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FORM 10-K
UNITED STATES
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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number 0-23173
OAO TECHNOLOGY SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 52-1973990
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7500 Greenway Center Drive
Greenbelt, Maryland 20770
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (301) 486-0400
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 23, 2000, was approximately
$58,713,003 based on the closing sale price of the Common Stock on March 23,
2000, of $6.969 as reported by the NASDAQ National Market System.
As of March 23, 2000, the registrant had outstanding 18,040,910 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 12, 2000 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, 1999
Item Page
- ---- ----
Part I
1 Business............................................................. 3
2 Properties........................................................... 13
3 Legal Proceedings.................................................... 13
4 Submission of Matters to a Vote of Security Holders.................. 13
Part II
5 Market for Registrant's Common Equity and
Related Stockholder Matters...................................... 13
6 Selected Consolidated Financial Data................................. 14
7 Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 15
7a Quantitative and Qualitative Disclosures about Market Risk........... 22
8 Financial Statements and Supplementary Data.......................... 23
9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure......................................... 45
Part III
10 Directors and Executive Officers of the Registrant................... 45
11 Executive Compensation............................................... 45
12 Security Ownership of Certain Beneficial Owners and Management....... 46
13 Certain Relationships and Related Transactions....................... 46
Part IV
14 Exhibits, Financial Statement Schedules and Reports on Form 8-K...... 46
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PART I
Item I. BUSINESS.
Overview
OAO Technology Solutions, Inc. (the "Company", or "OAOT") is a global
enterprise-wide integrator of information technology (IT) solutions. The Company
provides a wide range of outsourced information technology 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
lines: Network and Systems Business Solutions; Professional Services; E-Business
Consulting Solutions; and Healthcare IT Solutions.
Network and Systems Business Solutions, formerly Managed Services, includes
network and systems design, integration, and management of large-scale
environments linking multiple technologies, operating systems, protocols and
geographic areas. The Company has clients within enterprise systems, distributed
systems and networked systems, providing these services directly to its own
end-user customers and to its strategic customers as part of the IT outsourcing
team.
Professional Services, formerly Staff Augmentation, recruits professional
and technical staff locally, nationally and internationally. The skilled
workforce consists of programmers, system managers, operators, system support
personnel, network engineers and technical consultants. These technical IT
skills are provided to the Company's strategic and third-party customers
nationwide on a time and material basis. Highly skilled professionals are
provided to augment the customers internal ITs staffing requirements or to
respond to short-term staffing needs that cannot be sufficiently defined to
permit fixed prices.
E-Business Consulting Solutions, formerly Enterprise Resource Planning
(ERP), 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 (ADM). The Company's service line implements and supports systems
from Siebel Systems, NCR, SAP and Microsoft. This business unit also provides
third party vendor packaged software including Siebel Systems, SAP and
Microsoft, IBM and Rational on both a licensed and an application service
provider (ASP) basis.
Healthcare IT Solutions provides proprietary software products and business
solutions for health care organizations. The Company's proprietary MC400
software provides a comprehensive solution for the healthcare industry's payor
segment (HMO's, indemnity insurance plan and PHO's among others). The MC400
system is being web-enabled and provides over thirty modules that include claims
processing, disease and patient management, eligibility, enrollment and
utilization review. The Company has over fifty installed sites and offers a
viable solution to the healthcare industry that management believes meets the
Federal requirements of the Health Insurance Portability and Accountability Act
(HIPAA). The company offers clients flexible purchase options whereby MC400 can
be purchased on a one-time license and per-member per-month (PMPM) ASP type
basis. This includes product development, customer services, and installation
service, training and ongoing customer support.
Management has been and intends to continue to reinvest profits from its
Network and Systems Business Solutions and Professional Services segments to
continue to develop new IT businesses in the E-Business Consulting Solutions and
HealthCare IT Solutions business segments. These businesses include new specific
vertical markets, 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.
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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 as an
independent corporation. Finally, during December 1997 the Company raised
proceeds of approximately $34 million by issuing 6.235 million shares of common
stock for $5.00 per share and is traded as "OAOT" on the Nasdaq National Market.
Industry
The IT outsourcing industry is defined by several market segments, as
predicated by the strength and nature of customer demand. These market segments
typically include data center operations, network operations, client-server
operations, applications management and desktop management. 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 leading
market research firms, spending for worldwide IT services was expected to be
$2.2 trillion in 1999 and reach $3.3 trillion by 2002. Market demand for IT
outsourcing services within the United States is expected to grow from $161
billion during 1998 to $310 billion during 2003.
There are significant drivers that support the growth expectations for IT
solutions integrators. These drivers include the increasing complexity of IT
solutions and the many rapidly evolving technologies required to fulfill those
solutions. Additionally, many companies lack sufficient internal IT resources to
meet this demand and are outsourcing internal IT departments. Finally, there is
increasing industry consolidation and the formation of strategic partnerships.
Factors driving consolidation within the industry are customers demanding
complete end-to-end solutions and the increasing 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, providers of outsourcing services 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. This impracticality is due to the speed required to
meet and capture market demands.
The Network and System Business Solutions Markets. 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 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.
The Professional Services Markets. Many of the same factors fueling the
rapid expansion of the outsourcing industry are similarly impacting the
professional IT staffing industry. As the demand for technical resources
continues to expand, corporations are increasingly relying on
professional-specific staffing providers as a source for skilled IT
professionals. Whether to meet temporary or long-term demands, companies faced
with the difficulty of identifying, attracting, and retaining competent, highly
skilled IT professionals are supplementing their internal IT staff with
consultants obtained from professional-specific staffing companies. According to
a leading market research firm, the human resource outsourcing industry within
the United States is forecasted to grow from $13.9 billion in 1999 to $37.7
billion during 2003.
The E-Business Consulting Solutions Markets. The e-business markets are
served by customer solutions that organize and process information on intranets
and extranets as the primary application platform. These customer markets are
served by a host of vendors marketing proprietary software license
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and maintenance solutions, integration of front office customer relationship
management (CRM) and back office enterprise resource management (ERP) solutions
via application service provider (ASP) services. Examples of leading ERP
solutions are SAP, Baan and PeopleSoft, and examples of CRM solutions are Siebel
and Oracle.
Currently, the market for CRM solutions and ASP delivery models are
converging. Traditionally, ERP application engagements experienced long
implementation cycles, and high consulting and license fees that prevented
middle market companies from experiencing the same operating efficiencies as
larger competitors. The ASP implementations provide minimal customizations with
monthly access and service licensing fees, thereby offering various ranges of
customization services. More recently, the markets are offering server and
platform hosting services external to customer facilities. According to a
leading market research firm, over 75% of the companies with revenues of at
least $50 million will venture into e-business by 2004. The research firm also
forecasts the worldwide business-to-business e-commerce market will grow from
projections of $145 billion during 1999, to $403 billion during 2000, $953
billion during 2001, $2.18 trillion during 2002, $3.95 trillion during 2003, and
reach $7.3 trillion during 2004.
The ASP market within the United States is forecasted to grow from $398
million during 1998 to $9.8 billion during 2003 for a compounded average growth
rate of 89.7%. The market for CRM licensing will grow from less than $1 billion
in 1997 to $4 billion by 2002. Although these markets are expanding, there is
heightened awareness that the leading firms providing solutions to customers
will experience consolidation. For example, the research firm also indicated
that by 2004 the number of CRM firms will only be half of those operating during
1999.
The HealthCare IT Solutions Markets. The health care industry has
experienced significant recent transition, incurred by both the health care
provider/payor (the Company's customer) and by the evolution of products,
services, and fee arrangements made available by IT solution providers. Health
care providers and payors of health benefits include health maintenance
organizations (HMO's), preferred provider organizations (PPO's), third party
administrators (TPA's) and governments. Health care providers and payors have
experienced consolidation, forming large health organizations and networks, and
have incurred greater operating risks as the traditional fee-for-service
reimbursement model is being replaced by alternative payment models. To enhance
operating efficiencies and controls, the health care providers have increased
demand for comprehensive end-to-end IT systems and services. These system
solutions operate on hardware platforms including client/server networks,
mainframes and personal computer stations.
According to a leading market research firm, less than 40% of all health
care claim payments use Electronic Data Interchange (EDI), electronic funds
transfers and other technologies. The research firm also forecasts the IT market
size for health care products and services within the United States will grow
from projections of $27.2 billion during 1999, to $38.8 billion during 2002.
More specifically the forecast reported that demand for IT health care software
products will grow from $4.9 billion during 1999 to $7.9 billion during 2002,
and demand for health care networking services will grow from $1.1 billion
during 1999 to $1.7 billion during 2002.
The Company's Business Segments
Network and Systems Business Solutions
Network and Systems Business Solutions, formerly Managed Services, offers
customer solutions as Enterprise Systems Management (ESM), Distributed Systems
Management (DSM), and Networked Systems. Network and Business Systems Solutions
represents 44.7%, 64.8% and 90.6% of the Company's total 1999, 1998 and 1997
revenues, respectively. In prior years the Application Development and
Maintenance (ADM) solutions offering was also accounted for within this business
sector, but has been realigned with the E-Business Consulting Solutions business
sector within this report.
Enterprise Systems Management (ESM). The Company provides data center
operations management
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services, 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 data center engagement involves supporting a 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 regard to the Company's
support of the IBM Global Services' megacenters, 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. The megacenters utilize a very large network of
mainframe computer configurations that support both the strategic customer's
internal requirements and those of its end-user customers. The Company also
provides services 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.
The Company is engaged to perform pre-defined contractual functions on a
fixed-price basis and also supports a wide range of additional functions
pursuant to certain staffing service provisions under each contract. These
additional functions are performed on either 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.
The Company provides ESM services primarily to strategic customers that are
global providers of IT outsourcing services. IBM Global Services currently
engages the Company to provide management and operations services at three of
its four megacenters in the United States and its megacenters in the United
Kingdom. Each megacenter represents the networking of IBM's data centers across
a geographic region. Datacenter operations management provided approximately
25.2%, 30.2%, and 43.0% of total revenues for the years ended December 31, 1999,
1998 and 1997, respectively. The Company's data center contracts with IBM Global
Services are up for renewal during 2000. (See Growth Strategy - 1. Leveraging
existing relationships with strategic customers.)
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 18.4%, 24.7% and 28.3% of revenues, respectively,
for the years ended December 31, 1999, 1998 and 1997.
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.
Compaq requested OAOT to provide support in three major areas; interim support
services, change management and help desk staffing for workstations and servers
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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 staff
currently includes site managers, desktop analysts and technicians, and local
area network 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 help desk technicians, desktop analysts, and local area network
analysts at the RMC. Service contracts with Compaq require periodic renewal and
a portion of these contracts are up for renewal in 2000. (See Growth and
Strategy - 1. Leveraging existing relationships with strategic customers.)
Networked Systems. OAOT has experience in designing, deploying, and
managing local or wide area networks. This includes all facets of protocol
inter-networking, as well as vendor liaison with equipment vendors and
telecommunication firms. OAOT manages complex networked environments. The
Company routinely manages hundreds of millions of application minutes per month
for clients on a 24-hour, 7-day week, annual basis.
The Company believes its 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 believes that it is well
positioned to gain insight into market trends and make investments required to
pursue opportunities that result from these trends. This may allow the Company
to selectively broaden its service offerings.
Professional Services
Professional Services, formerly 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. Professional
Services represent 42.7%, 26.9% and 4.9% of the Company's total 1999, 1998 and
1997 revenues, respectively. OAO Services provides technical IT skills to a wide
range of end users and 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 customers internal IT staffing requirements that cannot
be sufficiently defined to permit fixed prices.
As of December 31, 1999, OAO Services provided over 700 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 writers. OAO Services provides personnel
possessing programming skills ranging from Oracle, SAP, C++, and COBOL/DB2, to
the every day needs of customers staffing requirements in the IT industry.
With offices strategically located in the Northeast, Southeast, Midwest and
the West, the Company's Professional Services division has the ability to
recruit professional and technical staff locally and nationally. The Company
believes that its Professional Services division is positioned to provide
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nationwide support to customers and it has continuously demonstrated this
ability since its inception.
E-Business Consulting Solutions
The e-business service and solutions market is rapidly evolving to pair
customer requirements with the constant stream of new technologies presented to
the market. These changes include the methods of delivery, as witnessed by the
convergence of the CRM solutions with the ASP delivery models. OAOT is
broadening its product lines and delivery methods to attempt to capture
additional opportunities and to provide its customers higher operating
efficiencies. OAOT believes that it has also strengthened itself by adding
seasoned personnel and resources, and also by realigning its delivery teams. To
enhance its ERP offerings, the Company added call center and customer
relationship management personnel, expanded its web-enablement and ADM
solutions, entered into a remarketing agreement with Siebel Systems, and entered
into an ASP hosting delivery agreement with Qwest. E-Business Consulting
Solutions represents 5.6% and 2.9% of the Company's total 1999 and 1998
revenues, respectively. There was no revenue for this segment in 1997.
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. The Company's ERP service line implements and supports
systems from SAP AG, one of the world's leaders in ERP solutions and other
software providers. The Company focuses its efforts on middle market commercial
customers as well as public sector customers.
The Company has established strategic relationships with both SAP and
Microsoft. As a Microsoft Certified Solutions Provider (MCSP), the Company has
trained and deployed technical consultants who are technically certified by SAP,
as well as being Microsoft Certified System Engineers (MCSE). This enables the
Company to provide a combination of highly technical skills. The Company
believes that highly trained and skilled consultants will allow the Company to
provide solutions for middle market commercial and public sector customers in a
more timely and cost effective manner.
Customer Relationship Management. The Company established this practice to
expand the front office solutions and customized solutions in application
design, implementation and hosting services. This practice has the ability to
configure the client's applications and provide access to the application from
an entirely managed environment. The Company brings the customers on line and
manages their systems at cost effective pricing. The CRM segment implements and
supports third party packaged software applications and systems on a licensed
and ASP basis. The Company focuses its efforts on middle market commercial
customers, as well as public sector customers. The Company signed a 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 CRM
front office applications for commercial and public sector customers in the
North America and Europe. The Company has also hired teams of Siebel consultants
to implement comprehensive CRM solutions.
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
eventually achieve level 3 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.
An example of these efforts is the expansion with IBM Global Services to
provide ADM services in support of IBM's AT&T application outsourcing contract.
To support this contract, the Company committed to hire application software
personnel at its Montcon Software Engineering Centre. In
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December 1999, the Company entered into another contract with IBM Global
Services to provide custom software application development for a significant
global technology manufacturing company. This agreement is expected to generate
$70 million in revenue over a 10-year term.
The Company formally announced its entry into the ASP market in February
2000. ASP services usually provide customers a pre-packaged suite of hardware,
network and software products and services that provide customers a software
application solution for a monthly fee. The Company's ASP business model will
attempt to customize the services to meet customer requirements by leveraging
its existing IT infrastructure and offering a comprehensive, single point of
responsibility service solution.
Healthcare IT Solutions
Healthcare IT Solutions represents 7.0%, 5.4% and 4.4% of the Company's
total 1999, 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 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.
Healthcare IT 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. During 1999, the Company began to
web-enable MC400 and expanded its functionality by adding disease management,
patient management, utilization review, and other healthcare-critical features
by purchasing proprietary software programs from Advanced Research Systems.
These new functionalities enhanced the marketability of the MC400 Managed Care
solution. The Company offers customers the flexibility of purchasing the MC400
with a one-time license fee or on a per-member, per-month (PMPM) ASP basis.
Growth Strategy
OAO Technology Solutions is dedicated to providing value-added, enterprise
infrastructure solutions that facilitate our customers' success through the
integration of business and IT processes. OAOT's vision is to use core
competencies of people and technology to meet its customers' technological
requirements in the new internet-centric economy. The Company believes it has a
unique opportunity to capture opportunities and enhance its the market position.
1. Leverage existing relationships with strategic customers.
Revenues from the Company's two strategic customers, IBM and Compaq, were
$137.6 million, $102.5 million and $76.5 million in the years ended December 31,
1999, 1998 and 1997, respectively. IBM accounted for 75.7%, 67.0% and 66.2% and
Compaq accounted for 15.9%, 23.4%, and 24.1% of revenues for the years ended
December 31, 1999, 1998, and 1997, respectively. The Company has diversified the
type of service provided to its strategic customers and expanded the number of
strategic customer business units to whom it provides services. For the year
ended December 31, 1999 the Company earned 25.2% of revenues from data center
management versus 60.2% in 1997.
The Company's traditional marketing method is to maintain and expand its
relationships with its
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strategic customers. The Company's personnel work or are located in these
customers' office locations. By locating management on site, this allows the
Company to establish a close alignment with each customers site personnel, and
thereby anticipate and respond to each customer's unique local needs. The
Company believes it could enhance its competitive advantage in the IT industry
by aligning with selected strategic customer accounts.
IBM. The Company's relationship with its largest strategic customer, IBM
Global Services, 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 was awarded its
first second-tier engagement with IBM in January 1993, successfully competing
against several existing IBM contractors. The Company has since been awarded
long-term engagements supporting three of IBM Global Services' 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. As recently as December 1999 the Company
signed a 10-year contract with IBM Global Services for $70 million for custom
application development (ADM) services.
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 supporting all of Compaq's
Canadian outsourcing engagements. In 1996, Compaq was also awarded an engagement
to provide services in support of one of the industry's largest desktop
outsourcing engagements. As a result of these engagements, the Company's
relationship with Compaq has expanded into other geographic areas, throughout
North America and the United Kingdom.
A decrease in the revenue or loss of a strategic customer could have a
material adverse effect on the Company's business, operating results, financial
condition and cash flows. There can be no assurance that either strategic
customer will renew existing contracts maturing within the next twelve months or
continue to engage the Company's services at historical levels, if at all. The
termination or non-renewal of a strategic customer's contract by an end-user
customer could also have a material adverse effect on the Company's business,
operating results, financial conditions and cash flows. The Company's data
center contracts with IBM are up for renewal during 2000. Additionally, in the
normal course of business, the Company must periodically renew its contracts
with Compaq. Several of these contracts are up for renewal in 2000. Company
management believes that OAOT offers the best solution and value to its
customers for these services. 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
2. Leverage existing core competencies to expand into higher margin faster
growth businesses including e-business and healthcare IT solutions.
The Company believes that its core competencies and skill sets are:
1. Experienced people managing network and system solutions including
data center help desk, desktop, desk side and other enterprise and
distributed systems management;
2. The infrastructure and worldwide ability to recruit information
technology personnel for OAOT and our customers;
3. Expertise in proprietary, web-enabled software with ASP environment
sales and implementation experience, and;
4. E-business solutions focused on application design, integration, and
management. These solutions are supplemented by strategic
relationships with independent software vendors and our own
proprietary software products.
10
<PAGE>
During 1999 OAOT began to use its core competencies to reposition itself into
higher margin, faster growth businesses of e-business solutions and Healthcare
IT solutions including Siebel CRM software solutions, and ADM services.
Management also began to reorganize its marketing and sales personnel to
emphasis the core competencies it has gained as a second-tier provider to
provide services directly to new customers. The Company is actively pursuing the
ASP market with both third party and its own MC400 Managed Care proprietary
software. The Company signed an agreement with Siebel Systems where it may
design, implement, sell and host solutions in North America and Europe. To
supplement the Siebel solutions, an agreement was made with Qwest in early 2000
for them to co-host the Company's ASP solution offerings. Hosting is the means
of providing customer's access to data and systems, external to their internal
hardware infrastructures.
3. Expand our sales and marketing to increase the customer base beyond the
strategic customers and develop direct company customer relationships.
During 1999 OAOT began to reposition itself into higher margin, faster
growth businesses and is attempting to enhance its position with new, direct
customer relationships. Management reorganized and began to expand its marketing
and sales personnel to begin to enhance its focus to extend beyond sales to its
strategic customers. Additionally, the Company began to focus on selling
e-business consulting services and healthcare IT solutions to new customers. The
Company is actively pursuing the ASP market with both third party and its own
MC400 managed care proprietary software.
These expansions work in tandem to penetrate new faster growth higher
margin markets and provide customers end-to-end IT solutions. The Company has
begun to employ seasoned personnel to expand its marketing practice. The
marketing personnel employ demand generation with early lead identification and
qualification skills. These marketing efforts are expected to allow the sales
personnel to focus entirely on qualified leads, rather than on demand
generation. The Company is also focused on expanding sales by ensuring its
customers' expectations have been met. The Company expects to meet customer
satisfaction levels by employing seasoned solution-specific sales personnel and
training the existing sales personnel on technical solution capabilities. These
customer-satisfaction efforts are expected to enhance future referral based
sales. The Company is expected to continue to make significant investments in
sales and marketing and product development to better position itself in key the
higher margin faster growth e-business solutions and Healthcare IT solutions
markets.
4. Develop Industry-Specific Expertise.
The Company intends to selectively develop expertise in industries that
will allow it to be a premier enterprise-wide integrator of information
technology solutions that may offer higher-margin opportunities. During 1999 the
Company acquired teams of call center professionals to gain a market presence in
the customer relationship management (CRM) markets. During 1997 the Company made
a significant investment in the healthcare industry by acquiring certain assets
of UniHealth Investment Company, a division of UniHealth, Inc., namely the MC400
managed care software. Also, during 1999 the Company committed itself to the
health care industry and its prior investment with the acquisition of patient
management software that will help allow our programmers to web-enable the MC400
and strengthen its marketability.
On May 27, 1999 the Company acquired the remaining 50% of the outstanding
capital stock of OAO/ICOR UK Ltd. not already owned by the Company, from Capita
Business Services Limited, a registered English & Wales company. Since making
this acquisition, this enterprise has further expanded its UK service and
relationship with the Company's largest strategic customer.
In July 1998, the Company expanded its offerings in the Professional IT
solutions 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
11
<PAGE>
Subcontracting (NTS) Supplier. It offers IBM Customer Support Center Services,
Year 2000 Support Services, and Deskside Support Services.
The acquisitions of DHR Technologies, Inc, ("DHR") in April of 1998, and
ETG, Inc. ("ETG") in November of 1998, contributed 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 and Microsoft applications.
5. Pursue Acquisitions and Alliances.
Management has been and intends to continue to reinvest profits from its
Network and Systems Business Solutions and Professional Services segments to
continue to develop new IT business in the E-Business Consulting Solutions and
HealthCare IT Solutions business segments. These businesses 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 shareholder value.
The Company is also actively evaluating acquisition opportunities to
accelerate its transition to higher margin faster growth businesses.
Additionally, the Company intends to continue to pursue expansion opportunities
through strategic alliances and joint ventures to enhance its competitive
position and expand its services.
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, employee relations, price, management
capability and technical expertise. The Company believes it has the ability to
successfully compete in these markets because of its core competencies,
strategic customer relationships, strategic alliances and product service
agreements that allows it to provide customers global, enterprise-wide
integration of information technology.
Employees
As of December 31, 1999, the Company employed approximately 2,160
employees, of which 1,862 were full time persons. Approximately 142 of these
employees have managerial responsibilities, and over 1,333 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 5
of the Company's employees under a collective bargaining agreement which expires
on January 10, 2002, and 10 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
12
<PAGE>
Professional Employees International Union (the "OPEIU") represents 25 of the
Company's employees under a collective bargaining agreement that expired on
February 29, 2000. The Company anticipates the agreement will be renewed with
reasonably similar terms and conditions, extending for a period of 2 years. The
Company believes that it has a good relationship with each union.
Item 2. PROPERTIES.
The Company's headquarters and principal administrative, sales and
marketing functions are located in approximately 25,150 square feet of leased
space in Greenbelt, Maryland. This lease expires in December 2003. The Company
leases office space in sixteen U.S. cities, as well as in Vancouver, British
Columbia; Toronto, Ontario; Calgary, Alberta, and Moncton, New Brunswick, and
Warwickshire, United Kingdom. Additionally, the Company shares offices with
joint venture partner in 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.
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, 1999, there
were 714 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.
1999
--------------------
Quarter High Low
---------- --------------------
First $7.50 $3.25
Second 5.13 3.13
Third 4.00 2.63
Fourth 8.50 3.13
1998
--------------------
Quarter High Low
---------- --------------------
First $11.81 $7.38
Second 9.63 4.50
Third 5.25 3.13
Fourth 4.63 2.38
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.
13
<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, 1999, 1998, 1997,
1996 and 1995 and the balance sheet data as of December 31, 1999, 1998, 1997,
1996 and 1995 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 (OAO),
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,
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Statement of Operations Data: -------------------------------------------------------------
Revenues $ 150,162 $ 113,342 $ 84,666 $ 57,891 $ 38,229
Direct costs 131,664 97,105 65,882 43,896 28,548
Selling, general and administrative 16,014 19,100 13,551 10,824 7,338
Restructuring and other charges -- 3,135 -- -- --
-------------------------------------------------------------
Income (loss) from operations 2,484 (5,998) 5,233 3,171 2,343
Interest and other income (expense), net 921 619 (453) (46) (115)
-------------------------------------------------------------
Income (loss) before income taxes 3,405 (5,379) 4,780 3,125 2,228
(Provision) benefit for income taxes (1,554) 1,881 (1,912) (1,315) (1,139)
-------------------------------------------------------------
Net income (loss) $ 1,851 $ (3,498) $ 2,868 $ 1,810 $ 1,089
-------------------------------------------------------------
Net income (loss) per common share:
Basic (1) $ 0.11 $ (0.21) $ 0.27 $ 0.18
========= ========= ========= =========
Diluted (1) $ 0.11 $ (0.21) $ 0.26 $ 0.17
========= ========= ========= =========
<CAPTION>
(In thousands, except per share amounts) As of December 31,
1999 1998 1997 1996 1995
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital $ 28,555 $ 26,394 $ 33,249 $ 4,718 $ (1,446)
Total assets 61,355 51,118 50,342 12,828 5,801
Capital lease obligation, including current portion 143 883 1,435 476 251
Stockholders' equity 39,622 35,448 38,066 5,840 1,654
</TABLE>
(1) See Note 5 to Notes to Consolidated Financial Statements for information
concerning calculation of basic and diluted net income per common share
14
<PAGE>
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 10-K,
including the Management's Discussion and Analysis of Financial Condition and
Results of Operations, and Notes to Consolidated Financial Statements, are
forward-looking statements that involve certain risks and uncertainties. Future
events and the Company's actual results may differ materially from the results
reflected in these forward-looking statements. Factors that might cause such a
difference include, but are not limited to, dependence on key strategic
customers, loss of or renegotiation of data center contracts, limited ability to
establish new strategic customer relationships, risks associated with
fixed-price contracts, competition in the industry, ability to sustain and
manage growth, general economic conditions, dependence on key personnel, risks
associated with international sales, uncertainties relating to the difficulties
of transacting on the internet, integrating solutions, reducing expenses, and
transforming the Company's business to internet-centric businesses, and other
risks described herein 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
lines: Network and Systems Business Solutions; Professional Services; Healthcare
IT Solutions, and E-Business Consulting Solutions.
Management intends to reinvest profits from its Network and Systems Business
Solutions and Professional Services segments to continue to develop new IT
businesses in the E-Business Consulting Solutions and Healthcare IT Solutions
business segments. These businesses 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.
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.
For the years ended December 31, 1999, 1998 and 1997 approximately 27.2%, 37.1%
and 60.8% of the Company's revenues, respectively, were derived from fixed-price
contracts. Fixed-price contracts as a percentage of total Company revenue
declined in 1999 compared to 1998 primarily due to the acquisition in July 1998
of OAO Services, Inc., which forms the Company's Professional Services business
and which primarily has time and materials contracts. Certain of the Company's
fixed-price contracts require the Company to meet certain pre-established levels
of service, while achieving certain
15
<PAGE>
operating or managerial efficiencies during the course of the engagements.
Profitability is generally lower during the early term of the 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.
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.
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.
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 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.
The Company has experienced substantial growth since its inception, with
revenues increasing to $150.2 million in 1999, 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 after the start-up
phase 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.
Revenues from two strategic customers were $137.6 million and $102.5 million for
the years ended December 31, 1999 and 1998, respectively. The largest strategic
customer accounted for 75.7% and 67.0%, and the second largest strategic
customer accounted for 15.9% and 23.4% of revenues for the years ended December
31, 1999 and 1998, respectively. The Company has diversified the type of service
provided to its strategic customers and expanded the number of strategic
customer business units to whom it provides services. For the year ended
December 31, 1996, OAOT earned 60.2% of its revenues from data center management
services provided to strategic customers. For the year ended December 31, 1999,
the Company earned 25.2% of revenues from data center management. A decrease in
the revenues or loss of a strategic customer could have a material adverse
effect on the Company's business, operating results, and financial condition.
There can be no assurance that either strategic customer will renew existing
contracts maturing within the next twelve months or continue to engage the
Company's services at historical levels, if at all. The termination or
non-renewal of a strategic customer's contract by an end-user customer could
16
<PAGE>
also have a material adverse effect on the Company's business, operating
results, and financial conditions. The Company's data center contracts with a
strategic customer are up for renewal during the second half of 2000. Company
management believes that OAOT offers the best solution and value to its
customers for these services. 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.
While the IT services industry has generally experienced labor shortages and
wage inflation in excess of many 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 professional 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 and as it expands its services into other
internet-centric and technology infrastructure solution businesses. 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.
Results of Operations
The following table sets forth, for the periods indicated, selected statements
of operations data as a percentage of net revenue:
1999 1998 1997
============================
Revenues ....................................... 100.0 % 100.0 % 100.0 %
Direct Costs ................................... 87.7 85.7 77.8
Selling, general and administrative expense .... 10.7 16.9 16.0
Restructuring and other charges ................ -- 2.7 --
----------------------------
Income (loss) from operations .................. 1.6 (5.3) 6.2
Interest and other income (expense) net ........ 0.6 0.5 (0.5)
----------------------------
Income (loss) before income taxes ......... 2.2 (4.8) 5.7
(Provision) benefit for income taxes ........... (1.0) 1.7 (2.3)
----------------------------
Net income (loss) ......................... 1.2% (3.1)% 3.4%
============================
Comparison of Year Ended December 31, 1999 to Year Ended December 31, 1998
Revenues
The Company's revenues increased $36.9 million or 33% to $150.2 million for the
year ended December 31, 1999, compared to $113.3 million for the same prior year
period. The increase is primarily due to increased Professional Services
revenues from the acquisition of OAO Services, Inc. in July 1998. Revenue growth
was also achieved within the newer Company businesses (E-Business Consulting
Solutions and Healthcare IT Solutions segments). These improved revenues were
offset by lower revenues in the Network and Systems Business Solutions segment.
17
<PAGE>
Revenues from Professional Services increased to $64.1 million for the year
ended December 31, 1999 from $30.5 million for 1998. The increase in revenues is
due to owning OAO Services, Inc. for the entire year in 1999 as compared to
approximately six months in 1998.
Revenues for the newer business segments of E-Business Consulting Solutions and
Healthcare IT Solutions increased $9.5 million to $18.9 million, or 101% for the
year ended December 31, 1999 versus $9.4 million for the year ended December 31,
1998. The revenues increase in the E-Business Consulting Solutions segment was
due primarily to the ADM and CRM practices. ADM revenues increased $3.1 million
to $4.6 million. The improvement is due to increased work performed in our
Moncton, Canada e-business software solutions center. Revenues also increased
due to expansion of the CRM consulting practice, which is a new service offered
in 1999.
Revenues for the Healthcare IT Solutions segment increased $4.5 million, or 74%,
to $10.6 million for the year ended December 31, 1999 versus $6.1 million for
the year ended December 31, 1998. This segment is comprised primarily of the
Company's proprietary healthcare software applications solutions business.
Healthcare solutions revenues increased due to a greater number of MC400
installation projects which increased consulting and implementation revenues.
License revenues declined due to a shift to an ASP type service priced on a per
member per month (PMPM) basis to its clients, versus a one-time license fee.
Management expects that PMPM type product sales will increase as a percentage of
the business, which will allow the healthcare software applications business to
increase its recurring revenues and expand its customer base to small and medium
size healthcare membership plans.
Revenues from Network and Systems Business Solutions declined $6.4 million to
$67.1 million for the year ended December 31, 1999 from $73.5 million for the
year ended December 31, 1998. Revenues increased $2.9 million due to the
acquisition of OAO/ICOR UK Ltd. in the United Kingdom in April 1999. However,
this revenue gain was offset by revenue decreases resulting from reductions in
the amount of work, including work order projects, head count downsizing on
continuing projects due to automation, consolidation of sites, insourcing (where
Company functions were transferred back to internal customer personnel) and
elimination of revenues on smaller, non-recurring projects with strategic
customers. The Company discontinued services on work order projects in the
fourth quarter of 1999. Work order projects are low margin, short-term fixed-fee
engagements, which comprised a declining portion of total Company revenues.
Total work order revenues were $1.5 million and $2.4 million for the years ended
December 31, 1999 and 1998, respectively. Revenues could be adversely affected
should OAOT's contracts for data center management not be renewed in 2000.
Direct Costs
The Company's direct costs increased 35.6% to $131.7 million for the year ended
December 31, 1999, from $97.1 million. As a percentage of revenues, direct costs
increased to 87.7% for the year ended 1999 versus 85.7% for the year ended 1998.
The increase in direct costs and increase in direct costs as a percentage of
revenues is primarily due to OAOT increasing its investment by $2 million to
$4.8 million to develop its newer business within its E-Business Consulting
Solutions segment in 1999. The businesses include ADM and CRM and e-business
consulting services.
Direct costs increased in the Healthcare IT Solutions segment due to increased
marketing and training costs incurred to support ASP based sales and to build
the infrastructure to support increased sales.
Direct costs within the ADM business increased $4.4 million to $7.2 million for
the year ended December 31, 1999. The increase is due to start-up costs on its
IBM Global Services/AT&T contract that include employee training, travel,
relocation, recruitment fees and commissions incurred to place a programmer on
the project. E-Business Consulting Solutions costs increased due to training and
recruiting of professional consultants and management, and marketing and product
development costs incurred to establish and grow the newer businesses.
18
<PAGE>
Direct costs increased proportionally to revenues in the Company's Network and
Systems Business Solutions and Professional Services businesses for the year
ended December 31, 1999 from the year ended December 31, 1998.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $16.0 million and $19.1
million for the years ended December 31, 1999 and 1998, respectively. The 1998
amount included $4.2 million of provision for uncollectible accounts receivable.
OAOT's selling, general and administrative expenses declined as a percentage of
revenues for the year ended December 31, 1999 to 10.7% compared to 16.9% for
1998. The decline in selling, general and administrative expenses as a
percentage of revenues is due to OAOT leveraging its overhead structure as
revenues increased by reducing the cost of outside consultants, administrative
programs, and administrative infrastructure. 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.
The effective tax rate increased to 45.6% in 1999 versus a 35% income tax
benefit in 1998. In 1999, the effective tax rate included income taxes in
foreign countries where the income tax rate is higher than in the United States.
In 1998, the Company had the benefit of losses in the United States, only.
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.
Revenues from Network and Systems Business Solutions (formerly Managed Services)
decreased 4.2% to $73.5 million for the year ended December 31, 1998 from $76.7
million for the year ended December 31, 1997. This decrease is due to the
expiration of several significant contracts and strategic customer pricing
pressures.
Revenues from Professional Services (formerly Staff Augmentation) was $30.5
million for the year ended December 31, 1998. In July 1998, the Company acquired
certain assets of OAO Services, Inc. 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, Inc. 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.
E-Business Consulting Solutions (formerly ERP) revenues were $3.3 million for
the year ended December 31, 1998. E-Business Consulting Solutions is a new
business segment formed by two acquisitions. The Company also initiated ADM
services in 1998 that generated revenues of approximately $1.5 million. 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,
19
<PAGE>
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 stockholders 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 stockholders' loans of $109,000.
Revenues from the Healthcare IT Solutions service line increased 60.5% to $6.1
million for the year ended December 31, 1998, from $3.8 million for the year
ended December 31, 1997. The increase in revenues 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.
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 the
establishment and development of its newer businesses in ADM, E-Business
Consulting Solutions, and Healthcare IT Solutions 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 were 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 has been discarded. As a result, the Company recorded a write-off of
approximately $2.1 million related to this abandonment.
20
<PAGE>
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.
Liquidity and Capital Resources
Cash and cash equivalents were $13.1 million as of December 31, 1999, and $9.6
million as of December 31, 1998. Cash provided by operations was $6.9 million
for the year ended December 31, 1999 versus a use of $3.2 million for the year
ended December 31, 1998. Cash provided by operations for the year ended December
31, 1999 was primarily generated from 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. Cash was also used to
acquire the unowned portion of OAO/ICOR UK Ltd. from the Company's joint venture
partner, and the acquisition of a patient and disease management software system
for resale with OAOT's MC400 system.
Cash was used by operations for the year ended December 31, 1998, due to an
increase in income tax receivable as well as decreases in accounts payable and
accounts receivable. Additional cash was used in investing activities for the
year ended December 31, 1998, primarily to acquire OAO Services, Inc. (now part
of Professional Services) and DHR Technologies, Inc. (now part of E-Business
Consulting Solutions). The Company's business operations are not capital
intensive, and expenditures in any given year are ordinarily not significant.
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.
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 of 0.30% to
0.50% of the unused balance and interest at the prime rate or, at the Company's
option, at 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. The term loan
facility provides for a draw fee of 0.50% payable when drawn upon and interest
at LIBOR plus a risk adjusted premium. 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 the restrictions, and replaces the
Company's Revolving Credit Agreement with another commercial bank. There were no
borrowings outstanding under this or its predecessor Agreement as of December
1999 or 1998.
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.
21
<PAGE>
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 March 6, 2000, the Company had not experienced
any significant Y2K related disruptions.
Item 7.a. 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 year ended December 31, 1999 and
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.
22
<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........................................................... 24
Consolidated Statements of Operations and Comprehensive Income for the years ended
December 31, 1999, 1998, and 1997.................................................. 25
Consolidated Balance Sheets as of December 31, 1999 and 1998........................... 26
Consolidated Statements of Cash Flows for the years ended December 31, 1999,
1998 and 1997.................................................................... 27
Consolidated Statements of Stockholders' Equity for the years ended December 31,
1999, 1998 and 1997.............................................................. 28
Notes to Consolidated Financial Statements............................................. 29
Schedule:
Schedule II - Valuation and Qualifying Accounts........................................ 45
</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.
23
<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, 1999 and 1998, 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, 1999. Our audits also included the financial statement
schedule on page 45. 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 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
misstatements. An audit includes examination, 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, 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
McLean, VA
February 9, 2000
24
<PAGE>
OAO TECHNOLOGY SOLUTIONS, INC.
Consolidated Statements of Operations and Comprehensive Income
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the years ended December 31,
-----------------------------------
1999 1998 1997
-----------------------------------
<S> <C> <C> <C>
Revenues $ 150,162 $ 113,342 $ 84,666
Direct costs 131,664 97,105 65,882
Selling, general and administrative 16,014 19,100 13,551
Restructuring and other charges -- 3,135 --
-----------------------------------
Income (loss) from operations 2,484 (5,998) 5,233
Interest and other income (expense), net 921 619 (453)
-----------------------------------
Income (loss) before income taxes 3,405 (5,379) 4,780
(Provision) benefit for income taxes (1,554) 1,881 (1,912)
-----------------------------------
Net income (loss) 1,851 (3,498) 2,868
Other comprehensive income (loss) :
Foreign currency translation adjustment 186 (435) --
-----------------------------------
Comprehensive income (loss) $ 2,037 $ (3,933) $ 2,868
-----------------------------------
Net income (loss) per common share:
Basic $ 0.11 $ (0.21) $ 0.27
-----------------------------------
Diluted $ 0.11 $ (0.21) $ 0.26
-----------------------------------
Weighted average number
of shares outstanding:
Basic 16,856 16,434 10,598
-----------------------------------
Diluted 17,362 16,434 11,202
-----------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
25
<PAGE>
OAO TECHNOLOGY SOLUTIONS, INC
Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31,
--------------------
1999 1998
--------------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 13,142 $ 9,615
Accounts receivable
Billed, net of allowance of $1,014 and $959, respectively 21,066 15,458
Unbilled, net of allowance of $493 and $710, respectively 5,059 11,082
--------------------
26,125 26,540
Note receivable - OAO Corporation 2,520 2,520
Deferred income taxes 1,031 1,136
Income tax receivable 934 1,337
Other current assets 6,447 469
--------------------
Total current assets 50,199 41,617
Property and equipment, net 4,387 4,007
Purchased and developed computer software for sale, net 1,596 --
Deposits and other assets 192 455
Goodwill 4,981 5,039
--------------------
Total assets $ 61,355 $ 51,118
====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,470 $ 6,481
Accrued expenses 11,718 7,761
Income taxes payable 605 --
Unearned revenue 797 545
Current portion of capital lease obligations 54 436
--------------------
Total current liabilities 21,644 15,223
Capital lease obligations, net of current portion 89 447
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;
18,101,124 and 16,694,060 shares issued and outstanding
at December 31, 1999 and 1998, respectively 181 167
Additional paid-in capital 40,743 35,729
Deferred compensation (131) (173)
Accumulated other comprehensive loss (249) (435)
Shareholders' receivable (2,933) --
Retained earnings 2,011 160
====================
Total stockholders' equity 39,622 35,448
====================
Total liabilities and stockholders' equity $ 61,355 $ 51,118
====================
</TABLE>
The accompanying notes are in integral part of these consolidated financial
statements.
26
<PAGE>
OAO TECHNOLOGY SOLUTIONS, INC
Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
For the years ended December 31,
---------------------------------
1999 1998 1997
---------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ 1,851 $ (3,498) $ 2,868
Adjustment to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 2,164 1,248 413
Asset abandonment costs -- 2,100 --
Deferred income taxes 105 (1,136) 466
Change in assets and liabilities, net of effects of acquisitions:
Accounts receivable, net 589 5,471 (11,406)
Income tax receivable 403 (1,337) --
Other current assets (3,243) 189 (545)
Deposits and other assets (76) 328 (765)
Accounts payable 2,274 (6,841) 2,014
Accrued expenses 2,009 652 2,039
Unearned revenue 252 166 (552)
Income taxes payable 605 (591) 336
---------------------------------
Net cash provided by (used in) operating activities 6,933 (3,249) (5,132)
---------------------------------
Cash Flows from Investing Activities:
Cash paid for the acquisition of OAO/ICOR UK Ltd. (141) -- --
Cash paid for the acquisition of OAO Services, Inc. (148) (2,195) --
Payment on OAO Services debt agreement -- (3,465) --
Cash paid for the acquisition of DHR Technologies, Inc. -- (938) --
Cash received in the acquisition of ETG -- 28 --
Cash paid for the acquisition of OAO HealthCare Solutions, Inc. -- -- (398)
Expenditures for property and equipment (3,389) (2,233) (1,969)
=================================
Net cash used in investing activities (3,678) (8,803) (2,367)
---------------------------------
Cash Flows from Financing Activities:
Borrowings under revolving credit agreement -- -- 6,800
Proceeds from the sale of common stock, net 1,277 298 29,339
Payments on credit agreements -- -- (6,800)
Receipt of stockholders' receivable -- 133 --
Payments on capital lease obligations (740) (552) (495)
Payments on notes payable -- (378) --
---------------------------------
Net cash provided by (used in) financing activities 537 (499) 28,844
=================================
Effect of exchange rate changes on cash (265) (55) --
Net increase (decrease) in cash and cash equivalents 3,527 (12,606) 21,345
Cash and cash equivalents, beginning of period 9,615 22,221 876
=================================
Cash and cash equivalents, end of period $ 13,142 $ 9,615 $ 22,221
=================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
27
<PAGE>
OAO TECHNOLOGY SOLUTIONS, INC
Consolidated Statement of Stockholders' Equity
(Dollars and Shares in thousands)
For the years ended December 31, 1999, 1998 ,1997
<TABLE>
<CAPTION>
Accumulated
Common 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, January 1, 1997 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
Options 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
===============================================================================================
Net income -- -- -- -- -- -- 1,851 1,851
Exercise of stock options 219 2 547 -- -- -- -- 549
Tax benefit related to
exercise of stock options -- -- 101 -- -- -- -- 101
Amortization of
deferred compensation -- -- -- 42 -- -- -- 42
Shares issued for
employee stock purchase plan 210 2 575 -- -- -- -- 577
Shares issued for note receivable 750 8 2,925 -- -- (2,933) -- --
Shares issued to vendor 228 2 816 -- -- -- -- 818
Foreign currency
translation adjustment -- -- -- -- 186 -- -- 186
Refund of costs associated
with sale of common stock -- -- 50 -- -- -- -- 50
-----------------------------------------------------------------------------------------------
Balance, December 31, 1999 18,101 $ 181 $ 40,743 $ (131) $ (249) $(2,933) $ 2,011 $ 39,622
===============================================================================================
</TABLE>
The accompanying notes are in integral part of these consolidated financial
statements.
28
<PAGE>
OAO TECHNOLOGY SOLUTIONS, INC.
NOTES TO CONSOLIDATE FINANCIAL STATEMENTS
1. Description of Company and Corporate Organization
OAO Technology Solutions, Inc. (the "Company" or "OAOT") is a global
enterprise-wide integrator of information technology 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, Healthcare IT Solutions, and
E-Business Consulting Solutions.
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.; Enterprise Technology Group,
Inc.(ETG); OAO Canada Limited.; Canadian Network Resources, Ltd.; Canadian
Resource Management, Ltd.; OAO Technology Solutions de Mexico, S.A. de C.V.;
OAO/ICOR do Brasil Ltda.; and OAO/ICOR UK Ltd. All accounts of non-U.S.
subsidiaries have been translated into U.S. dollars and are 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. Service revenues are generally recognized ratably over the period of
the related contract. 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. 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" and SOP 98-4 "Deferral of the Effective
Date of a Provision of SOP 97-2, Software Revenue Recognition." Revenues earned
under software license agreements with end-users are 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.
Maintenance and support revenues are recognized ratably over the term of the
related agreements, which range from one to five years. Revenues from consulting
services under time and materials contracts and for training are recognized as
services are performed.
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, 1999 and
1998, the Company's cash equivalents consisted of overnight reverse repurchase
agreements and demand deposits.
29
<PAGE>
Property and Equipment
Property and equipment are 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
amortized 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.
Purchased and Developed Software Costs
Development costs incurred in the research and development of new software
products and enhancements to existing software products are expensed as incurred
until technological feasibility has been established. The Company considers
technological feasibility to be established when all planning, designing, coding
and testing have been completed according to design specifications. After
technological feasibility is established, any additional costs are capitalized
in accordance with Statement of Financial Accounting Standards (SFAS) No. 86
"Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed." Purchased and developed software costs are amortized based on current
and future revenue for each product with annual minimum amortization equal to
the straight-line amortization over the remaining estimated economic life of the
product. Amortization of such costs were $86,000 in 1999 and $0 in 1998.
Unearned Revenue
Unearned revenue at December 31, 1999 and 1998 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, state and foreign 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 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,
30
<PAGE>
including goodwill, based on the projection of undiscounted cash flows whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be fully recoverable. Management believes no material impairment of
these assets exists at December 31, 1999.
Concentration of Risk
The Company has two strategic customers. One strategic customer accounted for
75.7%, 67.0% and 66.2%, and the other accounted for 15.9%, 23.4% and 24.1%, of
total revenues for the years ended December 31, 1999, 1998 and 1997,
respectively.
Financial instruments that potentially subject the Company to concentration of
credit risk principally consist of accounts receivable and cash equivalents. The
Company's two largest strategic customers accounted for approximately 61.9% and
22.1%, respectively, of accounts receivable as of December 31, 1999 and 53.7%
and 30.7%, respectively, as of December 31, 1998. The Company did not have any
other customers with balances in excess of 10.0% of accounts receivable as of
December 31, 1999 and 1998, 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, 1999 and 1998, the Company had invested
approximately $8.5 and $6.0 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
The Company follows the provisions of 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 the current year presentation.
3. Supplemental Disclosure of Cash Flow Information
<TABLE>
<CAPTION>
For the years ended
(Amounts in thousands) December 31,
------------------------
1999 1998 1997
------------------------
<S> <C> <C> <C>
Cash paid during the year for:
Interest $ 52 $ 135 $ 176
Income taxes 1,494 1,180 884
Supplemental noncash investing and financing activities:
Capital asset and lease obligation additions $ -- $ -- $1,454
Fair value of stock issued to vendor 2,288 -- --
Fair value of stock issued for note receivable from stockholder 2,933 -- --
</TABLE>
31
<PAGE>
4. Acquisitions
OAO/ICOR UK Ltd. Acquisition
On May 27, 1999 the Company acquired the remaining 50% of the outstanding
capital stock of OAO/ICOR UK Ltd. not already owned by the Company from Capita
Business Services Limited, a registered English & Wales company. The Company
paid $161,900 for the outstanding capital stock and $526,200 as repayment to
Capita Business Services Limited for amounts due from OAO/ICOR UK Ltd. The
acquisition was accounted for under the purchase method of accounting and the
Company has included the results of operations of OAO/ICOR UK Ltd. as a
consolidated entity from the effective date of the acquisition. The purchase
resulted in an excess of purchase price over net assets acquired of
approximately $501,000, which is being amortized on a straight-line basis over
seven years. The Company previously used the equity method of accounting for the
results of operations prior to this acquisition. Pro forma information related
to this acquisition is not included herein as the acquisition was not material.
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 stockholders. 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. In January 2000
Enterprise Technology Group, Inc. was merged into OAO Technology Solutions, Inc.
Pursuant to the agreement and plan of merger the ETG stockholders 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 stockholders were granted certain
"piggy-back" 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 stockholders, 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
totally approximately $216,000. Additionally at closing, the Company repaid
ETG's stockholder 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 results 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 seven years. Pro forma information related to this
acquisition is not included herein as the acquisition was not material.
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 stockholder (the individual stockholder 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 retirement 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 OAOT's pre-tax
profit.
32
<PAGE>
Under the terms of the Company's acquisition of OAO Services, Inc. from OAO and
another stockholder of OAO Services, Inc., the Company is required to make
earn-out payments in amounts equal to 10% of the Company's pre-tax profit in
excess, if any, of $2 million subject to increases, for the three years ended
December 31, 1999, 2000 and 2001. The aggregate earn-out payments shall not
exceed $5 million. For the year ended December 31, 1999, the Company recognized
$148,000 of earn-out payments due to OAO and the other stockholder. The amounts
earned under this agreement increase the amount of goodwill recognized by this
transaction.
Also on July 24, 1998, in connection with the acquisition of OAO Services, Inc.
OAOT entered into an Administrative Services Agreement with OAO, under which OAO
will provide OAO Services, Inc. with administrative support services through the
earlier of the date that OAOT determines, at its sole discretion, that it no
longer requires such services, or December 31, 1998. 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. In December 1999, the Company and OAO modified the terms of
the note to a demand note with an increased interest rate of prime plus 2.5%
payable quarterly. The note has quarterly principal payments until demand. All
other terms remain substantially unchanged. The Vice Chairman of the Board of
Directors of the Company, and owner of approximately 18% of the outstanding
shares of common stock of the Company has pledged as security approximately 1.3
million shares of Company stock.
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, Inc. 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.
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.
The unaudited pro forma information for the periods set forth below give effect
to the OAO Services, Inc. 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).
For the years ended December 31,
1998 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
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
33
<PAGE>
from the date of acquisition. The purchase price was allocated based on the fair
value of the assets acquired, including among other assets, cash of
approximately $162,000, 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.
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.
5. Net Income Per Common Share
<TABLE>
<CAPTION>
(Dollars in thousands, except per share amounts) For the years ended December 31,
===============================================
1999 1998 1997
-----------------------------------------------
<S> <C> <C> <C>
Basic Earnings (loss) Per Share
Net income (loss) $ 1,851 $ (3,498) $ 2,868
Weighted average number of shares 16,856 16,434 10,598
-----------------------------------------------
Basic earnings (loss) per share $ 0.11 $ (0.21) $ 0.27
===============================================
Diluted Earnings (loss) Per Share
Net income (loss) $ 1,851 $ (3,498) $ 2,868
Weighted average number of shares and equivalents:
Weighted average number of shares 16,856 16,434 10,598
Shares issuable upon exercise of stock options 506 -- 604
-----------------------------------------------
Total weighted average shares and equivalents 17,362 16,434 11,202
-----------------------------------------------
Diluted earnings (loss) per share $ 0.11 $ (0.21) $ 0.26
===============================================
</TABLE>
Options to purchase approximately 1,244,071 shares of common stock at or greater
than $4.21 were outstanding during 1999. Options to purchase 315,000 and 364,000
shares at $8.50 and $5.10 were outstanding during 1998 and 1997 respectively.
These options 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 shares.
6. Recent Accounting 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 or losses depends on the intended use of the derivative and its
resulting designation. The statement was originally effective for fiscal years
beginning after June 15, 1999. In June 1999, FASB delayed implementation of this
statement by one year, to June 15, 2000. The Company will adopt SFAS No. 133 in
the first quarter of 2001 and is evaluating the impact that implementation of
this statement will have on its consolidated financial statements.
7. Comprehensive Income (Loss)
The Company's source of other comprehensive income (loss) other than net income
is from foreign currency translation adjustments.
34
<PAGE>
8. 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. Unbilled accounts
receivable as of December 31, 1999 and 1998 consisted of the following (in
thousands):
<TABLE>
<CAPTION>
1999 1998
-----------------------
<S> <C> <C>
Amounts billable $ 4,727 $ 8,208
Amounts billable subject to the completion of contract milestones 602 1,464
Amounts billable pending receipt of contractual documents
authorizing billing 223 2,120
Allowance for doubtful accounts (493) (710)
-----------------------
Unbilled accounts receivables $ 5,059 $ 11,082
=======================
</TABLE>
During 1999 and 1998, the Company made provisions for uncollectible accounts
related to certain billed and unbilled receivables totaling approximately
$474,000 and $4.2 million, respectively.
9. Other Current Assets
The Company entered into a Value Added Industry Remarketer (VAIR) agreement with
Siebel Systems, Inc., on August 31, 1999. As part of this agreement, the Company
purchased software licenses for $5.1 million for resale to third parties. The
software licenses were purchased with cash of $2.8 million and the Company's
common stock. The common stock consisted of 228,800 shares with 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 are included in other current assets on the
consolidated balance sheet at December 31, 1999.
10. Property and Equipment
Property and equipment at December 31, 1999 and 1998 consisted of the following
(in thousands):
<TABLE>
<CAPTION>
1999 1998
-------------------------
<S> <C> <C>
Furniture and equipment $ 5,427 $ 3,394
Leasehold improvements 386 323
Purchased software 1,689 2,031
-------------------------
7,502 5,748
Less accumulated depreciation and amortization (3,115) (1,741)
-------------------------
Property and equipment, net $ 4,387 $ 4,007
=========================
</TABLE>
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 property and equipment amounts at
December 31, 1999 and 1998 are (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------------------------
<S> <C> <C>
Furniture and equipment $ 699 $ 772
Leasehold improvements -- 205
Purchased software -- 814
-------------------------
699 1,791
Less accumulated depreciation and amortization (337) (386)
-------------------------
Net leased property and equipment $ 362 $ 1,405
=========================
</TABLE>
35
<PAGE>
11. Accrued Expenses
Accrued expenses at December 31, 1999 and 1998 consisted of the following (in
thousands):
<TABLE>
<CAPTION>
1999 1998
-----------------------
<S> <C> <C>
Accrued salaries, bonuses, and other employee benefits $ 5,445 $ 4,206
Payroll taxes and amounts withheld from employees 2,012 1,226
Accrued subcontractor and professional fees 1,135 1,991
Trade vendors 2,747 237
Other 379 101
-----------------------
Total accrued expenses $11,718 $ 7,761
=======================
</TABLE>
12. Credit Agreements
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 $15 million revolving line of credit ("Revolver") and a $20 million
term loan facility. The Revolver provides for a commitment fee of 0.30% to 0.50%
of the unused balance and interest at the prime rate or, at the Company's
option, at LIBOR plus a 1.75% to 2.5% risk adjusted premium. The Revolver
matures on May 31, 2002. The Agreement's term loan facility provides for a draw
fee of 0.50% payable when drawn upon and interest at LIBOR plus a risk- adjusted
premium. The term loan facility matures on May 31, 2001. Draws under the
Agreement are limited to a multiple of earnings before interest, taxes,
depreciation and amortization (EBITDA). The Company may convert the revolving
line of credit to an asset-based loan limited to a percentage of eligible billed
and unbilled trade receivables. The Agreement also requires maintenance of
certain financial covenants, prohibits the payment of dividends and pledges all
Company assets as collateral among other restrictions and replaces the Company's
Revolving Credit Agreement with another bank. There were no borrowings
outstanding under either credit arrangement for the years ended December 31,
1999 and 1998.
13. Lease Commitments
The Company leases furniture and equipment under capital lease arrangements. The
Company also leases office space and office equipment under operating leases.
The minimum fixed non-cancelable lease payments under the Company's lease
commitments at December 31, 1999 are as follows (in thousands):
Capital Operating
Lease Leases
-------------------------
Future minimum lease payments:
Year ended December 31:
2000 $ 68 $ 1,628
2001 59 1,492
2002 39 1,150
2003 - 953
2004 - 357
----------------------
166 $ 5,580
=========
Less amount representing interest (23)
-------
Present value of lease payments 143
Current portion of capital leases (54)
=======
Noncurrent portion of capital leases $ 89
=======
Capital lease obligations bearing interest at 9.43% to 11.85% have aggregate
monthly payments of $9,187 and $3,475, respectively. A number of operating
leases have escalation clauses for increases in real estate
36
<PAGE>
taxes, operating costs and inflation, and various renewal options for up to five
years. Rent expense for the years ended December 31, 1999, 1998 and 1997
approximated $1,707,000, $1,297,000 and $821,000, respectively.
14. 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.
15. Stockholders' Equity
During 1999, the Board of Directors approved an increase in the number of
authorized shares of common stock to 50 million shares, at a par value of $0.01
per share. In addition, the Board approved an increase in the number of
authorized shares of preferred stock up to 10 million shares at a par value of
$.01 per share, none of which have been issued.
On August 31, 1999 the Company issued 228,800 shares of common stock with a
guaranteed market price of $10 per share to Siebel Systems, Inc. in exchange for
certain Siebel software license applications for resale by the Company as part
of its business. The Company has agreed to pay Siebel Systems, Inc. in cash the
difference if the market price on September 1, 2000 is less than the guaranteed
price of $10 per share. At December 31, 1999 the fair value of this guarantee of
approximately $1.3 million is included in accrued expenses.
16. Stock-Based Compensation
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 original 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. During 1999, the Board of Directors amended the Plan authorizing
the issuance of an additional 3.4 million shares of common stock, for a total of
6.6 million authorized common shares. 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 stock
options under APB Opinion No. 25, under which no compensation cost has been
recognized. Pursuant to SFAS No. 123, the Company recognized approximately
$42,000, $30,000 and $19,000 of compensation expense on options granted to
non-employees for the years ended December 31, 1999, 1998 and 1997,
respectively.
37
<PAGE>
A summary of the Company's stock option plan changes for the years ended
December 31, 1999, 1998, and 1997 is presented below:
<TABLE>
<CAPTION>
Number of Exercise Price Weighted-Average
Option Shares Per Share Exercise Price
--------------------------------------------------------
<S> <C> <C> <C> <C>
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
Granted 1,178,115 2.00 - 5.19 4.72
Canceled (1,102,590) 2.00 - 8.50 4.83
Exercised (219,523) 2.00 - 8.50 2.51
- --------------------------------------------------------------------------------------------------
Outstanding December 31, 1999 2,604,704 $2.00 - $8.50 $ 4.09
========================================================
</TABLE>
For the year ended December 31, 1998, 800,366 incentive stock options with
exercise prices ranging from $4.63 to $8.50 were re-priced to $3.50. These
options are included in amounts granted and canceled in 1998.
The following summarizes information about the Company's stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- --------------------------------------------------------- -----------------------------
Weighted
Average
Number Remaining Number
Outstanding at Contractual Weighted Exercisable at Weighted
Range of December 31, Life Average December 31, Average
Exercise Prices 1999 (in Years) Exercise Price 1999 Exercise Price
- --------------------------------------------------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C>
$2.00 -$2.40 424,188 4.84 $ 2.01 315,599 $ 2.01
3.32 - 3.50 856,445 4.67 3.46 191,572 3.49
4.01 - 4.97 294,780 3.49 4.66 171,070 4.80
5.00 - 5.19 934,291 5.21 5.16 186,212 5.07
5.63 55,000 4.38 5.63 13,750 5.63
8.50 40,000 4.11 8.50 28,750 8.50
- --------------------------------------------------------- -----------------------------
$2.00 -$8.50 2,604,704 4.74 $ 4.09 906,953 $ 3.74
- --------------------------------------------------------- -----------------------------
</TABLE>
As of December 31, 1999, 1998 and 1997, options of 906,953; 670,322 and 550,104
were exercisable with a weighted average exercise price of $3.74, $3.53 and
$3.58, respectively. As of December 31, 1999, 1998 and 1997, approximately 2.8
million, 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 1999, 1998 and 1997 respectively: risk-free
interest rates of 5.50, 5.17 and 6.15 percent; no expected dividend yields; and
expected lives of 5.0, 5.0 and 3.83 years, respectively. In 1999 and 1998, the
expected volatility was 70% and 55%, respectively. As no grants were made in
1997 subsequent to the Company's Offering, no volatility was considered in the
calculation for 1997. Using these assumptions, the fair value of the stock
38
<PAGE>
options granted in 1999, 1998 and 1997 on a per share, weighted average basis
was $2.94, $2.58 and $0.96, 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 (loss) and earnings (loss) per share would have been
reduced to the following pro forma amounts (in thousands, except per share
data):
1999 1998 1997
----------------------------------
Consolidated net income (loss):
As reported $ 1,851 $ (3,498) $ 2,868
Pro forma $ 807 $ (4,563) $ 2,663
Basic net income (loss) per common share:
As reported $ 0.11 $ (0.21) $ 0.27
Pro forma $ 0.05 $ (0.28) $ 0.25
Diluted net income (loss) per common share:
As reported $ 0.11 $ (0.21) $ 0.26
Pro forma $ 0.05 $ (0.28) $ 0.24
17. Income Taxes
The Company's provision for income taxes for the years ended December 31, 1999,
1998 and 1997 consisted of the following (in thousands):
1999 1998 1997
----------------------------
Current:
Federal $ 615 $ (134) $ 829
Foreign 605 (410) 481
State 128 (6) 136
----------------------------
Total current provision (benefit) 1,348 (550) 1,446
Deferred:
Federal 167 (1,153) 411
State 39 (178) 55
----------------------------
Total deferred (benefit) provision 206 (1,331) 466
----------------------------
Total provision (benefit) $ 1,554 $(1,881) $ 1,912
----------------------------
The provision (benefit) for income taxes differs from the amount computed by
applying the statutory Federal income tax rate as follows:
1999 1998 1997
--------------------------
Expected statutory amount 34.0% (34.0)% 34.0%
Nondeductible expense 0.8 (1.3) 1.4
Foreign income taxes 7.7 -- --
State income taxes, net of federal benefit 3.1 (1.5) 4.6
Other -- 1.8 --
--------------------------
Effective rate 45.6% (35.0)% 40.0%
----------------------------
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 effects of
significant temporary differences that comprise the deferred tax assets and
liabilities at December 31, 1999 and 1998 are as follows (in thousands):
39
<PAGE>
1999 1998
------------------------
Deferred tax assets:
Bad debt $ 510 $ 974
Accrued employee benefits 169 100
Goodwill 202 94
Charitable contributions 69 --
Severance -- 59
Other expense items 195 --
Depreciation -- 29
------------------------
Total deferred tax assets 1,145 1,256
Deferred tax liabilities (114) (120)
------------------------
Net deferred tax assets $ 1,031 $ 1,136
----------------------------
18. Employee Benefit Plans
Effective September 30, 1996, the Company established a 40l(k) Plan, the OAO
International Corporation Employee Savings Plan, (the "40l(k) Plan"). On
December 1, 1997, the 401(k) Plan name subsequently changed to the OAO
Technology Solutions Employee Savings Plan shortly after the Company changed its
name on July 7, 1997. The 40l(k) Plan covers substantially all of the Company's
U.S. employees. Participants may contribute to the 401(k) 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 $649,000, $586,000 and $353,000
in 1999, 1998 and 1997, 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 RRSP 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 $115,000, $102,000 and $103,000 in 1999, 1998 and 1997,
respectively.
The Company's Board of Directors adopted, and the Company's Stockholders
approved, the Company's Employee Stock Purchase Plan (ESPP) on May 21, 1998,
with a total of 1,000,000 shares reserved for issuance thereunder. The ESPP
enables substantially all employees in the United States and Canada to subscribe
to purchase shares of common stock on a quarterly basis. The purchase price is
determined as the lower of 85% of the fair market value of the shares on the
first day of the quarter or 85% of the fair market value of the shares on the
last trade day of the quarter. During 1999 the Company issued 210,021 shares at
an average price per share of $2.75 and during 1998 no shares were issued.
19. Segment and Geographic Information
The Company manages its business segments primarily by service line. The names
of the Company's reportable segments have been changed in 1999 to better
represent the services provided; however, the composition of the reported
segments have not been changed, except as described below. The Company's
reportable segments are Network and Systems Business Solutions, formerly Managed
Services; Professional Services, formerly Staff Augmentation; E-Business
Consulting Solutions, formerly ERP; Healthcare IT Solutions remained unchanged.
In addition, the Company's custom application development and maintenance (ADM)
product has been reclassified into the E-Business Consulting Solutions segment
in 1999, from the Network and Systems Business Solutions segment. The effect of
the reclassification was to increase the E-Business Consulting Solutions segment
and decrease the Network and Systems Business Solutions segment revenues by
$4.62 million and $1.47 million in 1999 and 1998, respectively, gross loss by
$2.57 million and $1.31 million in 1999 and 1998, respectively, and segment
assets by $2.46 million and $350,000 in 1999 and 1998, respectively. The 1998
results have been reclassified to conform to 1999, while the 1997 results were
not affected.
40
<PAGE>
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. 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.
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 Company's service line 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 ASP basis.
Healthcare IT Solutions provides proprietary software products and business
solutions for healthcare organizations. OAO HealthCare Solutions, Inc., a wholly
owned subsidiary, 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 accounting policies of the various segments are the same as those described
in the "Summary of Significant Account Policies," Note 2. 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.
Summary information by segment as of and for the years ended December 31, 1999,
1998 and 1997 is as follows (in thousands):
1999 1998 1997
-----------------------------------
NETWORK and SYSTEMS BUSINESS SOLUTIONS
Revenues $ 67,117 $ 73,465 $ 76,729
Gross profit 14,136 14,396 15,768
Segment assets 24,496 24,281 39,351
PROFESSIONAL SERVICES
Revenues 64,126 30,461 4,185
Gross profit 6,074 2,920 1,216
Segment assets 14,025 12,981 2,399
E-BUSINESS CONSULTING SOLUTIONS
Revenues 8,353 3,289 --
Gross (loss) (4,226) (2,671) --
Segment assets 9,786 3,420 --
HEALTHCARE IT SOLUTIONS
Revenues 10,566 6,127 3,752
Gross profit 2,514 1,592 1,800
Segment assets 5,958 2,556 5,250
SEGMENT TOTALS
Revenues $ 150,162 $ 113,342 $ 84,666
Gross profit 18,498 16,237 18,784
Segment assets 54,265 43,238 47,000
41
<PAGE>
The following table reconciles reportable gross profit and segment assets to the
Company's consolidated totals. Selling, general and administrative expenses;
restructuring and other charges; and interest and other income and expenses are
not allocated to segments.
<TABLE>
<CAPTION>
(Amounts in thousands) For the years ended December 31,
1999 1998 1997
-------------------------------
<S> <C> <C> <C>
Gross profit for reportable segments $ 18,498 $ 16,237 $ 18,784
Selling, general and administrative expenses unallocated 16,014 19,100 13,551
Restructuring and other charges unallocated -- 3,135 --
-------------------------------
Total consolidated income (loss) from operations 2,484 (5,998) 5,233
Interest and other income (expense) unallocated 921 619 (453)
-------------------------------
Total consolidated income (loss) before income taxes $ 3,405 $ (5,379) $ 4,780
-------------------------------
Total assets for reportable segments $ 54,265 $ 43,238 $ 47,000
Note receivable- OAO corporation 2,520 2,520 --
Property and equipment unallocated 2,605 2,887 3,342
Deferred income taxes unallocated 1,965 2,473 --
-------------------------------
Total consolidated assets $ 61,355 $ 51,118 $ 50,342
-------------------------------
</TABLE>
The Company generated substantially all of its revenues in the United States and
Canada during the three years ended December 31, 1999. The following represents
a summary of information by geographic area (in thousands):
For the years ended December 31,
1999 1998 1997
-----------------------------------
Revenues:
United States $ 131,261 $ 93,066 $ 64,080
Canada 16,029 20,193 20,421
Other consolidated entities 2,872 83 165
-----------------------------------
$ 150,162 $ 113,342 $ 84,666
-----------------------------------
Income (loss) before income taxes:
United States $ 4,722 $ (4,435) $ 5,011
Canada (1,575) (964) 1,501
Other consolidated entities 258 20 (1,732)
-----------------------------------
$ 3,405 $ (5,379) $ 4,780
-----------------------------------
Identifiable assets:
United States $ 51,702 $ 46,879 $ 47,413
Canada 9,493 5,258 3,798
Other consolidated entities 160 (1,019) (869)
-----------------------------------
$ 61,355 $ 51,118 $ 50,342
-----------------------------------
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.
42
<PAGE>
20. Related Party Transactions
The Company has entered into an administrative service agreement with Safeguard
Scientifics, Inc., which provides for payment of a maximum administrative fee of
1.0% of gross revenues per year, not to exceed $500,000. The Company expensed an
administrative fee of $500,000 to operations for each of the years ended
December 31, 1999, 1998 and 1997, 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
$3,000, $160,000 and $76,000 for the years ended December 31, 1999, 1998 and
1997, respectively.
Prior to the July 1998 acquisition of OAO Services, Inc., the Company and OAO
Services, Inc., a subsidiary of OAO, were related parties, as a common group of
stockholders held a substantial ownership interest in both companies. During the
first half of 1998, and for the year ended December 31, 1997, the Company served
as a subcontractor on several contracts with OAO Services, Inc. Total revenues
recorded under these contracts amounted to $494,000 and $4.2 million for the six
month period ended June 30, 1998, and the year ended December 31, 1997,
respectively. All inter-company receivables as of December 31, 1998 had been
eliminated.
During 1999, 1998 and 1997, the Company served as a subcontractor on several
contracts with OAO. Revenues under these contracts totaled $949,000, $291,000
and $299,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
The Company had $660,000, $298,000 and $159,000 in billed receivables due from
OAO as of December 31, 1999, 1998 and 1997, respectively. The Company had
$2,000, $0 and $139,000 of unbilled receivables related to services provided to
OAO as of December 31, 1999, 1998 and 1997, respectively.
In connection with the acquisition of ETG, the ETG stockholders, including the
Company's Chief Executive Officer, were granted certain "piggy-back"
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 stockholders, received 111,111 shares of the
Company's common stock in exchange for his 500 shares of ETG common stock. Prior
to the merger, the Company provided ETG interest free advances totaling
approximately $216,000. Additionally at closing, the Company repaid ETG's
stockholder loans of approximately $109,000.
On July 14, 1999 the Chief Executive Officer of the Company acquired 750,000
shares of common stock of the Company, $.01 par value, at $3.91 per share, in
exchange for a $2.9 million full recourse note, bearing interest of 5.82% due
July 14, 2004. The shares were also pledged as security interest to the Company.
The Chief Executive Officer has personally guaranteed the note.
21. Commitments and Contingencies
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.
43
<PAGE>
22. 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
statement 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>
(In thousands, except per share data) 1999 Quarters Ended
-------------------------------------------
March 31 June 30 Sept 30 Dec 31
-------- ------- ------- ------
<S> <C> <C> <C> <C>
Revenues $ 35,717 $ 39,219 $ 38,887 $ 36,339
Income from operations 404 203 734 1,143
Income before income taxes 501 564 957 1,383
Net income 301 340 527 683
Net income per common share:
Basic 0.02 0.02 0.03 0.04
Diluted 0.02 0.02 0.03 0.04
Weighted average number of
shares outstanding:
Basic 16,694 16,737 16,986 17,388
Diluted 17,334 17,204 17,666 17,971
<CAPTION>
(In thousands, except per share data) 1998 Quarters Ended
-------------------------------------------
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 16,977
</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.
44
<PAGE>
OAO TECHNOLOGY SOLUTIONS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 1999, 1998, 1997 and 1996
<TABLE>
<CAPTION>
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, 1997.... $ 400 -- 50 (161) -- $ 289
Year ended December 31, 1998.... $ 289 4,227 175 (239) (2,783) $ 1,669
Year ended December 31, 1999.... $ 1,669 474 -- -- (636) $ 1,507
</TABLE>
(A) Reflected on the Balance Sheet as a reduction of Accounts Receivable.
(B) A reduction of accounts receivable purchased in the acquisition of certain
assets of UniHealth Investment Company (see Note 4 in the Notes to
Consolidated Financial Statements) for the year ended December 31, 1997. A
reduction of accounts receivable purchased in acquisition of certain assets
of OAO Services, Inc. for the year ended December 31, 1998.
(C) A recovery of revenue.
(D) Reduced accounts receivable and allowance for uncollectible items.
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 12, 2000 (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.
45
<PAGE>
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.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements
The financial statements listed in the accompanying Table of Contents to
Consolidated Financial Statements are filed as part of this Form 10-K,
commencing on page 23.
(a)(2) Schedules
The following consolidated financial statement schedule of the Company is filed
as part of this Form 10-K.
Schedule II - Valuation and Qualifying Accounts
(a)(3) Exhibits
The exhibits are listed in the index to Exhibits appearing below.
(b) No reports were filed on Form 8-K during the last quarter of fiscal 1999.
(c) Exhibits
<TABLE>
<CAPTION>
Exhibit Page
No. Description No.
------------------------------------------------------------------------------------------------------
<S> <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 datedDecember 1, 1998 (7)
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, 1998 (7)
10.9 Agreement and Plan of Merger, dated as of November 1, 1998, among the Company, ETG
Acquisition Corporation, Enterprise Technology Group, Inc. and the shareholders
of Enterprise Technology Group, Inc. (7)
10.10 OAO Technology Solutions, Inc. Employee Stock Purchase Plan as of May 21, 1998 (6)
10.11 Credit Agreement dated June 30, 1999 by and among OAO Technology Solutions, Inc.,
and its subsidiaries and Bank of America (formerly NationsBank, N.A.) (8)
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.12 Amended and Restated OAO Technology Solutions, Inc. Restricted Stock Grant Letter.
Date of grant : July 14, 1999 issued to Gregory A. Pratt. (9)
10.13 Amended and Restated Term Note dated July 14, 1999 between the Company and Gregory A. Pratt. (9)
10.14 Amended and Restated Pledge Agreement dated July 14, 1999 between the Company and Gregory A. Pratt. (9)
10.15 Amended and Restated OAO Technology Solutions, Inc. 1996 Equity Compensation Plan (10)
21.1 Subsidiaries of the Registrant. (1)
27.1 Financial Data Schedule. (1)........................................................... 49
(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, filed on March 30,
1999.
(7) Incorporated by reference to the Company's Form 10-K, filed on March 30,
1999.
(8) Incorporated by reference to the Company's Form 10-Q, filed on August 16,
1999.
(9) Incorporated by reference to the Company's Form 10-Q, filed on November 15,
1999.
(10) Incorporated by reference to the Company's Form S-8, filed on July 13,
1999.
</TABLE>
47
<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 24, 2000 By: /s/ Gregory A. Pratt
---------------------
Gregory A. 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>
/s/ Gregory A. Pratt Chief Executive Officer,
-------------------- President and Director
Gregory A. Pratt (Principal Executive Officer) March 24, 2000
/s/ J. Jeffrey Fox Vice President of Finance and March 24, 2000
-------------------- Chief Financial Officer
J. Jeffrey Fox
/s/ Jerry L. Johnson Chairman of the Board of Directors March 24, 2000
--------------------
Jerry L. Johnson
/s/ Cecile D. Barker Director March 24, 2000
--------------------
Cecile D. Barker
/s/ Yvonne Brathwaite Burke Director March 24, 2000
---------------------------
Yvonne Brathwaite Burke
/s/ Frank B. Foster, III Director March 24, 2000
------------------------
Frank B. Foster, III
/s/ John F. Lehman Director March 24, 2000
------------------
John F. Lehman
/s/ Richard B. Lieb Director March 24, 2000
-------------------
Richard B. Lieb
</TABLE>
48
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 13,142
<SECURITIES> 0
<RECEIVABLES> 22,573
<ALLOWANCES> 1,507<F1>
<INVENTORY> 0
<CURRENT-ASSETS> 50,199
<PP&E> 7,502
<DEPRECIATION> 3,115<F2>
<TOTAL-ASSETS> 61,355
<CURRENT-LIABILITIES> 21,644
<BONDS> 143<F3>
0
0
<COMMON> 181
<OTHER-SE> 39,441
<TOTAL-LIABILITY-AND-EQUITY> 61,355
<SALES> 0
<TOTAL-REVENUES> 150,162
<CGS> 0
<TOTAL-COSTS> 131,664
<OTHER-EXPENSES> 16,014
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (921)
<INCOME-PRETAX> 3,405
<INCOME-TAX> 1,554
<INCOME-CONTINUING> 1,851
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,851
<EPS-BASIC> 0.11<F4>
<EPS-DILUTED> 0.11<F4>
<FN>
<F1> See Note 8 In the Notes to Consolidated Financial Statements, and Schedule
II - Valuation and Qualifying Accounts.
<F2> See Note 10 in the Notes to Consolidated Financial Statements.
<F3> Represents the long-term portion of capital lease obligation. See Note 13
in the Notes to Consolidated Financial Statements.
<F4> See Note 5 in Notes to Consolidated Financial Statements.
</FN>
</TABLE>
