<PAGE> 1
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, 1998
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 005-54161
ATLANTIC DATA SERVICES, INC.
(Exact Name of Registrant as Specified in its Charter)
MASSACHUSETTS 04-2696393
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
ONE BATTERYMARCH PARK
QUINCY, MASSACHUSETTS 02169
(Address of Principal Executive Offices) (Zip Code)
(617) 770 - 3333
(Registrant's Telephone Number, Including Area Code)
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 [ ] No [X]
As of July 31, 1998, there were 12,790,705 shares of the Registrant's Common
Stock, $.01 par value per share, outstanding.
<PAGE> 2
ATLANTIC DATA SERVICES, INC.
TABLE OF CONTENTS
Page
----
PART I - FINANCIAL INFORMATION
ITEM 1: Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 1998
(Unaudited) and March 31, 1998 3
Condensed Consolidated Statements of Income for the Three
Months Ended June 30, 1998 and 1997 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended June 30, 1998 and 1997 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II - OTHER INFORMATION
ITEM 2: Changes in Securities and Use of Proceeds 13
ITEM 6: Exhibits and Reports on Form 8-K 14
SIGNATURES 15
EXHIBIT INDEX 16
2
<PAGE> 3
Atlantic Data Services, Inc.
Condensed Consolidated Balance Sheets
(In thousands, except par value and share data)
<TABLE>
<CAPTION>
June 30, March 31,
1998 1998
----------- ---------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $27,344 $3,401
Accounts receivable, net 11,749 9,100
Prepaid expenses 188 462
Deferred taxes 351 284
------- -------
Total current assets 39,632 13,247
Property and equipment, net 1,112 995
Other assets 184 243
------- -------
$40,928 $14,485
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $4,619 $4,174
Deferred revenue 3 40
Billings in excess of cost and estimated
earnings on contracts 489 640
Federal and state income taxes 1,324 830
Deferred compensation 85 83
------- -------
Total current liabilities 6,520 5,767
Capital lease obligation 30 35
Stockholders' Equity:
Common stock, $.01 par value
60,000,000 shares authorized, 12,897,955 shares issued and
outstanding at June 30, 1998 and 11,746,840 shares authorized,
6,847,960 shares issued and outstanding at March 31, 1998 129 68
Class A common stock, $.01 par value, zero and 1,694,800 shares
authorized, zero and 928,790 shares issued and outstanding at
June 30, 1998 and March 31,1998, respectively -- 9
Special common stock, $.01 par value, zero and 3,104,080
authorized, zero and 3,104, 080 issued and outstanding at
June 30, 1998 and March 31, 1998, respectively -- 31
Preferred stock, $.01 par value, 1,000,000 and zero authorized, no
shares issued and outstanding at June 30, 1998 and March 31, 1998 -- --
respectively
Additional paid-in capital 25,758 2,245
Retained earnings 8,516 6,355
Less treasury Class A common stock at cost, 112,000 shares (25) (25)
------- -------
Total Stockholders' equity 34,378 8,683
------- -------
$40,928 $14,485
======= =======
</TABLE>
Note: The balance sheet at March 31, 1998 has been derived from the audited
financial statements at that date, but does not include all the information and
footnotes required by generally accepted accounting principals for complete
financial statements.
See accompanying notes to the condensed consolidated financial statements.
3
<PAGE> 4
Atlantic Data Services, Inc.
Condensed Consolidated Statements of Income
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
------------------
1998 1997
------- ------
<S> <C> <C>
Revenues $17,446 $8,231
Cost of revenues 9,981 4,751
------- ------
Gross profit 7,465 3,480
Operating expenses
Sales and marketing 1,552 579
General and administrative 2,305 1,275
------- ------
Total operating expenses 3,857 1,854
Income from operations 3,608 1,626
Interest income 153 28
Interest expense (1) (2)
------- ------
Income before provision for income taxes 3,760 1,652
Provision for income taxes 1,598 694
------- ------
Net income $ 2,162 $ 958
======= ======
Earnings per share $ 0.19 $ 0.10
======= ======
Diluted earnings per share $ 0.18 $ 0.10
======= ======
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
4
<PAGE> 5
Atlantic Data Services, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
-------------------
1998 1997
------- ------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 2,162 $ 958
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and Amortization 136 43
Provision for bad debts 100 36
Change in operating assets and liabilities:
Accounts receivable (2,749) (1,849)
Prepaid expenses and other assets 267 3
Accounts payable and accrued expenses 408 (311)
Billings in excess of cost and estimated earnings on contracts (151) 29
Federal and state income taxes 494 386
------- ------
Net cash provided by (used in) operating activities 667 (705)
INVESTING ACTIVITIES:
Purchase of property and equipment (253) (67)
FINANCING ACTIVITIES:
Principal payments under capital lease obligation (5) (5)
Proceeds from issuance of common stock, net 23,534
------- ------
Net cash provided by (used in) financing activities 23,529 (5)
Net increase (decrease) in cash and cash equivalents 23,943 (777)
Cash and cash equivalents, beginning of period 3,401 2,653
------- ------
Cash and cash equivalents, end of period $27,344 $1,876
======= ======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest 1 2
Taxes 1,105 300
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
5
<PAGE> 6
ATLANTIC DATA SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 1998
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements have been prepared by Atlantic Data Services, Inc. (the
"Company") in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting solely of normal recurring
adjustments) considered necessary for a fair presentation have been
included. Operating results for the three-month period ended June 30, 1998
are not necessarily indicative of the results that may be expected for
future periods of the full fiscal year. For further information, refer to
the Condensed Consolidated Financial Statements and Notes thereto included
in the Company's Registration Statement on Form S-1 for the year ended
March 31, 1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
The Company primarily derives its revenue from consulting services
under time and material billing arrangements. Under these arrangements,
revenue is recognized as the services are provided. Deferred revenue
pertains to time and material billing arrangements and represents cash
collected in advance of the performance of services.
Revenue on fixed price contracts is recognized using the percentage
of completion method of accounting and is adjusted monthly for the
cumulative impact of any revision in estimates. The Company determines the
percentage of its contracts by comparing costs incurred to date to total
estimated costs. Contract costs include all direct labor and expenses
related to the contract performance. An asset, "Costs and estimated
earnings in excess of billings," would represent revenues recognized in
excess of amounts billed. The liability, "Billings in excess of costs and
estimated earnings," represents billings in excess of revenues recognized.
Included in revenues are reimbursable contract-related travel and
entertainment expenses which are separately billed to clients.
6
<PAGE> 7
ATLANTIC DATA SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Earnings Per Share
On December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("FAS 128"). FAS 128 requires
the presentation of two amounts, earnings per share and diluted earnings per
share.
New Accounting Pronouncements
The company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS 130") and Statement of Financial
Accounting Standards No. 131, "Disclosure about Segments of an Enterprise and
Related Information" ("SFAS 131") in fiscal 1999. Neither standard has had a
material effect on the Company's financial position or results of operations.
3. EARNINGS PER SHARE
The following table sets forth the computation of earnings per share and
diluted earnings per share for the quarters ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
Three Months Ended
June 30,
1998 1997
----------- ----------
<S> <C> <C>
Numerator:
Net income (numerator for earnings per
share and diluted earnings per share) $ 2,162,229 $ 958,105
----------- ----------
Denominator:
Denominator for earnings per share
- weighted average shares and special common shares 11,354,605 9,952,040
Effect of dilutive common securities:
Employee stock options 382,728 --
----------- ----------
Denominator for diluted earnings per share 11,737,333 9,952,040
Earnings per share $ 0.19 $ 0.10
=========== ==========
Diluted earnings per share $ 0.18 $ 0.10
=========== ==========
</TABLE>
7
<PAGE> 8
ATLANTIC DATA SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
4. MAJOR CUSTOMERS
The nature of the Company's services results in the Company deriving
significant amounts of revenue from certain customers in a particular period.
For the quarter ended June 30, 1998 three customers accounted for 23.1%, 15.6%
and 13.7% of the Company's revenues. For the quarter ended June 30, 1997 two
customers accounted for 18.5% and 10.9% of the Company's revenues.
8
<PAGE> 9
ATLANTIC DATA SERVICES, INC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements.
For this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects," and
similar expressions are intended to identify forward-looking statements. There
are a number of important factors that could cause the Company's actual results
to differ materially from those indicated by such forward-looking statements.
These factors include, without limitation, those set forth below under the
caption "Certain Factors That May Affect Future Results."
OVERVIEW
ADS provides IT strategy consulting and systems integration services to
customers exclusively in the financial services industry, primarily banks. The
Company's service offerings are organized around five practice areas: IT
Strategy Consulting, Consolidations and Conversions, Year 2000 Resolution,
Application Outsourcing, and Electronic Commerce and Home Banking.
The Company was organized in Massachusetts in 1980 to provide consulting
services to banks and bank service bureaus. The Company's revenues are derived
primarily from professional fees billed to customers on a time and materials
basis, or in certain instances on a fixed price basis. Included in revenues are
reimbursable contract-related travel and entertainment expenses, which are
separately billed to clients. Substantially all of the Company's contracts,
other than fixed price contracts, are terminable by the customer following
limited notice and without significant penalty to the customer. Revenues from
fixed price contracts represented approximately 6.2 % and 12.6 % of the
Company's revenues for the quarters ended June 30, 1998 and 1997, respectively.
Revenues from the Company's five largest customers for the quarters ended
June 30, 1998 and 1997, were 67.2% and 53.1%, respectively, as a percentage of
revenues. For the quarter ended June 30, 1997 Associated Banc-Corp and Nations
Bank Corporation (Barnett Bank) accounted for approximately 18.5% and 10.9%,
respectively, of revenues. For the quarter ended June 30, 1998 National City
Corporation, First Security Information Technology, Inc. and Associated
Banc-Corp accounted for approximately 23.1%, 15.6% and 13.7%, respectively, of
revenues.
Cost of revenues consists primarily of salaries and employee benefits for
personnel dedicated to customer assignments, fees paid to subcontractors for
work performed in connection with customer assignments, and reimbursable
contract-related travel and entertainment expenses incurred by the Company in
connection with the delivery of its services.
9
<PAGE> 10
Sales and marketing expenses consist primarily of salaries, employee
benefits, travel expenses and promotional costs. General and administrative
expenses consist primarily of expenses associated with the Company's management,
finance and administrative groups, including recruiting, training, depreciation
and amortization, and occupancy costs.
THREE MONTHS ENDED JUNE 30, 1998 AND 1997
REVENUES
Revenues increased 112% for the quarter ended June 30, 1998 over the
quarter ended June 30, 1997, from $8.2 million to $17.4 million. This increase
was primarily due to an increase in volume of services delivered to customers
and an increase in the average billing rate.
COST OF REVENUES
Cost of revenues increased 110.1% from $4.8 million for the quarter ended
June 30, 1997 to $10.0 million for the quarter ended June, 30, 1998,
representing 57.7% and 57.2%, respectively, of revenues in each quarter. The
dollar increase in cost of revenues was primarily due to an increase in billable
personnel from 178 at June 30, 1997 to 292 at June 30, 1998.
SALES AND MARKETING
Sales and marketing expenses increased 168.1% from $.6 million for the
quarter ended June 30, 1997 to $1.6 million for the quarter ended June 30, 1998,
representing 7.0% and 8.9% of revenues, respectively. This increase resulted
primarily from the Company's decision to expand its sales and marketing group
from 8 employees at June 30, 1997 to 18 employees at June 30, 1998, the increase
in sales commissions related to the significant increase in revenues, travel
related expenses for the sales group, as well as increased investment in
marketing initiatives. The Company expects its sales and marketing expenses to
increase in absolute dollars as the Company continues to add sales and marketing
staff.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased 80.7% from $1.3 million for
the quarter ended June 30, 1997 to $2.3 million for the quarter ended June 30,
1998, representing 15.5% and 13.2% of revenues, respectively. This increase is
primarily due to increases in recruiting, occupancy and equipment costs to
support the Company's expansion, as well as costs associated with being a public
company. The decrease in general and administrative expenses as a percentage of
revenues reflects the significant increase in revenues for the quarter ended
June 30, 1998 compared to the quarter ended June 30, 1997. The Company expects
that general and administrative expenses will increase in absolute dollars as
personnel and facilities are added to support the
10
<PAGE> 11
Company's growth and as the Company incurs costs associated with being a public
company.
INTEREST INCOME
Interest income increased $125,000 from $28,000 for the quarter ended June
30, 1997 to $153,000 for the quarter ended June 30, 1998. This increase was
principally due to the increase in the amount of cash and cash equivalents
available for investment because of the net proceeds received from the Company's
initial public offering completed on May 28, 1998 of $23.4 million.
PROVISION FOR INCOME TAXES
The provision for income taxes increased $.9 million from $.7 million for
the quarter ended June 30, 1997 to $1.6 million for the quarter ended June 30,
1998, resulting in effective tax rates of 42.0% and 42.5%, respectively. The
Company's tax rate may vary from period to period based on its expansion into
areas with varying state and local statutory income tax rates. The increase in
the effective tax rate is primarily due to differences in applicable state
income tax rates.
LIQUIDITY AND CAPITAL RESOURCES
In May 1998, the Company completed its initial public offering of
2,500,000 shares, of which 2,000,000 shares were offered by the Company at a
price of $13 per share. The net proceeds to the Company after deducting
underwriting discounts and commissions and offering expenses payable by the
Company was approximately $23.4 million.
The Company has no long-term debt and continues to operate primarily
debt-free. Working capital increased to $33.1 million at June 30, 1998 compared
to $7.4 million at March 31, 1998. This increase was primarily due to the net
proceeds of the initial public offering of $23.4 million and an increase in
accounts receivable of $2.6 million. The Company's days sales outstanding at
June 30, 1998 were 61 compared to 66 days at June 30, 1997.
Capital expenditures for the quarter ended June 30, 1998 of $ 253,000 were
primarily to support new employees and the growth of the Company. Capital
expenditures for the remainder of fiscal 1999 are expected to be approximately
$750,000 and will be used principally for computer and other equipment and to a
lesser extent leasehold improvements.
The Company expects that existing cash and cash equivalent balances
together with cash provided from operations will be sufficient to meet the
Company's working capital and capital expenditure requirements for at least the
next 12 months. However, the Company is currently experiencing a period of
growth, which could place a strain on the Company's financial resources. In
order to meet client demand for the Company's
11
<PAGE> 12
services in fiscal 1999, the Company expects to continue to increase its
professional staff. Although the Company's plans to hire personnel are in
response to increased demand for the Company's services, a portion of these
expenses will be incurred in anticipation of increased demand. Operating results
and liquidity may be adversely affected if market demand and revenues do not
increase as anticipated.
To date, inflation has not had a material impact on the Company's
financial results
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
This Form 10-Q contains forward-looking statements such as statements
about capital expenditures, liquidity and sources of funds, working capital
needs, increases in personnel and related costs, general and administrative
expenses, sales and marketing expenses and other costs as a percentage of
revenue, and management's operating plans and objectives. These forward-looking
statements are subject to a number of risks and uncertainties that may cause
actual results to differ materially from expectations. Those risks and
uncertainties include, but are not limited to, variability of quarterly
operating results, dependence on the financial services industry, concentration
of revenues and dependence on customers, management of growth, availability of
professional staff, competitive pressures in the IT and systems integration
market, and risks associated with fixed price contracts and rapid technological
changes. Further information on factors that could cause results to differ from
those anticipated is included in filings made by the Company from time to time
with the Securities and Exchange Commission, including, but not limited to the
Company's Registration Statement on Form S-1, as filed with the SEC on March 26,
1998, as amended. Any forward-looking statements should be considered in light
of these factors.
12
<PAGE> 13
PART II
OTHER INFORMATION
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
(d) Use of Proceeds
On May 22, 1998, the Company commenced an initial public offering
("IPO") of 2,500,000 shares of common stock, par value $.01 per share (the
"Common Stock"), pursuant to the Company's final prospectus dated May 22,
1998 (the "Prospectus"). The Prospectus was contained in the Company's
Registration Statement on Form S-1, which was declared effective by the
Securities and Exchange Commission (SEC File No. 333-48703) on May 21,
1998. Of the 2,500,000 shares of Common Stock offered, 2,000,000 shares
were offered and sold by the Company and 500,000 shares were offered and
sold by certain stockholders of the Company. As part of the IPO, certain
stockholders of the Company granted the several underwriters, for whom
BancAmerica Robertson Stephens, BT Alex Brown and Adams, Harkness & Hill,
Inc., acted as representatives (the "Representatives"), an overallotment
option to purchase up to an additional 375,000 shares of Common Stock (the
"Underwriters' Option"). The IPO closed on May 28, 1998.
On June 22, 1998, the Representatives, on behalf of the several
underwriters purchased 375,000 shares of Common Stock from certain
stockholders of the Company pursuant to the exercise of the Underwriters'
Option.
The aggregate offering price of the IPO to the public was
$32,500,000 (exclusive of the Underwriters' Option), with proceeds to the
Company and the selling stockholders, after deduction of underwriting
discounts, of $24,180,000 (before deducting offering expenses payable by
the Company) and $6,045,000, respectively. The aggregate offering price of
the Underwriters' Option exercised $4,875,000, with proceeds to the
selling stockholders, after deduction of the underwriting discounts and
commissions, of $4,533,750.
From May 21, 1998 through June 30, 1998, the aggregate amount of
expenses incurred by the Company in connection with the issuance and
distribution of the shares of Common Stock offered and sold in the IPO
were approximately $3,082,000, including $2,275,000 in underwriting
discounts and approximately $807,000 in other expenses.
None of the expenses paid by the Company in connection with the IPO
or the exercise of the Underwriters' Option were paid, directly or
indirectly, to directors, officers, persons owning ten percent or more of
the Company's equity securities, or affiliates of the Company.
13
<PAGE> 14
The net proceeds to the Company from the IPO, after deducting
underwriting discounts and commissions and other expenses were
approximately $23,373,000.
From May 21, 1998 through June 30, 1998, the Company has applied
approximately $113,000 of the net proceeds from the IPO to working
capital. The Company invested the balance of such net proceeds primarily
in Money Market Accounts.
None of the net proceeds from the IPO were used to pay, directly or
indirectly, directors, officers, persons owning ten percent or more of the
Company's equity securities, or affiliates of the Company.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial data schedule
(b) Reports on Form 8-K
None
14
<PAGE> 15
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ATLANTIC DATA SERVICES, INC.
Date: July 31, 1998 By: /s/ Robert W. Howe
--------------------------------------
Robert W. Howe
Chairman and Chief Executive Officer
Date: July 31, 1998 By: /s/ Paul K. McGrath
--------------------------------------
Paul K. McGrath
Senior Vice President and Chief
Financial Officer (Principal Financial
and Accounting Officer)
15
<PAGE> 16
EXHIBIT INDEX
Page
27.1 Financial Data Schedule 17
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JUNE 30,
1998 FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S FORM 10-Q AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 27,344
<SECURITIES> 0
<RECEIVABLES> 11,849
<ALLOWANCES> 100
<INVENTORY> 0
<CURRENT-ASSETS> 39,632
<PP&E> 2,346
<DEPRECIATION> 1,234
<TOTAL-ASSETS> 40,928
<CURRENT-LIABILITIES> 6,520
<BONDS> 0
0
0
<COMMON> 129
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 40,928
<SALES> 17,446
<TOTAL-REVENUES> 17,446
<CGS> 9,981
<TOTAL-COSTS> 9,981
<OTHER-EXPENSES> 3,857
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1
<INCOME-PRETAX> 3,760
<INCOME-TAX> 1,598
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,162
<EPS-PRIMARY> .19
<EPS-DILUTED> .18
</TABLE>
