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 September 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 November 6, 2000, the registrant had outstanding 18,502,720 shares of
its Common Stock, par value $0.01 per share.
1
<PAGE>
OAO TECHNOLOGY SOLUTIONS, INC.
Quarterly Report on Form 10-Q for the Three and Nine Month Periods
Ended September 30, 2000
INDEX
Page Reference
COVER PAGE................................................................. 1
INDEX...................................................................... 2
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of September 30,
2000 and December 31, 1999 (Unaudited)....................... 3
Condensed Consolidated Statements of Operations and
Comprehensive Income for the Three and Nine Month
Periods Ended September 30, 2000 and 1999 (Unaudited)........ 4
Condensed Consolidated Statements of Cash Flows for
the Nine Months Ended September 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 6. Exhibits and Reports on Form 8-K
SIGNATURES................................................................ 16
2
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
OAO TECHNOLOGY SOLUTIONS, INC.
Condensed Consolidated Balance Sheets
(Unaudited)
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
-----------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 13,286 $ 13,142
Accounts receivable:
Billed, net of allowance of $ 581 and $1,014, respectively 18,331 21,066
Unbilled, net of allowance of $ 449 and $ 493, respectively 10,177 5,059
-----------------------------------
28,508 26,125
Note receivable - affiliate 2,320 2,520
Deferred income taxes 1,031 1,031
Income tax receivable 934 934
Other current assets 7,097 6,447
-----------------------------------
Total current assets 53,176 50,199
Property and equipment, net 4,973 4,387
Purchased and developed computer software for sale, net 2,348 1,596
Deposits and other assets 1,048 192
Goodwill 4,412 4,981
-----------------------------------
Total assets $ 65,957 $ 61,355
-----------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings under revolving credit agreement $ 6,000 $ --
Accounts payable 5,485 8,470
Accrued expenses 9,863 11,718
Income taxes payable 789 605
Unearned revenue 1,152 797
Current portion of capital lease obligations 12 54
-----------------------------------
Total current liabilities 23,301 21,644
Capital lease obligations, net of current portion 48 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;
18,503,689 and 18,101,124 shares issued and outstanding
at September 30, 2000 and December 31, 1999, respectively 185 181
Additional paid-in capital 42,238 40,743
Deferred compensation (35) (131)
Accumulated other comprehensive loss (488) (249)
Stockholder receivable (2,933) (2,933)
Retained earnings 3,641 2,011
-----------------------------------
Total stockholders' equity 42,608 39,622
-----------------------------------
Total liabilities and stockholders' equity $ 65,957 $ 61,355
===================================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
OAO TECHNOLOGY SOLUTIONS, INC.
Condensed Consolidated Statements of Operations and Comprehensive Income
(Unaudited)
(Dollars and shares in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
-------------------------------------------------
2000 1999 2000 1999
-------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 36,674 $ 38,887 $ 114,914 $ 113,823
Direct costs 30,904 34,058 96,468 101,052
-------------------------------------------------
5,770 4,829 18,446 12,771
Selling, general and administrative expense 6,017 4,095 16,615 11,430
-------------------------------------------------
Income (loss) from operations (247) 734 1,831 1,341
Interest and other income (expense), net 566 223 1,004 681
-------------------------------------------------
Income before income taxes 319 957 2,835 2,022
Provision for income taxes 136 430 1,205 854
-------------------------------------------------
Net income 183 527 1,630 1,168
Other comprehensive income (loss):
Foreign currency translation adjustment (135) 15 (239) 74
-------------------------------------------------
Comprehensive income $ 48 $ 542 $ 1,391 $ 1,242
=================================================
Net income per common share:
Basic $ 0.01 $ 0.03 $ 0.09 $ 0.07
=================================================
Diluted $ 0.01 $ 0.03 $ 0.09 $ 0.07
=================================================
Weighted average number of shares outstanding
Basic 17,910 16,986 17,802 16,804
=================================================
Diluted 18,269 17,667 18,552 17,355
=================================================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
OAO TECHNOLOGY SOLUTIONS, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30,
-----------------------
2000 1999
-----------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 1,630 $ 1,168
Adjustment to reconcile net income to net
cash (used in) provided by operating activities:
Depreciation and amortization 2,402 1,564
Change in fair value of stock guarantee (112) --
Change in assets and liabilities:
Accounts receivable, net (2,383) (253)
Other current assets (450) (3,378)
Deposits and other assets (760) (536)
Accounts payable (3,038) 1,246
Income taxes payable 184 --
Accrued expenses (1,743) 2,565
Unearned revenue 355 95
-----------------------
Net cash (used in) provided by operating activities (3,915) 2,471
-----------------------
Cash Flows from Investing Activities:
Purchase of business, net of cash acquired -- (164)
Capitalized software costs (1,236) --
Expenditures for property and equipment (1,936) (784)
-----------------------
Net cash used in investing activities (3,172) (948)
-----------------------
Cash Flows from Financing Activities:
Net borrowings under revolving credit agreement 6,000 --
Proceeds from common stock transactions, net 1,499 257
Payments on capital lease obligations (83) (639)
-----------------------
Net cash provided by (used in) financing activities 7,416 (382)
-----------------------
Effect of exchange rate changes on cash (185) 74
Net increase in cash and cash equivalents 144 1,215
Cash and cash equivalents, beginning of period 13,142 9,615
-----------------------
Cash and cash equivalents, end of period $ 13,286 $ 10,830
=======================
Supplemental cash flow information:
Cash paid for interest $ 47 $ 43
Cash paid for income taxes $ 1,294 $ 831
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
OAO TECHNOLOGY SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. 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
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 nine month
periods ended September 30, 2000, are not necessarily indicative of the results
to be expected for the full year.
2. New accounting pronouncements
In December 1999, the 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 does not expect that
the adoption of SAB 101 will have a material impact on its results of operations
and financial position.
In March 2000, the Financial Accounting Standards 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 had a guaranteed
per share value of $10 at August 31, 2000. The difference between the closing
share price at August 31, 2000, of $4.94, and the guaranteed per share value
will be paid in cash. The balance of the licenses is included in other current
assets and the value of the guarantee is included in accrued expenses on the
accompanying balance sheets. Changes in the value of the guarantee are reflected
in the Statements of Operations in the amount of $.3 million and $.1 million for
the three and nine month period ended September 30, 2000, respectively.
6
<PAGE>
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 359,000 and 681,000 for total diluted shares
outstanding of 18,269,000 and 17,667,000 for the three month period ended
September 30, 2000 and 1999, respectively, and by 750,000 and 551,000 for total
diluted shares outstanding of 18,552,000 and 17,355,000 for the nine month
period ended September 30, 2000 and 1999, respectively.
5. Revolving credit agreement
The Company had $ 6.0 million outstanding under its revolving credit agreement
as of September 30, 2000 with interest payable at the prime rate of 9.5 %.
6. 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 the 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, 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
<PAGE>
OAO TECHNOLOGY SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Segment information (continued)
Summary information by segment is as follows (in thousands):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
--------------------------------------------------------
2000 1999 2000 1999
--------------------------------------------------------
<S> <C> <C> <C> <C>
NETWORK and SYSTEMS BUSINESS SOLUTIONS
Revenues $ 13,514 $ 17,213 $ 46,426 $ 51,843
Gross profit 2,209 3,319 8,621 9,929
PROFESSIONAL SERVICES
Revenues 13,901 16,645 42,070 50,133
Gross profit 1,765 2,191 5,425 6,484
E-BUSINESS CONSULTING SOLUTIONS
Revenues 5,661 1,824 15,266 4,165
Gross profit (loss) 330 (1,391) 243 (4,538)
HEALTHCARE IT SOLUTIONS
Revenues 3,598 3,205 11,152 7,682
Gross profit 1,466 710 4,157 896
SEGMENT TOTALS
Revenues 36,674 38,887 114,914 113,823
Gross profit 5,770 4,829 18,446 12,771
Selling, general and administrative expenses unallocated 6,017 4,095 16,615 11,430
--------------------------------------------------------
Total consolidated income (loss) from operations (247) 734 1,831 1,341
Interest and other income (expense), net unallocated 566 223 1,004 681
--------------------------------------------------------
Total consolidated income before income taxes $ 319 $ 957 $ 2,835 $ 2,022
========================================================
</TABLE>
7. Reclassifications
Certain reclassifications have been made to the condensed consolidated financial
statements for the three and nine month periods ended September 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
Safe Harbor Statement
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 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
<PAGE>
OAO TECHNOLOGY SOLUTIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Overview (Continued)
E-Business Consulting Solutions are generally provided on a time and materials
contractual basis. The Company, through its E-Business Consulting Solutions
services, provides entire life cycle services for organizations. These services
range from initial business process modeling and development, through system
installation and implementation. The Company also provides a full suite of
continuous support services to help maintain and upgrade these complex,
mission-critical systems. The E-Business Consulting Solutions segment is
dedicated to implementing and supporting third-party designed software
applications and systems sold on a licensed and ASP basis.
The Company's Healthcare IT Solutions practice provides proprietary managed care
software application solutions under software license agreements via its MC400
software. The products are provided on a one-time license fee or a per member
per month (PMPM) long-term contractual basis and may include system development,
customer service, installation services, training, and ongoing support. In
addition, other services may be provided, such as total project management,
hardware planning and implementation, and custom programming. MC400 is currently
installed at over 50 managed care sites in the United States and the Bahamas.
The Company focuses its efforts on middle market commercial customers, as well
as public sector customers. In support of these efforts, the Company has
established strategic relationships with third-party software vendors such as
Siebel Systems, NCR, SAP, 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 information 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 nine months ended
September 30, September 30,
---------------------------------------------------------------------------------
(in millions) 2000 1999 2000 1999
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues ....................................... $ 36.7 100.0% $ 38.9 100.0% $114.9 100.0% $113.8 100.0%
Direct Costs ................................... 30.9 84.2% 34.1 87.7% 96.5 84.0% 101.1 88.8%
Selling, general and administrative expense .... 6.0 16.3% 4.1 10.5% 16.6 14.4% 11.4 10.0%
---------------------------------------------------------------------------------
Income (loss) from operations .................. (0.2) -0.5% 0.7 1.8% 1.8 1.6% 1.3 1.2%
Interest and other income (expense), net ....... 0.5 1.4% 0.2 0.5% 1.0 0.8% 0.7 0.6%
---------------------------------------------------------------------------------
Income before income taxes ............ 0.3 0.9% 0.9 2.3% 2.8 2.4% 2.0 1.8%
Provision for income taxes ..................... 0.1 0.4% 0.4 1.0% 1.2 1.0% 0.8 0.7%
---------------------------------------------------------------------------------
Net income ............................ $ 0.2 0.5% $ 0.5 1.3% $ 1.6 1.4% $ 1.2 1.1%
=================================================================================
</TABLE>
Comparison of the three and nine month periods ended September 30, 2000 to the
three and nine month periods ended September 30, 1999.
Revenues
The Company's revenues decreased $ 2.2 million or 5.7 % to $ 36.7 million for
the three months ended September 30, 2000, compared to $ 38.9 million for the
same period in 1999. For the nine months ended September 30, 2000 revenues
increased $ 1.1 million or 0.9 % to $ 114.9 million from $ 113.8 million for the
same period in 1999. The decrease and increase in revenues for the respective
three and nine month periods ended September 30, 2000 are the result of net
increases and decreases in revenues in the following business segments. Revenue
increases for the three months ended September 30, 2000 were driven by the
E-Business Consulting Solutions segment, while for the nine months ended
September 30, 2000 revenue increases were driven by both the E-Business
Consulting Solutions and Healthcare IT Solutions segments. In both the three and
nine month periods ended September 30, 2000 revenue increases were offset by
lower revenues in the Network and Systems Business Solutions and Professional
Services segments compared to the same periods in 1999.
Revenues for E-Business Consulting Solutions increased $ 3.9 million or 216.7 %
to $ 5.7 million, for the three months ended September 30, 2000 compared to $
1.8 million for the same period in 1999. The increases for the third quarter of
2000 coupled with similar increases reported for the first two quarters of 2000
lead to an increase in revenues of $ 11.1 million or 267.3 % to $ 15.3 million
for the nine months ended September 30, 2000 compared to $ 4.2 million for the
same period in 1999. The increase in revenues for both the three-month and nine
month periods ended September 30, 2000 was due primarily to increased activity
in the ADM and consulting practices compared with the same periods in 1999. The
number of billable personnel continued to increase on new and existing contracts
through the first three quarters of 2000, compared to the first three quarters
of 1999 when the contracts had lower levels of activity. Similarly, the
consulting practices were in the start-up phase in the first three quarters of
1999 and had lower revenues in those periods. The first three 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 $ 0.4 million, or
12.5 %, to $ 3.6 million for the three months ended September 30, 2000 compared
to $ 3.2 million for the same period in 1999. The increase in revenues was due
primarily to an increase in recurring revenues which includes primarily annual
software maintenance fees and per member, per month ("PMPM") subscription type
license sales. Recurring revenues are from business sold in prior periods that
are being recognized during the three months ended September 30, 2000. Two
additional license sales occurred under the PMPM pricing model in the third
quarter of 2000, which reflects the Company's decision to transition the
Healthcare IT Solutions segment to an Application Service Provider (ASP) sales
model. Revenues from these sales will be recognized in future periods. The
recurring revenue and perpetual license sales led to an increase in revenues of
$ 3.4 million or 44.5 % to $ 11.1 million for the nine months ended September
30, 2000 compared to $ 7.7 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 $ 3.7 million
or 21.5 % to $ 13.5 million for the three months ended September 30, 2000
compared to $ 17.2 million for the same period in 1999. The decrease in the
third quarter was due primarily to delays in the signing of a new contract
between a strategic customer and end user customer and continued pricing and
volume decreases from another strategic customer. Additionally, a low-margin
contract was not renewed which contributed to approximately $ 2 million of
revenues in the third quarter of 1999. 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 $ 5.4 million or 10.5 % to $ 46.4
million for the nine months ended September 30, 2000 compared to $ 51.8 million
for the same period in 1999 was driven primarily by the events in the second and
third quarters of 2000.
Revenues from Professional Services decreased $ 2.8 million or 16.8 % to $ 13.9
million for the three months ended September 30, 2000 compared to $ 16.7 million
for the three months ended September 30, 1999. The decrease in revenues is due
to continued softness in staffing requisitions from a strategic customer, which
began with the carry over effects of Y2K constraints. The carry over effects of
the Y2K constraints and continued softness in staffing requisitions lead to a
decrease in revenues for the nine months ended September 30, 2000 of $ 8.0
million or 16.0 % to $ 42.1 million compared to $ 50.1 million for the same
period in 1999.
Direct Costs
The Company's direct costs decreased $ 3.2 million or 9.4 % to $ 30.9 million
for the three months ended September 30, 2000, compared to $ 34.1 million for
the same period in 1999. Direct costs also decreased as a percentage of revenues
to 84.2 % for the three months ended September 30, 2000 versus 87.7 % for same
period in 1999. For the nine months ended September 30, 2000, direct costs
decreased $ 4.6 million or 4.5 % to $ 96.5 million from $ 101.1 million for the
same period in 1999. Direct costs also decreased as a percentage of revenues to
84.0 % for the nine months ended September 30, 2000 versus 88.8 % for the same
period in 1999. The decrease in direct costs as a percentage of revenues for
both the three and nine month periods ended September 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 by $ 2.2
million to $ 5.4 million for the three months ended September 30, 2000 from $
3.2 million for the same period in 1999. However, as a percent of the segment
revenues direct costs decreased to 94.7 % of sales in the third quarter of 2000
from 177.8 % of sales in the same period in 1999. The results in the third
quarter of 2000 are a continuation of the same experience in the first two
quarters of 2000, which resulted in a increase in direct costs of $ 6.4 million
or 73.5 % to $ 15.1 million for the nine months ended September 30, 2000
compared to $ 8.7 million for the same period last year. For the nine months
ended September 30, 2000 direct costs as a percentage of revenues decreased to
98.7 % compared to 209.0 % for the same period in 1999.
In the Healthcare IT Solutions segment direct costs remained relatively constant
for both the three and nine month periods ended September 30, 2000 compared to
the same periods in 1999. However, as a percent of segment revenues direct costs
decreased to 58.3 % of revenues in the third quarter of 2000, from 78.1 % of
revenues in the same period in 1999. For the nine months ended September 30,
2000 direct costs as a percentage of segment revenues decreased to 62.5% from
88.3 % for the same period in 1999. Direct costs as a percent of revenues
continue to decrease as a result of an increase in recurring revenues and
perpetual use software license sales.
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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 $ 6.0 million and $ 4.1
million for the three-month periods ended September 30, 2000 and 1999,
respectively. OAOT's selling, general and administrative expenses increased as a
percentage of revenues for the three months ended September 30, 2000 to 16.3 %
compared to 10.5 % for the same period in 1999. For the nine-month periods ended
September 30, 2000 and 1999 selling, general and administrative expenses were $
16.6 million and $ 11.4 million or 14.4 % and 10.0 % 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
expected growth. However, the Company expects selling, general and
administrative expenses to increase in absolute dollars and as a percentage of
revenues as it has been investing and will continue to invest in its sales and
marketing capabilities, as well as building a delivery team to support
anticipated sales. During the three months ended September 30, 2000, the Company
began to eliminate unproductive sales, marketing and delivery staff, in addition
to reducing corporate overhead costs. The results of the reductions will be
recognized in future periods.
Interest and Other Income (Expense) and Provision for Income Taxes
For the three-month period ended September 30, 2000 interest and other income
increased to $ 0.5 million from $ 0.2 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, and a positive mark
to market adjustment in the amount of $ 0.3 million to the obligation incurred
as a part of the Siebel VAIR agreement. The impact of the mark to market
adjustment had a lesser effect on the nine-month period ended September 30, 2000
by increasing interest and other income by $ 0.1 million. The mark to market
adjustment along with the other factors affecting the three-month period led to
an increase in interest and other income for the nine-month period ended
September 30, 2000 to $1.0 million from $ 0.7 million in the same period in
1999.
The effective tax rate was 42.5 % for the three and nine-month periods ended
September 30, 2000. The effective tax rate was increased in the third quarter of
1999 to change the cumulative effective tax rate from 40% in the first two
quarters of 1999 to an effective rate of 42.2% for the nine-months ended
September 30, 1999.
Liquidity and Capital Resources
Cash and cash equivalents were $ 13.3 million as of September 30, 2000, versus $
13.1 million as of December 31, 1999. Cash used in operations was $ 3.9 million
for the nine months ended September 30, 2000. Cash used in operations for the
nine months ended September 30, 2000 was due to the payment of accounts payable
and accrued expenses and an increase in net accounts receivable. OAOT's business
segments of Network and Systems Business Solutions and Professional Services
provided net cash flows which 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. The Company will
continue to invest in its sales and marketing capabilities, as well as building
a delivery team to support anticipated sales. 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 $ 3.2 million for the purchase of computers and office
equipment and certain software 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 offset by proceeds from borrowings under the
revolving credit agreement in the amount of $ 6.0 million, and the sale of the
Company's common stock through stock option exercises and purchases under the
employee stock purchase plan in the amount of $ 1.5 million.
The Company entered into a $35 million combined revolving credit and term loan
agreement (the "Agreement") with Bank of America on September 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.
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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)
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 and the revolving credit agreement had $ 6.0 million outstanding
as of September 30, 2000 with an interest rate of 9.5 %.
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 November 6, 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 nine month periods
ended September 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 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 September 30,
2000.
(1) Not 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: November 13, 2000 By: /s/ Gregory A. Pratt
-----------------------------------
Gregory A. Pratt
President and Chief Executive Officer
Date: November 13, 2000 By: /s/ J. Jeffrey Fox
-----------------------------------
J. Jeffrey Fox
Vice President Finance and Chief Financial
Officer
16
