UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission file number 0-23173
OAO TECHNOLOGY SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 52-1973990
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7500 Greenway Center Drive
Greenbelt, Maryland 20770
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (301) 486-0400
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of August 7, 2000, the registrant had outstanding 18,406,460 shares of
its Common Stock, par value $0.01 per share.
1
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OAO TECHNOLOGY SOLUTIONS, INC.
Quarterly Report on Form 10-Q for the Three and Six Month Periods
Ended June 30, 2000
INDEX
Page Reference
COVER PAGE.....................................................................1
INDEX..........................................................................2
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of June 30, 2000 and
December 31, 1999 (Unaudited)..........................................3
Condensed Consolidated Statements of Operations and
Comprehensive Income for the Three and Six Month Periods
Ended June 30, 2000 and 1999 (Unaudited)...............................4
Condensed Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 2000 and 1999 (Unaudited)............5
Notes to Condensed Consolidated Financial Statements (Unaudited).......6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................................9
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............14
PART II - OTHER INFORMATION...................................................15
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES....................................................................16
2
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PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
OAO TECHNOLOGY SOLUTIONS, INC.
Condensed Consolidated Balance Sheets
(Unaudited)
(Dollars in thousands, except share amounts)
June 30, December 31,
2000 1999
---------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 9,979 $ 13,142
Accounts receivable:
Billed, net of allowance of $531 and
$1,014, respectively 18,075 21,066
Unbilled, net of allowance of $449
and $493, respectively 8,660 5,059
-------- --------
26,735 26,125
Note receivable - OAO Corporation 2,520 2,520
Deferred income taxes 1,031 1,031
Income tax receivable 876 934
Other current assets 7,250 6,447
-------- --------
Total current assets 48,391 50,199
Property and equipment, net 5,022 4,387
Purchased and developed computer software
for sale, net 1,939 1,596
Deposits and other assets 954 192
Goodwill 4,601 4,981
-------- --------
Total assets $ 60,907 $ 61,355
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,368 $ 8,470
Accrued expenses 11,532 11,718
Income taxes payable 577 605
Unearned revenue 1,076 797
Current portion of capital lease obligations 24 54
-------- --------
Total current liabilities 18,577 21,644
Capital lease obligations, net of current portion 45 89
Commitments and contingencies -- --
Stockholders' equity :
Preferred stock, par $.01 per share, 10,000,000
shares authorized none issued and outstanding -- --
Common stock, par $.01 per share, 50,000,000 shares
authorized; 18,405,499 and 18,101,124 shares
issued and outstanding at June 30, 2000 and
December 31, 1999, respectively 184 181
Additional paid-in capital 41,973 40,743
Deferred compensation (44) (131)
Accumulated other comprehensive loss (353) (249)
Shareholders' receivable (2,933) (2,933)
Retained earnings 3,458 2,011
-------- --------
Total stockholders' equity 42,285 39,622
-------- --------
Total liabilities and stockholders' equity $ 60,907 $ 61,355
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
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OAO TECHNOLOGY SOLUTIONS, INC.
Condensed Consolidated Statements of Operations and Comprehensive Income
(Unaudited)
(Dollars and shares in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------------------- -------------------
2000 1999 2000 1999
-------------------- -------------------
<S> <C> <C> <C> <C>
Revenues $ 39,695 $ 39,219 $ 78,240 $ 74,936
Direct costs 32,369 35,127 65,564 66,994
-------- -------- -------- --------
7,326 4,092 12,676 7,942
Selling, general and administrative expense 5,885 3,889 10,598 7,335
-------- -------- -------- --------
Income from operations 1,441 203 2,078 607
Interest and other income (expense), net (158) 361 438 458
-------- -------- -------- --------
Income before income taxes 1,283 564 2,516 1,065
Provision for income taxes 545 224 1,069 424
-------- -------- -------- --------
Net income 738 340 1,447 641
Other comprehensive income :
Foreign currency translation adjustment 72 26 104 59
-------- -------- -------- --------
Comprehensive income $ 810 $ 366 $ 1,551 $ 700
======== ======== ======== ========
Net income per common share:
Basic $ 0.04 $ 0.02 $ 0.08 $ 0.04
======== ======== ======== ========
Diluted $ 0.04 $ 0.02 $ 0.08 $ 0.04
======== ======== ======== ========
Weighted average number
of shares outstanding:
Basic 17,755 16,737 17,695 16,715
======== ======== ======== ========
Diluted 18,372 17,139 18,745 17,190
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
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OAO TECHNOLOGY SOLUTIONS, INC
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Six months ended
June 30,
2000 1999
-------- --------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 1,447 $ 641
Adjustment to reconcile net income to net
cash (used in) provided by operating activities:
Depreciation and amortization 1,561 994
Change in fair value of stock guarantee 235 --
Change in assets and liabilities:
Accounts receivable, net (610) (1,785)
Other current assets (746) (516)
Deposits and other assets (675) (375)
Accounts payable (3,114) 1,201
Income taxes payable (28) --
Accrued expenses (421) 1,902
Unearned revenue 279 (372)
-------- --------
Net cash (used in) provided by operating activities (2,072) 1,690
-------- --------
Cash Flows from Investing Activities:
Purchase of business, net of cash acquired -- (139)
Capitalized sofware development costs (544) --
Expenditures for property and equipment (1,615) (451)
-------- --------
Net cash used in investing activities (2,159) (590)
-------- --------
Cash Flows from Financing Activities:
Proceeds from common stock transactions, net 1,233 127
Payments on capital lease obligations (74) (207)
-------- --------
Net cash provided by (used in) financing activities 1,159 (80)
-------- --------
Effect of exchange rate changes on cash (91) 59
Net (decrease) increase in cash and cash equivalents (3,163) 1,079
Cash and cash equivalents, beginning of period 13,142 9,615
-------- --------
Cash and cash equivalents, end of period $ 9,979 $ 10,694
======== ========
Supplemental cash flows information:
Cash paid for interest $ 38 $ 32
Cash paid for income taxes $ 1,168 $ 333
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
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OAO TECHNOLOGY SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Organization and basis of presentation
OAO Technology Solutions, Inc. (the "Company" or "OAOT") is a global
enterprise-wide integrator of information technology ("IT") solutions. The
Company, along with its wholly owned subsidiaries, provides a wide range of
outsourced information technology solutions and professional services. These
services include the operation of large-scale service delivery centers and
networks; distributed systems management; custom applications software
development and maintenance; professional IT services; enterprise application
solutions, integration, implementation and training services; web enablement and
e-business solutions; and proprietary software solutions for the managed care
marketplace. These services are provided through four business lines: Network
and Systems Business Solutions, Professional Services, E-Business Consulting
Solutions, and Healthcare IT Solutions.
The condensed consolidated financial statements included herein have been
prepared by the Company without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission ("SEC") and include, in the opinion of
the management, all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of interim period results. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. These condensed consolidated
financial statements should be read in conjunction with the financial statements
and notes thereto included in the Company's Annual Report on Form 10-K filed
with the SEC for the year ended December 31, 1999 and the Company's other
filings with the SEC. The results of operations for the three and six month
periods ended June 30, 2000, are not necessarily indicative of the results to be
expected for the full year.
2. New accounting pronouncements
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 summarizes certain of the SEC's views on applying generally
accepted accounting principles to revenue recognition in financial statements.
The Company is required to adopt SAB 101 no later than the fourth quarter of
fiscal 2000. The Company is currently evaluating the impact of SAB 101 on its
results of operations and financial position.
In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation--an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and among other issues clarifies
the following: the definition of an employee for purposes of applying APB
Opinion No. 25, the criteria for determining whether a plan qualifies as a
non-compensatory plan, the accounting consequence of various modifications to
the terms of previously fixed stock options or awards, and the accounting for an
exchange of stock compensation awards in a business combination. The Company
does not expect that the adoption of this interpretation will have a material
impact on its results of operations and financial position
3. Software Licenses for Resale
The Company entered into a Value Added Industry Remarketer agreement with Siebel
Systems, Inc. on August 31, 1999. As part of this agreement, the Company
purchased software licenses in the amount of $5.1 million for resale to third
parties. The software licenses were purchased with cash of $2.8 million and
228,800 shares of the Company's common stock. The common stock has a guaranteed
per share value of $10 at September 1, 2000. The difference, if any, between the
share price at September 1, 2000 and the guaranteed price will be paid in cash.
The balance of the licenses is included in other current assets and the fair
value of the guarantee is included in accrued expenses on the accompanying
balance sheets.
6
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OAO TECHNOLOGY SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
4. Earnings per share
Basic earnings per share has been calculated as net earnings divided by
weighted-average common shares outstanding, while diluted earnings per share has
been computed as net earnings divided by weighted average common and diluted
shares outstanding. The Company's stock options outstanding increased
outstanding common shares by 617,000 and 402,000 for total diluted shares
outstanding of 18,372,000 and 17,139,000 for the three month period ended June
30, 2000 and 1999, respectively, and by 1,050,000 and 475,000 for total diluted
shares outstanding of 18,745,000 and 17,190,000 for the six month period ended
June 30, 2000 and 1999, respectively.
5. Segment information
The Company manages its business segments primarily by service line. As reported
in the Company's Annual Report on Form 10K, the names and certain
classifications within the Company's reportable segments were changed in 1999 to
better describe the services provided. The 1999 quarterly results have been
reclassified to conform to 2000 presentation. The Company's reportable segments
are Network and Systems Business Solutions, Professional Services, E-Business
Consulting Solutions, and Healthcare IT Solutions.
Network and Systems Business Solutions; includes data-center operations
management, distributed systems management, and other IT services.
Professional Services; are provided by OAO Services, Inc, a wholly owned
subsidiary. Through OAO Services, Inc. the Company provides highly skilled IT
professionals to augment customer's staffing requirements nationwide. These
services are provided primarily to strategic customers and on a time and
materials basis.
E-Business Consulting Solutions; provides entire life cycle services for
organizations. These services range from initial business process modeling and
development, through system installation and implementation and custom software
application development and maintenance. The E-Business Consulting Solutions
segment is dedicated to implementing and supporting systems from Siebel Systems,
NCR, SAP and Microsoft. This segment also provides third party vendor packaged
software including Siebel Systems, SAP and Microsoft, IBM and Rational on both a
licensed and Application Service Provider ("ASP") basis.
Healthcare IT Solutions; provides proprietary software products and business
solutions for healthcare organizations. Through OAO HealthCare Solutions, Inc.,
a wholly owned subsidiary, the Company provides full service solutions via its
proprietary MC400 software on a one-time license and ASP basis. This includes
product development, customer service, and installation service, training and
ongoing support.
The Company evaluates the performance of each segment based on segment revenues
and gross profit. Segment gross profit includes only direct costs. Selling,
general and administrative expenses; net interest expense; and other income and
expenses are not allocated to segments.
7
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OAO TECHNOLOGY SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Segment information (Continued)
Summary information by segment is as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------------------- --------------------
(Amounts in thousands): 2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NETWORK and SYSTEMS BUSINESS SOLUTIONS
Revenues $ 16,183 $ 17,981 $ 32,912 $ 34,630
Gross profit 3,289 3,234 6,412 6,610
PROFESSIONAL SERVICES
Revenues 13,825 17,401 28,169 33,488
Gross profit 1,853 2,315 3,660 4,293
E-BUSINESS CONSULTING SOLUTIONS
Revenues 5,330 1,245 9,605 2,341
Gross profit (loss) 233 (1,594) (87) (3,147)
HEALTHCARE IT SOLUTIONS
Revenues 4,357 2,592 7,554 4,477
Gross profit 1,951 137 2,691 186
SEGMENT TOTALS
Revenues $ 39,695 $ 39,219 $ 78,240 $ 74,936
Gross profit 7,326 4,092 12,676 7,942
Selling, general and administrative expenses unallocated 5,885 3,889 10,598 7,335
-------- -------- -------- --------
Total consolidated income from operations 1,441 203 2,078 607
Interest and other income (expense), net unallocated (158) 361 438 458
-------- -------- -------- --------
Total consolidated income before income taxes $ 1,283 $ 564 $ 2,516 $ 1,065
-------- -------- -------- --------
</TABLE>
6. Reclassification
Certain reclassifications have been made to the condensed consolidated financial
statements for the three and six month periods ended June 30, 1999 in order to
conform to the presentation used in 2000.
8
<PAGE>
Item 2.
OAO TECHNOLOGY SOLUTIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is provided to increase the understanding
of, and should be read in conjunction with, the Condensed Consolidated Financial
Statements of the Company and Notes thereto included elsewhere in this quarterly
report. Historical results and percentage relationships among any amounts in
these financial statements are not necessarily indicative of trends in operating
results for any future period. The statements which are not historical facts
contained in this quarterly report, including this Management's Discussion and
Analysis of Financial Condition and Results of Operations, and Notes to these
Condensed Consolidated Financial Statements, constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements are based on currently available operating, financial
and competitive information, and are subject to various risks and uncertainties.
Future events and the Company's actual results may differ materially from the
results reflected in these forward-looking statements. Factors that might cause
such a difference include, but are not limited to, dependence on key strategic
and strategic end-user customers, limited ability to establish new strategic
customer relationships, risks associated with fixed-price contracts, ability to
sustain and manage growth, variability of quarterly operating results, the
Company's expansion and development of new service lines, marketing and other
business development initiatives, the commencement of new engagements,
competition in the industry, general economic conditions, dependence on key
personnel, the ability to attract, hire and retain personnel who possess the
technical skills and experience necessary to meet the service requirements of
its clients, the potential liability with respect to actions taken by its
employees, risks associated with international sales, and other risks described
herein, the Company's annual report on Form 10K and in the Company's other
Securities and Exchange Commission filings.
Overview
The Company is a global enterprise-wide integrator of information technology
(IT) solutions. The Company provides a wide range of outsourced IT solutions and
professional services, including the operation of large-scale service delivery
centers and networks, distributed systems management, custom applications
software development and maintenance, professional IT services, enterprise
application solutions, integration, implementation and training services, web
enablement and e-business solutions, and proprietary software solutions for the
managed care marketplace. These services are provided through four business
segments: Network and Systems Business Solutions; Professional Services;
E-Business Consulting Solutions and Healthcare IT Solutions.
The Company provides Network and Systems Business Solutions, generally on a
long-term, fixed-price contractual basis, to strategic customers as part of an
IT outsourcing team, providing services to a wide range of end-user customers.
The Company's strategic customers include IBM and Compaq with end-user
engagements including: Boeing, Ames Department Stores, United Health Care,
Campbell Soup, Ryder Systems Corporation, Citibank and others. The Company's
data center management contract was renewed for ten years. Management believes
that revenues from this contract may increase over the term of the contract;
however, there is no assurance that revenues from this contract will increase or
continue at historical revenue and profitability levels.
Professional Services provides information technology personnel primarily on a
time and materials basis, that are regularly utilized within engagements to meet
short or indefinite term requirements. There are also instances where an
engagement has started on a time and materials basis and evolved to a
fixed-price basis, as the requirements became sufficiently defined. Professional
Services are offered as part of the Company's service offerings to its strategic
customers as well as non-strategic customers.
9
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OAO TECHNOLOGY SOLUTIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Overview (Continued)
E-Business Consulting Solutions are generally provided on a time and materials
contractual basis. The Company, through its E-Business Consulting Solutions
services, provides entire life cycle services for organizations. These services
range from initial business process modeling and development, through system
installation and implementation. The Company also provides a full suite of
continuous support services to help maintain and upgrade these complex,
mission-critical systems. The E-Business Consulting Solutions segment is
dedicated to implementing and supporting third-party designed software
applications and systems sold on a licensed and ASP basis.
The Company's Healthcare IT Solutions practice provides proprietary managed care
software application solutions under software license agreements via its MC400
software. The products are provided on a one-time license fee or a per member
per month (PMPM) long-term contractual basis and may include system development,
customer service, installation services, training, and ongoing support. In
addition, other services may be provided, such as total project management,
hardware planning and implementation, and custom programming. MC400 is currently
installed at over 50 managed care sites in the United States and the Bahamas.
The Company focuses its efforts on middle market commercial customers, as well
as public sector customers. In support of these efforts, the Company has
established strategic relationships with third-party software vendors such as
Siebel Systems, NCR, SAP, Compaq and Microsoft. The Company signed a special
Value Added Industry Remarketer (VAIR) agreement with Siebel Systems, Inc. This
agreement permits OAOT to design, install, resell and host, on an ASP basis,
Siebel solutions for commercial and public sector customers in North America and
Europe. The Company has also hired teams of Siebel consultants to implement
comprehensive CRM solutions.
Management intends to reinvest profits from its Network and Systems Business
Solutions and Professional Services segments to continue to develop new service
offerings in the E-Business Consulting Solutions and Healthcare IT Solutions
segments. These offerings include e-business application solutions, application
service provider services (ASP), custom software application development and
maintenance (ADM), and customer relationship management services (CRM) including
license sales, application hosting, and consulting. Company management believes
that timely investment in internet-centric businesses and digital technology
infrastructure solutions will result in improved long-term stockholder value.
10
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OAO TECHNOLOGY SOLUTIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Results of Operations
The following table sets forth, for the periods indicated, selected statement of
operations data as a percentage of net revenue:
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
---------------------------------- ---------------------------------
(in millions) 2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 39.7 100.0% $ 39.2 100.0% $ 78.2 100.0% $ 74.9 100.0%
Direct Costs 32.4 81.6% 35.1 89.6% 65.5 83.8% 67.0 89.5%
Selling, general and administrative expense 5.9 14.9% 3.9 9.9% 10.6 13.5% 7.3 9.7%
------ ------ ------ ------ ------ ------ ------ ------
Income from operations 1.4 3.5% 0.2 0.5% 2.1 2.7% 0.6 0.8%
Interest and other income (expense), net (0.2) -0.5% 0.4 1.0% 0.4 0.5% 0.5 0.7%
------ ------ ------ ------ ------ ------ ------ ------
Income before income taxes 1.2 3.0% 0.6 1.5% 2.5 3.2% 1.1 1.5%
Provision for income taxes 0.5 1.3% 0.2 0.5% 1.1 1.4% 0.4 0.6%
------ ------ ------ ------ ------ ------ ------ ------
Net income $ 0.7 1.7% $ 0.4 1.0% $ 1.4 1.8% $ 0.7 0.9%
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
Comparison of the three and six month periods ended June 30, 2000 to the three
and six month periods ended June 30, 1999.
Revenues
The Company's revenues increased $ .5 million or 1.3 % to $ 39.7 million for the
three months ended June 30, 2000, compared to $ 39.2 million for the same period
in 1999. For the six months ended June 30, 2000 revenues increased $ 3.3 million
or 4.4 % to $ 78.2 million from $ 74.9 million for the same period in 1999.
Revenue increases were driven by the E-Business Consulting Solutions and
Healthcare IT Solutions segments, and were partially offset by lower revenues in
the Network and Systems Business Solutions and Professional Services segments
for both the three and six month periods ended June 30, 2000 compared to the
same periods in 1999.
Revenues for E-Business Consulting Solutions increased $ 4.1 million or 341.7 %
to $ 5.3 million, for the three months ended June 30, 2000 compared to $ 1.2
million for the same period in 1999. The increases for the second quarter of
2000 coupled with similar increases reported for the first quarter of 2000 lead
to an increase in revenues of $ 7.3 million or 317.4% to $9.6 million for the
six months ended June 30, 2000 compared to $ 2.3 million for the same period in
1999. The increase in revenues for both the three month and six month periods
ended June 30, 2000 was due primarily to increased activity in the ADM, and
consulting practices compared with the same periods in 1999. New and existing
contracts continued to ramp up through the first half of 2000, compared to the
first half of 1999 when the contracts had recently been awarded and had lower
levels of activity. Similarly, the consulting practices were in the start-up
phase in the first two quarters of 1999 and had little revenues in those
periods. The first and second quarters of 2000 reflect new projects and a
general increase in business volume resulting in comparatively higher revenues
from the same periods in 1999.
Revenues for the Healthcare IT Solutions segment increased $ 1.8 million, or
69.2 %, to $ 4.4 million for the three months ended June 30, 2000 compared to $
2.6 million for the same period in 1999. The increase in revenues was due
primarily to the continued effect of the recurring "per-member, per-month"
("PMPM") revenues which have occurred throughout 1999 and into the first half of
2000, and license sales that occurred in the second quarter of 2000. The PMPM
sales throughout the first half of the year and the license sales lead to and
increase in revenues of $ 3.0 million or 66.7 % to $ 7.5 million for the six
months ended June 30, 2000 compared to $ 4.5 million for the same period in
1999.
11
<PAGE>
OAO TECHNOLOGY SOLUTIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Revenues (continued)
Revenues from Network and Systems Business Solutions decreased by $ 1.8 million
or 10.0 % to $ 16.2 million for the three months ended June 30, 2000 compared to
$ 18.0 million for the same period in 1999. The decrease in the second quarter
was due primarily to delays in negotiations between a strategic customer and end
user customer for a contract renewal and continued pricing and volume decreases
from another strategic customer. The volume and pricing decreases were partially
offset in the first quarter by projects from new customers and the effect of the
UK acquisition, which occurred in the second quarter of 1999. Accordingly, the
decrease in revenues of $ 1.7 million or 4.9 % to $ 32.9 million for the six
months ended June 30, 2000 compared to $ 34.6 million for the same period in
1999 was driven primarily by the events in the second quarter of 2000.
Revenues from Professional Services decreased $ 3.6 million or 20.7 % to $ 13.8
million for the three months ended June 30, 2000 compared to $ 17.4 million for
the three months ended June 30, 1999. The decrease in revenues is due to the
continued carry over effects of Y2K constraints resulting in a lower number of
staffing requisitions from a strategic customer. The continued carry over
effects of the Y2K constraints lead to a decrease in revenues for the six months
ended June 30, 2000 of $ 5.3 million or 15.8 % to $ 28.2 million compared to $
33.5 million for the same period in 1999.
Direct Costs
The Company's direct costs decreased $ 2.7 million or 7.7 % to $ 32.4 million
for the three months ended June 30, 2000, compared to $ 35.1 million for the
same period in 1999. Direct costs also decreased as a percentage of revenues to
81.6 % for the three months ended June 30, 2000 versus 89.6 % for same period in
1999. For the six months ended June 30, 2000, direct costs decreased $ 1.5
million or 2.2 % to $ 65.5 million from $ 67.0 million for the same period in
1999. Direct costs also decreased as a percentage of revenues to 83.8 % for the
six months ended June 30, 2000 versus 89.5 % for same period in 1999. The
decrease in direct costs as a percentage of revenues for both the three and six
month periods ended June 30, 2000 compared to the same periods in 1999 is due
primarily to the E-Business Consulting Solutions and the Healthcare IT Solutions
segments. The other business segments maintained a relatively constant
relationship of direct costs to their respective revenues.
In the E-Business Consulting Solutions segment direct costs increased in dollars
by $ 2.3 million to $ 5.1 million for the three months ended June 30, 2000 from
$ 2.8 million for the same period in 1999. However, as a percent of the segment
revenues direct costs decreased from 233.3 % of sales in the second quarter 1999
to 96.2 % of sales in the second quarter of 2000. The results in the second
quarter of 2000 are a continuation of the same experience in the first quarter
of 2000, which resulted in a increase in direct cost dollars of $ 4.2 million or
76.4 % to $ 9.7 million for the six months ended June 30, 2000 compared to $ 5.5
million for the same period last year. For the six months ended June 30, 2000
direct costs as a percentage of revenues decreased to 101.0 % compared to 239.1%
for the same period in 1999.
In the Healthcare IT Solutions segment direct costs dollars remained relatively
constant for both the three and six month periods ended June 30, 2000 compared
to the same periods in 1999. However, as a percent of the segment revenues
direct costs decreased from 96.2 % of sales in the second quarter 1999 to 54.5 %
of sales in the second quarter of 2000. For the six months ended June 30, 2000
direct costs as a percentage of segment revenues decreased from 95.6 % in the
six month period ended June 30, 1999 to 65.3 % for the six month period ended
June 30, 2000. Direct costs as a percent of sales continue to decrease as a
result of the recurring revenues from PMPM and license sales of software.
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OAO TECHNOLOGY SOLUTIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $ 5.9 million and $ 3.9
million for the three-month periods ended June 30, 2000 and 1999, respectively.
OAOT's selling, general and administrative expenses increased as a percentage of
revenues for the three months ended June 30, 2000 to 14.9 % compared to 9.9 %
for the same period in 1999. For the six month periods ended June 30, 2000 and
1999 selling, general and administrative expenses were $ 10.6 million and $ 7.3
million or 13.5 % and 9.7 % of sales, respectively. The increases were a result
of increased sales and marketing efforts and the continuation of the company's
infrastructure build-out to accommodate its growth. The Company expects selling,
general and administrative expenses to increase in absolute dollars and as a
percentage of revenues as it continues to expand its sales and marketing
expenditures to penetrate new markets and expand its client base.
Interest and Other Income (Expense) and Provisions for Income Taxes
For the three month period ended June 30, 2000 interest and other income
(expense) decreased to a loss of $ .2 million from income of $ .4 million in the
same period in 1999. Interest income increased primarily due to a higher amount
of invested cash and interest earned on a note receivable from OAO Corporation,
however the income was offset by a negative mark to market adjustment in the
amount of $ .5 million to the obligation incurred as a part of the Siebel VAIR
agreement. The impact of the Siebel adjustment similarly affected the six month
period ended June 30, 2000 by decreasing interest and other income (expense) to
$ .4 million from $ .5 million in the same period in 1999. The effective tax
rate increased to 42.5 % for the three and six month periods ended June 30, 2000
versus a 40 % rate in the same periods in 1999.
Liquidity and Capital Resources
Cash and cash equivalents were $ 10.0 million as of June 30, 2000, versus $ 13.1
million as of December 31, 1999. Cash used in operations was $ 2.1 million for
the six months ended June 30, 2000. Cash used in operations for the six months
ended June 30, 2000 was due to the payment of accounts payable and accrued
expenses. OAOT's business segments of Network and Systems Business Solutions and
Professional Services, improved collections of accounts receivable, and cash
management. These increased cash flows were used to fund the Company's newer
Healthcare IT Solutions and E-Business Consulting Solutions business segments.
The Company expects to continue to invest in the operations of its newer
business segments including E-Business Consulting Solutions and Healthcare IT
Solutions for projects including ADM and enhancement of its ASP product during
2000. The Company will also invest in sales and marketing as it develops its
demand generation capabilities for these newer business services. Such costs
will continue to be expensed as incurred and represent significant use of future
cash which is expected to be funded from Company operations and available cash.
Cash used in investing activities was $ 2.2 million for the purchase of
computers and office equipment and certain software development costs associated
with the Healthcare IT segment. The Company's business operations will require
additional capital expenditures as the Company continues to expand its ADM
business and its other new business segments. Uses of cash were partially offset
by proceeds from the sale of the Company's common stock through stock option
exercises and purchases under the employee stock purchase plan in the amount of
$ 1.2 million.
The Company entered into a $35 million combined revolving credit and term loan
agreement (the "Agreement") with Bank of America on June 30, 1999. The Agreement
provides a revolving line of credit "Revolver" in the amount of $15 million that
matures on May 31, 2002. The Revolver provides for a commitment fee based on the
unused balance, and at the Company's option, interest at the prime rate, or the
LIBOR plus a 1.75% to 2.5% risk adjusted premium. The term loan facility, in the
amount of $20 million, matures on May 31, 2001. Borrowings under the Agreement
are limited to a multiple of earnings before interest, taxes, depreciation, and
amortization (EBITDA). However, the Company may convert, at its option, the
Revolver portion of the Agreement into an asset-based loan whose borrowing
availability would be a percentage of eligible billed and unbilled receivables.
The Agreement also requires maintenance of certain financial covenants,
prohibits the payment of dividends among other restrictions. There were no
borrowings outstanding under this Agreement as of December 1999 or June 30,
2000.
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OAO TECHNOLOGY SOLUTIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (continued)
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.
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. As of August 7, 2000, the Company had not experienced any
significant Y2K related disruptions.
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
The Company conducts business in foreign countries, primarily Canada and the
United Kingdom. Foreign currency transaction gains and losses were not material
to the Company's results of operations for the three and six month periods ended
June 30, 2000 and 1999. The Company believes its foreign currency risk is
related primarily to the difference between amounts the Company receives and
disburses in Canada in U.S. Dollars from U.S. dollar denominated contracts. The
Company does not expect the amount of foreign currency risk to be material in
the future. To date, the Company has not entered into any significant foreign
currency forward exchange contracts or other derivative financial instruments to
hedge the effects of adverse fluctuations in foreign currency exchange rates.
14
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PART II - OTHER INFORMATION
Item 4. Submission Of Matters To A Vote Of Security Holders:
A. The Annual Meeting of Shareholders was held May 12, 2000 at the Latham
Hotel in Washington, DC.
B. The following individuals were elected as directors at the Annual
Meeting:
Votes For Votes Withheld
1. Jerry L. Johnson 15,770,130 12,834
2. Cecile D. Barker 15,770,046 12,918
3. Gregory A. Pratt 15,770,616 12,348
4. Yvonne Brathwaite Burke 15,763,475 19,489
5. Frank B. Foster, III 15,767,826 15,138
6. John F. Lehman 15,770,476 12,488
7. Richard B. Lieb 15,770,206 12,758
C. Deloitte & Touche, LLP, independent accountants, were selected as
independent auditors for the fiscal year ending December 31, 2000 by a
vote of 15,751,529 for, 28,510 against and 2,925 abstentions.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Page
No. Description No.
------------- ----------------------------------------
27.1 Financial Data Schedule. (1) 17
(b) No reports were filed on form 8-K during the quarter ended June 30, 2000.
---------------------------
(1) Filed herewith.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OAO Technology Solutions, Inc.
(Registrant)
Date: August 11, 2000 By: /s/ Gregory A. Pratt
--------------------------------------------------
Gregory A. Pratt
President and Chief Executive Officer
Date: August 11, 2000 By: /s/ J. Jeffry Fox
--------------------------------------------------
J. Jeffrey Fox
Vice President Finance and Chief Financial Officer
16
