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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 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
16th Floor
Greenbelt, Maryland 20770
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (301) 486-0400
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on
which registered
None. Not applicable.
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, par value $0.01 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting and non-voting common equity held by
non-affiliates of the registrant as of March 23, 2001, was approximately
$13,276,652 based on the closing sale price of the Common Stock on March 23,
2001, of $1.33 as reported by the NASDAQ National Market System.
As of March 23, 2001, the registrant had outstanding 18,653,215 shares of
its Common Stock, par value $0.01 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Stockholders to
be held on May 16, 2000 are incorporated by reference in Part III, Items 10, 11,
12 and 13.
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OAO TECHNOLOGY SOLUTIONS, INC.
INDEX TO FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2000
Item Page
- --- ----
Part I
1 Business.......................................................... 3
2 Properties........................................................ 9
3 Legal Proceedings................................................. 10
4 Submission of Matters to a Vote of Security Holders............... 10
Part II
5 Market for Registrant's Common Equity and
Related Stockholder Matters................................... 10
6 Selected Consolidated Financial Data.............................. 11
7 Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 12
7a Quantitative and Qualitative Disclosures about Market Risk........ 19
8 Financial Statements and Supplementary Data....................... 20
9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...................................... 43
Part III
10 Directors and Executive Officers of the Registrant................ 43
11 Executive Compensation............................................ 43
12 Security Ownership of Certain Beneficial Owners and Management.... 43
13 Certain Relationships and Related Transactions.................... 43
Part IV
14 Exhibits, Financial Statement Schedules and Reports on Form 8-K... 44
PART I
Item I. BUSINESS.
OAO Technology Solutions, Inc. (OAOT - the Company) is a global integrator of
information technology and eBusiness solutions. OAOT is committed to provide
reliable IT solutions and implementation methods that allow our customers to
focus on their core businesses and keep their competitive edge. The Company
operates four business segments within two broad business sectors. The New
Business Sector includes services in what Management expects to be relatively
higher margin, faster growth business segments that are newer to OAOT and where
management also believes there is significant future growth potential. The
Traditional Business Sector includes services in relatively lower profit margin,
slower growth business segments that are profitable and have a recurring
positive cash-flow. The Company is committed to leveraging the advantages of its
Traditional Business Sector by investing these resources to rapidly grow its New
Business Sector. As a result of the evolution in the services the Company
provides, two of the Company's reportable segment names have been changed in
2000 from 1999; however, the composition of the reported segments has not
changed. The name changes have been conformed throughout this discussion and
analysis for consistency purposes.
The Company's Business Sectors and segments are as follows:
New Business Sector
Healthcare IT Solutions
Enterprise Applications and eBusiness Solutions
(formerly, E-Business Consulting Solutions)
Traditional Business Sector
Managed IT Services (formerly, Network and
Systems Business Solutions)
Professional Services
The Company has grown since its inception, with revenues increasing to $152.6
million in 2000, from $57.9 million in 1996. Revenues from two strategic
customers were $135.5 million and $137.6 million for the years ended December
31, 2000 and 1999, respectively. The largest strategic customer accounted for
76.0% and 75.7%, and the second largest strategic customer accounted for 12.8%
and 15.9% of revenues for the years ended December 31, 2000 and 1999,
respectively. The Company has diversified the type of service provided to its
strategic customers and expanded the number of strategic customer business units
to whom it provides services. For the year ended December 31, 1996, OAOT earned
60.2% of its revenues from data center management services provided to strategic
customers. For the year ended December 31, 2000, the Company earned 23.1% of its
revenues from data center management. A decrease in the revenues or loss of a
strategic customer could have a material adverse effect on the Company's
business, operating results, and financial condition. The early termination or
non-renewal of a strategic customer's contract by an end-user customer could
also have a material adverse effect on the Company's business, operating
results, and financial condition.
For the years ended December 31, 2000 and 1999, approximately 23%, and 30% of
the Company's revenues, respectively, were derived from fixed-price contracts.
Certain of the Company's fixed-price contracts require the Company to meet
pre-established levels of service, while achieving operating or managerial
efficiencies during the course of the engagements. Profitability is generally
lower during the early term of the engagements as the Company invests in
assuring a smooth start-up and in attaining certain service levels prior to the
implementation of productivity improvements. Upon completion of the initial
performance phase, the Company initiates activities to attempt to increase
profitability through improved management practices and the establishment of new
technical and operational methodologies. The inability to increase the
profitability of a contract could have a material adverse effect on the
Company's business, operating results and financial condition.
3
Engagements which involve new services to existing customers or services to new
customers may also result in lower margins during the early term of the
engagement. The Company has historically experienced margin improvements after
the start-up phase of its engagements, however, there can be no assurance of
future margin improvements. Further, the Company must realize and maintain
margins on its long-term contracts to offset the effect of any un-priced
increases in labor cost associated with delivery of services under these
long-term contracts. In addition, operating results can be affected by the level
of the Company's investments in international and other business development
activities. The Company believes that its business is not seasonal.
New Business Sector
The New Business Sector, consists of Enterprise Applications and eBusiness and
Healthcare IT Solutions. These are newer businesses that the Company entered
into over the previous four years. The AMS, (formerly ADM), business is the most
significant within the Enterprise Applications and eBusiness Solutions division.
OAOT management is focusing significant Company resources to grow the New
Business Sector and believes that it offers the best opportunity for future
growth. Revenues from the New Business Sector grew 94% in 2000, and this sector
now represents almost 25% of total Company revenues.
Healthcare IT Solutions
OAOT's MC400 software provides a comprehensive solution for healthcare benefit
organizations (health maintenance organizations, indemnity insurance plans,
physician hospital organizations, independent physician organizations and
self-insured employer plans, among others). The MC400 system is web-enabled and
provides over thirty modules that include claims processing, patient care
management, eligibility, enrollment, and utilization review. The Healthcare IT
Solutions division has over fifty installed sites. Our solution is ready for the
federal requirements of the Health Insurance Portability and Accountability Act
(HIPAA).
In 2000, OAOT acquired and began marketing and installing a care management
system (CMS) that enhances the MC400 product's capabilities. We also introduced
two additional major enhancements. The first is a communications server that
allows our customers to fax and email correspondence to both members and
providers. The second is our data warehouse/data-mining product for executive
information system reporting.
During 2000 OAOT, won a number of new customer accounts in our Healthcare IT
Solutions business that management believes will position the Company well for
the future. One was the sale of a software solution that established us as a
provider of solutions to the self-funded and self administrated market. Another
system sale demonstrated that our healthcare software solution could accommodate
a million-plus-member healthcare plan. The Company also signed its first
international distribution license agreement that is expected to provide
international sales of MC400. The Company intends to target these new markets in
2001, although there can be no assurance that the Company will be successful in
these markets.
OAOT recognizes that application software integration and management is
technically complex and generally very expensive. Therefore, we offer our
healthcare clients the application with the implementation solution that best
meets their size, complexity and financial resources. The Company offers clients
flexible purchasing options. MC400 can be purchased on a per member, per month
(PMPM) subscription basis or for a one time perpetual license fee. During 2000
OAOT emphasized selling MC400 on the PMPM basis. Under a PMPM sales model, the
Company recognizes revenue monthly over the contract term based on the number of
member users of the system. The Company believes that selling the MC400 on a
PMPM basis is mutually advantageous to customers and the Company. The PMPM sales
model may allow a customer to implement the MC400 with a lesser up front fee
thereby better matching the cashflows of their business with their investment in
MC400. Management believes OAOT will benefit because it receives a recurring
revenue stream over the period of the agreement, and since the revenue stream is
user based, it could grow as the customer's membership base grows. Management
believes that OAOT will receive greater revenues under the PMPM sales model over
the life of the contract than under a one time perpetual license sale, and that
the lesser up front cash payment could expand the market of potential MC400
users.
4
Enterprise Applications and eBusiness Solutions
OAOT's Enterprise Applications and eBusiness Solutions division provides
customer-centric integration services and software solutions that are designed
to work cohesively within the framework of our customers' existing business
models. The division's three practices are eBusiness Solutions,
Application/Managed Service Provider (A/MSP) and Application Management Services
(AMS).
Management believes that these practice areas, combined with industry
partnerships, provide OAOT with co-branding, market access and competency
development. Partnerships include: Siebel, SAP, Microsoft, Plumtree, Great
Plains and Mi8, among others. Through these partnerships, OAOT can offer our
customers a wide range of application choices with the flexibility to design and
construct the best possible solutions. For example, through the Great Plains
Global Accounts Partnership, OAOT can now offer customers the complete Great
Plains' front and back office solutions for such functions as financial
reporting, distribution, eCommerce, human resource management, manufacturing,
sales and marketing management, and customer service.
The AMS practice comprised 55% and 82% of this business segment's revenues in
1999 and 2000, respectively. Internet-centric business solutions are among our
new services and include eBusiness solutions that are designed to integrate
front office (customer relationship management "CRM") and back office
(enterprise resource planning "ERP"). Additional new related services include
web portal development and deployment, and customer contact center design. Our
CRM solutions are designed to provide customers with a single point of
accountability on a 7-day, 24-hour basis for application, desktop, server and
network related issues via the phone or an Internet portal. While these services
comprise a relatively small portion of current revenues, the Company is focused
on growing the future revenues from these services. However, there can be no
assurance that the Company will be successful in growing these revenues or that
if successful, it will be profitable.
OAOT believes results are achieved through understanding our customers' needs
and businesses and blending them with proven business methods to leverage our
customers' return on their IT investment. We combine motivated and skilled
employees, mature processes, and strategic partnerships with industry leaders to
provide integrated solutions. OAOT offers both customized and pre-packaged
solutions. eBusiness Solutions are delivered on a consulting and project basis.
A/MSP is both a stand-alone service and a vehicle to deliver our other services.
AMS services are made available through an A/MSP model or outsourced from the
customer. Additionally, OAOT can license its enterprise applications software
outright or sell it on an A/MSP basis. The Company developed a single point
eBusiness framework. Management believes the framework provides an advantage
when selecting core competency development, partner selection and integration
into customer environments. The single point framework is a model that provides
a one-stop shop, comprehensive license sale and installation. OAOT is the single
point of accountability for all aspects of our clients' enterprise application
software solutions -- from architecture to integration to ongoing performance.
Selected offerings in Enterprise Applications and eBusiness Solutions are as
follows:
eBusiness Solutions -- A collaborative effort that incorporates the people,
processes and tools of our customers' current business into an accelerated
process designed to help their eBusiness go to market quickly, increase the
return on investment from an existing IT infrastructure, and build the framework
for a successful future. eBusiness Solutions also include portal solutions that
provide personalized, secure, online access to the vital information and
applications specific to a business's needs, with direct communication to
business and financial communities.
Customer Relationship Management (CRM) -- Utilizing Siebel, a leading CRM
package, OAOT combines Internet-integrated technologies and ongoing management
services with cost-effective outsourcing solutions. OAOT focuses on Advanced
Customer Contact Center Solutions.
Application Management Services (AMS) -- Development, enhancement and
maintenance of software applications and strategic systems performed onsite or
in OAOT's own eBusiness Solution Centers located in the United States, and
Canada.
5
Traditional Business Sector
The Traditional Business Sector, consists of Managed IT Services and
Professional Services. In 2000, the Managed IT Services division renewed its
data center management contract with a strategic customer for a ten-year term.
In addition to the estimated $200 million base contract value, OAOT also has the
opportunity to increase the base contract through a preferred relationship,
giving OAOT first chance to compete for additional outsourced data center
support operations. We also added a Western region data center to our
responsibilities when the customer consolidated all four of its centers into a
single contract with one national partner. However, there is no assurance that
the contract will grow or even continue at historic levels. Further, the
Company's long-term contracts generally have early termination provisions, which
if invoked by its customers, could have a significant adverse impact on the
Company's profitability, cash flows and backlog.
Managed IT Services
OAOT has expertise and experience in network and systems design, integration,
and management of large-scale environments linking multiple technologies,
operating systems, protocols and geographic areas. OAOT manages enterprise
systems and provides desktop management services, which include on-site and
remote network systems management. These services are provided as either part of
an IT outsourcing team, with its strategic customers, to a wide range of end
users or directly to middle market customers. Selected offerings in Managed IT
Services are as follows:
Enterprise Systems Management -- OAOT has experience in managing complex system
environments for large IT clients. Our Enterprise Systems Management (ESM)
practice provides a disciplined approach to the operations and management of
data centers, including mainframe and client server systems. We partner with our
customers to provide them an outsourced, cost-effective, results-driven
solution.
Desktop Management Services -- OAOT manages desktop services for our two
strategic customers and other customers. Our Desktop Management Services (DMS)
practice provides cost-effective operation and management of distributed
desktops and servers including help desk and other desk side support services.
On-Site and Remote Network Systems Management -- OAOT has experience in
designing, deploying and managing local or wide area networks in the Internet
arena. This includes all facets of protocol internetworking, as well as vendor
liaison with equipment vendors and telecommunication firms. OAOT manages complex
networked environments and routinely manages application minutes for clients on
a 24-hour, 7-day annual basis, that have service level agreements.
Professional Services
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.
Skills include but are not limited to, computer operators, application and
systems programmers, network architects, designers, testers and installers,
software/hardware testers, help desk consultants, project managers, and
technical writers. Professional Services provides personnel possessing
programming skills ranging from Oracle, SAP, C++, and COBOL/DB2, to the every
day needs of customers staffing requirements in the IT industry.
Professional Services has offices strategically located in the Northeast,
Southeast, Midwest and the West, In October 2000, OAOT expanded its Professional
Services business to new markets in Atlanta and Boston. The Company's
Professional Services division has the ability to recruit professional and
technical staff locally and nationally. The Company believes that its
Professional Services division is positioned to provide nationwide support to
customers and it has continuously demonstrated this ability since its inception.
The Professional Services business is concentrated within one strategic
customer; however, the Company has expanded its customer base in 2000 and
continues to focus on expanding its customer base in the future.
6
Industry and competition
The Company sells technology services and solutions predominantly to technology
companies. A significant portion of annual revenues, 87% in 2000 and 90% in
1999, is "recurring revenue" under long-term contracts and other annually
renewable contracts that have historically been renewed year to year at
relatively constant levels of revenue. The Company begins 2001 with backlog
under long-term contracts of approximately $720 million. Backlog is expected to
be realized over the next ten years. However, the Company's long-term contracts
generally have early termination provisions, which if invoked by its customers,
could have a significant adverse impact the Company's profitability, cash flow
and backlog. Further, the Company's business is subject to general economic
conditions and economic conditions within the technology industry. As the
Company expands its New Business Sector, it may become more susceptible to the
overall economic conditions within the technology industry.
The IT services market is highly competitive and is served by numerous firms,
including systems consulting and integration firms, professional services
companies, application software firms, staff augmentation firms, the
professional service groups of computer equipment companies, facilities
management and management information systems outsourcing companies, certain
"Big Five" accounting firms, and general management consulting firms. Many
participants in the commercial IT services market have significantly greater
financial, technical and marketing resources and generate greater revenues than
the Company. The Company believes that the principal competitive factors in the
commercial IT services industry include responsiveness to client needs, the
ability to cause the transition of the outsourced services to occur on a prompt
and seamless basis, quality of service, employee relations, price, management
capability and technical expertise. The Company believes it has the ability to
successfully compete in these markets because of its core competencies,
strategic customer relationships, strategic alliances and product service
agreements that allows it to provide customers global, enterprise-wide
integration of information technology.
While the IT services industry has generally experienced labor shortages and
wage inflation in excess of many other industries, the Company's engagements
have not been materially affected. The Company prices its services under these
engagements on the basis of the historical cost of the outsourced function,
managerial experience, and its assessment of evolving technical factors. The
Company also enters into professional services engagements requiring high-demand
IT specialists for terms ranging up to 18 months, usually on a
time-and-materials basis. The Company is subject to the same general labor
pressures inherent in the IT services industry when performing these engagements
and as it expands its services into the New Business Sector. The Company is
dependent upon its ability to attract, hire and retain personnel who possess the
technical skills and experience necessary to meet the service requirements of
its clients. In pricing its services under shorter-term engagements, the Company
evaluates the existing labor market for IT specialists and the expected duration
of the engagement.
Managed IT Services -- Outsourcing engagements are typically characterized as
being long-term in nature and often involve the transfer by the customer of
certain of its facilities, technologies and employees to the outsourcer. The
outsourcer's responsibilities under IT engagements may vary widely from
engagement to engagement, ranging from the provision of certain specific IT
functions to the management of a client's entire IT operation. Within these
engagements, the relationships often involve the provision of employees or
consultants by a subcontracting vendor to the outsourcing vendor. The
subcontractor is normally paid on a time and materials basis and the outsourcing
vendor retains the managerial responsibility for the IT services provided by
such persons.
The IT outsourcing industry is defined by several market segments, as predicated
by the strength and nature of customer demand. These market segments typically
include data center operations, network operations, client-server operations,
applications management and desktop management. The use of outsourcing has grown
rapidly as corporations have increasingly determined that it is advantageous to
focus on their core competencies and outsource those functions that are not
central to their primary mission. Another reason for rapid growth is the cost
reduction opportunities offered by outsourcers who leverage more cost efficient
IT infrastructures. There are significant drivers that support the growth
expectations for IT solutions integrators. These drivers include
7
the increasing complexity of IT solutions and the many rapidly evolving
technologies required to fulfill those solutions. Additionally, many companies
lack sufficient internal IT resources to meet this demand and are outsourcing
internal IT departments. Finally, there is increasing industry consolidation and
the formation of strategic partnerships.
Professional Services -- Many of the same factors fueling the rapid expansion of
the outsourcing industry are similarly impacting the professional IT staffing
industry. As the demand for technical resources continues to expand,
corporations are increasingly relying on professional-specific staffing
providers as a source for skilled IT professionals. Whether to meet temporary or
long-term demands, companies faced with the difficulty of identifying,
attracting, and retaining competent, highly skilled IT professionals are
supplementing their internal IT staff with consultants obtained from
professional-specific staffing companies.
Enterprise Applications and eBusiness Solutions -- AMS services are currently
delivered through our strategic customer to strategic end user customers. A/MSP
is both a stand alone service and a vehicle to deliver our other services. AMS
services are made available through an A/MSP model or outsourced from the
customer. eBusiness Solutions and A/MSP focuses their 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 Plumtree, Siebel Systems, Great Plains, Mi8, SAP, and
Microsoft. As part of these strategic relationships 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 A/MSP basis,
Siebel solutions for commercial and public sector customers in North America and
Europe. Management recognizes the need to aggressively diversify and expand the
Company's services and customer base.
The HealthCare IT Solutions -- The health care industry has experienced
significant recent transition, incurred by both the health care provider/payor
(the Company's customer) and by the evolution of products, services, and fee
arrangements made available by IT solution providers. Health care providers and
payors of health benefits include: (health maintenance organizations, indemnity
insurance plans, physician hospital organizations, independent physician
organizations and self-insured employer plans, among others health maintenance
organizations (HMO's), preferred provider organizations (PPO's), third party
administrators (TPA's) and governments). Health care providers and payors have
experienced consolidation, forming large health organizations and networks, and
have incurred greater operating risks as the traditional fee-for-service
reimbursement model is being replaced by alternative payment models. To enhance
operating efficiencies and controls, the health care providers have increased
demand for comprehensive end-to-end IT systems and services. These system
solutions operate on hardware platforms including client/server networks,
mainframes and personal computer stations. The Federal Government is in the
process of defining and implementing the requirements of the Health Insurance
Portability and Accountability Act (HIPAA). These proposed regulations appear
extensive and concern privacy and health record reporting standards, among
others. The Company believes that these regulations could cause health care
payors to purchase new IT systems which could be beneficial to software
solutions providers like OAOT. However, there can be no assurance that the
proposed regulations will be implemented as expected or that they will cause any
increase in sales of the MC400 system.
8
Looking to the Future
The Company's overall strategy is to continue building its New Business Sector.
OAOT has invested, and expects to continue to invest the profits and cashflows
generated from its Traditional Business Sector to develop businesses within its
New Business Sector and enhance the Company's marketing and sales capabilities
to gain new customers. The Company is attempting to leverage our existing
customer base, as we more aggressively sell services from our Enterprise
Applications and eBusiness Solutions division to our Traditional Sector
customers. OAOT also expects to grow its business by expanding strategic
partnerships that build distribution channels and open additional markets,
pursuing strategic acquisitions, and enhancing the potential of our Healthcare
IT Solutions business. However, there can be no assurance that profitability in
the Company's Traditional Business Sectors will continue at historical levels,
or if investments are made in the New Business Sectors, they will result in
revenue growth and profitability.
The strategic alliances we have developed are an integral element of our plans
to diversify and expand our customer base. We believe our partnerships are
"best-in-class " and provide a broad spectrum of IT consulting and system
integration services and give us a strong platform for future growth. As we go
forward, we will continue to evaluate potential partner companies that may open
up additional opportunities for OAOT. Through our alliance partners, we added
multiple new customers to our client roster during 2000. In 2000 our customer
base increased from 42 at the beginning of the year to 94 by the end of the
year. The new customer accounts are relatively small and the Company remains
dependent on its two strategic customers. The Company's strategy is to continue
to grow the number of new accounts. However, there is no assurance that the
Company will be successful in doing so, or if successful the new accounts will
grow to a significant size or be profitable.
To supplement our plans for internal growth, OAOT is aggressively pursuing
acquisition candidates that will complement and enhance our New Business Sector
and expand our customer base. However, there can be no assurance that if
suitable acquisition targets are found, that the Company's lending facilities
will be sufficient to afford such targets, or the sellers will accept
management's valuation of their company.
Employees
As of December 31, 2000, the Company employed approximately 2,236 employees, of
which 1,917 were full time persons. Approximately 9% of these employees have
managerial responsibilities, and over 71% have technical responsibilities. The
Company typically utilizes the services of independent contractors only in
short-term engagements and certain international engagements. The Company
believes that its relationships with its employees are good.
The Southern California Professional Engineering Association represents 2 of the
Company's employees under a collective bargaining agreement, which expires on
January 10, 2002. The International Association of Machinists and Aerospace
Workers represents 6 of the Company's employees under a collective bargaining
agreement, which expires on January 15, 2002. The Office and Professional
Employees International Union (the "OPEIU") represents 24 of the Company's
employees under a collective bargaining agreement that expires on February 29,
2003. The Company believes that it has a good relationship with each union.
Item 2. PROPERTIES.
The Company's headquarters and principal administrative, sales and marketing
functions are located in approximately 25,150 square feet of leased space in
Greenbelt, Maryland. This lease expires in December 2003. The Company leases
office space in twenty locations in twelve U.S. cities, as well as in Vancouver,
British Columbia; Toronto, Ontario; Calgary, Alberta, and Moncton, New
Brunswick, and Warwickshire, United Kingdom. Additionally, the Company shares
offices with joint venture partner in Mexico City, Mexico. The Company
anticipates that additional space will be required as business expands and
believes that it will be able to obtain suitable space as needed.
9
Item 3. LEGAL PROCEEDINGS.
The Company believes that there are no claims or actions against the Company the
ultimate disposition of which will have a material adverse effect on the
Company's results of operations or financial position.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Stock Data: The Company's Common Stock, par value $0.01 per share,
commenced trading on the NASDAQ National Market tier of the NASDAQ Stock Market
on October 22, 1997, under the symbol "OAOT." As of December 31, 2000, there
were 626 record holders of the Company's Common Stock based on information
provided by the Company's transfer agent. The following table sets forth, for
the periods indicated, the high and low closing sale prices for the Company's
Common Stock.
2000
-------------------------
Quarter High Low
- ------------- -------------------------
First $9.94 $6.31
Second 8.44 2.62
Third 6.31 3.50
Fourth 3.94 1.13
1999
-------------------------
Quarter High Low
- ------------- -------------------------
First $7.50 $3.25
Second 5.13 3.13
Third 4.00 2.63
Fourth 8.50 3.13
The Company has not paid cash dividends on its Common Stock to date. It is
the present policy of the Company to retain future earnings to finance the
growth and development of its business, and therefore the Company does not
anticipate paying cash dividends on its Common Stock in the foreseeable future.
Furthermore, certain financial covenants in the Company's bank credit agreement
restrict the Company's ability to pay cash dividends.
10
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements of the
Company and the Notes thereto included elsewhere in this Form 10-K. The
following Statement of Operations Data and Balance Sheet Data have been derived
from the consolidated financial statements of the Company which have been
audited by Deloitte & Touche LLP, independent auditors.
(In thousands, except per share amounts) For the years ended December 31,
2000 1999 1998 1997 1996
---------------------------------------------------------------
Statement of Operations Data:
Revenues $ 152,585 $ 150,162 $ 113,342 $ 84,666 $ 57,891
Direct costs 127,905 131,664 97,105 65,882 43,896
Selling, general and administrative expenses 22,675 16,014 19,100 13,551 10,824
Restructuring and other charges -- -- 3,135 -- --
---------------------------------------------------------------
Income (loss) from operations 2,005 2,484 (5,998) 5,233 3,171
Interest and other income (expense), net 1,122 921 619 (453) (46)
---------------------------------------------------------------
Income (loss) before income taxes 3,127 3,405 (5,379) 4,780 3,125
(Provision) benefit for income taxes (1,329) (1,554) 1,881 (1,912) (1,315)
---------------------------------------------------------------
Net income (loss) $ 1,798 $ 1,851 $ (3,498) $ 2,868 $ 1,810
---------------------------------------------------------------
Net income (loss) per common share:
Basic $ 0.10 $ 0.11 $ (0.21) $ 0.27) $ 0.18)
========= ========= ========= ======== ========
Diluted $ 0.10 $ 0.11 $ (0.21) $ 0.26) $ 0.17)
========= ========= ========= ======== ========
As of December 31,
2000 1999 1998 1997 1996
---------------------------------------------------------------
Balance Sheet Data:
Working capital $ 29,457 $ 28,353 $ 26,394 $ 33,249 $ 4,718
Total assets 69,577 61,355 51,118 50,342 12,828
Capital lease obligations, including current portion 1,565 143 883 1,435 476
Stockholders' equity 43,242 39,622 35,448 38,066 5,840
11
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis is provided to increase the understanding
of, and should be read in conjunction with, the Consolidated Financial
Statements and Notes thereto found in Item 8 of this Form 10-K. Historical
results and percentage relationships among any amounts in these Financial
Statements are not necessarily indicative of trends in operating results for any
future period.
The statements which are not historical facts contained in this Form 10-K,
including Management's Discussion and Analysis of Financial Condition and
Results of Operations and Notes to 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 end-user customers, the ability to
establish new strategic customer relationships, risks associated with
fixed-price contracts, future financial results, the ability to sustain and
manage growth, lower than expected growth of non-strategic customer revenues,
success in achieving marketing and sales goals and other business development
initiatives, difficulties of investments in infrastructure, uncertainties
relating to the difficulties of transacting on the Internet, transitioning the
Company to New Business Sector businesses, potential changes in the prevailing
technology away from outsourcing IT applications, the failure of the Company to
make necessary enhancements or developments to its existing software products,
opportunities in the market place, competition in the industry, general economic
conditions, the possibility that strategic or end-user customers could invoke
early termination clauses contained in the Company's long-term contracts,
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 including
exposure to fluctuations between the U.S. dollar and other foreign currencies,
and other risks described herein and in the Company's other Securities and
Exchange Commission filings.
Overview
OAO Technology Solutions, Inc. ("the Company" or "OAOT") is a global integrator
of information technology and eBusiness solutions. The Company operates four
business segments within two broad business sectors. The New Business Sector
includes services in relatively higher margin, faster growth business segments
that are newer to OAOT and where management believes there is significant future
growth potential. The Traditional Business Sector includes services in
relatively lower profit margin, slower growth business segments that are
profitable and have a recurring positive cash-flow. The Company is leveraging
the advantages of its Traditional Business Sector by investing these resources
to rapidly grow its New Business Sector. As a result of the evolution in the
services the Company provides, two of the Company's reportable segment names
have been changed in 2000 from 1999; however, the composition of the reported
segments has not changed. The name changes have been conformed throughout this
discussion and analysis for consistency purposes. The Company's business sectors
and segments are as follows:
New Business Sector
Healthcare IT Solutions
Enterprise Applications and eBusiness Solutions
(formerly, E-Business Consulting Solutions)
Traditional Business Sector
Managed IT Services (formerly, Network and
Systems Business Solutions)
Professional Services
12
The Healthcare IT Solutions segment provides managed care software application
solutions under software license agreements via its MC400 software which is sold
on a per member, per month (PMPM) subscription basis or for a one-time perpetual
license fee. OAOT's MC400 software provides a comprehensive solution for
healthcare benefit organizations (health maintenance organizations, indemnity
insurance plans, physician hospital organizations, independent physician
organizations and self-insured employer plans among others). The MC400 system is
web-enabled and provides over thirty modules that include claims processing,
patient care management, eligibility, enrollment, utilization, internet
connectivity, data warehousing, care management and web portals in one
integrated system. The Company has over fifty installed sites and offers a
viable solution that is ready for the federal requirements of the Health
Insurance Portability and Accountability Act (HIPAA).
The Enterprise Applications and eBusiness Solutions segment provides
customer-centric integration services and software solutions that work
cohesively within the framework of our customers' existing business models. The
division's three practices are eBusiness Solutions, Application/Managed Service
Provider (A/MSP) and Application Management Services (AMS), formerly ADM. These
practice areas focus on the following partnerships: CRM/Siebel,
Portals/Plumtree, eCommerce/IBM and ERP with SAP and Great Plains. To complement
this, we also provide custom application management. OAOT offers both customized
and pre-packaged solutions. Integration services are delivered on a consulting
and project basis under both time and materials and fixed price arrangements,
while our application management and software solutions are made available
through an A/MSP model or outsourced from the customer. OAOT can license its
enterprise applications software outright or sell on an A/MSP basis.
The Managed IT Services segment provides network and systems design,
integration, and management of large-scale environments linking multiple
technologies, operating systems, protocols and geographic areas. OAOT manages
enterprise systems and provides desktop management services, which include
on-site and remote network systems management. These services are provided,
generally under long-term fixed price contracts, as either part of an IT
outsourcing team with its strategic customers to a wide range of end users or
directly to middle market customers. The Company's strategic partners and
customers include IBM and Compaq. In 2000 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 historic
revenue and profitability levels.
The Professional Services segment 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.
The Professional Services business is concentrated within one strategic
customer; however, the Company has expanded its customer base in 2000 and
continues to focus on expanding its customer base in the future.
The Company has experienced substantial growth since its inception, with
revenues increasing to $152.6 million in 2000, from $57.9 million in 1996.
Revenues from two strategic customers were $135.5 million and $137.6 million for
the years ended December 31, 2000 and 1999, respectively. The largest strategic
customer accounted for 76.0% and 75.7%, and the second largest strategic
customer accounted for 12.8% and 15.9% of revenues for the years ended December
31, 2000 and 1999, respectively. The Company has diversified the type of service
provided to its strategic customers and expanded the number of strategic
customer business units to whom it provides services. For the year ended
December 31, 1996, OAOT earned 60.2% of its revenues from data center management
services provided to strategic customers. For the year ended December 31, 2000,
the Company earned 23.1% of its revenues from data center management. A decrease
in the revenues or loss of a strategic customer could have a material adverse
effect on the Company's business, operating results, and financial condition.
The early termination or non-renewal of a strategic customer's contract by an
end-user customer could also have a material adverse effect on the Company's
business, operating results, and financial conditions.
13
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
Plumtree, Siebel Systems, Great Plains, Mi8, SAP, and Microsoft. As part of
these strategic relationships 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 A/MSP basis, Siebel solutions
for commercial and public sector customers in North America and Europe. The
Company has also hired teams of experienced sales professionals dedicated solely
to selling comprehensive CRM solutions. Although revenues resulting from these
relationships were relatively small in 2000, management expects revenues from
these relationships to be significant in the future. Management recognizes the
need to aggressively diversify and expand the Company's services and customer
base.
For the years ended December 31, 2000 and 1999, approximately 23%, and 30% of
the Company's revenues, respectively, were derived from fixed-price contracts.
Certain of the Company's fixed-price contracts require the Company to meet
pre-established levels of service, while achieving operating or managerial
efficiencies during the course of the engagements. Profitability is generally
lower during the early term of the engagements as the Company invests in
assuring a smooth start-up and in attaining certain service levels prior to the
implementation of productivity improvements. Upon completion of the initial
performance phase, the Company initiates activities to increase profitability
through improved management practices and the establishment of new technical and
operational methodologies.
Engagements which involve new services to existing customers or services to new
customers may also result in lower margins during the early term of the
engagement. The Company has historically experienced margin improvements after
the start-up phase of its engagements. In addition, operating results can be
affected by the level of the Company's investments in international and other
business development activities. The Company believes that its business is not
seasonal.
The Company sells technology services and solutions predominantly to technology
companies. A significant portion of annual revenues, 87% in 2000 and 90% in
1999, is "recurring revenue" under long-term contracts and other annually
renewable contracts that have historically been renewed year to year at
relatively constant levels of revenue. The Company begins 2001 with backlog
under long-term contracts of approximately $720 million. Backlog is expected to
be realized over the next ten years. However, the Company's long-term contracts
generally have early termination provisions, which if invoked by its customers,
could significantly impact the Company's backlog. Further, the Company's
business is subject to general economic conditions and economic conditions
within the technology industry, which appear to have been softening, especially
with the decline of "dot.com" businesses. As the Company expands its New
Business Sector, it may become more susceptible to the overall economic
conditions within the technology industry.
While the IT services industry has generally experienced labor shortages and
wage inflation in excess of many other industries, the Company's engagements
have not been materially affected. The Company prices its services under these
engagements on the basis of the historical cost of the outsourced function,
managerial experience, and its assessment of evolving technical factors. The
Company also enters into professional services engagements requiring high-demand
IT specialists for terms ranging up to 18 months, usually on a
time-and-materials basis. The Company is subject to the same general labor
pressures inherent in the IT services industry when performing these engagements
and as it expands its services into the New Business Sector. The Company is
dependent upon its ability to attract, hire and retain personnel who possess the
technical skills and experience necessary to meet the service requirements of
its clients. In pricing its services under shorter-term engagements, the Company
evaluates the existing labor market for IT specialists and the expected duration
of the engagement.
14
Results of Operations
The following table sets forth, for the periods indicated, selected statements
of operations data as a percentage of revenues:
For the years ended
December 31,
--------------------------------------------------------------------------
(in millions) 2000 1999 1998
--------------------------------------------------------------------------
Revenues ............................................. $152.6 100.0% $150.2 100.0% $113.3 100.0%
Direct costs ......................................... 127.9 83.8 131.7 87.7 97.1 85.7
Selling, general and administrative expenses ......... 22.7 14.9 16.0 10.7 19.1 16.9
Restructuring and other charges ...................... -- -- -- -- 3.1 2.7
--------------------------------------------------------------------------
Income (loss) from operations ........................ 2.0 1.3 2.5 1.6 (6.0) (5.3)
Interest and other income, net ....................... 1.1 0.7 0.9 0.6 0.6 0.5
--------------------------------------------------------------------------
Income (loss) before income taxes ............... 3.1 2.0 3.4 2.2 (5.4) (4.8)
(Provision) benefit for income taxes ................. (1.3) (0.9) (1.5) (1.0) 1.9 1.7
--------------------------------------------------------------------------
Net income (loss) ............................... $ 1.8 1.1% $ 1.9 1.2% $ (3.5) -3.1%
--------------------------------------------------------------------------
Comparison of the Year Ended December 31, 2000 to the Year Ended December 31,
1999
Revenues
The Company's revenues increased $2.4 million or 1.6% to $152.6 million for the
year ended December 31, 2000, compared to $150.2 million for the year ended
December 31, 1999. Revenue increases for the year ended December 31, 2000 were
driven by both the Enterprise Applications and eBusiness Solutions and
Healthcare IT Solutions segments. Revenue increases were offset by lower
revenues in Managed IT Services and Professional Services segments compared to
the year ended December 31, 1999.
Enterprise Applications and eBusiness Solutions revenues increased $14.7 million
or 175.0% to $23.1 million, for the year ended December 31, 2000 compared to
$8.4 million for the year ended December 31, 1999. This was due primarily to
increased activity in the AMS and consulting practices compared with 1999. The
number of billable personnel continued to increase on new and existing AMS
contracts throughout 2000, compared to 1999 when the contracts had lower levels
of activity. Similarly, the consulting practices were in the start-up phase
during most of 1999 and had lower revenues in that period.
Healthcare IT Solutions revenues increased $3.1 million, or 29.2%, to $13.7
million for the year ended December 31, 2000 compared to $10.6 million for the
year ended December 31, 1999. The increase in revenues was due primarily to an
increase in recurring revenues from annual software maintenance fees and PMPM
subscription type license sales, which reflects the Company's decision to
transition the Healthcare IT Solutions segment to a subscription sales model.
Revenue from existing PMPM customers increased in 2000 from 1999 due to
increases in the number of member users year-to-year, and as a result of having
a full year of sales in 2000 related to PMPM contracts signed throughout 1999.
Further, the aggregate number of PMPM customers increased from 1999 to 2000.
Managed IT Services revenues decreased by $6.6 million or 9.8% to $60.5 million
for the year ended December 31, 2000 compared to $67.1 million for the year
ended December 31, 1999. The decrease was due primarily to the renewal of a
contract, between a strategic customer and an end-user customer, at lower rates
and reduced personnel to perform services. Further, the Company experienced
continued pricing and volume decreases from another strategic customer.
Additionally, a low-margin contract was not renewed in 2000, which had
contributed revenues of approximately $8 million throughout 1999. The volume and
pricing decreases were partially offset by projects from new customers and the
effect of the UK acquisition, which occurred in the second quarter of 1999.
Professional Services revenues decreased $8.8 million or 13.7% to $55.3 million
for the year ended December 31, 2000 compared to $64.1 million for the year
ended December 31, 1999. The decrease in revenues was due to softness in
staffing requisitions from a strategic customer, which began with the carry over
effects of Y2K constraints and continued throughout most of 2000.
15
Direct Costs
The Company's direct costs decreased $3.8 million or 2.9% to $127.9 million for
the year ended December 31, 2000, compared to $131.7 million for the year ended
December 31, 1999. Direct costs also decreased as a percentage of revenues to
83.8% for the year ended December 31, 2000 versus 87.7% for the same period in
1999. The decrease in direct costs as a percentage of revenues for the year
ended December 31, 2000 compared to the year ended December 31, 1999 is due
primarily to the New Business Sector segments of Enterprise Applications and
eBusiness Solutions and the Healthcare IT Solutions segments. The other
Traditional Business Sector segments maintained a relatively constant
relationship of direct costs to their respective revenues.
In the Enterprise Applications and eBusiness Solutions segment, direct costs
increased by $8.7 million to $21.3 million for the year ended December 31, 2000
from $12.6 million for the year ended December 31, 1999. However, as a percent
of the segment revenues, direct costs decreased to 92.2% of revenues for the
year ended December 31, 2000 from 150.0% of revenues in the year ended December
31, 1999. The improvement in the relationship of direct cost to revenues is a
result of the increased levels of business in 2000 compared to most of 1999 when
the segment was ramping up its activity.
In the Healthcare IT Solutions segment, direct costs as a percent of segment
revenues decreased to 65.7% of revenues in 2000, from 76.4% of revenues in 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.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $22.7 million and $16.0
million for the years ended December 31, 2000 and 1999, respectively. OAOT's
selling, general and administrative expenses increased as a percentage of
revenues for the year ended December 31, 2000 to 14.9% compared to 10.7% for
year ended December 31, 1999. 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 New Business Sector growth. During the third quarter
of 2000, the Company began to eliminate unproductive sales, marketing and
delivery staff, in addition to reducing corporate overhead costs. The results of
the reductions began to be recognized in the fourth quarter of 2000 and will
continue to be realized in future periods. The reductions in costs realized by
the workforce reductions and other cost saving measures were offset by an
increase to reserves associated with amounts due from several customers affected
by the economic downturn in the later part of 2000.
Interest and other income (expense) and Provision for Income Taxes
Interest income decreased to $1.0 million for the year ended December 31, 2000
from $1.1 million for the year ended December 31, 1999. Interest income
decreased primarily due to a slightly lower amount of average invested cash.
Other income was positively affected by a positive mark to market adjustment in
the amount of $0.1 million to the obligation incurred as a part of the Siebel
VAIR agreement.
The effective tax rate was approximately 42.5% for the year ended December 31,
2000. The effective tax rate was 45.6% in 1999. The Company's effective tax rate
includes income taxes in foreign countries where the income tax rate is higher
than in the United States. Differences between the effective tax rates from 1999
to 2000 were a result of minor fluctuations in the amount of permanent
differences between book reporting and income tax reporting items, and measures
the Company has taken to minimize the effect of foreign taxes.
16
Comparison of the Year Ended December 31, 1999 to the Year Ended December 31,
1998
Revenues
The Company's revenues increased $36.9 million or 33% to $150.2 million for the
year ended December 31, 1999, compared to $113.3 million for the same prior year
period. The increase was primarily due to increased Professional Services
revenues from the acquisition of OAO Services, Inc. in July 1998. Revenue growth
was also achieved within the New Business Sector from both the Enterprise
Applications and eBusiness Solutions and Healthcare IT Solutions segments. These
improved revenues were offset by lower revenues in the Managed IT Services
segment.
Professional Services revenues increased to $64.1 million for the year ended
December 31, 1999 from $30.5 million for 1998. The increase in revenues was due
to owning OAO Services, Inc. for the entire year in 1999 as compared to
approximately six months in 1998.
The New Business Sector segments of Enterprise Applications and eBusiness
Solutions and Healthcare IT Solutions revenues increased $9.5 million to $19.0
million, or 100% for the year ended December 31, 1999 versus $9.5 million for
the year ended December 31, 1998. The revenues increase in the Enterprise
Applications and eBusiness Solutions segment was due primarily to the AMS and
CRM practices. AMS revenues increased $3.1 million to $4.6 million. The
improvement was due to increased work performed in our Moncton, Canada eBusiness
software solutions center. Revenues also increased due to expansion of the CRM
consulting practice, which was a new service offered in 1999.
Healthcare IT Solutions revenues increased $4.5 million, or 74%, to $10.6
million for the year ended December 31, 1999 versus $6.1 million for the year
ended December 31, 1998. This segment is comprised primarily of the Company's
healthcare software applications solutions business. Healthcare solutions
revenues increased due to a greater number of MC400 installation projects which
increased consulting and implementation revenues. License revenues declined due
to a shift to a subscription type service priced on a PMPM basis to its clients,
versus a one-time license fee.
Managed IT Services revenues declined $6.4 million to $67.1 million for the year
ended December 31, 1999 from $73.5 million for the year ended December 31, 1998.
Revenues increased $2.9 million due to the acquisition of OAO/ICOR UK Ltd. in
the United Kingdom in April 1999. However, this revenue gain was offset by
revenue decreases resulting from reductions in the amount of work, including
work order projects, head count downsizing on continuing projects due to
automation, consolidation of sites, insourcing (where Company functions were
transferred back to internal customer personnel) and elimination of revenues on
smaller, non-recurring projects with strategic customers. The Company
discontinued services on work order projects in the fourth quarter of 1999. Work
order projects are low margin, short-term fixed-fee engagements, which comprised
a declining portion of total Company revenues. Total work order revenues were
$1.5 million and $2.4 million for the years ended December 31, 1999 and 1998,
respectively.
Direct Costs
The Company's direct costs increased 35.6% to $131.7 million for the year ended
December 31, 1999, from $97.1 million. As a percentage of revenues, direct costs
increased to 87.7% for the year ended 1999 versus 85.7% for the year ended 1998.
The increase in direct costs and increase in direct costs as a percentage of
revenues was primarily due to OAOT increasing its investment by $2 million to
$4.8 million to develop its Enterprise Applications and eBusiness Solutions
segment in 1999.
Direct costs increased in the Healthcare IT Solutions segment due to increased
marketing and training costs incurred to support subscription based sales and to
build the infrastructure to support increased sales.
Direct costs within the AMS business increased $4.4 million to $7.2 million for
the year ended December 31, 1999. The increase was due to start-up costs on a
contract with a strategic end-user customer that included employee training,
travel, relocation, recruitment fees and commissions incurred to place a
programmer on the project. Enterprise Applications and eBusiness Solutions costs
increased due to training and recruiting of professional consultants and
management, and marketing and product development costs incurred to establish
and grow the newer businesses.
17
Direct costs increased proportionally to revenues in the Company's Managed IT
Services and Professional Services segments for the year ended December 31, 1999
from the year ended December 31, 1998.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $16.0 million and $19.1
million for the years ended December 31, 1999 and 1998, respectively. The 1998
amount included a $4.2 million provision for uncollectible accounts receivable
compared with $474,000 in 1999. OAOT's selling, general and administrative
expenses declined as a percentage of revenues for the year ended December 31,
1999 to 10.7% compared to 16.9% for 1998. The decline in selling, general and
administrative expenses as a percentage of revenues was due to OAOT leveraging
its overhead structure as revenues increased by reducing the cost of outside
consultants, administrative programs, and administrative infrastructure.
Interest and other income (expense) and Provision for Income Taxes
Interest income increased primarily due to a higher amount of invested cash and
interest earned on a note receivable from OAO Corporation. The effective tax
rate increased to 45.6% in 1999 versus a 35% income tax benefit in 1998 due to a
loss for that year. In 1999, the effective tax rate included income taxes in
foreign countries where the income tax rate is higher than in the United States.
In 1998, the Company had the benefit of losses in the United States only.
Liquidity and Capital Resources
Cash and cash equivalents were $11.8 million as of December 31, 2000, versus
$13.1 million as of December 31, 1999. Cash used in operations was $4.5 million
for the year ended December 31, 2000 compared with $6.9 million of cash provided
by operations in 1999. Cash used in operations was primarily due to the payment
of accounts payable and accrued expenses and an increase in net accounts
receivable. Net accounts receivable was impacted by slight differences in the
timing of payments by a strategic customer from 1999 to 2000. Approximately $4
million of accounts receivable was received in January 2001, whereas a similar
amount was received in December 1999. OAOT's Managed IT Services and
Professional Services business segments provided net cash flows which were used
to fund the Company's newer Healthcare IT Solutions and Enterprise Applications
and eBusiness Solutions business segments.
The Company expects to continue to invest in the operations of its New Business
Sectors of Enterprise Applications and eBusiness Solutions and Healthcare IT
Solutions, for projects including eBusiness Solutions, Application/Managed
Service Provider (A/MSP) and Application Management Services (AMS). 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 $5.8 million, which was primarily for the purchase of
computers and office equipment used primarily in the Company's AMS business, 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 AMS business and its other New Business Sector segments.
Uses of cash from operating and investing activities were offset by proceeds
from net borrowings under the revolving credit agreement in the amount of $6.0
million, the sale of the Company's common stock through stock option exercises
and purchases under the employee stock purchase plan in the amount of $1.6
million and by proceeds of another $1.6 million from a sale-leaseback
transaction with a bank involving furniture and equipment purchased during 2000.
18
The Company has a $35 million combined revolving credit and term loan agreement
("the Agreement") with a Bank. 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 Agreement's term loan facility provides for a draw
fee of 0.50% payable when drawn upon and interest at LIBOR plus a risk- adjusted
premium. The term loan facility, in the amount of $20 million, matures on May
31, 2001. However, in the event that there are no borrowings under the term
facility by May 31, 2001, the maturity is extended to May 31, 2002. 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 and pledges all
Company assets as collateral, among other restrictions. However, there can be no
assurance that, based on the Company's operations, its covenants will permit the
full amounts under the Agreement to be utilized in the future. There were no
borrowings outstanding under this Agreement as of December 31, 1999 and $6.0
million outstanding as of December 31, 2000 with an interest rate of 9.5%. The
amount outstanding was repaid in January 2001.
The Company currently anticipates that its existing cash balances, bank credit
facilities, or any 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.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." The
statement requires companies to recognize all derivatives as either assets or
liabilities, with the instruments measured at fair value. The accounting for
changes in fair value and gains or losses depends on the intended use of the
derivative and its resulting designation. The Company will adopt SFAS No. 133 on
January 1, 2001 and believes that the adoption of this standard will not have an
impact on its results of operations and financial position.
Item 7a. 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 years ended December 31, 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. 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; however, the Company
periodically reviews its exposure to foreign currency risk and may take action
to limit its foreign currency exchange exposure if deemed appropriate.
19
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Consolidated Financial Statements of OAO Technology Solutions, Inc. and
Subsidiaries are filed as part of this form 10-K.
Index to Financial Statements and Schedule Page
- ------------------------------------------ ----
Financial Statements:
Independent Auditors' Report ..................................... 21
Consolidated Statements of Operations and Comprehensive Income
for the years ended December 31, 2000, 1999, and 1998 ........ 22
Consolidated Balance Sheets as of December 31, 2000 and 1999 ..... 23
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998 ........................... 24
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 2000, 1999 and 1998 ..................... 25
Notes to Consolidated Financial Statements ....................... 26
Schedule:
Schedule II - Valuation and Qualifying Accounts ............ 42
Schedules not listed above have been omitted because they are not
applicable or the information required to be set forth therein is included in
the financial statements or the notes thereto.
20
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of OAO Technology Solutions, Inc.:
We have audited the accompanying consolidated balance sheets of OAO Technology
Solutions, Inc. and subsidiaries as of December 31, 2000 and 1999, and the
related consolidated statements of operations and comprehensive income,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 2000. Our audits also included the financial statement
schedule on page 42. These financial statements and the financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on the financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the consolidated financial position of OAO Technology Solutions, Inc.
and subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
McLean, VA
February 9, 2001
21
OAO TECHNOLOGY SOLUTIONS, INC.
Consolidated Statements of Operations and Comprehensive Income
(Dollars and shares in thousands, except per share amounts)
For the years ended December 31,
---------------------------------------------------
2000 1999 1998
---------------------------------------------------
Revenues $ 152,585 $ 150,162 $ 113,342
Direct costs 127,905 131,664 97,105
---------------------------------------------------
24,680 18,498 16,237
Selling, general and administrative expenses 22,675 16,014 19,100
Restructuring and other charges -- -- 3,135
---------------------------------------------------
Income (loss) from operations 2,005 2,484 (5,998)
Interest and other income (expense):
Interest income 1,027 1,137 858
Interest expense (35) (269) (200)
Other 130 53 (39)
---------------------------------------------------
Income (loss) before income taxes 3,127 3,405 (5,379)
(Provision) benefit for income taxes (1,329) (1,554) 1,881
---------------------------------------------------
Net income (loss) 1,798 1,851 (3,498)
Other comprehensive (loss) income :
Foreign currency translation adjustment (271) 186 (435)
---------------------------------------------------
Comprehensive income (loss) $ 1,527 $ 2,037 $ (3,933)
---------------------------------------------------
Net income (loss) per common share:
Basic $ 0.10 $ 0.11 $ (0.21)
---------------------------------------------------
Diluted $ 0.10 $ 0.11 $ (0.21)
---------------------------------------------------
Weighted average number of shares outstanding:
Basic 17,883 16,856 16,434
---------------------------------------------------
Diluted 18,484 17,362 16,434
---------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
22
OAO TECHNOLOGY SOLUTIONS, INC
Consolidated Balance Sheets
(Dollars in thousands)
As of December 31,
-------------------------------
2000 1999
-------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 11,779 $ 13,142
Accounts receivable
Billed, net of allowance of $1,280 and $1,014, respectively 25,129 21,066
Unbilled, net of allowance of $449 and $493, respectively 6,684 5,059
-------------------------------
31,813 26,125
Note receivable, OAO Corporation 2,160 2,520
Deferred income taxes 1,093 829
Income tax receivable 754 934
Other current assets 6,959 6,447
-------------------------------
Total current assets 54,558 49,997
Property and equipment, net 5,778 4,387
Purchased and developed software for sale, net 2,279 1,596
Deposits and other assets 1,943 192
Deferred income taxes 261 202
Goodwill 4,758 4,981
-------------------------------
Total assets $ 69,577 $ 61,355
===============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings under revolving credit agreement $ 6,000 $ --
Accounts payable 6,464 8,470
Accrued expenses 10,545 11,718
Income tax payable 523 605
Unearned revenue 959 797
Current portion of capital lease obligations 610 54
-------------------------------
Total current liabilities 25,101 21,644
Capital lease obligations, net of current portion 955 89
Other 279 --
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;
18,648,765 and 18,101,124 shares issued and outstanding, respectively 186 181
Additional paid-in capital 42,725 40,743
Deferred compensation (25) (131)
Accumulated other comprehensive loss (520) (249)
Stockholder's receivable (2,933) (2,933)
Retained earnings 3,809 2,011
-------------------------------
Total stockholders' equity 43,242 39,622
-------------------------------
Total liabilities and stockholders' equity $ 69,577 $ 61,355
===============================
The accompanying notes are in integral part of these consolidated financial
statements.
23
OAO TECHNOLOGY SOLUTIONS, INC
Consolidated Statements of Cash Flows
(Dollars in thousands)
For the years ended December 31,
--------------------------------------------
2000 1999 1998
--------------------------------------------
Cash Flows from Operating Activities:
Net income (loss) $ 1,798 $ 1,851 $ (3,498)
Adjustment to reconcile net income (loss) to net
cash (used in) provided by operating activities:
Depreciation and amortization 3,326 2,164 1,248
Asset abandonment costs -- -- 2,100
Bad debt expense 755 474 4,200
Deferred income taxes 23 105 (1,136)
Change in assets and liabilities:
Accounts receivable (6,468) 115 1,271
Income tax receivable 180 403 (1,337)
Other current assets (714) (3,243) 189
Deposits and other assets (696) (76) 328
Accounts payable (2,355) 2,274 (6,841)
Accrued expenses (820) 2,009 652
Unearned revenue 203 252 166
Other long-term liabilities 279 -- --
Income tax payable (52) 605 (591)
--------------------------------------------
Net cash (used in) provided by operating activities (4,541) 6,933 (3,249)
--------------------------------------------
Cash Flows from Investing Activities:
Purchase of businesses, net of cash acquired (546) (289) (6,570)
Expenditures for property and equipment (3,479) (1,707) (2,233)
Repayments of notes receivable 360 -- --
Capitalized software costs (1,097) (1,682) --
Other assets (1,000) -- --
--------------------------------------------
Net cash used in investing activities (5,762) (3,678) (8,803)
--------------------------------------------
Cash Flows from Financing Activities:
Borrowings under revolving credit agreement, net 6,000 -- --
Proceeds from the sale of common stock, net 1,641 1,277 298
Receipt of stockholders' receivable -- -- 133
Repayments of capital lease obligations (148) (740) (552)
Proceeds from sale-leaseback 1,584 -- --
Repayments of notes payable -- -- (378)
--------------------------------------------
Net cash provided by (used in) financing activities 9,077 537 (499)
--------------------------------------------
Effect of exchange rate changes on cash (137) (265) (55)
--------------------------------------------
Net (decrease) increase in cash and cash equivalents (1,363) 3,527 (12,606)
Cash and cash equivalents, beginning of year 13,142 9,615 22,221
--------------------------------------------
Cash and cash equivalents, end of year $ 11,779 $ 13,142 $ 9,615
============================================
The accompanying notes are an integral part of these consolidated financial
statements.
24
OAO TECHNOLOGY SOLUTIONS, INC
Consolidated Statement of Stockholders' Equity
(Dollars and Shares in thousands)
For the years ended December 31, 2000, 1999, 1998
Accumulated
Common Stock Additional Other Total
--------------- Paid-in Deferred Compensation Stockholders' Retained Stockholders'
Shares Amount Capital Compensation Loss Receivable Earnings Equity
-----------------------------------------------------------------------------------------------
Balance, January 1, 1998 16,285 $163 $ 34,454 $ (76) $ -- $ (133) $ 3,658 $ 38,066
-----------------------------------------------------------------------------------------------
Net loss -- -- -- -- -- -- (3,498) (3,498)
Exercise of stock options 187 2 489 -- -- -- -- 491
Amortization of
deferred compensation -- -- -- 30 -- -- -- 30
Shares issued for the
acquisition of ETG 222 2 852 -- -- -- -- 854
Option grants to non-employees -- -- 127 (127) -- -- -- --
Payment of stockholders receivable -- -- -- -- -- 133 -- 133
Foreign currency
translation adjustment -- -- -- -- (435) -- -- (435)
Costs associated with sale
of common stock -- -- (193) -- -- -- -- (193)
-----------------------------------------------------------------------------------------------
Balance, December 31, 1998 16,694 167 35,729 (173) (435) -- 160 35,448
-----------------------------------------------------------------------------------------------
Net income -- -- -- -- -- -- 1,851 1,851
Exercise of stock options 219 2 547 -- -- -- -- 549
Tax benefit related to
exercise of stock options -- -- 101 -- -- -- -- 101
Amortization of
deferred compensation -- -- -- 42 -- -- -- 42
Shares issued for
employee stock purchase plan 210 2 575 -- -- -- -- 577
Shares issued for note receivable 750 8 2,925 -- -- (2,933) -- --
Shares issued to vendor 228 2 816 -- -- -- -- 818
Foreign currency
translation adjustment -- -- -- -- 186 -- -- 186
Refund of costs associated
with sale of common stock -- -- 50 -- -- -- -- 50
-----------------------------------------------------------------------------------------------
Balance, December 31, 1999 18,101 181 40,743 (131) (249) (2,933) 2,011 39,622
-----------------------------------------------------------------------------------------------
Net income -- -- -- -- -- -- 1,798 1,798
Exercise of stock options 217 2 815 -- -- -- -- 817
Tax benefit related to
exercise of stock options -- -- 346 -- -- -- -- 346
Amortization of
deferred compensation -- -- -- 106 -- -- -- 106
Shares issued for
employee stock purchase plan 331 3 821 -- -- -- -- 824
Foreign currency
translation adjustment -- -- -- -- (271) -- -- (271)
-----------------------------------------------------------------------------------------------
Balance, December 31, 2000 18,649 $186 $ 42,725 $ (25) $(520) $(2,933) $ 3,809 $ 43,242
-----------------------------------------------------------------------------------------------
The accompanying notes are in integral part of these consolidated financial
statements.
25
OAO TECHNOLOGY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
1. Summary of Significant Accounting Policies
Description of the Company
OAO Technology Solutions, Inc. ("the Company" or "OAOT") is a global integrator
of information technology and eBusiness solutions. The Company began its
operations in 1993 as a division of OAO Corporation, was incorporated in March
1996 and was spun off from OAO Corporation in April 1996. The Company operates
four business segments: Healthcare IT Solutions, Enterprise Applications and
eBusiness Solutions, Managed IT Services, and Professional Services.
Principles of Consolidation
The consolidated financial statements include the accounts of all majority owned
domestic and foreign subsidiaries. All other investments in affiliates are
carried at cost. All significant inter-company accounts and transactions have
been eliminated.
Revenue Recognition
The Company provides services under contracts, primarily to large commercial
customers. Service revenues are generally recognized ratably over the period of
the related contract. Revenue for fixed-price contracts is recorded on the basis
of the estimated percentage of completion, based on costs incurred as compared
to estimated costs at completion of the services rendered. Revenues under
time-and-materials contracts are recorded at the contracted rates plus other
direct costs as they are incurred. Losses, if any, on contracts are recognized
as soon as they become known.
The Company recognizes software revenue under the provisions of Statement of
Position (SOP) No. 97-2, "Software Revenue Recognition" (as amended by SOP No.
98-4 and SOP No. 98-9). Except as noted below, software license fees are
recognized as revenue upon the customer's execution of a noncancelable license
agreement and the Company's delivery of the software, provided that the fee is
fixed and determinable, collectibility is probable, and no customization of the
software is required. Revenues are recognized from per member, per month (PMPM)
software license arrangements as payments from customers become due. Revenues
from software maintenance contracts are recognized ratably over the maintenance
period based upon their vendor specific objective evidence of fair value.
Revenues from consulting and training services are recognized on a
time-and-materials basis as services are performed. Amounts received in advance
of the delivery of software or the performance of services are classified as
unearned revenue on the consolidated balance sheets.
Stock-Based Compensation
The Company follows the provisions of Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation." As
permitted under this statement, the Company continues to follow the accounting
provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting for
Stock Issued to Employees" for the recognition and measurement of employee
stock-based compensation and, therefore, provides only the disclosures required
under SFAS No. 123. Using the intrinsic method prescribed in APB Opinion No. 25,
compensation costs are measured as the excess, if any, of the quoted market
price of the Company's stock at the date of grant over the amount an employee
must pay to acquire the stock.
Income Taxes
The provision for income taxes includes federal, state and foreign income taxes
currently payable plus the net change during the year in the deferred tax
liability or asset. The current or deferred tax consequences of all events that
have been recognized in the financial statements are measured based on
provisions of enacted tax law to determine the amount of taxes payable or
refundable in future periods.
26
Restructuring and Other Charges
During 1998, the Company recorded pre-tax restructuring charges of approximately
$1 million. The restructuring costs relate primarily to involuntary employee
termination benefits. Terminated employees were notified, in writing, of the
terms and conditions of their severance.
During the third quarter of 1998, the Company discontinued an enterprise-wide
financial management system project. As a result, the Company recorded a
write-off of approximately $2.1 million related to this abandonment.
Foreign Currency Translation
The assets and liabilities of the Company's foreign subsidiaries, whose
functional currency is other than the U.S. dollar, are translated at the
exchange rates in effect on the balance sheet date, and income and expenses are
translated at the weighted average exchange rate during the period. Translation
gains or losses are included as a component of accumulated other comprehensive
loss and represent the sole source of comprehensive income (loss) other than net
income (loss).
Cash and Cash Equivalents
The Company considers all securities with a remaining maturity of three months
or less at the date of purchase to be cash equivalents. At December 31, 2000 and
1999, the Company's cash equivalents consisted of overnight reverse repurchase
agreements and demand deposits.
Property and Equipment
Property and equipment, which includes capital leases, is recorded at cost.
Purchased or developed internal-use software is capitalized in accordance with
SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use." Property and Equipment and internal use software are
depreciated using the straight-line method over their estimated useful lives of
three to five years. Leasehold improvements and capital leases are amortized
over the shorter of the term of the related lease or their estimated useful
lives.
Software Development Costs
Development costs incurred in the research and development of new software
products and enhancements to existing software products are expensed as incurred
until technological feasibility has been established. After technological
feasibility is established, costs are capitalized in accordance with SFAS No. 86
"Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed." Software product development costs are amortized based on current and
future revenue for each product with annual minimum amortization equal to the
straight-line amortization over the remaining estimated economic life of the
product. Amortization of such costs was $414,000, $86,000 and $0 for the years
ended December 31, 2000, 1999 and 1998, respectively.
Goodwill
Goodwill resulting from business purchases represents the excess of the purchase
price over the fair value of the net assets acquired. Goodwill is amortized on a
straight-line basis over estimated useful lives of seven to ten years.
Amortization expense was $769,000, $751,000, and $313,000 for the years ended
December 31, 2000, 1999 and 1998, respectively. Accumulated amortization was
$1,907,000 and $1,138,000 at December 31, 2000 and 1999, respectively.
Evaluation of Long-lived Assets
In accordance with SFAS No. 121, "Accounting for the Impairment of Long-lived
Assets and for Long-Lived Assets to be Disposed of," the Company evaluates the
potential impairment of long-lived assets, including goodwill, based on the
projection of undiscounted cash flows whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be fully
recoverable.
27
Fair Value of Financial Instruments
The Company's financial instruments, principally cash and cash equivalents,
accounts receivable, accounts payable, and accrued expenses are carried at cost,
which approximates fair value due to the short term nature of these instruments.
The Company's note receivable and revolving debt are carried at cost which
approximates fair value as these instruments bear interest at variable market
rates. Considerable judgement is required to estimate fair value. Accordingly,
the estimates provided are not necessarily indicative of the amounts the Company
could realize in a current market exchange.
Concentration of Risk
The Company has two strategic customers. One strategic customer accounted for
76.0%, 75.7% and 67.0%, and the other accounted for 12.8%, 15.9% and 23.4%, of
total revenues for the years ended December 31, 2000, 1999 and 1998,
respectively.
Financial instruments that potentially subject the Company to concentration of
credit risk principally consist of accounts receivable and cash equivalents. The
Company's two largest strategic customers accounted for approximately 60.9% and
9.5%, respectively, of accounts receivable as of December 31, 2000 and 61.9% and
22.1%, respectively, of accounts receivable as of December 31, 1999. The Company
did not have any other customers with balances in excess of 10.0% of accounts
receivable as of December 31, 2000 and 1999, respectively. The Company performs
ongoing credit evaluations of its customers, but generally does not require
collateral to support customer receivables.
The Company has investments in overnight reverse repurchase agreements with a
commercial bank. As of December 31, 2000 and 1999, the Company had invested
approximately $10.5 and $8.5 million in overnight reverse repurchase agreements
with this bank. The bank provides underlying collateral consisting of U.S.
government securities which fully secures the carrying value of the reverse
repurchase agreements. Because the transactions are entered into and settled
daily, management believes that the risk of market value impairment on a given
day is nominal.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." The
statement requires companies to recognize all derivatives as either assets or
liabilities, with the instruments measured at fair value. The accounting for
changes in fair value and gains or losses depends on the intended use of the
derivative and its resulting designation. The Company will adopt SFAS No. 133 on
January 1, 2001 and believes that the adoption of this standard will not have an
impact on its results of operations and financial position.
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 adoption of SAB 101 in the fourth
quarter of 2000 did not impact the Company's results of operations or financial
position.
In March 2000, the FASB issued 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 adoption of this interpretation did not impact the Company's
results of operations or financial position.
28
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Reclassifications
Certain amounts previously reported in the consolidated financial statements
have been reclassified to conform to the current year presentation.
2. Supplemental Disclosure of Cash Flow Information
For the years ended December 31,
2000 1999 1998
--------------------------------
Cash paid during the year for:
Interest $ 68 $ 52 $ 135
Income taxes 1,309 1,494 1,180
Supplemental noncash investing and financing activities:
Fair value of stock issued for software licenses -- 2,288 --
Fair value of stock issued for note receivable -- 2,933 --
3. Acquisitions
The Company has made several acquisitions to further its strategic business
objectives. In October 2000, the Company acquired the assets of a division of
another company for approximately $400,000 in cash. The division provides IT
staff augmentation services and has offices in Atlanta and Boston. The Company
also made one acquisition in 1999, and three in 1998. All acquisitions were
accounted for under the purchase method of accounting and the excess of the
purchase price over the fair value of net assets acquired was allocated to
goodwill. The results of each of the acquired companies have been included in
the operations of the Company from the effective date of acquisition. The
Company's 1999 and 1998 acquisitions are as follows:
OAO/ICOR UK Ltd. Acquisition
Effective May 27, 1999, the Company acquired the remaining 50% of the
outstanding capital stock of OAO/ICOR UK Ltd. not already owned by the Company.
The Company paid $688,000 for the outstanding capital stock of the seller. The
purchase resulted in goodwill of approximately $501,000, which is being
amortized on a straight-line basis over seven years. The Company ceased applying
the equity method of accounting on the effective date of the acquisition.
ETG, Inc. Acquisition
Effective November 1, 1998, the Company entered into an agreement and plan of
merger with Enterprise Technology Group, Inc. (ETG), a Delaware corporation, and
ETG's three stockholders. Pursuant to the agreement and plan of merger, the ETG
stockholders exchanged all of the issued and outstanding stock of ETG,
consisting of 1,000 shares of common stock, par value $.10 per share, for
222,222 shares of common stock, par value $.01 per share of the Company valued
at approximately $850,000. The Company, prior to the merger, provided ETG
interest free advances totaling approximately $216,000. Additionally, at
closing, the Company repaid ETG's stockholder loans of approximately $109,000.
The purchase resulted in goodwill of approximately $1,000,000, which is being
amortized on a straight-line basis over seven years.
29
OAO Services, Inc. Acquisition
Effective July 1, 1998, the Company completed the acquisition of all of the
outstanding capital stock of OAO Services, Inc., pursuant to a Stock Purchase
Agreement among the Company, OAO Corporation and an individual stockholder (the
individual stockholder together with OAO Corporation, the "Stockholders").
Pursuant to the terms of the Stock Purchase Agreement, the purchase price
payable by the Company to the Stockholders in connection with the acquisition
included (i) cash in the amount of $2,305,000, subject to certain purchase price
adjustments, (ii) the payment by OAOT to the bank of $4,561,000 for the
retirement of outstanding debt under a financing agreement, and (iii) earn-out
payments to the Stockholders. Under the terms of the Stock Purchase Agreement,
the Company is required to make earn-out payments in amounts equal to 10% of the
Company's pre-tax profit in excess, if any, of $2 million subject to certain
increases, for the three years ended December 31, 1999, 2000 and 2001. The
aggregate earn-out payments shall not exceed $5 million. For the years ended
December 31, 2000 and 1999, the Company recognized $125,000 and $148,000 of
earn-out payments, respectively. The amounts earned under this agreement
increase the amount of goodwill attributable to this transaction. The purchase
resulted in goodwill of approximately $2,300,000, which is being amortized on a
straight-line basis over ten years.
DHR Technologies Acquisition
Effective April 2, 1998, the Company acquired certain assets and liabilities of
DHR Technologies, Inc. (DHR) for approximately $1.1 million in cash and assumed
liabilities. DHR, a Maryland-based information technology services company and
software developer, provided technical services in a variety of disciplines,
including object-oriented software engineering; WorldWide Web/multimedia
applications; training and consulting; and maintenance engineering. The purchase
resulted in goodwill of approximately $1,500,000, which is being amortized on a
straight-line basis over seven years.
The unaudited pro forma information set forth below gives effect to the OAO
Services, Inc. acquisition as if it had occurred at the beginning of 1998. The
effect of the other acquisitions in 2000, 1999, and 1998 are not significant to
the pro forma information and therefore have been excluded from the presentation
below. The pro forma information is presented for informational purposes only
and is not necessarily indicative of the results of operations that actually
would have been achieved had the acquisition been consummated as of that time
(unaudited, dollars in thousands except per share amounts):
For the year ended
December 31,
1998
------------------
Revenue $ 142,140
Net loss (2,986)
Basic loss per share (0.18)
Diluted loss per share (0.18)
30
4. Net Income Per Common Share
(dollars and shares in thousands, except per share amounts)
For the years ended December 31,
2000 1999 1998
--------------------------------
Basic Earnings (Loss) Per Share
Net income (loss) $ 1,798 $ 1,851 $ (3,498)
Weighted average number of shares 17,883 16,856 16,434
--------------------------------
Basic earnings (loss) per share $ 0.10 $ 0.11 $ (0.21)
================================
Diluted Earnings (Loss) Per Share
Net income (loss) $ 1,798 $ 1,851 $ (3,498)
Weighted average number of shares and equivalents:
Weighted average shares 17,883 16,856 16,434
Shares issuable upon exercise of stock options 601 506 --
--------------------------------
Total weighted average shares and equivalents 18,484 17,362 16,434
--------------------------------
Diluted earnings (loss) per share: $ 0.10 $ 0.11 $ (0.21)
================================
Options to purchase 1,975,656, 1,244,071 and 315,000 shares outstanding during
2000, 1999 and 1998, respectively, were not included in the computation of
diluted net income per common share because the options' exercise prices were
greater than the average market price of the common shares.
5. Unbilled Accounts Receivable
Unbilled accounts receivable as of December 31, 2000 and 1999 consisted of the
following (in thousands):
2000 1999
------------------
Amounts billable $ 4,488 $ 4,727
Amounts billable subject to extended payment terms 2,561 602
Amounts billable pending receipt of contractual documents
authorizing billing 84 223
Allowance for doubtful accounts (449) (493)
------------------
Total $ 6,684 $ 5,059
==================
6. Other Current Assets
Other current assets include software licenses for resale of $4.8 million and
$5.0 million at December 31, 2000 and 1999, respectively. In connection with a
Value Added Industry Remarketer agreement with Siebel Systems, Inc., on August
31, 1999, 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, which was
guaranteed to have a market value of $10 per share at August 31, 2000. The
difference between the closing share price at August 31, 2000, of $4.94, and the
guaranteed market value, which is approximately $1.2 million, is due August 31,
2001. The cash settlement amount of $1.2 million and the fair value of this
guarantee of $1.3 million is included in accrued expenses at December 31, 2000
and 1999, respectively. Changes in the fair value of the guarantee are reflected
in the Statements of Operations as other income in the amount of $0.1 million
for the year ended December 31, 2000.
31
7. Property and Equipment
Property and equipment at December 31, 2000 and 1999 consisted of the following
(in thousands):
2000 1999
---------------------
Furniture and equipment $ 6,929 $ 5,427
Leasehold improvements 522 386
Internal-use software 2,877 1,689
---------------------
10,328 7,502
Less accumulated depreciation and amortization (4,550) (3,115)
---------------------
Property and equipment, net $ 5,778 $ 4,387
======================
The Company leases furniture and equipment which are accounted for as capital
leases. Amounts related to capital leased assets included in property and
equipment at December 31, 2000 and 1999 are furniture and equipment of
$2,103,000 and $699,000, respectively and accumulated amortization of $447,000
and $337,000, respectively.
8. Accrued Expenses
Accrued expenses at December 31, 2000 and 1999 consisted of the following (in
thousands):
2000 1999
-----------------------
Accrued compensation and benefits $ 5,993 $ 7,457
Accrued expenses - primarily trade vendors 4,087 3,882
Other 465 379
-----------------------
Total accrued expenses $10,545 $11,718
=======================
32
9. Credit Agreements
The Company entered into a $35 million combined revolving credit and term loan
agreement (the "Agreement") with a bank on June 30, 1999. The Agreement provides
a $15 million revolving line of credit ("Revolver") and a $20 million term loan
facility. The Revolver provides for a commitment fee of 0.30% to 0.50% of the
unused balance and interest at the prime rate or, at the Company's option, at
LIBOR plus a 1.75% to 2.5% risk adjusted premium. The Revolver matures on May
31, 2002. The Agreement's term loan facility provides for a draw fee of 0.50%
payable when drawn upon and interest at LIBOR plus a risk- adjusted premium. The
term loan facility matures on May 31, 2001. However, in the event that there are
no borrowings under the term facility by May 31, 2001, the maturity is extended
to May 31, 2002. Draws under the Agreement are limited to a multiple of earnings
before interest, taxes, depreciation and amortization (EBITDA). The Company may
convert the revolving line of credit to an asset-based loan limited to a
percentage of eligible billed and unbilled trade receivables. The Agreement also
requires maintenance of certain financial covenants, prohibits the payment of
dividends and pledges all Company assets as collateral, among other
restrictions. There were no borrowings outstanding under this Agreement as of
December 1999 and $ 6.0 million outstanding as of December 31, 2000 bearing
interest at a rate of 9.5 %.
10. Lease Commitments
The Company leases furniture and equipment under capital lease arrangements. The
Company also leases office space and office equipment under operating leases.
The minimum fixed, non-cancelable lease payments under the Company's lease
commitments at December 31, 2000 are as follows:
Future minimum lease payments: Capital Operating
Year ended December 31: Leases Leases
-----------------------
2001 $ 751 $ 3,239
2002 738 2,961
2003 145 2,834
2004 144 2,323
2005 10 2,067
Thereafter -- 1,701
-----------------------
1,788 $15,125
--------
Less amount representing interest (223)
--------
Present value of lease payments 1,565
Current portion of capital lease obligations 610
--------
--------
Noncurrent portion of capital lease obligations $ 955
--------
Capital lease obligations have effective interest rates that range from 7.8% to
9.5% and have aggregate monthly payments of approximately $60,000 and $9,000, at
December 31, 2000 and 1999, respectively. A number of operating leases have
escalation clauses for increases in real estate taxes, operating costs and
inflation, and various renewal options for up to five years. Rent expense for
the years ended December 31, 2000, 1999 and 1998 was approximately $2,076,000,
$1,707,000 and $1,297,000, respectively.
33
11. Income Taxes
The Company's provision (benefit) for income taxes for the years ended December
31, 2000, 1999 and 1998 consisted of the following (in thousands):
2000 1999 1998
---------------------------
Current:
Federal $ 150 $ 615 $ (134)
Foreign 1,115 605 (410)
State 41 128 (6)
---------------------------
Total current provision (benefit) 1,306 1,348 (550)
Deferred:
Federal 19 167 (1,153)
State 4 39 (178)
---------------------------
Total deferred provision (benefit) 23 206 (1,331)
---------------------------
Total provision (benefit) $ 1,329 $ 1,554 $(1,881)
---------------------------
The provision (benefit) for income taxes differs from the amount computed by
applying the statutory Federal income tax rate as follows:
2000 1999 1998
---------------------------
Expected statutory amount 34.0% 34.0% (34.0)%
Nondeductible expense 3.1 0.8 (1.3)
Foreign income taxes 3.9 7.7 --
State income taxes, net of federal benefit 1.4 3.1 (1.5)
Other 0.1 -- 1.8
---------------------------
Effective rate 42.5% 45.6% (35.0)%
---------------------------
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and amounts used for income tax purposes. The tax effects of
significant temporary differences that comprise the deferred tax assets and
liabilities at December 31, 2000 and 1999 are as follows (in thousands):
2000 1999
-----------------------
Deferred tax assets:
Bad debt $ 674 $ 510
Accrued employee benefits 212 169
Goodwill 261 202
Charitable contributions 85 69
Other expense items 195 195
-----------------------
Total deferred tax assets 1,427 1,145
Deferred tax liabilities (73) (114)
-----------------------
Net deferred tax assets $ 1,354 $ 1,031
-----------------------
Deferred tax assets and liabilities are reflected on the Company's consolidated
balance sheets at December 31, 2000 and 1999 as follows (in thousands):
2000 1999
-----------------------
Net current deferred tax assets $1,093 $ 829
Net non-current deferred tax assets 261 202
-----------------------
Net deferred tax assets $1,354 $1,031
-----------------------
34
12. Employee Benefit Plans
Employee Savings Plans
The Company sponsors defined contribution plans for its eligible employees in
the United States and Canada. The U.S. plan covers substantially all of the
Company's U.S. employees. Participants may contribute to the plan an amount
between 1% and 15% of their total annual compensation. The Company makes
matching contributions of 20% of each participant's contributions up to 10% of
annual compensation. The Canadian plan covers substantially all of the Company's
Canadian employees. Participants may contribute to the plan an amount between 1%
and 18% of their total annual compensation. The Company makes matching
contributions of 50% of each participant's contributions up to 5% of annual
compensation. Company matching contributions under all defined contribution
savings plans amounted to approximately $839,000, $764,000 and $688,000 in 2000,
1999 and 1998, respectively.
Employee Stock Purchase Plan
The Company has a qualified Employee Stock Purchase Plan (ESPP) under section
423 of the Internal Revenue Code, with a total of 1,000,000 shares reserved for
issuance thereunder. The ESPP enables substantially all employees in the United
States and Canada to subscribe to purchase shares of common stock on a quarterly
basis. The purchase price is determined as the lower of 85% of the fair market
value of the shares on the first day of the quarter or 85% of the fair market
value of the shares on the last trade day of the quarter. During 2000 and 1999,
the Company issued 337,125 and 210,021 shares, respectively, at an average price
per share of $3.31 and $2.75. No shares were issued during 1998.
Deferred Compensation Plan
Beginning in 2000, the Company established a non-qualified deferred compensation
plan for certain Executives and Directors, which provides the opportunity for
participants to enter into agreements for the deferral of a specified percentage
of their cash compensation. The amount of compensation to be deferred is
determined by participant elections, subject to plan limitations. The Company
may make discretionary contributions, which are subject to a vesting schedule.
The amount distributed will be based on the amounts deferred, as increased or
decreased for deemed investment in mutual funds or other investments designated
by the participant from choices offered by the Company. Contributions to the
plan are held by a "Rabbi Trust," the net assets of which are consolidated into
the financial statements of the Company. Such investments consist primarily of
marketable equity securities, classified as trading securities, which have been
included in deposits and other assets on the consolidated balance sheet at their
fair value of $279,000 at December 31, 2000. Unrealized gains and losses on
investments held in the "Rabbi Trust" are recognized in net income of the period
in which they occur. The deferred compensation obligation of $279,000 is
included in other noncurrent liabilities on the consolidated balance sheet.
Changes in the fair value of the deferred compensation obligation are recognized
in net income in the period they occur.
Stock-Based Compensation
Under the 1996 Equity Compensation Plan, as amended, (the "Plan") the Company is
authorized to grant stock options to employees, officers, directors and
consultants. The Plan provides for the issuance of up to 6.6 million shares of
common stock for the grant of incentive stock options, nonqualified stock
options, stock appreciation rights, and restricted stock awards up to a maximum
of 1.6 million shares of common stock to an individual in any one year.
Generally, these grants vest ratably over a four or five year period and expire
six to ten years after the date of grant. The exercise price of options granted
under the Plan is equal to the fair market value on the date of grant. The
Company accounts for employee stock options under APB Opinion No. 25, under
which no compensation cost has been recognized. Pursuant to SFAS No. 123, the
Company recognized approximately $106,000, $42,000 and $30,000 of compensation
expense on options granted to non-employees for the years ended December 31,
2000, 1999 and 1998, respectively.
35
A summary of the Company's stock option plan activity for the years ended
December 31, 2000, 1999, and 1998 is presented below:
Number of Average
Option Exercise Price Exercise
Shares Per Share Price
----------------------------------------------------
Outstanding January 1, 1998 1,505,476 $2.00 - $5.10 $ 2.93
Granted 2,942,865 3.50 - 8.50 5.53
Canceled (1,512,849) 2.00 - 8.50 6.01
Exercised (186,790) 2.00 - 5.10 2.63
- ----------------------------------------------------------------------------------------------
Outstanding, December 31, 1998 2,748,702 $2.00 - $8.50 $ 4.04
Granted 1,178,115 2.00 - 5.19 4.72
Canceled (1,102,590) 2.00 - 8.50 4.83
Exercised (219,523) 2.00 - 8.50 2.51
- ----------------------------------------------------------------------------------------------
Outstanding, December 31, 1999 2,604,704 $2.00 - $8.50 $ 4.09
Granted 2,056,150 1.35 - 8.27 6.21
Canceled (765,822) 2.00 - 8.50 5.47
Exercised (216,664) 2.00 - 8.50 3.77
- ----------------------------------------------------------------------------------------------
Outstanding December 31, 2000 3,678,368 $1.35 - $8.50 $ 5.01
----------------------------------------------------
For the year ended December 31, 1998, 800,366 incentive stock options with
exercise prices ranging from $4.63 to $8.50 were re-priced to $3.50. These
options are included in amounts granted and canceled in 1998.
The following summarizes information about the Company's stock options
outstanding at December 31, 2000:
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Life Exercise Number Exercise
Prices Outstanding (in Years) Price Exercisable Price
- ------------------------------------------------------------------------------------------
$1.35-$2.00 737,063 5.25 $ 1.62 309,563 $ 2.00
2.40 - 3.50 787,899 3.95 3.38 319,890 3.44
3.66 - 5.19 939,956 4.28 4.94 353,021 5.04
5.63 45,000 3.38 5.63 22,500 5.63
8.27 - 8.50 1,168,450 5.47 8.27 32,500 8.32
- ------------------------------------------------------------------------------------------
$1.35-$8.50 3,678,368 4.77 $ 5.01 1,037,474 $ 3.76
- ------------------------------------------------------------------------------------------
As of December 31, 2000, 1999 and 1998, options of 1,037,474, 906,953 and
670,322, respectively, were exercisable with a weighted average exercise price
of $3.76, $3.74 and $3.53, respectively. As of December 31, 2000, 1999 and 1998,
approximately 1.5 million, 2.8 million and 200,000 options were available for
grant, respectively.
36
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions for grants in 2000, 1999 and 1998: risk-free interest rates of 5.94,
5.50 and 5.17 percent, respectively; no expected dividend yields; and expected
lives of 5 years. In 2000, 1999 and 1998, the expected volatility was 93%, 70%
and 55%, respectively. Using these assumptions, the fair value of the stock
options granted in 2000, 1999 and 1998 on a per share, weighted average basis
was $4.63, $2.94 and $2.58, respectively, which would be amortized as
compensation expense over the vesting period of the options.
Had compensation cost for these plans been recognized under SFAS No. 123, the
Company's net income (loss) and earnings (loss) per share would have been
reduced to the following pro forma amounts:
2000 1999 1998
--------------------------------
Consolidated net income (loss):
As reported $ 1,798 $ 1,851 $ (3,498)
Pro forma (1,009) 807 (4,563)
Basic net income (loss) per common share:
As reported 0.10 0.11 (0.21)
Pro forma (0.06) 0.05 (0.28)
Diluted net income (loss) per common share:
As reported 0.10 0.11 (0.21)
Pro forma (0.06) 0.05 (0.28)
13. Segment and Geographic Information
The Company operates four business segments. The Company's reportable segments
are Healthcare IT Solutions, Enterprise Applications and eBusiness Solutions
(formerly, E-Business Consulting Solutions), Managed IT Services (formerly,
Network and Systems Business Solutions) and Professional Services. As a result
of the evolution in the services the Company provides, two of the Company's
reportable segment names have been changed in 2000 from 1999; however, the
composition of the reported segments from 2000 to 1999 has not changed.
The Healthcare IT Solutions segment provides proprietary software products and
business solutions for healthcare organizations. The division provides full
service solutions via its proprietary MC400 software on a one-time license or
PMPM basis. This includes customer service, installation service, training and
ongoing support.
The Enterprise Applications and eBusiness Solutions segment provides integration
services and software solutions. The division's three practices are eBusiness
Solutions, Application/Managed Service Provider (A/MSP) and Application
Management Services (AMS). These practice areas focus on AMS, CRM, Portals,
eCommerce and ERP.
The Managed IT Services segment provides network and systems design,
integration, and management of large-scale data-center environments linking
multiple technologies, operating systems, protocols and geographic areas. The
division manages enterprise systems and provides desktop management services,
which includes on-site and remote network systems management.
The Professional Services segment provides information technology personnel that
are regularly utilized within engagements to meet short or indefinite term
requirements. These highly skilled professionals are provided to augment the
client's staffing requirements.
37
The Company evaluates the performance of each segment based on segment revenues
and gross profit. Summary information by segment as of and for the years ended
December 31, 2000, 1999 and 1998 is as follows (in thousands):
2000 1999 1998
----------------------------------------------------
Managed IT Services
Revenues $ 60,518 $ 67,117 $ 73,465
Gross profit 11,271 14,136 14,396
Segment assets 26,312 24,496 24,281
Professional Services
Revenues 55,299 64,126 30,461
Gross profit 6,911 6,074 2,920
Segment assets 11,515 14,025 12,981
Enterprise Applications and eBusiness Solutions
Revenues 23,102 8,353 3,289
Gross profit (loss) 1,820 (4,226) (2,671)
Segment assets 14,636 9,786 3,420
Healthcare IT Solutions
Revenues 13,666 10,566 6,127
Gross profit 4,678 2,514 1,592
Segment assets 9,791 5,958 2,556
Segment totals
Revenues $ 152,585 $ 150,162 $ 113,342
Gross profit 24,680 18,498 16,237
Segment assets 62,254 54,265 43,238
The following table reconciles reportable gross profit and segment assets to the
Company's consolidated totals. Selling, general and administrative expenses;
restructuring and other charges; and interest and other income and expenses are
not allocated to segments (in thousands):
2000 1999 1998
--------------------------------------------
Gross profit for reportable segments $ 24,680 $ 18,498 $ 16,237
Selling, general and administrative expenses unallocated 22,675 16,014 19,100
Restructuring and other charges unallocated -- -- 3,135
--------------------------------------------
Total consolidated income (loss) from operations 2,005 2,484 (5,998)
Interest and other (income) expense unallocated 1,122 921 619
--------------------------------------------
Total consolidated income (loss) before income taxes $ 3,127 $ 3,405 $ (5,379)
--------------------------------------------
Total assets for reportable segments $ 62,254 $ 54,265 $ 43,238
Note receivable, OAO Corporation 2,160 2,520 2,520
Property and equipment unallocated 3,055 2,605 2,887
Income taxes unallocated 2,108 1,965 2,473
--------------------------------------------
Total consolidated assets $ 69,577 $ 61,355 $ 51,118
--------------------------------------------
38
The Company generated substantially all of its revenues in the United States and
Canada during the three years ended December 31, 2000. The following represents
a summary of information by geographic area (in thousands):
For the years ended December 31,
2000 1999 1998
----------------------------------------------------
Revenues:
United States $ 117,711 $ 131,261 $ 93,066
Canada 29,019 16,029 20,193
Other consolidated entities 5,855 2,872 83
----------------------------------------------------
$ 152,585 $ 150,162 $ 113,342
----------------------------------------------------
(Loss) income before income taxes:
United States $ (965) $ 4,722 $ (4,435)
Canada 3,395 (1,575) (964)
Other consolidated entities 697 258 20
----------------------------------------------------
$ 3,127 $ 3,405 $ (5,379)
----------------------------------------------------
Identifiable assets:
United States $ 59,049 $ 51,702 $ 46,879
Canada 9,016 9,493 5,258
Other consolidated entities 1,512 160 (1,019)
----------------------------------------------------
$ 69,577 $ 61,355 $ 51,118
----------------------------------------------------
14. Related Party Transactions
OAO Corporation
The Company and OAO Corporation (OAO) are related parties because a common
stockholder holds a substantial ownership interest in both companies and is the
Vice-Chairman of the Board of Directors of the Company.
In May 1999, the Company loaned OAO approximately $2.5 million. The note, as
amended, is a demand note with minimum quarterly principal payments of $90,000
plus interest at the prime rate plus 2.5%. The note is further secured by
approximately 1.3 million shares of Company stock owned by the Vice-Chairman of
the Board of Directors.
During 2000, 1999 and 1998, the Company served as a subcontractor on several
contracts with OAO. Revenues under these contracts totaled $871,000, $949,000
and $785,000, respectively. In connection with the OAO Services acquisition, the
Company paid OAO $364,000 under an administrative services agreement during
1998. The Company had $421,000, $662,000 and $298,000 in billed and unbilled
receivables due from OAO as of December 31, 2000, 1999 and 1998, respectively,
and has advanced $500,000 to OAO at December 31, 2000 in connection with a
teaming agreement.
Other
The Company had an administrative service agreement with Safeguard Scientifics,
Inc., which was terminated effective April 1, 2000. The agreement provided for
payment of an administrative fee, not to exceed $500,000. The Company expensed
an administrative fee to operations of $124,000 for the year ended December 31,
2000 and $500,000 for each of the years ended December 31, 1999 and 1998,
respectively, in connection with this agreement. In addition to the
administrative fee, the Company paid other professional service fees incurred on
behalf of the Company of $160,000 for the year ended December 31, 1998.
39
On July 14, 1999, the Chief Executive Officer of the Company acquired 750,000
shares of common stock of the Company, $.01 par value, at $3.91 per share, in
exchange for a $2.9 million full recourse note, bearing interest of 5.82% due
July 14, 2004. The shares were pledged as collateral for the note, which the
Chief Executive Officer has personally guaranteed.
The Company and an unrelated third party each made a strategic investment in an
entity, in which the Company's Chief Executive Officer is a member of that
entity's Board of Directors. In December 2000, the Company paid $500,000 for a
10% ownership interest. The valuation received by the Company was equal to that
of the unrelated third party's investment. The investment is accounted for under
the cost method of accounting and is classified as deposits and other assets in
the accompanying consolidated balance sheets.
15. Contingencies
The Company from time to time is involved in various litigation arising in the
normal course of business. In management's opinion, the Company's ultimate
liability or loss, if any, resulting from such litigation will not have a
material adverse effect on the Company's financial position, results of
operations or cash flows.
40
16. Quarterly Financial Data (Unaudited)
Set forth below is a summary of the unaudited quarterly results of operations
for the years ended December 31, 2000 and 1999 (In thousands, except per share
data):
2000 Quarters Ended
March 31 June 30 Sept. 30 Dec. 31
-------- -------- -------- --------
Revenues $ 38,545 $ 39,695 $ 36,674 $ 37,671
Income (loss) from operations 637 1,441 (247) 174
Income before income taxes 1,233 1,283 319 292
Net income $ 709 $ 738 $ 183 $ 168
Net income per common share:
Basic $ 0.04 $ 0.04 $ 0.01 $ 0.01
Diluted 0.04 0.04 0.01 0.01
Weighted average number of shares outstanding:
Basic 17,635 17,755 17,910 18,130
Diluted 18,976 18,372 18,269 18,206
1999 Quarters Ended
March 31 June 30 Sept. 30 Dec. 31
-------- -------- -------- --------
Revenues $ 35,717 $ 39,219 $ 38,887 $ 36,339
Income from operations 404 203 734 1,143
Income before income taxes 501 564 957 1,383
Net income $ 301 $ 340 $ 527 $ 683
Net income per common share:
Basic $ 0.02 $ 0.02 $ 0.03 $ 0.04
Diluted 0.02 0.02 0.03 0.04
Weighted average number of shares outstanding:
Basic 16,694 16,737 16,986 17,388
Diluted 17,334 17,204 17,666 17,971
Earnings per share calculations for each of the quarters are based on weighted
average number of shares outstanding in each period. Diluted earnings per share
calculations adjust net earnings for the dilutive effect of common stock
equivalents. Therefore, the sum of the quarters may not necessarily equal the
year-to-date earnings per share.
41
OAO TECHNOLOGY SOLUTIONS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 2000, 1999 and 1998
Additions
--------------------
Balance Charges
at to costs Charges to
beginning and other Deductions Write- Balance at
(In thousands) of year expenses accounts(B) (C) Offs(D) end of year
- -------------- ------- -------- ----------- ---------- ------- -----------
Allowance for uncollectible
accounts (A)
Year ended December 31, 1998 ............. $ 289 4,227 175 (239) (2,783) $1,669
Year ended December 31, 1999 ............. $1,669 474 -- -- (636) $1,507
Year ended December 31, 2000 ............. $1,507 755 -- -- (533) $1,729
(A) Reflected on the consolidated balance sheets as a reduction of accounts
receivable.
(B) A reduction of accounts receivable purchased in acquisition of certain
assets of OAO Services, Inc. for the year ended December 31, 1998.
(C) Provided as a recovery of revenue.
(D) Reduced accounts receivable and allowance for uncollectible items.
42
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item is incorporated by reference to the
sections of the Registrant's definitive Proxy Statement for the Annual Meeting
of Stockholders to be held on May 16, 2001 (the "Proxy Statement"), entitled
"Election of Directors -- Nominees," "Executive Officers" and "Common Stock
Ownership of Principal Stockholders and Management -- Compliance with Section
16(a) Beneficial Ownership Reporting Compliance," to be filed with the
Commission.
Item 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
sections of the Proxy Statement entitled "Election of Directors -- Compensation
of Directors" and "Executive Compensation and Other Information," to be filed
with the Commission.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANGEMENT.
The information required by this Item is incorporated by reference to the
section of the Proxy Statement entitled "Common Stock Ownership of Principal
Stockholders and Management," to be filed with the Commission.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated by reference to the
sections of the Proxy Statement entitled "Election of Directors -- Nominees" and
"Executive Compensation and Other Information -- Compensation Committee
Interlocks and Insider Participation," to be filed with the Commission.
43
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) (1) Financial Statements
The financial statements listed in the accompanying Table of Contents to
Consolidated financial Statements are filed as part of this Form 10-K,
commencing on page 20.
(a) (2) Schedules
The following consolidated financial statement schedule of the Company is filed
as part of this Form 10-K.
Schedule II - Valuation and Qualifying Accounts
(a) (3) Exhibits
The exhibits are listed in the index to Exhibits appearing below.
(b) No reports were filed on form 8-K during the last quarter of fiscal
2000.
(c) Exhibits
44
Exhibit Page
No. Description No.
- --------------------------------------------------------------------------------
3.1 Amended and Restated Certificate of Incorporation of the
Company, as amended. (2)
3.2 Amended and Restated By-Laws of the Company. (2)
10.1 Conformed form of Vendor Agreement between the Company and
Integrated Systems Solutions Corporation, as amended. (2)
10.2 Basic Order Agreement between Digital Equipment Corporation
and OAO Canada Limited/OAO Technology Solutions, Inc. (2)
(4)
10.3 Amended and Restated OAO Technology Solutions, Inc. 1996
Equity Compensation Plan. (2)
10.4 Employment Agreement between William R. Hill and the
Company, dated April 1, 1996. (2)
10.5 Employment Agreement between Gregory Pratt and Company dated
June 1, 1998 (5)
10.6 Employment Agreement between Ron Branch and Company dated
December 1, 1998 (7)
10.7 Stock Purchase Agreement, dated July 24, 1998, among the
Company, OAO Services, Inc., OAO Corporation and William
Hill (3)
10.8 Registration Rights Agreement between Gregory Pratt and
Company dated November 1, 1998 (7)
10.9 Agreement and Plan of Merger, dated as of November 1, 1998,
among the Company, ETG Acquisition Corporation, Enterprise
Technology Group, Inc. and the shareholders of Enterprise
Technology Group, Inc. (7)
10.10 OAO Technology Solutions, Inc. Employee Stock Purchase Plan
as of May 21, 1998 (6)
10.11 Credit Agreement dated June 30, 1999 by and among OAO
Technology Solutions, Inc., and its subsidiaries and Bank of
America (formerly NationsBank, N.A.) (8)
10.12 Amended and Restated OAO Technology Solutions, Inc.
Restricted Stock Grant Letter. Date of grant: July 14, 1999
issued to Gregory A. Pratt. (9)
10.13 Amended and Restated Term Note dated July 14, 1999 between
the Company and Gregory A. Pratt. (9)
10.14 Amended and Restated Pledge Agreement dated July 14, 1999
between the Company and Gregory A. Pratt. (9)
10.15 Amended and Restated OAO Technology Solutions, Inc. 1996
Equity Compensation Plan (10)
10.16 Executive and director deferred compensation plan. (11)
10.17 Consent of Deloitte and Touche LLP (1)
21.1 Subsidiaries of the Registrant.
o OAO HealthCare Solutions, Inc. o OAO Services, Inc. o OAO Systems, Inc. o OAO
Technology Solutions (Canada) Inc. o OAO Technology Solutions Europe B.V. o OAO
Technology Solutions de Mexico, S.A. de C.V. o OAO Technology Solutions UK
Limited.
45
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements Nos.
333-36534, 333-75273, 333-75407, and 333-82789 of OAO Technology Solutions, Inc.
on Form S-8 of our report dated February 9, 2001, appearing in this Annual
Report on Form 10-K of OAO Technology Solutions, Inc. for the year ended
December 31, 2000.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
McLean, Virginia
March 28, 2001
46
(1) Filed herewith.
(2) Incorporated by reference to the Company's Registration Statement on Form
S-1 (Registration No. 333-00796) declared effective on October 22, 1997.
(3) Incorporated by reference to the Company's current report on Form 8-K,
filed on August 7, 1998.
(4) Confidential Treatment Requested. The entire agreement has been filed
separately with the Securities and Exchange Commission.
(5) Incorporated by reference to the Company's Form 10Q, filed on August 14,
1998.
(6) Incorporated by reference to the Company's Form S-8, filed on March 30,
1999.
(7) Incorporated by reference to the Company's Form 10-K, filed on March 30,
1999.
(8) Incorporated by reference to the Company's Form 10-Q, filed on August 16,
1999.
(9) Incorporated by reference to the Company's Form 10-Q, filed on November 15,
1999.
(10) Incorporated by reference to the Company's Form S-8, filed on July 13,
1999.
(11) Incorporated by reference to the Company's Form S-8, filed on May 8, 2000.
47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
OAO Technology Solutions, Inc.
March 28, 2001 By: /s/ Gregory A. Pratt
-----------------------------
Gregory A. Pratt
Chief Executive Officer
and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Gregory A. Pratt Chief Executive Officer,
- --------------------------- President and Director
Gregory A. Pratt (Principal Executive Officer) March 30, 2001
/s/ J. Jeffrey Fox Senior Vice President of Finance March 30, 2001
- --------------------------- and Chief Financial Officer
J. Jeffrey Fox
/s/ Jerry L. Johnson Chairman of the Board of March 30, 2001
- --------------------------- Directors
Jerry L. Johnson
/s/ Cecile D. Barker Director March 30, 2001
- ---------------------------
Cecile D. Barker
/s/ Yvonne Brathwaite Burke Director March 30, 2001
- ---------------------------
Yvonne Brathwaite Burke
/s/ Frank B. Foster, III Director March 30, 2001
- ---------------------------
Frank B. Foster, III
/s/ John F. Lehman Director March 30, 2001
- ---------------------------
John F. Lehman
/s/ Richard B. Lieb Director March 30, 2001
- ---------------------------
Richard B. Lieb
48