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 SEPTEMBER 30, 1998
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
incorporation or organization) Identification Number)
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 October 31, 1998 there were 14,626,852 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 September 30, 1998
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
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations 8-10
Liquidity, Capital Resources and
Year 2000 System Conversion 11-12
PART II - OTHER INFORMATION
Items 1-6 Other Information 13
Signatures 14
2
COMPUTER MANAGEMENT SCIENCES, INC.
Consolidated Balance Sheets
September 30, December 31,
1998 1997
(unaudited)
Current assets:
Cash and cash equivalents $ 7,751,288 14,550,323
Accounts receivable, net 17,322,846 11,720,377
Revenue earned in excess of billings 1,439,899 2,461,228
Investments 3,204,202 2,805,072
Refundable income taxes - 4,358,250
Other receivables 451,644 251,407
Notes receivable 7,307,434 619,328
Other current assets 182,827 127,289
------------ ------------
Total current assets 37,660,140 36,893,274
------------ ------------
Property and equipment:
Land 3,588,000 2,562,000
Buildings and improvements 14,748,629 9,100,902
Computers and software 5,741,821 3,934,806
Office furniture and equipment 3,331,546 2,586,417
Vehicles 433,944 391,750
------------ ------------
27,843,940 18,575,875
Less accumulated depreciation 4,323,719 3,077,243
------------ ------------
Net property and equipment 23,520,221 15,498,632
------------ ------------
Other assets:
Intangible assets, net of accumulated
amortization of $1,247,457 and $872,230 3,841,306 3,516,531
Land held for investment, at cost 424,065 424,065
Investments 8,905,394 8,137,146
Notes receivable, less current portion 3,582,592 829,792
Other 1,080,608 823,830
------------ ------------
Total other assets 17,833,965 13,731,364
------------ ------------
Total assets $ 79,014,326 66,123,270
============ ============
(continued)
3
COMPUTER MANAGEMENT SCIENCES, INC.
Consolidated Balance Sheets, continued
September 30, December 31,
1998 1997
(unaudited)
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 1,076,971 106,320
Accrued expenses 5,996,303 4,341,936
Unearned revenue 201,894 376,556
Income taxes payable 113,687 -
Deferred income taxes 135,690 50,623
----------- -----------
Total current liabilities 7,524,545 4,875,435
----------- -----------
Long-term liabilities:
Deferred income taxes 57,401 249,553
Other 31,731 35,594
----------- -----------
Total long term liabilities 89,132 285,147
----------- -----------
Shareholders' equity:
Preferred stock, $.01 par value; 5,000,000
shares authorized, no shares issued
and outstanding in 1998 and 1997 - -
Common stock, $.01 par value; 40,000,000
shares authorized, 14,622,164 and
14,455,337 shares issued and
outstanding in 1998 and 1997 146,223 144,554
Paid-in capital 39,931,802 38,605,137
Retained earnings 31,211,798 22,054,155
Accumulated comprehensive income, net of
income tax 110,826 158,842
----------- -----------
Total shareholders' equity 71,400,649 60,962,688
----------- -----------
Total liabilities and
shareholders' equity $ 79,014,326 66,123,270
=========== ===========
See accompanying notes to consolidated financial statements.
4
COMPUTER MANAGEMENT SCIENCES, INC.
Consolidated Statements of Operations
(Unaudited)
For the Three Month For the Nine Month
Period Ended September 30, Period Ended September 30,
1998 1997 1998 1997
Revenue $ 23,019,251 18,160,441 66,233,072 51,934,107
Direct costs 13,908,779 11,022,348 39,871,389 31,756,016
------------- -------------- ------------- -------------
Gross profit 9,110,472 7,138,093 26,361,683 20,178,091
Selling, general and administrative
expenses 4,394,408 3,722,474 12,730,892 10,752,888
----------- ------------- -------------- ------------
Income from operations 4,716,064 3,415,619 13,630,791 9,425,203
Other income (expense):
Investment and other income 491,653 470,626 1,099,168 1,264,193
Interest expense - (665) (2,316) (11,110)
------------- -------------- ------------- -------------
491,653 469,961 1,096,852 1,253,083
------------- -------------- ------------- -------------
Income before income taxes 5,207,717 3,885,580 14,727,643 10,678,286
Provision for income taxes 2,005,000 1,465,000 5,570,000 4,085,000
------------- -------------- ------------- -------------
Net income $ 3,202,717 2,420,580 9,157,643 6,593,286
============= ============== ============= =============
Net income per share - basic $ 0.22 0.18 0.63 0.50
============= ============= ============= =============
Weighted average number of common
shares outstanding - basic 14,610,662 13,512,361 14,588,319 13,256,650
Net income per share - diluted $ 0.21 0.16 0.60 0.43
============= ============= ============= =============
Weighted average number of common
and common equivalent shares
outstanding - diluted 15,232,775 15,205,959 15,287,039 15,160,143
See accompanying notes to consolidated financial statements.
5
COMPUTER MANAGEMENT SCIENCES, INC.
Consolidated Statements of Cash Flows
(Unaudited)
For The Nine Months
Ended September 30,
1998 1997
---- ----
Cash flow from operating activities:
Net income $ 9,157,643 6,593,286
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 1,588,597 1,049,860
Net loss (gain) on disposition of property and equipment 3,711 (70,386)
Deferred income tax benefit (75,453) (86,224)
Change in assets and liabilities:
Increase in accounts and other receivables (4,781,377) (2,740,734)
Increase in other current assets (55,538) (113,392)
Increase in other assets (256,778) (357,856)
Increase in accounts payable and accrued expense 2,625,018 574,680
Decrease in unearned revenue (174,662) (116,421)
Increase in income taxes payable 5,324,376 1,609,578
------------- -------------
Net cash provided by operating activities 13,355,537 6,342,391
------------- -------------
Cash flow from investing activities:
Purchases of property and equipment (9,401,015) (7,230,541)
Proceeds from the sale of property and equipment 162,343 117,435
Purchase of investments, net (1,247,026) (166,327)
Increase in intangible assets (700,000) (1,450,000)
(Increase) decrease in notes receivable (9,440,906) 447,061
-------------- -------------
Net cash used in investing activities (20,626,604) (8,282,372)
-------------- -------------
Cash flow from financing activities:
Repayment of notes payable (3,863) (940,275)
Proceeds from issuance of common stock 475,895 411,797
------------- -------------
Net cash provided by (used in) financing activities 472,032 (528,478)
------------- -------------
Net decrease in cash and cash equivalents (6,799,035) (2,468,459)
Cash and cash equivalents at beginning of period 14,550,323 14,201,624
------------- -------------
Cash and cash equivalents at end of period $ 7,751,288 11,733,165
============= =============
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 30, 1998. 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) Newly Issued Accounting Pronouncement
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income", effective January 1,
1998. This Statement establishes standards for reporting and display of
comprehensive income and its components. Comprehensive income for the
nine months ended September 30, 1998 and 1997 was $9,109,627 and
$6,698,745, respectively. This amount differs from net income due to
changes in the net unrealized gains on marketable securities available
for sale.
(3) Earnings Per Share
Net income per share of common stock is computed based upon the weighted
average number of common shares and share equivalents outstanding during
the period. 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 for all period presented.
(4) Subsequent Event
On October 30, 1998, the Company acquired substantially all of the assets
of Competitive Systems Advantage, Inc. (CSA), a Chicago-based information
technology firm specializing in providing systems integration consulting
services to the insurance and banking industries. The purchase price of
the acquisition was approximately $5.6 million in cash at closing and up
to $3 million in additional cash consideration which is contingent on CSA
meeting certain revenue and gross profit thresholds during 1999 and 2000.
7
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 1997 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
revenue for the period indicated:
Percentage of Total Revenue
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
Revenue 100.0% 100.0% 100.0% 100.0%
Direct Costs 60.4% 60.7% 60.2% 61.1%
Gross Profit 39.6% 39.3% 39.8% 38.9%
Selling, general, and
administrative expenses 19.1% 20.5% 19.2% 20.7%
Income from operations 20.5% 18.8% 20.6% 18.1%
Other income, net 2.1% 2.6% 1.7% 2.4%
Income before income taxes 22.6% 21.4% 22.2% 20.6%
Provision for income taxes 8.7% 8.1% 8.4% 7.9%
Net income 13.9% 13.3% 13.8% 12.7%
8
COMPUTER MANAGEMENT SCIENCES, INC.
Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
Revenue:
Revenue for the third quarter ended September 30, 1998 was $23.0 million, a
27% increase over revenue of $18.2 million recorded in the third quarter of
1997. Revenue for the nine months ended September 30, 1998 increased $14.3
million to $66.2 million, reflecting a 28% improvement over the comparable
1997 period. Consulting service revenue, which represents 99% of total
revenue for the third quarter and year to date 1998, increased 28% and 29%
over the quarter and nine months ended September 30, 1997, respectively. 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 600 in the third quarter of 1997
to 724 for the current quarter, a 21% 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
Systems Outsourcing Center (SOC) model. The Company's ability to execute,
manage and leverage fixed bid projects via its SOC network translates to
"virtual" headcount growth (i.e. increased revenue per consultant). As a
percentage of revenue, fixed bid projects remained consistent at 8% of total
revenue for the third quarter of 1998 and 1997, but for the nine months
ended September 30, 1998, fixed bid revenue comprised 13% of total revenue
versus 7% for the comparable period in 1997. Year to date, revenue has grown
at a rate consistent with the current quarter as a result of increased
consultant headcount and improved billing rates as discussed above.
Gross Profit:
Gross profit for the third quarter of 1998 was $9.1 million, representing a
$2.0 million, or 28%, improvement over gross profit for the third quarter of
1997. For the current nine month period, gross profit increased 31% to $26.4
million compared to $20.2 million for the same period in 1997. Expressed as
a percentage of revenue, gross profit was 39.8% in the third quarter of 1998
versus 38.9% in the 1997 third quarter. 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 of approximately 4% in average hourly billing rates for the
third quarter over the average hourly billing rates for the 1997 third
quarter. Year to date, the gross profit percentage is above that of the
comparable period for the prior year due to increased fixed bid margins and
billing rates 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 $4.4 million for the
third quarter of 1998, an increase of $672 thousand, or 18%, over the third
quarter of 1997. Expressed as a percentage of revenue, however, S,G&A
expenses decreased from 20.5% in the third quarter of 1997 to 19.1% for the
third quarter of 1998. For the current nine month period, S,G&A expenses
decreased as a percentage of revenue to 19.2% from 20.7% for the comparable
1997 period. The improved percentage, for both the current quarter and year
to date, resulted from increased revenue and cost containment of marketing
and other fixed expenses. Partially offsetting this percentage improvement
were increases of $178 thousand and $863 thousand in the third quarter and
year to date 1998, respectively, for the Resource Development Program, an
internal technical training program, which was a new initiative during the
second half of 1997. Also contributing to the increased dollar amount were
increases in depreciation resulting from our SOC additions and profit
sharing expense.
9
COMPUTER MANAGEMENT SCIENCES, INC.
Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
Net Income:
Net income increased 32% to $3.2 million for the third quarter of 1998,
compared to net income of $2.4 million for the third quarter of 1997. This
translates into third quarter 1998 diluted earnings per share of $0.21
versus $0.16 in the third quarter of 1997, a 32% increase. For the current
nine month period, net income was $9.2 million, an increase of $2.6 million
over net income for the comparable 1997 period. This improved performance
for both the third quarter and nine month period was a result of increased
revenue, improved billing rates and cost containment of S,G&A expenses, as
discussed above. Also contributing to the increase year to date, was an
improvement in the effective income tax rate, which declined from 38.3% of
income before income taxes in 1997 to 37.8% in 1998. The improved effective
tax rate is a result of state and local tax planning strategies that were
implemented in the fourth quarter of 1997. Net income expressed as a
percentage of revenue was 13.9% and 13.8% for the quarter and nine month
period ended September 30, 1998 versus 13.3% and 12.7% for the same period
in 1997.
10
COMPUTER MANAGEMENT SCIENCES, INC.
Liquidity, Capital Resources and Year 2000 System Conversion
Liquidity and Capital Resources
During the nine months ended September 30, 1998, cash decreased $6.8
million and working capital decreased $1.9 million. While a number of
factors contributed to the decrease in cash, the main components were
increases in accounts receivable, notes receivable, intangible assets,
investments and property and equipment, as discussed below. Partially
offsetting these uses of cash were income tax refunds as well as an
increase in accounts payable and accrued liabilities. The increase in
notes receivable is attributable primarily to the following two
related-party notes receivable: (i) approximately $2.5 million principal
amount due from Jerry W. Davis, the Company's CEO, under a promissory
note dated April 17, 1998, the proceeds of which were used to pay federal
income tax obligations arising from the exercise in late 1997 of certain
non-qualified stock options of the Company; and (ii) approximately $4.7
million principal amount due from a limited partnership controlled by
Jerry W. Davis and Anthony V. Weight, the Company's CEO and acting CEO,
respectively, under a promissory note dated July 2, 1998, the proceeds of
which were used to purchase an aircraft that is used for both personal
and business purposes. Both of these notes bear interest at 5.6% per
annum and are payable interest only monthly until maturity, December 31,
1998, when the full unpaid principal and interest are due and payable.
The decrease in working capital is primarily due to an increase in income
taxes payable in the current period versus a $4.4 million income tax
receivable at the end of last year.
As of December 31, 1997, $9.8 million was invested in funds with original
maturity of ninety days or less and were classified as cash equivalents,
versus $4.8 million at September 30, 1998. The timing of maturities of
governmental bonds as well as the reinvestment of short-term investments
in commercial paper with maturities greater than ninety days have
resulted in a decrease in cash equivalents with corresponding decreases
in short-term investments. By the end of the third quarter, $3.2 million
was invested in current securities and $8.9 million was invested in
various corporate and governmental bonds with maturities exceeding one
year.
Accounts receivable increased $4.8 million during the first nine months
of 1998. The number days of sales outstanding as of September 30, 1998
and December 31, 1997 were approximately 63 and 61 days, respectively.
Therefore, the increase in accounts receivable is primarily a reflection
of increased sales volume experienced during the period.
During the current nine month period, the Company spent approximately
$9.4 million for capital expenditures. Of these capital expenditures,
$1.8 million was spent for building improvements and renovations to the
Denver SOC, the new Jacksonville SOC and the Nashville SOC; $2.6 million
was spent for computer equipment, software and furniture for the Denver
SOC, Nashville SOC and corporate purposes; $3.9 million was spent on a
building for a future SOC in Richmond; and $850 thousand was spent on a
building for a future SOC in Nashville. The Company also paid $700
thousand in connection with the second contingent consideration payment
due under the acquisition agreement to purchase Pathways Consulting,
Inc., dated July 31, 1996.
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 1998.
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.
11
COMPUTER MANAGEMENT SCIENCES, INC.
Liquidity, Capital Resources and Year 2000 System Conversion, continued
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 has implemented new systems to resolve 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 new enterprise wide software was implemented and live
effective April 1, 1998 and has cost the Company approximately $800
thousand. Management believes that the effect of the Year 2000 on its
internal information systems will have an immaterial impact on the
Company. The Company is also reviewing the Year 2000 system conversions
of other companies with which it does business in order to determine
their compliance.
12
COMPUTER MANAGEMENT SCIENCES, INC.
Part II - Other Information
Item 1 - Legal Proceedings - None
Item 2 - Changes in Securities and Use of Proceeds:
(a) Changes in Securities - None
(b) Use of Proceeds - Not applicable
Item 3 - Defaults Upon Senior Securities - None
Item 4 - Submission of Matter to a Vote of Security Holders - None
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 nine
months ended September 30, 1998, pursuant to Article
5 of Regulation S-X.
Exhibit 27.1 - Restated Financial Data Schedule as of and for
the nine months ended September 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: November 13, 1998 /s/ Anthony Colaluca
--------------------
Anthony Colaluca
Vice President and
Chief Financial Officer