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, 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 0-23173
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 10, 1999, the registrant had outstanding 16,733,072 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, 1999
INDEX
Page Reference
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COVER PAGE ................................................................. 1
INDEX ...................................................................... 2
PART I - FINANCIAL INFORMATION
Item 1 FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of March 31, 1999
and December 31, 1998 (Unaudited) ....................... 3
Condensed Consolidated Statements of Operations and the
Comprehensive Income for the Three Months Ended
March 31, 1999 and 1998 (Unaudited) ..................... 4
Condensed Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 1999
and 1998 (Unaudited) .................................... 5
Notes to Condensed Consolidated Financial
Statements (Unaudited) .................................. 6
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ........................ 10
PART II - OTHER INFORMATION ................................................ 15
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES ................................................................. 16
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
OAO TECHNOLOGY SOLUTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 11,134 $ 9,615
Accounts receivable:
Billed, net of allowance for uncollectible accounts
of $1,014 and $959, respectively 14,047 15,458
Unbilled, net of allowance for uncollectible accounts
of $710 and $710, respectively 13,737 11,082
-------- --------
27,784 26,540
Note receivable - related party 2,520 2,520
Income tax receivable 1,388 1,337
Deferred tax asset 1,136 1,136
Other current assets 579 469
-------- --------
Total current assets 44,541 41,617
Property and equipment, net 3,828 4,007
Deposits and other assets 359 455
Goodwill 4,882 5,039
-------- --------
Total assets $ 53,610 $ 51,118
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,988 $ 6,481
Accrued expenses 7,753 7,761
Unearned revenue 219 545
Current maturities of capital lease obligations 313 436
-------- --------
Total current liabilities 17,273 15,223
Capital lease obligations, net of current maturities 468 447
Commitments and contingencies -- --
Stockholders' equity:
Common stock, par value $0.01 per share,
Authorized, 25,000,000; 16,734,352 and 16,694,060
issued and outstanding at March 31, 1999 and
December 31, 1998, respectively 167 167
Additional paid-in capital 35,805 35,729
Deferred compensation (162) (173)
Accumulated other comprehensive loss (402) (435)
Retained earnings 461 160
-------- --------
Total stockholders' equity 35,869 35,448
-------- --------
Total liabilities and stockholders' equity $ 53,610 $ 51,118
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
OAO TECHNOLOGY SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(Unaudited)
(Dollars in thousands, except per share amounts)
Three months ended
March 31,
------------------
1999 1998
------- -------
Revenues $35,714 $23,006
Direct costs 31,864 19,086
------- -------
Gross profit 3,850 3,920
Selling, general and administrative 3,446 3,041
------- -------
Income from operations 404 879
Interest and other income (expense), net 97 186
------- -------
Income before income taxes 501 1,065
Income tax provision 200 427
------- -------
Net income 301 638
Other comprehensive income, net of tax:
Foreign currency translation adjustment 20 11
------- -------
Comprehensive income $ 321 $ 649
======= =======
Net income per common share:
Basic $ 0.02 $ 0.04
======= =======
Diluted $ 0.02 $ 0.04
======= =======
Weighted average number of common shares outstanding:
Basic 16,694 16,299
======= =======
Diluted 17,334 17,175
======= =======
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
<PAGE>
OAO TECHNOLOGY SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three months ended
March 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 301 $ 638
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 507 213
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable, net (1,244) 675
Other current assets (161) (1,257)
Deposits and other assets 96 334
Accounts payable 2,296 (2,508)
Accrued expenses (8) 706
Unearned revenue (326) (379)
Income tax payable 211 59
-------- --------
Net cash provided by (used in) operating activities 1,672 (1,519)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (160) (771)
-------- --------
Net cash used in investing activities (160) (771)
-------- --------
Cash flows from financing activities:
Proceeds from the exercise of stock options 76 181
Payments on stockholders' receivables -- 86
Payments on capital lease obligations (102) (104)
Payments on notes payable -- (378)
-------- --------
Net cash (used in) provided by financing activities (26) (215)
-------- --------
Effect of exchange rate changes on cash 33 19
Net increase (decrease) in cash and cash equivalents 1,519 (2,486)
Cash and cash equivalents, beginning of period 9,615 22,221
-------- --------
Cash and cash equivalents, end of period $ 11,134 $ 19,735
======== ========
Supplemental disclosures of cash flow information
Cash payments for interest $ 17 $ 26
Cash payments for income taxes -- $ 368
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
OAO TECHNOLOGY SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
OAO Technology Solutions, Inc. (the "Company" or "OAOT") along with its
wholly owned subsidiaries, provides a wide range of outsourced information
technology solutions and professional services including: systems and software
engineering; the operation of large-scale service delivery centers and networks,
distributed system management, application development and maintenance; staff
augmentation services; enterprise resource planning, implementation training
service, web enablement and e-business solutions; and state-of-the-art software
solutions for the managed care marketplace. These services are organized through
four business lines: Managed Services; Staff Augmentation; Enterprise
Application Solutions ("EAS"); and Healthcare IT Solutions.
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
the 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 consolidated 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 for the year ended December 31, 1998. The results of
operations for the three-month period ended March 31, 1999, 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 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. Based on eligible receivables as of March 31, 1999
OAOT had the entire $10 million available under the Agreement. The Agreement
also requires the maintenance of certain financial covenants and prohibits the
payment of dividends. There were no borrowings outstanding under the Agreement
as of March 31, 1999 and December 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. For the three-month periods ended March 31, 1999 and 1998
the Company's stock options outstanding increased outstanding common shares by
641,000 and 876,000 respectively, for total diluted shares outstanding of
17,334,000 and 17,175,000, respectively.
6
<PAGE>
4. ACQUISITIONS
OAO Services, Inc.
On July 28, 1998, the Company completed the acquisition of all the
outstanding capital stock of OAO Services, Inc., pursuant to a Stock Purchase
Agreement dated July 24, 1998 among OAO Services, Inc., the Company, OAO
Corporation ("OAOC") and an individual shareholder (the individual shareholder
together with OAOC, the "Stockholders"). The acquisition was effective as of
July 1, 1998.
Pursuant to the terms of the Stock Purchase Agreement, the purchase price
payable by the Company to the Stockholders in connection with the acquisition
included (i) cash in the amount of $2,305,000, subject to certain purchase price
adjustments, (ii) the payment by OAOT to the bank of $4,561,000 for the
retirement of outstanding debt under a financing agreement (of this amount,
$3,465,611 is a paydown of the portion of the debt allocated to the Company,
with the remainder, being a payment of the balance allocated to OAOC), and (iii)
earn-out payments to the Stockholders in amounts equal to 10% of the OAOT's
Pre-Tax Profit, as defined in the Stock Purchase Agreement, in excess, if any,
of $2,000,000, subject to increases as defined in the Stock Purchase Agreement,
for the three years ending December 31, 1999, 2000 and 2001. The aggregate of
all earn-out payments under the Stock Purchase Agreement will not exceed
$5,000,000, and each earn-out payment will be payable by OAOT on the 90th
business day after the OAOT receipt of its audited financial statements for the
year for which such payment is to be made.
The unaudited pro forma information for the three months ended March 31,1998 set
forth below gives effect to the OAO Services acquisition as if it had occurred
at the beginning of that period. No pro forma information is presented for the
three months ended March 31, 1999 as the results of the OAO Services acquisition
were included in the Company's results of operations for the entire period. The
pro forma information is presented for informational purposes only and is not
necessarily indicative of the results of operations that actually would have
been achieved had the acquisition been consummated as of that time.
For the three months ended
March 31, 1998
---------------------------------
(unaudited, dollars in thousands)
Revenue $36,840
Net income 1,067
Basic earnings per share .07
Diluted earnings per share .06
5. SEGMENT INFORMATION
The Company manages its business segments primarily by service line. The
Company's reportable segments are Managed Services, Staff Augmentation,
Healthcare IT Solutions, and EAS.
Managed Services includes datacenter operations management, distributed
systems management, application development and maintenance, and other IT
services.
Staff Augmentation services are provided by OAO Services, Inc. a wholly
owned subsidiary. Staff augmentation services provides technical IT skills to
strategic customers nationwide on a time and materials basis. Highly skilled
professionals are provided to augment the client's staffing or to respond to
requirements that cannot be sufficiently defined to permit fixed prices.
7
<PAGE>
Healthcare IT Solutions provides managed care information software products
and business solutions for health care organizations. OAO HealthCare Solutions,
Inc., a wholly owned subsidiary, provides full service solutions to users of the
managed care product MC400. This includes product development, customer service,
installation service, training and ongoing support.
Enterprise Application Solutions provides entire life cycle services for
organizations using ERP software, internet website enablement and e-business
applications. These services range from initial business process modeling and
development, through system installation implementation to ongoing operating
maintenance and system optimization.
The Company evaluates the performance of each segment based on segment
revenues and gross profit. Segment gross profit includes only direct costs.
Corporate selling, general and administrative costs are currently not allocated
to each segment. The basis of segmentation is the same as that used for the
December 31,1998 annual report to shareholders.
Summary information by segment as of and for the three months ended March
31, 1999 and 1998 is as follows (in thousands):
For the three months ended
March 31,
---------------------------
1999 1998
-------- --------
MANAGED SERVICES
Revenues $ 16,633 $ 20,103
Gross profit 2,340 2,844
Segment assets 24,215 41,796
STAFF AUGMENTATION
Revenues 16,088 --
Gross profit 1,978 --
Segment assets 16,669 --
EAS
Revenues 918 --
Gross Profit (Loss) (517) --
Segment assets 2,644 --
HEALTHCARE IT SOLUTIONS
Revenues 2,075 2,903
Gross profit 49 1,076
Segment assets 2,310 2,929
SEGMENT TOTALS
Revenues $ 35,714 $ 23,006
Gross profit 3,850 3,920
Segment assets 45,838 44,725
8
<PAGE>
The following table reconciles reportable gross profit and segment assets to the
Company's consolidated totals. Selling, general and administrative expenses,
restructuring and other charges, and interest and other income expenses are not
allocated to segments in thousands.
For the three months
ended March 31,
--------------------
1999 1998
------- -------
Gross profit for reportable segments $ 3,850 $ 3,920
Selling, general and administrative expenses unallocated 3,446 3,041
------- -------
Total consolidated income from operations 404 879
Interest and other (income) expenses unallocated 97 186
------- -------
Total consolidated income before income taxes $ 501 $ 1,065
======= =======
Total assets for reportable segments $45,838 $44,725
Note receivable - related party
2,520 --
Property and equipment unallocated 2,728 3,940
Deferred and other income taxes unallocated 2,524 --
------- -------
Total consolidated assets $53,610 $48,665
======= =======
6. RECLASSIFICATION
Certain reclassifications have been made to the financial statements for
the three months ended March 31, 1998 in order to conform to the presentation
used in 1999.
9
<PAGE>
Item 2.
OAO TECHNOLOGY SOLUTIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is provided to increase the
understanding of, and should be read in conjunction with, the Condensed
Consolidated Financial Statements of the Company and Notes thereto included
elsewhere in this quarterly report. Historical results and percentage
relationships among any amounts in these financial statements are not
necessarily indicative of trends in operating results for any future period. The
statements which are not historical facts contained in this quarterly report,
including this Management's Discussion and Analysis of Financial Condition and
Results of Operations, and Notes to these Condensed Consolidated Financial
Statements, contain certain forward-looking statements that involve risks and
uncertainties. Future events and the Company's actual results may 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 customer relationships, risks associated with fixed-price contracts,
competition in the industry, ability to sustain and manage growth, variability
of quarterly operating results, general economic conditions, dependence on key
personnel, risks associated with international sales and other risks described
herein and in the Company's other Securities and Exchange Commission filings.
Overview
The Company is an enterprise information technology ("IT") infrastructure
solution provider. The Company provides a wide range of out-sourced IT solutions
and professional services, including the operation of large-scale service
delivery centers and networks (high volume system of computers and information
networks), distributed systems management ("DSM"), applications software
development and maintenance, staff augmentation services, enterprise application
solutions, integration, implementation and training services, and software
solutions for the managed care marketplace.
The Company is transforming its business model to include enterprise
solutions that help to adapt data management to the internet. Management intends
to reinvest profits from its managed services and staff augmentation segments to
develop new IT businesses. These businesses include e-business enablement and
enterprise applications development and implementation. Company management
believes that timely investment in web-centric, digital infrastructure solutions
will result in improved long-term shareholder value.
The Company provides managed services generally on a long-term, fixed-price
contractual basis, to strategic customers as part of an IT out-sourcing team
providing services to a wide range of end-user customers. The Company's
strategic customers have been IBM's Global Services and Compaq. Revenues from
its strategic customers for the three months ended March 31, 1999 and 1998 were
$32.7 million and $20.1 million which comprised 91% and 87% of revenues,
respectively.
10
<PAGE>
Staff augmentation services are part of the Company's service offerings to
its strategic customers. These services, provided on a time and material basis,
are regularly utilized within engagements to meet short or indefinite term
requirements, to deliver personnel who augment the client's staffing or to
respond to requirements that cannot be sufficiently defined to permit fixed
prices. There are also instances where an engagement has started on a time and
material basis and evolved to a fixed-price basis, as the requirements became
sufficiently defined.
EAS services are generally provided on a time and material contractual
basis. The Company, through its EAS service line, provides entire life cycle
services for organizations and internet website enablement and e-business
applications. These services range from initial business process modeling and
development, through system installation and implementation. The Company also
provides a full suite of continuous support services to help maintain and
upgrade these complex, mission-critical systems. The Company focuses its efforts
on public sector customers as well as middle market commercial customers. In
support of these efforts, the Company has established strategic relationships
with SAP and Microsoft.
The Company provides Healthcare IT Solutions services under software
license agreements with end-users, mostly within the managed care segment of the
healthcare industry via its MC400 software. The agreements include product
development, customer service, installation services, training and ongoing
support. In addition, other services may be provided, such as total project
management, hardware planning and implementation, and custom programming.
Quarterly results can be affected by the Company's level of investment in
the expansion and development of new service lines, as well as the commencement
of new contracts and engagements, the loss of strategic or end-user customers,
the timing of personnel cost increases and the portion of revenues derived from
new client engagements.
The loss of IBM or Compaq as a strategic customer or a decrease in the
revenue derived from the Company's relationships with either IBM or Compaq could
have a material adverse effect on the Company's business, operating results and
financial condition. There can be no assurance that either strategic customer
will renew existing contracts maturing within the next twelve months or continue
to engage the Company's services at historical levels, if at all. The
termination or non-renewal of a strategic customer's contract by an end-user
customer could also have a material adverse effect on the Company's business,
operating results and financial conditions.
Results of Operations
Revenues
The Company's revenues increased 55.2% to $35.7 million for the three
months ended March 31, 1999, compared to $23.0 million for the same prior year
period. Revenue increased predominantly due to the acquisition of OAO Services,
Inc. in July 1998 which contributed $16.1 million in revenues in the quarter
ended March 31, 1999. Other new businesses including e-commerce and ERP
contributed $.9 million of revenues. These new business revenues were offset by
decreased revenues in the managed services and Healthcare IT businesses of $3.4
million and $.8 million, respectively. Managed service revenues declined
primarily due to reductions in the amount of work, head count downsizing on
continuing projects due to automation, consolidation of sites insourcing (where
Company functions were transferred back to internal client personnel), and
elimination of revenue on smaller, non-recurring projects with its strategic
customers.
During the three months ended March 31, 1999, the Healthcare IT segment
benefited from having an installed system user base. Healthcare revenues
declined $.8 million to $2.1 million from $2.9 million
11
<PAGE>
for the three months ended March 31, 1999 and 1998, respectively. The decrease
was due to less license revenue in the quarter ended March 31, 1999.
The Company signed a contract to provide ADM services to AT&T in February
1999. The contract is for a ten year term with estimated revenues of $150
million. This contract expands OAOT's array of services and diversifies its
customer base. The Company is developing an applications software factory in
Moncton, Canada to service this contract. OAOT is also marketing its new
capability to other non-strategic customer companies. Revenues during the three
months ended March 31, 1999 were approximately $.6 million and are expected to
grow in 1999 as more billable staff are added to the contract.
The Company expects to expand its ADM business and successfully market new
non-strategic customer business in its managed services and staff augmentation
segments. OAOT will simultaneously work to renew its existing business and
expand participation in new business with its strategic partners as part of its
strategy to offset potential reductions in revenue from continuing projects with
its strategic partners.
Direct Costs
The Company's direct costs increased 67.0% or $12.8 million to $31.9
million for the three months ended March 31, 1999 compared to $19.1 million for
the same prior year period. Direct costs attributable to the staff augmentation
segment of business for the three months ended March 31, 1999 were $14.1
million. Direct costs related to the managed services business decreased
proportionately to the reduction in revenue. Direct costs consist primarily of
direct labor, related fringe benefits and indirect direct costs of managing a
project or business unit. As a percentage of revenue, direct costs increased to
89.2% for the three months ended March 31, 1999, compared to 83% for the
comparable periods in 1998.
Gross margin decreased $.1 million or 1.8% to $3.8 million from $3.9
million for the three months ended March 31, 1999 and 1998, respectively. The
decline in gross margin was due to: 1) the Company's increased investment in new
business segments. These new product offerings include e-business enablement and
enterprise application development and implementation. 2) a reduction in
HealthCare IT margin; and 3) a reduction of managed service gross margin. These
declines were primarily offset by gross margin earned by the staff augmentation
business for the three months ended March 31, 1999.
The Company's enterprise application solutions investments are still in the
early stage and are important to implementing OAOT's e-business strategy.
Additional investments are expected to be incurred in 1999 to grow these
businesses.
The decline in the Healthcare IT segment gross margin was due to a change
in the revenue mix of the business. For the three months ended March 31, 1999,
revenues were comprised of software services consisting of implementation and
customization revenue which have a lower margin than license fee revenue.
Gross margin for managed services declined during the quarter ended March
31, 1999 compared to the same prior year period due to increased investment to
develop the ADM business, including the software applications factory located in
Moncton, Canada, and reduced head count and other pricing pressures on
continuing projects with its strategic customers. The Company expects to make
additional investments during 1999 in its ADM business. Additionally, the
Company expects continuing pricing pressure on existing projects with its
strategic customers. The combined investment in its ADM business
12
<PAGE>
and strategic customer pricing pressure could potentially cause continued
reductions in gross margin, gross margin percentage and revenue for its managed
services business.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 13.3% to $3.4
million in the three months ended March 31, 1999, compared to $3.0 million for
the same prior year period. As a percentage of revenues, these expenses
decreased to 9.7% for the three months ended March 31, 1999 from 13.2% for the
same prior period. Aggregate costs increased due to the acquisition of OAO
Services, Inc. in July 1998. The aggregate percentage decrease was primarily the
result of reductions in general and administrative costs. The Company reduced
the cost of outside consultants, administrative programs and administrative
infrastructure during the three months ended March 31, 1999.
Other
Interest income decreased approximately $.2 million in the quarter ended
March 31, 1999 compared to the same prior year period due to both lower interest
rates and invested cash. The Company made acquisitions with the Initial Public
Offering proceeds in 1998 which decreased invested cash during the three months
ended March 31, 1999 compared to the quarter ended March 31, 1998.
Liquidity and Capital Resources
Cash and cash equivalents were $11.1 million as of March 31, 1999, and
$19.7 million at March 31, 1998. Cash flows provided by operations were $1.7
million for the three months ended March 31, 1999 versus $1.5 million of cash
flow used in operations for the three months ended March 31, 1998. Cash provided
by operations for the three months ended March 31, 1999 was primarily the result
of an increase in accounts payable due to the Company improving management of
vendor credit.
The Company's managed services and staff augmentation segments of business
are not capital intensive, and expenditures in any given year are ordinarily not
significant. The Company expects to incur capitalized costs associated with the
enhancement of existing and development of new system modules for its MC400
healthcare software during the remainder of 1999.
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. Based on eligible
receivables as of March 31, 1999, OAOT had the entire $10 million available
under the Agreement. The Company is required to maintain certain financial and
other covenants under the Agreement with which it was in compliance as of March
31, 1999. As of March 31, 1999 there were no outstanding borrowings under the
Agreement.
The Company currently anticipates that its existing cash balances as well
as cash generated from operations will be sufficient to satisfy its operating
cash needs for the foreseeable future. The Company is negotiating to renew the
Agreement, which expires on May 31, 1999. OAOT believes that the Agreement will
be renewed or replaced and 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.
13
<PAGE>
Impact of the Year 2000 (Y2K) Issue
The Company recognizes the need to ensure that its operations will not be
adversely impacted by Y2K failures. This problem is a result of computer
programs having been written using two digits (rather than four) to define the
applicable year. Any information technology ("IT") systems that have time
sensitive software may recognize a date using "00" as the year 1900 rather than
the year 2000, which could result in miscalculations and system failures. As of
March 31, 1999, the Company has surveyed all of its business and critical
systems, and plans for replacement of non-compliant equipment and software have
been put in place. The Company is also in the process of obtaining compliance
certificates from its third party vendors. The cost of the replacement systems
is estimated at approximately $75,000, scheduled to be incurred during the first
nine months of 1999 in the normal course of business. The Company is developing
a written contingency plan regarding the effect, if any, should any of its third
party vendors fail to deliver Y2K compliance.
Based on its efforts to date, the Company believes that the vast majority
of both its IT and its non-IT systems, including all critical and important
systems, will remain up and running after January 1, 2000. At this time, the
Company believes that the most likely "worst-case" scenerio involves potential
disruptions in areas in which the Company's operations must rely on such third
parties whose systems may not work properly after January 1, 2000. While such
failures could affect important operations of the Company and its subsidiaries,
whether directly or indirectly, in a significant manner, the Company cannot at
present estimate either the likelihood or the potential cost of such failures.
Additionally, there can be no assurance that the Year 2000 will not have a
material adverse effect on the Company's financial position of results of
operations.
The nature and focus of the Company's efforts to address the year 2000
problem may be revised periodically as new issues are identified. In addition,
it is important to note that the description of the Company's efforts
necessarily involves estimates and projections with respect to activities in the
future. The estimates and projections are subject to change as work continues,
and such changes may be substantial.
Quantitative and Qualitative Disclosures about Market Risks
The Company conducts business in foreign countries, primarily Canada.
Foreign currency transaction gains and losses were not material to the Company's
results of operations for the three months ended March 31, 1999 and 1998. OAOT
believes its foreign currency risk is related primarily to the difference
between amounts the Company receives and disburses in Canada in U.S. Dollars
from U.S. dollar denominated contracts. The Company does not expect the amount
of foreign currency risk to be material in the future. To date, the Company has
not entered into any significant foreign currency forward exchange contracts or
other derivative financial instruments to hedge the effects of adverse
fluctuations in foreign currency exchange rates.
14
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Page
No. Description No.
- ------------ ----------------------------------------------- ---------------
27.1 Financial Data Schedule. (1) 17
- ----------
(1) Filed herewith.
15
<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: May 14, 1999 By:
-----------------------------
Gregory A. Pratt
President and Chief Executive Officer
Date: May 14, 1999 By:
-----------------------------
J. Jeffrey Fox
Vice President and Chief Financial Officer
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BT REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 11,134
<SECURITIES> 0
<RECEIVABLES> 30,813<F1>
<ALLOWANCES> (1,724)
<INVENTORY> 0
<CURRENT-ASSETS> 1,715
<PP&E> 3,828<F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 53,610
<CURRENT-LIABILITIES> 17,273
<BONDS> 468<F3>
0
0
<COMMON> 167
<OTHER-SE> 35,702
<TOTAL-LIABILITY-AND-EQUITY> 53,610
<SALES> 0
<TOTAL-REVENUES> 35,714
<CGS> 0
<TOTAL-COSTS> 31,864
<OTHER-EXPENSES> 3,446
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 97<F4>
<INCOME-PRETAX> 501
<INCOME-TAX> 200
<INCOME-CONTINUING> 301
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 301
<EPS-PRIMARY> 0.02
<EPS-DILUTED> 0.02
<FN>
<F1> Shown net of allowance for uncollectible accounts on face of Consolidated
Balance Sheet.
<F2> Shown in this Financial Data Schedule net of related accumulated
depreciation for consistency with Consolidated Balance Sheet.
<F3> Represents the long-term portion of capital lease obligations.
<F4> Represents interest income of the Company.
</FN>
</TABLE>
