UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission file number 0-23173
OAO TECHNOLOGY SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 52-1973990
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7500 Greenway Center Drive
Greenbelt, Maryland 20770
- --------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (301) 486-0400
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
As of May 8, 2000, the registrant had outstanding 18,315,830 shares of
its Common Stock, par value $0.01 per share.
1
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OAO TECHNOLOGY SOLUTIONS, INC.
Quarterly Report on Form 10-Q for the Three Months Ended March 31, 2000
INDEX
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Page Reference
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COVER PAGE.....................................................................1
INDEX..........................................................................2
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of March 31, 2000 and
December 31, 1999 (Unaudited)......................................3
Condensed Consolidated Statements of Operations and the
Comprehensive Income for the Three Months Ended
March 31, 2000 and 1999 (Unaudited)................................4
Condensed Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 2000 and 1999
(Unaudited)........................................................5
Notes to Condensed Consolidated Financial Statements (Unaudited)...6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................................9
PART II - OTHER INFORMATION..................................................15
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES....................................................................16
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
OAO TECHNOLOGY SOLUTIONS, INC.
Condensed Consolidated Balance Sheets
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
----------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 11,733 $ 13,142
Accounts receivable
Billed, net of allowance of $ 695 and $1,014 , respectively 18,642 21,066
Unbilled, net of allowance of $449 and $493, respectively 6,874 5,059
-----------------------------
25,516 26,125
Note receivable - OAO Corporation 2,520 2,520
Deferred income taxes 1,031 1,031
Income tax receivable 934 934
Other current assets 6,566 6,447
-----------------------------
Total current assets 48,300 50,199
Property and equipment, net 4,791 4,387
Purchased and developed computer software for sale, net 1,551 1,596
Deposits and other assets 623 192
Goodwill 4,791 4,981
-----------------------------
Total assets $ 60,056 $ 61,355
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,636 $ 8,470
Accrued expenses 10,406 11,718
Income taxes payable 483 605
Unearned revenue 1,169 797
Current portion of capital lease obligations 24 54
-----------------------------
Total current liabilities 18,718 21,644
Capital lease obligations, net of current portion 34 89
Commitments and contingencies -- --
Stockholders' equity :
Preferred stock, par $.01 per share, 10,000,000 shares authorized
none issued and outstanding -- --
Common stock, par $.01 per share, 50,000,000 shares authorized;
18,300,191 and 18,101,124 shares issued and outstanding
at March 31, 2000 and December 31, 1999, respectively 183 181
Additional paid-in capital 41,734 40,743
Deferred compensation (120) (131)
Accumulated other comprehensive loss (281) (249)
Shareholders' receivable (2,933) (2,933)
Retained earnings 2,721 2,011
-----------------------------
Total stockholders' equity 41,304 39,622
-----------------------------
Total liabilities and stockholders' equity $ 60,056 $ 61,355
=============================
The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>
3
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OAO TECHNOLOGY SOLUTIONS, INC.
Condensed Consolidated Statements of Operations and Comprehensive Income
(Unaudited)
(Dollars and shares in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended
March 31,
-------------------------
2000 1999
-------------------------
<S> <C> <C>
Revenues $38,545 $35,717
Direct costs 33,195 31,867
-------------------------
5,350 3,850
Selling, general and administrative expense 4,713 3,446
-------------------------
Income from operations 637 404
Interest and other income (expense), net 596 97
-------------------------
Income before income taxes 1,233 501
Provision for income taxes 524 200
-------------------------
Net income 709 301
Other comprehensive income :
Foreign currency translation adjustment 32 33
-------------------------
Comprehensive income $ 741 $ 334
=========================
Net income per common share:
Basic $ 0.04 $ 0.02
=========================
Diluted $ 0.04 $ 0.02
=========================
Weighted average number of shares outstanding:
Basic 17,635 16,694
=========================
Diluted 18,976 17,334
=========================
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
<PAGE>
OAO TECHNOLOGY SOLUTIONS, INC
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three months ended
March 31,
------------------------------
2000 1999
------------------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 709 $ 301
Adjustment to reconcile net income to net
cash (used in) provided by operating activities:
Depreciation and amortization 766 507
Change in assets and liabilities:
Accounts receivable, net 609 (1,244)
Other current assets (119) (161)
Deposits and other assets (420) 96
Accounts payable (1,954) 2,296
Accrued expenses (1,312) (8)
Unearned revenue 372 (326)
Income taxes payable (122) 211
------------------------------
Net cash (used in) provided by operating activities (1,471) 1,672
------------------------------
Cash Flows from Investing Activities:
Expenditures for property and equipment (933) (160)
------------------------------
Net cash used in investing activities (933) (160)
------------------------------
Cash Flows from Financing Activities:
Proceeds from the sale of common stock, net 993 76
Payments on capital lease obligations (85) (102)
------------------------------
Net cash provided by (used in) financing activities 908 (26)
------------------------------
Effect of exchange rate changes on cash 87 33
Net (decrease) increase in cash and cash equivalents (1,409) 1,519
Cash and cash equivalents, beginning of period 13,142 9,615
------------------------------
Cash and cash equivalents, end of period $ 11,733 $ 11,134
===============================
Supplemental cash flows information:
Cash paid for interest $ 18 $ 17
Cash paid for income taxes $ 867 --
The accompanying notes are an integral part of these condensed
consolidated financial statements.
</TABLE>
5
<PAGE>
OAO TECHNOLOGY SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Organization and basis of presentation
OAO Technology Solutions, Inc. (the "Company" or "OAOT") is a global
enterprise-wide integrator of information technology ("IT") solutions. The
Company, along with its wholly owned subsidiaries, provides a wide range of
outsourced information technology solutions and professional services. These
services include the operation of large-scale service delivery centers and
networks; distributed systems management; custom applications software
development and maintenance; professional IT services; enterprise application
solutions, integration, implementation and training services; web enablement and
e-business solutions; and proprietary software solutions for the managed care
marketplace. These services are provided through four business lines: Network
and Systems Business Solutions, Professional Services, E-Business Consulting
Solutions, and Healthcare IT Solutions.
The condensed consolidated financial statements included herein have been
prepared by the Company without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission ("SEC") and include, in the opinion of
the management, all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of interim period results. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. These condensed consolidated
financial statements should be read in conjunction with the financial statements
and notes thereto included in the Company's Annual Report on Form 10-K filed
with the SEC for the year ended December 31, 1999 and the Company's other
filings with the SEC. The results of operations for the three-month period ended
March 31, 2000, are not necessarily indicative of the results to be expected for
the full year.
2. Software Licenses for Resale
The Company entered into a Value Added Industry Remarketer agreement with Siebel
Systems, Inc., on August 31, 1999. As part of this agreement, the Company
purchased software licenses in the amount of $5.1 million for resale to third
parties. The software licenses were purchased with cash of $2.8 million and
228,800 shares of the Company's common stock. The common stock has a guaranteed
per share value of $10 at September 1, 2000. The difference, if any, between the
share price at September 1, 2000 and the guaranteed price will be paid in cash.
The balance of the licenses is included in other current assets and the fair
value of the guarantee is included in accrued expenses on the accompanying
balance sheets.
3. Earnings per share
Basic earnings per share has been calculated as net earnings divided by
weighted-average common shares outstanding, while diluted earnings per share has
been computed as net earnings divided by weighted average common and diluted
shares outstanding. For the three-month periods ended March 31, 2000 and 1999
the Company's stock options outstanding increased outstanding common shares by
1,341,000 and 640,000 respectively, for total diluted shares outstanding of
18,976,000 and 17,334,000 respectively.
6
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OAO TECHNOLOGY SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
4. Segment information
The Company manages its business segments primarily by service line. As reported
in the Company's Annual Report on Form 10K, the names and certain
classifications within the Company's reportable segments were changed in 1999 to
better describe the services provided. The 1999 quarterly results have been
reclassified to conform to 2000 presentation. The Company's reportable segments
are Network and Systems Business Solutions, Professional Services, E-Business
Consulting Solutions, and Healthcare IT Solutions.
Network and Systems Business Solutions; includes data-center operations
management, distributed systems management, and other IT services.
Professional Services; are provided by OAO Services, Inc, a wholly owned
subsidiary. Through OAO Services, Inc. the Company provides highly skilled IT
professionals to augment customer's staffing requirements nationwide. These
services are provided primarily to strategic customers and on a time and
materials basis.
E-Business Consulting Solutions; provides entire life cycle services for
organizations. These services range from initial business process modeling and
development, through system installation and implementation and custom software
application development and maintenance. The E-Business Consulting Solutions
segment is dedicated to implementing and supporting systems from Siebel Systems,
NCR, SAP and Microsoft. This segment also provides third party vendor packaged
software including Siebel Systems, SAP and Microsoft, IBM and Rational on both a
licensed and Application Service Provider ("ASP") basis.
Healthcare IT Solutions; provides proprietary software products and business
solutions for healthcare organizations. Through OAO HealthCare Solutions, Inc.,
a wholly owned subsidiary, the Company provides full service solutions via its
proprietary MC400 software on a one-time license and ASP basis. This includes
product development, customer service, and installation service, training and
ongoing support.
The Company evaluates the performance of each segment based on segment revenues
and gross profit. Segment gross profit includes only direct costs. Selling,
general and administrative expenses; net interest expense; and other income and
expenses are not allocated to segments.
7
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OAO TECHNOLOGY SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Segment information (Continued)
Summary information by segment is as follows:
<TABLE>
<CAPTION>
For the three months ended
March 31,
------------------------------
2000 1999
------------------------------
<S> <C> <C>
(Amounts in thousands):
NETWORK and SYSTEMS BUSINESS SOLUTIONS
Revenues $ 16,729 $ 16,649
Gross profit 3,123 3,376
PROFESSIONAL SERVICES
Revenues 14,344 16,087
Gross profit 1,807 1,978
E-BUSINESS CONSULTING SOLUTIONS
Revenues 4,275 1,096
Gross loss (320) (1,553)
HEALTHCARE IT SOLUTIONS
Revenues 3,197 1,885
Gross profit 740 49
SEGMENT TOTALS
Revenues $ 38,545 $ 35,717
Gross profit 5,350 3,850
Selling, general and administrative expenses unallocated 4,713 3,446
------------------------------
Total consolidated income from operations 637 404
Interest and other income (expense), net unallocated 596 97
------------------------------
Total consolidated income before income taxes $ 1,233 $ 501
==============================
</TABLE>
5. Reclassification
Certain reclassifications have been made to the condensed consolidated financial
statements for the three months ended March 31, 1999 in order to conform to the
presentation used in 2000.
8
<PAGE>
Item 2.
OAO TECHNOLOGY SOLUTIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is provided to increase the understanding
of, and should be read in conjunction with, the Condensed Consolidated Financial
Statements of the Company and Notes thereto included elsewhere in this quarterly
report. Historical results and percentage relationships among any amounts in
these financial statements are not necessarily indicative of trends in operating
results for any future period. The statements which are not historical facts
contained in this quarterly report, including this Management's Discussion and
Analysis of Financial Condition and Results of Operations, and Notes to these
Condensed Consolidated Financial Statements, constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements are based on currently available operating, financial
and competitive information, and are subject to various risks and uncertainties.
Future events and the Company's actual results may differ materially from the
results reflected in these forward-looking statements. Factors that might cause
such a difference include, but are not limited to, dependence on key strategic
and strategic end-user customers, limited ability to establish new strategic
customer relationships, risks associated with fixed-price contracts, ability to
sustain and manage growth, variability of quarterly operating results, the
Company's expansion and development of new service lines, marketing and other
business development initiatives, the commencement of new engagements,
competition in the industry, general economic conditions, dependence on key
personnel, the ability to attract, hire and retain personnel who possess the
technical skills and experience necessary to meet the service requirements of
its clients, the potential liability with respect to actions taken by its
employees, risks associated with international sales, and other risks described
herein, the Company's annual report on Form 10K and in the Company's other
Securities and Exchange Commission filings.
Overview
The Company is a global enterprise-wide integrator of information technology
(IT) solutions. The Company provides a wide range of outsourced IT solutions and
professional services, including the operation of large-scale service delivery
centers and networks, distributed systems management, custom applications
software development and maintenance, professional IT services, enterprise
application solutions, integration, implementation and training services, web
enablement and e-business solutions, and proprietary software solutions for the
managed care marketplace. These services are provided through four business
segments: Network and Systems Business Solutions; Professional Services;
E-Business Consulting Solutions and Healthcare IT Solutions.
The Company provides Network and Systems Business Solutions, 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 include IBM and Compaq with end-user
engagements including: Boeing, Ames Department Stores, United Health Care,
Campbell Soup, Ryder Systems Corporation, Citibank and others. The Company's
data center contracts with a strategic customer are up for renewal. The Company
has submitted its bid for renewal and expects to be notified of the customer's
decision by July 31, 2000. There can be no assurance that OAOT will win all or
any portion of these contracts or that all or any portion of these contracts, if
renewed, would continue at historical profitability levels.
Professional Services provides information technology personnel primarily on a
time and materials basis, that are regularly utilized within engagements to meet
short or indefinite term requirements. 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. Professional
Services are offered as part of the Company's service offerings to its strategic
customers as well as non-strategic customers.
9
<PAGE>
OAO TECHNOLOGY SOLUTIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Overview (Continued)
E-Business Consulting Solutions are generally provided on a time and materials
contractual basis. The Company, through its E-Business Consulting Solutions
services, 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 E-Business Consulting Solutions segment is
dedicated to implementing and supporting third-party designed software
applications and systems sold on a licensed and ASP basis.
The Company's Healthcare IT Solutions practice provides proprietary managed care
software application solutions under software license agreements via its MC400
software. The products are provided on a one-time license fee or a per member
per month (PMPM) long-term contractual basis and may include system 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 sites in the United States and the Bahamas.
The Company focuses its efforts on middle market commercial customers, as well
as public sector customers. In support of these efforts, the Company has
established strategic relationships with third-party software vendors such as
Siebel Systems, NCR, SAP, Compaq and Microsoft. The Company signed a special
Value Added Industry Remarketer (VAIR) agreement with Siebel Systems, Inc. This
agreement permits OAOT to design, install, resell and host, on an ASP basis,
Siebel solutions for commercial and public sector customers in North America and
Europe. The Company has also hired teams of Siebel consultants to implement
comprehensive CRM solutions.
Management intends to reinvest profits from its Network and Systems Business
Solutions and Professional Services segments to continue to develop new service
offerings in the E-Business Consulting Solutions and Healthcare IT Solutions
segments. These offerings include e-business application solutions, application
service provider services (ASP), custom software application development and
maintenance (ADM), and customer relationship management services (CRM) including
license sales, application hosting, and consulting. Company management believes
that timely investment in internet-centric businesses and digital technology
infrastructure solutions will result in improved long-term stockholder value.
10
<PAGE>
OAO TECHNOLOGY SOLUTIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Results of Operations
The following table sets forth, for the periods indicated, selected statement of
operations data as a percentage of net revenue:
<TABLE>
<CAPTION>
For the three months ended March 31,
(in millions) 2000 1999
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues ......................................................... $ 38.5 100.0% $ 35.7 100.0%
Direct Costs ..................................................... 33.2 86.2% 31.9 89.3%
Selling, general and administrative expense ...................... 4.7 12.2% 3.4 9.6%
-----------------------------------------------------------
Income from operations ........................................... 0.6 1.6% 0.4 1.1%
Interest and other income (expense), net ......................... 0.6 1.6% 0.1 0.3%
-----------------------------------------------------------
Income before income taxes .................................. 1.2 3.2% 0.5 1.4%
Provision for income taxes ....................................... 0.5 1.4% 0.2 0.6%
-----------------------------------------------------------
Net income .................................................. $ 0.7 1.8% $ 0.3 0.8%
-----------------------------------------------------------
</TABLE>
Comparison of the three-month period ended March 31, 2000 to the three-month
period ended March 31, 1999.
Revenues
The Company's revenues increased $ 2.8 million or 7.9 % to $ 38.5 million for
the three months ended March 31, 2000, compared to $ 35.7 million for the three
months ended March 31, 1999. The increase was driven primarily by the E-Business
Consulting Solutions and Healthcare IT Solutions segments. This increase was
partially offset by lower revenues in the Professional Services segment due to a
lower number staffing requisitions from a Strategic Customer.
Revenues for E-Business Consulting Solutions increased $ 3.2 million or 290.1 %
to $ 4.3 million, for the three months ended March 31, 2000 compared to $ 1.1
million for the three months ended March 31, 1999. The increase in revenues was
due primarily to increased activity in the ADM, CRM and ERP businesses. In the
ADM business both the AT&T and Nissan contracts began after the first quarter of
1999, and accordingly the first quarter 2000 compares favorably to the first
quarter 1999. Both contracts continue to increase their level of activity and
utilization. The CRM and ERP businesses were in the start-up phase in the first
quarter of 1999 and had little revenues in that period, whereas in the first
quarter of 2000, projects are in place resulting in comparatively higher
revenues from first quarter 1999 to first quarter 2000.
Revenues for the Healthcare IT Solutions segment increased $ 1.3 million, or
69.6 %, to $ 3.2 million for the three months ended March 31, 2000 compared to $
1.9 million for the three months ended March 31, 1999. The increase in revenues
was due primarily to the effect of the recurring "per-member, per-month"
("PMPM") revenues which have occurred throughout 1999 and into the first quarter
of 2000, which cause a favorable comparison over the same period in 1999.
Revenues from Network and Systems Business Solutions remained relatively
constant with an increase of $ 0.1 million or 0.5 % to $ 16.7 million for the
three months ended March 31, 2000 compared to $ 16.6 million for the three
months ended March 31, 1999. Decreases in the work order business and pricing
and volume decreases from a strategic customer were off set by new projects from
new customers and the effect of the UK acquisition which occurred in the second
quarter of 1999, but is fully reflected in the first quarter of 2000. IBM Global
Services notified the Company that it would not renew the console operations
contract. It is expected that the contract would have provided revenues of
approximately $3.5 million during the remainder of 2000. In light of the pricing
of the renewal bid submitted by the Company, Company management believes that
the loss of this contract will not have a material effect on the Company's
profitability in 2000 and beyond.
11
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OAO TECHNOLOGY SOLUTIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Revenues (continued)
Revenues from Professional Services decreased $ 1.7 million or 10.8 % to $ 14.3
million for the three months ended March 31, 2000 compared to $ 16.1 million for
1999. The decrease in revenues is due to the carry over effects of Y2K
constraints resulting in a lower number of staffing requisitions from a
strategic customer, however, revenues have increased from the fourth quarter
1999.
Direct Costs
The Company's direct costs increased $ 1.3 million or 4.2 % to $ 33.2 million
for the three months ended March 31, 2000, compared to $ 31.9 million for the
three months ended March 31, 1999. As a percentage of revenues; however, direct
costs decreased to 86.2 % for the three months ended March 31, 2000 versus 89.3
% for same period in 1999. The decrease in direct costs as a percentage of
revenues is due primarily to the E-Business Consulting Solutions and the
Healthcare IT Solutions segments. The other segments remained relatively
constant for direct costs in relation to their respective revenues.
In the E-Business Consulting Solutions segment direct costs increased by $ 1.9
million to $ 4.6 million for the three months ended March 31, 2000 from $ 2.6
million for the three months ended March 31, 1999. However, as a percent of the
segment revenues direct costs decreased from 241.7 % of sales in the first
quarter 1999 to 107.5 % of sales in the first quarter of 2000. The decrease was
due to the transition from start-up status in the first quarter of 1999 to
working on projects in the first quarter of 2000.
In the Healthcare IT Solutions segment direct costs increased by $ 0.6 million
to $ 2.5 million for the three months ended March 31, 2000 from $ 1.8 million
for the three months ended March 31, 1999. However, as a percent of the segment
revenues direct costs decreased from 97.4 % of sales in the first quarter 1999
to 76.9 % of sales in the first quarter of 2000. Direct costs as a percent of
sales continue to decrease as a result of the recurring revenues from PMPM sales
of software.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $ 4.7 million and $3.4 million
for the three month periods ended March 31, 2000 and 1999, respectively. OAOT's
selling, general and administrative expenses increased as a percentage of
revenues for the three months ended March 31, 2000 to 12.2 % compared to 9.6 %
for the three months ended March 31, 1999. The increase was a result of
increased sales and marketing efforts and the continuation of the company's
infrastructure build-out to accommodate its growth. The Company expects selling,
general and administrative expenses to increase in absolute dollars and as a
percentage of revenues as it continues to expand its sales and marketing
expenditures to penetrate new markets and expand its client base.
Interest and Other Income and Provisions for Income Taxes
Interest income increased primarily due to a higher amount of invested cash and
interest earned on a note receivable from OAO Corporation, and from the decrease
in the obligation under the Siebel stock fair value guarantee incurred in
connection with the value added industry remarketer agreement with Siebel
Systems, Inc. The effective tax rate increased to 42 % for the three months
ended March 31, 2000 versus a 40 % rate in the same period in 1999.
12
<PAGE>
OAO TECHNOLOGY SOLUTIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources
Cash and cash equivalents were $ 11.7 million as of March 31, 2000, versus $
13.1 million as of December 31, 1999. Cash used in operations was $ 1.5 million
for the three months ended March 31, 2000. Cash used in operations for the three
months ended March 31, 2000 was due to the payment of accounts payable and
accrued expenses. OAOT's business segments of Network and Systems Business
Solutions and Professional Services, improved collections of accounts
receivable, and cash management. These increased cash flows were used to fund
the Company's newer Healthcare IT Solutions and E-Business Consulting Solutions
business segments, including its ADM business. However, the Company expects to
continue to invest in the operations of its newer business segments including
E-Business Consulting Solutions and Healthcare IT Solutions for projects
including ADM and enhancement of its ASP product during 2000. The Company will
also invest in sales and marketing as it develops its demand generation
capabilities for these newer business services. Such costs will continue to be
expensed as incurred and represent significant use of future cash which is
expected to be funded from Company operations and available cash.
Cash used in investing activities was $ 0.9 million for the purchase of
computers and office equipment. The Company's business operations are not
capital intensive, and expenditures in any given year are ordinarily not
significant.
The Company entered into a $35 million combined revolving credit and term loan
agreement (the "Agreement") with Bank of America on June 30, 1999. The Agreement
provides a revolving line of credit "Revolver" in the amount of $15 million that
matures on May 31, 2002. The Revolver provides for a commitment fee based on the
unused balance, and at the Company's option, interest at the prime rate or, the
LIBOR plus a 1.75% to 2.5% risk adjusted premium. The term loan facility, in the
amount of $20 million, matures on May 31, 2001. Borrowings under the Agreement
are limited to a multiple of earnings before interest, taxes, depreciation, and
amortization (EBITDA). However, the Company may convert, at its option, the
Revolver portion of the Agreement into an asset-based loan whose borrowing
availability would be a percentage of eligible billed and unbilled receivables.
The Agreement also requires maintenance of certain financial covenants,
prohibits the payment of dividends among other restrictions. There were no
borrowings outstanding under this Agreement as of December 1999 or March 31,
2000.
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 has announced an acquisition
program as part of its strategy to accelerate revenues and earnings growth. The
Company expects to use bank credit to leverage the Company's financial position.
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 additional debt or equity financing will be
available to the Company on terms and conditions acceptable to the Company, if
at all.
13
<PAGE>
OAO TECHNOLOGY SOLUTIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Impact of the Year 2000 "Y2K" Issue
The Company surveyed and remediated where necessary all of its business and
mission-critical systems among other procedures and tests, as part of its Y2K
planning process. The total incremental cost of replacement systems and Y2K
contingency planning was estimated at $100,000. As of May 8, 2000, the Company
had not experienced any significant Y2K related disruptions.
Quantitative and Qualitative Disclosures about Market Risk
The Company conducts business in foreign countries, primarily Canada and the
United Kingdom. Foreign currency transaction gains and losses were not material
to the Company's results of operations for the three months ended March 31, 2000
and 1999. 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.
14
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Page
No. Description No.
- ------------- -------------------------------------------------------- -----
27.1 Financial Data Schedule. (1) 17
(b) No reports were filed on form 8-K during the quarter ended March 31, 2000.
- ------------------
(1) Filed herewith.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<CAPTION>
OAO Technology Solutions, Inc.
(Registrant)
<S> <C>
Date: May 15, 2000 By /S/ Gregory A. Pratt
-------------------------------
Gregory A. Pratt
President and Chief Executive Officer
Date: May 15, 2000 By: /S/ J. Jeffrey Fox
-------------------------------
J. Jeffrey Fox
Vice President Finance and Chief Financial Officer
</TABLE>
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0001043476
<NAME> OAO TECHNOLOGY SOLUTIONS, INC.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 11,733
<SECURITIES> 0
<RECEIVABLES> 27,225
<ALLOWANCES> (1,709)
<INVENTORY> 0
<CURRENT-ASSETS> 11,051
<PP&E> 4,791<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 60,056
<CURRENT-LIABILITIES> 18,718
<BONDS> 34<F2>
0
0
<COMMON> 183
<OTHER-SE> 41,121
<TOTAL-LIABILITY-AND-EQUITY> 60,056
<SALES> 0
<TOTAL-REVENUES> 38,545
<CGS> 0
<TOTAL-COSTS> 33,195
<OTHER-EXPENSES> 4,713
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 596<F3>
<INCOME-PRETAX> 1,233
<INCOME-TAX> 524
<INCOME-CONTINUING> 709
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 709
<EPS-BASIC> .04
<EPS-DILUTED> .04
<FN>
(F1) Shown in this Financial Data Schedule net of related accumulated
depreciation for consistency with Condensed Consolidated Balance Sheet.
(F2) Represents the long-term portion of capital lease obligations.
(F3) Represents interest and other income of the Company.
</FN>
</TABLE>
