507,877 4,691,279 (13,640) 6,220,963
Shares issued for exercised stock
options 67 - 30,784 - - 30,851
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 - - - 2,824,016 - 2,824,016
Unrealized gain on investments,
net of income tax (note 5) - - - - 53,781 53,781
--------- --------- ------------ ---------- --------- ------------
Balance at December 31, 1995 57,364 - 29,507,885 7,513,295 40,141 37,118,685
Shares issued for exercised stock
options 424 - 159,441 - - 159,865
Stock splits (note 10) 72,183 - (72,183) - - -
Contribution of undistributed
S Corporation earnings of
pooled entity - - 695,312 (695,312) - -
Adjustment to conform year-end of
pooled entity - - - 41,227 - 41,227
Net income - - - 5,926,075 - 5,926,075
Unrealized gain on investments,
net of income tax (note 5) - - - - 10,113 10,113
--------- --------- ------------- ----------- --------- --------------
Balance at December 31, 1996 129,971 - 30,290,455 12,785,285 50,254 43,255,965
Shares issued for exercised stock
options 14,583 - 578,452 - - 593,035
Income tax benefit for stock option
exercises - - 7,736,230 - - 7,736,230
Net income - - - 9,268,870 - 9,268,870
Unrealized gain on investments,
net of income tax (note 5) - - - - 108,588 108,588
--------- --------- ------------- ----------- --------- --------------
Balance at December 31, 1997 $ 144,554 - 38,605,137 22,054,155 158,842 60,962,688
========= ========= ============= =========== ========= ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
COMPUTER MANAGEMENT SCIENCES, INC.
Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flow from operating activities:
Net income $ 9,268,870 5,926,075 2,824,016
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,467,767 1,055,553 788,052
Net gain on disposition of property
and equipment (63,193) (7,631) (1,984)
Net gain on sale of investments (83,540) (22,852) (25,655)
Deferred income tax (benefit) expense (136,591) 221,954 (81,421)
Adjustment to conform year-end of pooled entity - 41,227 -
Change in assets and liabilities:
Increase in accounts and other
receivables (3,491,286) (3,747,068) (2,222,257)
(Increase) decrease in other current assets (5,220) 101,261 (70,120)
Decrease in refundable income taxes - - 23,726
(Increase) decrease in other assets (414,131) (299,856) 11,564
Increase in accounts payable and
accrued expenses 1,041,960 509,631 413,262
Increase (decrease) in unearned revenue 46,265 (443,403) 299,905
Increase in income taxes payable 3,365,041 130,489 90,165
------------- ------------- -------------
Net cash provided by operating
activities 10,995,942 3,465,380 2,049,253
------------- ------------- -------------
Cash flow from investing activities:
Purchases of property and equipment (8,869,405) (5,145,032) (1,245,888)
Proceeds from the sale of property and equipment 118,470 9,610 23,703
Increase in intangible assets (1,450,000) (2,557,155) (176,575)
Decrease (increase) in notes receivable 151,222 (1,356,719) (221,873)
Purchases of investments available for sale (8,668,212) (13,490,608) (502,102)
Proceeds from sale of investments 8,421,278 3,738,675 303,802
------------- ------------- -------------
Net cash used in investing activities (10,296,647) (18,801,229) (1,818,933)
------------- ------------- -------------
(Continued)
</TABLE>
F-7
<PAGE>
COMPUTER MANAGEMENT SCIENCES, INC.
Consolidated Statements of Cash Flows (continued)
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flow from financing activities:
Proceeds from issuance of common stock $ 593,035 159,865 28,479,551
Payment of stock issuance costs - - (457,626)
Dividends paid - - (2,000)
Proceeds from notes payable - - 959,078
Repayment of notes payable and other long-
term liabilities (943,631) (704,057) (266,315)
---------------- --------------- ----------------
Net cash (used in) provided by
financing activities (350,596) (544,192) 28,712,688
---------------- ---------------- ----------------
Net increase (decrease) in cash
and cash equivalents 348,699 (15,880,041) 28,943,008
Cash and cash equivalents at beginning of year 14,201,624 30,081,665 1,138,657
---------------- --------------- ----------------
Cash and cash equivalents at end of year $ 14,550,323 14,201,624 30,081,665
================ =============== ================
Cash paid for income taxes $ 2,137,493 3,831,602 1,794,867
================ =============== ================
Cash paid for interest $ 12,800 116,132 127,573
================ =============== ================
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
COMPUTER MANAGEMENT SCIENCES, INC.
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(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 fifteen 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.
Earnings Per Share
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings per Share," on December 31, 1997.
This statement governs the computation, presentation, and disclosure
requirements of earnings per share ("EPS") for entities with publicly
held common stock. Effective December 31, 1997 the Company has calculated
EPS in accordance with SFAS No. 128 and all periods presented have been
restated.
Net income per share of common stock is computed based upon the weighted
average number of common shares and share equivalents outstanding during
the year. Stock options, when dilutive, are included as share
equivalents.
Weighted average shares outstanding under the basic calculation differs
from that under the diluted calculation due to the weighted average
effect of dilutive stock options using the treasury stock method of
1,671,216, 2,068,610 and 1,861,546 shares during 1997, 1996, 1995,
respectively.
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 10.
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
requires 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 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 has been
accounted for as a pooling-of-interests and, accordingly, the Company's
historical consolidated financial statements have been restated to
include the accounts and results of operations of Miaco. Miaco will
continue to operate as a wholly-owned subsidiary of the Company.
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
F-12
<PAGE>
COMPUTER MANAGEMENT SCIENCES, INC.
Notes to Consolidated Financial Statements
(2) Business Combinations and Acquisitions, continued
Business Combinations, continued
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. To reflect
the earnings of SCS on an after tax basis, a pro forma charge in lieu of
income taxes of $132,669 in 1996, and $75,752 in 1995 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, 1996 and 1995 are
summarized below:
1996 1995
---- ----
Revenue:
Company $ 46,095,306 24,975,281
SCS - 4,185,322
MSD - 2,837,617
Miaco 11,336,916 9,537,514
-------------- -------------
Combined $ 57,432,222 41,535,734
============== =============
Net income (loss):
Company $ 6,219,227 2,740,223
SCS - 193,740
MSD - 202,639
Miaco (293,152) (312,586)
-------------- -------------
Combined $ 5,926,075 2,824,016
============== =============
There were no significant transactions between the Company and Miaco, 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, 1997 and 1996, Pathways
exceeded its first two revenue goals and as a result $700,000 of the
contingent consideration was paid in the first quarter of 1997 an
additional $700,000 payment will be made in the first quarter of 1998,
with goodwill adjusted accordingly. Goodwill of $2,975,425 has been
recorded thus far and is being amortized over 15 years.
The acquisition of Weldon and Pathways 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 which 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 receivable consisted of the following at December 31, 1997 and
1996:
1997 1996
---- ----
Notes receivable from third parties $ 890,219 993,005
Notes receivable from stockholders 357,941 273,250
Notes receivable from an employee - 235,825
Notes receivable from officers 200,960 98,262
------------- ------------
Total $ 1,449,120 1,600,342
Less current portion 619,328 465,250
------------- ------------
Non-current portion $ 829,792 1,135,092
============= ============
Notes receivable have interest rates ranging from 5.6% 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 are 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, 1997 and 1996 are
as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
1997
Equity securities $ 1,852,345 233,747 - 2,086,092
Debt securities 8,434,535 12,100 (20,648) 8,425,987
Mutual funds 399,306 30,833 - 430,139
------------- ------------- ---------- -------------
Total $ 10,686,186 276,680 (20,648) 10,942,218
============= ============= ========== =============
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
============= ============= ========== =============
</TABLE>
The cost and estimated fair value of debt securities available for sale
at December 31, 1997, by contractual maturity is as follows:
Estimated
Cost Fair Value
Due in one year or less $ 2,814,765 2,805,072
Due in one to five years 5,619,770 5,620,915
-------------- -------------
$ 8,434,535 8,425,987
============== =============
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
$115,686, $32,491, and $27,295 and gross realized losses of $32,146,
$9,639, and $1,640, for the years ended December 31, 1997, 1996 and 1995,
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 $256,032 and
$82,139 at December 31, 1997 and 1996, respectively. The change in
unrealized gains, net of income taxes, have been included as a separate
component of shareholder's equity and amounted to $108,588 and $10,113
for the years ended December 31, 1997 and 1996, respectively.
(6) Notes Payable
Notes payable consisted of the following at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Line-of-credit, up to the lesser of $750,000 or 75% of trade
accounts receivable less than 90 days old, secured by trade
accounts receivable, due on demand, with interest
due at the prime rate, terminated July 25, 1997 $ - 100
Revolving Credit Loan, up to $4,000,000, unsecured, contingent on
meeting certain financial covenants, due May 31, 1999,
with interest due at the prime rate minus .5% - -
Other notes payable, interest ranging from 8% to 12.5% per annum,
collateralized by accounts receivable,
paid in full during 1997 - 864,311
----------- -----------
Total $ - 864,411
=========== ===========
</TABLE>
F-17
<PAGE>
COMPUTER MANAGEMENT SCIENCES, INC.
Notes to Consolidated Financial Statements
(7) Income Taxes
The income tax expense for the years ended December 31, 1997, 1996 and
1995 was allocated as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Income from continuing operations $ 5,670,000 4,184,045 1,815,982
Shareholders' equity, for recognition of
unrealized gain on marketable
equity securities 65,305 6,417 34,122
------------- ------------- -------------
$ 5,735,305 4,190,462 1,850,104
============= ============= =============
Net income before income taxes is derived solely from domestic
operations. The provision for income tax expense for the years ended
December 31, 1997, 1996 and 1995 consists of the following:
1997 1996 1995
---- ---- ----
Current tax expense $ 5,806,591 3,962,091 1,897,403
Deferred tax expense (benefit) (136,591) 221,954 (81,421)
-------------- ------------- -------------
Total $ 5,670,000 4,184,045 1,815,982
============= ============= =============
</TABLE>
F-18
<PAGE>
COMPUTER MANAGEMENT SCIENCES, INC.
Notes to Consolidated Financial Statements
(7) Income Taxes, continued
Income tax expense attributable to income from continuing operations for
the years ended December 31, 1997, 1996 and 1995, differed from the
amounts computed by applying the U.S. Federal income tax rate of 34% to
income before taxes as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Computed "expected" tax expense $ 5,079,216 3,437,441 1,577,599
Increase (decrease) in income taxes resulting
from:
S Corporation income - (115,364) (65,872)
Tax exempt interest (10,561) (34,650) (3,772)
Non-deductible meals and entertainment 51,002 37,268 31,779
Non-deductible merger related costs - 132,325 -
State income tax, net of federal benefit 573,725 500,903 238,349
Dividend income exclusion (29,737) (25,194) -
Deferred income taxes resulting from
change in tax status of pooled entity - 246,876 -
Other, net 6,355 4,440 37,899
------------- ------------- -------------
$ 5,670,000 4,184,045 1,815,982
============= ============= =============
</TABLE>
The effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities as of December 31, 1997
and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Accrued expenses $ 215,237 171,489
Allowance for doubtful accounts 78,928 69,309
Net operating loss carry-forward 123,841 120,470
Intangible assets 69,116 -
Other 5,929 3,284
------------- -------------
Total deferred tax assets 493,051 364,552
------------- -------------
Deferred tax liabilities:
Change of reporting from the cash basis to the
accrual basis for income tax purposes 298,345 452,127
Property and equipment depreciation 397,692 205,800
Intangible assets - 46,202
Unrealized gain on investments 97,190 31,885
------------- -------------
Total deferred tax liabilities 793,227 736,014
------------- -------------
Net deferred tax liabilities $ 300,176 371,462
============= =============
</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.
(8) Benefit Plans
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:
<TABLE>
<CAPTION>
December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Profit Sharing Plan $ - - 294,929
ESOP 1,250,000 1,000,000 475,000
--------------- -------------- -------------
$ 1,250,000 1,000,000 769,929
============= ============== =============
</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, however,
unexercised options remain outstanding 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).
At December 31, 1997, there were 346,149 additional shares available for
grant under the Plans. The per share weighted-average fair value of stock
options granted during 1997, 1996 and 1995 was $10.10, $10.26 and $2.23,
respectively, on the date of grant using the Black Scholes option-pricing
model with the following weighted-average assumptions: 1997 - no expected
dividend yield, risk-free interest rate of 5.8%, weighted average
expected volatility of 57.1% and an expected life of 6 years; 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:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net income:
As reported $ 9,268,870 6,040,282 2,748,264
Pro forma 8,765,310 5,893,516 2,355,600
Per share:
As reported - basic $ 0.69 0.47 0.30
Pro forma - basic 0.65 0.45 0.25
Per share:
As reported - diluted $ 0.61 0.40 0.25
Pro forma - diluted 0.59 0.40 0.23
</TABLE>
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 1997, 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, 1994 1,618,875 $ .223
Granted 885,073 3.927
Exercised (15,349) 2.010
Forfeited (29,275) 2.578
------------ -----------
Balance at December 31, 1995 2,459,324 1.576
Granted 189,403 17.802
Exercised (95,182) 1.680
Forfeited (69,910) 4.839
------------ -----------
Balance at December 31, 1996 2,483,635 2.678
Granted 511,976 17.655
Exercised (1,458,236) .407
Forfeited (122,758) 12.355
------------ -----------
Balance at December 31, 1997 1,414,617 $ 9.600
============ ===========
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, 1997.
Weighted
Average Weighted
Number of Remaining Range of Average
Options Contractual Exercise Exercise
Outstanding Life Prices Price
125,334 1.2 years $ 0.078 - 2.175 $ .376
532,093 7.4 years 2.176 - 4.350 2.583
16,665 7.6 years 4.351 - 6.525 6.229
132,879 7.8 years 6.526 - 8.700 8.142
108,500 9.3 years 10.875 - 13.050 13.000
24,750 8.5 years 13.051 - 15.225 14.071
111,796 9.7 years 15.226 - 17.400 16.001
149,100 9.0 years 17.401 - 19.575 18.748
213,500 9.5 years 19.576 - 21.750 21.687
---------- -------------- -------------------- -----------
1,414,617 7.7 years $ 0.078 - 21.750 $ 9.600
========== ============== ==================== ===========
The following table presents information regarding options currently
exercisable at December 31, 1997.
Weighted
Number of Range of Average
Options Exercise Exercise
Exercisable Prices Price
108,599 $ 0.078 - 2.175 $ 0.197
434,138 2.176 - 4.350 2.584
8,565 4.351 - 6.525 6.236
50,253 6.526 - 8.700 8.129
300 10.875 - 13.050 13.000
6,750 13.051 - 15.225 14.260
1,396 15.226 - 17.400 16.075
23,700 17.401 - 19.575 18.788
2,700 19.576 - 21.750 20.750
------------- ------------------ ---------
636,401 $ 0.078 - 21.750 $ 3.502
============= ================== =========
F-23
<PAGE>
COMPUTER MANAGEMENT SCIENCES, INC.
Notes to Consolidated Financial Statements
(9) Accrued Expenses
Accrued expenses at December 31, 1997 and 1996 consist of the following:
1997 1996
---- ----
Salaries and benefits $ 1,779,786 1,387,913
Employee benefit plan contributions 238,877 227,492
Payroll tax and withholdings 1,235,823 520,866
Other 1,087,450 688,440
------------- --------------
$ 4,341,936 2,824,711
============= ==============
(10) Shareholders' Equity
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.
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.
On April 4, 1997, the Company's Board of Directors approved an amendment
to the Amended and Restated Articles of Incorporation of the Company to
increase the authorized capital stock of the Company from 20,000,000
shares of common stock and 5,000,000 shares of preferred stock to
40,000,000 shares of common stock and 5,000,000 shares of preferred
stock, each maintaining a $0.01 par value per share. Such amendment was
submitted to a vote and approved by the shareholders of the Company on
June 6, 1997.
F-24
<PAGE>
COMPUTER MANAGEMENT SCIENCES, INC.
Notes to Consolidated Financial Statements
(11) Commitments
The Company leases office space in nine national locations and computer
equipment under non-cancelable agreements which expire at various dates
through 2000. 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 $507,000, $711,000
and $594,000 for the years ended December 31, 1997, 1996 and 1995,
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:
1998 $ 140,581
1999 110,475
2000 42,783
-----------
$ 293,839
===========
F-25
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.
3. Name: Miaco Corporation
State of Incorporation: Colorado
Name Under Which Subsidiary Does Business: Miaco Corporation
4. Name: CMSI Management Company
State of Incorporation: Florida
Name Under Which Subsidiary Does Business: CMSI Management Company
<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, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 14,550,323
<SECURITIES> 2,805,072
<RECEIVABLES> 11,720,377
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 36,893,274
<PP&E> 18,575,875
<DEPRECIATION> 3,077,243
<TOTAL-ASSETS> 66,123,270
<CURRENT-LIABILITIES> 4,875,435
<BONDS> 0
0
0
<COMMON> 144,554
<OTHER-SE> 60,818,134
<TOTAL-LIABILITY-AND-EQUITY> 66,123,270
<SALES> 71,162,549
<TOTAL-REVENUES> 71,162,549
<CGS> 43,342,847
<TOTAL-COSTS> 43,342,847
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,800
<INCOME-PRETAX> 14,938,870
<INCOME-TAX> 5,670,000
<INCOME-CONTINUING> 9,268,870
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,268,870
<EPS-PRIMARY> 0.69
<EPS-DILUTED> 0.61
</TABLE>
<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> 14,201,624
<SECURITIES> 4,895,482
<RECEIVABLES> 9,375,005
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 30,640,463
<PP&E> 9,839,110
<DEPRECIATION> 2,248,972
<TOTAL-ASSETS> 48,370,490
<CURRENT-LIABILITIES> 4,613,937
<BONDS> 0
0
0
<COMMON> 129,971
<OTHER-SE> 43,125,994
<TOTAL-LIABILITY-AND-EQUITY> 48,370,490
<SALES> 57,432,222
<TOTAL-REVENUES> 57,432,222
<CGS> 35,272,809
<TOTAL-COSTS> 35,272,809
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 116,132
<INCOME-PRETAX> 10,110,120
<INCOME-TAX> 4,069,838
<INCOME-CONTINUING> 6,040,282
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,040,282
<EPS-PRIMARY> 0.47
<EPS-DILUTED> 0.40
</TABLE>
<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, 1995 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 30,081,665
<SECURITIES> 0
<RECEIVABLES> 6,570,708
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 37,541,262
<PP&E> 4,711,519
<DEPRECIATION> 1,659,668
<TOTAL-ASSETS> 42,497,867
<CURRENT-LIABILITIES> 5,064,112
<BONDS> 0
0
0
<COMMON> 57,364
<OTHER-SE> 37,061,321
<TOTAL-LIABILITY-AND-EQUITY> 42,497,867
<SALES> 41,535,734
<TOTAL-REVENUES> 41,535,734
<CGS> 25,685,857
<TOTAL-COSTS> 25,685,857
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 127,573
<INCOME-PRETAX> 4,639,998
<INCOME-TAX> 1,891,734
<INCOME-CONTINUING> 2,748,264
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,748,264
<EPS-PRIMARY> 0.30
<EPS-DILUTED> 0.25
</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 sheet 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 (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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of 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 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 the year then ended (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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to 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 the year then ended, in conformity with
generally accepted accounting principles.
Dellinger & Deese,L.L.P.
Charlotte, North Carolina
March 28, 1996
Exhibit 99.5
Report of Ehrhardt, Keefe, Steiner & Hottman PC, Independent Auditors of Miaco
Board of Directors
Miaco Corporation (Miaco)
Englewood, Colorado
We have audited the balance sheet of Miaco Corporation (the Company) as of March
31, 1996, and the related statements of operations, changes in stockholders'
equity and cash flows for the year then ended (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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Miaco Corporation as of March
31, 1996, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
Ehrhardt Keefe Steiner & Hottman PC
May 29, 1996
Denver, Colorado
