<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OR 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: 0-22737
-------------------------
ADVANCED COMMUNICATION SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 54-1421222
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
10089 LEE HIGHWAY, FAIRFAX, VIRGINIA 22030
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE AND ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER,
INCLUDING AREA CODE: (703) 934-8130
</TABLE>
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 NO X
------ ------
AS OF THE CLOSE OF BUSINESS ON AUGUST 13, 1997, THE REGISTRANT HAD OUTSTANDING
6,030,000 SHARES OF COMMON STOCK, PAR VALUE $.01 PER SHARE.
1
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ADVANCED COMMUNICATION SYSTEMS, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of June 30, 1997
and September 30, 1996 3
Condensed Consolidated Statements of Operations for the Three
and Nine Months Ended June 30, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended June 30, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II. OTHER INFORMATION 11
Item 6. Exhibit and Reports on Form 8-K 13
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ADVANCED COMMUNICATION SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1997 1996
---------------- ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $1,916 $1,177
Contract receivables 9,820 9,987
Other receivables 204 69
Prepaid expenses 767 208
---------------- ----------------
Total current assets 12,707 11,441
---------------- ----------------
Property and equipment, net 792 571
Other assets:
Notes receivable, stockholders 483 443
Other related party receivables 368 138
Software development costs, net 554 461
Other assets 227 63
---------------- ----------------
Total other assets 1,632 1,105
---------------- ----------------
Total assets $15,131 $13,117
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $4,845 $2,125
Accrued expenses 6,041 3,476
Billings in excess of revenue 387 362
Deferred income tax liability 72 91
Payable to stockholders 3,887 -
---------------- ----------------
Total current liabilities 15,232 6,054
Line of credit - 2,688
---------------- ----------------
Total liabilities 15,232 8,742
---------------- ----------------
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized,
no shares issued and outstanding - -
Common stock, $.01 par value, 40,000,000 shares authorized,
6,750,000 shares issued at June 30, 1997 and September 30, 1996 67 67
Paid-in-capital and accretion 68 16,506
Retained earnings 52 4,520
Adjustment for redemption value greater than
amounts paid in by stockholders - (16,438)
Less - Treasury stock, 2,945,000 shares at June 30, 1997, and
3,017,250 shares at September 30, 1996 (288) (280)
---------------- ----------------
Total stockholders' equity (deficit) (101) 4,375
---------------- ----------------
Total liabilities and stockholders' equity $15,131 $13,117
================ ================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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ADVANCED COMMUNICATION SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30 JUNE 30
1997 1996 1997 1996
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Revenues $14,379 $7,215 $35,510 $20,251
Direct Costs 10,432 4,475 25,179 11,670
Indirect, general and administrative expenses 3,040 2,358 8,066 7,133
-------- -------- -------- ---------
Income from operations 907 382 2,265 1,448
Interest expense 2 72 136 199
Other income, net 16 17 60 44
-------- -------- -------- ---------
Income before taxes 921 327 2,189 1,293
Provision for income taxes 33 - 33 -
-------- -------- -------- ---------
Net income $888 $327 $2,156 $1,293
======== ======== ======== =========
Pro forma statements of operations data
Income before taxes as reported $921 $327 $2,189 $1,293
Pro forma tax provision 359 123 854 509
-------- -------- -------- ---------
Pro forma net income $562 $204 $1,335 $784
======== ======== ======== =========
Pro forma net income per share $0.13 $0.05 $0.31 $0.18
======== ======== ======== =========
Pro forma weighted average shares outstanding 4,442 4,361 4,378 4,361
======== ======== ======== =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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ADVANCED COMMUNICATION SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30
1997 1996
--------- --------------
<S> <C> <C>
Cash flow from operating activities:
Net income $2,156 $1,293
Adjustments to reconcile net income to net cash provided by
operating activities-
Depreciation and amortization 323 275
Changes in assets and liabilities:
Contract receivables (3,288) (1,387)
Other receivables (135) (43)
Prepaid expenses (559) (6)
Other related party receivables (230) (3)
Other assets (164) (12)
Accounts payable 2,720 (485)
Accrued expenses 2,565 476
Billings in excess of revenues 25 25
Income taxes payable - (7)
Deferred income taxes (19) 7
--------- --------------
Net cash provided by operating activities 3,394 133
--------- --------------
Cash flows from investing activities:
Purchases of property and equipment (441) (297)
Capitalized software development costs (196) -
--------- --------------
Net cash used in investing activities (637) (297)
--------- --------------
Cash flows from financing activities:
Net borrowings (repayments) under line of credit (2,688) 771
Collection of receivables on behalf of stockholders 678 -
Purchase of treasury stock (65) -
Sale of treasury stock 57 -
Stockholders' distributions - (28)
--------- --------------
Net cash (used in) provided by financing activities (2,018) 743
--------- --------------
Net increase in cash 739 579
Cash and cash equivalents, beginning of year 1,177 592
--------- --------------
Cash and cash equivalents, end of period $1,916 $1,171
========= ==============
Supplemental Information:
Interest paid $182 $229
========= ==============
Income taxes paid $15 $12
========= ==============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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ADVANCED COMMUNICATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated balance sheet as of June 30, 1997 and
the statements of operations and cash flows for all periods presented have been
prepared by Advanced Communication Systems, Inc. ("the Company"), and have not
been audited. These financial statements, in the opinion of management,
include all adjustments, consisting of normal recurring adjustments, necessary
for a fair presentation of the financial position, results of operations and
cash flows for all periods presented. These condensed consolidated financial
statements should be read in conjunction with the financial statements and
notes thereto for the year ended September 30, 1996 included in the Company's
Registration Statement on Form S-1 (File No. 333-23959). Interim operating
results are not necessarily indicative of operating results for the full year.
2. MANAGEMENT'S 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
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
3. COMPLETION OF INITIAL PUBLIC OFFERING
After the date of these financial statements, in July 1997, the Company
consummated the initial public offering of its Common Stock, selling 1,850,000
shares of Common Stock, including the underwriter's overallotment option of
375,000 shares, for $7.50 per share. The initial public offering resulted in
net proceeds to the Company of approximately $14.4 million after deducting
underwriting discounts and offering expenses payable by the Company.
4. PROVISION FOR INCOME TAXES
Prior to June 25, 1997, the Company elected to be treated as an S corporation
and was not subject to federal and certain state income taxes. As a result, no
provision for federal or state income taxes has been included in the historical
statements of operations prior to June 25, 1997. On June 25, 1997, in
connection with the initial public offering discussed in Note 3, the S
corporation status was terminated, thereby subjecting future income of the
Company to federal and state income taxes at the corporate level. Subsequent
to June 25, 1997, the Company has provided for federal and state income taxes in
the statements of operations based on the effective tax rate.
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5. PRO FORMA NET INCOME PER SHARE
Pro forma net income is based on the assumption that the Company's S
corporation status was terminated at the beginning of each year. Pro forma net
income per share has been computed by dividing pro forma net income by the pro
forma weighted average number of common shares outstanding during each period.
The pro forma weighted average shares outstanding is based on: (i) the
weighted average shares outstanding during the period assuming the dilutive
effect of all options outstanding (ii) stock options issued during the twelve
months immediately preceding the offering date (using the treasury stock method
and an initial public offering price of $7.50 per share) for all periods
presented; and (iii) the assumed sale of a sufficient number of shares of the
Company's Common Stock necessary to fund the distribution of all undistributed
S corporation earnings in excess of the preceding twelve months earnings.
Pro forma fully diluted net income per share approximates primary net income
per share for all periods presented.
6. STOCKHOLDERS' EQUITY:
RECAPITALIZATION AND STOCK SPLIT
On May 5, 1997, the Company amended and restated its Certificate of
Incorporation to increase the number of authorized shares to 40,000,000 shares
of Common Stock, par value $.01 per share, and 1,000,000 shares of Preferred
Stock, par value $.01 per share. In June, 1997, the Board of Directors
approved a stock dividend having the effect of a 6,750-for-1 stock split of the
Common Stock, which was paid to the stockholders effective June 25, 1997. The
change in the Company's Common Stock for the stock dividend has been given
retroactive effect for all periods presented.
S CORPORATION DISTRIBUTION
In connection with the termination of the Company's S corporation status and
its Initial Public Offering, the Board of Directors declared a $6.6 million
dividend of its previously undistributed S corporation earnings in June 1997.
The distribution was made as follows: $3.4 million, in kind, in the form of
contract receivables in June 1997, and $3.2 million in cash in July 1997. As
of June 30, 1997, the Company collected $678,000 of distributed contract
receivables, on behalf of the stockholders. Accordingly, $3.9 million payable
to stockholders at June 30, 1997 is reflected as a current liability on the
accompanying balance sheet.
STOCK REDEMPTION AGREEMENTS
All of the outstanding shares of Common Stock and options were subject to Stock
Redemption Agreements. Adjustment for redemption value greater than amounts
paid in by stockholders represented the accretion of the outstanding Common
Stock to the redemption value. In connection with the initial public offering,
these agreements were canceled on June 27, 1997, and the corresponding
accretion was removed.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data as a
percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- ------------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0%
Direct costs . . . . . . . . . . . . . . . . . . . . . . 72.6 62.0 70.9 57.6
Indirect, general and administrative expenses . . . . . . 21.1 32.7 22.7 35.2
----- ------ ------ ------
Income from operations . . . . . . . . . . . . . . . . 6.3 5.3 6.4 7.2
Other income (expense), net . . . . . . . . . . . . . . 0.1 (0.8) (0.2) (0.8)
----- ------ ------ ------
Income before taxes . . . . . . . . . . . . . . . . . . . 6.4 4.5 6.2 6.4
Provision for income taxes . . . . . . . . . . . . . . . 0.2 - 0.1 -
----- ------ ------ ------
Net income . . . . . . . . . . . . . . . . . . . . . . . 6.2 4.5 6.1 6.4
===== ====== ====== ======
Pro forma tax provision . . . . . . . . . . . . . . . . . 2.5 1.7 2.4 2.5
Pro forma net income . . . . . . . . . . . . . . . . . . 3.9% 2.8% 3.8% 3.9%
===== ====== ====== ======
</TABLE>
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30, 1996
Revenues increased 99.3%, or $7.2 million, to $14.4 million for the three
months ended June 30, 1997, from $7.2 million for the same period in 1996. The
increase was due to a $5.5 million increase in revenues from communication
systems and IT Services, primarily under contracts with the U.S. Navy, and a
$1.7 million increase in revenues from systems integration services.
Direct costs include labor costs, related fringe benefits, subcontract costs,
material costs and other non-overhead costs directly related to a contract.
Direct costs increased to $10.4 million for the three months ended June 30,
1997 from $4.5 million for the same period in 1996. Direct costs, expressed as
a percentage of revenues, increased to 72.6% for the three months ended June
30, 1997 from 62.0% for the same period in 1996, primarily due to an increased
proportion of revenues coming from systems integration services. These
services have higher direct costs because the contracts generally require the
Company to purchase hardware components as part of the services.
Indirect, general and administrative expenses include fringe benefits,
overhead, selling and administrative costs, depreciation and amortization, bid
and proposal costs and research and development expenses. Indirect expense
increased to $3.0 million for the three months ended June 30, 1997 from $2.4
million for the same period in 1996. The increase was due primarily to the
higher level of revenues discussed above. Indirect expenses, expressed as a
percentage of
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revenues, decreased to 21.1% from 32.7% for the three months ended June 30,
1997, due to the higher proportion of systems integration revenues, which
typically have lower associated indirect expenses.
Income from operations increased 137.4%, to $907,000 for the three months ended
June 30, 1997, from $382,000 for the same period in 1996, primarily due to
increased revenues from U.S. Navy contracts and systems integration. As a
percentage of revenues, income from operations increased to 6.3% for the three
months ended June 30, 1997, from 5.3% for the comparable period in the prior
year, primarily attributable to increased system integration and international
revenues which typically carry higher margins.
Other income (expense), net, consists of interest expense, offset in part by
interest income from short-term deposits of cash. Interest expense was $2,000
and $72,000 for the three month periods ended June 30, 1997 and 1996,
respectively. Interest income was $16,000 and $17,000 for the three months
ended June 30, 1997 and 1996, respectively.
The Company's pro forma effective tax rate was 39.0% and 37.6% for the three
months ended June 30, 1997 and 1996, respectively.
NINE MONTHS ENDED JUNE 30, 1997 COMPARED TO NINE MONTHS ENDED JUNE 30, 1996
Revenues increased 75.3%, or $15.3 million, to $35.5 million for the nine
months ended June 30, 1997, from $20.3 million for the same period in 1996.
The increase was due to a $9.5 million increase in revenues from communication
systems and IT Services, primarily under contracts with the U.S. Navy, and a
$5.8 million increase in revenues from systems integration services.
Direct costs increased to $25.2 million for the nine months ended June 30, 1997
from $11.7 million for the same period in 1996. Direct costs, expressed as a
percentage of revenues, increased to 70.9% for the nine months ended June 30,
1997 from 57.6% for the same period in 1996, primarily due to increased
revenues from systems integration services.
Indirect, general and administrative expenses increased to $8.1 million for the
nine months ended June 30, 1997 from $7.1 million for the same period in 1996.
The increase was due primarily to the higher level of revenues discussed above.
Indirect expenses, expressed as a percentage of revenues, decreased to 22.7%
for the nine months ended June 30, 1997 from 35.2% for the same period in 1996,
because a higher proportion of revenues was generated from systems integration
services.
Income from operations increased 56.4%, to $2.3 million for the nine months
ended June 30, 1997, from $1.4 million for the same period in 1996. As a
percentage of revenues, income from operations decreased to 6.4% in the nine
months ended June 30, 1997 from 7.2% in the same period in 1996. This was due
primarily to international revenues from the sale of ISALTS products at
significantly higher margins in 1996, partially offset by increased revenues
from systems integration services.
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Interest expense was $136,000 and $199,000 for the nine months ended June 30,
1997 and 1996, respectively. Interest income was $60,000 and $44,000 for the
nine months ended June 30, 1997 and 1996, respectively.
The Company's pro forma effective tax rate was 39.0% and 39.4% for the nine
months ended June 30, 1997 and 1996, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated cash flow from operating activities of $3.4 million for
the nine months ended June 30, 1997, resulting primarily from net income,
increases in accounts payable and accrued expenses, partially offset by
increases in contract receivables. The increase in contract receivables was
due to increased revenues from the two large U.S. Navy contracts awarded to the
Company during fiscal 1996 and from systems integration and resale business
under the GSA Schedule Contract. For the nine months ended June 30, 1996, the
Company generated cash flow from operating activities which amounted to
$133,000, resulting primarily from net income and increases in accrued
expenses, and partially offset by increases in contract receivables.
The principal use of cash for investing activities has been for the purchase of
computers and equipment. These purchases totaled $441,000 and $297,000 for the
nine months ended June 30, 1997 and 1996, respectively. Further, the Company
invested $196,000 in software development costs for its latest Microsoft
Exchange-based product, ISALTS 2000, in the nine months ended June 30, 1997.
In connection with the termination of the Company's S corporation status, the
Company made a $3.4 million non-cash distribution in June 1997, in the form of
contract receivables, to its stockholders (see Note 6). Of this, $678,000 was
collected by the Company on behalf of the stockholders as of June 30, 1997.
The Company leases office space from 10089 Management, L.L.C., a Virginia
limited liability company ("10089 Management"), which has as its majority
members Messrs. Robinson, Martinache and Costello, the principal stockholders
and directors and officers of the Company. The Company had guaranteed 10089
Management's bank borrowings, but this guaranty was terminated upon the closing
of the initial public offering.
The Company currently has a line of credit with a commercial bank under which
it can borrow up to a maximum $5.0 million. As of June 30, 1997, there was no
debt outstanding under this facility.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 11.1 Statement Regarding Computation of
Earnings per Share
Exhibit 27.1 Financial Data Schedule
(b) The Company filed no report on Form 8-K during the quarter
ended June 30, 1997.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registration has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 13, 1997 ADVANCED COMMUNICATION SYSTEMS, INC.
/S/ George A. Robinson
-------------------------------------------------
George A. Robinson
President and Chief Executive Officer
/S/ Dev Ganesan
-------------------------------------------------
Dev Ganesan
Chief Financial Officer
12
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EXHIBIT 11.1 - COMPUTATION OF PER SHARE EARNINGS
ADVANCED COMMUNICATION SYSTEMS, INC. AND SUBSIDIARIES
PRO FORMA NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30 JUNE 30
1997 1996 1997 1996
-------------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
Weighted average common stock outstanding 3,812,250 3,732,750 3,788,397 3,732,750
Common stock equivalent - 73,440 16,402 73,440
Stock options issued during twelve months
immediately preceding the offering date (using the
treasury stock method and the initial public
offering price per share) 80,857 75,833 71,111 75,833
Stock issued to satisfy S corporation distribution in
excess of preceding twelve month earnings based on
the initial public offering price per share 549,000 479,333 502,323 479,333
-------------- --------------- ------------- -------------
Pro forma weighted average shares 4,442,107 4,361,356 4,378,233 4,361,356
============== =============== ============= =============
Pro forma net income $ 562 $ 204 $ 1,335 $ 784
============== =============== ============= =============
Pro forma net income per share $ 0.13 $ 0.05 $ 0.31 $ 0.18
============== =============== ============= =============
</TABLE>
13
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 1,916
<SECURITIES> 0
<RECEIVABLES> 9,820
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 12,707
<PP&E> 792
<DEPRECIATION> 0
<TOTAL-ASSETS> 15,131
<CURRENT-LIABILITIES> 15,232
<BONDS> 0
0
0
<COMMON> 67
<OTHER-SE> (168)
<TOTAL-LIABILITY-AND-EQUITY> 15,131
<SALES> 0
<TOTAL-REVENUES> 35,510
<CGS> 25,179
<TOTAL-COSTS> 33,245
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 136
<INCOME-PRETAX> 2,189
<INCOME-TAX> 854
<INCOME-CONTINUING> 1,335
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,335
<EPS-PRIMARY> .31
<EPS-DILUTED> .31
</TABLE>
