UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------------
FORM 10-Q
{X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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: 000-26622
COMPUTER MANAGEMENT SCIENCES, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 59-2264633
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
8133 Baymeadows Way, Jacksonville, Florida 32256
(Address of principal executive offices) (zip code)
(904) 737-8955
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last
report)
-----------------------------------
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 ____
As of July 31, 1997 there were 13,502,389 shares of the Registrant's common
stock, $0.01 par value, outstanding.
COMPUTER MANAGEMENT SCIENCES, INC.
Index to Form 10-Q
For the Quarter Ended June 30, 1997
Page
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets 3-4
Consolidated Statements of Operations 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7-8
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations 9-11
Liquidity and Capital Resources 12
PART II - OTHER INFORMATION
Items 1-6 Other Information 13
Signatures 14
2
COMPUTER MANAGEMENT SCIENCES, INC.
Consolidated Balance Sheets
June 30, December 31,
1997 1996
(unaudited) (restated)
Current assets:
Cash and cash equivalents $ 8,521,560 14,201,624
Accounts receivable, net 11,230,303 9,375,005
Revenue earned in excess of billings 2,009,371 1,485,205
Investments 5,500,085 4,895,482
Other receivables 219,100 81,516
Notes receivable 382,608 465,250
Refundable income taxes 1,862,021 -
Other current assets 557,236 136,381
--------------- ----------------
Total current assets 30,282,284 30,640,463
--------------- ----------------
Property and equipment:
Land 2,562,000 2,107,000
Buildings and improvements 7,115,811 3,309,151
Computers and software 3,101,960 2,656,423
Office furniture and equipment 2,121,043 1,435,101
Vehicles 357,012 331,435
--------------- ----------------
15,257,826 9,839,110
Less accumulated depreciation 2,559,907 2,248,972
--------------- ----------------
Net property and equipment 12,697,919 7,590,138
Other assets:
Intangible assets, net of accumulated
amortization of $639,584 and $310,280 3,749,181 2,628,664
Land held for investment, at cost 424,065 424,065
Investments 6,012,181 5,542,369
Notes receivable, less current portion 889,267 1,135,092
Other 380,865 409,699
--------------- ----------------
Total other assets 11,455,559 10,139,889
--------------- ----------------
Total assets $ 54,435,762 48,370,490
=============== ================
(continued)
3
COMPUTER MANAGEMENT SCIENCES, INC.
Consolidated Balance Sheets, continued
June 30, December 31,
1997 1996
(unaudited) (restated)
Liabilities and Shareholders' Equity
Current liabilities:
Notes payable $ - 864,411
Accounts payable 73,741 282,275
Accrued expenses 3,438,959 2,824,711
Unearned revenue 409,940 330,291
Income taxes payable - 312,249
Deferred income taxes 118,635 -
--------------- ----------------
Total current liabilities 4,041,275 4,613,937
--------------- ----------------
Long-term liabilities:
Notes payable 42,169 114,814
Deferred income taxes 267,115 385,774
--------------- ----------------
Total long term liabilities 309,284 500,588
--------------- ----------------
Shareholders' equity:
Common stock, $.01 par value; 40,000,000
shares authorized, 13,485,658 and
12,997,101 shares issued and outstanding
in 1997 and 1996 134,857 129,971
Preferred stock, $.01 par value; 5,000,000
shares authorized, no shares issued and
outstanding in 1997 and 1996 - -
Paid-in capital 32,916,066 30,290,455
Retained earnings 16,957,991 12,785,285
Unrealized gain on investments, net of
income tax 76,289 50,254
-------------- ----------------
Total shareholders' equity 50,085,203 43,255,965
-------------- ----------------
Total liabilities and
shareholders'equity $ 54,435,762 48,370,490
=============== ================
See accompanying notes to consolidated financial statements.
4
COMPUTER MANAGEMENT SCIENCES, INC.
Consolidated Statements of Operations
(Unaudited)
For the Three Month For the Six Month
Period Ended June 30, Period Ended June 30,
1997 1996 1997 1996
(restated) (restated)
Revenue $ 17,544,512 13,821,834 33,773,666 26,894,844
Direct costs 10,685,869 8,498,865 20,733,668 16,451,808
------------- -------------- ------------- -------------
Gross profit 6,858,643 5,322,969 13,039,998 10,443,036
Selling, general and administrative
expenses 3,619,503 3,134,129 7,030,414 6,319,330
------------- -------------- ------------- -------------
Income from operations 3,239,140 2,188,840 6,009,584 4,123,706
Other income (expense):
Investment and other income 446,882 398,538 793,565 781,662
Interest expense (2,631) (34,014) (10,443) (65,832)
------------- -------------- ------------- -------------
444,251 364,524 783,122 715,830
------------- -------------- ------------- -------------
Income before income taxes 3,683,391 2,553,364 6,792,706 4,839,536
Provision for income taxes 1,433,000 959,000 2,620,000 1,779,000
------------- -------------- ------------- -------------
Net income $ 2,250,391 1,594,364 4,172,706 3,060,536
============= ============== ============= =============
Pro forma information (note 2):
Net income as reported $ 2,250,391 1,594,364 4,172,706 3,060,536
Pro forma charge (credit) in lieu of
income taxes - 34,516 - 132,669
------------- -------------- ------------- -------------
Pro forma net income $ 2,250,391 1,559,848 4,172,706 2,927,867
============= ============== ============= =============
Pro forma net income per share $ .15 .10 .28 .20
============= ============== ============= =============
Weighted average number of common
and common equivalent shares
outstanding 15,179,948 15,047,876 15,155,555 14,969,474
See accompanying notes to consolidated financial statements.
5
COMPUTER MANAGEMENT SCIENCES, INC.
Consolidated Statements of Cash Flows
(Unaudited)
For The Six Months
Ended June 30,
1997 1996
---- ----
(restated)
Cash flow from operating activities:
Net income $ 4,172,706 3,060,536
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 669,827 338,100
Net gain on disposition of property and equipment (61,051) (600)
Deferred income (benefit) tax (16,273) 43,308
Pooling adjustment to conform fiscal year-ends - 41,227
Change in assets and liabilities:
Increase in accounts and other receivables (2,441,765) (3,138,956)
(Increase) decrease in other current assets (435,167) 23,249
Decrease (increase) in other assets 274,659 (23,228)
Increase in accounts payable and accrued expense 405,714 358,833
Increase (decrease) in unearned revenue 79,649 (314,701)
Increase (decrease) in income taxes payable 258,355 (128,861)
------------- --------------
Net cash provided by operating activities 2,906,654 258,907
------------- -------------
Cash flow from investing activities:
Purchases of property and equipment (5,494,974) (637,238)
Proceeds from the sale of property and equipment 107,900 600
Purchase of investments, net (1,032,131) (9,169,537)
Increase in intangible assets (1,450,000) (225,163)
Decrease (increase) in notes receivable 7,359 (275,000)
------------- -------------
Net cash used in investing activities (7,861,846) (10,306,338)
------------- -------------
Cash flow from financing activities:
Repayment of notes payable (937,056) (748,790)
Proceeds from issuance of common stock 212,184 150,804
------------- -------------
Net cash used in financing activities (724,872) (597,986)
------------- -------------
Net decrease in cash and cash equivalents (5,680,064) (10,645,417)
Cash and cash equivalents at beginning of period 14,201,624 30,081,665
------------- -------------
Cash and cash equivalents at end of period $ 8,521,560 19,436,2480
============= =============
See accompanying notes to consolidated financial statements.
6
COMPUTER MANAGEMENT SCIENCES, INC.
Notes to Consolidated Financial Statements
(1) Organization and Basis of Presentation
Computer Management Sciences, Inc. (the Company), provides computer
systems and information technology consulting, project management,
systems analysis and design, and programming services to a broad range of
industries and software/hardware platforms. The Company's services are
generally an outside resource supplementing a client's internal
information technology (IT) capabilities, and include various technical
services, such as technology support services, IT solutions services and
strategic IT consulting.
The interim financial information included herein is unaudited. Certain
information and footnote disclosures normally included in the financial
statements have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC), although the
Company believes that the disclosures made are adequate to make the
information presented not misleading. These financial statements should
be read in conjunction with the financial statements and related notes
contained in the Company's annual report on Form 10-K filed with the SEC
on March 31, 1997. Other than as indicated herein, there have been no
significant changes from the financial data published in that report. In
the opinion of management, such unaudited information reflects all
adjustments, consisting of normal recurring accruals and other
adjustments necessary for a fair presentation of the unaudited
information.
The results of operations for such interim periods are not necessarily
indicative of the results for the full year.
(2) Business Combinations
On January 17, 1997, the Company issued 584,080 shares of its common
stock in exchange 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 combination and,
accordingly, the Company's historical consolidated financial statements
have been restated to include the accounts and results of operations of
Miaco. Prior to its acquisition by the Company, Miaco's fiscal year ended
on March 31. Miaco's fiscal year end was conformed with the Company's
December 31 year end during 1996. 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 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. To reflect the earnings of SCS on an after tax basis, a pro
forma charge in lieu of income has been included, in the accompanying
consolidated statements of operations, for the periods preceding the
termination of S Corporation status.
7
COMPUTER MANAGEMENT SCIENCES, INC.
Notes to Consolidated Financial Statements, continued
(3) Newly Issued Accounting Pronouncement
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 will begin to
calculate EPS in compliance with SFAS 128 for the fourth quarter and year
ended December 31, 1997. After adoption, all prior period EPS data
presented will be restated to conform to SFAS 128. The Company does not
believe that the adoption of SFAS 128 will materially impact historical
or future EPS.
8
COMPUTER MANAGEMENT SCIENCES, INC.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward Looking Statements
This Report on Form 10-Q may contain 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 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.
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 the Company's 1996 Annual Report on Form 10-K
on file with the Securities and Exchange Commission. Historical events are not
necessarily indicative of trends in operating results for any future period.
Reference is also made to the above paragraph, with regard to the risks and
uncertainties associated with forward-looking statements.
Results of Operations
The information in the following table is presented as a percentage of
net sales for the period indicated:
Percentage of Total Revenue
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
---- ---- ---- ----
Revenue 100.0% 100.0% 100.0% 100.0%
Direct Costs 60.9% 61.5% 61.4% 61.2%
Gross Profit 39.1% 38.5% 38.6% 38.8%
Selling, general, and administrative
expenses 20.6% 22.7% 20.8% 23.5%
Income from operations 18.5% 15.8% 17.8% 15.3%
Other income, net 2.5% 2.6% 2.3% 2.7%
Income before income taxes 21.0% 18.5% 20.1% 18.0%
Provision for income taxes 8.2% 6.9% 7.8% 6.6%
Net income 12.8% 11.5% 12.4% 11.4%
Pro forma net income 12.8% 11.3% 12.4% 10.9%
9
COMPUTER MANAGEMENT SCIENCES, INC.
Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
Revenue:
Revenue for the second quarter ended June 30, 1997 was $17,544,512, a 26.9%
increase over revenue of $13,821,834 recorded in the second quarter of 1996.
Revenue for the six months ended June 30, 1997 increased $6,878,822 to
$33,773,666, reflecting a 25.6% improvement over the comparable 1996 period.
The increase in revenue during the current quarter was primarily
attributable to an increase in volume of services which was sustained by the
growth in the average billable consultant headcount from 492 in the second
quarter of 1996 to 580 for the current period, an 18% increase. Also
contributing to the increase in revenue was a slight change in the mix of
services delivered by the Company. During the later part of 1996 and
continuing into 1997, the number of strategic IT solution consulting and
outsourcing/fixed bid projects undertaken by the Company has steadily
increased and positively impacted average hourly billing rates. The success
of the Company's Systems Outsourcing Centers (SOCs) have contributed to this
change in the mix of services. Year to date, revenue has grown at a slower
rate as result of one less billing day in the first six months of 1997
versus 1996 due to the timing of holidays. The Company will recoup this lost
day during the fourth quarter of 1997.
Gross Profit:
Gross profit in the second quarter of 1997 was $6,858,643, a $1,535,674
improvement over the second quarter of 1996. For the current six month
period, gross profit increased 24.9% to $13,039,998 compared to $10,443,036
for the same period in 1996. Expressed as a percentage of revenue, gross
profit was 39.1% for the 1997 second quarter versus 38.5% for the 1996
second quarter. This increase in the gross profit percentage is primarily
due to an additional billing day which was recouped from the first quarter
and a change in the mix of services delivered, as discussed above, which
resulted in an increase in average hourly billing rates of approximately 6%
during the current quarter. Year to date, however, the gross profit
percentage for the current period is slightly below that of the prior year
due to one less billing day as discussed above. The increased dollar amount,
in both the current quarter and year to date, is attributable to the
increase in revenue.
S,G&A Expenses:
Selling, general and administrative expenses totaled $3,619,503 for the
second quarter of 1997, an increase of $485,374 over the second quarter of
1996. Expressed as a percentage of revenue, however, S,G&A expenses
decreased from 22.7% in the second quarter 1996 to 20.6% for the second
quarter 1997. For the current six month period, S,G&A expenses decreased as
a percentage of revenue to 20.8% from 23.5% for the comparable 1996 period.
The improved percentage, for both the current quarter and year to date,
resulted from increased volume and cost containment of marketing and other
fixed expenses. Management believes that this percentage will continue to
improve as the Company enters the third and fourth quarter of 1997 and the
January 1997 pooling with Miaco is fully assimilated.
Net Income and Pro Forma Net Income:
Net income increased 44.3% to $2,250,391 for the second quarter of 1997,
compared to pro forma net income of $1,559,848 for the second quarter of
1996. This translates into second quarter 1997 earnings per share of
$0.15 versus $0.10 in 1996, which exceeded analysts' consensus estimates
of $0.14 for the current quarter. For the current six month period, net
income was $4,172,706, an increase of $1,244,839 over pro forma net
income for the comparable 1996 period. This improved performance for both
the second quarter and six month period was a result of increased
revenue, improved billing rates and cost containment of S,G&A expenses.
Also contributing to the increase was a slight improvement in
non-operating revenue as a result of deploying the capital funds in
10
COMPUTER MANAGEMENT SCIENCES, INC.
Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
Net Income and Pro Forma Net Income, continued:
higher yield investments. For the second quarter and six month period of
1997, the effective tax rate was 38.9% and 38.6% versus 37.6% and 36.8% for
the comparable 1996 period. The significant increase in the effective tax
rate is due to the business combination with SCS, an S Corporation acquired
by the Company on April 30, 1996. The acquisition of SCS was accounted for
as a pooling-of-interests. As an S Corporation, SCS's tax liability was the
responsibility of its stockholders. To reflect the earnings of SCS on an
after tax basis, a pro forma charge in lieu of income taxes has been
included for the periods preceding the termination of S Corporation status.
On a comparable basis, pro forma net income expressed as a percentage of
revenue was 12.8% and 12.4% for the quarter and six month period ended June
30, 1997, respectively, versus 11.3% and 10.9% for the same periods in
1996.
11
COMPUTER MANAGEMENT SCIENCES, INC.
Liquidity and Capital Resources
During the six months ended June 30, 1997, cash decreased $5,680,064 and
working capital increased $214,483. While a number of factors contributed
to the decrease in cash, the main components were increases in
investments, accounts receivable, intangible assets and property and
equipment, as discussed below. The increase in working capital is
primarily due to current period income tax benefits resulting from
nonqualified stock option exercises as well as prepaid profit
sharing/ESOP contributions.
As of December 31, 1996, $12.8 million was invested in funds with
original maturity of ninety days or less and were classified as cash
equivalents, versus $8.4 million at June 30, 1997. In an effort to
increase the return on investments, the Company acquired investments with
maturities extending beyond ninety days during the current six month
period. By the end of the second quarter, $5,500,085 was invested in
current securities and $6,012,181 was invested in various corporate and
governmental bonds with maturities exceeding one year.
Accounts receivable increased $1,855,298 during the first six months of
1997. The number days of sales outstanding as of June 30, 1997 was 60
days, which is the same as the number of days of sales outstanding at the
end of 1996. Therefore, the increase in accounts receivable is a
reflection of increased sales volume experienced during the period.
During the current six month period, the Company spent approximately $5.5
million for capital expenditures. Of these capital expenditures, $4.3
million was spent for property, buildings and improvements to house the
Greenville, Denver and Charlotte SOCs, and $1.1 million was spent for
computer equipment, software and furniture for the Tallahassee,
Greenville and Charlotte SOCs.
The Company maintains a $750,000 revolving credit facility with a
commercial bank, permitting advances equal to the lesser of $750,000 or
75% of "qualified accounts" (defined as trade accounts receivables less
than 90 days old, which approximated $9.9 million as of June 30, 1997).
The credit facility has been inactive during 1997. During August 1997,
the Company obtained a $4 million line of credit to replace the existing
credit facility. The line of credit is unsecured (but with a negative
pledge on Company assets) and 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 Company
assumed certain debt obligations totaling $937,056 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 and long-term
working capital requirements and to fund its expansion through the
establishment of additional branch offices, SOC locations, and possible
acquisitions.
12
COMPUTER MANAGEMENT SCIENCES, INC.
Part II - Other Information
Item 1 - Legal Proceedings - None
Item 2 - Changes in Securities - None
Item 3 - Defaults Upon Senior Securities - None
Item 4 - Submission of Matter to a Vote of Security Holders -
An annual meeting of the shareholders of the Company was held on June
6, 1997, at which two Class II directors were nominated for election by
management. The result of the vote was as follows:
Votes Votes Broker Non-
Votes For Against Withheld Abstentions Votes
Anthony V. Weight 11,267,265 -0- 27,307 -0- -0-
Perry E. Esping 11,273,703 -0- 20,869 -0- -0-
In addition, the Board of Directors of the Company proposed that the
Company's Amended and Restated Articles of Incorporation be amended to
increase the authorized capital stock of the Company from 20,000,000
shares of common stock, $0.01 par value per share (Common Stock), and
5,000,000 shares of preferred stock, $0.01 par value per share
(Preferred Stock), to 40,000,000 shares of Common Stock and 5,000,000
shares of Preferred Stock. The result of the vote was as follows:
Votes Votes Broker Non-
Votes For Against Withheld Abstentions Votes
10,615,927 375,569 -0- 28,750 274,326
Item 5 - Other Information - None
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits -
Exhibit 27 - Financial Data Schedule as of and for the six months
ended June 30, 1997, pursuant to Article 5 of Regulation S-X.
(b) Reports: None
13
COMPUTER MANAGEMENT SCIENCES, INC.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMPUTER MANAGEMENT SCIENCES, INC.
(Registrant)
Date: August 13, 1997 /s/ Anthony Colaluca
--------------------
Anthony Colaluca
Vice President and Chief Financial Officer
14