FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on
which registered
None. Not applicable.
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, par value $0.01 per share
(Title of class)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting and non-voting common equity held by
non-affiliates of the registrant as of March 9, 1999, was approximately
$53,922,676 based on the closing sale price of the Common Stock on March 9,
1999, of $4.1975 as reported by the NASDAQ National Market System.
As of March 9, 1999, the registrant had outstanding 16,694,060 shares of
its Common Stock, par value $0.01 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Stockholders to
be held on May 14, 1999 are incorporated by reference in Part III, Items 10, 11,
12 and 13.
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OAO TECHNOLOGY SOLUTIONS, INC.
INDEX TO FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1998
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Item Page
No. No.
---- ----
Part I
<S> <C> <C>
1 Business........................................................................... 3
2 Properties......................................................................... 11
3 Legal Proceedings.................................................................. 12
4 Submission of Matters to a Vote of Security Holders................................ 12
Part II
5 Market for Registrant's Common Equity and Related Stockholder Matters.............. 12
6 Selected Consolidated Financial Data............................................... 13
7 Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................................ 13
8 Financial Statements and Supplementary Data........................................ 21
9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure......................................................... 44
Part III
10 Directors and Executive Officers of the Registrant................................. 44
11 Executive Compensation............................................................. 44
12 Security Ownership of Certain Beneficial Owners and Management..................... 44
13 Certain Relationships and Related Transactions..................................... 44
Part IV
14 Exhibits, Financial Statement Schedules and Reports on Form 8-K.................... 45
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PART I
Item I. BUSINESS.
Overview
OAO Technology Solutions, Inc. (the "Company", or "OAOT") is an enterprise
information technology ("IT") infrastructure solution provider. The Company
provides a wide range of outsourced information technology solutions and
professional services through four service lines: Managed Services; Staff
Augmentation; Enterprise Resource Planning; and Healthcare IT Solutions. The
Company typically provides these solutions and services to strategic customers,
which are global providers of IT outsourcing services. The Company works with
its strategic customers as part of the IT outsourcing/team in providing services
to a wide range of end-user customers.
Managed Services includes the operation of large-scale datacenter complexes
and networks (high volume system of computers and information networks),
distributed systems management ("DSM"), applications software development and
maintenance. The Company believes that it is differentiated from other IT
service providers through its focus on relationships with a limited number of
carefully selected strategic customers, its ability to perform successfully and
profitably under multi-year, fixed-price contracts and its ability to provide
services on a national and international basis.
Staff Augmentation Services are provided by OAO Services, Inc., ("OAO
Services") a wholly owned subsidiary of OAOT which was formed in 1995 and
acquired by the Company in July 1998. OAO Services provides technical IT skills
to strategic customers nationwide. These services, provided on a time and
material basis, are regularly utilized within engagements to meet short, long
and indefinite term requirements.
The Company provides entire life cycle services for organizations using
Enterprise Resource Planning (ERP) software. 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 complex, mission critical systems.
Industry specific services represent a small but growing and important
component of the Company's business. The Company has found that it can provide
significant added value to industry-specific markets by melding its proven
capabilities in IT with in-depth expertise in the targeted market. OAO
HealthCare Solutions provides managed care information software products and
business solutions for health care organizations that offer risk-oriented
agreements for defined member populations.
The Company began operations in January 1993, as a separate business
division of OAO Corporation ("OAO"), and was incorporated in the State of
Delaware in March 1996. In April 1996, the Company was spun-off from OAO.
Industry
The use of outsourcing has grown rapidly as corporations have increasingly
determined that it is advantageous to focus on their core competencies and
outsource those functions that are not central to their primary mission.
According to a leading market research firm, the IT services industry in 1998
was estimated to have been over $126.0 billion in the U.S. and even larger
internationally. Including hardware and software, the U.S. outsourcing market is
$231.0 billion.
The Company believes that a number of factors have resulted in a
significant shift in the awareness and acceptance by organizations of the
benefits of IT outsourcing. Historically, most IT outsourcing arrangements were
premised on the primary goal of cost reduction and were often limited to
discrete functions such as the management of data centers. Over the past several
years, however, a number of fundamental developments have occurred which have
caused organizations to reconsider the benefits of outsourcing their IT
functions. These developments include global competition, businesses' focus on
"core competencies", accelerating technological change and the need for
enterprise-wide system integration arising from the rapid growth in the number
of software applications and end-users throughout organizations. The principal
technology-driven change is the continuing movement by large corporations to
deploy, distributed computer networks using client/server architecture. The move
to open standards based computing environments continues to accelerate today as
a result of improvements in price/performance ratios for computer systems and
advances in open computing standards and enabling technologies. These
technological changes are making it increasingly difficult and expensive for
businesses to maintain in-house the necessary technical and management
capabilities, to handle their current IT needs, and to effectively exploit
rapidly evolving technologies.
One of the key trends occurring in the IT outsourcing industry is an
increasing use of business partnerships and alliances among outsourcing vendors
to deliver a broader range of technical skills more cost-effectively to the
end-user customer. Factors driving this trend include the complexity and
convergence of technology required in outsourcing engagements, lack of available
technical resources, shortened delivery times, and investment costs of
internally building technical capabilities. As a result, outsourcing providers
recognize that it is not practical to internally develop and manage all of the
technical skills and critical resources necessary to perform increasingly
complex outsourcing engagements.
Outsourcing engagements are typically characterized as being long-term in
nature and often involve the transfer by the customer of certain of its
facilities, technologies and employees to the outsourcer. The outsourcer's
responsibilities under IT engagements may vary widely from engagement to
engagement, ranging from the provision of certain specific IT functions to the
management of a client's entire IT operation. Within these
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engagements, the relationships often involve the provision of employees or
consultants by a subcontracting vendor to the outsourcing vendor. The
subcontractor is normally paid on a time and materials basis and the outsourcing
vendor retains the managerial responsibility for the IT services provided by
such persons.
Many of the same factors fueling the rapid expansion of the outsourcing
industry are similarly impacting the staff augmentation industry. As the demand
for technical resources continues to expand, corporations are increasingly
relying on staff augmentation providers as a source for skilled IT
professionals. An industry magazine reports that in 1998, 74.0% of all companies
are using temporary workers hired through a staffing company. Whether to meet
temporary or long-term demands, companies faced with the difficulty of
identifying, attracting, and retaining competent, highly skilled IT professional
are supplementing their in-house IT staff with consultants obtained from staff
augmentation companies.
Growth Strategy
The Company's goal is to become one of the premier enterprise
infrastructure solution providers by pursuing the following principal
strategies:
Leverage Existing Relationships. By establishing and nurturing close
relationships with a limited number of strategic customers, the Company intends
to continue building a reputation for performance that supports the Company's
selection by its strategic customers as a value-added partner of choice. In
support of this strategy, the employees that deliver services to strategic
customers are organized in customer teams, with each customer team responsible
for a particular strategic customer. In addition to designated customer teams,
the Company also maintains engagement managers who are responsible for each
strategic customer relationship and who seek to identify additional business
opportunities within the strategic customer organization. As a result of these
relationships, the Company was granted several engagements by strategic
customers without the requirement that the Company participate in a competitive
selection process.
Selectively Expand Base of Strategic Customers. The Company intends to
selectively expand the number of strategic customers with which it maintains
relationships by carefully evaluating market opportunities with IT services and
product providers who value the Company's outsourcing approach.
Develop Industry-Specific Expertise. The Company intends to selectively
develop expertise in industries that will allow it to be a premier enterprise
infrastructure solutions provider and that may offer higher-margin
opportunities. The Company has invested in developing expertise in the
healthcare industry, and during 1997, strengthened its offerings in this
marketplace through the acquisition of certain assets of UniHealth Investment
Company, a division of UniHealth, Inc. OAO HealthCare Solutions produces a
software product named MC400, which assists managed care organizations in the
administration of benefits structures and provider contracts.
The acquisitions of DHR Technologies, Inc, ("DHR") in April of 1998, and
ETG, Inc. ("ETG") in November of 1998, contribute to the development of the
Enterprise Resource Planning ("ERP") expertise. DHR provides advanced
computerized solutions and related technical services to power, industrial,
healthcare and financial clients. ETG provides integration, implementation and
training services for SAP(TM) and Microsoft(R) applications.
In July 1998, the Company expanded its offerings in the staff augmentation
industry with the acquisition of OAO Services, Inc. OAO Services, Inc. offers a
broad range of IT skills including systems engineers, architects, managers, and
ERP specialties. OAO Services is an IBM National Technical Subcontracting (NTS)
Supplier. It offers IBM Customer Support Center Services, Year 2000 Support
Services, and Deskside Support Services.
The Company will continue to target other vertical markets that are
undergoing regulatory, technological or competitive changes which provide
opportunities for increased outsourcing of IT functions. The Company will likely
make investments in new technical and service capabilities to enhance its
vertical market strategy.
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Pursue Acquisitions and Alliances.The Company intends to continue to pursue
expansion opportunities to aid in the achievement of its goal to be the premier
enterprise infrastructure solution provider by means of acquisitions and
alliances. The Company believes that expanded technical skills, additional
industry expertise, and a broader customer base may result from these
activities.
OAOT's Services
The Company provides its strategic customers with a wide range of IT
solutions and professional services, through four service lines: Managed
Services; Staff Augmentation; Enterprise Resource Planning; and Healthcare IT
Solutions.
Managed Services includes Datacenter Operations Management (formerly
defined as Megacenter Operations Management), Distributed Systems Management,
Application Development and Maintenance, and other IT services. Managed Services
represents 64.2% and 90.6% of the Company's total 1998 and 1997 revenues,
respectively.
The Company provides Managed Services primarily to strategic customers
which are global providers of IT outsourcing services. The Company believes that
it is differentiated from other IT service providers through its focus on
relationships with a limited number of carefully selected strategic customers,
its ability to perform successfully and profitably under multi-year, fixed-price
contracts and its ability to provide services on a national and international
basis. The Company's strategy is to build long-term relationships with its
strategic customers by understanding their business needs and by providing
specific services within the strategic customers' large-scale outsourcing
engagements more cost-effectively than other alternatives. The Company delivers
its services through customer teams, each of which has full responsibility for
the delivery of services to a specific end-user customer. The Company's close
relationships with its strategic customers, its ability to rapidly transition
and integrate its management personnel into new engagements, and its ability to
effectively manage personnel in the client environment, allow the Company to
profitably price its services under fixed-price contracts. By offering
fixed-price contracts, the Company reduces the execution and pricing risk for
its customers in their large-scale outsourcing engagements.
Large-scale outsourcing engagements typically involve the acquisition of IT
assets by the outsourcing provider from the end-user customer. These assets can
range from fixed assets, such as entire data centers and computer networks, to
personnel, such as data center, help desk and programming staff. The Company's
role in outsourcing engagements usually involves the retention of IT personnel
from the end-user customer. By retaining employees as part of its new
outsourcing engagements, to date, the Company's growth has not been impeded by
the availability of qualified technical personnel. In each new outsourcing
engagement, the Company utilizes its expertise in IT staffing and operations to
evaluate and retain outsourced staff and to reengineer the operations of the
outsourced function. Through this process, the Company historically has been
able to improve the performance of, and manage on a more cost-effective basis,
the outsourced function for its customers.
Datacenter Operations Management. The Company's Datacenter Operations
Management services cover the entire spectrum of the management and operation of
large scale computing equipment and all of its ancillary equipment, systems,
services and associated networks. This generally includes the performance of any
task associated with the operation or management of a traditional mainframe data
center. IBM currently engages the Company to provide management and operations
services at three of its four Megacenters in the U.S. Each Megacenter represents
the networking of IBM's data centers across a geographic region. Datacenter
Operations Management provided approximately 30.9%, 43.0%, and 60.2% of total
revenues for the years ended December 31, 1998, 1997 and 1996, respectively.
The Company provides services which support all aspects of datacenter
management such as policy formulation, planning, process and procedure creation,
service level development, staffing and directing the work force, budgeting and
controlling, relocation and consolidation, and upgrading of equipment, services
and systems. In performing these services, the Company is normally responsible
for the attainment of service level requirements and has the flexibility of
directing the personnel as it deems appropriate.
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The Company provides services which involve all elements of the technical
operations of a datacenter, including management and operation of distributed
networks of systems, computer room equipment scheduling and operations, network
center operation and management, tape library management, off-site data storage,
disaster planning and recovery, tape and print equipment operations, print
distribution, help desk and call center operations, move/add/change operations
for user equipment, computer and network systems programming, computer and
network systems performance measurement and tuning, production job scheduling
and control for applications systems, maintenance and development of software
applications systems, and quality assurance for technical operations.
A typical datacenter engagement involves supporting a strategic customer by
selectively accepting functions within the total outsourcing engagement. The
Company's role is to assume full responsibility for managing, staffing and
delivering service level requirements for those functions. For example, in the
Company's seven-year contractual engagement to support a very large IBM
Megacenter dispersed across the Northeast region of the U.S., the Company
performs the functions of console operations, network operations, output
processing operations, data storage operations, and user services functions such
as move/add/change operations. This Megacenter utilizes a very large network of
mainframe computer configurations that support both the strategic customer's
internal requirements and those of its end-user customers. Within this
engagement, the Company performs defined functions on a fixed-price basis and
also supports a wide range of additional functions pursuant to certain staffing
service provisions under the contract. These additional functions may be
performed by the Company on a short or long-term basis, depending on the
requirements of the strategic customer. The Company performs these functions in
the facilities of both its strategic and end-user customers, including regional,
national and international locations.
Distributed Systems Management ("DSM"). The Company's primary focus in DSM
services is on the evolving market for outsourced support of the desktop-network
requirements of the end-user customers. The Company believes that the trend
toward outsourcing the operation and management of desktop-network requirements
presents a major opportunity for growth. The services being delivered by the
Company vary by engagement and include: network operating system architecture
and implementation; evaluation and redesign of server architecture;
communications network evaluation and restructuring for improved connectivity
and efficiency; design and implementation of E-mail solutions; rollout of the
new desktop system into the user environment; transition services to support a
smooth migration to a new centrally managed desktop environment; help desk
services; deskside training services; asset management support and control;
design and implementation of automated centralized asset control; and operation
support, including activities associated with changes in technology, the
client's organizational structure or physical plant changes. DSM engagements
accounted for approximately 24.7%, 28.3%, and 17.7% of revenues, respectively,
for the years ended December 31, 1998, 1997 and 1996.
As an example of the Company's DSM services, the Company has teamed with
its strategic customer, Compaq Computer Corporation to provide support of
desktop computers and local area networks for a major financial institution.
Digital Equipment Corporation (now Compaq) contracted to provide standardized
desktops, laptops and local area networks hardware, software and support to the
end-user customer's offices worldwide. Compaq requested OAOT to provide support
in three major areas; interim support services, change management, and help desk
staffing for over 12,000 workstations and 500 servers throughout North America.
Under the interim support services agreement, the Company assumed
responsibility for onsite services being performed by the end-user customers
while their offices were migrated to the new configurations. Subsequently, the
end-user customer has asked that OAOT continue this onsite service after sites
are migrated. Services include onsite support of desktops, laptops, and local
area networks including design and installation of desktop, server, and network
configurations, modification to equipment and/or software, and desktop, network
and server upgrades, changes and moves of equipment and software, and some
hardware and software maintenance. The Company has full responsibility for all
management and technical aspects including negotiating with subcontractors and
working with client management and employees. OAOT's onsite support
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staff currently includes about 100 Site Managers, desktop analysts and
technicians, and local area network analysts and technicians.
Under the change management function, the strategic customer issues work
orders to request specific tasks to be performed. The Company performs work
orders that have to do with design, implementation, and moves of desktop,
server, and network configurations, modification to equipment and/or software,
and desktop, network and server upgrades. Work may be done under a fixed price
basis or time and materials. OAOT manages all fixed price work orders assigned
to the Company. Compaq retains management control over work orders on which the
Company supplies only technical support (T&M.). Current staffing for work orders
includes about 35 task managers, desktop analysts and technicians, server
analysts and technicians, and LAN analysts and technicians.
The Company's help desk support for this project is performed at Compaq's
Remote Management Center (RMC) in Calgary, Alberta, Canada. The RMC provides
hot-line and telephonic support to end-user customer offices throughout North
America. The Company's support services include first and second level
assistance for desktop, laptop, and local area network users and, if necessary,
dispatch of local technicians for additional support. The Company currently
provides over 120 help desk technicians, desktop analysts, and local area
network analysts at the RMC.
Application Development and Maintenance ("ADM"). Application development
and maintenance services encompass the development, integration, and enhancement
of business application software. These business applications include existing
web enabled applications such as electronic commerce, enterprise resource
planning, and legacy applications. Customers can access software engineering
centers in the United States, Canada (Northshore) and Mexico (Southshore). These
centers are collaboratively networked to provide ADM services and have programs
to achieve level 4 certification in the Software Engineering Institutes
Capability Maturity Model (SEI CMM). SEI CMM has been widely adopted as the
industry standard for measuring software development and maintenance processes.
Other IT Outsourcing. The Company's relationships with its strategic
customers, and its posture as a value-added partner of choice working within
end-user customer engagements and facilities, provide opportunities to be highly
responsive to evolving customer needs. As a result, the Company is
well-positioned to gain insight into market trends and make investments required
to pursue opportunities that result from these trends. As a result, the Company
may more selectively broaden its service offerings.
System engineering services are a natural adjunct to the Company's other
services and represent a large and growing need of its strategic customers. The
Company has completed a number of short to medium term engagements in this area,
including an engagement in support of a systems integration project with Perot
Systems. Within this complex project, involving the development and
implementation of a system to support the operation of the deregulated electric
utility market, the Company provided support for the system test function and
provided the networking expertise across the project. The Company believes that
there is a growing market for outsourced IT services in support of utility
deregulation.
Staff Augmentation Services are provided by OAO Services, Inc., ("OAO
Services") a wholly owned subsidiary of OAOT which was formed in 1995 and
acquired by the Company in July 1998. Staff Augmentation Services represent
26.9% and 5.0% of the Company's total 1998 and 1997 revenues, respectively. OAO
Services provides technical IT skills to strategic customers nationwide. These
services, provided on a time and material basis, are regularly utilized within
engagements to meet short, long and indefinite term requirements. Highly skilled
professionals are provided to augment the end-user customers staffing or to
respond to requirements that cannot be sufficiently defined to permit fixed
prices.
As of December 31, 1998, OAO Services provided over 800 consultants to
customers, primarily IBM, with skills, including but not limited to, computer
operators, application and systems programmers, network architects, designers,
testers and installers, software/hardware testers, help desk consultants,
project managers, and technical
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writers. OAO Services provides personnel possessing skills ranging from Oracle,
SAP, C++, and COBOL/DB2, programmers to the every day needs of customers
staffing requirements in the IT industry.
With offices strategically located in the Northeast, Southeast, Midwest and
West. OAO Services is positioned to provide superior nationwide support to
customers and has continuously demonstrated this ability since its inception.
Enterprise Resource Planning. The Company provides entire life cycle
services for organizations using Enterprise Resource Planning (ERP) software.
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 complex,
mission critical systems. Enterprise Resource Planning represents 1.6% of the
Company's total 1998 revenues. There was no revenue for Enterprise Resource
Planning in 1997.
The Company's ERP service line is dedicated to implementing and supporting
systems from SAP AG - one of the world's leader in ERP solutions. The Company
focuses its efforts on public sector customers as well as middle market
commercial customers. The Company believes these two classes of customers
represent significant growth potential over the next three years for ERP
vendors.
In support of these efforts, the Company has established strategic
relationships with both SAP and Microsoft. As a Microsoft Certified Solutions
Provider (MCSP), the Company has launched a program to train and deploy
technical consultants who are technically certified by SAP, as well as being
Microsoft Certified System Engineers (MCSE). This will enable the Company to
provide a combination of highly technical skills, which are unique in the
marketplace. The investment will allow the Company to provide solutions for
government agencies and middle market businesses in a more timely and cost
effective manner.
Healthcare IT Solutions. Industry specific services represent a small, but
growing and important component of the Company's business. Healthcare IT
Solutions represents 7.3% and 4.4% of the Company's total 1998 and 1997
revenues, respectively. The Company has found that it can provide significant
added value to industry-specific markets by melding its proven capabilities in
IT with in-depth expertise in the targeted market. The Company targeted the
healthcare industry based upon the dynamics of the industry. An evaluation of
the information aspects of the industry clearly indicated the value of shared
information across the dispersed providers of healthcare and related businesses
such as employers and insurers. For example, through the Company's acquisition
in 1997, OAO HealthCare Solutions provides managed care information software
products and business solutions for health care organizations that offer
risk-oriented agreements for defined member populations. The MC400 managed care
software system is comprised of over thirty modules that provide a managed care
organization with all of the required processes and methodologies needed to
manage benefit structures and provider contracts.
OAO HealthCare Solutions provides full service solutions to users of the
managed care product MC400. This includes 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. MC400 is currently installed at over 50
managed care organizations across the nation.
Relationships with Strategic Customers
IBM. The Company's relationship with its strategic customer, IBM, has
continued to expand in terms of revenues, the range of services provided, the
number of engagements and the number of IBM business units which have engaged
the Company's services. The Company won its first engagement with IBM in January
1993, successfully competing against several existing IBM contractors, when it
was chosen to perform a number of specific functions in a large outsourcing
contract which IBM had been awarded by Boeing. The initial three year term of
this engagement has subsequently been extended to a ten year term, through year
2003, and the scope of the engagement now encompasses the performance of
functions in support of IBM's Central Megacenter. In August 1993, the Company
won a similar engagement to perform a number of specific functions in support of
IBM's internal computer complex in the mid-Hudson Valley in New York. The
Company employed approximately 100 former IBM employees at the beginning of this
engagement. The initial two year term of this engagement has
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subsequently been extended to a seven year term, through year 2000, and the
scope of the engagement now encompasses the performance by more than 500
employees of various functions in support of IBM's Northeast Megacenter. In
early 1995, the Company won a three year engagement to perform specific IT
functions in support of IBM's South Megacenter, which has been extended to
December 1999. As a result of these engagements, IBM currently engages the
Company's services at three of its four U.S. Megacenters.
IBM has also engaged the Company to perform IT services in support of other
large outsourcing contracts which it has been awarded, including engagements
with Ameritech, Amtrak, Blue Cross /Blue Shield of New Jersey and PECO Energy.
The Company was chosen to support Ameritech and PECO Energy engagements without
having to submit competitive bids. Revenues from IBM were 67.0%, 66.2% and
82.2%, respectively, of the Company's total revenues for the years ended
December 31, 1998, 1997 and 1996.
Compaq. Compaq became a strategic customer in January 1995, when the
Company was awarded a contract to provide services in support of an end-user
customer in Vancouver, British Columbia. Later in 1995, the Company was awarded
additional engagements with Compaq in Central and Eastern Canada. During 1996,
the Company became a delivery partner of Compaq across all of Compaq's Canadian
outsourcing engagements and played an important role in assisting Compaq to
obtain a long-term extension of a large outsourcing contract in Canada. In 1996,
Compaq was awarded an engagement to provide services in support of one of the
industry's largest desktop outsourcing engagements. This particular end-user
customer is one of the world's largest financial institutions and presents
global opportunities for Compaq and the Company. As a result of these
engagements, the Company's relationship with Compaq has begun to expand into
other geographic areas, including the U.S. and the United Kingdom. Revenues from
Compaq accounted for 23.4%. 24.1%, and 11.4% of the Company's total revenue for
the years ended December 31, 1998, 1997 and 1996, respectively.
Operations
The Company's organizational structure is composed of three parts: customer
teams, an enablement team and corporate management and staff.
Customer teams are responsible for the actual delivery of the Company's
services and provide individual, specific customer focus. Each customer team has
full accountability for the success of the Company's relationship and business
execution with a particular strategic customer and is directly responsible for
the marketing, closing, and delivery of services to that client. Within customer
teams, empowered entrepreneurial business units are responsible for a single or
group of contracts or for a geographical area with its strategic customer.
The Company's enablement team is responsible for assisting customer teams
in handling the significant up front activities that occur during the beginning
and transition phases of engagements. The enablement team precedes customer
teams when entering new geographical locations and establishes the required
infrastructure to service clients at that location. When entering new
international locations, this often includes: identifying legal, accounting,
bookkeeping, and human resource support; organizing a new business entity; and
acquiring physical facilities. The enablement team also supports transition
efforts (new engagement start-ups) by providing experienced specialists to
provide facility, administrative and other support to the customer team.
The Company's corporate management and staff is responsible for
establishing the strategic direction of the Company, strategic marketing,
investor relations, corporate finance and accounting, human resource policy
guidance, and other administrative support services.
In structuring each outsourcing engagement, the Company works with its
strategic customers to identify elements within the engagement where the Company
can assume full responsibility for contract performance. The breadth of the
Company's service offerings provides meaningful flexibility to the strategic
customer in providing a total solution to the end-user customer's outsourcing
requirements. The Company's roles include providing services at customer
locations locally, nationally and internationally.
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In a typical engagement, the Company will retain the personnel working
within the function that is being outsourced. The enablement team will support
this transition, by establishing the required infrastructure to support the new
work site. In addition, this team will support the process of transitioning the
incumbent personnel, evaluating their capabilities and selectively hiring
productive outsourced personnel as Company employees. The Company strives to
cultivate strong morale and develop its culture with new employees, emphasizing
the degree to which it values these employees, who often find the opportunity to
work with the Company appealing compared to their previous positions working in
a non-core function. The customer team also focuses on "seamless transitions" by
minimizing any disruption within the outsourced function, often overstaffing new
engagements to ensure client satisfaction. Since the Company normally selects
the majority of the staff on an engagement from incumbent personnel, the
recruiting function for each new engagement is normally minimal. Therefore, the
Company's growth to date has not been impeded by the availability of qualified
technical personnel. As the Company implements efficiencies at an engagement, it
is able to selectively utilize existing employees for other engagements and
business opportunities.
As each outsourcing engagement is transitioned over to the Company,
operational management is inserted into the engagement to oversee the Company's
role on an ongoing basis. Within customer teams, the operational managers and
engagement staff are formed into empowered, entrepreneurial business units,
responsible and accountable for the outcome of this engagement. During the early
stages of each engagement, the outsourced function is evaluated and reengineered
for quality of performance and efficiency, as the Company seeks to drive down
operational costs while exceeding service delivery expectations of the client.
Each customer team has full accountability for the success of the Company's
relationships and business execution with its client, and is directly
responsible for delivering contracted solutions and services, and identifying,
marketing and closing additional new business opportunities within existing
engagements.
Sales and Marketing
To date, the Company has focused its marketing efforts on maintaining and
expanding its relationships with a limited number of strategic customers. The
Company's customer-intimate business model is the driving force of the sales and
marketing function. Since the Company has co-located its offices with those of
its strategic customers, its customer teams are designed to focus on and serve
the strategic customer in targeted market segments. Each customer team includes
two or more account executives who have the responsibility to expand the
Company's business with that strategic customer. Since the customer teams are
closely aligned with and co-located with the strategic customer, the Company is
in a better position to anticipate and respond to the strategic customer's
unique needs; thereby, creating a competitive advantage by ensuring account
control and growth with its strategic customers. After establishing its customer
team in a manner which the Company believes will exceed its strategic customers
expectations, the Company expands its marketing activities from that location.
Once the customer teams anticipate the strategic customer's future needs,
the Company's management is responsible for positioning the Company to meet
these needs through new service offerings. Under the leadership of management,
the Company has made, and will continue to make, significant investments to
position itself in key industries, technologies and global markets.
Competition
The IT services market is highly competitive and is served by numerous
firms, including systems consulting and integration firms, professional services
companies, application software firms, staff augmentation firms, the
professional service groups of computer equipment companies, facilities
management and management information systems outsourcing companies, certain
"Big Five" accounting firms, and general management consulting firms. Many
participants in the commercial IT services market have significantly greater
financial, technical and marketing resources and generate greater revenues than
the Company. The Company believes that the principal competitive factors in the
commercial IT services industry include responsiveness to client needs, the
ability to cause the transition of the outsourced services to occur on a prompt
and seamless basis, quality of service,
10
<PAGE>
employee relations, price, management capability and technical expertise. The
Company believes that its ability to compete also depends on a number of
competitive factors outside its control, including the ability of its
competitors to hire, retain and motivate skilled technical and management
personnel, the price at which others offer comparable services and the extent of
its competitors' responsiveness to client needs.
Employees
As of December 31, 1998, the Company employed over 2,000 full time persons.
Approximately 84 of these employees have managerial responsibilities, and over
1,107 have technical responsibilities. The Company typically utilizes the
services of independent contractors only in short-term engagements and certain
international engagements. The Company believes that its relationships with its
employees are good.
The Southern California Professional Engineering Association represents 4
of the Company's employees under a collective bargaining agreement which expires
on January 10, 2002, and 11 of the Company's employees are represented by the
International Association of Machinists and Aerospace Workers under a collective
bargaining agreement which expires on January 15, 2002. The Office and
Professional Employees International Union (the "OPEIU") represents 22 of the
Company's employees under a collective bargaining agreement that expires on
February 29, 2000. The Company believes that its relationship with each union is
good.
Item 2. PROPERTIES.
The Company's headquarters and principal administrative, sales and
marketing functions are located in approximately 14,100 square feet of leased
space in Greenbelt, Maryland. This lease expires in December 2003. The Company
leases office space in eighteen U.S. cities, as well as in Vancouver, British
Columbia; Toronto, Ontario; Calgary, Alberta, and Moncton, New Brunswick.
Additionally, the Company shares offices with joint venture partners in London,
England, and Mexico City, Mexico.
The Company anticipates that additional space will be required as business
expands and believes that it will be able to obtain suitable space as needed.
11
<PAGE>
Item 3. LEGAL PROCEEDINGS.
The Company believes that there are no claims or actions against the
Company the ultimate disposition of which will have a material adverse effect on
the Company's results of operations or financial position.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Stock Data: The Company's Common Stock, par value $0.01 per share,
commenced trading on the NASDAQ National Market tier of the NASDAQ Stock Market
on October 22, 1997, under the symbol "OAOT." As of December 31, 1998, there
were 871 record holders of the Company's Common Stock based on information
provided by the Company's transfer agent. The following table sets forth, for
the periods indicated, the high and low closing sale prices for the Company's
Common Stock.
1998
---------------------
Quarter High Low
--------- ------
First $11 13/16 $7 3/8
Second 9 5/8 4 1/2
Third 5 1/4 3 1/8
Fourth 4 5/8 2 3/8
1997
---------------------
Quarter High Low
--------- ------
Fourth $12 1/2 $8 1/2
The Company has not paid cash dividends on its Common Stock to date. It is
the present policy of the Company to retain future earnings to finance the
growth and development of its business, and therefore the Company does not
anticipate paying cash dividends on its Common Stock in the foreseeable future.
Furthermore, certain financial covenants in the Company's bank credit agreement
restrict the Company's ability to pay cash dividends.
12
<PAGE>
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements of the
Company and the Notes thereto included elsewhere in this Form 10-K. The
statement of operations data for the years ended December 31, 1998, 1997, 1996,
1995 and 1994, and the balance sheet data as of December 31, 1998, 1997, 1996,
1995 and 1994 have been derived from consolidated financial statements of the
Company which have been audited by Deloitte & Touche LLP, independent auditors.
The Company began its operations in 1993 as a division of OAO Corporation, was
incorporated in March 1996 and was spun off from OAO Corporation in April 1996.
In July 1998, the Company acquired OAO Services, Inc. from OAO Corporation.
<TABLE>
<CAPTION>
(In thousands, except per share amounts) For the years ended December 31,
-----------------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues $ 113,342 $ 84,666 $ 57,891 $ 38,229 $ 22,472
Direct costs 97,105 65,882 43,896 28,548 16,503
Selling, general and administrative 19,100 13,551 10,824 7,338 4,743
Restructuring and other charges 3,135 -- -- -- --
--------- --------- --------- --------- ---------
(Loss) income from operations (5,998) 5,233 3,171 2,343 1,226
Interest and other (income) expense, net (619) 453 46 115 61
--------- --------- --------- --------- ---------
(Loss) income before income taxes (5,379) 4,780 3,125 2,228 1,165
(Benefit) provision for income taxes (1,881) 1,912 1,315 1,139 466
--------- --------- --------- --------- ---------
Net (loss) income $ (3,498) $ 2,868 $ 1,810 $ 1,089 $ 699
========= ========= ========= ========= =========
Net (loss) income per common share:
Basic (1) $ (0.21) $ 0.27 $ 0.18
========= ========= =========
Diluted (1) $ (0.21) $ 0.26 $ 0.17
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
(In thousands) As of December 31,
-----------------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital $ 26,394 $ 33,249 $ 4,718 $ (1,446) $ (964)
Total assets 51,118 50,342 12,828 5,801 3,198
Capital lease obligations, including
current portion 883 1,435 476 251 --
Stockholders' equity 35,448 38,066 5,840 1,654 565
</TABLE>
(1) See Note 4 to Notes to Consolidated Financial Statements for information
concerning calculation of basic and diluted net income per common share.
Item 7. 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 Consolidated
Financial Statements and Notes thereto found in Item 8 of this Form 10-K.
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 Form 10K,
including the Management's Discussion and Analysis of Financial Condition and
Results of Operations, and Notes to Consolidated Financial
13
<PAGE>
Statements, are forward-looking statements that involve certain risks and
uncertainties. Actual results may differ materially based on numerous factors,
including but not limited to the Company's dependence on key strategic
customers, risks associated with fixed-price contracts, competition in the
industry, general economic conditions, and other risks described herein and in
the Company's other Securities and Exchange Commission filings.
Overview
The Company is an enterprise IT infrastructure solution provider. The
Company provides a wide range of outsourced information technology solutions and
professional services, including the operation of large-scale datacenter
complexes and networks (high volume system of computers and information
networks), distributed systems managementn ("DSM"), applications software
development and maintenance, staffing augmentation services, enterprise resource
planning, integration, implementation and training services, and software
solutions for the managed care marketplace
The Company provides managed services, generally on a long-term,
fixed-price contractual basis, to strategic customers as part of an IT
outsourcing team providing services to a wide range of end-user customers. The
Company's strategic customers have been IBM's Global Services and Compaq with
engagements including end-users: Boeing, Campbell Soup, Ryder Systems
Corporation and Citibank.
For the years ended December 31, 1998, 1997, and 1996, approximately 37.1%,
60.8%, and 73.8% of the Company's revenues, respectively, were derived from
fixed-price contracts. Fixed-price contracts as a percentage of total Company
revenue declined in 1998 primarily due to the acquisition in July 1998 of OAO
Services, Inc., which has primarily time and materials contracts. The
fixed-price contracts range from three to ten years in length and are accounted
for under the percentage of completion method. The Company's fixed-price
contracts generally require the Company to meet certain pre-established levels
of service, while achieving certain operating or managerial efficiencies during
the course of the engagements. Profitability is generally lower during the early
term of the these engagements as the Company invests in assuring a smooth
start-up and in attaining certain service levels prior to the implementation of
productivity improvements. Upon completion of the initial performance phase, the
Company initiates activities to increase profitability through improved
management practices and the establishment of new technical and operational
methodologies.
Staff augmentation services are a part of the Company's service offerings
to its strategic customers. These services, provided on a time and materials
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
materials basis and evolved to a fixed-price basis as the requirements became
sufficiently defined.
ERP services are generally provided on a time and materials contractual
basis. The Company, through its ERP service line, provides entire life cycle
services for organizations. 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 ERP service
line is dedicated to implementing and supporting systems from SAP AG - one of
the world's leaders in ERP solutions. 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 both SAP
and Microsoft. As a Microsoft Certified Solutions Provider (MCSP), the Company
has launched a program to train and deploy technical consultants who are
technically certified by SAP, as well as being Microsoft Certified System
Engineers (MCSE). This will enable the Company to provide a combination of
highly technical skills.
The Company provides Healthcare IT Solutions services under software
license agreements with end users. 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
14
<PAGE>
implementation, and custom programming. MC400 is currently installed at over 50
managed care organizations across the nation.
The Company has experienced substantial growth since its inception, with
revenues increasing to $113.3 million in 1998, from $12.1 million in 1993.
Engagements which involve new services to existing customers or services to new
customers may result in lower margins during the early term of the engagement.
The Company has historically experienced margin improvements over the course of
its engagements. In addition, operating results can be affected by the level of
the Company's investments in international and other business development
activities. The Company believes that its business is not seasonal. Quarterly
results can be affected by the Company's level of investment in the expansion
and development of new service lines, 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 Company's relationship with its first strategic customer, IBM, has
continued to expand in terms of revenues, the range of services provided, the
number of engagements and the number of IBM business units which have engaged
the Company's services. Revenues from IBM have increased on a percentage basis
of the Company's total revenues, to 67.0% for the year ended December 31, 1998
from 66.2% for the year ended December 31, 1997 and declined on a percentage
basis from 82.2% for the year ended December 31,1996. The percentage has
increased for the year ended December 31, 1998 due primarily to the increase in
IBM revenues resulting from the acquisition of OAO Services, Inc. IBM is OAO
Services' primary customer. The declining revenue percentage trend between 1996
and 1997 is primarily attributable to the Company's expanding relationship with
Compaq, which became a primary customer in 1995. The Company is currently a
major delivery partner of Compaq for outsourcing engagements across Canada, and
its relationship with Compaq has expanded into other geographic areas. Revenues
from Compaq accounted for 23.4%, 24.1%, and 11.4% of the Company's total
revenues for the years ended December 31, 1998, 1997 and 1996, respectively. 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 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 condition.
While the IT services industry has generally experienced labor shortages
and wage inflation in excess of most other industries, the Company's engagements
have not been materially affected, primarily due to the Company's practice of
retaining the majority of the outsourced personnel. The Company prices its
services under these engagements on the basis of the historical cost of the
outsourced function, managerial experience and its assessment of evolving
technical factors. The Company also enters into staffing services engagements
requiring high-demand IT specialists for terms ranging up to 18 months, usually
on a time and materials basis. The Company is subject to the same general labor
pressures inherent in the IT services industry when performing these
engagements, which are primarily related to the Company's DSM and systems
integration services. The Company is dependent upon its ability to attract, hire
and retain personnel who possess the technical skills and experience necessary
to meet the service requirements of its clients. In pricing its services under
shorter term engagements, the Company evaluates the existing labor market for IT
specialists and the expected duration of the engagement.
The Company often places its employees in the workplace of both its
strategic and end-user customers. The Company is therefore exposed to potential
liability with respect to actions taken by its employees, such as damages caused
by employee errors, misuse of client-proprietary information or theft of client
property. Due to the nature of the Company's potential liability with respect to
any such actions, there can be no assurance that any insurance maintained by the
Company will be adequate to cover any such liability.
15
<PAGE>
Results of Operations
The following table sets forth, for the periods indicated, selected
statements of operations data as a percentage of net revenue:
Year Ended December 31,
------------------------
1998 1997 1996
----- ----- -----
Revenues ........................................... 100.0% 100.0% 100.0%
Direct costs ....................................... 85.7 77.8 75.8
Selling, general and administrative expense ........ 16.9 16.0 18.7
Restructuring and other charges .................... 2.7 -- --
----- ----- -----
(Loss) income from operations ...................... (5.3) 6.2 5.5
Interest and other (income) expense, net ........... (0.5) 0.5 0.1
----- ----- -----
(Loss) income before income taxes ............. (4.8) 5.7 5.4
Benefit (provision) for income taxes ............... (1.7) 2.3 2.3
----- ----- -----
Net (loss) income ............................. (3.1)% 3.4% 3.1%
===== ===== =====
Comparison of Year Ended December 31, 1998 to Year Ended December 31, 1997
Revenues
The Company's revenues increased 33.8% to $113.3 million for the year ended
December 31, 1998, from $84.7 million for the year ended December 31, 1997. This
increase was primarily due to increased revenues as a result of acquisitions.
Revenue from Managed Services decreased 8.4% to $72.8 million for the year
ended December 31, 1998 from $79.5 million for the year ended December 31, 1997.
This decrease is due to the expiration of several significant contracts, and
strategic customer pricing pressures. The decrease was offset by increases in
revenues resulting from the Company's new initiative to provide certain ADM
services. This new line of business has provided approximately $1.5 million in
revenue for the year ended December 31, 1998.
Revenue from Staff Augmentation was $30.5 million for the year ended
December 31, 1998. In July 1998, the Company acquired certain assets of OAO
Services in a cash purchase transaction. The acquisition has been accounted for
under the purchase method of accounting, thus the results of operations of the
acquired company have been included in the consolidated financial statements
from the date of acquisition. Prior to the acquisition, OAO Services had
revenues of $29.3 million and $65.8 million for the six months ended June 30,
1998 and twelve months ended December 31, 1997.
ERP revenue was $1.8 million for the year ended December 31, 1998. Two
acquisitions contributed to ERP revenue in 1998. 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/multi-media
applications; training and consulting; and maintenance engineering. Effective
November 1, 1998, the Company acquired Enterprise Technologies Group, Inc.
("ETG"). Pursuant to the agreement ETG shareholders exchanged all the issued and
outstanding stock of ETG consisting of 1,000 shares of Common Stock, par value
$.10 per share into 222,222 shares of Common Stock, par value $.01 per share of
the Company. The ETG shareholders were granted certain "piggyback" registration
rights whereby under certain circumstances, and subject to certain conditions,
they may include these shares of OAOT Common Stock in any registration of shares
of OAOT Common Stock. The Company, prior to the merger, provided ETG interest
free advances totaling approximately $216,000. Additionally, at closing, the
Company repaid ETG's shareholders loans of $109,000.
16
<PAGE>
Revenue from the Healthcare IT Solutions service line increased 57.7% to
$8.2 million for the year ended December 31, 1998, from $5.2 million for the
year ended December 31, 1997. The increase in revenue was attributable to the
Company's subsidiary OAO HealthCare Solutions. OAO HealthCare Solutions sells
the MC400 software package and was acquired by the Company in November 1997.
This increase in Healthcare was offset by a decline in revenue related to the
completion of one legacy project.
Direct Costs
The Company's direct costs increased by 47.3% to $97.1 million for the year
ended December 31, 1998, from $65.9 million for the year ended December 31,
1997. As a percentage of revenues, direct costs increased to 85.7% for the year
ended December 31, 1998, from 77.8% for the year ended December 31, 1997. The
Company attributes this increase to increased costs associated with its
establishment and development of the ADM, ERP and Healthcare service offerings.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 40.4% to $19.1
million for the year ended December 31, 1998, from $13.6 million for the year
ended December 31, 1997. As a percentage of revenues these costs increased to
16.9% for the year ended December 31, 1998 from 16.0% for the year ended
December 31, 1997 primarily due to provisions for uncollectible accounts
receivable of approximately $4.2 million recorded during 1998. The Company
intends to continue building its marketing, financial and administrative
infrastructure to enable it to support its growth opportunities.
Restructuring and Other Charges
During 1998, in connection with management plans to reduce costs and
improve operating efficiencies, the Company recorded pre-tax restructuring
charges of approximately $1,035,000. The restructuring costs relate primarily to
involuntary employee termination benefits. Employee termination benefits include
severance, wage continuation, outplacement services and other benefits. All of
the terminated employees were notified of their termination and the terms and
conditions of their severance in writing. Although some of the severance
payments are being made in equal semi-monthly amounts up to a twelve-month
period of time, the terminated employees are not obligated to provide any
services after their date of termination.
During 1997, the Company began implementation of an enterprise wide
financial management project. The program included modules for general ledger,
accounts receivable, accounts payable, project accounting and human resources.
During the third quarter of 1998, due to significant cost overruns and project
definition changes, the Company hired an outside consultant to review the status
of this project. Based on this review, the Company has abandoned the majority of
the original software modules and the related implementation costs. Except for
the human resources module, none of the remaining modules had been implemented,
and all the related implementation software documentation for these abandoned
modules have been discarded. As a result, the Company recorded a write-off of
approximately $2.1 million related to this abandonment.
Interest Expense and Provision for Income Taxes
Interest expense was not material in either year as the Company satisfied
its working capital needs through cash generated from operations and the initial
public offering in 1997. The effective tax rate decreased to 35.0 % benefit in
1998 from a 40.0% provision in 1997
17
<PAGE>
Comparison of Year Ended December 31, 1997 to the Year Ended December 31, 1996
Revenues
The Company's revenues increased 46.3% to $84.7 million for the year ended
December 31, 1997, from $57.9 million for the year ended December 31, 1996. This
increase was generally attributable to increases in international revenues and
increases in revenues from newer lines of business, such as DSM services.
International revenue, primarily from the Company's relationship with Compaq
(Digital) in Canada, increased to $20.4 million for the year ended December 31,
1997, compared to $6.9 million for the same prior year period. Revenues from the
Company's DSM services increased by 135.3% to $24.0 million in 1997, compared to
$10.2 million in 1996. Revenues from the Company's Megacenter Operations
increased by 4.3% to $36.4 million for the year ended December 31, 1997,
compared to $34.9 million for the year ended December 31, 1996.
Direct Costs
The Company's direct costs increased 50.1% to $65.9 million for the year
ended December 31, 1997, compared to $43.9 million for the year ended December
31, 1996. Direct costs consist primarily of direct labor costs and related
fringe benefit costs. As a percentage of revenue, direct costs increased to
77.8% for the year ended December 31, 1997, compared to 75.8% for the year ended
December 31, 1996. This percentage increase is primarily due to the higher
proportion of revenues from new engagements and new services in 1997 compared to
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
Selling, general and administrative ("SG&A") expenses increased 25.9% to
$13.6 million for the year ended December 31, 1997, compared to $10.8 million
for the year ended December 31, 1996. As a percentage of revenues, these
expenses decreased to 16.0% from 18.7%, which the Company generally attributes
to increased economies of scale from higher revenues. 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.
Interest Income, Expense and Tax Provision
Interest income was approximately $70,000 and $30,000 for the year ended
December 31, 1997, and 1996, respectively. Interest income increased due to
income earned on the proceeds of the Company's Initial Public Offering (the
"Offering") completed on December 4, 1997. Interest expense was approximately
$523,000 for the year ended December 31, 1997, as compared to approximately
$76,000 for the year ended December 31, 1996. Interest expense increased due to
increased borrowings in 1997 to support working capital requirements prior to
the completion of the Offering. The effective tax rate decreased to 40.0% for
the year ended December 31, 1997, compared to 42.1% for the year ended December
31, 1996, primarily due to a change in the distribution of income among various
tax jurisdictions.
Liquidity and Capital Resources
Cash and cash equivalents were $9.6 million as of December 31, 1998, and
$22.2 million as of December 31, 1997. Cash flows used in operations were $2.9
million for the year ended December 31, 1998 and $5.1 million
18
<PAGE>
for the year ended December 31, 1997. The use of cash in operations for the year
ended December 31, 1998, was primarily the result of the increase in income tax
receivable, as well as decreases in accounts payable and accounts receivable.
The cash used in investing activities for the year ended December 31, 1998 was
primarily the result of the acquisitions of OAO Services and DHR Technologies,
Inc. The Company's business is not capital intensive, and expenditures in any
given year are ordinarily not significant. The Company primarily funded its uses
of cash from operations and proceeds received from its initial public offering
in 1997. Capital expenditures in 1998 included capital expenditures associated
with the development of an operational, administrative and financial information
system.
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. Amounts available
under the Agreement based on eligible receivables, as of December 31, 1998 were
approximately $9.0 million. The Company is required to maintain certain
financial and other covenants under the Agreement with which it was not in
compliance as of December 31,1998, however, the Company has obtained waivers and
the Bank has agreed to new terms, including new covenants, subject to formal
documentation between the Bank and the Company. As of December 31, 1998, 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 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.
Impact of the Year 2000 Issue
The Company recognizes the need to ensure that its operations will not be
adversely impacted by Y2K failures. The Company has recognized the need to
ensure that its operations will not be adversely impacted by the risk of
potential disruption from the "year 2000 (Y2K) problem." This problem is a
result of computer programs having been written using two digits (rather than
four) to define the applicable year. Any 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.
The problem also extends to many "non-IT" systems; that is, operating and
control systems that rely on embedded chip systems. In addition, like every
other business enterprise, the Company is at risk from Y2K failures on the part
of its major business counterparts, including third-party vendors, as well as
potential failures in public and private infrastructure services, including
electricity, water, gas, transportation and communications.
System failures resulting from the Y2K problem could adversely affect
operations and financial results in all of the Company's business segments.
Failures may affect important operations as billing and collection and payroll
operations, as well as other routine business operations.
Accordingly, in January of 1998, the Company initiated a program to
determine its state of readiness for its IT and non-IT systems and to identify
and properly address issues associated with the Y2K issue. The Company has made
substantial progress in assessing how it will be impacted by the issue. In June
of 1998, a Company wide initiative began to assess third-party vendor state of
readiness. The Company is in the process of obtaining compliance certificates
from its third-party vendors; however, the Company is unable to definitively
determine that all third-party vendors will reach Y2K-ready status.
As of December 31, 1998, 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 cost of the replacement systems is
estimated at approximately $50,000, scheduled to be incurred in the first
quarter of 1999 in the normal course of business. The Company does not have a
written contingency plan in place addressing the effect, if any, should any
19
<PAGE>
of its third-party vendors fail to deliver Y2K compliance. Any additional need
for contingency plans or back-up systems will be addressed and determined during
the first half of 1999.
The activities involved in the Company's Y2K program necessarily involve
estimates and projections, as described above, of activities and resources that
will be required in the future. These estimates and projections may be revised
as work progresses on this program. If any of the significant third party
vendors are not Y2K compliant and/or the Company fails to identify or replace
non-compliant equipment or software and noncompliance causes a material
disruption to the business of the Company, the Company's revenues and financial
position could be materially adversely affected. There can be no assurance that
Y2K will not have a material adverse effect on the Company's financial position
or results of operations.
Based upon 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. Accordingly, the
Company does not currently anticipate that internal systems failures will result
in any material adverse effect to its operations or financial condition. During
1999, the Company will continue and expand its efforts to ensure that major
third-party vendors and providers of infrastructure services, such as utilities
and communications services, will also be prepared for the year 2000 The Company
is devoloping contingency plans to address any failures on their part to become
Y2K compliant. At this time, the Company believes that the most likely
"worst-case" scenario 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, either directly or indirectly,
in a significant manner, the Company cannot at present estimate either the
likelihood or the potential cost of such failures.
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
required in the future. These estimates and projections are subject to change as
work continues, and such changes may be substantial.
Item 7a 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 year ended December 31, 1998. The Company 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.
20
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Consolidated Financial Statements of OAO Technology Solutions, Inc. and
Subsidiaries are filed as part of this form 10-K.
<TABLE>
<CAPTION>
Index to Financial Statements and Schedule Page
- ------------------------------------------ ----
<S> <C>
Financial Statements:
Independent Auditors' Report ............................................................... 22
Consolidated Statements of Operations and Comprehensive Income for the years ended
December 31, 1998, 1997, and 1996 ........................................................ 23
Consolidated Balance Sheets as of December 31, 1998 and 1997 ............................... 24
Consolidated Statements of Cash Flows for the years ended December 31, 1998,
1997 and 1996 ........................................................................... 25
Consolidated Statements of Stockholders' Equity for the years ended December 31,
1998, 1997 and 1996 ..................................................................... 26
Notes to Consolidated Financial Statements ................................................. 27
Schedule:
Schedule II - Valuation and Qualifying Accounts ............................................ 43
</TABLE>
Schedules not listed above have been omitted because they are not
applicable or the information required to be set forth therein is included in
the financial statements or the notes thereto.
21
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of OAO Technology Solutions, Inc.:
We have audited the accompanying consolidated balance sheets of OAO
Technology Solutions, Inc. and subsidiaries as of December 31, 1998 and 1997,
and the related consolidated statements of operations and comprehensive income,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1998. Our audit also included the financial statement
schedule on page 43. These financial statements and the financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of OAO Technology Solutions, Inc.
and subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
Also, in our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects, the information set forth herein.
Deloitte & Touche LLP
Washington, D.C.
February 24, 1999
22
<PAGE>
<TABLE>
<CAPTION>
OAO TECHNOLOGY SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Dollars in Thousands, Except Per Share Amounts)
For the years ended December 31,
-------------------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenues .......................................................... $ 113,342 $ 84,666 $ 57,891
Direct costs ...................................................... 97,105 65,882 43,896
Selling, general and administrative ............................... 19,100 13,551 10,824
Restructuring and other charges ................................... 3,135 -- --
------------ ------------ ------------
(Loss) income from operations ..................................... (5,998) 5,233 3,171
Interest and other (income) expense, net .......................... (619) 453 46
------------ ------------ ------------
(Loss) income before income taxes ................................. (5,379) 4,780 3,125
(Benefit) provision for income taxes .............................. (1,881) 1,912 1,315
------------ ------------ ------------
Net (loss) income ................................................. (3,498) 2,868 1,810
Other comprehensive loss, net of tax:
Foreign currency translation adjustment ....................... 283 -- --
Comprehensive (loss) income ....................................... $ (3,781) $ 2,868 $ 1,810
============ ============ ============
Net (loss) income per common share:
Basic ......................................................... $ (0.21) $ 0.27 $ 0.18*
============ ============ ============
Diluted ....................................................... $ (0.21) $ 0.26 $ 0.17*
============ ============ ============
Weighted average number of shares outstanding:
Basic ......................................................... 16,433,757 10,598,130 10,000,000*
============ ============ ============
Diluted ....................................................... 16,433,757 11,202,171 10,497,534*
============ ============ ============
* Pro forma (See Note 4)
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
OAO TECHNOLOGY SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
December 31,
---------------------------
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................................................ $ 9,615 $ 22,221
Accounts receivable:
Billed, net of allowance of $959 and $50, respectively ................................ 15,458 12,146
Unbilled, net of allowance of $710 and $239 respectively .............................. 11,082 9,400
-------- --------
26,540 21,546
Note receivable - OAO Corporation ........................................................ 2,520 --
Deferred income taxes - current .......................................................... 1,136 --
Income tax receivable .................................................................... 1,337 --
Other current assets ..................................................................... 469 875
-------- --------
Total current assets .................................................................. 41,617 44,642
Property and equipment, net .................................................................. 4,007 4,611
Deposits and other assets .................................................................... 455 753
Goodwill ..................................................................................... 5,039 336
======== ========
Total assets .......................................................................... $ 51,118 $ 50,342
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ......................................................................... $ 6,481 $ 3,773
Accrued expenses ......................................................................... 7,761 5,720
Income taxes payable ..................................................................... -- 477
Unearned revenue ......................................................................... 545 379
Notes payable ............................................................................ -- 378
Current portion of capital lease obligations ............................................. 436 552
Deferred income taxes .................................................................... -- 114
-------- --------
Total current liabilities ............................................................. 15,223 11,393
Capital lease obligations, net of current portion ............................................ 447 883
Commitments and contingencies
Stockholders' equity:
Common stock, par value $.01 per share, 25,000,000
shares authorized; 16,694,060 and 16,285,050
shares issued and outstanding at December 31, 1998,
and 1997, respectively ................................................................. 167 163
Additional paid-in capital ............................................................... 35,729 34,454
Deferred compensation .................................................................... (173) (76)
Accumulated other comprehensive loss ..................................................... (435) --
Stockholders' receivable ................................................................. -- (133)
Retained earnings ........................................................................ 160 3,658
-------- --------
Total stockholders' equity ............................................................ 35,448 38,066
-------- --------
Total liabilities and stockholders' equity ............................................ $ 51,118 $ 50,342
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
24
<PAGE>
OAO TECHNOLOGY SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars In Thousands)
<TABLE>
<CAPTION>
For the years ended December 31,
--------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net (loss) income ................................................................ $ (3,498) $ 2,868 $ 1,810
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Depreciation and amortization .................................................. 1,248 413 245
Asset abandonment costs ........................................................ 2,100 -- --
Net increase in the allowance for uncollectible accounts ....................... 1,155 -- --
Changes in assets and liabilities, net of effects of acquisition:
Accounts receivable, net ....................................................... 4,316 (11,406) (7,831)
Deferred income taxes .......................................................... (2,473) 466 89
Other current assets ........................................................... 189 (545) (293)
Deposits and other assets ...................................................... 328 (765) (24)
Accounts payable ............................................................... (6,841) 2,014 331
Accrued expenses ............................................................... 652 2,039 1,970
Unearned revenue ............................................................... 166 (552) 174
Income taxes payable ........................................................... (591) 336 141
-------- -------- --------
Net cash used in operating activities ................................... (3,249) (5,132) (3,388)
-------- -------- --------
Cash Flows from Investing Activities:
Cash paid for the acquisition of OAO Services ...................................... (2,195) -- --
Payment on OAO Services debt agreement ............................................. (3,465) -- --
Cash paid for the acquisition of DHR Technologies .................................. (938) -- --
Cash received in the acquisition of ETG cash ....................................... 28 -- --
Cash paid for the acquisition of OAO HealthCare Solutions, Inc. .................... -- (398) --
Expenditures for property and equipment ............................................ (2,233) (1,969) (970)
-------- -------- --------
Net cash used in investing activities ................................... (8,803) (2,367) (970)
-------- -------- --------
Cash Flows from Financing Activities:
Borrowings under revolving credit agreement ........................................ -- 6,800 282
Proceeds from the sale of common stock, net ........................................ 298 29,339 5,000
Payments on credit agreements ...................................................... -- (6,800) --
Receipt of stockholders' receivable ................................................ 133 -- --
Payments on capital lease obligations .............................................. (552) (495) (57)
Payments on notes payable .......................................................... (378) -- --
-------- -------- --------
Net cash (used in) provided by financing activities ..................... (499) 28,844 5,225
-------- -------- --------
Effect of exchange rate changes on cash ............................................... (55) -- --
Net (decrease) increase in cash and cash equivalents .................................. (12,606) 21,345 867
Cash and cash equivalents, beginning of period ........................................ 22,221 876 9
-------- -------- --------
Cash and cash equivalents, end of period .............................................. $ 9,615 $ 22,221 $ 876
======== ======== ========
Supplemental Disclosures of Cash Flow Information
Cash payments for interest ....................................................... $ 135 $ 176 $ 45
Cash payments for income taxes ................................................... 1,180 844 1,085
Supplemental Noncash Investing and Financing Activities
Capital asset and lease obligation additions ..................................... $ -- $ 1,454 $ --
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
OAO TECHNOLOGY SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars and Shares in Thousands)
For the years ended December 31, 1998, 1997 and 1996
Common Accumulated
Stock Additional Other Total
------------------- Paid-In Deferred Comprehensive Stockholders' Retained Stockholders'
Shares Amount Capital Compensation Loss Receivable Earnings Equity
-------- -------- ---------- ------------ ------------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 ...... 5,000 $ 50 $ -- $ -- $ -- $ -- $ 1,604 $ 1,654
Net income ...................... -- -- -- -- -- -- 1,810 1,810
Sale of common stock ............ 5,000 50 4,950 -- -- -- -- 5,000
Distribution to OAO Corporation . -- -- -- -- -- -- (2,624) (2,624)
-------- -------- -------- -------- ------ ------ -------- --------
Balance, December 31, 1996 ...... 10,000 100 4,950 -- -- -- 790 5,840
======== ======== ======== ======== ====== ====== ======== ========
Net income ...................... -- -- -- -- -- -- 2,868 2,868
Exercise of stock options ....... 50 1 99 -- -- -- -- 100
Sale of common stock ............ 6,235 62 29,310 -- -- (133) -- 29,239
Option grants to non-employees .. -- -- 95 (95) -- -- -- --
Amortization of deferred
compensation .................. -- -- -- 19 -- -- -- 19
-------- -------- -------- -------- ------ ------ -------- --------
Balance, December 31, 1997 ...... 16,285 163 34,454 (76) -- (133) 3,658 38,066
======== ======== ======== ======== ====== ====== ======== ========
Net loss ........................ -- -- -- -- -- -- (3,498) (3,498)
Exercise of stock options ....... 187 2 489 -- -- -- -- 491
Amortization of deferred
compensation .................. -- -- -- 30 -- -- -- 30
Shares issued for the
acquisition of ETG ............ 222 2 852 -- -- -- -- 854
Option grants to non-employees .. -- -- 127 (127) -- -- -- --
Payment of stockholders
receivable .................... -- -- -- -- -- 133 -- 133
Foreign currency translation
adjustment .................... -- -- -- -- (435) -- -- (435)
Costs associated with sale of
common stock .................. -- -- (193) -- -- -- -- (193)
-------- -------- -------- -------- ------ ------ -------- --------
Balance, December 31, 1998 ...... 16,694 $ 167 $ 35,729 $ (173) $ (435) $ -- $ 160 $ 35,448
======== ======== ======== ======== ====== ====== ======== ========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
26
<PAGE>
OAO TECHNOLOGY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF COMPANY AND CORPORATE ORGANIZATION
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 systems management, applications development and maintenance;
staffing augmentation services; enterprise resource planning, implementation and
training services, 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 Resource Planning; and Healthcare IT
Solutions.
The Company's business began in January 1993, as a separate business
division of OAO Corporation ("OAO"), an organization that provides 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 March 1996.
In April 1996, the Company was spun off from OAO.
Subsequently, on April 8, 1996, Safeguard Scientifics, Inc. ("Safeguard")
invested $5.0 million in the Company in exchange for 5.0 million shares of
common stock, which represented 50% of the common stock outstanding as of that
date.
The accompanying financial statements reflect the Company's operations
since its formation as a division of OAO. Prior to the spin-off and
recapitalization as a new company in April, 1996, the Company's financial
statements include allocations of indirect costs of OAO, primarily rent and
administrative costs, of approximately $484,000 for the year ended December 31,
1996. This allocation has been based on the relative sales and labor costs of
the Company as compared to the total sales and labor costs of OAO and its
subsidiaries. Such allocations were consistent with that required by the Defense
Contract Audit Agency in connection with the administration of OAO's U.S.
government contracts and are considered reasonable by management. In connection
with the spin-off and subsequent investment by Safeguard, certain obligations to
the Company from OAO as of the date of the spin-off, in the amount of $2.6
million were forgiven by the Company and treated as a distribution to OAO. This
transaction has been reflected in the accompanying financial statements as a
reduction of stockholders' equity at the date of the spin-off.
Subsequent to the spin-off in 1996, the Company was charged administrative
fees by OAO of approximately $600,000 through September 30, 1996, for
administration of the accounting and human resource functions. No additional
administrative fees for these specific services have been charged by OAO
subsequent to September 30, 1996. Such charges were negotiated with OAO based on
the charges for such services under the allocation methodology prior to the
spin-off and were considered reasonable by management.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. The accompanying consolidated financial
statements include the accounts of OAO Technology Solutions, Inc. and its wholly
owned subsidiaries: OAO Systems, Inc.; OAO HealthCare Solutions, Inc.; OAO
Services, Inc.; ETG, Inc.; DHR Technologies; OAO Canada, Ltd.; Canadian Network
Resources, Ltd.; Canadian Resources Management, Ltd.; OAO Brazil, LTDA; and OAO
UK Limited. All accounts of non-U.S. subsidiaries have been translated into U.S.
dollars and included in the consolidated financial statements. All intercompany
accounts and transactions have been eliminated.
Revenue Recognition. The Company provides services under contracts,
primarily to large commercial customers. Revenue for fixed-price contracts is
recorded on the basis of the estimated percentage of completion, based on costs
incurred as compared to estimated costs at completion of the services rendered.
27
<PAGE>
Revenues under time-and-materials contracts are recorded at the contracted rates
times the labor hours plus other direct costs as they are incurred. Losses, if
any, on all contracts are recognized as soon as they become known.
The Company accounts for software revenues in accordance with the American
Institute of Certified Public Accountants' ("AICPA") Statement of Position
("SOP") 97-2, "Software Revenue Recognition." Revenues earned under software
license agreements with end users are generally recognized when the software has
been delivered and accepted by the customer, persuasive evidence of a
contractual arrangement exists, the Company's fee is fixed or determinable, and
collectibility is probable.
Cash and Cash Equivalents. The Company considers all securities with a
remaining maturity of three months or less at the date of purchase to be cash
equivalents. At December 31, 1998 and 1997, the Company's cash equivalents
consisted of overnight reverse repurchase agreements and demand deposits.
Property and Equipment. Property and equipment is recorded at cost. The
cost of office furniture, computer and office equipment, and purchased software
is depreciated from the date of installation using the straight-line method over
the estimated useful lives of the assets, which range from three to five years.
Included in property and equipment are leasehold improvements and leased
equipment, which are depreciated using the straight-line method over the shorter
of their estimated useful lives or the term of the related leases. Software
development costs incurred for products to be used internally are capitalized
and are amortized on a straight-line basis over five years. Amortization of
these costs begins upon completion of software.
Unearned Revenue. Unearned revenue at December 31, 1998 and 1997 represents
prepayment for purchases of services that had not been rendered as of the
respective dates.
Income Taxes. The provision for income taxes includes federal and state
income taxes currently payable plus the net change during the year in the
deferred tax liability or asset. The current or deferred tax consequences of all
events that have been recognized in the financial statements are measured based
on provisions of enacted tax law to determine the amount of taxes payable or
refundable in future periods.
Foreign Currency Translation. The assets and liabilities of the Company's
foreign subsidiaries whose functional currency is other than the U.S. dollar are
translated at the exchange rates in effect on the reporting date, and income and
expenses are translated at the weighted average exchange rate during the period.
Translation gains or losses are included as a component of stockholders' equity.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Evaluation of Long-Lived Assets. In accordance with the Statement of
Financial Accounting Standard ("SFAS"), No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be disposed of," the Company
evaluates the potential impairment of long-lived assets, including goodwill,
based on the projection of undiscounted cash flows whenever events or changes in
circumstances indicated that the carrying amount of an asset may not be fully
recoverable. Management believes no material impairment of these assets exists
at December 31, 1998.
Concentration of Risk. The Company's largest customer accounted for
approximately 67.0%, 66.2%, and 82.2% of total revenues for the years ended
December 31, 1998, 1997, and 1996, respectively. In addition, one other customer
accounted for approximately 23.4%, 24.1%, and 11.4% of total revenues for the
years ended December 31, 1998, 1997 and 1996, respectively.
Financial instruments that potentially subject the Company to concentration
of credit risk principally consist of accounts receivable and cash equivalents.
The Company's largest customer accounted for approximately 53.7% and 30.1% of
accounts receivable as of December 31, 1998 and 1997, respectively. In addition,
other customers with balances in excess of 10.0% accounted for approximately
30.7% and 46.0% of
28
<PAGE>
accounts receivable as of December 31, 1998 and 1997, respectively. The Company
performs ongoing credit evaluations of its customers, but generally does not
require collateral to support customer receivables.
The Company has investments in overnight reverse repurchase agreements with
a commercial bank. As of December 31, 1998 and 1997, the Company had invested
approximately $6.0 and $20.9 million in overnight reverse repurchase agreements
with this bank. The bank provides underlying collateral consisting of U.S.
government securities which fully secures the carrying value of the reverse
repurchase agreements. Because the transactions are entered into and settled
daily, management believes that the risk of market value impairment on a given
day is nominal.
Stock-Based Compensation. In 1996, the Company adopted the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation." As permitted under this Statement, the Company
continues to follow the accounting provisions of Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issue to Employees" for the
recognition and measurement of employee stock-based compensation and therefore
provides only the disclosures required under SFAS No. 123, using the intrinsic
method prescribed in APB Opinion No. 25, compensation costs are measured as the
excess, if any, of the quoted market price of the Company's stock at the date of
grant over the amount an employee must pay to acquire the stock.
Reclassifications. Certain amounts previously reported in the consolidated
financial statements have been reclassified to conform to current year
presentation.
3. ACQUISITIONS
OAO HealthCare Solutions, Inc. Acquisition
In November 1997, the Company acquired certain assets of UniHealth
Investment Company, a division of UniHealth, Inc., for approximately $398,000 in
cash. This division produces a software product named MC400 which assists
managed care organizations in the administration of benefits structures and
provider contracts. This acquisition has been accounted for under the purchase
method of accounting, and accordingly, the results of operations of the acquired
division have been included in the consolidated financial statements from the
date of acquisition. The purchase price was allocated based on the fair value of
the acquired assets and assumed liabilities at the date of acquisition. The
purchase resulted in an excess of purchase price over net assets acquired of
approximately $340,000, which is being amortized on a straight-line basis over
seven years. Pro forma information related to this acquisition is not included
herein as the acquisition was not material.
DHR Technologies Acquisition
On April 2, 1998, the Company acquired certain assets and liabilities of
DHR Technologies, Inc. ("DHR") for approximately $1.1 million in cash. DHR, a
Maryland-based information technology services company and software developer,
provided 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 has been
accounted for under the purchase method of accounting; thus, the results of
operations of the acquired company have been included in the consolidated
financial statement from the date of acquisition. The purchase price was
allocated based on the fair value of the assets acquired, including among other
assets approximately $162,000 of cash, and the liabilities assumed at the date
of acquisition. The purchase resulted in an excess of purchase price over net
liabilities acquired of approximately $1.5 million, which is being amortized on
a straight-line basis over seven years. Pro forma information related to this
acquisition is not included herein as the acquisition was not material.
29
<PAGE>
OAO Services, Inc. Acquisition
On July 24, 1998, the Company completed the acquisition of all of 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 and an
individual shareholder (the individual shareholder together with OAO, 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 OAO), 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.
Also on July 24, 1998, in connection with the acquisition of OAO Services,
OAOT entered into an Administrative Services Agreement with OAO, under which OAO
will provide OAO Services with administrative support services through the
earlier of the date that OAOT determines, in its sole discretion, that it no
longer requires such services, or December 31, 1998. In consideration for
providing such services, OAOT will pay to OAO $100,000 per month. During the
twelve-month period ended December 31, 1998, the Company incurred $364,000 of
costs under this agreement.
Also, in connection with its purchase of OAO Services, Inc. from OAO, the
Company loaned OAO approximately $2.5 million. The Company entered into a
promissory note from OAO for this amount bearing interest at prime plus 2.0% due
December 1, 1999. The note is guaranteed by an individual, who is the Chairman
of the Board of Directors and Chief Executive Officer of OAO, holder of 95% of
OAO's outstanding shares of capital stock, the Vice Chairman of the Board of
Directors of the Company, and owner of approximately 20.0% of the outstanding
shares of common stock of the Company, has pledged as security approximately 1.3
million of the shares of the Company's stock, currently valued at approximately
$3.9 million.
The total purchase price of $2,305,000 consisted of a cash payment of
$2,195,000 and other non-cash consideration of $110,000. The acquisition has
been accounted for under the purchase method of accounting, and accordingly, the
results of operations of OAO Services have been included in the consolidated
financial statements from the date of acquisition. The purchase price was
allocated to the net assets and liabilities acquired based on their estimated
fair values at the date of acquisition as follows:
Receivables $10,268,000
Property and equipment 180,000
Due from OAO Corp. 2,312,000
Other assets 31,000
Accounts payable (8,255,000)
Accrued expenses (1,071,000)
Note payable (3,465,000)
Excess of purchase price over net assets 2,305,000
-----------
Purchase price $ 2,305,000
===========
The purchase resulted in an excess of purchase price over net assets
acquired of approximately $2.3 million, which is being amortized on a
straight-line basis over ten years.
30
<PAGE>
The unaudited pro forma information for the periods set forth below give
effect to the OAO Services acquisition as if it had occurred at the beginning of
each 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 (unaudited, dollars in thousands).
Year Ended Year Ended
December 31, 1998 December 31, 1997
----------------- -----------------
Revenue $142,140 $146,312
Net (loss) income (2,986) 3,018
Basic (loss) earnings per share (0.18) 0.28
Diluted (loss) earnings per share (0.18) 0.27
ETG, Inc. Acquisition
Effective November 1, 1998, the Company entered into an agreement and plan
of merger with ETG Acquisition Corporation, a wholly owned subsidiary of the
Company with Enterprise Technology Group, Inc., a Delaware corporation ("ETG")
and ETG's three shareholders. In accordance with the agreement, ETG was merged
with ETG Acquisition Corporation, with ETG Acquisition Corporation continuing on
as the surviving corporation. By virtue of merger, the name of the surviving
corporation was changed to Enterprise Technology Group, Inc.
Pursuant to the agreement and plan of merger the ETG shareholders exchanged
all of the issued and outstanding stock of ETG, consisting of 1,000 shares of
Common Stock, par value $.10 per share for 222,222 shares of Common Stock, par
value $.01 per share of the Company. The ETG shareholders were granted certain
"piggyback" registration rights whereby under certain circumstances, and subject
to certain conditions, they may include these shares of OAOT Common Stock in any
registration of shares of OAOT Common Stock. The Company's Chief Executive
Officer was one of the ETG selling shareholders, and exchanged 500 shares of ETG
common stock he owned for 111,111 shares of the Company's Common Stock. The
Company, prior to the merger, provided ETG interest free advances totaling
approximately $216,000. Additionally at closing, the Company repaid ETG's
shareholder loans of approximately $109,000.
The acquisition has been accounted for under the purchase method of
accounting, thus the results of operations of the acquired company have been
included in the consolidated financial statements from the date of acquisition.
The purchase price was allocated based on the fair value of the assets acquired,
including approximately $28,000 of cash, and the liabilities assumed at the date
of acquisition. The purchase resulted in an excess of purchase price over net
assets acquired of approximately $1.0 million, which is being amortized on a
straight-line basis over 7 years. Pro forma information related to this
acquisition is not included herein as the acquisition was not material.
4. NET INCOME PER COMMON SHARE
Calculation of basic and diluted net income per common share for the year
ended December 31, 1996, is on a pro forma basis based upon operations for the
period, assuming the incorporation, spin-off and the issuance of the common
stock all took place on January 1, 1996. For the year ended December 31, 1998,
the Company had a loss, thus the 816,000 shares from the exercise of stock
options were anti-dilutive, and basic and diluted earnings per share are the
same. For the year ended December 31, 1997, the weighted average number of
shares outstanding for the calculation of diluted net income per common share
includes 604,000 shares from the exercise of employee stock options.
Options to purchase approximately 315,000 and 364,000 shares of common
stock at $8.50 and $5.10, respectively, were outstanding during 1998 and 1997
but were not included in the computation of diluted net income per common share
because the options' exercise prices were greater than the average market price
of the common share.
31
<PAGE>
5. RECENT AUTHORITATIVE PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The statement
requires companies to recognize all derivatives as either assets or liabilities,
with the instruments measured at fair value. The accounting for changes in fair
value and gains and losses depends on the intended use of the derivative and its
resulting designation. The statement is effective for fiscal years beginning
after June 15, 1999. The Company will adopt SFAS No. 133 in the first quarter of
2000. The Company is evaluating the effect that implementation of SFAS No. 133
will have on its consolidated financial statements.
6. COMPREHENSIVE (LOSS) INCOME
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income." The statement established rules for the reporting of comprehensive
income and its components. 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 (loss) other than net income is from foreign currency
translation adjustments. The adoption of SFAS No. 130 had no impact on total
stockholders' equity. Prior years' financial statements have been reclassified
to conform to the SFAS No. 130 requirements. There were no adjustments to net
income to arrive at comprehensive income for the years ended December 31, 1997
and 1996.
7. UNBILLED ACCOUNTS RECEIVABLE
Unbilled accounts receivable include certain costs and a portion of the fee
and expected profit, which is billable upon completion of the contracts or the
completion of certain tasks under terms of the contracts. Additionally, the
Company receives requests to perform services on an as-needed basis and must
immediately respond to these requests; the administrative processing to create
the applicable purchase orders may occur after services have actually been
provided. Unbilled accounts receivable as of December 31, 1998 and 1997
consisted of the following (in thousands):
1998 1997
-------- --------
Amounts billable $ 8,208 6,202
Amounts billable subject to the completion of
contract milestones 1,464 541
Amounts billable pending receipt of contractual
documents authorizing billing 2,120 2,896
-------- --------
Allowance for doubtful accounts (710) (239)
-------- --------
Total unbilled receivables $ 11,082 $ 9,400
======== ========
During 1998, the Company took provisions for uncollectible accounts related to
certain billed and unbilled receivables totaling approximately $4.2 million.
32
<PAGE>
8. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1998 and 1997 consisted of the
following (in thousands):
1998 1997
------- -------
Furniture and equipment $ 3,394 $ 2,230
Leasehold improvements 323 308
Capitalized software 2,031 2,921
------- -------
5,748 5,459
Less accumulated depreciation and amortization (1,741) (848)
------- -------
Net property and equipment $ 4,007 $ 4,611
======= =======
The Company leases furniture, equipment and automobiles, and financed
certain leasehold improvements under capital leases. The capitalized costs and
related accumulated amortization, included in the amounts above, at December 31,
1998 and 1997 are (in thousands):
1998 1997
------- -------
Furniture and equipment $ 772 $ 1,032
Leasehold improvements 205 205
Capitalized software 814 814
------- -------
1,791 2,051
Less accumulated depreciation and amortization (386) (319)
------- -------
Net leased property and equipment $ 1,405 $ 1,732
======= =======
9. ACCRUED EXPENSES
Accrued expenses at December 31, 1998 and 1997 consisted of the following
(in thousands):
1998 1997
------ ------
Accrued salaries, bonuses, and other employee benefits $3,612 $2,406
Payroll taxes and amounts withheld from employees 1,226 801
Other accrued foreign taxes 72 382
Accrued equipment purchases -- 577
Accrued severance 594 --
Accrued subcontractor and professional fees 1,991 917
Other 266 637
------ ------
Total accrued expenses $7,761 $5,720
====== ======
10. 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. Amounts available under the agreement based on
eligible receivables as of December 31, 1998 was approximately $9.0 million. The
Agreement also requires the maintenance of certain financial covenants and
prohibits the payment of dividends. The Company was not in compliance with
certain covenants as of December 31, 1998; however, the Company has
33
<PAGE>
obtained waivers and the Bank has agreed to new terms, including new covenants,
subject to formal documentation between the Bank and the Company. There were no
borrowings outstanding under the Agreement and the Line as of December 31, 1998
and 1997.
11. CAPITAL LEASE OBLIGATIONS
Capital lease obligations as of December 31, 1998 and 1997 consisted of the
following (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Capital lease obligations bearing interest at 5.00% to 11.72%, aggregate monthly
payments of approximately $44,000 and $53,000, respectively $ 883 $ 1,435
Less current portion of capital lease obligations (436) (552)
------- -------
Long term portion of capital lease obligations $ 447 $ 883
======= =======
</TABLE>
Future payments under the capital lease obligations are summarized below (in
thousands):
Capital
Year ended December 31, Leases
--------
1999 $ 517
2000 354
2001 60
2002 47
2003 36
-------
Total capital lease obligations $ 1,014
Less amounts representing interest (131)
-------
Total capital lease obligations $ 883
=======
12. RESTRUCTURING AND OTHER CHARGES
During 1998, in connection with management plans to reduce costs and
improve operating efficiencies, the Company recorded pre-tax restructuring
charges of approximately $1,035,000. The restructuring costs relate primarily to
involuntary employee termination benefits. Employee termination benefits include
severance, wage continuation, outplacement services and other benefits. All of
the thirteen terminated employees were notified of their termination and the
terms and condition for their severance in writing. Although some of the
severance payments are being made in equal semi-monthly amounts up to a twelve
month period of the time, the terminated employee is not obligated to provide
services after the date of termination. As of December 31,1998, approximately
$594,000 was recorded in accrued expenses.
During 1997, the Company began implementation of an enterprise wide
financial management project. The program included modules for general ledger,
accounts receivable, accounts payable, project accounting and human resources.
During the third quarter of 1998, due to significant cost overruns and project
definition changes, the Company hired an outside consultant to review the status
of this project. Based on this review, the Company has completely abandoned the
majority of the original software modules and the related implementation costs.
Except for the human resources module, none of the remaining modules had been
implemented, and all the related implementation software documentation for these
abandoned modules have been discarded. As a result, the Company recorded a
write-off of approximately $2.1 million related to this abandonment.
13. STOCKHOLDERS' EQUITY
During 1997, the Board of Directors approved an increase in the number of
authorized shares of common stock to 25.0 million shares, a par value of $0.01
per share, and a split of all shares of common stock at a ratio of
34
<PAGE>
1.6667 to one. All share amounts have been restated to give effect to the stock
split. In addition, the Board authorized the issuance of 5.0 million shares of
preferred stock, none of which have been issued.
In 1996, the Company adopted the 1996 Equity Compensation Plan (the "Plan")
under which the Company is authorized to grant stock options to employees,
officers, directors, and consultants. The Plan provides for the issuance of up
to 3.2 million shares of common stock pursuant to the grant of incentive stock
options, nonqualified stock options, stock appreciation rights, and restricted
stock awards for a maximum of 1.6 million shares of common stock in any one
year. Generally, these options vest ratably over a four or five year period and
expire six to ten years after the date of grant. The exercise price of options
granted under the Plan is equal to the estimated fair market value on the date
of grant. The Company accounts for employee options under APB Opinion No. 25,
under which no compensation cost has been recognized. Pursuant to SFAS No. 123,
the Company recognized approximately $25,000 and $19,000 of compensation expense
on options granted to non-employees for the years ended December 31, 1998 and
1997, respectively.
A summary of the status of the Company's stock option plan at December 31,
1998, 1997 and 1996 changes during the years then ended is presented below.
Number Weighted-
of Exercise Average
Option Price Exercise
Shares Per Share Price
--------- ----------- ----------
Outstanding, December 31, 1995 -- -- --
Granted 1,133,333 $2.00-$2.40 $2.02
Canceled (16,667) 2.00 2.00
Exercised -- -- --
---------- ----------- -----
Outstanding, December 31, 1996 1,116,666 $2.00-$2.40 $2.02
Granted 505,083 2.40-5.10 4.74
Canceled (66,223) 2.00-2.40 2.01
Exercised (50,050) 2.00 2.00
---------- ----------- -----
Outstanding, December 31, 1997 1,505,476 $2.00-$5.10 $2.93
Granted 2,942,865 3.50-8.50 5.53
Canceled (1,512,849) 2.00-8.50 6.01
Exercised (186,790) 2.00-5.10 2.63
---------- ----------- -----
Outstanding, December 31, 1998 2,748,702 $2.00-$8.50 $4.04
========== =========== =====
For the year ended December 31, 1998, 800,366 incentive stock options with
exercise prices ranging from $4.63 to $8.50 were repriced to $3.50. These
options are included in amounts granted and cancelled in 1998.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ---------------------------------------------------------------------- ----------------------------
Number Weighted Number
Range Outstanding Average Weighted Exercisable Weighted
of at Remaining Average At Average
Exercise December 31, Contractual Exercise December 31, Exercise
Prices 1998 Life (in years) Price 1998 Price
- ----------- ------------ --------------- -------- ------------ --------
<S> <C> <C> <C> <C> <C>
$2.00-$2.40 626,378 5.96 $2.03 315,645 $2.02
3.50-3.63 1,312,699 5.53 3.55 28,337 3.50
4.63-4.75 105,708 2.10 4.75 89,916 4.75
5.00-5.13 333,917 5.09 5.09 236,424 5.10
5.63 55,000 5.38 5.63 -- --
8.50 315,000 5.11 8.50 -- --
- ----------- --------- ---- ----- ------- -----
$2.00-$8.50 2,748,702 5.39 $4.04 670,322 $3.53
=========== ========= ==== ===== ======= =====
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ---------------------------------------------------------------------- ----------------------------
Number Weighted Number
Range Outstanding Average Weighted Exercisable Weighted
of at Remaining Average At Average
Exercise December 31, Contractual Exercise December 31, Exercise
Prices 1997 Life (in years) Price 1997 Price
- ----------- ------------ --------------- -------- ------------ --------
<S> <C> <C> <C> <C> <C>
$2.00-$2.40 1,064,559 4.44 $2.04 306,689 $2.02
5.00- 5.10 440,917 6.09 5.08 243,415 5.09
- ----------- --------- ---- ----- ------- -----
$2.00-$5.10 1,505,476 4.92 $2.93 550,104 $3.58
=========== ========= ==== ===== ======= =====
</TABLE>
As of December 31, 1998 and 1997, 670,322 and 550,104 options,
respectively, were exercisable with a weighted average exercise price of $3.53
and $3.58 respectively. As of December 31, 1998 and 1997, approximately 200,000
and 1.2 million options were available for grant, respectively.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1998, 1997 and 1996, respectively: risk-free
interest rates of 5.17, 6.15 and 5.94 percent; no expected dividend yields; and
expected lives of 5.00, 3.83 and 6.00 years, respectively. In 1998, the expected
volatility was 55%. As no grants were made in 1997 subsequent to the Company's
Offering, no volatility was considered in the calculation for 1997 or 1996.
Using these assumptions, the fair value of the stock options granted in 1998,
1997 and 1996 on a per share, weighted average basis was $2.58, $0.96 and $1.02,
respectively, which would be amortized as compensation expense over the vesting
period of the options.
Had compensation cost for these plans been recognized under SFAS No. 123,
the Company's net income and earnings per share would have been reduced to the
following pro forma amounts (in thousands, except per share data).
1998 1997 1996
---- ---- ----
Net (loss) income:
As reported $(3,498) $2,868 $1,810
Pro forma $(4,563) $2,663 $1,647
Basic net (loss) income per common share:
As reported $ (0.21) $ 0.27 $ 0.18
Pro forma $ (0.28) $ 0.25 $ 0.16
Diluted net (loss) income per common share:
As reported $ (0.21) $ 0.26 $ 0.17
Pro forma $ (0.28) $ 0.24 $ 0.16
36
<PAGE>
14. INCOME TAXES
The Company's provision for income taxes for the years ended December 31,
1998, 1997 and 1996, consisted of the following (in thousands):
1998 1997 1996
------- ------- -------
Current - Federal $ (134) $ 829 $ 1,006
- Foreign (410) 481 --
- State (6) 136 220
------- ------- -------
Total current (benefit) provision (550) 1,446 1,226
------- ------- -------
Deferred - Federal (1,153) 411 68
- State (178) 55 21
------- ------- -------
Total deferred (benefit) provision (1,331) 466 89
------- ------- -------
Total (benefit) provision $(1,881) $ 1,912 $ 1,315
======= ======= =======
The provision for income taxes differs from the amount computed by applying
the statutory federal income tax rate as follows:
1998 1997 1996
---- ---- ----
Expected statutory amount 34.0% 34.0% 34.0%
Nondeductible expenses 1.3 1.4 2.0
State income taxes, net of federal benefit 1.5 4.6 4.6
Other (1.8) -- 1.5
---- ---- ----
Effective rate 35.0% 40.0% 42.1%
==== ==== ====
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and amounts used for income tax purposes.
The tax effect of significant temporary differences that comprise the
deferred tax assets and liabilities at December 31, 1998 and 1997 are as follows
(in thousands):
1998 1997
------- -------
Deferred tax assets:
Bad debt 974 --
Accrued employee benefits 100 25
Goodwill 94 --
Severance 59 --
Depreciation 29 --
------- -------
Total deferred tax assets 1,256 25
Deferred tax liabilities: (120) (139)
------- -------
Net deferred tax assets (liabilities) $ 1,136 $ (114)
======= =======
37
<PAGE>
15. EMPLOYEE BENEFIT PLANS
Effective September 30, 1996, the Company established a 401(k) Plan, the
OAO International Corporation Employee Savings Plan (the "401(k) Plan"). The
401(k) Plan covers substantially all of the Company's U.S. employees.
Participants may contribute to the Plan an amount between 1% and 15% of their
total annual compensation. The Company makes matching contributions of 20% of
each participant's contributions up to 10%. Company matching contributions
amounted to approximately $586,000, $353,000, and $201,000 in 1998, 1997, and
1996 respectively.
Effective January 16, 1995, the Company established the OAO Canada Limited
Employee Retirement Savings Plan (the "RRSP Plan"). The RRSP Plan covers
substantially all of the Company's Canadian employees. Participants may
contribute to the Plan an amount between 1% and 18% of their total annual
compensation. The Company makes matching contributions of 50% of each
participant's contributions up to 5%. Company matching contributions amounted to
approximately $102,000, $103,000 and $71,000 in 1998, 1997, and 1996
respectively.
The Company's Board of Directors adopted, and the Company's Shareholders
approved, the Company's Employee Stock Purchase Plan on May 21, 1998, with a
total of 1,000,000 shares reserved for issuance thereunder. No shares were
issued in 1998.
16. SEGMENT AND GEOGRAPHIC AREA 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 ERP.
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. OAO Services, Inc. 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.
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 Resource Planning provides entire life cycle services for
organizations using ERP software. These services range from initial business
process modeling and development, through system installation and
implementation. The Company's ERP service line is dedicated to implementing and
supporting systems from both SAP-AG and Microsoft.
The accounting policies of the various segments are the same as those
described in the "Summary of Significant Accounting Policies," Note 1. The
Company evaluates the performance of each segment based on segment revenues and
gross profit. Segment gross profit includes only direct costs. Sales, general
and administrative costs are currently not allocated to each segment.
38
<PAGE>
Summary information by segment as of and for the years ended December 31,
1998, 1997 and 1996 is as follows (in thousands):
1998 1997 1996
---- ---- ----
MANAGED SERVICES
Revenues $ 72,800 $ 76,729 $ 55,217
Gross profit 12,344 15,768 13,180
Segment assets 24,633 39,351 10,806
STAFF AUGMENTATION
Revenues 30,461 4,185 1,557
Gross profit 3,997 1,216 17
Segment assets 12,981 2,399 377
ERP
Revenues 1,821 -- --
Gross profit (loss) (1,446) -- --
Segment assets 3,068 -- --
HEALTHCARE IT SOLUTIONS
Revenues 8,260 3,752 1,117
Gross profit 1,342 1,800 798
Segment assets 2,556 5,250 577
SEGMENT TOTALS
Revenues $ 113,342 $ 84,666 $ 57,891
Gross Profit 16,237 18,784 13,995
Segment assets 43,238 47,000 11,760
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 and
expense are not allocated to segments.
<TABLE>
<CAPTION>
For the years ended December 31,
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Gross profit for reportable segments $ 16,237 $ 18,784 $ 13,995
Selling, general and administrative expenses unallocated 19,100 13,551 10,824
Restructuring and other charges unallocated 3,135 -- --
-------- -------- --------
Total consolidated (loss) income from operations (5,998) 5,233 3,171
-------- -------- --------
Interest and other (income) expense unallocated (619) 453 46
-------- -------- --------
Total consolidated (loss) income before income taxes $ (5,379) $ 4,780 $ 3,125
======== ======== ========
Total assets for reportable segments $ 43,238 $ 47,000 $ 11,760
Note receivable - OAO Corporation 2,520 -- --
Property and equipment unallocated 2,887 3,342 709
Deferred income taxes unallocated 2,473 -- 359
-------- -------- --------
Total consolidated assets $ 51,118 $ 50,342 $ 12,828
======== ======== ========
</TABLE>
39
<PAGE>
The Company generated substantially all of its revenues in the United
States and Canada during the three years ended December 31, 1998. The following
represents a summary of information by geographic area (in thousands):
<TABLE>
<CAPTION>
For the years ended December 31,
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
United States $ 93,066 $ 64,080 $ 51,000
Canada 20,193 20,421 6,891
Other consolidated entities 83 165 --
--------- --------- ---------
$ 113,342 $ 84,666 $ 57,891
--------- --------- ---------
(Loss) income before income taxes:
United States $ (4,435) $ 5,011 $ 5,682
Canada (964) 1,501 228
Other consolidated entities 20 (1,732) (2,785)
--------- --------- ---------
$ (5,379) $ 4,780 $ 3,125
--------- --------- ---------
Identifiable assets:
United States $ 46,879 $ 47,413 $ 12,733
Canada 5,258 3,798 2,473
Eliminations and other consolidated entities (1,019) (869) (2,378)
--------- --------- ---------
$ 51,118 $ 50,342 $ 12,828
--------- --------- ---------
</TABLE>
Sales between geographic areas are not material. Costs related to business
development in international locations other than Canada of approximately $1.8
million have been included in "Other Consolidated Entities" for the year ended
December 31, 1997. Identifiable assets are those assets used in the operations
in each geographic area.
17. RELATED PARTY TRANSACTIONS
At the date of its investment in the Company, April 8, 1996 (Note 1),
Safeguard paid $5.0 million to OAO Services, Inc. ("Services") in return for a
grant by Services to the Company of an option to purchase at anytime through
April 8, 2000, all of the shares of common stock of Services at an exercise
price based on revenues and earnings levels of Services for the 12 months prior
to the date of exercise.
Pursuant to the terms of an agreement dated July 11, 1997, the Services'
option was canceled in consideration of the right granted to the Company and
Safeguard to receive certain future payments in the event of any sale of OAO and
Services or any public offering by OAO which occurs prior to April 8, 2000. In
each instance, the minimum amount to be received by the Company would be
$500,000, with the potential for a higher amount based on the value of the
transaction.
The Company has entered into an administrative services agreement with
Safeguard, which provides for payment of a maximum administrative fee of 1.0% of
gross revenues per year, not to exceed $125,000 for the six months ended
September 30, 1996, and $500,000 per year thereafter. The Company expensed an
administrative fee of $500,000, $500,000 and $250,000 to operations for the
years ended December 31, 1998, 1997 and 1996, respectively, in connection with
this agreement. In addition to the administrative fee the Company has reimbursed
travel expenses and paid other professional services pass through fees of
$160,000, $76,000, and none for the years ended December 31, 1998, 1997 and
1996, respectively.
Prior to the July 1998 acquisition of OAO Services, the Company and OAO
Services, a subsidiary of OAO, were related parties, as a common group of
shareholders held a substantial ownership interest in both companies. During the
first half of 1998, and for the years ended December 31, 1997 and 1996, the
Company served as a subcontractor on several contracts with OAO Services. Total
revenues recorded under these contracts amounted to $494,000, $4.2 million and
$1.6 million, for the six month period ended June 30, 1998, and the years ended
December 31, 1997 and 1996, respectively. As of December 31, 1997 and 1996, the
Company had $1.9
40
<PAGE>
million and $764,000 of billed receivables and $502,000 and $297,000 of unbilled
receivables, respectively, which were due from OAO Services. All intercompany
receivables as of December 31, 1998 have been eliminated.
During 1998 and 1997, the Company served as a subcontractor on several
contracts with OAO. Revenues under these contracts totaled $291,000 and $299,000
for the years ended December 31, 1998 and 1997, respectively. In addition to the
$2.5 million note receivable, the Company had $298,000 in billed receivables due
from OAO as of December 31, 1998 and $159,000 in billed receivables as of
December 31, 1997. The Company had no unbilled receivables due from OAO as of
December 31, 1998 and $139,000 as of December 31, 1997.
In connection with the acquisition of ETG, the ETG shareholders, including
the Company's Chief Executive Officer, were granted certain "piggyback"
registration rights whereby under certain circumstances, and subject to certain
conditions, they may include these shares of OAOT Common Stock in any
registration of shares of OAOT Common Stock. The Company's Chief Executive
Officer as one of the ETG selling shareholders, received 111,111 shares of the
Company's Common Stock, in exchange for his 500 shares of ETG Common Stock. The
Company, prior to the merger, provided ETG interest free advances totaling
approximately $216,000. Additionally at closing, the Company repaid ETG's
shareholder loans of approximately $109,000.
18. COMMITMENTS AND CONTINGENCIES
The Company has entered into long-term lease agreements for office space
and equipment. The minimum fixed rental commitments related to all
non-cancelable operating leases are approximately as follows (in thousands):
Operating
Year ended December 31, Leases
- ----------------------- ------
1999 $1,187
2000 608
2001 421
2002 361
2003 355
------
Total minimum lease payments $2,932
======
A number of these leases have escalation clauses for increases in real
estate taxes, operating costs, and inflation and provide various renewal options
up to five years. Rent expense for the years ended December 31, 1998, 1997 and
1996, approximated $1,297,000, $821,000, and $355,000, respectively.
The Company is involved in various litigation arising in the normal course
of business. In management's opinion, the Company's ultimate liability or loss,
if any, resulting from this litigation will not have a material adverse effect
on the accompanying financial statements.
41
<PAGE>
19. QUARTERLY FINANCIAL DATA (UNAUDITED)
Set forth below are selected unaudited financial statements of operations
for the last eight fiscal quarters of the Company. In Management's opinion, the
results below have been prepared on the same basis as the audited financial
statements contained herein and include all material adjustments, consisting of
only normal recurring adjustments, necessary for a fair presentation of the
information for the periods. Results of any one or more quarters are not
necessarily indicative of annual results or continuing trends.
<TABLE>
<CAPTION>
1998 Quarters Ended
-------------------------------------------------------------
(In thousands, except per share data) March 31, June 30, Sept. 30, Dec. 31,
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $ 23,006 $ 20,340 $ 34,520 $ 35,476
Income (loss) from operations 879 (4,374) (3,152) 649
Income (loss) before income taxes 1,065 (4,179) (3,018) 753
Net income (loss) $ 638 $ (2,672) $ (1,972) $ 508
Net income (loss) per common share:
Basic $ 0.04 $ (0.16) $ (0.12) $ 0.03
Diluted $ 0.04 $ (0.16) $ (0.12) $ 0.03
Weighted average number of shares outstanding:
Basic 16,299 16,392 16,430 16,610
Diluted 17,175 16,392 16,430 16,997
<CAPTION>
1997 Quarters Ended
-------------------------------------------------------------
(In thousands, except per share data) March 31, June 30, Sept. 30, Dec. 31,
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $ 19,161 $ 20,177 $ 20,618 $ 24,710
Income from operations 1,022 1,228 1,341 1,642
Income before income taxes 1,017 1,146 1,235 1,382
Net income $ 584 $ 648 $ 716 $ 920
Net income per common share:
Basic $ 0.06 $ 0.06 $ 0.07 $ 0.08
Diluted $ 0.06 $ 0.06 $ 0.07 $ 0.07
Weighted average number of shares outstanding:
Basic 10,000 10,000 10,001 11,719
Diluted 10,183 10,187 10,489 12,463
</TABLE>
Earnings per share calculations for each of the quarters are based on weighted
average number of shares outstanding in each period. Diluted earnings per share
calculations adjust net earnings for the dilutive effect of common stock
equivalents. Therefore, the sum of the quarters may not necessarily equal the
year-to-date earnings per share.
42
<PAGE>
<TABLE>
<CAPTION>
OAO TECHNOLOGY SOLUTIONS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 1998, 1997 and 1996
Additions
-------------------------
Balance Charges
at to costs Charges to
beginning and other Deductions Write- Balance at
(In thousands) of year expenses accounts(B) (C) Offs(D) end of year
--------- -------- ----------- ---------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
Allowance for uncollectible
accounts (A)
Year ended December 31, 1996 -- -- 400 -- 400
Year ended December 31, 1997 400 50 (161) 289
Year ended December 31, 1998 289 4,227 175 (239) (2,783) 1,669
</TABLE>
(A) Reflected on the Balance Sheet as a reduction of Accounts Receivable.
(B) Provided as a reduction of revenue for the year ended December 31, 1996.
Provided as a reduction of accounts receivable purchased in the acquisition
of certain assets of UniHealth Investment Company (see Note 3 in the Notes
to Consolidated Financial Statements) for the year ended December 31, 1997.
Provided as a reduction of accounts receivable purchased in acquisition of
certain assets of OAO Services, Inc. for the year ended December 31, 1998.
(C) Provided as a recovery of revenue.
(D) Reduced accounts receivable and allowance for uncollectible items.
43
<PAGE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item is incorporated by reference to the
sections of the Registrant's definitive Proxy Statement for the Annual Meeting
of Stockholders to be held on May 14, 1999 (the "Proxy Statement"), entitled
"Election of Directors - Nominees," "Executive Officers" and "Common Stock
Ownership of Principal Stockholders and Management - Compliance with Section
16(a) Beneficial Ownership Reporting Compliance," to be filed with the
Commission.
Item 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
sections of the Proxy Statement entitled "Election of Directors - Compensation
of Directors" and "Executive Compensation and Other Information," to be filed
with the Commission.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANGEMENT.
The information required by this Item is incorporated by reference to the
section of the Proxy Statement entitled "Common Stock Ownership of Principal
Stockholders and Management," to be filed with the Commission.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated by reference to the
sections of the Proxy Statement entitled "Election of Directors - Nominees" and
"Executive Compensation and Other Information - Compensation Committee
Interlocks and Insider Participation," to be filed with the Commission.
44
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>
Exhibit Page
No. Description No.
------- -------------------------------------------------------------------------------------- ----
<S> <C> <C>
3.1 Amended and Restated Certificate of Incorporation of the Company, as amended. (2)
3.2 Amended and Restated By-Laws of the Company. (2)
10.1 Conformed form of Vendor Agreement between the Company and Integrated Systems
Solutions Corporation, as amended. (2)
10.2 Basic Order Agreement between Digital Equipment Corporation and OAO Canada Limited/OAO
Technology Solutions, Inc. (2) (4)
10.3 Amended and Restated OAO Technology Solutions, Inc. 1996 Equity Compensation Plan. (2)
10.4 Employment Agreement between William R. Hill and the Company, dated
April 1, 1996. (2)
10.5 Employment Agreement between Gregory Pratt and Company dated June 1, 1998 (5)
10.6 Employment Agreement between Ron Branch and Company dated December 1, 1998 (1) 47
10.7 Stock Purchase Agreement, dated July 24, 1998, among the Company,
OAO Services, Inc., OAO Corporation and William Hill (3)
10.8 Registration Rights Agreement between Gregory Pratt and Company dated November 1, 55
1998 (1)
10.9 Agreement and Plan of Merger, dated as of November 1, 1998, among the Company, ETG 61
Acquisition Corporation, Enterprise Technology Group, Inc. and the shareholders of
Enterprise Technology Group, Inc. (1)
10.10 OAO Technology Solutions, Inc. Employee Stock Purchase Plan as of May 21, 1998 (6)
21.1 Subsidiaries of the Registrant. (1)
27.1 Financial Data Schedule. (1) 84
</TABLE>
(1) Filed herewith.
(2) Incorporated by reference to the Company's Registration Statement on Form
S-1 (Registration No. 333-00796) declared effective on October 22, 1997.
(3) Incorporated by reference to the Company's current report on Form 8-K,
filed on August 7, 1998.
(4) Confidential Treatment Requested. The entire agreement has been filed
separately with the Securities and Exchange Commission.
(5) Incorporated by reference to the Company's Form 10Q, filed on August 14,
1998.
(6) Incorporated by reference to the Company's Form S-8 to be filed on March
30, 1999.
45
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
OAO Technology Solutions, Inc.
March 12, 1999 By:_______________________________
Gregory Pratt
Chief Executive Officer
and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Chief Executive Officer,
- ------------------------------------ President and Director
Gregory Pratt (Principal Executive Officer) March 12, 1999
Acting Chief Financial Officer
and Treasurer (Principal
Financial and Accounting Officer)
Chairman of the Board of Directors
- ------------------------------------ Director March 12, 1999
Jerry L. Johnson
- ------------------------------------ Director March 12, 1999
Cecile D. Barker
- ------------------------------------ Director March 12, 1999
Thomas C. Lynch
- ------------------------------------ Director March 12, 1999
Frank B. Foster, III
- ------------------------------------ Director March 12, 1999
Yvonne Brathwaite Burke
- ------------------------------------ Director March 12, 1999
William R. Hill
- ------------------------------------ Director March 12, 1999
John Lehman
</TABLE>
46
EMPLOYMENT AGREEMENT
(Ronald A. Branch)
AGREEMENT, made as of this 1st day of December 1998, by and between OAO
Technology Solutions, Inc., 7500 Greenway Center Drive, 16th Floor, Greenbelt,
Maryland, a Delaware corporation (the "Corporation"), and Ronald A. Branch, 14
Ashton Drive, Voorhees, NJ 08043 ("Employee").
W I T N E S S E T H :
WHEREAS, the Corporation is engaged in the business of providing
information technology infrastructure solutions through a full range of
outsourcing, enterprise resource planning, staff augmentation, and healthcare
information technology solutions;
WHEREAS, the Corporation desires to employ Employee as Executive Vice
President of Marketing and Sales Operations of the Corporation in connection
with the conduct of the business of the Corporation, and Employee desires to
accept such employment on the terms and conditions herein set forth;
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements hereinafter set forth, the parties hereto, intending
legally to be bound, hereby agree as follows:
1. Employment. The Corporation hereby employs Employee as Executive Vice
President of Marketing and Sales Operations, and Employee hereby accepts such
employment, upon the terms and conditions hereinafter set forth.
2. Term. The Employment of Employee under this Agreement shall be on an "at
will" basis.
3. Office and Duties.
(a) During the term hereof, Employee shall serve as Executive Vice
President of Marketing and Sales Operations of the Corporation. Subject to
any restrictions set forth in the Shareholders' Agreement or in the Bylaws
of the Corporation, Employee shall perform such duties as are customary for
an Employee as Executive Vice President of Marketing and Sales Operations
of businesses in the United States similar in kind and size to the
Corporation and such other duties as may from time to time be assigned to
him by the President, the CEO or the Board of Directors of the Corporation
in keeping with his position.
(b) During the term hereof, Employee shall use his best efforts to
carry out his duties and responsibilities hereunder and devote his entire
working time to the business and affairs of the Corporation and shall not,
in any advisory or other capacity, work for any other individual, firm or
corporation without first having obtained the written consent of the
Corporation.
(c) During the term hereof, the principal place of employment of
Employee shall be the Corporation's headquarters in Greenbelt, Maryland or
such other locations as may be selected for the Corporation's facilities,
although it is understood that in connection with his duties under this
agreement, Employee will be required to travel to and perform services at
other locations.
(d) Employee represents and warrants to the Corporation that he is not
subject to, or a party to, any employment agreement, non-competition
covenant, non-disclosure agreement or other agreement, covenant,
understanding or restriction which would prohibit Employee from executing
this Agreement and performing fully his duties and responsibilities
hereunder, or which would in any manner, directly or indirectly, limit or
affect the duties and responsibilities which may now or in the future be
assigned to Employee by the Corporation.
(e) Employee agrees to cooperate at the request of the Corporation in
any efforts to obtain "key-man" life insurance on Employee's life.
47
<PAGE>
4. Compensation. As compensation for the services to be rendered hereunder
by Employee, the Corporation agrees to pay or provide to Employee:
(a) Salary. A basic salary (the "Base Salary") for such services at
the annual rate of $250,000, payable in semi-monthly installments.
(b) Bonus. Employee shall be eligible to earn an incentive bonus of up
to 100% of the base salary, subject to the achievement of certain company
and individual milestones determined annually by the Compensation Committee
of the Board of Directors.
(c) Options. Upon execution of this Agreement and subject to Board
Approval, the Corporation shall grant to Employee stock options of the
Corporation equal to 500,000 shares. Stock options will be governed by the
Corporation's 1996 Equity Compensation Plan, as amended and restated. The
option will become exercisable for the purchase of the shares in equal
increments on each of the first four (4) anniversaries of the date of
grant, and will expire on the earlier of the sixth (6th) anniversary of the
date of grant or: (i) immediately upon Employee's voluntary termination of
employment with the Corporation, (ii) immediately upon the Corporation's
discharge of Employee for cause (as defined herein); (iii) 90 days after
the Corporation discharges Employee without cause or due to Employee's
disability; and (iv) 180 days after Employee's death. The option will also
contain other customary terms and conditions which shall be reasonably
satisfactory to both parties.
(d) Insurance. The Corporation shall provide to Employee and his
family the employee contributory package of group life, health, dental and
disability insurance coverage that the Corporation makes available to its
employees. The term family shall mean the spouse of the Employee and his
dependent children who may be insured from time to time as dependents under
such policies of the Corporation.
(e) Automobile. The Corporation will provide Employee with a car
allowance not to exceed $800 per month. The allowance will be taxable to
employee. Employee shall be responsible for the payment of all insurance,
maintenance, repairs, gasoline and other reasonable and necessary costs
incident to the operation of such automobile.
(f) Other Benefits. Nothing contained herein shall be deemed to limit
or affect the right of Employee to receive additional bonuses or other
forms of additional compensation or to participate in any retirement,
disability, profit sharing, stock option, cash or stock bonus or other plan
or arrangement, or in any other benefits now or hereafter provided by the
Corporation for its employees or executives at the sole discretion of the
Board of Directors of the Corporation.
(g) Expenses. It is contemplated that, in connection with his
employment hereunder, Employee may be required to incur reasonable
business, entertainment and travel expenses. The Corporation agrees to
reimburse Employee in full for all such reasonable and necessary business,
entertainment and travel expenses incurred or expended by him in connection
with the performance of his duties hereunder; provided Employee submits to
the Corporation vouchers or expense statements satisfactorily evidencing
such expenses as may be reasonably required by the Corporation and such
expenses are in accordance with any corporate policy with respect thereto.
Such expenses shall be reimbursed 30 days after submission of any required
documentation therefor. All expenses must be approved by the President and
Chief Executive Officer of the Corporation or his designee.
(h) Vacation. Employee shall be entitled to fifteen (15) days of
Personal Leave, according to the Corporation's Employee Handbook. Such
Personal Leave may be taken at such times as is reasonably consistent with
proper performance by Employee of his duties and responsibilities
hereunder.
(i) 401K Plan. Employee will be eligible to participate in the
Corporation's 401K plan immediately through voluntary contributions, which
the Corporation will match $ .20 for each $1.00 contributed by Employee up
to the limits contained in the Corporation's plan.
5. Termination of Employment.
48
<PAGE>
(a) The Corporation may terminate this Agreement with cause
immediately upon written notice to Employee. "Termination for cause" shall
mean discharge by the Corporation on the following grounds:
(i) Employee's conviction in a court of law of any crime or offense,
which conviction makes him unfit for continuing employment, prevents him
from effective management of the Corporation or materially adversely
affects the reputation or business activities of the Corporation.
(ii) Dishonesty or willful misconduct which materially, adversely
affects the reputation or business activities of the Corporation and which
continues after written notice thereof to Employee.
(iii) Substance abuse, including abuse of alcohol or use of illegal
narcotics, and other drugs or substances, for which Employee fails to
undertake and maintain treatment after 15 days after requested by the
Corporation, or misappropriation of funds.
(a) Upon such termination for cause, Employee shall lose all right,
title and interest in and to all payments required to be made in accordance
with the provisions of this Agreement, and the Corporation shall have no
further obligation to Employee hereunder, except for compensation pursuant
to Paragraphs 4(a) and 4(d) through 4(i) to which Employee is entitled
through the date of termination, bonus compensation to which Employee is
entitled for and in respect of the preceding fiscal year if not theretofore
paid, and any benefits referred to in Paragraph 4 hereof to which Employee
has a vested right under the terms and conditions of the plan or program
pursuant to which such benefits were granted.
(b) The Corporation may terminate the Employee without cause at any
time. In the event of termination of Employee without cause, the
Corporation shall pay or provide to Employee (in addition to the salary,
bonus and other compensation to which Employee shall be entitled or shall
have earned pursuant to Paragraph 4 hereof through the date of such
termination and any benefits referred to in Paragraph 4 hereof in which
Employee has a vested right under the terms and conditions of the plan or
program pursuant to which such benefits were granted), (i) the basic salary
pursuant to the provisions of Paragraph 4(a) hereof for a period of 12
months from the effective date of such termination, payable ratably over
such 12 month period, and (ii) the health insurance coverage pursuant to
the provisions of Paragraph 4(d) hereof for a period of 12 months from the
effective date of such termination.
(c) Employee may terminate this Agreement by resignation and giving
the Corporation three (3) months notice. The Corporation can waive this
notice and agree with Employee to an earlier termination date. Upon
termination by Employee, all obligations of the Corporation and Employee
under this Agreement will cease as of the date of final termination, except
Employee's obligations under Paragraphs 7 and 8 will survive.
6. Restrictive Covenants and Confidentiality; Injunctive Relief.
(a) Employee agrees, as a condition to the Corporation agreeing to
employ Employee and to the performance by the Corporation of its
obligations hereunder, particularly its obligations under Paragraph 4
hereof and, in the case where Employee is terminated by Employer without
cause, in consideration of the payment of the Base Salary in effect on
termination thereof at the times it would otherwise be paid hereunder
during the 1 year subsequent to termination, that during the term of this
Agreement and any renewals and extensions hereof and for a period of 1 year
thereafter, or such shorter period if Employer elects not to continue to
pay any Base Salary as may be required hereunder subsequent to a
termination without cause, Employee shall not, without prior written
approval of the Board of Directors of the Corporation, directly or
indirectly through any other person, firm or corporation, whether
individually or in conjunction with any other person, or as an employee,
agent, consultant, representative, partner or holder of any interest in any
other person, firm, corporation or other association:
(i) solicit, entice or induce any Customer (as defined below) to
become a client, customer, OEM, distributor or reseller of any other
person, firm or corporation with respect to products and/or services then
sold or under development by the Corporation or to cease doing business
with the Corporation, and Employee shall not approach any such person, firm
or corporation for such purpose or authorize or knowingly approve the
taking of such actions by any other person; or
49
<PAGE>
(ii) solicit, entice or induce directly or indirectly any person who
presently is or at any time during the term hereof shall be an employee of
the Corporation to become employed by any other person, firm or corporation
or to leave their employment with the Corporation, and Employee shall not
approach any such employee for such purpose; or
(iii) compete with, or encourage or assist others to compete with, or
solicit orders or otherwise participate in business transactions in
competition with, the business engaged in by the Corporation at any time
during the term of Employee's employment (unless such business shall have
been abandoned by the Corporation). The restriction contained in this
subparagraph 7(a)(iii) shall apply anywhere worldwide.
For purposes of this Paragraph 6, a Customer means any person or
entity which at the time of determination if made prior to termination of
employment, or, after termination of employment, at the time of such
termination, shall be, or shall have been within two years prior to such
time, a client, customer, OEM, distributor or reseller of the Corporation
or a bona fide prospect to become a Customer.
Nothing in the foregoing shall prohibit Employee from engaging in any
business that is not in competition with the Corporation after termination
of employment with the Corporation, or investing in the securities of any
corporation having securities listed on a national securities exchange,
provided that such investment does not exceed 5% of any class of securities
of any corporation engaged in business in competition with the Corporation,
and provided that such ownership represents a passive investment and that
neither Employee nor any group of persons including him, in any way, either
directly or indirectly, manages or exercises control of any such
corporation, guarantees any of its financial obligations, otherwise takes
any part in its business, other than exercising his rights as a
shareholder, or seeks to do any of the foregoing.
(b) Employee acknowledges that during the term of his employment, he
will have access to confidential information of the Corporation, including
information about "Developments" (as defined in Paragraph 7 below),
business plans, costs, customers, profits, markets, sales, products, key
personnel, pricing policies, operational methods and other business affairs
and methods and other information not available to the public or in the
public domain (hereinafter referred to as "Confidential Information"). In
recognition of the foregoing, Employee covenants and agrees that, except as
required by his duties to the Corporation, Employee will keep secret all
Confidential Information of the Corporation and will not, directly or
indirectly, either during the term of his employment hereunder or at any
time thereafter while such Confidential Information remains confidential,
disclose or disseminate to anyone or make use of, for any purpose
whatsoever except for the benefit of the Company in the course of his
employment, any Confidential Information, and upon termination of his
employment, Employee will promptly deliver to the Corporation all tangible
materials and objects containing Confidential Information (including all
copies thereof, whether prepared by Employee or others) which he may
possess or have under his control. The term "Confidential Information"
shall not include any information which can be demonstrated (i) to be
generally known in the industry or to the public other than through breach
of Employee's obligations hereunder, (ii) to have been in Employee's
possession prior to his employment with the Corporation and not assigned to
the Corporation, or (iii) to have been disclosed to Employee by an
independent third party not under any obligation of confidentiality.
(c) Employee represents (i) that his experience and capabilities are
such that the restrictions contained herein will not prevent him from
obtaining employment or otherwise earning a living at the same general
economic benefit as reasonably required by him and (ii) that he has, prior
to the execution of this Agreement, reviewed this Agreement thoroughly with
his legal counsel.
(d) Employee acknowledges that the restrictions contained in this
Paragraph 6 are reasonable and necessary to protect the legitimate business
interests of the Corporation and that the Corporation would not have
entered into this Agreement in the absence of such restrictions. By reason
of the foregoing, Employee agrees that if he violates any of the provisions
of this Paragraph 6, the Corporation would sustain irreparable harm and,
therefore, irrevocably and unconditionally (i) agrees that in addition to
any other remedies which the Corporation may have under this Agreement or
otherwise, all of which remedies shall be cumulative, the Corporation shall
be entitled to apply to any court of competent jurisdiction for preliminary
and permanent injunctive relief and other equitable relief, (ii) that such
relief and any other claim by the Corporation pursuant hereto may be
brought in the United States District Court for the State of Delaware, or
if such court does not have subject matter jurisdiction or will not accept
jurisdiction, in any court of general jurisdiction in the State of
50
<PAGE>
Delaware; (iii) consents to the non-exclusive jurisdiction of any such
court in any such suit, action or proceeding, and (iv) waives any objection
which Employee may have to the laying of venue of any such suit, action or
proceeding in any such court. Employee also irrevocably and unconditionally
consents to the service of any process, pleadings, notices or other papers
in a manner permitted by the notice provisions hereof. In the event that
any of the provisions of this Paragraph 6 hereof should ever be adjudicated
to exceed the time, geographic, product or service, or other limitations
permitted by applicable law in any jurisdiction, then such provisions shall
be deemed reformed in such jurisdiction to the maximum time, geographic,
product or service, or other limitations permitted by applicable law.
(e) Employee agrees that the Corporation may provide a copy of this
Paragraph 6 to any business or enterprise (i) which the Employee may
directly or indirectly own, manage, operate, finance, join, control or
participate in the ownership, management, operation, financing, or control
of, or (ii) with which he may be connected with as an officer, director,
employee, partner, principal, agent, representative, consultant or
otherwise, or in connection with which he may use or permit his name to be
used; provided, however, that this provision shall not apply as to
subparagraph (a) or (b) after expiration of the time periods set forth
therein or with respect to any activities, entities or persons excluded by
the terms hereof. Employee will provide the names and addresses of any of
such persons or entities as the Corporation may from time to time
reasonably request.
(f) In the event of any breach or violation of the restriction
contained in subparagraph (a) above, the period therein specified shall
abate during the time of any violation thereof and that portion remaining
at the time of commencement of any violation shall not begin to run until
such violation has been fully and finally cured.
7. Ownership of Inventions and Ideas. Employee acknowledges that the
Corporation shall be the sole owner of all the results and proceeds of
Employee's service hereunder, including but not limited to, all patents, patent
applications, patent rights, formulas, copyrights, inventions, developments,
discoveries, other improvements, data, documentation, drawings, charts, and
other written, audio and/or visual materials relating to equipment, methods,
products, processes, or programs in connection with or useful to the
Corporation's business (collectively, the "Developments") which Employee, by
himself or in conjunction with any other person, may conceive, make, acquire,
acquire knowledge of, develop or create during the term of Employee's employment
hereunder, free and clear of any claims by Employee (or any successor or
assignee of him) of any kind or character whatsoever other than Employee's right
to compensation hereunder. Employee acknowledges that all copyrightable
Developments shall be considered works made for hire under the Federal Copyright
Act. Employee hereby assigns and transfers his right, title and interest in and
to all such Developments, and agrees that he shall, at the request of the
Corporation, execute or cooperate with the Corporation in any patent
applications, execute such assignments, certificates or other instruments, and
do any and all other acts, as the Board of Directors of the Corporation from
time to time reasonably deems necessary or desirable to evidence, establish,
maintain, perfect, protect, enforce or defend the Corporation's right, title and
interest in or to any such Developments.
Anything in this Paragraph 8 to the contrary notwithstanding, the Paragraph
shall not be construed as prohibiting or limiting the provisions of the last
subparagraph of Paragraph 6(b) hereof and the ability of the Employer to grant
the license described therein.
8. Survival. The provisions of Paragraphs 7 and 8 shall survive the
termination of this Agreement for any reason whatsoever.
9. Dispute Resolutions.
(a) If any dispute arises under this Agreement that is not settled
promptly in the ordinary course of business, Employer and Employee shall
seek to resolve any such dispute between them, first, by negotiating
promptly with each other in good faith in face-to-face negotiations.
(b) If the parties are unable to resolve the dispute between them
within 20 business days (or such period as the parties shall otherwise
agree) through these face-to-face negotiations, then the controversy or
claim shall be settled by arbitration conducted on a confidential basis,
under the U.S. Arbitration Act, if applicable, and the then current
Commercial Arbitration Rules of the American Arbitration Association (the
"Association")
51
<PAGE>
strictly in accordance with the terms of this Agreement and the substantive
law of the State of Maryland. The arbitration shall be conducted at the
Association's regional office located closest to the Corporation's
principal place of business by one arbitrator experienced in employment
matters. Judgment upon the arbitrator's award may be entered and enforced
in any court of competent jurisdiction. Neither party shall institute a
proceeding hereunder unless at least 10 days prior thereto such party shall
have given written notice to the other party of its intent to do so.
(b) Neither party shall be precluded hereby from securing equitable
remedies in courts of any jurisdiction, including, but not limited to,
temporary restraining orders and preliminary injunctions to protect its
rights and interests but shall not be sought as a means to avoid or stay
arbitration or Summary Proceeding.
11. Miscellaneous.
(a) Any notice authorized or required to be given or made by or
pursuant to this Agreement shall be made in writing and either personally
delivered or mailed by overnight express mail to the respective address of
the party to receive such notice, which address is the one designated below
the name of such party on the signature page hereof, or to such other
address as a party may specify by notice to the other parties hereto.
(b) This Agreement cancels and supersedes any and all prior agreements
and understandings between or among any or all of the parties hereto with
respect to the employment by or obligations of Employee to any thereof.
This Agreement constitutes the entire agreement among the parties with
respect to the matters herein provided, and no modification or waiver of
any provision hereof shall be effective unless in writing and signed by the
parties hereto.
(c) All of the terms and provisions of this Agreement shall be binding
upon and inure to the benefit of and be enforceable by the respective
heirs, executors, administrators, legal representatives, successors and
assigns of the parties hereto, except that the duties and responsibilities
of Employee hereunder are of a personal nature and shall not be assignable
or delegable in whole or in part by Employee.
(d) Employee agrees that the obligations of the Corporation hereunder
shall be limited to the Corporation only, and Employee agrees that he shall
not bring any claim or suit against any director or shareholder of the
Corporation or any other person other than the Corporation for any breach
or default by the Corporation of its obligations hereunder.
(e) If any provision of this Agreement or application thereof to
anyone or under any circumstances is adjudicated to be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability
shall not affect any other provision or application of this Agreement which
can be given effect without the invalid or unenforceable provision or
application and shall not invalidate or render unenforceable such provision
or application in any other jurisdiction.
(f) No remedy conferred upon any party by this Agreement is intended
to be exclusive of any other remedy, and each and every such remedy shall
be cumulative and shall be in addition to any other remedy given hereunder
or now or hereafter existing at law or in equity. No delay or omission by
any party in exercising any right, remedy or power hereunder or existing at
law or in equity shall be construed as a waiver thereof, and any such
right, remedy or power may be exercised by the party possessing the same
from time to time and as often as may be deemed expedient or necessary by
such party in its sole discretion.
(g) This Agreement may be executed in several counterparts, each of
which is an original. It shall not be necessary in making proof of this
Agreement or any counterpart hereof to produce or account for any of the
other counterparts.
(h) In the event of a lawsuit by either party to enforce any
provisions of this Agreement, the prevailing party shall be entitled to
recover reasonable costs, expenses and attorney's fees from the other
party.
52
<PAGE>
11. Controlling Law. The validity, interpretation, construction,
performance and enforcement of this Agreement shall be governed by the laws of
the State of Maryland.
IN WITNESS WHEREOF, Employee has hereunto set his hand and the Corporation has
caused this instrument to be duly executed as of the day and year first above
written.
Witness: Employee:
_________________________ _________________________
Attest: _________________________
_________________________ By:______________________
Title: Title:
53
<PAGE>
Schedule 4(b)
Section 4(b) Bonus. Incentive Compensation will be awarded on the basis of
achievement and be at rates no greater than
% of Base Pretax Income
--------- -------------
100
Milestones:
54
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT, dated as of November 1, 1998 between Gregory
A. Pratt, with an address 1125 Kaolin Road, Kennett Square, PA 19348 (the
"Holder") and OAO Technology Solutions, Inc. with an address at 7500 Greenway
Center Drive, 16th Floor, Greenbelt, MD 20770 (the "Company").
WITNESSETH:
WHEREAS, the Holder is the beneficial owner of 111,000 shares (the
"Shares") of the common stock, par value $.01 per share, of the Company ("Common
Stock");
WHEREAS, the Holder desires to have certain registration rights under the
securities laws, and the Company desires that the Holder have such registration
rights;
NOW, THEREFORE, in consideration of the mutual agreements contained herein
and other good and valuable consideration, the parties hereby agree as follows:
1. If, at any time during the period commencing on the date hereof and
terminating on the date on which the Shares become saleable under Rule 144
promulgated under the Act (as defined below), the Company shall determine to
file any registration statement, or any post-effective amendment to a
registration statement, under the Securities Act of 1933, as amended (the
"Act"), covering equity securities of the Company (other than registration
statements on Form S-8 or S-4 or any other form not generally available for the
registration of securities for sale to the public) for its own account or for
the account of others, the Company shall advise the Holder by written notice at
least ten (10) business days prior to any filing, and shall, upon the request of
the Holder, and at the expense of the Company, include in any such registration
statement, or any such post-effective amendment to a registration statement, all
of the Registrable Securities (as hereinafter defined) that the Holder has
requested in writing to be registered, provided that such written request is
delivered to the Company within seven (7) business days of the Holder's receipt
of notice from the Company. As used in this Agreement, "Registrable Securities"
shall mean (i) the Shares, and (ii) any Common Stock of the Company issued as
(or issuable upon the conversion or exercise of any convertible security,
option, warrant right or other security which is issued as) a dividend or other
distribution with respect to, or in exchange for or in replacement of the
Shares. All costs and expenses of such registration statement shall be borne by
the Company, except underwriting discounts or commissions applicable to any of
the Registrable Securities sold by the Holder and any counsel to the Holder.
55
<PAGE>
The Company shall not be required to register any securities of the Holder on
more than one occasion; provided that if the Holder has been prevented from
selling all of the Registrable Securities the Holder wished to sell because of
limitations imposed under paragraph (c) of this Section 1, then the Holder shall
be entitled to include the Registrable Securities in one or more additional
registration statements under the terms of this Section 1 until the Holder has
been able to sell all of the Registrable Securities the Holder wishes to sell.
(a) The Company shall supply prospectuses and such other documents as
the Holder may reasonably request in order to facilitate the public sale or
other disposition of the Registrable Securities, use its reasonable best
efforts to register and qualify any of the Registrable Securities for sale
in a reasonable number of states and do any and all other acts and things
which may be necessary or desirable to enable the Holder to consummate the
public sale or other disposition of the Registrable Securities subject to
the rights of others with similar rights.
(b) The Company shall also furnish indemnification in the manner
provided in Section 3 hereof, except that the maximum amount of such
indemnification shall be limited to the amount of proceeds received by the
Holder from the sale of the Registrable Securities. The Holder shall
furnish information and indemnification as set forth in Section 3 hereof,
except that the maximum amount which may be recovered from the Holder shall
be limited to the amount of proceeds received by the Holder from the sale
of the Registrable Securities.
(c) In connection with any offering involving an underwriting of
shares of the Company's Common Stock, the Company shall not be required
under this Section 1 to include any of the Holder's Registrable Securities
in such underwriting unless the Holder accepts the terms of the
underwriting as agreed upon between the Company and the underwriters
selected by it (or by other persons entitled to select the underwriters),
and then only in such quantity as the underwriters determine in their sole
discretion will not jeopardize or limit the success of the offering by the
Company. If the total amount of securities, including Registrable
Securities, requested by selling stockholders to be included in such
offering exceeds the amount of securities that the underwriters determine
in their sole discretion is compatible with the success of the offering,
then the Company shall be required to include in the offering only that
number of such securities, including Registrable Securities, which the
underwriters determine in their sole discretion will not jeopardize the
success of the offering (the securities so included to be apportioned pro
rata (subject to the registration rights described in the Company's filings
with the Securities and Exchange Commission) among the selling stockholders
(whether such selling stockholders acquire or have acquired such
56
<PAGE>
Common Stock before, on or after the date hereof) according to the total
amount of securities entitled to be included therein owned by each selling
stockholder or in such other proportions as shall mutually be agreed to by
such selling stockholders).
2. Representations by the Holder. The Holder understands that the
Registrable Securities are and will be deemed to be "restricted securities" as
such term is defined in Rule 144 and can only be sold (a) in accordance with the
provisions of the Rule or such other duly available exemption from the
registration requirements of the Act or (b) pursuant to an effective
registration statement as set forth in this Agreement. The Holder is acquiring
the Shares for its own account (and not for the account of others) and not with
a view to the distribution or resale thereof. Upon any subsequent transfer or
disposition of any Registrable Securities made in reliance on an exemption from
the registration provisions of the Act, the Holder agrees to deliver to the
Company either an opinion of counsel satisfactory to the Company to the effect
that such transfer or disposition may be made without registration of such
Registrable Securities under the Act and/or such other documents or certificates
as the Company may require.
3. (a) Whenever pursuant to Section 1 hereof, a registration statement
relating to any of the Registrable Securities is filed under the Act, amended or
supplemented, the Company shall, to the extent permitted by law, indemnify and
hold harmless Holder, and each person, if any, who controls (within the meaning
of the Act) Holder, and each underwriter (within the meaning of the Act) of such
securities and each person, if any, who controls (within the meaning of the Act)
any such underwriter, against such losses, claims, damages, liabilities or
actions, joint or several, to which Holder, any such controlling person or any
such underwriter may become subject, under the Act or otherwise, insofar as such
losses, claims, damages, liabilities or actions in respect thereof, arise out of
or are based upon any untrue statement or alleged untrue statement of any
material fact contained in any such registration statement or any preliminary
prospectus or final prospectus constituting a part thereof or any amendment or
supplement thereto, or arise out of or are based upon the omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, and shall reimburse Holder and each such
controlling person and underwriter for any legal or other expenses reasonably
incurred by Holder or such controlling person or underwriter in connection with
investigating or defending any such losses, claims, damages, liabilities or
actions; provided, however, that the Company will not be liable in any such case
to the extent that any such losses, claims, damages, liabilities or actions
arise out of or are based upon an untrue statement or alleged untrue statement
or omission or alleged omission made in said registration statement, said
preliminary
57
<PAGE>
prospectus, said final prospectus or said amendment or supplement in reliance
upon and in conformity with written information furnished by Holder or any other
underwriter, for use in the preparation thereof.
(b) The Holder shall indemnify and hold harmless the Company, each of its
directors, each of its officers and each person, if any, who controls the
Company within the meaning of the Act against any losses, claims, damages,
liabilities or actions, to which the Company or any such director, officer or
controlling person may become subject, under the Act or otherwise, insofar as
such losses, claims, damages, liabilities or actions arise out of or are based
upon any untrue or alleged untrue statement of any preliminary prospectus, said
final prospectus, or said amendment or supplement, or arise out of or are based
upon the omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statement therein not
misleading in each case to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged omission was made
in said registration statement, said preliminary prospectus, said final
prospectus or said amendment or supplement in reliance upon and in conformity
with written information furnished by such Holder for use in the preparation
thereof; and shall reimburse the Company or any such director, officer or
controlling person for any legal or other expenses reasonably incurred by them
in connection with investigating or defending any such losses, claims, damages,
liabilities or actions.
(c) Promptly after receipt by an indemnified party under this Section 3 of
notice of the commencement of any action, such indemnified party shall, if a
claim in respect thereof is to be made against any indemnifying party, give the
indemnifying party notice of the commencement thereof; but the omission to so
notify the indemnifying party shall not relieve it from any liability which it
may have to an indemnified party otherwise than under this Section 3.
(d) In case any such action is brought against any indemnified party, and
it notifies an indemnifying party of the commencement thereof, the indemnifying
party shall be entitled to participate in, and, to the extent that it may wish,
jointly with any other indemnifying party similarly notified, to assume the
defense thereof, with counsel reasonably satisfactory to such indemnified party,
and after notice from the indemnifying party to such indemnified party, the
indemnifying party shall not be liable to such indemnified party under this
Section 3 for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof, other than reasonable
costs of investigation.
(e) To the extent any indemnification by an indemnifying party is
prohibited or limited by law, the indemnifying party agrees to make the maximum
contribution with respect to any amounts for which it
58
<PAGE>
would otherwise be liable under this Section 2 to the extent permitted by law,
provided that (i) no contribution shall be made under circumstances where the
indemnifying party would not have been liable for indemnification under the
fault standards set forth in this Section 3, (ii) no seller of Registrable
Securities guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any seller of
Registrable Securities who was not guilty of such fraudulent misrepresentation
and (iii) contribution by the Holder shall be limited in amount to the net
amount of proceeds received by him from the sale of the Registrable Securities
pursuant to such Registration Statement or prospectus.
4. All notices, requests, consents or other communications ("Notices")
which either party may desire or be required to give to the other hereunder
shall be in writing and shall be delivered by hand, overnight express carrier,
or sent by registered or certified mail, return receipt requested, postage
prepaid, in any event, addressed to the parties at their respective addresses
first above set forth. Notices given in the manner aforesaid shall be deemed to
have been given three (3) business days after the day so mailed, the following
business day after delivery to any overnight express carrier and on the day so
delivered by hand (if delivered on a business day prior to 5 p.m., or if not,
then on the next business day). Either party shall have the right to change its
address(es) for the receipt of Notices by giving Notice to the other party in
either manner aforesaid. Any Notice required or permitted to be given by either
party may be given by that party's attorney.
5. (a) This Agreement shall bind and inure to the benefit of the parties
hereto and their respective successors.
(b) This Agreement shall be governed by, interpreted under and construed
and enforced in accordance with, the laws of the State of Delaware.
(c) This Agreement has been fully negotiated by the parties and rules of
construction construing ambiguities against the party responsible for drafting
agreements shall not apply.
(d) This Agreement contains the entire agreement between the parties with
respect to the subject matter hereof and supersedes all prior understandings, if
any, with respect thereto.
(e) This Agreement may not be modified, changed, supplemented or
terminated, nor may any obligations hereunder be waived, except by written
instrument signed by the party to be charged or by its agent duly authorized in
writing or as otherwise expressly permitted herein.
59
<PAGE>
(f) Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or remedy,
will not operate as a waiver thereof. No waiver will be effective unless and
until it is in writing and signed by the party giving the waiver.
(g) This Agreement may be executed in one or more counterparts, each of
which when so executed and delivered shall be deemed an original, but all of
which taken together shall constitute but one and the same original.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as
of the date first above written.
OAO Technology Solutions, Inc.
By:___________________________
Name: Gregory A. Pratt
Title: President
___________________________
Gregory A. Pratt
60
AGREEMENT AND PLAN OF MERGER
Among
OAO TECHNOLOGY SOLUTIONS, INC.
ETG ACQUISITION CORPORATION
ENTERPRISE TECHNOLOGY GROUP, INC.
and
EACH OF THE SHAREHOLDERS
OF
ENTERPRISE TECHNOLOGY GROUP, INC.
DATED AS OF NOVEMBER 1, 1998
61
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
ARTICLE I THE MERGER.............................................................................5
Section 1.1 The Merger...............................................................5
Section 1.2 Closing..................................................................5
Section 1.3 Effective Time...........................................................5
Section 1.4 Conversion of Securities.................................................6
Section 1.5 Adjustment to Exchange Ratio.............................................6
Section 1.6 Exchange of Securities...................................................7
Section 1.7 Definition of Subsidiary and Affiliate...................................7
ARTICLE II CERTAIN MATTERS RELATING TO THE SURVIVING
CORPORATION..............................................................................7
Section 2.1 Certificate of Incorporation of the
Surviving Corporation....................................................7
Section 2.2 By-Laws of the Surviving Corporation.....................................7
Section 2.3 Directors and Officers of the Surviving Corporation......................7
ARTICLE III REPRESENTATIONS AND WARRANTIES OF PARENT
AND MERGER SUB.......................................................................8
Section 3.1 Existence, Good Standing, Corporate
Authority................................................................8
Section 3.2 Authorization, Validity and Effect of
Agreements...............................................................8
Section 3.3 Capitalization...........................................................8
Section 3.4 Parent Reports and Financial Statements..................................9
Section 3.5 No Violation.............................................................9
Section 3.6 No Brokers..............................................................10
Section 3.7 Parent Common Stock.....................................................10
Section 3.8 Interim Operations of Merger Sub........................................10
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE SELLING
SHAREHOLDERS.........................................................................10
Section 4.1 Existence, Good Standing, Corporate
Authority...............................................................10
Section 4.2 Authorization, Validity and Effect of
Agreements..............................................................11
Section 4.3 Compliance with Laws....................................................11
Section 4.4 Capitalization..........................................................11
Section 4.5 Subsidiaries............................................................11
Section 4.6 Other Interests.........................................................11
Section 4.7 No Violation............................................................11
Section 4.8 Conduct of Business.....................................................12
Section 4.9 Litigation..............................................................12
Section 4.10 Absence of Certain Changes..............................................12
Section 4.11 Intellectual Property and Software Products.............................13
Section 4.12 Year 2000 Compliance....................................................14
Section 4.13 Properties..............................................................16
Section 4.14 Material Contracts......................................................16
Section 4.15 Taxes...................................................................17
Section 4.16 Employee Benefit Plans..................................................17
Section 4.17 Labor Matters...........................................................17
Section 4.18 Absence of Indemnifiable Claims, etc....................................17
Section 4.19 No Brokers..............................................................17
Section 4.20 Financial Condition.....................................................18
Section 4.21 Liabilities.............................................................18
Section 4.22 Questionable Payments...................................................18
Section 4.23 Environmental Matters...................................................18
Section 4.24 Insurance...............................................................20
Section 4.25 Full Disclosure.........................................................20
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
ARTICLE V COVENANTS.............................................................................20
Section 5.1 Covenant Not to Compete.................................................20
Section 5.2 Confidentiality.........................................................21
Section 5.3 Interim Operations of ETG...............................................21
Section 5.4 Filings; Other Action...................................................22
Section 5.5 Inspection of Records...................................................23
Section 5.6 Further Action..........................................................23
Section 5.7 Expenses................................................................23
Section 5.8 Survival of Representations and Warranties
of The Selling Shareholders.............................................23
Section 5.9 Adjustments.............................................................23
ARTICLE VI CONDITIONS...........................................................................24
Section 6.1 Conditions to Obligation of ETG to
Effect the Merger.......................................................24
Section 6.2 Conditions to Obligation of Parent and
Merger Sub to Effect the Merger.........................................24
ARTICLE VII TERMINATION.........................................................................25
Section 7.1 Termination.............................................................25
Section 7.2 Effect of Termination...................................................25
ARTICLE VIII INDEMNIFICATION
Section 8.1 Obligation of ETG and the Selling Shareholders to
Indemnify...............................................................26
Section 8.2 Obligation of Parent to Indemnify.......................................26
Section 8.3 Notice and Opportunity to Defend........................................26
ARTICLE IX GENERAL PROVISIONS...................................................................27
Section 9.1 Notices.................................................................27
Section 9.2 Assignment, Binding Effect..............................................27
Section 9.3 Entire Agreement........................................................27
Section 9.4 Amendment...............................................................27
Section 9.5 Governing Law...........................................................28
Section 9.6 Counterparts............................................................28
Section 9.7 Headings................................................................28
Section 9.8 Interpretation..........................................................28
Section 9.9 Waivers.................................................................28
Section 9.10 Incorporation of Schedules and Exhibits.................................28
Section 9.11 Severability............................................................28
Section 9.12 Enforcement of Agreement................................................28
</TABLE>
63
<PAGE>
SCHEDULES
Schedule 1 Selling Shareholders
Schedule 4.9 Litigation
Schedule 4.11 Intellectual Property and Software Products
Schedule 4.13(a) Assets and Property Owned by ETG
Schedule 4.13(b) Liens
Schedule 4.13(c) Assets and Property Leased by ETG
Schedule 4.14 Material Contracts of ETG
Schedule 4.16 Employee Benefit Plans
Schedule 4.17 Name, Title and Salary of Employees
Schedule 4.21 Assumed Liabilities
Schedule 4.24 Insurance
EXHIBITS
Exhibit A Registration Rights Agreement
Exhibit B Restricted Securities Letter
<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER is dated as of November 1, 1998 (the
"Agreement") among OAO Technology Solutions, Inc., a Delaware corporation
("Parent"), ETG Acquisition Corporation, a Delaware corporation and the
wholly-owned subsidiary of Parent ("Merger Sub"), Enterprise Technology Group,
Inc., a Delaware corporation ("ETG"), and each of the shareholders of ETG listed
on Schedule 1 attached hereto (the "Selling Shareholders").
WHEREAS, the parties wish to provide for the terms and conditions upon
which ETG will be acquired by Parent by means of a merger of ETG with and into
Merger Sub;
WHEREAS, it is the intention of the parties to this Agreement that for
federal income tax purposes, the merger provided for herein shall qualify as a
"reorganization" within the meaning of Sections 368(a)(1)(A) and 368(a)(2)(D) of
the Internal Revenue Code of 1986, as amended (the "Code"); and
NOW THEREFORE, in consideration of the premises and of the representations,
warranties, covenants and agreements set forth herein, the parties hereto hereby
agree as follows:
ARTICLE I
THE MERGER
Section 1.1 The Merger. Upon the terms and subject to the conditions of
this Agreement, at the Effective Time (as defined in Section 1.3 of this
Agreement), ETG shall be merged with and into Merger Sub in accordance with the
laws of the State of Delaware and the terms of this Agreement (the "Merger"),
whereupon the separate corporate existence of ETG shall cease, and Merger Sub
shall continue as the surviving corporation of the Merger (Merger Sub, in such
capacity hereinafter sometimes referred to as the "Surviving Corporation"). The
name of Merger Sub as the Surviving Corporation, shall be changed, by virtue of
the Merger, to Enterprise Technology Group, Inc..
Section 1.2 Closing. Subject to the terms and conditions of this Agreement,
the closing of the Merger (the "Closing") shall take place (a) at the offices of
OAO Technology Solutions, Inc., 7500 Greenway Center Drive, 16th Floor;
Greenbelt, MD 20770 at 10:00 a.m. on the first business day after all the
conditions set forth in Article VI of this Agreement (other than those that are
waived by the party or parties for whose benefit such conditions exist) are
satisfied; or (b) at such other place, time, and/or date upon which the parties
hereto may otherwise agree. The date upon which the Closing shall occur is
referred to herein as the "Closing Date."
Section 1.3 Effective Time. As soon as practical after all the conditions
to the Merger set forth in Article VI of this Agreement have been fulfilled or
waived and this Agreement shall not have been terminated as provided in Article
VII hereof, the parties hereto shall cause a certificate of merger to be
properly executed and filed in accordance with the laws of the State of Delaware
and the terms of this Agreement. The parties hereto shall also take such further
actions as may be required under the laws of the State of Delaware in connection
with the consummation of the Merger. The Merger shall become effective at such
time as the certificate of merger is duly filed with the Secretary of State of
the State of Delaware or at such later time as is specified in the certificates
of merger (the "Effective Time"). From and after the Effective Time, the
Surviving Corporation shall possess all the rights, privileges, powers and
franchises and be subject to all of the restrictions, disabilities, liabilities
and duties of ETG and Merger Sub, all as provided under applicable law.
Section 1.4 Conversion of Securities. At the Effective Time, by virtue of
the Merger and without any action on the part of Parent, Merger Sub, ETG or the
holder of any of the following securities:
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<PAGE>
(a) ETG Common Stock. Subject to Section 1.6, each share of Common
Stock par value $ .10 per share of ETG (the "ETG Common Stock") issued and
outstanding immediately prior to the Effective Time shall be converted into
the right to receive 222.222 validly issued, fully paid and non-assessable
shares of Common Stock, par value $.01 per share, of Parent (the "Parent
Common Stock") (such ratio, as adjusted as contemplated pursuant to Section
1.5 being referred to herein as the "Exchange Ratio"). No fractional shares
shall be issued. All such shares of ETG Common Stock shall no longer be
outstanding and shall automatically be cancelled and shall cease to exist,
and each member shall cease to have any rights with respect thereto, except
the right to receive the shares of Parent Common Stock to be issued
pursuant to this Section 1.4 with respect thereto upon the surrender of
such interests in accordance with Section 1.6.
(b) ETG Stock Owned by ETG. All shares of ETG which immediately prior
to the Effective Time are held directly by ETG in its treasury, if any,
shall be cancelled and retired and shall cease to exist, and no capital
stock of Parent or other consideration shall be delivered with respect
thereto.
(c) Merger Sub Common Stock. Each share of capital stock of Merger Sub
issued and outstanding immediately prior to the Effective Time shall remain
outstanding and shall continue as one share of capital stock of the
Surviving Corporation and each certificate evidencing ownership of any such
shares shall continue to evidence ownership of the same number and kind of
shares of the Surviving Corporation.
Section 1.5 Adjustment of Exchange Ratio. In the event that, subsequent to
the date of this Agreement but prior to the Effective Time, the outstanding
shares of Parent Common Stock or ETG Common Stock, respectively, shall have been
changed into a different number of shares or interests or a different class as a
result of a stock split, reverse stock split, stock dividend, subdivision,
reclassification, split, combination, exchange, recapitalization or other
similar transaction, the Exchange Ratio shall be appropriately adjusted.
Section 1.6 Exchange of Securities.
(a) Promptly after the Effective Time, Parent shall upon surrender of
the stock certificates representing all of the issued and outstanding
shares of ETG Common Stock, deliver a stock certificate to each of the
Selling Shareholders listed on Schedule 1 hereto representing the number of
shares of Parent Common Stock set forth opposite such Selling Stockholder's
name on Schedule 1.
(b) All shares of Parent Common Stock issued upon conversion of the
ETG Common Stock in accordance with the terms hereof shall be deemed to
have been issued in full satisfaction of all rights pertaining to such ETG
Common Stock.
Section 1.8 Definition of Subsidiary and Affiliate. As used in this
Agreement, (i) a "Subsidiary" of any party means any corporation or other
organization, whether incorporated or unincorporated, of which such party or any
other Subsidiary of such party is a general partner or at least a majority of
the securities or other interests having by their terms ordinary voting power to
elect a majority of the Board of Directors or others performing similar
functions with respect to such corporation or other organization is directly or
indirectly owned or controlled by such party, by any one or more of its
Subsidiaries, or by such party and one or more of its Subsidiaries (ii) an
"Affiliate" of any party means any individual, corporation or other
organization, whether incorporated or unincorporated, which directly or
indirectly controls, or is controlled by, or is under common control with, such
party. The term "control" means the possession, directly or indirectly, of the
power to direct or cause the direction of the management or policies of any
corporation or other organization, whether incorporated or unincorporated,
whether through the ownership of voting securities, by contract or otherwise.
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<PAGE>
ARTICLE II
CERTAIN MATTERS RELATING TO
THE SURVIVING CORPORATION
Section 2.1 Certificate of Incorporation of the Surviving Corporation. The
Certificate of Incorporation of Merger Sub, as in effect at the Effective Time,
shall be the Certificate of Incorporation of the Surviving Corporation until
thereafter amended as provided by law.
Section 2.2 By-laws of the Surviving Corporation. The By-laws of Merger
Sub, as in effect at the Effective Time, shall be the By-laws of the Surviving
Corporation until thereafter amended as provided by law.
Section 2.3 Directors and Officers of the Surviving Corporation. The
directors of Merger Sub immediately prior to the Effective Time shall be the
directors of the Surviving Corporation and all such directors will hold office
from the Effective Time until their respective successors are duly elected or
appointed and qualify in the manner provided in the Certificate of Incorporation
and By-laws of the Surviving Corporation, or as otherwise provided by applicable
law. The officers of Merger Sub immediately prior to the Effective Time shall be
the officers of the Surviving Corporation and all such officers will hold office
until their respective successors are duly appointed and qualify in the manner
provided in the By-laws of the Surviving Corporation, or as otherwise provided
by applicable law.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Parent and Merger Sub represent and warrant to ETG as of the date hereof
and at the Effective Time as follows:
Section 3.1 Existence, Good Standing, Corporate Authority. Parent and each
of its Subsidiaries are corporations or partnerships duly organized, validly
existing and in good standing under the laws of their respective jurisdiction of
incorporation. Each of Parent and each of its Subsidiaries is duly licensed or
qualified to do business as a foreign corporation or partnership and is in good
standing under the laws of any other state of the United States in which the
character of the properties owned or leased by it or in which the transaction of
its respective business makes such qualification necessary, except where the
failure to be so qualified or to be in good standing would not have a material
adverse effect on the business, results of operations or financial condition of
Parent and its Subsidiaries taken as a whole (a "Parent Material Adverse
Effect"). Parent and each of its Subsidiaries have all requisite corporate power
and authority to own, operate and lease their respective properties.
Section 3.2 Authorization, Validity and Effect of Agreements. Each of
Parent and Merger Sub has the requisite corporate power and authority to execute
and deliver this Agreement and all agreements and documents to be executed and
delivered in connection herewith (the "Ancillary Agreements"). The execution and
delivery of this Agreement (and the agreements contemplated hereby) and the
consummation by Parent and Merger Sub of the transactions contemplated hereby
has been duly authorized by all requisite corporate action. This Agreement
constitutes, and all Ancillary Agreements to be executed and delivered in
connection herewith (when executed and delivered pursuant hereto for value
received) will constitute, the valid and legally binding obligations of Parent
and Merger Sub, enforceable against Parent and Merger Sub in accordance with
their respective terms, subject to applicable bankruptcy, insolvency, moratorium
or other similar laws relating to creditors' rights and general principles of
equity.
Section 3.3 Capitalization. The authorized capital stock of Parent consists
of 25,000,000 shares of Parent Common Stock and 5,000,000 shares of preferred
stock, par value $.01 per share (the "Parent Preferred Stock"). As of November
9, 1998, there were 16,449,649 shares of Parent Common Stock and no shares of
Parent Preferred Stock, issued and outstanding. Since such date no additional
shares of capital
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stock of parent have been issued, except pursuant to the exercise of options
outstanding under Parents' Amended and Restated 1996 Equity Compensation Plan
(the "Parent Stock Option Plan"). Parent has no outstanding bonds, debentures,
notes or other obligations the holders of which have the right to vote (or which
are convertible into or exercisable for securities having the right to vote)
with the stockholders of Parent on any matter. All issued and outstanding shares
of Parent Common Stock are duly authorized, validly issued, fully paid,
nonassessable and free of preemptive rights. There are not at the date of this
Agreement any existing options, warrants, calls subscriptions, convertible
securities, or other rights, agreements or commitments which obligate Parent or
any of its Subsidiaries to issue, transfer, redeem or sell any shares of capital
stock of Parent or any of its Subsidiaries except (i) as contemplated by this
Agreement, (ii) pursuant to the Parent Stock Option Plan and (iii) as described
in the Parent Commission Filings (as hereinafter defined).
Section 3.4 Parent Reports and Financial Statements. Parent has heretofore
made available to ETG true and complete copies of all reports, registration,
statements, and other documents (in each case together with all amendments
thereto) filed by Parent with the Securities and Exchange Commission since
October 21, 1997 (such reports, registration statements, definitive proxy
statements and other documents, together with any amendments thereto, are
sometimes collectively referred to as the "Parent Commission Filings"). As of
their respective dates, each of the Parent Commission Filings complied in all
material respects with the applicable requirements of the Securities Act of
1993, as amended, the Exchange Act of 1934, as amended and the rules and
regulations under each such Act, and none of the Parent Commission Filings and
no representation or warranty by Parent or Merger Sub in this Agreement and the
Ancillary Agreements contained as of such date any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
Section 3.5 No Violation. Neither the execution and delivery by Parent and
Merger Sub of this Agreement, nor the consummation by Parent and Merger Sub of
the transactions contemplated hereby in accordance with the terms hereof, will
(a) conflict with or result in a breach of any provisions of the Restated
Certificate of Incorporation or the Amended and Restated Bylaws of Parent or any
of its Subsidiaries; (b) result in a breach or violation of, a default under, or
the triggering of any payment or other material obligations pursuant to, or
accelerate vesting under, the Parent Stock Option Plan, or any grant or award
made under the foregoing; (c) violate, conflict with, result in a breach of any
provision of, constitute a default (or an event which, with notice or lapse of
time or both, would constitute a default) under, result in the termination, or
in a right of termination or cancellation of, accelerate the performance
required by, result in the triggering of any payment or other material
obligations pursuant to, result in the creation of any lien, security interest,
charge or encumbrance upon any of the material properties of Parent or its
Subsidiaries under, or result in being declared void, voidable, or without
further binding effect, any of the terms, conditions or provisions of any note,
bond, mortgage, indenture, deed of trust or any material license, franchise,
permit, lease, contract, agreement or other instrument, commitment or obligation
to which Parent or any of its Subsidiaries is a party, or by which Parent or any
of its Subsidiaries or any of their respective properties is bound or affected,
except for any of the foregoing matters which would not have a Parent Material
Adverse Effect; (d) contravene or conflict with or constitute a violation of any
provision of any law, regulation, judgment, injunction, order or decree binding
upon or applicable to Parent or any of its Subsidiaries which would have a
Parent Material Adverse Effect; or (e) other than the filings provided for in
Section 1.3, filings under applicable federal, state and local regulatory laws,
filings required under the Exchange Act, the Securities Act, the NASD, or
applicable state securities and "Blue Sky" laws or filings in connection with
the maintenance of qualification to do business in other jurisdictions
(collectively, the "Regulatory Filings"), require any material consent, approval
or authorization of, or declaration, of or registration with, any domestic
governmental or regulatory authority, the failure to obtain or make would have a
Parent Material Adverse Effect.
Section 3.6 No Brokers. Parent has not entered into any contract,
arrangement or understanding with any person or firm which may result in the
obligation of ETG or Parent to pay any finder's fee, brokerage or agent's
commissions or other like payment in connection with the negotiations leading to
this Agreement or the consummation of the transactions contemplated hereby.
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Section 3.7 Parent Common Stock. The issuance and delivery by Parent of
shares of Parent Common Stock in connection with the Merger and this Agreement
have been duly and validly authorized by all necessary corporate action on the
part of Parent. The shares of Parent Common Stock to be issued in connection
with the Merger and this Agreement, when issued in accordance with the terms of
this Agreement, will be validly issued, fully paid and nonassessable and not
subject to preemptive rights of any sort.
Section 3.8 Interim Operations of Merger Sub. Merger Sub will be formed
solely for the purpose of engaging in the transactions contemplated hereby, and
immediately prior to the Effective Time will have engaged in no other business
activities, will have no Subsidiaries, and will have conducted its operations
only as contemplated hereby.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE SELLING SHAREHOLDERS Each of the
Selling Shareholders jointly and severally hereby represent and warrant to
Parent as of the date hereof and at the Effective Time as follows:
Section 4.1 Existence, Good Standing, Corporate Authority. ETG is a
corporation duly organized, validly existing and in good standing under the laws
of Delaware. ETG is duly licensed or qualified to do business as a foreign
corporation or partnership and is in good standing under the laws of any other
state of the United States in which the character of the properties owned or
leased by it or in which the transaction of its respective business makes such
qualification necessary, except where the failure to be so qualified or to be in
good standing would not have a material adverse effect on the business, results
of operations or financial condition of ETG (a "ETG Material Adverse Effect").
ETG has all requisite corporate power and authority to own, operate and lease
its properties. The copies of ETG's Certificate of Incorporation and Bylaws
previously delivered or made available to Parent are true and correct.
Section 4.2 Authorization, Validity and Effect of Agreements. ETG has the
requisite corporate power and authority to execute and deliver this agreement
and all agreements and documents to be executed and delivered in connection
herewith. The execution and delivery of this Agreement (and the agreements
contemplated hereby) and the consummation by ETG of the transactions
contemplated hereby has been duly authorized by all requisite corporate action.
This Agreement constitutes, and all agreements and documents to be executed and
delivered in connection herewith (when executed and delivered pursuant hereto
for value received) will constitute, the valid and legally binding obligations
of ETG, enforceable against ETG in accordance with their respective terms,
subject to applicable bankruptcy, insolvency, moratorium or other similar laws
relating to creditors' rights and general principles of equity.
Section 4.3 Compliance with Laws. ETG has complied in all material respects
with each, and is not in violation of any law, ordinance or governmental rule or
regulation necessary to the ownership of its or the operation of the business or
otherwise.
Section 4.4 Capitalization. (a) The authorized capital stock of ETG
consists of 1,000,000 shares of ETG Common Stock and no shares of preferred
stock. As of November 1, 1998, there were 1,000 shares of ETG Common Stock
issued and outstanding. Schedule 1 hereto sets forth the name of each
shareholder of ETG and the shares of ETG Common Stock owned by each such
shareholder. Since November 1, 1998, no additional shares of capital stock of
ETG have been issued. ETG has no outstanding bonds, debentures, notes or other
obligations the holders of which have the right to vote (or which are
convertible into or exercisable for securities having the right to vote) with
the shareholders of ETG on any matter. All outstanding shares of ETG Common
Stock are duly authorized. There are not at the date of this Agreement any
existing options, warrants, calls, subscriptions, convertible securities, or
other rights, agreements or commitments which obligate ETG to issue, transfer,
redeem or sell any shares of capital stock of ETG.
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(b) Each Selling Shareholder is the lawful owner of record and beneficially
of the number of shares of the ETG Common Stock set forth opposite his
respective name in Schedule 1 hereto, free and clear of all pledges, liens,
claims and encumbrances of every kind, including, without limitation, any
agreements, subscriptions, options, warrants, calls, commitments or rights of
any character granting to any person, firm or corporation any interest in or
right to acquire from such Selling Shareholder at any time, or upon the
happening of any event, any shares of the ETG Common Stock. Each Selling
Shareholder has full legal power and all authorization required by law to
transfer and deliver the ETG Common Stock owned by him in accordance with this
Agreement.
Section 4.5 Subsidiaries. ETG does not have any Subsidiaries.
Section 4.6 Other Interests. ETG does not own, directly or indirectly any
interest or investment (whether equity or debt) in any corporation, partnership
joint venture, business, trust or entity.
Section 4.7 No Violation. Neither the execution and delivery by ETG of this
Agreement, nor the consummation by ETG of the transactions contemplated hereby
in accordance with the terms hereof, will (a) conflict with or result in a
breach of any provisions of the Certificate of Incorporation or Bylaws of ETG;
(b) violate, conflict with, result in a breach of any provision of, constitute a
default (or an event which, with notice or lapse of time or both, would
constitute a default) under, result in the termination, or in a right of
termination or cancellation of, accelerate the performance required by, result
in the triggering of any payment or other obligations pursuant to, result in the
creation of any lien, security interest, charge or encumbrance upon any of the
properties of ETG under, or result in being declared void, voidable, or without
further binding effect, any of the terms, conditions or provisions of any note,
bond, mortgage, indenture, deed of trust or any material license, franchise,
permit, lease, contract, agreement or other instrument, commitment or obligation
to which ETG is a party, or by which ETG or its properties is bound or affected;
(c) contravene or conflict with or constitute a violation of any provisions of
any law, regulation, judgment, injunction, order or decree binding upon or
applicable to ETG; or (d) other than the Regulatory Filings, required any
consent, approval or authorization of, or declaration, of or registration with,
any domestic governmental or regulatory authority.
Section 4.8 Conduct of Business. The business of ETG is not being conducted
in default or violation of any term, condition or provisions of (a) its
respective Articles of Certificate of Incorporation or By-Laws or similar
organizational documents; (b) any note, bond, mortgage, indenture, contract,
agreement, lease or other instrument or agreement of any kind to which ETG is
now a party or by which ETG or its properties or assets may be bound; or (c) any
federal, state, local or foreign statute, law, ordinance, rule, regulation or
approval applicable to ETG.
Section 4.9 Litigation. Except as disclosed on Schedule 4.9 hereto, there
are no actions, suits or proceedings pending against ETG or threatened against
ETG at law or in equity, or before or by any federal or state commission, board,
bureau, agency or instrumentality.
Section 4.10 Absence of Certain Changes. Since November 1, 1998, ETG has
conducted its business only in the ordinary course of such business, and there
has not been (a) any ETG Material Adverse Effect (b) any declaration, setting
aside or payment of any dividend or other distribution with respect to its
capital stock; or (c) any material change in its accounting principles,
practices or methods, except any such change after the date of this Agreement
required by generally accepted accounting principles.
Section 4.11 Intellectual Property and Software Products.
(a) ETG does not currently use nor has it previously used in the
operation of its business (including in the development, production or
marketing of its products and services) any copyrights, patents or
trademarks except for those listed in Schedule 4.11. ETG owns or has the
lawful right to use all copyrights (registered of unregistered), patents,
patent applications, trademarks, trademark applications, technology rights
and licenses, logos, trade names, Software Products (as defined below),
trade secrets, know-how and other intellectual property (collectively,
"Intellectual Property") that has been used in the
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operation of its business in the ordinary course or otherwise. All of the
Intellectual Property listed in Schedule 4.11 is owned by ETG, free and
clear of all liens, security interests, charges or encumbrances or used
pursuant to an agreement that is described in Schedule 4.11. The Company
does not infringe upon or unlawfully or wrongfully used any Intellectual
Property rights owned or claimed by any other person. ETG is not in default
and has not received any notice of any claim of infringement or any other
claim or proceeding with respect to any such Intellectual Property. Except
for any rights under written licenses or other written Contracts, no
current or former employee of ETG and no other person owns or has any
proprietary, financial or other interest, direct or indirect, in whole or
in part, and including any right to royalties or other compensation, in any
of the Intellectual Property.
(b) Schedule 4.11 contains a complete list of all of the computer
software products sold, licensed, distributed, marketed, used or under
development by, or licensed to or under development for, ETG (the "Software
Products"). Each of the Software Products performs substantially in
accordance with the specifications, documentation and other written
material used in connection with the sale, license, distribution, marketing
or use thereof and is free of errors and defects in programming and
operation except such defects as would not materially and adversely affect
the use of the respective Software Products for their intended purposes.
(c) Except as specified in Schedule 4.11, all right, title and
interest in and to the Software Products is owned by ETG, free and clear of
all liens, security interests, charges or encumbrances and any of such
Software Products that is not owned is available for use pursuant to an
agreement that is described in Schedule 4.11. No government funding was
utilized in the development of any of the Software Products. The sale,
license, distribution, marketing or use of the Software Products by ETG
does not violate any rights of any other person, and ETG has not received
any communication alleging such a violation. Except as specified in
Schedule 4.11, ETG does not have any obligation to compensate any person
for the sale, license, distribution, marketing or use of the Software
Products. Other than as set forth in Schedule 4.11, ETG has not granted to
any other person any license, option or other right in or to any of the
Software Products, except for non-exclusive, royalty-bearing, end-user
licenses granted by ETG pursuant to license agreements, copies of any of
which have been provided to Parent (the "End-User Licenses").
(d) ETG does not have any obligation owing to any person to maintain,
modify, improve or upgrade any of the Software Products, except for any
such obligation set forth in an End-User License or under a
customer-specific services agreement and such other obligations as would
not, individually or in the aggregate, have a ETG Material Adverse Effect.
(e) All officers of ETG and all employees and consultants of ETG who
are involved in the design, review, evaluation or development of
Intellectual Property have executed a nondisclosure and assignment of
inventions agreement (a "Confidentiality Agreement") sufficient to protect
the confidentiality and value of such items and to vest in ETG exclusive
ownership thereof. To any Selling Shareholder knowledge, (i) none of the
Confidential Information has been used, divulged or appropriated for the
benefit of any person other than ETG or otherwise to detriment of ETG, (ii)
except as specified in Schedule 4.11, no employee or consultant of ETG has
used any other person's trade secrets or other information that is
confidential in the course of his or her work for ETG and (iv) no employee
or consultant of ETG is, or is currently expected to be, in Default under
any term of any employment contract, agreement or arrangement relating to
the Intellectual Property, or any Confidentiality Agreement of any other
Contract or any restrictive covenant relating to the Intellectual Property,
or the development or exploitation thereof.
Section 4.12 Year 2000 Compliance
(a) Definitions. The following terms, as used in this Section 4.12,
have the following meaning:
"Facilities" means any facilities or equipment used by ETG in any
location, including heating, ventilating and air conditioning systems,
mechanical systems, elevators, security systems, fire suppression systems,
telecommunications systems, fax machines, copy machines and
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equipment, whether or not owned by ETG.
"Internal MIS Systems" means any Software and computer systems
(including hardware, firmware, operating system software, utilities and
applications software) used in the ordinary course of the business by or on
behalf of ETG, including ETG's payroll, accounting, billing/receivables,
inventory, asset tracking, customer service, human resources and e-mail
systems.
"Products" means any products offered or furnished by ETG, or any
predecessor in interest of ETG, currently or at time in the past,
including, without limitation, the Software Products; each item of
hardware, Software or firmware; any system, equipment or products
consisting of or containing one or more thereof; and nay and all
enhancements, upgrades customizations, modifications and maintenance
thereto.
"Services" means any services offered or furnished by ETG in the
conduct of its business, or by any predecessor in interest of ETG,
currently or at any time in the past.
"Software" means any computer software of any nature whatsoever,
including all systems software, all applications software, whether for
general business usage (e.g., accounting, finance, word processing,
graphics, spreadsheet analysis, etc.) or specific, unique-to-the-business
usage (e.g., purchase or service order processing, etc.) and all computer
operating, security or programming software, that is owned by or licensed
to ETG or used, or has been developed or designed for or is in the process
of being developed or designed for use, directly or indirectly, in the
conduct of the business of ETG, and any and all documentation and object an
source codes related thereto.
"Year 2000 Compliant" means that (i) the Products, Services or other
item(s) at issue accurately process, provide and/or receive all date/time
data (including calculating, comparing, sequencing, processing and
outputting) within, from, into and between centuries (including the
twentieth and twenty-first centuries and the years 1999 and 2000),
including leap year calculations, and (ii) neither the performance nor the
functionality of ETG's Products, Services and other item(s) at issue will
be affected by any dates/time prior to, on, after or spanning January 1,
2000. The design of the Products, Services and other item(s) at issue to
ensure compliance with the representations and warranties contained in this
Section 4.12 includes proper date/time data century recognition and
recognition of 1999 and 2000, calculations that accommodate single century
and multi-century formulae and date/time values before, on, after and
spanning January 1, 2000, and date/time data interface values that reflect
the century, 1999 and 2000. In particular, but without limitation, (A) no
value for current date/time will cause any error, interruption or decreased
performance in or for such Products, Services and other item(s), (B) all
manipulations of date and time related data (including calculating,
comparing, sequencing, processing and outputting) will produce correct
results for all valid dates and times when used independently or in
combination with other Products, Services and/or items, (C) date/time
elements in interfaces and data storage will specify the century to
eliminate date ambiguity without human intervention, including leap year
calculations, (D) where any date/time element is represented without a
century, the correct century will be unambiguous for all manipulations
involving that element, (E) authorization codes, passwords and zaps (purge
functions) will function normally and in the same manner during, prior to,
on and after January 1, 2000, including the manner in which they function
with respect to expiration dates and CPU serial numbers, and (F) ETG's
provision of Products, Services and other item(s) will not be interrupted,
delayed, decreased or otherwise affected by the advent of the year 2000.
(b) Products and Services. Without limiting the generality of Section
4.12(b), all of the Company's Products and Services are Year 2000
Compliant. If ETG is obligated to repair or replace Products or Services
previously provided by ETG that are not Year 2000 Compliant in order to
meet ETG's contractual obligations, avoid personal injury or other
liability, avoid
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misrepresentation claims or satisfy any other obligations or requirements,
ETG has repaired or replaced those Products and Services to make them Year
2000 Compliant. ETG has furnished Parent with true, correct and complete
copies of any customer agreements and other materials and correspondence in
which ETG has furnished (or could be deemed to have furnished) assurances
as to the performance and/or functionality of ETG's Products and Services
on or after January 1, 2000.
(c) Internal MIS Systems and Facilities. All of ETG's Internal MIS
Systems and Facilities are Year 2000 Compliant.
(d) Suppliers. To the Selling Shareholders knowledge, all vendors of
products and services to ETG, and their respective products, services and
operations, are Year 2000 Complaint. To the Selling Shareholders knowledge,
each such vendor will continue to furnish its products or services to ETG,
without interruption or material delay, on and after January 1, 2000. ETG
has entered into appropriate agreements with each of its vendors certifying
that all hardware, software or firmware, and any other products and
services furnished by such vendor, including any and all enhancements,
upgrades, customizations, modifications, maintenance and the like, are Year
2000 Compliant. All such vendor agreements include appropriate
indemnification by the vendor in favor of ETG and ETG's successors if that
vendor or its products, services or operations fail to be Year 2000
Compliant or it the products, services or operations fail to conform to or
meet the terms of the vendor warranties, representations or other
contractual terms.
(e) Year 2000 Compliance Investigations and Reports. ETG has furnished
Parent with a true, correct and complete copy of any internal
investigations, memoranda, budget plans, forecasts or reports concerning
the Year 2000 Compliance of the products, services, operations, systems,
supplies and facilities of ETG and ETG's vendors.
Section 4.13 Properties. Schedule 4.13(a) hereto sets forth a complete and
accurate description and list of all assets and property owned by ETG, including
real property. ETG has good and valid title (good and marketable title in the
case of owned real property) to all of its assets and properties, free and clear
of any lien, claim or other encumbrance except as disclosed on Schedule 4.13(b)
hereto. ETG has not received notice that any of its assets or properties is in
violation in any material respect of any existing law or any building, zoning,
health, safety or other ordinance, code or regulation. The plant, facilities and
equipment of ETG necessary to the operation of its business are in operating
condition and repair sufficient for the operation of the business as presently
conducted. Schedule 4.13(c) sets forth a complete list of all leases of real or
personal property to which ETG is a party. Such leases are valid and subsisting
leases, upon consummation of the transaction contemplated hereby, shall continue
to entitle the Surviving Corporation to the use and possession of the real or
personal property purported to be covered thereby for the terms specified in
such leases and for the purposes for which such real or personal property is now
used.
Section 4.14 Material Contracts. Except as set forth on Schedule 4.14,
neither ETG nor its properties is a party to, bound by, or subject to (a) any
loan agreements, guaranties or other evidence of indebtedness; (b) any agreement
relating to the ownership or control of any interest in a partnership,
corporation, limited liability company, joint venture or other entity or similar
arrangement; (c) any employment contracts or consulting arrangements entered
into by ETG or agreements or arrangements with respect to severance or similar
matters; (d) any agreement or arrangement restricting in any manner (i) ETG's
right to compete with any other person or entity; (ii) the right of any other
party to compete with ETG; or (iii) the ability of such person or entity to
employ any of ETG's employees; (e) any secrecy or confidentiality agreement; (f)
any contract, agreement or arrangement containing change of control provisions;
(g) any agreement or arrangement between ETG and any of its officers, directors
or other Affiliates; or (i) any contract, agreement or arrangement requiring a
payment in excess of $25,000 in any twelve month period; or (j) any other
contract, agreement or arrangement, including equipment leases (collectively,
the "ETG Contracts"). Schedule 4.14 sets forth a description of each of the ETG
Contracts. All the ETG Contracts are valid, subsisting, in full force and
effect, and binding upon ETG in accordance
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with their terms, and binding upon the other parties thereto in accordance with
their terms. ETG is not (with or without notice or lapse of time or both) in
default under any ETG Contract nor is any other party to any such contract or
other agreement (with or without notice or lapse of time or both) in default
thereunder.
Section 4.15 Taxes. ETG (a) has timely filed all federal, state and foreign
tax returns required to be filed by it for tax years ended prior to the date of
this Agreement or requests for extensions have been timely filed and any such
request shall have been granted and not expired, and all such returns are
complete and accurate in all material respects; (b) has paid or accrued all
taxes shown to be due and payable on such returns and has paid or accrued all
payroll, sales, and admissions taxes and such other taxes as have been due and
payable; and (c) has properly accrued all such taxes for such periods subsequent
to the periods covered by such returns.
Section 4.16 Employee Benefit Plans. All employee benefit plans and other
benefit arrangements covering employees of ETG (the "ETG Benefit Plans") and all
employee agreements providing compensation, severance or other benefits to any
employee or former employee of ETG are set forth on Schedule 4.16 hereto. True
and complete copies of all ETG Benefit Plans, including any related trust or
funding vehicles, policies or contracts, have been made available to Parent.
None of the ETG Benefit Plans is intended to be qualified under Section 401(a)
of the Code nor does ETG have any "pension plans" as such term is defined in
Section 3(2) of ERISA, with respect to which payments must be made to the
Pension Guaranty Corporation.
Section 4.17 Labor Matters. ETG is not a party to, or bound by, any
collective bargaining agreement, contract or other agreement or understanding
with a labor union or labor organization. There is no unfair labor practice or
labor arbitration proceeding pending or threatened against ETG relating to its
business. There are no organization efforts with respect to the formation of a
collective bargaining unit presently being made or threatened involving
employees of ETG. There is no labor strike, dispute, slowdown or work stoppage
pending or threatened against ETG nor has it experienced any of the same during
the last three years. All employees of ETG are employed at will. A list of ETG's
employees, together with such employee's current job title and salary history
during the last three years, is described on Schedule 4.17.
Section 4.18 Absence of Indemnifiable Claims, etc. There are no losses,
claims, damages, costs, expenses, liabilities or judgments which would entitle
any director, officer or employee of ETG to indemnification by ETG under
applicable law, the Certificate of Incorporation or By-laws of ETG or any
insurance policy maintained by ETG.
Section 4.19 No Brokers. ETG has not entered into any contract, arrangement
or understanding with any person or firm which may result in the obligation of
ETG or Parent to pay any payments in connection with the negotiations leading to
this Agreement or the consummation of the transactions contemplated hereby. ETG
is not aware of any claim for payment of any finder's fees, brokerage or agent's
commission or other like payments in connection with the negotiations leading to
this Agreement or the consummation of the transaction contemplated hereby.
Section 4.20 Financial Condition. ETG has delivered to Parent true and
correct copies of the following, initialed by the chief executive officer of
ETG: financial statements consisting of balance sheets and income statements of
ETG as of July 31, 1998. Each such balance sheet presents fairly the financial
condition, assets, liabilities, and shareholders equity of ETG as of its date;
each such statement of income presents fairly the results of operations of ETG
for the period indicated. The financial statements referred to in this Section
4.20 are in accordance with generally accepted accounting principles. Since
October 7, 1997,
(i) There has at no time been a material adverse change in the
financial condition, results of operations, businesses, properties, assets,
liabilities, or future prospects of ETG.
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(ii) ETG has not authorized, declared, paid, or effected any dividend
or liquidating or other distribution in respect of its membership interests
or any direct or indirect redemption, purchase, or other acquisition of any
interests of ETG.
(iii) The operations and businesses of ETG have been conducted in all
respects only in the ordinary course.
(iv) ETG has not suffered an extraordinary loss (whether or not
covered by insurance) or waived any right of substantial value.
There is no fact known to ETG which materially adversely affects or in the
future (as far as ETG can foresee) may materially adversely affect the financial
condition, results of operations, businesses, properties, assets, liabilities,
or future prospects of ETG or the Surviving Corporation.
Section 4.21 Liabilities. Other than the liabilities and obligations of ETG
listed on Schedule 4.21 hereto which the Surviving Corporation is assuming and
which do not, in the aggregate, exceed $125,000, ETG does not have and has not
incurred any other liabilities or obligations.
Section 4.22 Questionable Payments. Neither ETG, nor any director, officer,
agent, employee, or other person associated with or acting on behalf of ETG, nor
any stockholder of ETG has, directly or indirectly: used any corporate funds for
unlawful contributions, gifts, entertainment, or other unlawful expenses
relating to political activity; made any unlawful payment to foreign or domestic
government officials or employees or to foreign or domestic political parties or
campaigns from corporate funds; violated any provision of the Foreign Corrupt
Practices Act of 1977, as amended; or made any bribe, rebate, payoff, influence
payment, kickback, or other unlawful payment.
Section 4.23 Environmental Matters.(a) No notice, notification, demand,
request for information, citation, summons or order has been issued, no
complaint has been filed, no penalty has been assessed and no investigation or
review is pending or threatened by any Governmental Entity (a) with respect to
any alleged violation by ETG of any law, ordinance or regulation of any
Governmental Entity, with respect to any generation, treatment, storage,
recycling, transportation or disposal or release, as defined in 42 USMC ss.
9601(22) ("Release") of any toxic, caustic or otherwise hazardous substance,
including petroleum, its derivatives, by-products and other hydrocarbons,
whether or not regulated under federal, state or local environmental statutes,
ordinances, rules, regulations or orders ("Hazardous Substance") generated by
the Company.
(b) (i) ETG has not handled any Hazardous Substance on property now or
previously owned or leased by ETG; (ii) no polychlorinated biphenyls or urea
formaldehyde is or has been present at any property now or previously owned or
leased by ETG; (iii) no asbestos is or has been present at any property now or
previously owned or leased by ETG; (iv) there are no underground storage tanks
for Hazardous Substances, active or abandoned, at any property now or previously
owned or leased by ETG; (v) no Hazardous Substance has been Released at, on or
under any property now or previously owned or leased by ETG; and (vi) no
Hazardous Substance has been released or is present, in a reportable or
threshold planning quantity, where such a quantity has been established by
statute, ordinance, rule, regulation or order, at, on or under any property now
or previously owned by ETG.
(c) ETG has not transported or arranged for the transportation, directly or
indirectly, of any Hazardous Substance to any location which is listed or
proposed for listing under the Comprehensive Environmental Responses,
Compensation and Liability Act of 1980, as amended ("CERCLA"), or on any similar
state list or which is the subject of federal, state or local enforcement
actions or other investigations which may lead to claims against ETG for cleanup
costs, remedial work, damages to natural resources or for personal injury
claims, including, but not limited to, claims under CERCLA.
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(d) No oral or written notification of a Release of a Hazardous Substance
has been filed by or on behalf of ETG and no property now or previously owned or
leased by ETG is listed or, to the Selling Shareholders knowledge, proposed for
listing, on the National Priorities List promulgated pursuant to CERCLA, or any
similar state list of sites requiring investigation or clean-up.
(e) There are no environmental liens on any of the real property or other
properties owned or leased by ETG, and no governmental actions have been taken
or are in process which could subject any of such properties to such liens and
ETG would not be required to place any notice or restriction relating to the
presence of Hazardous Substances at any property owned by any of them in any
deed to such property.
(f) There have been no environmental investigations, studies, audits,
tests, reviews or other analyses conducted by or which are in the possession of
ETG in relation to any property or facility now or previously owned or leased by
ETG which have not been delivered to Parent prior to the date hereof.
4.24 Insurance. Schedule 4.24 sets forth all policies or binders of fire,
liability, workmen's compensation, vehicular or other insurance held by or on
behalf of ETG (specifying the insurer, the policy number or covering note number
with respect to binders, and describing each pending claim thereunder of more
than $10,000, setting forth the aggregate amounts paid out under each such
policy through the date of this Agreement and the aggregate limit of any of the
insurer's liability thereunder). Such policies and binders are in full force and
effect and insure against risks and liabilities customary for the business in
which ETG is engaged. ETG is not in default with respect to any provision
contained in any such policy or binder and has not failed to give any notice or
present any claim under any such policy or binder in due and timely fashion.
Except for claims set forth on Schedule 4.24 there are no outstanding unpaid
claims under any such policy or binder. ETG has not received a notice of
cancellation or non-renewal of any such policy or binder. ETG has no knowledge
of any inaccuracy in any application for such policies or binders, any failure
to pay premiums when due or any similar state of facts which might form the
basis for termination of any such insurance.
4.25 Full Disclosure. All documents and other papers delivered by or on
behalf of ETG in connection with this Agreement and the transactions
contemplated hereby are true, complete and authentic. The information furnished
by or on behalf of ETG to Parent and its representatives in connection with this
Agreement and the transactions contemplated hereby does not contain any untrue
statement of a material fact and does not omit to state a material fact required
to be stated therein or necessary to make the statements made, in the context in
which made, not false or misleading. There is no fact which ETG has not
disclosed to Parent in writing which materially adversely affects, or so far as
ETG can now foresee will materially adversely affect, the assets, properties,
business or condition (financial or otherwise) or prospects of ETG or the
ability of ETG to perform this Agreement.
ARTICLE V
COVENANTS
Section 5.1 Confidential Information. For an indefinite period after the
Closing, no Restricted Party shall divulge, communicate or use in any way, any
confidential information or trade secrets of the Parent or its Subsidiaries.
Section 5.2 Interim Operations of ETG. Prior to the Effective Time, unless
Parent has consented in writing thereto, ETG:
(i) Shall conduct its operations according to its usual, regular and
ordinary course in substantially the same manner as heretofore conducted;
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(ii) Shall use its reasonable efforts to preserve intact its business
organizations and goodwill, keep available the services of officers and
employees and maintain satisfactory relationships with those persons having
business relationships with it;
(iii) Shall not amend its Certificate of Incorporation or Bylaws or
comparable governing instruments;
(iv) Shall promptly notify Parent of any material emergency or other
material change in its condition (financial or otherwise), business,
properties, assets, liabilities, prospects or the normal course of its
business or of its properties, any material litigation or material
governmental complaints, investigations or hearings (or communications
indicating that the same may be contemplated), or the breach of any
representation or warranty contained herein;
(v) Shall not (A), issue any shares of it capital stock, effect any
stock split or otherwise change its capitalization as it existed on the
date hereof or otherwise change (B) grant, confer or award any option,
warrant, conversion right or other right not existing on the date hereof to
acquire any shares of its capital stock; (C) increase any compensation or
enter into or amend any employment agreement with any of its present or
future officers, directors or employees; (D) grant any severance or
termination package to any employee or consultant; or (E) adopt any new
employee benefit plan (including any stock option, benefit or purchase
plan) or amend any existing employee benefit plan in any respect;
(vi) Shall not declare, set aside or pay any dividend or make any
other distribution or payment with respect to any shares of its capital
stock;
(vii) Shall not enter into any material transaction, or agree to enter
into any material transaction, outside the ordinary course of business,
including, without limitation, any transaction involving a merger,
consolidation, joint venture, partial or complete liquidation or
dissolution, reorganization, recapitalization, restructuring or a purchase,
sale, lease or other disposition of a substantial portion of assets or
capital stock;
(viii) Shall not incur any indebtedness for borrowed money or
guarantee any such indebtedness or issue or sell any debt securities or
warrants or rights to acquire any debt securities of others;
(ix) Shall not make any loans, advances or capital contributions to,
or investments in, any other person;
(x) Shall not make or commit to make any capital expenditures;
(xi) Shall not apply any of its assets to the direct or indirect
payment, discharge, satisfaction or reduction of any amount payable
directly or indirectly to or for the benefit of any Affiliate or enter into
any transaction with any Affiliate.
(xii) Shall not alter the manner of keeping its books, accounts or
records, or change in any manner the accounting practices therein
reflected;
(xiii) Shall not grant or make any mortgage or pledge or subject
itself or any of its properties or assets to any lien, charge or
encumbrance of any kind; and
(xiv) Shall maintain insurance on its tangible assets and its
businesses in such amounts and against such risks and losses as are
currently in effect.
Section 5.4 Filings; Other Action.
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(a) Subject to the terms and conditions herein provided, ETG and
Parent shall use all reasonable efforts to take, or cause to be taken, all
action and do, or cause to be done, all things necessary, proper or
appropriate to consummate and make effective the transactions contemplated
by this Agreement. If, at any time after the Effective Time, any further
reasonable action is necessary or desirable to carry out the purpose of
this Agreement, the proper officers and directors of Parent and ETG shall
take all such necessary action.
(b) (i) ETG and Parent shall give any notices to third parties, and
use all reasonable efforts to obtain any third party consents, necessary,
proper or advisable to consummate the transactions contemplated in this
Agreement.
(ii) In the event that either party shall fail to obtain any third
party consent described in subsection (b) (i) above, such party shall use
all reasonable efforts, and shall take any such actions reasonably
requested by the other party hereto, to minimize any adverse effect upon
ETG and Parent, its Subsidiaries, and their respective businesses
resulting, or which could reasonably be expected to result after the
Effective Time, from the failure to obtain such consent.
(c) From and after the date of this Agreement until the Effective
Time, each party hereto shall promptly notify the other of (i) the
occurrence, or non-occurrence, of any event the occurrence, or
non-occurrence, of which would be likely to cause any condition to the
obligations of any party to effect the Merger and the other transactions
contemplated by this Agreement not to be satisfied, or (ii) the failure of
ETG or Parent, as the case may be, to comply with or satisfy any covenant,
condition or agreement to be complied with or satisfied by it pursuant to
this Agreement which would be likely to result in any condition to the
obligations of any party to effect the Merger and the other transactions
contemplated by this Agreement not to be satisfied; provided, however, that
the delivery of any notice pursuant hereto shall not cure any breach of any
representation or warranty requiring disclosure of such matter prior to the
date of this Agreement or otherwise limit or affect the remedies available
hereunder to the party receiving such notice.
Section 5.5 Inspection of Records. From the date hereof to the Effective
Time, ETG shall (a) allow all designated officers, attorneys, accountants and
other representatives of Parent reasonable access at all reasonable times to the
offices, records and files, correspondence, audits and properties, as well as to
all information relating to commitments, contracts, titles and financial
position, or otherwise pertaining to the business and affairs, of ETG; (b)
furnish to Parent and its representatives such financial and operating data and
other information as such persons may reasonably request; and (c) instruct the
employees, counsel and financial advisors of ETG to cooperate with the Parent
and its representatives in its investigation of ETG business.
Section 5.6 Further Action. Each party hereto shall, subject to the
fulfillment at or before the Effective Time of each of the conditions of
performance set forth herein or the waiver thereof, perform such further acts
and execute such documents as may be reasonably required to effect the Merger.
Section 5.7 Expenses. Whether or not the Merger is consummated, all costs
and expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall, except as otherwise provided herein, be paid by the
Selling Shareholders if incurred by the Selling Shareholders or ETG, and by
Parent if incurred by Parent or Merger Sub.
Section 5.8 Survival of Representations and Warranties of ETG and the
Selling Shareholders. Notwithstanding any right of Parent to investigate the
affairs of ETG and notwithstanding any knowledge of facts determined or
determinable by Parent pursuant to such investigation or right of investigation,
Parent has the right to rely fully upon the representations, warranties,
covenants and agreement of the Selling Shareholders contained in this Agreement.
All such representations, warranties, covenants and agreements shall survive the
execution and delivery hereof and the Closing hereunder. All representations,
warranties, covenants and agreements made herein by Parent and Merger Sub shall
survive the execution and delivery hereof and the Closing hereunder.
78
<PAGE>
Section 5.9 Adjustments.
(a) The parties hereto agree that (i) all real property taxes,
personal property taxes, and similar ad valorem obligations that are levied
against ETG or its property, (ii) all expenses relating to ETG's business,
including, but not limited to, utilities, bank debt and trade and accounts
payable, and (ii) all revenue relating to ETG's business, including
accounts receivable, shall be apportioned between the Selling Shareholders
and Parent as of the Closing Date based on the portion of each such expense
or revenue attributable to the period falling on or before the Closing Date
on the one hand, which the Selling Shareholders shall bear the
responsibility and benefit of, and the portion of each such expense or
revenue attributable to the period falling after the Closing Date, on the
other hand, which Parent shall bear the responsibility and benefit of (the
"Closing Adjustment").
(b) To the extent that any of the prorations made pursuant to this
Section 5.9 are based upon estimates of payments to be made and/or expenses
to be incurred subsequent to the Closing Date, or either party discovers
any errors or omissions in respect of such prorations, the parties agree to
adjust such prorations promptly upon receipt of such payments or of bills
or other documentation setting forth the actual amount of such expenses.
ARTICLE VI
CONDITIONS
Section 6.1 Conditions to Obligation of ETG to Effect the Merger. The
obligation of ETG to effect the Merger shall be subject to the fulfillment at or
prior to the Closing Date of the following conditions:
(a) Parent shall have performed, in all material respects, all of its
agreements contained herein that are required to be performed by Parent on
or prior to the Closing Date, and ETG shall have received a certificate of
the President or Senior Vice President of Parent dated the Closing Date,
certifying to such effect.
(b) The representations and warranties of Parent and Merger Sub
contained in this Agreement and in any document delivered in connection
herewith shall be true and correct as of the Closing, and ETG shall have
received a certificate of the President or Senior Vice President of Parent,
dated the Closing Date, certifying to such effect.
(c) Parent shall have executed and delivered to the Selling
Shareholders the Registration Rights Agreement, substantially in the form
of Exhibit A hereto;
Section 6.2 Conditions to Obligation of Parent and Merger Sub to Effect the
Merger. The obligations of Parent and Merger Sub to effect the Merger shall be
subject to the fulfillment at or prior to the Closing Date of the following
conditions:
(a) ETG shall have performed, in all material respects, all of its
agreements contained herein that are required to be performed by ETG on or
prior to the Closing Date, and Parent shall have received a certificate of
the President or a Vice President of ETG, dated the Closing Date,
certifying to such effect.
(b) The representations and warranties of the Selling Shareholders
contained in this Agreement and in any document delivered in connection
herewith shall be true and correct as of the Closing, and Parent shall have
received a certificate from each of the Selling Shareholders, dated the
Closing Date, certifying to such effect.
79
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(c) The Selling Shareholders shall have executed and delivered the
Restricted Securities Letter addressed to Parent, substantially with the
form of Exhibit B hereto.
ARTICLE VII
TERMINATION
Section 7.1 Termination. This Agreement may be terminated and the Merger
contemplated hereby may be abandoned, by written notice promptly given to the
other parties hereto, at any time prior to the Effective Time, whether prior to
or after approval by their respective stockholders or members:
Section 7.1.1 By mutual written consent of Parent and ETG;
Section 7.1.2 By either Parent or ETG, if a court of competent jurisdiction
or a Governmental Entity shall have issued an order, decree or ruling or taken
any other action, in each case permanently restraining, enjoining or otherwise
prohibiting the transactions contemplated by this Agreement and such order,
decree, ruling or other action shall have become final and nonappealable;
Section 7.1.3 By Parent, if ETG fails to perform in all material respects
its obligations under this Agreement;
Section 7.1.4 By Parent, if there shall have occurred a ETG Material
Adverse Change since the date of this Agreement; or
Section 7.1.5 By ETG, if Parent fails to perform in all material respects
its obligations under this Agreement.
Section 7.2 Effect of Termination. In the event of the termination of this
Agreement and abandonment of the Merger as provided in Section 7.1 hereof, this
Agreement shall forthwith become void and there shall be no liability on the
part of Parent or ETG, except as set forth in this Section hereof and Article
VIII and except to the extent that such termination results from the willful
breach of a party hereto of any of its representations, warranties, covenants or
agreements set forth in this Agreement.
ARTICLE VIII
INDEMNIFICATION
Section 8.1 Obligation of the Selling Shareholders to Indemnify. Each of
the Selling Shareholders shall indemnify, defend and hold harmless Parent and
its assigns from and against any losses, liabilities, damages or deficiencies
(including interest, penalties and reasonable attorneys' fees and disbursements)
("Losses") based upon, arising out of or otherwise in respect of:
(i) the breach of any representation, warranty, covenant or agreement
of ETG or the Selling Shareholders contained in this Agreement or in any
document or other writing delivered pursuant to this Agreement (determined
for this purpose as if all references to knowledge and materiality
contained in Article IV are deleted); and
(ii) any liabilities or obligations of ETG arising prior to the
Closing Date other than those specifically assumed hereunder.
8.2 Obligation of Parent to Indemnify. Parent shall indemnify, defend and
hold harmless each of the Selling Shareholders from and against any losses,
liabilities, damages or deficiencies
80
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(including interest, penalties and reasonable attorneys' fees and disbursements)
("Losses") arising out of or due to a breach of any representation, warranty,
covenant or agreement of Parent contained in this Agreement or in any document
or other papers delivered by Parent pursuant to this Agreement (determined for
this purpose as if all references to knowledge and materiality contained in
Article IV are deleted).
8.3 Notice and Opportunity to Defend. If any party (the "Indemnitee")
receives notice of any claim or the commencement of any action or proceeding
with respect to which any other party (or parties ) is obligated to provide
indemnification (the "Indemnifying Party") pursuant to Section 8.1 or 8.2, the
Indemnitee shall promptly give the Indemnifying Party notice thereof; provided,
however, that failure to give such notification shall not affect the
indemnification provided hereunder except to the extent the Indemnifying Party
shall have been actually prejudiced as a result of such failure. The Indemnified
Party shall have the right to retain counsel of its own choice to represent it,
and the Indemnifying Party shall pay the fees, expenses and disbursements of
such counsel; and such counsel shall, to the extent consistent with its
professional responsibilities, cooperate with the Indemnifying Party and any
counsel designated by the Indemnifying Party. The Indemnifying Party shall be
liable for any settlement of any claim against the Indemnified Party made with
the Indemnifying Party's written consent, which consent shall not be
unreasonably withheld. The Indemnifying Party shall not, without the prior
written consent of the Indemnified Party, settle or compromise any claim, or
permit a default or consent to the entry of any judgment in respect thereof,
unless such settlement, compromise or consent includes, as a unconditional term
thereof, the giving by the claimant to the Indemnified Party of an unconditional
release from all liability in respect of such claim.
ARTICLE IX
GENERAL PROVISIONS
Section 9.1 Notices. Any notice required to be given hereunder shall be
sufficient if in writing, and sent by facsimile transmission or by courier
service (with proof of service), hand delivery or certified or registered mail
(return receipt requested and first-class postage prepaid), addressed as
follows:
If to Parent or Merger Sub: If to ETG:
OAO Technology Solutions, Inc. Norman G. Matlock
7500 Greenway Center Drive Two Penn Center, Suite 200
16th Floor Philadelphia, PA 19102
Greenbelt, MD 20770
or to such other address as any party shall specify by written notice so given,
and such notice shall be deemed to have been delivered as of the date so
telecommunicated, personally delivered or mailed.
Section 9.2 Assignment, Binding Effect. Neither this Agreement nor any of
the rights, interests or obligations hereunder shall be assigned by any of the
parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other parties. Subject to the preceding sentence, this
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective permitted successors and assigns.
Section 9.3 Entire Agreement.This Agreement and any documents delivered by
the parties in connection herewith constitute the entire agreement among the
parties with respect to the subject matter hereof and supersede all prior
agreements and understandings among the parties with respect thereto. No
addition to or modification of any provision of this Agreement shall be binding
upon any party hereto unless made in writing and signed by all parties hereto.
Section 9.4 Amendment. This Agreement may not be amended except by an
instrument
81
<PAGE>
in writing signed on behalf of each of the parties hereto.
Section 9.5 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware without regard to
its rules of conflict of laws.
Section 9.6 Counterparts. This Agreement may be executed by the parties
hereto in separate counterparts, each of which when so executed and delivered
shall be an original, but all such counterparts shall together constitute one
and the same instrument.
Section 9.7 Headings. Headings of the Articles and Sections of this
Agreement are for the convenience of the parties only and shall be given no
substantive or interpretive effect whatsoever.
Section 9.8 Interpretation. In this Agreement, unless the context otherwise
requires, words describing the singular number shall include the plural and vice
versa, and words denoting any gender shall include all genders and words
denoting natural persons shall include corporations and partnerships and vice
versa.
Section 9.9 Waivers. Except as provided in this Agreement, no action taken
pursuant to this Agreement, including, without limitation, any investigation by
or on behalf of any party, shall be deemed to constitute a waiver by the party
taking such action of compliance with any representations, warranties, covenants
or agreements contained in this Agreement. The waiver by any party hereto of a
breach of any provision hereunder shall not operate or be construed as a waiver
of any prior or subsequent breach of the same or any other provision hereunder.
Section 9.10 Incorporation of Schedules and Exhibits. The Schedules and
Exhibits attached hereto and referred to herein are hereby incorporated herein
and made a part hereof for all purposes as if fully set forth herein.
Section 9.11 Severability. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, the provision shall be interpreted
to be only so broad as is enforceable.
Section 9.12 Enforcement of Agreement. The parties hereto agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement was not performed in accordance with its specific terms or was
otherwise breached. It is accordingly agreed that the parties shall be entitled
to seek an injunction or injunctions to prevent breaches of this Agreement and
to enforce specifically the terms and provisions hereof, this being in addition
to any other remedy to which they are entitled at law or in equity.
82
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IN WITNESS WHEREOF, the parties have executed this Agreement and caused the
same to be duly delivered on their behalf on the day and year first written
above.
OAO TECHNOLOGY SOLUTIONS, INC.
By:___________________________
Name: Gregory A. Pratt
Title: President
ETG ACQUISITION CORPORATION
By:____________________________
Name: Gregory A. Pratt
Title: President
ENTERPRISE TECHNOLOGY GROUP, INC.
By:____________________________
Name: Gregory A. Pratt
Title: President
SELLING SHAREHOLDERS:
______________________________
Gregory Pratt
_____________________________
Mark Stanoch
_____________________________
Annette Stanoch
83
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