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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended: Commission File Number:
March 31, 1998 333-36447
FEDERAL DATA CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 52-0940566
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation) Number)
4800 Hampden Lane, Bethesda, MD 20814
(Address of principal executive offices) (Zip Code)
(301) 986-0800
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address, and former fiscal year, if
changed since last report)
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 of1934 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 the close of business April 30, 1998, the registrant had outstanding
2,910,896 shares of Common Stock, par value $.01 per share.
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<PAGE>
INDEX
Page
Part I. Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1997
and March 31, 1998 (Unaudited) ................................ 3
Consolidated Statements of Operations for the Three Months
Ended March 31, 1997 and 1998 (Unaudited) ..................... 4
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1997 and 1998 (Unaudited) ..................... 5
Notes to Consolidated Financial Statements (Unaudited) ........ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................... 8
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K .............................. 10
2
<PAGE>
Part I. Financial Information
Item 1 Consolidated Financial Statements
Federal Data Corporation
Consolidated Balance Sheets
(In thousands, except share data)
December 31, March 31,
1997 1998
--------- ---------
Assets (Unaudited)
Cash and cash equivalents ........................... $ 6,327 $ 0
Accounts receivable ................................. 96,074 98,127
Net investment in sales-type leases ................. 6,839 7,520
Inventory ........................................... 6,346 10,220
Other assets ........................................ 8,376 5,985
--------- ---------
Total current assets ............................... 123,962 121,852
Net investment in sales-type leases ................. 1,203 238
Leased and other property and equipment ............. 3,746 5,925
Goodwill and intangibles ............................ 54,161 75,775
Other assets ........................................ 9,894 8,341
--------- ---------
Total assets ....................................... $ 192,966 $ 212,131
========= =========
Liabilities and stockholders' equity (deficit)
Accounts payable and other liabilities .............. $ 73,760 $ 63,043
Obligations under capital leases - nonrecourse ...... 2,636 2,500
--------- ---------
Total current liabilities .......................... 76,396 65,543
Notes payable - recourse ............................ 113,000 143,924
Obligations under capital leases - nonrecourse ...... 359 149
Other liabilities ................................... 2,194 3,966
--------- ---------
Total liabilities .................................. 191,949 213,582
--------- ---------
Stockholders' equity (deficit)
Common stock, $.01 par value: 8,000,000 shares
authorized; shares issued and outstanding,
2,910,896 in 1997 and 1998 ......................... 29 29
Capital in excess of par value ...................... 40,300 40,296
Accumulated deficit ................................. (39,312) (41,776)
--------- ---------
Total stockholders' equity (deficit) ............... 1,017 (1,451)
--------- ---------
Total liabilities and stockholders' equity (deficit) $ 192,966 $ 212,131
========= =========
See notes to consolidated financial statements.
3
<PAGE>
Federal Data Corporation
Consolidated Statements of Operations
(In thousands)
(Unaudited)
Three Months Ended
March 31,
--------------------
1997 1998
-------- --------
Revenues
Equipment and software sales ...................... $ 13,567 $ 53,201
Maintenance and support services .................. 16,307 38,210
Interest and other ................................ 604 438
-------- --------
Total revenues ....................... 30,478 91,849
-------- --------
Expenses
Cost of sales and services ........................ 23,492 79,238
Selling, general and administrative ............... 6,091 10,295
Goodwill and intangibles .......................... -- 2,168
Interest .......................................... 1,678 3,580
-------- --------
Total expenses ....................... 31,261 95,281
-------- --------
Loss before income tax benefit ......................... (783) (3,432)
Income tax benefit ..................................... (313) (968)
-------- --------
Net loss ............................................... $ (470) $ (2,464)
======== ========
See notes to consolidated financial statements.
4
<PAGE>
Federal Data Corporation
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Three Months Ended
March 31,
1997 1998
-------- --------
Cash flows from operating activities:
Net loss .......................................... $ (470) $ (2,464)
Adjustments to reconcile net loss to
net cash flows from operating activities:
Depreciation and amortization ..................... 146 2,722
Loss recorded on sales-type leases ................ 455 --
Collections from sales-type leases ................ 733 311
Increase in inventory ............................. -- (3,875)
Decrease in accounts receivable ................... 10,045 13,200
Decrease in accounts payable and accrued expenses . (7,470) (11,603)
Net change in other assets and liabilities ........ (508) 1,992
-------- --------
Net cash flows from operating activities .......... 2,931 283
-------- --------
Cash flows from investing activities:
Acquisitions of businesses, net of cash received .. -- (30,346)
Purchase of property and equipment ................ (339) (1,011)
-------- --------
Net cash flows from investing activities .......... (339) (31,357)
-------- --------
Cash flows from financing activities:
Repayments of borrowings .......................... (1,964) --
Net (repayments) borrowings under line of credit .. (100) 25,171
Repayments of capital lease obligations ........... (610) (424)
-------- --------
Net cash flows from financing activities .......... (2,674) 24,747
-------- --------
Net change in cash and cash equivalents ................ (82) (6,327)
Cash and cash equivalents, beginning of period ......... 1,191 6,327
-------- --------
Cash and cash equivalents, end of period ............... $ 1,109 $ 0
======== ========
See notes to consolidated financial statements.
5
<PAGE>
Federal Data Corporation
Notes to Consolidated Financial Statements
(In thousands)
(Unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements include the
accounts of Federal Data Corporation and its wholly-owned subsidiaries
(collectively, the Company) and have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
note disclosures normally included in the annual financial statements, prepared
in accordance with generally accepted accounting principles, have been condensed
or omitted pursuant to those rules and regulations, although the Company
believes that the disclosures made are adequate to make the information
presented not misleading.
In the opinion of management, the accompanying unaudited consolidated financial
statements reflect all necessary adjustments and reclassifications (all of which
are of a normal, recurring nature) that are necessary for fair presentation for
the periods presented. It is suggested that these unaudited consolidated
financial statements be read in conjunction with the consolidated financial
statements and the notes thereto included in the Company's latest annual report
to the Securities and Exchange Commission on Form 10-K 405 for the year ended
December 31, 1997.
The results of operations for the three month period ended March 31, 1998, are
not necessarily indicative of the results to be expected for the full fiscal
year ending December 31, 1998.
All of the Company's direct and indirect wholly-owned subsidiaries have fully
and unconditionally guaranteed, on a joint and several basis, the Company's
obligations under its Senior Subordinated Notes. The Company is a holding
company with no assets or operations other than its investments in its
subsidiaries. The separate financial statements of the subsidiary guarantors are
not presented because the Company's management believes that such financial
statements are not material to investors.
Note 2 - Acquisitions
During the quarter ended June 30, 1997, the Company purchased all of the
outstanding shares of common stock of NYMA, Inc. (NYMA) and Sylvest Management
Systems Corporation (Sylvest) (collectively, the 1997 Acquisitions) for an
aggregate purchase price of $72,604. The agreements provide for additional
payments of up to $3,000 if certain operating objectives related to new business
activity are met. Such payments, if any, will be determined during the second
quarter of 1998 and accounted for as adjustments to the purchase price. NYMA is
a provider of high technology engineering and information technology services
under contracts with various United States Government (the Government) agencies
and subcontracts with large government contractors. Sylvest is a leading
reseller and technical services vendor supporting open systems architecture
within the federal marketplace.
In February and March 1998, the Company purchased all of the outstanding common
stock of R.O.W. Sciences, Inc. (R.O.W.) and Technical and Management Assistance,
Inc. (TMA) and also in March purchased all of the assets of Telos Information
Systems (TIS), a division of Telos Corporation, (collectively, the 1998
Acquisitions). The aggregate purchase price of the 1998 Acquisitions was
$32,675. The agreements also provide for additional cash payments up to $1,000
if certain revenue objectives are met. Such payments, if any, will be accounted
for as adjustments to the purchase price. The purchase prices for R.O.W. and TMA
are subject to adjustment based on an audit of the closing balance sheets. The
Company financed the 1998 Acquisitions principally through borrowings under its
existing line of credit facility. R.O.W. provides information technology and
health science research services to federal and commercial clients. TMA provides
software development services principally to the air traffic management function
within the
6
<PAGE>
Federal Aviation Administration. TIS provides information technology and
engineering services principally to NASA and the Jet Propulsion Laboratory.
The Company recorded goodwill of $48,491 and $18,952 related to the 1997 and
1998 Acquisitions, respectively, and it is being amortized over fifteen years.
The purchase price of the acquisitions includes intangible assets of $10,701 and
$4,830 for the 1997 and 1998 Acquisitions, respectively. The intangible assets
represent contract backlog at the acquisition date and is recorded at the
present value of the projected pretax profits. The present value of the contract
backlog is being amortized over the remaining terms of the acquired contracts in
relation to the recognition of related contract revenue.
Condensed unaudited pro forma operating data which gives effect to all of the
acquisitions described above for the year ended December 31, 1997 and the three
months ended March 31, 1997 and 1998 is provided below. Such condensed unaudited
pro forma operating data has been prepared as if the acquisitions occurred as of
the beginning of the reporting period. The Company is currently conducting an
analysis of the allocation of the purchase price for the 1998 Acquisitions. The
preliminary purchase price allocation may change during the year ending December
31, 1998 as additional information concerning the net asset valuation is
obtained.
<TABLE>
<CAPTION>
Year Ended Three Months Ended
December 31, March 31,
1997 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Revenues ............................................ $ 505,283 $ 100,931 $ 101,445
========= ========= =========
Loss before extraordinary item and income tax benefit $ (5,056) $ (2,873) $ (3,524)
========= ========= =========
Loss before extraordinary item ...................... $ (5,306) $ (2,122) $ (2,591)
========= ========= =========
</TABLE>
In the opinion of management, the condensed unaudited pro forma operating data
is not indicative of the actual results that would have occurred had the
acquisitions been consummated at the beginning of 1997 or at the beginning of
1998 or of future operations of the combined companies under the ownership and
management of the Company.
Note 3 - Recent Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Standards No. 130, "Reporting Comprehensive Income" (SFAS No. 130).
SFAS No. 130 establishes standards for the reporting and presenting of
comprehensive income and its components (revenue, expenses, gains and losses) in
a full set of general-purpose financial statements. At March 31, 1998, there is
no impact on the Company's financial reporting as a result of its adoption of
SFAS 130.
Also in June 1997, the Financial Accounting Standards Board issued Statement of
Financial Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" (SFAS No. 131). SFAS No. 131 establishes standards for the
manner in which public business enterprises report information about operating
segments and the related disclosures about products and services, geographic
area, and major customers. SFAS No. 131 is effective for financial statements
issued for fiscal years beginning after December 15, 1997. The Company is
currently reviewing what effect this standard will have on future reporting.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
EXCEPT AS EXPRESSLY INDICATED, THE FOLLOWING DISCUSSION DOES NOT GIVE EFFECT TO
THE PRE-ACQUISITION OPERATIONS OF NYMA, SYLVEST, R.O.W., TIS AND TMA
(COLLECTIVELY, THE ACQUISITIONS) OR INCLUDE PRO FORMA FINANCIAL INFORMATION.
Results Of Operations
Three Months Ended March 31, 1998 Compared With Three Months Ended March 31,
1997
Revenues
Revenues for the three months ended March 31, 1998 were $91.8 million, up $61.4
million or 201% over the comparable period of 1997. The Acquisitions accounted
for $51.4 million of the increase in revenue over the comparable period of 1997.
Revenue from equipment and software sales was $53.2 million, up $39.6 million or
292% over the comparable period of 1997. The Acquisitions accounted for $28.4
million of the increase in equipment and software sales revenue over 1997. The
remaining increase in revenue from equipment and software sales is principally
due to increased emphasis on the Company's sale of commercial off-the-shelf
(COTS) products. Revenue from maintenance and support services was $38.2
million, up $21.9 million or 134% over the comparable period of 1997. The
Acquisitions accounted for $22.9 million of the increase in maintenance and
support services revenue over the comparable period of 1997. This increase in
maintenance and support services revenue was partially offset by a reduction in
maintenance and support services revenue due to the expiration of an existing
Department of the Navy contract during the fourth quarter of 1997.
Cost of Sales and Services
Cost of sales and services for the three months ended March 31, 1998 was $79.2
million, up $55.7 million or 237% over the comparable period of 1997. The
Acquisitions accounted for $46.0 million of the increase in cost of sales and
services over the comparable period of 1997. Cost of sales and services in 1998
was 87% of sales and services revenues compared with 79% of sales and services
revenues for the comparable period of 1997. The decrease in the gross margin
percentage primarily relates to increased influence of the COTS products sold
through the Company's Systems & Technology Group including Sylvest, which
generally have lower gross margin percentages than product sales by the
Company's Systems Integration Group and Solutions Group, and the lower margins
on the cost plus fee business of NYMA, R.O.W., TIS and TMA.
Selling, General and Administrative Expense
Selling, general and administrative expense for the three month period ended
March 31, 1998 was $10.3 million, up $4.2 million or 69% over the comparable
period of 1997. The Acquisitions accounted for $4.3 million of the increase in
selling, general and administrative expenses over the comparable period of 1997.
Excluding the effect of the Acquisitions, selling, general and administrative
expense for the three month period ended March 31, 1998 was 15% of revenues,
compared with 20% in the comparable period of 1997. This decrease in selling,
general and administrative expense as a percent of revenue was due primarily to
economies of scale resulting from the increase in revenues.
Amortization of Goodwill and Intangible Asset
The excess of the cost of the Acquisitions over the fair value of identifiable
net tangible and intangible assets acquired was $67.4 million and is being
amortized on a straight-line basis over fifteen years. The present value of the
contract profits of $15.5 million acquired in the Acquisitions is being
amortized over the remaining terms of the acquired contracts in relation to the
recognition of related contract revenue. Amortization of goodwill and intangible
assets for the three months ended March 31, 1998 was $2.2 million.
8
<PAGE>
Interest Expense
Interest expense for the three months ended March 31, 1998 was $3.6 million, up
$1.9 million, or 113% over the comparable period of 1997. Recourse interest
expense increased $2.2 million for the three months ended March 31,1998 over the
comparable period of 1997 primarily due to increased recourse debt used to
partially finance the Acquisitions. Interest expense on nonrecourse debt
declined $0.3 million for the three months ended March 31, 1998 from the
comparable period of 1997 due to a reduced level of capital leases. Interest
expense is expected to be higher in 1998 than in 1997, reflecting the higher
level of indebtedness to be outstanding for the full year, as a result of the
acquisitions of NYMA and Sylvest, and the additional indebtedness incurred to
finance the acquisitions of R.O.W., TIS and TMA.
Income Tax Benefit
The income tax benefit for the three month period ended March 31, 1998 is based
on an estimated annual effective rate, excluding expenses not deductible for
income tax purposes. Before giving effect to the Acquisitions, the effective tax
provision rate for the year ending December 31, 1998 is estimated to be 40%,
approximately the same rate recorded during the three months ended March 31,
1997. The Company believes that the nondeductibility of the additional
amortization of goodwill and the value related to contract backlog associated
with the NYMA and R.O.W. acquisitions will cause the annual effective tax rate
for 1998 to be higher than the annual effective tax rate in 1997.
Net Loss
Net loss for the three months ended March 31, 1998 was $2.5 million, a $2.0
million increase from the net loss of $0.5 million recorded in the comparable
period of 1997 based on the reasons discussed above.
Liquidity and Capital Resources
The Company's primary source of liquidity is cash provided by operations. The
Company's liquidity requirements generally vary seasonally with revenues, which
are generally higher in the third and fourth quarters of each fiscal year.
Historically, cash flow from the collection of accounts receivable from the
Government has generally been predictable and dependable. Cash and cash
equivalents were $0.0 million at March 31, 1998, down $6.3 million from December
31, 1997 primarily as a result of net cash flow from operating activities of
$0.3 million and net cash flows from financing activities of $24.7 million being
offset by net cash flow used in investing activities of $31.4 million. Net cash
flow from operating activities was primarily a result of decreases in accounts
receivable and other assets and liabilities of $13.2 million and $1.8 million,
respectively. The increased focus on COTS products sold through the Systems &
Technology Group used $3.9 million in cash to increase inventory over the
December 31, 1997 levels. In addition, cash was used to reduce accounts payable
and accrued expenses by $11.6 million. Net cash flow from financing activities
was $24.7 million for the three months ended March 31, 1998 primarily as a
result of net borrowings under the Company's working capital line of credit of
$28.9 million and issuance of term notes in connection with the R.O.W and TMA
acquisitions due in 2000 totaling $2.0 million. This cash was used, in part, to
repay and retire line of credit balances of acquired companies of $3.8 million.
Net cash used in investing activities amounted to $31.4 million for the three
months ended March 31, 1998, primarily as a result of the acquisition of R.O.W.,
TMA and TIS totaling $30.3 million and the purchases of property and equipment
totaling $1.0 million.
EBITDA represents the sum of loss before income tax benefit, net recourse
interest expense and depreciation and amortization. EBITDA is not a measure of
performance or financial condition under generally accepted accounting
principles, but is presented to provide additional information related to debt
service capability. EBITDA should not be considered in isolation or as a
substitute for other measures of financial performance or liquidity under
generally accepted accounting principles. While EBITDA is frequently used as a
measure of operations and the ability to meet debt service requirements, it is
not necessarily comparable to other similarly titled captions of other companies
due to the potential
9
<PAGE>
inconsistencies in the method of calculation. The following presentation
represents the Company's computation of EBITDA (in thousands):
Three Months Ended
March 31,
------------------
1997 1998
------- -------
Loss before income tax benefit ................... $ (783) $(3,432)
Net recourse interest expense .................... 1,291 3,463
Depreciation and amortization .................... 146 2,722
------- -------
EBITDA ...................................... $ 654 $ 2,753
======= =======
###
The foregoing discussion of various factors that may impact 1998 performance
contains certain forward-looking statements. In addition, the Company or its
representatives from time to time may make or have made certain forward-looking
statements. Those forward looking statements made by the Company or its
representatives are qualified in their entirety by reference to the discussion
in this document, other public documents, and the discussion of important
factors that could cause the Company's actual results to differ materially from
those projected or discussed in those forward looking statements. It is intended
that the foregoing constitute meaningful cautionary statements so as to obtain
the protections of the safe harbor established for such statements by the
Private Securities Litigation Reform Act of 1995.
###
Part II. Other Information
Item 6 (a). Exhibits
27 Financial Data Schedule
Item 6 (b). Reports on Form 8-K.
The Company filed a Form 8-K dated March 3, 1998, March 16, 1998 and March 24,
1998 related to the acquisition of R.O.W. Sciences, Inc., Telos Information
Systems, a division of Telos Corporation and Technical and Management
Assistance, Inc. In addition, the Company filed a Form 8-K/A dated May 4, 1998
and May 14, 1998 related to the acquisition of R.O.W. Sciences, Inc. and Telos
Information Systems.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
FEDERAL DATA CORPORATION
By: /s/ James M. Dean
------------------------------------------
James M. Dean
Vice President and Chief Financial Officer
Date: May 15, 1998
10
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 98,929
<ALLOWANCES> 802
<INVENTORY> 10,220
<CURRENT-ASSETS> 121,852
<PP&E> 23,209
<DEPRECIATION> 17,284
<TOTAL-ASSETS> 212,131
<CURRENT-LIABILITIES> 65,537
<BONDS> 143,924
0
0
<COMMON> 29
<OTHER-SE> (1,474)
<TOTAL-LIABILITY-AND-EQUITY> 212,131
<SALES> 91,411
<TOTAL-REVENUES> 91,849
<CGS> 79,238
<TOTAL-COSTS> 95,281
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 15
<INTEREST-EXPENSE> 3,580
<INCOME-PRETAX> (3,432)
<INCOME-TAX> (968)
<INCOME-CONTINUING> (2,464)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,464)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
