SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission file number 0-23173
OAO TECHNOLOGY SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 52-1973990
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7500 Greenway Center Drive
Greenbelt, Maryland 20770
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (301) 486-0400
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 May 8, 1998, the registrant had outstanding 16,395,733 shares of its
Common Stock, par value $0.01 per share.
<PAGE>
OAO TECHNOLOGY SOLUTIONS, INC.
Quarterly Report on Form 10-Q for the Quarterly Period Ended March 31, 1998
INDEX
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Page Reference
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COVER PAGE...............................................................................................1
INDEX....................................................................................................2
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of March 31, 1998 (unaudited) and
December 31, 1997...........................................................3
Consolidated Statements of Operations for the Three Months Ended
March 31, 1998 and 1997 (unaudited).........................................4
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 1998 and 1997 (unaudited)...................................................5
Notes to Consolidated Financial Statements (unaudited).................................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 and Use of Proceeds
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
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
OAO TECHNOLOGY SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
3/31/98 12/31/97
-------- --------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 19,735 $ 22,221
Accounts receivable:
Billed 13,069 12,146
Unbilled 7,908 9,400
Other current assets 2,026 875
-------- --------
Total current assets 42,738 44,642
Property and equipment, net 5,184 4,611
Deposits and other assets 419 753
Goodwill 324 336
-------- --------
Total assets $ 48,665 $ 50,342
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,265 $ 3,773
Accrued expenses 6,426 5,720
Income taxes payable 536 477
Unearned revenue -- 379
Notes payable -- 378
Current maturities of capital lease obligations 463 552
Deferred income taxes 114 114
-------- --------
Total current liabilities 8,804 11,393
Capital lease obligations, net of current portion 868 883
Commitments and Contingencies
Stockholders' Equity:
Common Stock, par value $0.01 per share,
authorized, 25,000,000; 16,341,632 and 16,285,050
issued and outstanding at March 31, 1998 and
December 31, 1997, respectively 163 163
Additional paid-in capital 34,635 34,454
Deferred compensation (73) (76)
Stockholders' receivable (47) (133)
Retained earnings 4,296 3,658
Unrealized gain on foreign currency translation 19 --
-------- --------
Total stockholders' equity 38,993 38,066
-------- --------
Total liabilities and stockholders' equity $ 48,665 $ 50,342
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
3
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OAO TECHNOLOGY SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands, except per share data)
Three Months Ended
March 31,
--------------------
1998 1997
-------- --------
Revenues $ 23,006 $ 19,161
Direct Costs 18,724 14,820
-------- --------
Gross Profit 4,282 4,341
Selling, General and Administrative 3,403 3,319
-------- --------
Income from Operations 879 1,022
Interest and Other (Income) Expense, net (186) 5
-------- --------
Income Before Income Taxes 1,065 1,017
Provision for Income Taxes 427 433
-------- --------
Net Income $ 638 $ 584
======== ========
Net Income Per Common Share:
Diluted $ 0.04 $ 0.06
======== ========
Basic $ 0.04 $ 0.06
======== ========
Weighted Average Number of Common Shares Outstanding:
Diluted 17,175 10,183
======== ========
Basic 16,299 10,000
======== ========
The accompanying notes are an integral part of these consolidated statements.
4
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OAO TECHNOLOGY SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net Income $ 638 $ 584
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization 213 67
Changes in assets and liabilities:
Accounts receivable, net 675 (3,251)
Other current assets (1,257) 54
Deposits and other assets 334 (2)
Accounts payable (2,508) (825)
Accrued expenses 706 400
Unearned revenue (379) (92)
Income taxes payable 59 323
-------- --------
Net cash used in operating activities (1,519) (2,742)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (771) (47)
-------- --------
Net cash used in investing activities (771) (47)
-------- --------
Cash flows from financing activities:
Borrowings under revolving credit agreement -- 2,310
Proceeds from the exercise of stock options 181 --
Payments on stockholders' receivable 86 --
Payments on capital lease obligations (104) --
Payments on notes payable (378) --
-------- --------
Net cash provided by financing activities (215) 2,310
-------- --------
Effect of exchange rate changes on cash 19 --
Net decrease in cash and cash equivalents (2,486) (479)
Cash and cash equivalents, beginning of period 22,221 876
-------- --------
Cash and cash equivalents, end of period $ 19,735 $ 397
======== ========
Supplemental Disclosures of Cash Flow Information
Cash payments for income taxes $ 368 $ 110
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
5
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OAO TECHNOLOGY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
OAO Technology Solutions, Inc. (the "Company") along with its wholly owned
subsidiaries, 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 Annual Report on Form
10-K. The results of operations for the three-month period ended March 31, 1998,
are not necessarily indicative of the results to be expected for the full year.
2. CREDIT AGREEMENTS
The Company has a $10.0 million Revolving Credit Agreement (the
"Agreement") with a bank. The Agreement, which matures on May 31, 1999, provides
for a commitment fee of 0.375% on the unused portion and interest on any
outstanding amounts at the prime rate 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. The Agreement also
requires the maintenance of certain financial covenants and prohibits the
payment of dividends. Additionally, the Company has a $750,000 line of credit
(the "Line") with the same bank and the same terms as the Agreement. There were
no borrowings under the Agreement or the Line during the three months ended
March 31, 1998.
3. EARNINGS PER SHARE
Basic earnings per share has been calculated as net earnings divided by
weighted-average common shares outstanding, while diluted earnings per share has
been computed as net earnings divided by weighted average common and diluted
shares outstanding. The following table provides a reconciliation of
weighted-average common shares outstanding to weighted-average common and
dilutive shares outstanding.
6
<PAGE>
For the Three Months Ended
March 31,
--------------------------
1998 1997
------ ------
Common shares outstanding 16,299 10,000
Diluted shares outstanding
Options 876 183
------ ------
Total common and dilutive shares 17,175 10,183
====== ======
Shares outstanding are computed using the weighted-average number of shares of
common and common equivalent shares, which consist of stock options, for each
period.
4. SUBSEQUENT EVENT - ACQUISITION
In April 1998, the Company acquired certain assets of DHR Technologies,
Inc. ("DHR") for approximately $1.1 million in cash. DHR, a Maryland-based
information technology services company and software developer, provides
technical services in a variety of disciplines, including object-oriented
software engineering; World Wide Web/multimedia applications; training and
consulting; and maintenance engineering. The acquisition will be accounted for
under the purchase method of accounting, thus the results of operations of the
acquired company will be included in the consolidated financial statements from
the date of acquisition. The purchase price will be allocated based on the fair
values of the assets acquired and the liabilities assumed at the date of
acquisition.
5. RELATED PARTY TRANSACTION
Included in Other Current Assets is a $266,000 note receivable from the
Company's Chief Executive Officer and President, which bears interest at 5.5%
and is due in full on November 30, 1998.
7
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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 partner 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. The Company provides these
services to strategic clients ("Strategic Clients") as part of an IT outsourcing
team serving engagement clients ("Engagement Clients"), who are the ultimate
end-users of the services. The Company's primary Strategic Clients have been
IBM's Global Services ("IBM") and Digital Equipment Corporation ("Digital").
Engagement Clients include Ameritech, Blue Cross/Blue Shield and McDonnell
Douglas. During the first quarter of 1998, the Company invested approximately
$546,000 in the development of a new line of business, Applications Development
and Maintenance ("ADM") by opening a center in New Brunswick, Canada devoted
solely to the provision of these services (the "Northshore Solution"). In
addition, the Company provides consulting services and software to managed care
organizations through its Healthcare division ("Healthcare").
Results of Operations
Revenues
The Company's revenues increased 19.8% to $23.0 million for the three
months ended March 31, 1998, compared to $19.2 million for the same prior year
period. Revenue from Healthcare increased 253.7% to $2.9 million for the three
months ended March 31, 1998, from approximately $820,000 for the same prior year
period. The increase in revenue from Healthcare is attributable to approximately
$2.3 million of revenue from the Company's subsidiary, OAO Healthcare Solutions,
which sells the MC400 software package and was acquired by the Company in
November, 1997. Revenue from Digital increased 123.5% to $7.6 million for the
three months ended March 31, 1998, compared to $3.4 million for the same prior
year period. In January 1998, Digital announced its proposed merger into Compaq.
While the effect of this merger on the Company's relationship with Digital is
unknown, the merger of Digital and Compaq could adversely impact the Company's
future Digital revenues.
The increases in revenue from Healthcare and Digital were offset by the
decrease in revenue from IBM. For the three months ended March 31, 1998, IBM
revenue decreased 21.8% to $11.5 million from $14.7 million for the same prior
year period. This decrease is due to a combination of pricing pressures
resulting in revenue reductions on three continuing contracts; the elimination
of approximately $1.2 million in revenue from a non-recurring project which
occurred during the first quarter of the prior year; and the shutdown of two
small 13M projects during the current year. In March 1998, the Company announced
a new initiative to provide certain ADM services to IBM, with work to be
performed in Canada via the Northshore Solution. While the Company is continuing
to participate in proposal efforts with IBM, and will continue to pursue the
expansion of the Northshore Solution both with IBM and other customers, it
expects the pricing pressures and certain contract expirations to continue.
Accordingly, revenue from IBM could potentially continue to decrease.
8
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In April 1998, the Company acquired certain assets of DHR Technologies,
Inc. ("DHR") for approximately $1.1 million in cash. DHR, a Maryland-based
information technology services company and software developer, provides
technical services in a variety of disciplines, including object-oriented
software engineering; World Wide Web/multimedia applications; training and
consulting; and maintenance engineering. The acquisition will be accounted for
under the purchase method of accounting, thus the results of operations of the
acquired company will be included in the consolidated financial statements from
the date of acquisition. In the first quarter of 1998, prior to the acquisition,
DHR had revenues of approximately $927,000.
Direct Costs
The Company's direct costs increased 26.4% to $18.7 million for the three
months ended March 31, 1998, compared to $14.8 million for the same prior year
period. Direct costs consist primarily of direct labor cost and related fringe
benefit costs. As a percentage of revenue, direct costs increased to 81.4% for
the three months ended March 31, 1998, compared to 77.3% for the comparable
period in 1997.
Gross margin for the Healthcare division was $1.7 million or 57.7% of the
related revenue for the three months ended March 31, 1998, compared to $419,000
or 51.0% of the related revenue for the same prior year period, while gross
margin for the Company's business with IBM and Digital was $2.8 million or 14.8%
of the related revenue for the first quarter of 1998, compared to $4.0 million
or 22.2% of the related revenue for the same prior year period. Healthcare
margins increased primarily due to license revenue associated with the MC400
operations, which were acquired in the fourth quarter of 1997. Healthcare
margins are not expected to continue at the same level as during the first
quarter as the revenue mix is expected to consist less of revenue from the sale
of software licenses and more of revenue from software services. Margins related
to the Company's business with IBM and Digital decreased primarily as a result
of pricing pressures on continuing projects which accelerated during the first
quarter of 1998, and due to the expiration of several projects during the
current quarter. In addition, margins were adversely impacted by approximately
$546,000 of start-up costs related to the Northshore Solution project. These
costs are expected to continue early into the second quarter. The trend
regarding pricing pressures from customers may also potentially impact the
collection of certain outstanding receivables. The Company is continuing to
negotiate with its customers regarding the pricing pressures and the collection
of the receivables, but there can be no assurance regarding the successful
outcome of these discussions. As a result of the trends described above, the
Company expects that profitability in the second quarter will be below that of
the first quarter and could be substantially lower in the event that the Company
is unsuccessful in its negotiations with its major customers.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 3.0% to $3.4 million
in the three months ended March 31, 1998, compared to $3.3 million for the same
prior year period. As a percentage of revenues, these expenses decreased to
14.8% for the three months ended March 31, 1998 from 17.3% for the same prior
period. The aggregate percentage decrease was primarily the result of increased
economies of scale from higher revenues. The aggregate increase is the result of
the Company's continuing efforts to build its marketing, financial and
administrative infrastructure to enable it to support its growth opportunities.
Other
Interest income of approximately $280,000 was earned during the three
months ended March 31, 1998 on the proceeds from the Company's Initial Public
Offering (the "Offering") completed on December 4, 1997. Interest expense was
immaterial for both the three months ended March 31, 1998 and 1997. Included in
interest and other (income) expense for the three months ended March 31, 1998,
is the Company's portion of the loss from a joint venture investment in the
United Kingdom of approximately $71,000. This loss was minimal for the same
prior year period.
Liquidity and Capital Resources
Cash and cash equivalents were $19.7 million at March 31, 1998, and
$397,000 at March 31, 1997. Cash flows used in operations were $1.5 million for
the three months ended March 31, 1998 and $2.7 million for the
9
<PAGE>
three months ended March 31, 1997. The Company primarily funded its uses of cash
in 1998 from operations and the proceeds received from the Offering, and in 1997
from borrowings under the Company's credit facility prior to the completion of
the Offering. The use of cash in operations for the three months ended March 31,
1998, was primarily the result of the increase in other current assets as well
as decreases in accounts payable and unearned revenue partially offset by income
from operations and increases in accrued expenses.
The Company's business is not capital intensive, and expenditures in any
given year are ordinarily not significant. Capital expenditures in the first
three months of 1998 included expenditures associated with the development of a
new operational, administrative and financial information system. The Company
expects to incur additional capitalized costs associated with the development of
and implementation of the new management information systems through the third
quarter of 1998.
The Company currently has a $10.0 million revolving credit agreement (the
"Agreement") with a commercial bank. Advances under the Agreement are limited to
80% of certain eligible accounts receivable of the Company. As of March 31,
1998, based on the amount of such accounts receivable, the Company was eligible
to borrow $9.1 million of the available $10.0 million. The Company is required
to maintain certain financial and other covenants under the facility. The
company also has a $750,000 line of credit (the "Line") with the same bank which
has the same terms as under the Agreement. As of March 31, 1998, the Company had
no outstanding borrowings.
The Company currently anticipates that its existing cash balances, cash
generated from operations and the amounts available under its existing line of
credit, 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.
Recent Authoritative Pronouncements
Effective January 1, 1998, the Company adopted Statement of Position
("SOP") 97-2, "Software Revenue Recognition" which is effective for all
transactions the Company enters into subsequent to December 15, 1997. The
adoption of this statement did not have a material effect on the Company's
financial position.
In 1998, the Company adopted Statement of Financial Accounting Standard
("SFAS") No. 130, "Reporting Comprehensive Income" which was effective for
fiscal years beginning after December 15, 1997. Comprehensive income is the
change in equity of a business enterprise during a period from transactions and
other events and circumstances from non-owner sources. The Company's source of
other comprehensive income other than net income, is from foreign currency
translation adjustments and deferred compensation which are disclosed separately
in the Stockholders' Equity section of the Consolidated Balance Sheets.
Comprehensive income has been retroactively restated for prior periods disclosed
herein. Comprehensive income was $584,000 for both the quarters ended March 31,
1998 and 1997, which did not differ materially from net income.
In 1997 and 1998, the Financial Accounting Standards Board ("FASB") issued
pronouncements relating to the presentation and disclosure of information
related to segment data and the disclosure of information about pensions and
other postretirement benefits, respectively. The Company is required to adopt
the provisions of these pronouncements, if applicable, for the year ending
December 31, 1998. The adoption of these pronouncements will not have an impact
on the Company's financial position and results of operations, but may change
the presentation of certain of the Company's Notes to the Consolidated Financial
Statements.
In March, 1998, the American Institute of Certified Public Accountants
("AICPA") issued SOP 98-5, "Reporting on the Costs of Start-Up Activities,"
which requires costs of start-up activities and organization costs to be
expensed as incurred. This SOP is effective for financial statements for fiscal
years beginning after December 15, 1998. The Company is currently assessing the
impact of early application of the SOP.
10
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings - Not Applicable
Item 2. Changes in Securities and Use of Proceeds - 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
Exhibit Page
No. Description No.
- ---------- -------------------------------------------------------- ---------
11.1 Statement Regarding Computation of Earnings Per Share. (1) 13
27.1 Financial Data Schedule. (1) 14
- ----------
(1) Filed herewith.
(b) Reports on Form 8-K - None
11
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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: By: /s/William R. Hill
William R. Hill
Chief Executive Officer and President
Date: By: /s/Samuel Horgan
Samuel Horgan
Chief Financial Officer
12
11.1 STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
Basic earnings per share has been calculated as net earnings divided by
weighted-average common shares outstanding, while diluted earnings per share has
been computed as net earnings divided by weighted average common and diluted
shares outstanding. The following table provides a reconciliation of
weighted-average common shares outstanding to weighted-average common and
dilutive shares outstanding.
For the Three Months Ended
March 31,
--------------------------
1998 1997
------ ------
Common shares outstanding 16,299 10,000
Diluted shares outstanding
Options 876 183
------ ------
Total common and dilutive shares 17,175 10,183
====== ======
Shares outstanding are computed using the weighted-average number of shares of
common and common equivalent shares, which consist of stock options, for each
period.
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001043476
<NAME> OAO TECHNOLOGY SOLUTIONS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 19,735
<SECURITIES> 0
<RECEIVABLES> 20,977
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 42,738
<PP&E> 5,184
<DEPRECIATION> 0
<TOTAL-ASSETS> 48,665
<CURRENT-LIABILITIES> 8,804
<BONDS> 868<F1>
0
0
<COMMON> 163
<OTHER-SE> 38,830
<TOTAL-LIABILITY-AND-EQUITY> 48,665
<SALES> 0
<TOTAL-REVENUES> 23,006
<CGS> 0
<TOTAL-COSTS> 18,724
<OTHER-EXPENSES> 3,403
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 186
<INCOME-PRETAX> 1,065
<INCOME-TAX> 427
<INCOME-CONTINUING> 638
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 638
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.04
<FN>
Represents the long-term portion of capital lease obligations.
</FN>
</TABLE>
