<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10Q
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
Commission File Number:
---------
OAO TECHNOLOGY SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or jurisdiction of incorporation or organization)
52-1973990
(I.R.S. Employer Identification Number)
7500 Greenway Center Drive
Greenbelt, Maryland 20770
(Address of principal executive offices)
(301) 486-0400
(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 requirement for the past 90 days.
X Yes No
- --- ---
Indicate the number of shares outstanding of each of the issuer's classes
of Common Stock, as of the latest practicable date.
Shares Outstanding as of November 28, 1997
10,045,208 Shares of Common Stock, $0.01 par value
<PAGE>
OAO TECHNOLOGY SOLUTIONS, INC.
Quarterly Report on Form 10-Q for the Quarterly Period Ended September 30, 1997
INDEX
Page Reference
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COVER PAGE.........................................................1
INDEX..............................................................2
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS.................................3
Consolidated Balance Sheets as of
September 30, 1997 (unaudited) and December 31,
1996...............................................3
Consolidated Statements of Operations for the
Three Months and Nine Months Ended
September 30, 1997 and 1996 (unaudited)............4
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1997 and 1996
(unaudited)........................................5
Notes to 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 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Default Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES........................................................12
<PAGE>
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
OAO TECHNOLOGY SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents......................................................... $ 453 $ 876
Accounts receivable:
Billed.......................................................................... 8,770 5,031
Unbilled........................................................................ 6,585 4,831
Deferred Income Taxes............................................................. 352 352
Other current assets.............................................................. 670 330
------------- ------------
Total current assets............................................................ 16,830 11,420
Property and Equipment-Net:....................................................... 3,146 1,384
Deposits and Other Assets:........................................................ 627 24
------------- ------------
Total assets.................................................................... $ 20,603 $ 12,828
------------- ------------
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Bank line of
credit.............................................................................. $ 5,200 $ 95
Accounts payable.................................................................. 946 1,759
Income taxes payable.............................................................. 1,069 141
Accrued expenses.................................................................. 3,377 3,681
Unearned revenue.................................................................. 906 931
Current maturities of long term debt.............................................. 1,167 190
------------- ------------
Total current liabilities....................................................... 12,665 6,702
Long term debt:..................................................................... 150 286
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Total liabilities............................................................... 12,815 6,988
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Commitments and Contingencies
Stockholders' Equity:
Preferred stock, par value $.01 per share, 5,000,000 authorized;
none issued and outstanding....................................................... -- --
Common stock, par value $.01 per share,
authorized, 25,000,000 and 10,000,000 shares
respectively; issued and outstanding,10,008,292
and 10,000,000 respectively....................................................... 100 100
Additional paid-in capital........................................................ 4,950 4,950
Retained earnings................................................................. 2,738 790
------------- ------------
Total stockholders' equity...................................................... 7,788 5,840
------------- ------------
Total liabilities and stockholders' equity...................................... $ 20,603 $ 12,828
------------- ------------
------------- ------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
OAO TECHNOLOGY SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
<S> <C> <C> <C> <C>
1997 1996 1997 1996
--------- --------- --------- ---------
Revenues.............................................................. $ 20,618 $ 15,996 $ 59,956 $ 40,317
Direct Costs.......................................................... 16,137 12,360 46,910 30,530
--------- --------- --------- ---------
Gross Profit.......................................................... 4,481 3,636 13,046 9,787
--------- --------- --------- ---------
Selling, General and Administrative................................... 3,140 2,869 9,455 7,743
--------- --------- --------- ---------
Income from Operations................................................ 1,341 767 3,591 2,044
Interest Expense...................................................... 106 7 193 37
--------- --------- --------- ---------
Income Before Income Taxes............................................ 1,235 760 3,398 2,007
Provision for Income Taxes............................................ 519 320 1,450 842
--------- --------- --------- ---------
Net Income............................................................ $ 716 $ 440 $ 1,948 $ 1,165
--------- --------- --------- ---------
--------- --------- --------- ---------
Net Income Per Common and Common Share Equivalent..................... $ 0.07 $ 0.04 $ 0.19 $ 0.11
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted Average Number of Common and Common Share Equivalents
Outstanding......................................................... 10,414 10,422 10,414 10,422
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
OAO TECHNOLOGY SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
--------------------
<S> <C> <C>
1997 1996
--------- ---------
Cash flows from operating activities:
Net income..................................................................................... $ 1,948 $ 1,165
Adjustments to reconcile net income to cash flows
(used in) provided by operating activities:
Depreciation and amortization................................................................ 163 133
Deferred income taxes........................................................................ -- 441
Changes in assets and liabililties:
Accounts receivable.......................................................................... (5,493) (6,782)
Other current assets......................................................................... (340) (1,511)
Deposits and other assets.................................................................... (603) (615)
Due from OAO Corporation..................................................................... -- 2,624
Accounts payable............................................................................. (813) (143)
Income taxes payable......................................................................... 928 322
Accrued expenses............................................................................. (304) 468
Unearned revenue............................................................................. (25) (21)
--------- ---------
Net cash used in operating activities...................................................... (4,539) (3,919)
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment.......................................................... (1,925) (465)
--------- ---------
Net cash used in investing activities...................................................... (1,925) (465)
--------- ---------
Cash flows from financing activities:
Proceeds from sale of stock.................................................................. -- 5,000
Net proceeds/payments on debt................................................................ 6,041 87
--------- ---------
Net cash provided by financing activities.................................................. 6,041 5,087
--------- ---------
Net (decrease) increase in cash and cash equivalents........................................... $ (423) $ 703
Cash and cash equivalents, beginning of period................................................. $ 876 $ 9
--------- ---------
Cash and cash equivalents, end of period....................................................... $ 453 $ 712
--------- ---------
--------- ---------
Supplemental disclosure of cash flow information
Cash paid for income taxes................................................................... $ 128 $ 915
Cash paid for interest....................................................................... $ 193 $ 37
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
OAO TECHNOLOGY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(Unaudited)
1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
OAO Technology Solutions, Inc. (the "Company") began in January 1993
as a separate business division of OAO Corporation ("OAO"), an organization
that provides information technology ("IT") services to governmental
entities. OAO formed the Company as a separate business division in order
to provide IT solutions and services to corporate clients. The Company
became a wholly owned subsidiary of OAO when it was incorporated in
September 1995. The Company was reincorporated in the State of Delaware
in March 1996. In April 1996, the Company was spun off from OAO.
The Company provides a wide range of outsourced information technology
solutions and professional services, including the operation of large-scale
data center complexes and networks, distributed systems management, staffing
services and other information technology services.
The condensed consolidated financial statements included herein have been
prepared by the Company without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission ("SEC") and include, in the opinion
of management, all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of interim period results. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. The Company believes that its disclosures are adequate to make
the information presented not misleading. These condensed financial
statements should be read in conjunction with the financial statements and
notes thereto included in the Company's Registration Statement on Form S-1.
The results of operations for the three month and nine month periods ended
September 30, 1997, are not necessarily indicative of the results to be
expected for the full year.
2. SUBSEQUENT EVENT - ACQUISITION
To increase the Company's presence in the managed care marketplace, in
November 1997, the Company acquired certain assets of UniHealth Investment
Company, a division of UniHealth, Inc., of Burbank, CA. The approximate
$900,000 acquisition cost will be accounted for as a purchase. Approximately
$400,000 of the acquisition cost relates to receivables. Accordingly, the
operating results of UniHealth Investment Company will be included in the
Company's operating results from the date of acquisition. The new company
will be named OAO Healthcare Solutions ("OAOHC") and will be operated as a
subsidiary of the Company. OAOHC's primary product is a software product
named MC400. The software provides required processes and methods for the
management of benefits structures and provider contracts. The product
contains thirty integrated modules which provide essential medical
management, financial management, and program controls to assist managed care
organizations in the generation of favorable margins on fixed price contracts.
3. RECENT AUTHORITATIVE PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB")
released Statement No. 128, "Earnings Per Share." Statement No. 128 requires
dual presentation of basic and diluted earnings per share on the face of the
income statement for all periods presented. Basic earnings per share
excludes dilution and is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for
the period. Diluted earnings per share reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock. Diluted earnings per share is
computed similarly to fully diluted earnings per share
<PAGE>
pursuant to Accounting Principles Bulletin No. 15. The Company has not
presented fully diluted earnings per share as the difference between these
amounts and primary earnings per share was not material. Statement No. 128
is effective for fiscal years ending after December 15, 1997. Had the
statement been effective for the quarter and nine months ended September 30,
1997 and 1996, earnings per share would have been presented as follows.
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
------------------ ------------------
Basic earnings per share $.07 $.04 $.19 $.12
Diluted earnings per share $.07 $.04 $.19 $.11
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income," which establishes standards for the reporting and display of
comprehensive income and its components in the financial statements. The
Company is required to adopt the provision of the statement for the year
ending December 31, 1998. The Company is presently evaluating the impact of
this new standard on its financial statements.
In June 1997, the FASB issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which requires the
Company to present certain information about operating segments and related
information, including geographic and major customer data, in its annual
financial statements and in condensed financial statements for interim
periods. The Company is required to adopt the provisions of the statement
for the year ending December 31, 1998. The Company is presently evaluating
the impact of the new standard on its financial statements.
4. Credit Agreement
In March 1997, the Company entered into a $5 million
revolving credit agreement with CoreStates Bank, N.A. that was amended to
$7.5 million in August 1997. The agreement, which matures on May 31, 1999,
provides for a commitment fee of .375% on the unused portion and interest at
the prime rate and/or, at the Company's option, at the bank's overnight base
rate plus 2% or LIBOR plus 2%. Borrowings under the agreement are limited to
a percentage of eligible billed receivables not greater than 90 days old.
The agreement also requires the maintenance of certain financial covenants
and prohibits the payment of dividends.
In October 1997, the Company entered into an additional $750,000 line of
credit agreement with CoreStates Bank N.A. payable on demand. Outstanding
borrowings accrue interest at the bank's overnight base rate plus 2% or at
the Company's option, LIBOR plus 2%. The Company has had no borrowings under
this facility.
<PAGE>
Item 2.
OAO TECHNOLOGY SOLUTIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following should be read in conjunction with the Consolidated
Financial Statements of the Company and Notes thereto included elsewhere in
this quarterly report. This report contains certain forward-looking
statements that involve risks and uncertainties. Future events and the
Company's actual results could differ materially from the results reflected
in these forward-looking statements. Factors that might cause such a
difference include, but are not limited to, dependence on key strategic
customers, limited ability to establish new strategic client relationships,
risks associated with fixed-price contracts, ability to sustain and manage
growth, variability of quarterly operating results, dependence on key
personnel, competition, and risks associated with international sales.
Overview
- --------
The Company provides a wide range of outsourced IT solutions and
professional services, including the operation of large-scale data center
complexes and networks ("Megacenter Operations"), distributed systems
management ("DSM"), staffing services and other IT services. From its
inception in January 1993 until March 26, 1996, the Company operated as a
business division of OAO Corporation, was incorporated in the State of
Delaware in March 1996, and was spun off from OAO Corporation in April 1996.
The Consolidated Financial Statements of the Company and the Notes thereto
included in this quarterly report reflect the Company's operations as if it
had been a separate legal entity since its January 1993 inception.
In October 1997, the Company filed a registration statement offering
6,720,000 shares of Company stock (the "Offering"). The registration
includes a rights offering to Safeguard Scientifics, Inc. ("Safeguard")
shareholders of 6,400,000 shares of the Company's common stock. An
additional 320,000 shares of common stock were offered to other individuals
selected by the Company.
Results of Operations
- ---------------------
Revenues
The Company's revenues increased 28.8% to $20.6 million for the
three months ended September 30, 1997, compared to $16.0 million for the same
prior year period. Revenues increased 48.9% to $60.0 million for the nine
months ended September 30, 1997, compared to $40.3 million for the same prior
year period. This increase was generally attributable to volume increases
within existing contracts resulting from growth in the Company's ongoing
business, an expansion of the scope of services requested from the Company,
increases in international revenues, and increases in revenues from newer
lines of business. International revenue, primarily from the Company's
relationship with Digital in Canada, increased to $5.3 million for the three
months ended September 30, 1997, compared to $2.1 million for the same prior
year period and increased to $12.7 million for the nine months ended
September 30, 1997, compared to $5.1 million for the same prior year period.
Direct Costs
The Company's direct costs increased 29.8 % to $16.1 million for the three
months ended September 30, 1997, compared to $12.4 million for the same prior
year period and increased 53.8% to $46.9 million for the nine months ended
September 30, 1997, compared to $30.5 million for the same prior year period.
Direct costs consist primarily of direct labor costs and related fringe benefit
costs. As a
<PAGE>
percentage of revenue, direct costs increased to 78.3% for the three months
ended September 30, 1997, compared to 77.3% for the comparable period in 1996
and increased to 78.2% for the nine months ended September 30, 1997, compared
to 75.7% for the comparable period in 1996. In entering new engagements, the
Company may accept short term contracts that do not include the economies of
scale, leverage or short term opportunities for productivity improvements
that are available in more mature or longer term engagements. The Company
believes that these initial contracts are important in penetrating new
markets and in establishing the degree of customer confidence required to
secure additional business.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 6.9% to $3.1 million
in the three months ended September 30, 1997, compared to $2.9 million for the
same prior year period and increased 23.4% to $9.5 million in the nine months
ended September 30, 1997, compared to $7.7 million for the same prior year
period. As a percentage of revenues, these expenses decreased to 15.2% for the
three months ended September 30, 1997, from 17.9 % for the same prior period.
As a percentage of revenues these expenses decreased to 15.8% for the nine
months ended September 30, 1997, from 19.2% for the same prior period. The
aggregate increase was primarily the result of the continued development of
additional service capabilities and other expenditures necessary to support the
Company's growth. The Company intends to continue building its marketing,
financial and administrative infrastructure to enable it to support its growth
opportunities. Growth in the financial and administrative infrastructure is
expected to be slower than overall revenue growth.
Interest Expense and Provision for Income Taxes
Interest expense increased to $106,000 in the three months ended
September 30, 1997, compared to $7,000 in the same prior period and increased
to $193,000 in the nine months ended September 30, 1997, compared to $37,000 in
the same prior period, reflecting an increase in borrowings. The Company's
effective tax rate was 42.0% for the three months ended September 30, 1997,
compared to 42.1% for the same prior period and 42.7% for the nine months ended
September 30, 1997, compared to 42.0% for the nine months ended
September 30, 1996. The changes in tax rates were primarily due to changes in
the distribution of income among tax jurisdictions.
Liquidity and Capital Resources
Cash and cash equivalents were $453,000 at September 30, 1997, and
$712,000 at September 30, 1996. Cash flows used in operations was $4.5
million for the nine months ended September 30, 1997, and $3.9 million for
the nine months ended September 30, 1996. The Company primarily funded its
uses of cash in 1996 and 1997 from proceeds received from a $5.0 million
investment by Safeguard Scientifics, Inc. in April 1996 and from borrowings
under the Company's credit facility. The use of cash in operations in 1996
and in the nine months ended September 30, 1997, was primarily the result of
increases in both billed and unbilled accounts receivable partially offset by
income from operations and increases in income taxes payable. The overall
increase in billed accounts receivable was primarily the result of increased
revenues and an increase in the average time period in which accounts
receivable have been collected. The average time period in which billed
accounts receivable have been collected has increased over time, primarily
because the focus on obtaining contracts with rapid contractual payment terms
has been less due to the increased focus on the growth of other revenues of
the Company. The increase in unbilled accounts receivable was primarily the
result of revenue growth and a growth in quick response services provided by
the Company. Since the Company receives requests for quick response services
on an as-required basis and acts immediately to meet its clients' response
needs, these services are often delivered prior to the receipt of written
purchase orders. The Company has begun to take steps to improve its
collection of accounts receivable, including increased sensitivity to payment
terms in the contracting process, initiation of accounts receivable
collection incentive compensation, and increased ongoing monitoring efforts.
During 1997, as described below, the Company obtained a $7.5 million accounts
receivable based credit facility to fund the increase in receivables.
<PAGE>
The Company's business is not capital intensive and capital expenditures
in any given year are ordinarily not significant. Capital expenditures were
$1.9 million for the nine months ended September 30, 1997, and $465,000 for
the nine months ended September 30, 1996. Capital expenditures in the first
nine months of 1997 included expenditures associated with the Company's new
leased corporate headquarters facility and costs associated with the
development of new operational, administrative and financial information
system software. During the remainder of 1997, the Company expects to incur
additional capitalized costs associated with the development of and
implementation of new management information systems.
The Company currently has a $7.5 million line of credit with CoreStates
Bank, N.A., of which $5.2 million was outstanding at September 30, 1997.
Advances under the line of credit are limited to 80% of certain eligible
accounts receivable of the Company. As of September 30, 1997, based on the
amount of such accounts receivable, the Company was eligible to borrow $1.1
million of the remaining $2.3 million which was unused as of that date. The
Company is required to maintain certain financial and other covenants under
the facility. The Company intends to repay the outstanding amount under the
facility with a portion of the proceeds from the Offering. The Company also
has a $750,000 line of credit with CoreStates Bank, N.A. with no borrowings
as of September 30, 1997.
The Company currently anticipates that the net proceeds received by the
Company from the Offering, together with amounts available under its existing
line of credit, cash generated from operations and existing cash balances, will
be sufficient to satisfy its operating cash needs for the foreseeable future.
The Company believes that additional bank credit would be available to fund such
operating and capital requirements if the Company's cash needs expand more
rapidly than expected. In addition, the Company could consider seeking
additional public or private debt or equity financing to fund future growth
opportunities. No assurance can be given, however, that such bank credit or
debt or equity financing will be available to the Company on terms and
conditions acceptable to the Company, if at all.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings - Not Applicable
Item 2. Changes in Securities - Not Applicable
Item 3. Default Upon Senior Securities - Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders - Not
Applicable
Item 5. Other Information - Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) Reports on Form 8-K - None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OAO Technology Solutions, Inc.
(Registrant)
Date: November 28, 1997 By: /s/ William R. Hill
-------------------
William R. Hill
Chief Executive Officer
and President
Date: November 28, 1997 By: /s/ Samuel Horgan
-----------------
Samuel Horgan
Chief Financial Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1997, AND THE CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<PERIOD-START> JAN-01-1997
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 453
<SECURITIES> 0
<RECEIVABLES> 15,985
<ALLOWANCES> 630
<INVENTORY> 0
<CURRENT-ASSETS> 16,830
<PP&E> 3,917
<DEPRECIATION> 771
<TOTAL-ASSETS> 20,603
<CURRENT-LIABILITIES> 12,665
<BONDS> 0
0
0
<COMMON> 100
<OTHER-SE> 7,688
<TOTAL-LIABILITY-AND-EQUITY> 20,603
<SALES> 59,956
<TOTAL-REVENUES> 59,956
<CGS> 46,910
<TOTAL-COSTS> 56,365
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 193
<INCOME-PRETAX> 3,398
<INCOME-TAX> 1,450
<INCOME-CONTINUING> 1,948
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,948
<EPS-PRIMARY> .19
<EPS-DILUTED> .19
</TABLE>
