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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, 1999
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)
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DELAWARE 54-1421222
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
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10089 LEE HIGHWAY, FAIRFAX, VIRGINIA 22030
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE AND ZIP CODE)
(703) 934-8130
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
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 THE CLOSE OF BUSINESS ON JULY 30, 1999, THE REGISTRANT HAD OUTSTANDING
8,729,283 SHARES OF COMMON STOCK, PAR VALUE $.01 PER SHARE.
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ADVANCED COMMUNICATION SYSTEMS, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
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PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of June 30, 1999
and September 30, 1998 3
Condensed Consolidated Statements of Operations for the Three
Months and Nine Months Ended June 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended June 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition 8
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
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ADVANCED COMMUNICATION SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
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<CAPTION>
JUNE 30 SEPTEMBER 30
1999 1998
---- ----
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ASSETS
Current assets:
Cash and cash equivalents....................................................... $180 $2,457
Contract receivables, billed and unbilled....................................... 67,639 54,059
Other receivables............................................................... 318 286
Prepaid expenses................................................................ 1,807 958
Inventories..................................................................... 467 583
----------- -----------
Total current assets......................................................... 70,411 58,343
----------- -----------
Property and equipment, net..................................................... 8,392 8,044
Other assets:
Other related party receivables................................................. 87 88
Assets held for sale - software development costs, net.......................... 3,848 3,186
Intangibles, net (principally goodwill)......................................... 58,461 49,726
Other non-current assets........................................................ 456 348
----------- -----------
Total other assets........................................................... 62,852 53,348
----------- -----------
Total assets.............................................................. $141,655 $119,735
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt............................................... $91 $87
Obligations under capital lease................................................. 414 1,100
Accounts payable................................................................ 6,625 9,577
Accrued expenses and other current liabilities.................................. 31,184 22,772
Billings in excess of revenue................................................... 1,784 1,208
Income taxes payable............................................................ 739 1,104
Deferred income tax liability................................................... 2,003 1,059
----------- -----------
Total current liabilities.................................................... 42,840 36,907
Obligations under capital lease - long-term..................................... 307 523
Deferred income tax liability - long-term....................................... 2,161 858
Long-term debt.................................................................. 45,535 36,564
----------- -----------
Total liabilities............................................................ 90,843 74,852
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,
11,450,000 shares issued at June 30, 1999 and September 30, 1998.............. 115 115
Paid-in-capital................................................................. 42,052 41,105
Retained earnings............................................................... 8,960 3,991
Less - Treasury stock, 2,745,985 shares at June 30, 1999
and 2,854,887 shares at September 30, 1998.................................... (315) (328)
----------- -----------
Total stockholders' equity................................................... 50,812 44,883
----------- -----------
Total liabilities and stockholders' equity................................ $141,655 $119,735
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated financial statements.
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ADVANCED COMMUNICATION SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
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THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30 JUNE 30
1999 1998 1999 1998
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Revenues........................................ $57,568 $25,848 $156,403 $58,398
Direct costs.................................... 39,932 16,374 106,183 37,364
Indirect, general and administrative expenses... 13,441 7,309 39,265 16,130
---------- ---------- ----------- ----------
Income from operations.......................... 4,195 2,165 10,955 4,904
Interest expense, net........................... (802) (377) (2,741) (740)
---------- ---------- ----------- ----------
Income before taxes............................. 3,393 1,788 8,214 4,164
Income tax expense.............................. 1,355 626 3,256 1,505
---------- ---------- ----------- ----------
Net income...................................... $2,038 $1,162 $4,958 $2,659
========== ========== =========== ==========
Net income per share - basic.................... $0.23 $0.16 $0.57 $0.40
========== ========== =========== ==========
Net income per share - diluted.................. $0.23 $0.16 $0.56 $0.39
========== ========== =========== ==========
Weighted average shares outstanding - basic..... 8,699 7,310 8,663 6,729
========== ========== =========== ==========
Weighted average shares outstanding - diluted... 8,847 7,448 8,788 6,855
========== ========== =========== ==========
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated financial statements.
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ADVANCED COMMUNICATION SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
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NINE MONTHS ENDED
JUNE 30
1999 1998
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Cash flow from operating activities:
Net income............................................................ $4,958 $2,659
Adjustments to reconcile net income to net cash
used in operating activities-
Depreciation and amortization................................... 2,738 983
Increase in reserves............................................ - 65
Deferred tax provision.......................................... 2,247 1,389
Changes in assets and liabilities:
Contract receivables...................................... (13,580) (4,207)
Other receivables......................................... (32) (278)
Prepaid expenses.......................................... (849) 82
Inventories............................................... 116 (221)
Other related party receivables........................... 1 (397)
Other assets.............................................. (108) (4)
Accounts payable.......................................... (2,952) (3,182)
Accrued expenses and other current liabilities............ 3,687 2,001
Billings in excess of revenue............................. 576 49
Income taxes payable...................................... (259) (40)
----------- -----------
Net cash used in operating activities................ (3,457) (1,101)
----------- -----------
Cash flows from investing activities:
Acquisitions, net of cash acquired.................................... - (55,067)
Purchases of property and equipment................................... (1,908) (1,251)
Capitalized software development costs................................ (662) (791)
Increase in intangible assets......................................... (5,177) (1,066)
----------- -----------
Net cash used in investing activities................. (7,747) (58,175)
----------- -----------
Cash flows from financing activities:
Net proceeds from the sale of common stock............................ - 22,838
Net costs incurred in sale of common stock............................ (5) -
Net borrowings repaid................................................. (25) (876)
Net borrowings under line of credit................................... 9,000 35,528
Net repayments of obligations under capital leases.................... (902) -
Sale of treasury stock................................................ 859 425
----------- -----------
Net cash provided by financing activities............. 8,927 57,915
----------- -----------
Net decrease in cash.................................................. (2,277) (1,361)
Cash and cash equivalents, beginning of period........................ 2,457 2,744
----------- -----------
Cash and cash equivalents, end of period.............................. $180 $1,383
=========== ===========
Income taxes paid..................................................... $1,195 $169
=========== ===========
Interest paid......................................................... $2,849 $787
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated financial statements.
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ADVANCED COMMUNICATION SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated balance sheet as of June 30, 1999 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 fiscal year ended September 30, 1998 included in the Company's
Annual Report on Form 10-K. 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. ACQUISITION
In June 1998, the Company acquired all the outstanding shares of SEMCOR, Inc.
("SEMCOR") for a preliminary purchase price of $38.1 million in cash and
additional contingent payments, up to a maximum of $5.0 million for the
six-month period ended December 31, 1998, and up to a maximum of $10.0 million
for the twelve-month period ending December 31, 1999, based on the achievement
of certain financial goals. SEMCOR successfully achieved the financial goals for
the six-month period ended December 31, 1998 as outlined in the stock purchase
agreement, and accordingly the selling shareholders were paid the maximum of
$5.0 million in February 1999. Such amount is being carried as intangible assets
(goodwill). In connection with the final determination of the fair value of
assets acquired and pursuant to the provisions of Accounting Principles Board
Opinion No. 16, the Company has valued acquired contracts in process at contract
price, minus the estimated costs to complete and an allowance for the normal
industry profit on its effort to complete such contracts which amounted to $4.7
million. Effective April 1, 1999, this adjustment has been reflected in the
accompanying balance sheet as an increase to goodwill and a corresponding
increase to accrued expenses. The cost adjustment and goodwill amortization
were $595,000 and $30,000, respectively, for the three months ended June 30,
1999.
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4. CONTRACT RECEIVABLES
Contract receivables consist of the following:
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JUNE 30 SEPTEMBER 30
1999 1998
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(UNAUDITED)
(IN THOUSANDS)
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U.S. government:
Amounts billed............................................................. $24,678 $22,088
Recoverable costs and accrued profit on progress
completed; not billed.................................................... 37,312 27,777
-------- ----------
Subtotal.............................................................. 61,990 49,865
-------- ----------
Commercial customers:
Amounts billed............................................................. 5,513 4,469
Recoverable costs and accrued profit on progress
completed; not billed.................................................... 1,504 864
-------- ---------
Subtotal.............................................................. 7,017 5,333
-------- ---------
Less allowance for doubtful accounts............................................ 1,368 1,139
-------- ---------
Total................................................................. $67,639 $54,059
======== =========
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5. SOFTWARE DEVELOPMENT COSTS
As of June 30, 1999, the Company capitalized software development costs totaling
$3.8 million. Management is seeking a buyer for the related technology and plans
to sell the technology for approximately book value. Accordingly, the Company
has classified these assets as assets held for sale in the accompanying balance
sheet.
6. LONG-TERM DEBT
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Notes payable and line of credit consist of the following: (IN THOUSANDS)
JUNE 30, SEPTEMBER 30,
1999 1998
-------------------- ----------------------
(UNAUDITED)
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Line of credit:
$55,000,000 line of credit with a commercial bank ($45,000,000
at September 30, 1998) expiring February 28, 2002.................. $44,000 $35,000
Notes payable:
Note payable to bank, interest at 9.9%, due February
2005, secured by a First Deed of Trust on an office building....... 954 964
Note payable to Urban Business Development Corporation, interest
at 8.575%, due January 2015, guaranteed by the Small Business
Administration and secured by a Second Deed of Trust on an office
building........................................................... 672 687
-------------------- ----------------------
45,626 36,651
Less current maturities............................................ 91 87
-------------------- ----------------------
$45,535 $36,564
==================== ======================
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As discussed in Item 2 below, the Company's line of credit arrangement with a
commercial bank, consisting of two credit facilities, was decreased in June 1999
from $60.0 million to $55.0 million. The first facility, in an amount up to
$30.0 million, may be used to finance acquisitions, working capital, and other
corporate purposes, and bears interest at either the bank's prime rate or at a
London interbank offered rate ("LIBOR") for one, two or three month periods,
plus a percentage, not more than 2.2%, which depends on the Company's historical
performance. The second facility, in an amount up to $25.0 million, may be used
to finance acquisitions and for other corporate purposes approved by the lender,
and bears interest at either the bank's prime rate or at a LIBOR rate plus a
percentage, not more than 2.45%, which depends on the Company's historical
financial performance. Each facility expires on February 28, 2002. The credit
agreement contains various covenants requiring the Company and its subsidiaries,
on a consolidated basis, to maintain certain financial ratios, including debt to
cash flow, fixed charge coverage and minimum net worth. The credit agreement
also prohibits the payment of dividends.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements based on management's
current expectations, estimates and projections about the Company's industry,
management's beliefs and certain assumptions made by management. These
forward-looking statements involve risks and uncertainties, and actual results
may differ materially from those anticipated or expressed in such statements.
Potential risks and uncertainties include, among others, those set forth herein
and in the Company's annual report on Form 10-K, as filed with the Securities
and Exchange Commission. Except as required by law, the Company undertakes no
obligation to update any forward-looking statement, whether as a result of new
information, future events or otherwise.
OVERVIEW
The Company provides communications, information systems and applied technology
services and solutions, predominately to U.S. government agencies and to a
lesser extent commercial and international customers. The Company's two
significant U.S. Navy communication services contracts and programs with SPAWAR
accounted for 13.4% of the revenues for the nine-month period ended June 30,
1999. Although the Company intends to expand its commercial and international
sales, a relatively small number of contracts are likely to continue to account
for a significant portion of the Company's future revenues.
Many of the Company's contracts are funded from year to year, based primarily on
the procuring agency's fiscal requirements. There can be no assurance that
Congress will appropriate funds or that procuring agencies will commit funds to
the Company's contracts for their anticipated terms. The Company's business,
financial condition and results of operations could be materially affected by
changes in procurement policies, a reduction in funds available for the services
provided by it and other risks generally associated with federal government
contracts.
The Company's contracts with the government and its subcontracts with government
prime contractors are subject to termination for the convenience of the
government; termination,
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reduction or modification in the event of change in the government's
requirements or budgetary constraints; and, when it participates as a
subcontractor, termination for the failure or inability of the prime contractor
to perform its prime contract. In addition, most of the Company's government
contracts have a base term of one year and a number of option years, and there
can be no assurance that the government will extend a contract through its
option years. Termination of any of the Company's large government contracts, or
failure of the government to extend such contracts, could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Many of the Company's large contracts require the Company to supply services
upon request, and the Company receives no payments under these contracts until
such services are funded. There can be no assurance that cancellations or scope
adjustments of these contracts might not occur or that the Company's services
under these contracts will be requested at the anticipated levels in the future.
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data as a
percentage of revenues for the periods indicated:
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THREE MONTHS NINE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------------------------- -----------------------------------------
1999 1998 1999 1998
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Revenues................................. 100.0 % 100.0 % 100.0 % 100.0 %
Direct costs............................. 69.4 63.3 67.9 64.0
Indirect, general and administrative..... 23.3 28.3 25.1 27.6
-------------- -------------- ----------------- -----------------
Income from operations................... 7.3 8.4 7.0 8.4
Interest expense, net.................... (1.4) (1.5) (1.7) (1.3)
-------------- -------------- ----------------- -----------------
Income before taxes...................... 5.9 6.9 5.3 7.1
Provision for income taxes .............. 2.4 2.4 2.1 2.6
-------------- -------------- ----------------- -----------------
Net income............................... 3.5 % 4.5 % 3.2 % 4.5 %
============== ============== ================= =================
</TABLE>
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
Revenues increased 122.7%, or $31.7 million, to $57.6 million for the three
months ended June 30, 1999, from $25.8 million for the same period in 1998. The
increase was principally due to an increase in revenues resulting from the
Company's acquisition of SEMCOR and an increase in systems integration and
communication services revenues, partially offset by a decrease in information
technology services revenues from federal agency information technology
customers.
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 $39.9 million for the three months ended June 30, 1999
from $16.4 million for the same period in 1998 due
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primarily to increased revenues from the acquisition of SEMCOR and an increase
in systems integration revenues. Direct costs, expressed as a percentage of
revenues, increased to 69.4% for the three months ended June 30, 1999 from 63.3%
for the same period in 1998, primarily due to an increase in the proportion of
revenues resulting from systems integration services. These services have higher
direct costs than the other services the Company provides 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 expenses
increased to $13.4 million for the three months ended June 30, 1999, from $7.3
million for the same period in 1998. The increase was due primarily to the
higher level of revenues discussed above. Indirect expenses, expressed as a
percentage of revenues, decreased to 23.3% from 28.3% for the three months ended
June 30, 1999 and 1998 respectively, due to the higher proportion of systems
integration revenues, which typically have lower associated indirect expenses,
partially offest by an increase in the amortization of intangible assets,
principally goodwill, resulting from the acquisition of SEMCOR.
Income from operations increased 93.8%, to $4.2 million for the three months
ended June 30, 1999, from $2.2 million for the same period in 1998, primarily
due to increased operating results from communication systems revenues and
applied technology services revenues from the acquisition of SEMCOR and an
increase in systems integration operating results, partially offset by a
decrease in information technology operating results. Income from operations,
expressed as a percentage of revenues, decreased to 7.3% for the three months
ended June 30, 1999, from 8.4% for the comparable period in the prior year,
principally attributable to the traditionally lower operating margins
experienced by SEMCOR, the lower margins from federal agency information
technology customers and from the amortization of intangible assets resulting
from the SEMCOR acquisition.
Interest expense, net, consists of interest expense resulting primarily from the
debt incurred to fund the Company's acquisitions, offset in part by interest
income from short-term deposits of cash and other sources of non-operating
income. Interest expense was $822,000 and $409,000 for the three-month periods
ended June 30, 1999 and 1998, respectively. Interest and other non-operating
income was $20,000 and $32,000 for the three months ended June 30, 1999 and
1998, respectively.
The Company's effective income tax rate was 39.9% and 35.0% for the three months
ended June 30, 1999 and 1998, respectively. This increase was primarily due to
higher effective state income tax rates resulting from the acquisition of
SEMCOR.
NINE MONTHS ENDED JUNE 30, 1999 COMPARED TO NINE MONTHS ENDED JUNE 30, 1998
Revenues increased 167.8%, or $98.0 million, to $156.4 million for the nine
months ended June 30, 1999, from $58.4 million for the same period in 1998. The
increase was principally due to an
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increase in revenues resulting from the Company's acquisition of SEMCOR, and an
increase in systems integration and communication services revenues.
Direct costs increased to $106.1 million for the nine months ended June 30,
1999, from $37.4 million for the same period in 1998 due primarily to increased
revenues from the Company's acquisition of SEMCOR and from the increase in
systems integration revenues. Direct costs, expressed as a percentage of
revenues, increased to 67.9% for the nine months ended June 30, 1999, from 64.0%
for the same period in 1998, primarily due to an increase in the proportion of
revenues derived from systems integration services. These services have higher
direct costs than other services the Company provides because the contracts
generally require the Company to purchase hardware components as part of the
services.
Indirect expenses increased to $39.3 million for the nine months ended June 30,
1999 from $16.1 million for the same period in 1998. The increase was due
primarily to the higher level of revenues discussed above. Indirect expenses,
expressed as a percentage of revenues, decreased to 25.1% for the nine months
ended June 30, 1999, from 27.6% for the comparable period last year, due to the
higher proportion of systems integration revenues, that typically have lower
associated indirect expenses, partially offset by an increase in the
amortization of intangible assets, principally goodwill, resulting from the
acquisition of SEMCOR.
Income from operations increased 123.4%, to $11.0 million for the nine months
ended June 30, 1999, from $4.9 million for the same period in 1998, primarily
due to increased operating results from communication systems and applied
technology revenues from the acquisition of SEMCOR and from the increase in
systems integration operating results. As a percentage of revenues, income from
operations decreased to 7.0% for the nine months ended June 30, 1999, from 8.4%
for the comparable period in the prior year, principally attributable to the
traditionally lower operating margins experienced by SEMCOR, the lower margins
from federal agency information technology customers and from the amortization
of intangible assets resulting from the SEMCOR acquisition.
Interest expense, net, consists of interest expense resulting primarily from the
debt incurred to fund the Company's acquisitions, offset in part by interest
income from short-term deposits of cash and other sources of non-operating
income. Interest expense was $2.8 million and $787,000 for the nine-month
periods ended June 30, 1999 and 1998, respectively. Interest and other sources
of non-operating income were $108,000 and $47,000 for the nine months ended June
30, 1999 and 1998, respectively.
The Company's effective tax rate was 39.6% and 36.1% for the nine months ended
June 30, 1999 and 1998, respectively. This increase was primarily due to higher
effective state income tax rates resulting from the acquisition of SEMCOR.
LIQUIDITY AND CAPITAL RESOURCES
The Company used cash from operating activities of $3.5 million for the nine
months ended June 30, 1999, resulting primarily from net income, increases in
contract receivables and prepaid
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expenses and decreases in accounts payable, partially offset by an increase in
accrued expenses. The increase in contract receivables was due to an increase in
revenues recognized for the period. Included in contract receivables at June 30,
1999, is a contractual obligation of the Australian Navy in the amount of $1.8
million. The Australian Navy is contesting this obligation and the Company
continues to vigorously pursue all available remedies to enforce payment of such
amount. For the nine months ended June 30, 1998, the Company used cash from
operating activities of $1.1 million resulting primarily from net income,
increases in contract receivables and decreases in accounts payable, partially
offset by an increase in accrued expenses.
The principal use of cash for investing activities was for the purchases of
computers and equipment, the investment in software development costs and for an
earnout payment of $5.0 million to the former shareholders of SEMCOR based on
SEMCOR's achievement of certain financial goals for the six-month period ended
December 31, 1998. The purchases of computers and equipment totaled $1.9 million
and $1.3 million for the nine-month period ended June 30, 1999 and 1998,
respectively. Further the Company invested $662,000 and $791,000 in software
development costs in the nine-month period ended June 30, 1999 and 1998,
respectively. During the nine-month period ended June 30, 1998, the Company used
cash from investing activities for the acquisitions of Advanced Management,
Incorporated and SEMCOR, Inc.
Cash provided by financing activities was $8.9 million for the nine months ended
June 30, 1999, resulting primarily from net borrowings under the Company's
credit facilities and from sales of treasury stock, partially offset by the
repayment of capital lease obligations. During the nine-month period ended June
30, 1998, cash provided by financing activities was $58.0 million primarily from
the follow-on offering of the Company's common stock and net borrowings under
the Company's credit facilities.
Effective June 30, 1999, the Company's line of credit arrangement with a
commercial bank was reduced from $60.0 million to $55.0 million. The first
facility, in an amount up to $30.0 million, may be used to finance acquisitions,
working capital, and other corporate purposes, and bears interest at either the
bank's prime rate or at LIBOR for one, two or three month periods, plus a
percentage, not more than 2.2%, which depends on the Company's historical
performance. The second facility, in an amount up to $25.0 million, may be used
to finance acquisitions and for other corporate purposes approved by the lender,
and bears interest at either the bank's prime rate or at a LIBOR rate plus a
percentage, not more than 2.45%, which depends on the Company's historical
financial performance. Each facility expires on February 28, 2002. The credit
agreement contains various covenants requiring the Company and its subsidiaries,
on a consolidated basis, to maintain certain financial ratios, including debt to
cash flow, fixed charge coverage and minimum net worth. The credit agreement
also prohibits the payment of dividends. As of June 30, 1999, $52.0 million was
available on the credit facilities and the outstanding balance was $44.0 million
with an additional $3.8 million in standby letters of credit.
The Company currently anticipates that its current cash balances, amounts
available under its credit facilities and net cash provided by operating
activities will be sufficient to meet its working capital and capital
expenditure requirements for at least the next twelve months.
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Inflation did not have a material impact on the Company's revenues or income
from operations for the nine months ended June 30, 1999 or 1998.
YEAR 2000 DISCLOSURE
OVERVIEW
As is true for most companies, the Year 2000 computer problem creates a risk for
the Company. If systems do not correctly recognize the date information when the
year changes to 2000, there could be an adverse impact on the Company's
operations. The risk exists primarily in four areas; the Company's internal
systems, third parties with which the Company has a material relationship,
Company products and Company Year 2000 services.
In response to the Year 2000 problem and the associated risks, the Company has
developed a comprehensive compliance program to evaluate, address and remedy the
date related problems with respect to the Company's internal systems, third
party relationships, Company products and services. The compliance program is
managed by the Company's Chief Technical Officer, and is tailored after the
guidance promulgated by the General Accounting Office ("GAO") in their
publication, "Year 2000 Computing Crisis: An Assessment Guide" and by the
Department of the Navy Year 2000 Action Plan. The Company has adopted the
following five-phase approach that was endorsed by the GAO and recognized by the
U.S. Congress:
AWARENESS PHASE. The Company's management is familiarized with the scope of the
Year 2000 impact, the problem is defined, compliance standards are established
and an overall strategy is developed. A Year 2000 program team is formed to
organize and implement the Company's Year 2000 compliance program.
ASSESSMENT PHASE. The Year 2000 team determines the impact on the Company's
systems, tools, products and contracts. The team creates an inventory and
evaluation of systems that support the core business sectors. Third party
service providers are contacted concerning their compliance with the Year 2000
problem with regard to the products and services they provide. The team then
prioritizes the conversion or replacement of existing systems that are confirmed
to be Year 2000 non-compliant.
RENOVATION PHASE. The Year 2000 program team rectifies the problems discovered
in the assessment phase by modifying or replacing systems that are Year 2000
non-compliant.
VALIDATION PHASE. The renovated or replaced systems, applications and databases
are tested and certified as Year 2000 compliant.
IMPLEMENTATION PHASE. The renovated or replaced systems are fully implemented
and extensive testing is performed to insure coordination with other systems
and databases. Backup and recovery plans are put in place.
13
<PAGE> 14
The Company has determined the following:
The Company's internal mission critical systems, including its local
and wide area networks, its financial systems, and its embedded microcontrollers
within facility, security, telephone and other systems, are Year 2000 compliant.
The Company has received representation from its vendors and
suppliers of essential hardware, software and services that they are Year 2000
compliant.
The Company has verified that its current products are Year 2000
compliant and believes that there are no compliance issues with its Year
2000-related services. The Company will continue to assess and improve its Year
2000 compliance in all areas.
COST FOR YEAR 2000 COMPLIANCE
The Company has budgeted $550,000 for Year 2000 compliance. To date, the Company
has spent approximately $344,000.
YEAR 2000 RISKS
The Company believes that its Year 2000 compliance plan is a comprehensive one,
however, there can be no assurances that the Company will not experience
unanticipated negative consequences caused by undetected Year 2000 defects in
its internal systems including third party hardware and software products. In
addition, there can be no assurances that the Company will not experience
unanticipated negative consequences caused by the failure of services provided
by third parties such as electrical power, telecommunications services and
delivery services. As a result, the Year 2000 problem could have a materially
adverse effect on the Company's financial condition or results of operations.
CONTINGENCY PLANS
The Company currently is developing contingency plans. The Company will continue
to develop contingency plans as required to mitigate the effects of delays, if
any, in internal systems compliance, third party business interruption,
non-compliant Company products and risks associated with providing Year
2000-related services.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
14
<PAGE> 15
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<S> <C>
(a) Exhibit 11.1 Statement Regarding Computation of Per Share Earnings
Exhibit 27.1 Financial Data Schedule
(b) Reports on Form-8K -None
</TABLE>
15
<PAGE> 16
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.
Date: August 16, 1999 ADVANCED COMMUNICATION SYSTEMS, INC.
/S/ George A. Robinson
-------------------------------------------------
George A. Robinson
Chairman, President
and Chief Executive Officer
/S/ Dev Ganesan
-------------------------------------------------
Dev Ganesan
Executive Vice President, Chief
Financial Officer and Treasurer
16
<PAGE> 1
EXHIBIT 11.1 - COMPUTATION OF PER SHARE EARNINGS
ADVANCED COMMUNICATION SYSTEMS, INC.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30 JUNE 30
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic:
Total basic average shares outstanding....... 8,699 7,310 8,663 6,729
===== ===== ===== =====
Net income................................... $2,038 $1,162 $4,958 $2,659
====== ====== ====== ======
Net income per share - basic................. $0.23 $0.16 $0.57 $0.40
===== ===== ===== =====
Diluted:
Total basic average shares outstanding....... 8,699 7,310 8,663 6,729
Plus dilutive stock options.................. 148 138 125 126
----- ----- ----- -----
Total diluted average shares................. 8,847 7,448 8,788 6,855
===== ===== ===== =====
Net income per share - diluted............... $0.23 $0.16 $0.56 $0.39
===== ===== ===== =====
</TABLE>
17
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001035104
<NAME> ADVANCED COMMUNICATION SYSTEMS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 180
<SECURITIES> 0
<RECEIVABLES> 69,007
<ALLOWANCES> 1,368
<INVENTORY> 467
<CURRENT-ASSETS> 70,411
<PP&E> 17,946
<DEPRECIATION> 9,554
<TOTAL-ASSETS> 141,655
<CURRENT-LIABILITIES> 42,840
<BONDS> 0
0
0
<COMMON> 115
<OTHER-SE> 50,697
<TOTAL-LIABILITY-AND-EQUITY> 141,655
<SALES> 0
<TOTAL-REVENUES> 156,403
<CGS> 0
<TOTAL-COSTS> 145,448
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,849
<INCOME-PRETAX> 8,214
<INCOME-TAX> 3,256
<INCOME-CONTINUING> 4,958
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,958
<EPS-BASIC> .57
<EPS-DILUTED> .56
</TABLE>
