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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, 2001
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 15, 2002, was approximately
$21,141,000 based on the closing sale price of the Common Stock on March 15,
2002, of $2.37 as reported by the NASDAQ National Market System.
As of March 15, 2002, the registrant had outstanding 17,876,885 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 Shareholders to
be held on May 17, 2002 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, 2001
Item Page
- ---- ----
Part I
1 Business........................................................ 3
2 Properties...................................................... 8
3 Legal Proceedings............................................... 9
4 Submission of Matters to a Vote of Security Holders............. 9
Part II
5 Market for Registrant's Common Equity and
Related Shareholder Matters................................. 9
6 Selected Consolidated Financial Data............................ 10
7 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 11
7a Quantitative and Qualitative Disclosures about Market Risk...... 20
8 Financial Statements and Supplementary Data..................... 21
9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 44
Part III
10 Directors and Executive Officers of the Registrant.............. 44
11 Executive Compensation.......................................... 44
12 Security Ownership of Certain Beneficial Owners and Management.. 44
13 Certain Relationships and Related Transactions.................. 44
Part IV
14 Exhibits and Reports on Form 8-K................................ 45
PART I
Item I. BUSINESS.
OAO Technology Solutions, Inc. ("OAOT" or the "Company") is a global provider of
information technology services that address the enterprise-wide challenges of
Fortune 1000 companies, mid-market organizations, health benefit organizations,
and the public sector.
We began operations in 1993 as a division of OAO Corporation, were incorporated
in March 1996 and spun off from OAO Corporation in April 1996. We have grown
since inception, with revenues increasing to $163.1 million in 2001, from $57.9
million in 1996. Our strategic partners and customers include IBM, Compaq and
Computer Sciences Corporation (CSC). Revenues from the two largest strategic
customers were $124.9 million and $135.5 million for the years ended December
31, 2001 and 2000, respectively. The largest strategic customer (IBM) accounted
for 69.2% and 76.0%, and the second largest strategic customer (Compaq)
accounted for 7.4% and 12.8% of revenues for the years ended December 31, 2001
and 2000, respectively. We have diversified the types of services we provide to
our strategic customers and expanded the number of strategic customer business
units to whom we provide services. For the year ended December 31, 1996, we
earned 60.2% of our revenues from data center management services provided to a
strategic customer. For the year ended December 31, 2001, we earned 20.8% of our
revenues from data center management. A decrease in revenues from or loss of a
strategic customer could have a material adverse effect on our 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 our business, operating results and financial
condition.
For the years ended December 31, 2001 and 2000, approximately 26% and 23% of our
revenues, respectively, were derived from fixed-price contracts. Certain of our
fixed-price contracts require us 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 we invest 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, we initiate 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
our business, operating results and financial condition.
Engagements that involve new services to existing customers or services to new
customers may also result in lower margins during the early term of the
engagement. We have historically experienced margin improvements after the
start-up phase of our engagements, however, there can be no assurance of future
margin improvements. Further, we must realize and maintain margins on our
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 our investments in
international and other business development activities. We believe that our
business is not seasonal.
We operate two business segments: Managed IT Solutions and Healthcare IT
Solutions. In order to align our reporting with competitors in the industry and
to make our segment information more useful, all of our IT service related
operating segments have been consolidated into one reportable segment, Managed
IT Solutions. All prior period segment information has been restated to reflect
this change. Our operating segments formerly reported as Enterprise Applications
and eBusiness Solutions, Managed IT Services, and Professional Services have
been combined as a result of this change and are now collectively reported as
Managed IT Solutions. Healthcare IT Solutions remains unchanged.
Managed IT Solutions
Our Managed IT Solutions segment 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. We
manage enterprise systems and provide 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. We plan to continue
to pursue relationships with strategic customers, while marketing our solutions
directly to middle market commercial and public sector customers. We believe
that our ability to offer one source of
3
accountability for companies seeking a full range of application and
infrastructure outsourcing solutions, coupled with our commitment to quality,
differentiate our services and provide us with a competitive advantage. Our
commitment to quality is evidenced by our Application Solutions division's
achievement of a SW-CMM (Software Capability Maturity Model) process maturity
Level II. In addition, we continue to actively implement quality processes
throughout the Company in accordance with the Malcolm Baldrige Quality Program.
We believe that we provide customers the flexibility, responsiveness and
cost-effectiveness of a smaller firm, while offering the benefits that a larger
outsourcer could provide, all at a cost that is lower than they could achieve
themselves.
Our service offerings in Managed IT Solutions are as follows:
Application Solutions
Our Application Solutions service offerings include Application Support,
Application Management and Application Development/Integration. Application
Solutions are both a stand-alone service and a vehicle to deliver our other
services. Application Solutions services are made available through an
application/managed service provider model or outsourced from the customer.
Application Solutions provides outsourcing for a complete set of services that
include development/integration, management, and/or support of applications.
Application outsourcing may involve the transfer of people and application
software to a remote application solution center. Application Solutions 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 application support model or outsourced from the customer.
From our CustomerCare centers, primarily located in Toronto and Moncton, Canada,
our Application Support services offer a single point of accountability for
application software including help requests and proactive application
monitoring. We have decided to exit the software license reseller portion of
this practice and write-off our investment in third party software licenses. We
will further focus on providing service solutions.
IT Infrastructure Solutions
Our IT Infrastructure Solutions service offerings include Network and Desktop
Management Services (NDMS), Data Center Management (DCM) and Professional
Staffing Services. NDMS and DCM provide network and systems design, integration,
and management of large-scale environments linking multiple technologies,
operating systems, protocols and geographic areas. IT Infrastructure Solutions
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 Fortune 1000 and middle market customers. Professional Staffing
Services provides information technology personnel, primarily on a
time-and-materials basis, that are regularly utilized within engagements to meet
short or indefinite term requirements. There are also instances where an
engagement has started on a time-and-materials basis and evolved to a
fixed-price basis, as the requirements became sufficiently defined. Professional
Staffing personnel 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 Staffing Services provides personnel who
possess programming skills ranging from Oracle, SAP, C++, and COBOL/DB2, to the
every day needs of staffing requirements in the IT industry. Professional
Staffing Services has offices strategically located in the Northeast, Southeast,
Midwest and West. In October 2000, we expanded our Professional Staffing
Services business to new markets in Atlanta and Boston. Our Professional
Staffing Services division has the ability to recruit professional and technical
staff locally and nationally. We believe that our Professional Staffing Services
division is positioned to provide nationwide support to customers and it has
continuously demonstrated this ability since its inception. The Professional
Staffing Services business is concentrated within one strategic customer;
however, we have expanded our customer base in 2001 and will continue to focus
on expanding our customer base in the future.
Healthcare IT Solutions
On August 31, 2001, we acquired the EZ-CAP(R) software business of QuadraMed
Corporation. The EZ-CAP managed care software product is a leading industry
solution for at-risk healthcare organizations, and is currently installed at
approximately 200 clients. The acquisition facilitates our entry into the
provider (physician-hospital) segment of the healthcare benefit processing
software market. The EZ-CAP system
4
provides over fifteen integrated modules that include internet connectivity,
electronic data interchange, eligibility, enrollment, claims processing,
utilization management and reporting.
Our Healthcare IT Solutions segment provides managed care software application
solutions under software license agreements via its MC400(TM) and EZ-CAP(R)
software solutions, which are sold on a per member, per month (PMPM)
subscription basis or for a one-time perpetual license fee. We plan to continue
efforts to market our software solutions on a PMPM subscription basis. The
pay-as-you-go feature of the PMPM model is attractive to customers concerned
with managing cash flow and broadens the target market for our products. In
addition, the PMPM model provides a more consistent and predictable cash flow
and revenue stream and could have a greater contract value than a perpetual
license sale. This effort to market our products on a PMPM basis could result in
the deferral of revenue, profit and cash flow in our Healthcare IT Solutions
segment in the short term. Our MC400 software provides a comprehensive solution
for healthcare organizations (health maintenance organizations, indemnity
insurance plans, physician hospital organizations, independent physician
organizations, third party administrators and self-insured employer plans, among
others). The MC400 system is web-enabled and provides over thirty integrated
modules that include claims processing, patient care management, electronic data
interchange, eligibility, enrollment, utilization, internet connectivity, data
warehousing, care management and web portals. We have over fifty MC400 installed
sites and offer a viable solution that is ready for the federal requirements of
the Health Insurance Portability and Accountability Act (HIPAA). EZ-CAP is
currently installed at approximately 200 clients nationwide and internationally
and provides secure, web-enabled solutions. The EZ-CAP system provides over
fifteen integrated modules that include internet connectivity, electronic data
interchange, eligibility, enrollment, claims processing, utilization management
and reporting. We recently released EZ-CAP 4.0, which operates on Microsoft SQL
Server enterprise technology and permits the use of a central database to
concurrently process information for multiple managed care companies.
In 2000, Healthcare IT Solutions acquired and began marketing and installing a
care management system (CMS) that enhances the MC400 product's capabilities. We
also introduced three additional major enhancements. The first is an internet
centric web enabled system that allows customers to connect to the system from
any computer worldwide. The second is our data warehouse and decision support
system that allows customers to store and report on historical data using
analytical tools and reporting analysis. The third enhancement is our new
Communications system that allows our customers to process all forms of letters,
desk top publishing, correspondence, fax and email correspondence to any
recipient of the system. Global distribution automation and automatic processing
and scheduling of all correspondence enables our clients to reduce their costs
and save time. We are committed to investing the resources necessary to continue
to develop new modules for our Healthcare software solutions in order to meet
the evolving needs of our customers and to address changes in technology and in
the industry.
During 2001 and 2000, Healthcare IT Solutions won a number of new customer
accounts that we believe have positioned us well for the future. One such
customer account resulted from the sale of a software solution that established
us as a provider of solutions to the third party administrator market. Another
system sale demonstrated that our healthcare software solution could accommodate
a million-plus-member healthcare plan. We also signed our first international
distribution license agreement, which is expected to provide international sales
of MC400. The acquisition of EZ-CAP gave us entry into the healthcare provider
benefit processing market. We expect to derive considerable synergies from the
co-marketing of our MC400 and EZ-CAP solutions. We intend to continue to target
these markets in 2002, although there can be no assurance that we will be
successful in these markets.
5
Industry and Competition
We sell technology services and solutions predominantly to technology companies
and their customers. A significant portion of annual revenues, 85% in 2001 and
87% in 2000, 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. We begin 2002 with backlog under
long-term contracts of approximately $650 million, of which approximately $567
million is not expected to be filled in 2002. Backlog is expected to be realized
over the next ten years. However, our long-term contracts generally have early
termination provisions that, if invoked by its customers, could have a
significant adverse impact on the our revenue, profitability, cash flow and
backlog. Further, our 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.
Managed IT Solutions
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 IT services market have significantly greater financial,
technical and marketing resources, and generate greater revenues than the
Company. We believe that the principal competitive factors in the 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. We believe we have the ability to successfully compete in
these markets because of our core competencies, strategic customer
relationships, strategic alliances and product service agreements, which allow
us to provide customers global, enterprise-wide integration of information
technology. We believe that our ability to offer one source of accountability
for companies seeking a full range of application and infrastructure outsourcing
solutions, coupled with our commitment to quality, differentiate our services
and provide us with a competitive advantage. Our commitment to quality is
evidenced by our Application Solutions division's achievement of a SW-CMM
(Software Capability Maturity Model) process maturity Level II. In addition, we
continue to actively implement quality processes throughout the Company in
accordance with the Malcolm Baldrige Quality Program.
While historically the IT services industry has generally experienced labor
shortages and wage inflation in excess of many other industries, our engagements
have not been materially affected. We price our services under these engagements
on the basis of the historical cost of the outsourced function, managerial
experience, and its assessment of evolving technical factors. We also enter into
professional services engagements requiring high-demand IT specialists for terms
ranging up to 18 months, usually on a time-and-materials basis. As general
economic conditions have weakened in the past year, the trend in the IT industry
has shifted from a shortage of labor to a surplus of labor. We are subject to
the same general industry pricing pressures, required efficiency improvements
and labor pressures inherent in the IT services industry when performing
engagements. As a result, we have experienced and may continue to experience
pricing pressure, especially from strategic customers. We expect to be able to
partially pass along any price reductions to our suppliers. We are dependent
upon our ability to attract, hire and retain personnel who possess the technical
skills and experience necessary to meet the service requirements of our clients.
In pricing our services under shorter-term engagements, we evaluate the existing
labor market for IT specialists and the expected duration of the engagement.
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. There are significant drivers that support the
growth expectations for IT solutions integrators. These drivers include 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.
6
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 increasingly rely 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.
HealthCare IT Solutions
The healthcare industry has experienced significant recent transition, incurred
by both the healthcare provider/payor 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: indemnity insurance plans,
physician hospital organizations, independent physician organizations and
self-insured employer plans, 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 healthcare 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 (HIPAA). These proposed regulations appear extensive and
concern privacy and health record reporting standards, among others. We believe
that these regulations could cause healthcare payors to purchase new IT systems,
which could be beneficial to software solutions providers like us. However,
certain HIPAA requirements have been delayed for one year in 2001 and there can
be no assurance that the proposed regulations will be implemented as expected or
that they will cause any increase in sales of our healthcare IT solutions.
7
Looking to the Future
Our overall strategy is to continue growing revenues and diversifying our
customer base. We have invested, and expect to continue to invest, the profits
and cashflows generated from our business to enhance our marketing and sales
capabilities to gain new customers. Our strategy is to leverage our existing
customer base, as we continue to market our IT solutions directly to middle
market commercial and public sector companies. We will continue to pursue new
partnerships with strategic customers and acquisitions, which will open
additional markets and distribution channels. In addition, we are implementing a
marketing strategy that is focused on cross-selling our services as we seek to
become recognized as a quality focused, cost effective, full service provider of
IT outsourcing services.
We remain committed to investing the resources necessary to enhance the
potential of our Healthcare IT Solutions business. We believe the growth
opportunities remain strong in our Healthcare IT Solutions segment given the
success of our MC400 system and the opportunities to help the industry become
compliant with HIPAA regulations. In addition, the acquisition of EZ-CAP has
expanded our solutions to the healthcare provider market and provides
cross-selling opportunities with our MC400 functionality.
Employees
As of December 31, 2001, the Company employed approximately 2,400 employees, of
which 2,155 were full time. Approximately 9% of these employees have managerial
responsibilities, and over 70% 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.
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. 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.
8
Item 3. LEGAL PROCEEDINGS.
The Company believes that there are no claims or actions against the Company the
ultimate disposition of which would 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 SHAREHOLDER 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, 2001, there
were 606 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.
2001
--------------------
Quarter High Low
------- --------------------
First $2.38 $1.13
Second 2.23 0.91
Third 1.75 0.87
Fourth 3.00 0.88
2000
--------------------
Quarter High Low
------- --------------------
First $9.94 $6.31
Second 8.44 2.62
Third 6.31 3.50
Fourth 3.94 1.13
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.
9
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,
2001 2000 1999 1998 1997
-----------------------------------------------------------
Statement of Operations Data:
Revenues $ 163,100 $ 152,585 $ 150,162 $ 113,342 $ 84,666
Direct costs 131,446 127,905 131,664 97,105 65,882
Write-down of prepaid software licenses 5,085 -- -- -- --
Selling, general and administrative expenses 28,918 22,675 16,014 19,100 13,551
Write-down of impaired assets and other 3,308 -- -- -- --
Restructuring charges -- -- -- 3,135 --
-----------------------------------------------------------
(Loss) income from operations (5,657) 2,005 2,484 (5,998) 5,233
Interest and other income (expense), net 251 1,122 921 619 (453)
-----------------------------------------------------------
(Loss) income before income taxes (5,406) 3,127 3,405 (5,379) 4,780
(Benefit) provision for income taxes (1,893) 1,329 1,554 (1,881) 1,912
-----------------------------------------------------------
Net (loss) income $ (3,513) $ 1,798 $ 1,851 $ (3,498) $ 2,868
===========================================================
Net (loss) income per common share:
Basic $ (0.19) $ 0.10 $ 0.11 $ (0.21) $ 0.27
========= ========= ========= ========= =========
Diluted $ (0.19) $ 0.10 $ 0.11 $ (0.21) $ 0.26
========= ========= ========= ========= =========
As of December 31,
2001 2000 1999 1998 1997
-----------------------------------------------------------
Balance Sheet Data:
Working capital $ 25,324 $ 29,457 $ 28,353 $ 26,394 $ 33,249
Total assets 74,557 69,577 61,355 51,118 50,342
Long-term debt 6,753 -- -- -- --
Capital lease obligations, including current portion 1,824 1,565 143 883 1,435
Shareholders' equity 38,405 43,242 39,622 35,448 38,066
10
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 that are not historical facts contained in this Form 10-K,
including this 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 revenue growth and pricing pressure from
strategic and non-strategic customers, 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, 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, possible deferral of revenue,
profit and cash flow from any increase in per-member per-month and/or
percentage-of-completion basis software sales in relation to total software
sales, inability to successfully install healthcare software sold on a timely
basis, competition in the industry, general economic conditions and level of
information technology service spending, 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
ability to successfully integrate recent acquisitions, 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.
Segments Overview
OAOT is a global provider of information technology services that address the
enterprise-wide challenges of Fortune 1000 companies, mid-market organizations,
health benefit organizations, and the public sector. The Company operates two
business segments: Managed IT Solutions and Healthcare IT Solutions. In order to
align our reporting with competitors in the industry and to make our segment
information more useful to users, all of the Company's IT service related
operating segments have been consolidated into one reportable segment, Managed
IT Solutions. All prior period segment information has been restated to reflect
this change. The Company's business segments formerly reported as Enterprise
Applications and eBusiness Solutions, Managed IT Services, and Professional
Services have been combined as a result of this change and are now collectively
reported as Managed IT Solutions. Healthcare IT Solutions remains unchanged.
11
Managed IT Solutions
(Application Solutions and IT Infrastructure Solutions)
Application Solutions
The Company's Application Solutions service offerings include Application
Support, Application Management and Application Development/Integration.
Application Solutions provides outsourcing for a complete set of services that
include development/integration, management, and/or support of applications.
Application outsourcing may involve the transfer of people and application
software to OAOT and possibly to a remote application solution center. 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 application support model or outsourced
from the customer. The Company has decided to exit the software license reseller
portion of this practice and write-off its investment in Siebel prepaid Customer
Relationship Management (CRM) software licenses. The Company will further focus
on providing service solutions.
IT Infrastructure Solutions
OAOT's IT Infrastructure Solutions service offerings include Network and Desktop
Management Services (NDMS), Data Center Management (DCM) and Professional
Staffing Services. NDMS and DCM provide 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 Fortune 1000
and middle market customers. The Company's strategic partners and customers
include IBM, Compaq and Computer Sciences Corporation (CSC). In 2000, the
Company's data center management contract with a strategic customer 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. Professional Staffing Services offers 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 Staffing Services business is concentrated within one strategic
customer; however, the Company has expanded its customer base and will continue
to focus on expanding its customer base in the future.
Healthcare IT Solutions
The Healthcare IT Solutions segment provides managed care software application
solutions under software license agreements via its MC400 and EZ-CAP software
solutions, which are 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 MC400 installed
sites and offers a viable solution that is ready for the federal requirements of
the Health Insurance Portability and Accountability Act (HIPAA). EZ-CAP is
currently installed at approximately 200 clients and provides secure,
web-enabled modules for authorizations, premium billing, capitation payment,
data reconciliation, benefit administration, contract management, and health
plan and member eligibility management. The Company recently released EZ-CAP
4.0, which operates on Microsoft SQL Server enterprise technology and permits
the use of a central database to concurrently process information for multiple
managed care companies.
The Company considers revenue recognition to be a critical accounting policy
(see Note 1 to the Financial Statements included in Item 8 of this Form 10-K for
a full description of the Company's accounting policies). 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,
12
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. If customization of the software
is required, revenues are recognized on the percentage-of-completion basis over
the period during which customization is performed (generally six to twelve
months). Revenues are recognized from PMPM software license arrangements monthly
over the term of the arrangement. As the healthcare industry and the needs of
our customers become more complex, the number of license sales requiring
customization could increase in the future. The resulting shift to
percentage-of-completion accounting could defer the Company's ability to
recognize revenue and profit in our Healthcare IT Solutions segment in the short
term.
The Company plans to continue efforts to market its software solutions on a PMPM
subscription basis. The pay-as-you-go feature of the PMPM model is attractive to
customers concerned with managing cash flow and broadens the target market for
our products. In addition, the PMPM model provides a more consistent and
predictable cash flow and revenue stream and could have a greater contract value
than a perpetual license sale. This effort to market our products on a PMPM
basis could result in the deferral of revenue, profit and cash flow in our
Healthcare IT Solutions segment in the short term.
General Overview
The Company has grown since its inception, with revenues increasing to $163.1
million in 2001, from $57.9 million in 1996. Revenues from the two largest
strategic customers were $124.9 million and $135.5 million for the years ended
December 31, 2001 and 2000, respectively. The largest strategic customer (IBM)
accounted for 69.2% and 76.0%, and the second largest strategic customer
(Compaq) accounted for 7.4% and 12.8% of revenues for the years ended December
31, 2001 and 2000, respectively. The Company has diversified the types of
services 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, 2001, the Company earned 20.8% of its revenues from data center management.
A decrease in revenues from 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, 2001 and 2000, approximately 26%, and 23% 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.
Engagements that 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, 85% in 2001 and 87% in
2000, 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 2002 with backlog
under long-term contracts of approximately $650 million, of which approximately
$567 million is not expected to be filled in 2002. 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 on 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, which appear
to have been softening, especially with the decline of "dot.com" businesses.
13
While historically 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. As general economic conditions have weakened in
the past year, the trend in the IT industry has shifted from a shortage of labor
to a surplus of labor. The Company is subject to the same general industry
pricing pressures, required efficiency improvements and labor pressures inherent
in the IT services industry when performing engagements. As a result, the
Company has experienced and may continue to experience pricing pressure,
especially from strategic customers. The Company expects to be able to partially
pass along any price reductions to its suppliers. 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) 2001 2000 1999
------------------------------------------------------
Revenues ...................................... $ 163.1 100.0% $ 152.6 100.0% $ 150.2 100.0%
Direct costs .................................. 131.4 80.6 127.9 83.8 131.7 87.7
Write-down of prepaid software licenses ....... 5.1 3.1 -- -- -- --
Selling, general and administrative expenses .. 28.9 17.7 22.7 14.9 16.0 10.7
Write-down of impaired assets and other ....... 3.4 2.1 -- -- -- --
------------------------------------------------------
(Loss) income from operations ................ (5.7) (3.5) 2.0 1.3 2.5 1.7
Interest and other income, net ................ 0.3 0.2 1.1 0.7 0.9 0.6
------------------------------------------------------
(Loss) income before income taxes ............. (5.4) (3.3) 3.1 2.0 3.4 2.3
(Benefit) provision for income taxes........... (1.9) (1.2) 1.3 0.9 1.5 1.0
------------------------------------------------------
Net (loss) income ............................. $ (3.5) (2.1) $ 1.8 1.2 $ 1.9 1.3
------------------------------------------------------
Comparison of the Year Ended December 31, 2001 to the Year Ended December 31,
2000
Revenues
For the year ended December 31, 2001, revenues increased $10.5 million or 6.9%
to $163.1 million from $152.6 million for the same period in 2000. The increase
in revenues for year ended December 31, 2001 was driven by both the Managed IT
Solutions and Healthcare IT Solutions segments.
Revenues from the Managed IT Solutions segment increased $5.6 million to $144.5
million for the year ended December 31, 2001 from $138.9 million for the same
period in 2000. This increase in revenues was due to increases in Application
Solutions revenues, which were partially offset by lower revenues in IT
Infrastructure Solutions.
Revenues from Application Solutions increased $18.0 million or 78.0% to $41.1
million for the year ended December 31, 2001 compared to $23.1 million for the
same period in 2000. The increase in revenues was due primarily to increased
activity in the Application Support and Application Management businesses
attributable to a full year of activity on a project that began in 2000 and
activity under a new contract in 2001. This activity resulted in an increase in
billable headcount by 215 to a total of 500 in 2001. It is anticipated that this
business will continue to have a favorable impact with headcount expected to
increase through May 2002. However, new contracts will have to be won for
headcount to continue to increase. These increases were partially offset by
decreases in Application Development/Integration revenue as a result of fewer
active projects, particularly in software implementation services.
Revenues from IT Infrastructure Solutions decreased by $12.4 million or 10.7% to
$103.4 million for the year ended December 31, 2001 compared to $115.8 million
for the same period in 2000. This decline is primarily due to decreases in
Network and Desktop Management services and Professional Staffing Services
revenues. The decline in Network and Desktop Management services revenues was
due to in-sourcing of services by one customer, and lower pricing and service
levels under its current contract requirements. The decrease in Professional
Staffing Services revenues is due to continued softness in staffing requisitions
from a strategic customer and by the decline in IT staff requisitions as a
result of the slow down in the technology market. This softness is expected to
continue into future periods. Additionally, the Professional Staffing Services
line has experienced and expects to continue to experience pricing pressure from
a strategic customer due to an excess supply of IT professionals, which is
expected to be partially passed through to the Company's suppliers. The Company
is diversifying its customer base in its Managed IT Solutions segment, which is
expected to partially mitigate reliance on strategic customers and diversify
services.
Revenues from the Healthcare IT Solutions segment increased $4.9 million or
35.8% to $18.6 million for the year ended December 31, 2001 compared to $13.7
million for the same period in 2000. The increase in revenue was primarily
attributable to an increase in the number of MC400 perpetual license sales in
2001 and the EZ-CAP acquisition.
15
Direct Costs
Direct costs increased $8.6 million to $136.5 million for the year ended
December 31, 2001 from $127.9 million in the same period in 2000. Direct costs
were stable as a percentage of revenues at 84% for the years ended December 31,
2001 and 2000.
The increase in direct costs for the year ended December 31, 2001 was affected
by the write-down of $5.1 million related to prepaid software licenses, which
are attributable to the Application Solutions division of the Managed IT
Solutions segment. Excluding the write-down of prepaid software licenses, the
ratio of direct costs to revenues for the Company improved to 81% for the year
ended December 31, 2001 compared to 84% for the same period in 2000. The
improvement in direct costs as a percent of revenue for the year ended December
31, 2001, excluding the write-down, is due to improvements in profitability in
the Application Solutions division of the Managed IT Solutions segment and
improvements in profitability in the Healthcare IT Solutions segment.
Excluding the write-down of $5.1 million related to prepaid software licenses,
the Managed IT Solutions segment direct costs increased $0.2 million to $119.1
million for the year ended December 31, 2001 compared to $118.9 million for the
same period last year. Direct costs were relatively stable due to increases in
the Application Solutions division being offset by a decrease in direct costs in
the IT Infrastructure Solutions division. The increases in Application Solutions
direct costs reflect the overall increase in business activity in the segment.
Excluding the write-down of $5.1 million, the Application Solutions division
gross profit increased to $6.9 million for the year ended December 31, 2001 from
$1.8 million for the same period in 2000. The improvement in profitability is
the result of a more favorable mix in billable to non-billable headcount, and an
overall increase in billable headcount (from 285 in December 2000 to 500 in
December 2001) in the Application Support and Application Management businesses.
The decrease in direct costs in IT Infrastructure Solutions reflects the overall
decrease in activity in the division as well as improvements in the management
of direct labor expenses and savings from the reduction of overhead personnel.
HealthCare IT Solutions' direct costs for the year ended December 31, 2001
increased $3.3 million to $12.3 million compared to $9.0 million for the same
period in 2000. HealthCare IT Solutions' gross profit increased to $6.2 million
for the year ended December 31, 2001 compared to $4.7 million for the same
period in 2000. The increase in direct costs was primarily the result of the
purchase of EZ-CAP in 2001. Also affecting the increase in direct costs was the
expansion of the Healthcare IT Solutions management team and customer support
services personnel in the second half of 2001 to support expected future sales
growth. Increased profitability is due to an increase in MC400 perpetual license
sales in 2001.
Selling, General and Administrative Expenses
For the years ended December 31, 2001 and 2000, selling, general and
administrative expenses (SGA) were $28.9 million and $22.7 million or 18% and
15% of revenues, respectively. The increase in SGA is the result of increases in
both the Managed IT Solutions and Healthcare IT Solutions segments. The increase
in the Managed IT Solutions segment is primarily the result of growth in the
Application Support and Application Management businesses. In addition, the
Professional Staffing Services business SGA increased, reflecting a full year of
results from an acquisition made late in 2000. In the Healthcare IT Solutions
segment, the increase is primarily a result of an increase in management staff
to facilitate growth and the EZ-CAP acquisition.
Also affecting the increase in SGA, for the year ended December 31, 2001, was an
increase in bonus accrued under a management incentive plan and an increase in
bad debt expense. Bad debt expense increased due to the bankruptcy of a
HealthCare customer and as a result of weakening economic conditions. The
Company expects future selling, general and administrative expenses to grow less
rapidly as a percentage of revenues as expenses stabilize and revenues increase.
16
Write-down of Impaired Assets and Other
During 2001, the Company incurred charges for the write-down of impaired assets
and other costs totaling $3.3 million. The charges included the write-down of
goodwill of $1.3 million, the write-down of certain cost basis and other
investments of $1.0 million, the write-down of internal-use software of $0.9
million, and other of $0.1 million. There were no such write-downs or other
charges in 2000.
In connection with an internal business unit realignment in the last quarter of
2001, the Company performed an impairment analysis of certain 1998 acquisitions.
As a result of this analysis, the Company wrote-off approximately $1.3 million
of goodwill, which represented the excess of the carrying value of these assets
as compared to the fair value of the assets as determined in accordance with
SFAS 121.
During December 2000, the Company made an investment in an entity in which the
Company's Chief Executive Officer is a member of the Board of Directors. Based
on this entity's financial condition, the Company determined that its investment
in this entity was other-than-temporarily impaired. Accordingly, the investment
of approximately $0.5 million and a note receivable of approximately $0.1
million were written-off during 2001. In addition, an investment of
approximately $0.4 million in a venture with a third party was written-off after
the third party failed to secure a significant contract.
During 2001, the Company began implementation of a new enterprise-wide
information system. Certain financial modules, which were replaced by the new
system in 2001, were taken out of service resulting in a write-off of
approximately $0.9 million.
Interest and Other Income and Provision for Income Taxes
For the year ended December 31, 2001, net interest and other income decreased to
$0.3 million from $1.1 million for the same period in 2000. The decrease is
primarily due to lower interest rates on invested cash and an increase in
interest expense related to the term loan used to finance the EZ-CAP
acquisition. Due to the loss before taxes in 2001, the Company had a benefit
from income taxes of $1.9 million compared to a provision of $1.3 million in
2000. The Company's effective tax rate was 35.1% for the benefit in 2001 as
compared to 42.5% for the provision in 2000. The lower effective tax rate in
2001 is due to the non-deductibility of certain asset impairment charges
recorded in 2001.
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 an increase in the Healthcare IT Solutions segment. Revenue in the
Managed IT Solutions segment was stable as increases in the Application
Solutions division were offset by decreases in the IT Infrastructure Solutions
division as compared to 1999.
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 market
Healthcare IT Solutions' products under 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.
Application Solutions revenues increased $14.7 million or 176.6% 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 Application Support and Application Management businesses compared with
1999. The number of billable personnel continued to increase on new and existing
contracts throughout 2000,
17
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.
IT Infrastructure Solutions revenues decreased by $15.4 million or 11.8% to
$115.9 million for the year ended December 31, 2000 compared to $131.2 million
for the year ended December 31, 1999. The Data Center Management and Network and
Desktop Management Services businesses suffered decreases primarily due 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 $8.0 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.
Decreases in revenue in the Professional Staffing Services business 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.
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
84% for the year ended December 31, 2000 versus 88% 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 improvements in profitability in the Application Solutions division of the
Managed IT Solutions segment and the Healthcare IT Solutions segment.
In the Application Solutions division, gross profit increased by $6.0 million to
$1.8 million for the year ended December 31, 2000 from $(4.2) million for the
year ended December 31, 1999. The improvement in profitability was a result of
the increased levels of business in 2000 compared to most of 1999 when this
division was ramping up its activity.
In the Healthcare IT Solutions segment, gross profit increased by $2.2 million
to $4.7 million for the year ended December 31, 2000 from $2.5 million for the
year ended December 31, 1999. The improvement in profitability was 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. 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 expected 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 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. The
Company's effective tax rate was approximately 42.5% for the year ended December
31, 2000. The Company's 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 took to minimize the effect of foreign taxes.
18
Liquidity and Capital Resources
Cash and cash equivalents were $9.1 million as of December 31, 2001, versus
$11.8 million as of December 31, 2000. Cash provided by operations was $8.2
million for the year ended December 31, 2001 compared with $4.5 million of cash
used in operations in 2000. The increase in cash provided by operations was
primarily due to an increase in accrued compensation and benefits and an
increase in income from operations after giving effect for non-cash charges
including depreciation and amortization, the write-down of prepaid software
licenses, the write-down of impaired assets and other, and bad debt expense.
These increases in cash flows were partially offset by an increase in net
accounts receivable and deferred income taxes. Net accounts receivable were
impacted by reimbursable costs from a contract with a strategic customer in 2001
and HealthCare IT Solutions license sales late in 2001.
Cash used in investing activities was $11.5 million, which was primarily for the
purchase of EZ-CAP, the purchase of computers and office equipment used
primarily in the Company's Application Solutions business, and certain software
associated with the Healthcare IT Solutions segment. The Company's business
operations will require additional capital expenditures as the Company continues
to grow its service offerings.
Financing activities provided cash of $0.9 million in 2001. The proceeds of a
term note used to finance the EZ-CAP acquisition were offset by the payment of
the revolving credit agreement in the amount of $6.0 million, the repurchase of
common stock under the Company's stock repurchase program of $1.7 million, and
payments under capital lease obligations totaling $0.8 million.
On August 29, 2001, the Company amended its credit agreement dated June 30, 1999
(the "Amendment"). The Amendment provides a $15 million revolving line of credit
("Revolver") and a $9 million term loan facility. The Revolver provides for a
commitment fee of 0.375% to 0.500% of the unused balance and interest at the
prime rate or, at the Company's option, at LIBOR plus a risk-adjusted premium.
The Revolver matures on September 30, 2003. Draws under the Revolver in cash or
letters of credit are limited to a formula driven borrowing base determined by
the levels of certain receivables, as defined in the Amendment. The Amendment's
term loan facility was drawn on in full to fund the EZ-CAP acquisition. There
was $8,550,000 outstanding on the term loan at December 31, 2001, which bears
interest at LIBOR plus a risk-adjusted premium, totaling 3.9% at December 31,
2001. The term loan facility matures on September 30, 2006 and is due in sixty
equal monthly principal payments, plus interest. The Amendment also modified
certain required financial covenants. There were no borrowings outstanding under
the Revolver as of December 31, 2001. There was approximately $1,000,000 and
$330,000 of letters of credit outstanding under the Revolver as of December 31,
2001 and 2000, respectively.
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 or on terms and conditions
acceptable to the Company.
Recent Accounting Pronouncements
Effective January 1, 2001, the Company adopted Statement of Financial Accounting
Standard No. 133 "Accounting for Derivative Instruments and Hedging Activities,"
as amended by Statement of Financial Accounting Standard No. 138," Accounting
for Certain Derivative Instruments and Certain Hedging Activities." SFAS No.
133, as amended, establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. The statement requires that entities
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The Company's
use of derivatives is currently limited to an interest rate swap on its floating
rate term loan. There was no impact of adopting this standard on January 1,
2001, as the Company held no derivatives at that time.
19
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations."
SFAS 141 requires the purchase method of accounting for business combinations
initiated after June 30, 2001 and eliminates the pooling-of-interests method.
The Company does not believe that the adoption of SFAS 141 will have a
significant impact on its financial statements.
In July 2001, the FASB also issued Statement of Financial Accounting Standards
No. 142 ("SFAS 142"). "Goodwill and Other Intangible Assets", which is effective
January 1, 2002. SFAS 142 requires, among other things, the discontinuance of
goodwill amortization. In addition, the Standard includes provisions for the
reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill and
the identification of reporting units for purposes of assessing potential future
impairments of goodwill. SFAS 142 also requires the Company to complete a
transitional goodwill impairment test six months from the date of adoption. The
Company is currently assessing but has not yet determined the impact SFAS 142
will have on its financial position and results of operations.
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("FASB
144"), which addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. FASB 144 supersedes both FASB Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" and the accounting and reporting provisions of APB Opinion No.
30, "Reporting the Results of Operation - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," for the disposal of a Segment of a Business (as
previously defined in that opinion). FASB 144 also amends ARB No. 51,
"Consolidated Financial Statements" to eliminate the exception to consolidation
for a subsidiary for which control is likely temporary. The provisions of FASB
144 are required to be applied with fiscal years beginning after December 15,
2001. The Company is currently assessing but has not yet determined the impact
FASB 144 will have on its financial position and results of operations.
Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's primary market risk is foreign currency exposure and changing
interest rates. 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 during the three years
ended December 31, 2001. The Company believes its foreign currency risk is
related primarily to the difference between amounts the Company receives and
disburses in Canada in U.S. dollars from U.S. dollar denominated contracts. The
Company's foreign currency risk will increase with the growth of its business.
The Company's interest rate risk is related to the variable rate on amounts
outstanding on the Company's credit agreement. Amounts outstanding on the
Company's term loan bear interest at LIBOR plus a risk-adjusted premium,
totaling 3.9% at December 31, 2001.
On October 31, 2001 the Company, to comply with the terms of its credit
agreement, entered into an interest rate swap agreement effectively converting
the interest rate from variable to fixed on 63.33% of the principal amount
outstanding on the term loan. The swap agreement is for a period of 4 years and
fixes the variable portion of the interest rate on the term loan to 2.67%
through October 2002, 4.09% through October 2003, 5.22% through 2004 and 5.72%
through 2005. As of December 31, 2001, the notional amount of the term loan
covered by the swap agreement was $5,600,000 and the market value of the swap
was a liability of $3,124. The interest rate under this swap agreement,
including the risk-adjusted premium, was 4.67% at December 31, 2001.
Through December 31, 2001, the Company has not entered into any significant
foreign currency forward exchange contracts or other derivative financial
instruments to hedge the effects of potential adverse fluctuations in foreign
currency exchange rates or interest rates, other than described herein; however,
the Company periodically reviews its exposure to foreign currency and interest
rate risk and may take action to limit its exposure if deemed appropriate.
20
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 Page
- ------------------------------ ----
Financial Statements:
Independent Auditors' Report........................................... 22
Consolidated Statements of Operations and Comprehensive Income for the
years ended December 31, 2001, 2000, and 1999...................... 23
Consolidated Balance Sheets as of December 31, 2001 and 2000........... 24
Consolidated Statements of Cash Flows for the years ended December 31,
2001, 2000 and 1999.............................................. 25
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 2001, 2000 and 1999................................. 26
Notes to Consolidated Financial Statements............................. 27
Schedules 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.
21
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
of OAO Technology Solutions, Inc.:
We have audited the accompanying consolidated balance sheets of OAO Technology
Solutions, Inc. and subsidiaries as of December 31, 2001 and 2000, and the
related consolidated statements of operations and comprehensive income,
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 2001. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on the
financial statements 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, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States of America.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
McLean, VA
February 11, 2002
22
OAO TECHNOLOGY SOLUTIONS, INC.
Consolidated Statements of Operations and Comprehensive Income
(in thousands, except per share amounts)
For the years ended December 31,
-----------------------------------
2001 2000 1999
-----------------------------------
Revenues $ 163,100 $ 152,585 $ 150,162
Direct costs 131,446 127,905 131,664
Write-down of prepaid software licenses (Note 6) 5,085 -- --
-----------------------------------
26,569 24,680 18,498
Selling, general and administrative expenses 28,918 22,675 16,014
Write-down of impaired assets and other (Note 8) 3,308 -- --
-----------------------------------
(Loss) income from operations (5,657) 2,005 2,484
Interest and other income (expense):
Interest income 504 1,027 1,137
Interest expense (249) (35) (269)
Other (4) 130 53
-----------------------------------
(Loss) income before income taxes (5,406) 3,127 3,405
(Benefit) provision for income taxes (1,893) 1,329 1,554
-----------------------------------
Net (loss) income (3,513) 1,798 1,851
Other comprehensive (loss) income :
Net change in fair value of cash flow hedge (3) -- --
Foreign currency translation adjustment (325) (271) 186
-----------------------------------
Comprehensive (loss) income $ (3,841) $ 1,527 $ 2,037
===================================
Net (loss) income per common share:
Basic $ (0.19) $ 0.10 $ 0.11
===================================
Diluted $ (0.19) $ 0.10 $ 0.11
===================================
Weighted average number of shares outstanding:
Basic 18,935 17,883 16,856
===================================
Diluted 18,935 18,484 17,362
===================================
The accompanying notes are an integral part of these consolidated financial
statements.
23
OAO TECHNOLOGY SOLUTIONS, INC.
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
As of December 31,
--------------------
2001 2000
--------------------
ASSETS
Current assets:
Cash and cash equivalents $ 9,060 $ 11,779
Accounts receivable, net 36,602 31,813
Note receivable, OAO Corporation 1,714 2,160
Deferred income taxes 4,040 1,093
Income tax receivable 358 754
Other current assets 1,305 6,959
--------------------
Total current assets 53,079 54,558
Property and equipment, net 5,220 5,778
Purchased and developed software for sale, net 1,737 2,279
Deposits and other assets 1,355 1,943
Deferred income taxes 898 261
Intangible assets, net 12,268 4,758
--------------------
Total assets $ 74,557 $ 69,577
====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Borrowings under revolving credit agreement $ -- $ 6,000
Term loan, current portion 1,800 --
Accounts payable 6,893 6,464
Accrued expenses 5,108 4,552
Accrued compensation and benefits 10,513 5,993
Income tax payable 460 523
Unearned revenue 2,022 959
Current portion of capital lease obligations 959 610
--------------------
Total current liabilities 27,755 25,101
Capital lease obligations, net of current portion and other 1,644 1,234
Term loan, net of current portion 6,753 --
Commitments and contingencies
Shareholders' 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;
18,702,710 and 18,648,765 shares issued and outstanding
as of December 31, 2001 and 2000, respectively 187 186
Additional paid-in capital 41,703 42,725
Deferred compensation -- (25)
Accumulated other comprehensive net loss (848) (520)
Shareholder receivable (2,933) (2,933)
Retained earnings 296 3,809
--------------------
Total shareholders' equity 38,405 43,242
--------------------
Total liabilities and shareholders' equity $ 74,557 $ 69,577
====================
The accompanying notes are in integral part of these consolidated financial
statements.
24
OAO TECHNOLOGY SOLUTIONS, INC.
Consolidated Statements of Cash Flows
(in thousands)
For the years ended December 31,
--------------------------------
2001 2000 1999
--------------------------------
Cash Flows from Operating Activities:
Net (loss) income $ (3,513) $ 1,798 $ 1,851
Adjustment to reconcile net (loss) income to net
cash provided by (used in) operating activities:
Depreciation and amortization 4,418 3,326 2,164
Write-down of prepaid software licenses 5,085 -- --
Write-down of impaired assets and other 3,308 -- --
Bad debt expense 2,153 755 474
Tax benefit related to exercise of stock options -- 346 101
Deferred income taxes (3,584) (323) 4
Change in assets and liabilities:
Accounts receivable (6,029) (6,468) 115
Income tax receivable 396 180 403
Other current assets 666 (714) (3,243)
Deposits and other assets (241) (696) (76)
Accounts payable (368) (2,355) 2,274
Accrued expenses 556 640 (16)
Accrued compensation and benefits 4,520 (1,460) 2,025
Unearned revenue 439 203 252
Other long-term liabilities 500 279 --
Income tax payable (63) (52) 605
--------------------------------
Net cash provided by (used in) operating activities 8,243 (4,541) 6,933
--------------------------------
Cash Flows from Investing Activities:
Purchase of businesses, net of cash acquired (9,037) (546) (289)
Expenditures for property and equipment (2,302) (3,479) (1,707)
Repayments of notes receivable -- 360 --
Capitalized software costs (194) (1,097) (1,682)
Other assets -- (1,000) --
--------------------------------
Net cash used in investing activities (11,533) (5,762) (3,678)
--------------------------------
Cash Flows from Financing Activities:
Revolving credit agreement, net (6,000) 6,000 --
Proceeds from exercises of stock options and employee stock purchase plan 646 1,641 1,277
Repurchase of common stock (1,667) -- --
Deferred financing costs (136) -- --
Repayments of capital lease obligations (809) (148) (740)
Proceeds from sale-leaseback 312 1,584 --
Proceeds from term loan 9,000 -- --
Repayments of term loan (450) -- --
--------------------------------
Net cash provided by financing activities 896 9,077 537
--------------------------------
Effect of exchange rate changes on cash (325) (137) (265)
--------------------------------
Net (decrease) increase in cash and cash equivalents (2,719) (1,363) 3,527
Cash and cash equivalents, beginning of year 11,779 13,142 9,615
--------------------------------
Cash and cash equivalents, end of year $ 9,060 $ 11,779 $ 13,142
================================
The accompanying notes are an integral part of these consolidated financial
statements.
25
OAO TECHNOLOGY SOLUTIONS, INC.
Consolidated Statements of Shareholders' Equity
(in thousands)
For the years ended December 31, 2001, 2000 and 1999
Accumulated
Common Stock Additional Other Total
-------------------- Paid-in Deferred Comprehensive Shareholder Retained Shareholders'
Shares Amount Capital Compensation Net Loss Receivable Earnings Equity
Balance, January 1, 1999 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
----------------------------------------------------------------------------------------------
Net loss -- -- -- -- -- -- (3,513) (3,513)
Exercise of stock options 9 1 15 -- -- -- -- 16
Amortization of
deferred compensation -- -- -- 25 -- -- -- 25
Shares issued for
employee stock purchase plan 741 7 623 -- -- -- -- 630
Repurchase of common stock (696) (7) (1,660) -- -- -- -- (1,667)
Change in fair value of
cash flow hedge -- -- -- -- (7) -- -- (7)
Cash flow hedge loss
reclassified to earnings -- -- -- -- 4 -- -- 4
Foreign currency
translation adjustment -- -- -- -- (325) -- -- (325)
----------------------------------------------------------------------------------------------
Balance, December 31, 2001 18,703 $ 187 $ 41,703 $ -- $ (848) $ (2,933) $ 296 $ 38,405
----------------------------------------------------------------------------------------------
The accompanying notes are in integral part of these consolidated financial
statements.
26
OAO TECHNOLOGY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
1. Summary of Significant Accounting Policies
Description of the Company
OAO Technology Solutions, Inc. ("the Company" or "OAOT") is a global provider of
information technology services that address the enterprise-wide challenges of
Fortune 1000 companies, mid-market organizations, health benefit organizations,
and the public sector. 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 two business segments: Managed
IT Solutions and Healthcare IT Solutions.
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 various contracts, primarily to large
commercial customers. Revenue under fixed-price contracts is recorded under the
percentage-of-completion method based on costs incurred in relation to estimated
total costs. Revenues under time-and-materials contracts are recorded at the
contracted rates plus other direct costs as they are incurred. Service revenues
are generally recognized ratably over the period of the related contract. Losses
on contracts, if any, 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. If customization of the software is required, revenues are
recognized on the percentage-of-completion basis over the period during which
customization is performed (generally six to twelve months).
Revenues are recognized from per member, per month (PMPM) software license
arrangements monthly over the term of the arrangement. 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.
27
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 at the balance sheet dates are included as a component of
accumulated other comprehensive income or loss.
Cash and Cash Equivalents
The Company considers all securities with a maturity of three months or less at
the date of purchase to be cash equivalents. At December 31, 2001 and 2000, the
Company's cash equivalents consisted of overnight repurchase agreements and
demand deposits. Cash and cash equivalents are stated at cost, which
approximates market value.
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 development costs are amortized at the greater of the amount
computed using either (a) the straight-line method over the estimated economic
life of the product, commencing with the date the product is first available for
general release or (b) the ratio that current gross revenue bears to total
current and anticipated future gross revenue. Generally, an economic life of 3
years is assigned to capitalized software development costs. Amortization of
such costs was $737,000, $414,000 and $86,000 for the years ended December 31,
2001, 2000 and 1999, respectively.
Intangible Assets
The Company's intangible assets consisted of the following as of December 31 (in
thousands):
2001 2000
------------------------
Goodwill $ 10,005 $ 6,665
Less accumulated amortization (1,417) (1,907)
------------------------
Goodwill, net 8,588 4,758
------------------------
Software 1,800 --
Customer list 2,100 --
Less accumulated amortization (220) --
------------------------
Identifiable intangibles, net 3,680 --
------------------------
Intangible assets, net $ 12,268 $ 4,758
========================
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. Software
and customer list represent the identifiable intangibles associated with the
EZ-CAP acquisition (see Note 3). Software and customer list are amortized on a
straight-line basis over their estimated useful lives of 5 and 7 years,
respectively. Amortization expense was $836,000, $769,000, and $751,000 for the
years ended December 31, 2001, 2000 and 1999, respectively. In accordance with
Statement of Financial Accounting Standards No. 142 "Goodwill and Other
Intangible Assets", goodwill resulting from acquisitions subsequent to July 1,
2001 was not amortized. In 2001, the Company wrote-off approximately $1.3
million of goodwill, which represented the excess of the carrying value of these
assets as compared to the fair value of the assets as determined in accordance
with SFAS 121. See Note 8 for more information.
28
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," ("SFAS 121") 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.
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, revolving debt, and term loan 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 whose combined revenues exceed 10% of
total revenue. One strategic customer accounted for 69.2%, 76.0% and 75.7% of
total revenues for the years ended December 31, 2001, 2000 and 1999,
respectively. The other strategic customer accounted for 7.4%, 12.8% and 15.9%
of total revenues for the years ended December 31, 2001, 2000 and 1999,
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 30.2% and
16.8%, respectively, of accounts receivable as of December 31, 2001 and 60.9%
and 9.5%, respectively, of accounts receivable as of December 31, 2000. The
Company did not have any other customers with balances in excess of 10.0% of
accounts receivable as of December 31, 2001 or 2000. 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 repurchase agreements with a commercial
bank. As of December 31, 2001 and 2000, the Company had invested approximately
$7.3 million and $10.5 million in overnight repurchase agreements with this
bank. The bank provides underlying collateral consisting of U.S. government
securities, which fully secures the carrying value of the 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
Effective January 1, 2001, the Company adopted Statement of Financial Accounting
Standard No. 133 "Accounting for Derivative Instruments and Hedging Activities,"
as amended by Statement of Financial Accounting Standard No. 138," Accounting
for Certain Derivative Instruments and Certain Hedging Activities." SFAS No.
133, as amended, establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. The statement requires that entities
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The Company's
use of derivatives is currently limited to an interest rate swap on its floating
rate term loan. There was no impact of adopting this standard on January 1,
2001, as the Company held no derivatives at that time.
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations."
SFAS 141 requires the purchase method of accounting for business combinations
initiated after June 30, 2001 and eliminates the pooling-of-interests method.
The Company does not believe that the adoption of SFAS 141 will have a
significant impact on its financial statements.
In July 2001, the FASB also issued Statement of Financial Accounting Standards
No. 142 ("SFAS 142"). "Goodwill and Other Intangible Assets", which is effective
January 1, 2002. SFAS 142 requires, among other things, the discontinuance of
goodwill amortization. In addition, the Standard includes provisions for the
reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill and
29
the identification of reporting units for purposes of assessing potential future
impairments of goodwill. SFAS 142 also requires the Company to complete a
transitional goodwill impairment test six months from the date of adoption. The
Company is currently assessing but has not yet determined the impact SFAS 142
will have on its financial position and results of operations.
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("FASB
144"), which addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. FASB 144 supersedes both FASB Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" and the accounting and reporting provisions of APB Opinion No.
30, "Reporting the Results of Operation - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," for the disposal of a Segment of a Business (as
previously defined in that opinion). FASB 144 also amends ARB No. 51,
"Consolidated Financial Statements" to eliminate the exception to consolidation
for a subsidiary for which control is likely temporary. The provisions of FASB
144 are required to be applied with fiscal years beginning after December 15,
2001. The Company is currently assessing but has not yet determined the impact
FASB 144 will have on its financial position and results of operations.
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.
Significant items subject to such estimates and assumptions include the carrying
amount of long-lived assets, the allowance for doubtful accounts receivable, the
valuation of financial instruments, and contingencies (see Note 16).
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
(in thousands)
For the years ended December 31,
2001 2000 1999
-----------------------------------
Cash paid during the year for:
Interest $ 216 $ 68 $ 52
Income taxes $ 1,468 $ 1,309 $ 1,494
Supplemental non-cash investing and financing activities:
Property and equipment purchased under capital leases $ 756 $ -- $ --
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. All acquisitions were accounted for under the purchase method of
accounting. The results of each of the acquired companies have been included in
the operations of the Company from the effective date of the acquisition. The
Company's acquisitions are as follows:
EZ-CAP Acquisition
On August 31, 2001, the Company closed on the acquisition (the "Acquisition") of
EZ-CAP, a division of QuadraMed Corporation (QuadraMed). The purchase
consideration was $9,000,000 cash and contingent consideration in the form of
additional cash payments to the seller not to exceed $5,000,000 during the
18-month period subsequent to the closing date, subject to achieving certain
performance targets.
30
The assets acquired and liabilities assumed as part of the transaction were
recorded at estimated fair values. The purchase price allocation resulted in
$3.9 million for identifiable intangible assets including software and customer
list and the excess purchase price of $5.8 million over the fair value of assets
acquired was allocated to goodwill.
The following unaudited pro forma financial information for the years ended
December 31, 2001 and 2000 assumes the Acquisition occurred as of the beginning
of the respective year, after giving effect to certain adjustments, including
interest expense and the amortization of intangible assets. The EZ-CAP financial
amounts used to prepare the pro forma information were derived from the
historical books and records of QuadraMed and are not necessarily indicative of
the operating results had the EZ-CAP division operated on a stand-alone basis.
This pro forma information has been prepared for comparative purposes only and
is not necessarily indicative of the results of operations that may occur in the
future or that would have occurred if the business combination had been in
effect on the dates indicated.
(in thousands, except per share amounts) Years Ended
December 31,
---------------------------
2001 2000
---------------------------
Revenues $ 169,395 $ 161,445
Net (loss) income $ (3,297) $ 1,749
Basic (loss) income per share $ (0.17) $ 0.10
Diluted (loss) income per share $ (0.17) $ 0.09
NetEffect Europe, Ltd. Acquisition
On August 31, 2001, the Company purchased the assets of NetEffect Europe, Ltd.
The acquired business, located in Slough, England, expands the Company's
information technology consulting services and provides additional client
relations. The purchase resulted in goodwill of approximately $130,000. The
purchase price included contingent consideration in the form of additional cash
payments to the seller not to exceed $1,000,000 during the 24-month period
subsequent to the closing date, subject to achieving certain performance
targets. This transaction was not material to the Company's financial position
or results of operations and is excluded from the pro forma financial
information presented above.
OAO/ICOR UK Ltd. Acquisition
On 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. The Company ceased applying the
equity method of accounting on the effective date of the acquisition.
31
4. Net (Loss) Income Per Common Share
(in thousands, except per share amounts)
For the years ended December 31,
2001 2000 1999
-------------------------------
Basic (loss) earnings per share:
Net (loss) income $ (3,513) $ 1,798 $ 1,851
Weighted average number of shares 18,935 17,883 16,856
-------------------------------
Basic (loss) earnings per share $ (0.19) $ 0.10 $ 0.11
===============================
Diluted (loss) earnings per share:
Net (loss) income $ (3,513) $ 1,798 $ 1,851
Weighted average number of shares and equivalents:
Weighted average shares 18,935 17,883 16,856
Shares issuable upon exercise of stock options -- 601 506
-------------------------------
Total weighted average shares and equivalents 18,935 18,484 17,362
-------------------------------
Diluted (loss) earnings per share: $ (0.19) $ 0.10 $ 0.11
===============================
The dilutive effect of shares issuable upon exercise of stock options has been
excluded from the diluted earnings (loss) per share computation for the year
ended December 31, 2001 as inclusion of such shares would be anti-dilutive.
5. Accounts Receivable
As of December 31, the components of accounts receivable consisted of the
following (in thousands):
2001 2000
-------------------
Amounts billed $ 28,635 $ 26,409
Amounts unbilled 9,543 7,049
Amounts unbilled pending receipt of contractual documents
authorizing billing - 84
Allowance for doubtful accounts (1,576) (1,729)
-------------------
Total $ 36,602 $ 31,813
===================
The allowance for doubtful accounts activity for the years ended December 31 is
as follows (in thousands):
2001 2000 1999
--------------------------------
Balance at beginning of year $ 1,729 $ 1,507 $ 1,669
Provision for losses charged to expense 2,153 755 474
Charge-offs, net of recoveries (2,306) (533) (636)
--------------------------------
Balance at end of year $ 1,576 $ 1,729 $ 1,507
================================
6. Other Current Assets
Other current assets included software licenses for resale of zero at December
31, 2001 and $5.1 million at December 31 2000. 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.
32
During 2001, the Company wrote-off $5.1 million representing all presently on
hand and future purchase commitments to acquire Siebel software licenses. The
Company filed suit against Siebel for breach of the implied duty of good faith
and fair dealing under these agreements. See Note 16 for more information
regarding this suit.
7. Property and Equipment
Property and equipment consisted of the following as of December 31 (in
thousands):
2001 2000
---------------------
Furniture and equipment $ 6,853 $ 6,929
Leasehold improvements 1,141 522
Internal-use software 2,805 2,877
---------------------
10,799 10,328
Less accumulated depreciation and amortization (5,579) (4,550)
---------------------
Property and equipment, net $ 5,220 $ 5,778
=====================
The Company leases furniture and equipment that are accounted for as capital
leases. Amounts related to capital leased assets included in property and
equipment at December 31, 2001 and 2000 are furniture and equipment of
$3,041,000 and $2,103,000, respectively and accumulated amortization of
$1,277,000 and $447,000, respectively.
8. Write-Down of Impaired Assets and Other
The following represents a detail of the write-down of impaired assets and other
for the year ended December 31, 2001 (in thousands):
Goodwill $ 1,272
Cost basis and other investments 990
Internal-use software 896
Other 150
--------
Total write-down of impaired assets and other $ 3,308
========
In connection with an internal business unit realignment in the last quarter of
2001, the Company performed an impairment analysis of certain 1998 acquisitions.
As a result of this analysis, the Company wrote-off approximately $1.3 million
of goodwill, which represented the excess of the carrying value of these assets
as compared to the fair value of the assets as determined in accordance with
SFAS 121.
During December 2000, the Company made an investment in an entity in which the
Company's Chief Executive Officer is a member of the Board of Directors. Based
on this entity's financial condition, the Company determined that its investment
in this entity was other-than-temporarily impaired. Accordingly, the investment
of approximately $0.5 million and a note receivable of approximately $0.1
million were written-off during 2001. In addition, an investment of
approximately $0.4 million in a venture with a third party was written-off after
the third party failed to secure a significant contract.
During 2001, the Company began implementation of a new enterprise-wide
information system. Certain financial modules, which were replaced by the new
system in 2001, were taken out of service resulting in a write-off of
approximately $0.9 million.
33
9. Credit Agreements
On August 29, 2001, the Company amended its credit agreement dated June 30, 1999
(the "Amendment"). The Amendment provides a $15 million revolving line of credit
("Revolver") and a $9 million term loan facility. The Revolver provides for a
commitment fee of 0.375% to 0.500% of the unused balance and interest at the
prime rate or, at the Company's option, at LIBOR plus a risk-adjusted premium.
The Revolver matures on September 30, 2003. Draws under the Revolver in cash or
letters of credit are limited to a formula driven borrowing base determined by
the levels of certain receivables, as defined in the Amendment. The Amendment's
term loan facility was drawn on in full to fund the EZ-CAP acquisition (see Note
3). There was $8,550,000 outstanding on the term loan at December 31, 2001,
which bears interest at LIBOR plus a risk-adjusted premium, totaling 3.9% at
December 31, 2001. The term loan facility matures on September 30, 2006 and is
due in sixty equal monthly principal payments, plus interest. The Amendment also
modified certain required financial covenants. There were no borrowings
outstanding under the Revolver as of December 31, 2001 and $6.0 million was
outstanding as of December 31, 2000 bearing interest at a rate of 9.5 %. There
was approximately $1,000,000 and $330,000 of letters of credit outstanding under
the Revolver as of December 31, 2001 and 2000, respectively.
On October 31, 2001, to comply with the terms of the Amendment, the Company
entered into an interest rate swap agreement, effectively converting the
interest rate from variable to fixed on 63.33% of the principal amount
outstanding on the term loan. The swap agreement is being accounted for as a
cash flow hedge, in accordance with Statement of Financial Accounting Standard
No. 133, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities". The swap agreement is for a period of 4 years and fixes the
variable portion of the interest rate on the term loan to 2.67% through October
2002, 4.09% through October 2003, 5.22% through 2004 and 5.72% through 2005. As
of December 31, 2001, the notional amount of the term loan covered by the swap
agreement was $5,600,000 and the fair value was a liability of $3,124. The fair
value of the swap agreement is reflected on the balance sheet in Term loan, net
of current portion. Changes in fair value of the swap are reflected as
adjustments to shareholders' equity through other comprehensive income. The
interest rate under this swap agreement, including the risk-adjusted premium,
was 4.67% at December 31, 2001.
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, 2001 are as follows (in thousands):
Future minimum lease payments: Capital Operating
Year ended December 31: Leases Leases
------------------------
2002 $ 1,055 $ 4,709
2003 455 4,468
2004 404 3,850
2005 63 3,243
2006 - 2,518
Thereafter - 245
---------- ---------
1,977 $ 19,033
=========
Less amount representing interest (153)
----------
Present value of lease payments 1,824
Current portion of capital lease obligations 959
----------
Noncurrent portion of capital lease obligations $ 865
==========
Capital lease obligations have effective interest rates that range from 7.8% to
9.5% and have aggregate monthly payments of approximately $88,000 and $60,000,
at December 31, 2001 and 2000, 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, 2001, 2000 and 1999 was approximately $3,638,000,
$2,076,000 and $1,707,000, respectively. During the years ended December 31,
2001 and 2000, the Company entered into capital leases related to
sales-leaseback transactions for property and equipment with a book value of
approximately $312,000 and $1,584,000, respectively.
34
11. Income Taxes
The Company's (benefit) provision for income taxes for the years ended December
31 consisted of the following (in thousands):
2001 2000 1999
----------------------------
Current:
Federal $ 910 $ 150 $ 615
Foreign 353 1,115 605
State 281 41 128
----------------------------
Total current provision 1,544 1,306 1,348
Deferred:
Federal (2,829) 19 167
State (608) 4 39
----------------------------
Total deferred (benefit) provision (3,437) 23 206
----------------------------
Total (benefit) provision $(1,893) $ 1,329 $ 1,554
============================
The (benefit) provision for income taxes differs from the amount computed by
applying the statutory federal income tax rate as follows:
2001 2000 1999
---------------------
Expected statutory amount (34.0)% 34.0 % 34.0%
Nondeductible expense 5.4 3.1 0.8
Foreign income taxes (1.9) 3.9 7.7
State income taxes, net of federal benefit (4.6) 1.4 3.1
Other -- 0.1 --
---------------------
Effective rate (35.1)% 42.5% 45.6%
=====================
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 are as follows (in thousands):
2001 2000
-----------------
Deferred tax assets:
Bad debt $ 1,166 $ 674
Accrued employee benefits 341 212
Goodwill 568 261
Charitable contributions -- 85
Inventory basis difference 1,983 --
Deferred compensation 195 --
Depreciation 330 --
Other expense items 355 195
-----------------
Total deferred tax assets 4,938 1,427
Deferred tax liabilities -- (73)
-----------------
Net deferred tax assets $ 4,938 $ 1,354
=================
Deferred tax assets and liabilities are reflected on the Company's consolidated
balance sheets at December 31 as follows (in thousands):
2001 2000
---------------
Net current deferred tax assets $4,040 $1,093
Net non-current deferred tax assets 898 261
---------------
Net deferred tax assets $4,938 $1,354
===============
35
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 $782,000, $839,000 and $764,000 for the
years ended December 31, 2001, 2000 and 1999, respectively.
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 in 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 $779,000 and $279,000 at December 31, 2001 and 2000, respectively.
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 is included in capital lease obligations, net of current
portion and other on the consolidated balance sheets. Changes in the fair value
of the deferred compensation obligation are recognized in net income in the
period they occur.
13. Shareholders' Equity
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 2,000,000 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 2001, 2000 and
1999, the Company issued 740,882, 331,125 and 210,021 shares, respectively, at
an average price per share of $0.89, $3.31 and $2.75.
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 $25,000, $106,000 and $42,000 of compensation
expense on options granted to non-employees for the years ended December 31,
2001, 2000 and 1999, respectively.
36
A summary of the Company's stock option plan activity for the years ended
December 31, 2001, 2000, and 1999 is presented below:
Weighed
Number of Average
Option Exercise Price Exercise
Shares Per Share Price
--------------------------------------------
Outstanding, January 1, 1999 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
Granted 1,755,052 1.50 - 2.09 1.59
Canceled (606,794) 1.35 - 8.27 3.58
Exercised (8,916) 1.35 - 2.09 1.83
- --------------------------------------------------------------------------------
Outstanding December 31, 2001 4,817,710 $1.35 -$8.27 $ 3.91
============================================
The following summarizes information about the Company's stock options
outstanding at December 31, 2001:
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (in Years) Price Exercisable Price
- ---------------------------------------------------------------------------
$ 1.35 -$1.65 1,883,000 3.89 $ 1.53 114,375 $ 1.35
1.71 - 5.19 1,845,510 3.30 3.84 1,140,618 3.83
5.63 - 8.27 1,089,200 4.45 8.16 330,607 8.00
- ---------------------------------------------------------------------------
$ 1.35 -$8.27 4,817,710 3.79 $ 3.91 1,585,600 $ 4.52
===========================================================================
As of December 31, 2001, 2000 and 1999, options of 1,585,600, 1,037,474 and
906,953, respectively, were exercisable with a weighted average exercise price
of $4.52, $3.76 and $3.74, respectively. As of December 31, 2001, 2000 and 1999,
approximately 0.5 million, 1.5 million and 2.8 million options were available
for grant, respectively.
37
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 2001, 2000 and 1999: risk-free interest rates of 4.39,
5.94 and 5.50 percent, respectively and no expected dividend yields. The
expected lives of 3 years for fiscal 2001 and 5 years for fiscal 2000 and 1999
were also assumed in the model. In 2001, 2000 and 1999, the expected volatility
was 107%, 93% and 70%, respectively. Using these assumptions, the fair value of
the stock options granted in 2001, 2000 and 1999 on a per share, weighted
average basis was $0.94, $4.63 and $2.94, 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 (loss) income and (loss) earnings per share would have been as
follows for the years ended December 31 (in thousands, except per share
amounts):
2001 2000 1999
--------------------------------
Consolidated net (loss) income:
As reported $ (3,513) $ 1,798 $ 1,851
Pro forma (5,952) (1,009) 807
Basic net (loss) income per common share:
As reported (0.19) 0.10 0.11
Pro forma (0.31) (0.06) 0.05
Diluted net (loss) income per common share:
As reported (0.19) 0.10 0.11
Pro forma (0.31) (0.06) 0.05
Stock Repurchase Program
In 2001, the Company's Board of Directors authorized the repurchase of up to 2
million shares of its common stock. The shares may be repurchased in the open
market or through negotiated transactions. The timing and number of shares
repurchased will be determined by management and depend on market conditions and
other factors. During 2001, 696,128 shares were repurchased under this program.
14. Segment and Geographic Information
The Company operates two business segments: Managed IT Solutions and Healthcare
IT Solutions. In order to align our reporting with competitors in the industry
and to make our segment information more useful to users, all of the Company's
IT service related operating segments have been consolidated into one reportable
segment, Managed IT Solutions. All prior period segment information has been
restated to reflect this change. The Company's business segments formerly
reported as Enterprise Applications and eBusiness Solutions, Managed IT
Services, and Professional Services have been combined as a result of this
change and are now collectively reported as Managed IT Solutions. Healthcare IT
Solutions remains unchanged.
The Managed IT Solutions segment provides application management, enterprise
systems management and desktop management services encompassing network and
systems design, software solutions, integration, and management of large-scale
data-center environments, which includes on-site and remote network systems
management. In addition, we offer information technology personnel that are
utilized to augment short or indefinite term engagement requirements.
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 and via its EZ-CAP software, which is the industry standard for
at-risk healthcare organizations. This includes customer service, installation
service, training and ongoing support.
38
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 is as follows (in thousands):
2001 2000 1999
----------------------------------------
Managed IT Solutions
Revenues $144,535 $ 138,919 $ 139,596
Gross profit 20,330 20,002 15,984
Segment assets 44,528 55,518 50,912
Healthcare IT Solutions
Revenues 18,565 13,666 10,566
Gross profit 6,239 4,678 2,514
Segment assets 23,019 9,791 5,958
Segment totals
Revenues $163,100 $ 152,585 $ 150,162
Gross profit 26,569 24,680 18,498
Segment assets 67,547 65,309 56,870
The following table reconciles reportable gross profit and segment assets to the
Company's consolidated totals. Selling, general and administrative expenses and
interest and other income and expenses are not allocated to segments (in
thousands):
As of and for the years ended December 31,
2001 2000 1999
-------------------------------
Gross profit for reportable segments $ 26,569 $ 24,680 $ 18,498
Selling, general and administrative expenses unallocated 32,226 22,675 16,014
-------------------------------
Total consolidated (loss) income from operations (5,657) 2,005 2,484
Interest and other income, net 251 1,122 921
-------------------------------
Total consolidated (loss) income before income taxes $ (5,406) $ 3,127 $ 3,405
===============================
Total assets for reportable segments $ 67,547 $ 65,309 $ 56,870
Note receivable, OAO Corporation 1,714 2,160 2,520
Income taxes unallocated 5,296 2,108 1,965
-------------------------------
Total consolidated assets $ 74,557 $ 69,577 $ 61,355
===============================
The Company generated substantially all of its revenues in the United States and
Canada during the three years ended December 31, 2001. The following represents
a summary of information by geographic area (in thousands):
For the years ended December 31,
2001 2000 1999
----------------------------------
Revenues:
United States $ 109,172 $ 117,711 $ 131,261
Canada 46,097 29,019 16,029
Other consolidated entities 7,831 5,855 2,872
----------------------------------
$ 163,100 $ 152,585 $ 150,162
==================================
(Loss) income before income taxes:
United States $ (7,690) $ 1,040 $ 1,467
Canada 1,842 1,390 1,680
Other consolidated entities 442 697 258
----------------------------------
$ (5,406) $ 3,127 $ 3,405
==================================
Identifiable assets:
United States $ 58,311 $ 59,049 $ 51,702
Canada 14,165 9,016 9,493
Other consolidated entities 2,081 1,512 160
----------------------------------
$ 74,557 $ 69,577 $ 61,355
==================================
39
15. Related Party Transactions
OAO Corporation
The Company and OAO Corporation (OAO) were related parties during 2001 because
the Vice Chairman of the Board of Directors of the Company held a substantial
ownership interest in OAO Corporation. In December 2001, the Vice Chairman sold
his entire interest in OAO.
In support of the Terrapin transaction, the Vice Chairman agreed to consult to
the Company beginning in January 2002 to help it launch a new business. The Vice
Chairman is being paid a fee of $10,000 per month for his efforts, commencing on
January 1, 2002 pursuant to a Professional Services Agreement. The Professional
Services Agreement was approved by the Board of Directors in the fourth quarter
of 2001. The Agreement has a one-year term and will automatically renew for
successive one-year terms in the absence of written notice from either party.
In May 1999, the Company loaned OAO approximately $2.5 million. The demand note
required minimum quarterly principal payments of $90,000 plus interest at the
prime rate plus 2.5%, and was secured by approximately 1.3 million shares of the
Company's common stock beneficially owned by the Vice Chairman of the Board of
Directors. There was approximately $1.7 million and $2.2 million due from OAO
under this note as of December 31, 2001 and 2000, respectively. This note was
paid in full in January 2002.
During 2001, 2000 and 1999, the Company served as a subcontractor on several
contracts with OAO. Revenues for the years ended December 31, 2001, 2000 and
1999 under these contracts totaled $307,000, $871,000 and $949,000,
respectively. The Company had $690,000 and $421,000 in receivables due from OAO
as of December 31, 2001 and 2000, respectively.
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 per year. The Company
expensed an administrative fee to operations of $124,000 and $500,000 for the
years ended December 31, 2000 and 1999, respectively, in connection with this
agreement.
On October 22, 2001, Terrapin Partners Subsidiary LLC ("Terrapin Partners"), an
affiliate of J.F. Lehman & Company, Inc. ("JFL"), acquired all 5.7 million
shares of the Company's common stock held by Safeguard Scientifics, Inc. and two
of its affiliates ("Safeguard"). In addition, the Vice Chairman of the Company's
Board of Directors, the President and Chief Executive Officer of the Company,
and the Senior Vice President of Finance and Chief Financial Officer of the
Company contributed an aggregate of 1,369,458 shares of the Company's common
stock to Terrapin Partners in exchange for a like number of common units of
Terrapin Partners' parent, Terrapin Partners Holding Company LLC, with an
initial stated value of $1.65 per unit. John F. Lehman, the Chairman of the
Board of the Company, is a founding member and the Chairman and Chief Executive
Officer of JFL.
On October 22, 2001, the Vice Chairman of the Board of Directors of the Company
and majority owner of OAO entered into a Voting Agreement and Irrevocable Proxy
with Terrapin Partners pursuant to which the Vice Chairman with respect to
1,826,400 shares of the Company's common stock that he beneficially owns, but
that are pledged to secure obligations (the "Pledged Shares"), (i) agreed to
vote the Pledged Shares in accordance with voting instructions received from
Terrapin Partners, (ii) granted Terrapin Partners an irrevocable proxy to vote
the Pledged Shares and (iii) agreed to contribute the Pledged Shares to Terrapin
Partners in exchange for a like number of common units with an initial stated
value of $1.65 per unit upon any or all of the Pledged Shares becoming
unencumbered.
In connection with the Terrapin Partners transactions, and as a condition to the
Board of Directors of the Company approving those transactions for purposes of
Section 203 of the Delaware General Corporation Law, the Company, Terrapin
Partners and an affiliate of JFL, J.F. Lehman Equity Investors I, L.P.
("JFLEI"), entered into a Stockholders Agreement, dated as of October 22, 2001
(the "Stockholders Agreement"). Pursuant to the Stockholders Agreement, the
parties thereto agreed that during the term of the Stockholders Agreement, the
Board of Directors of the Company would continue to maintain a committee of
independent directors (the "Independent Committee") consisting of at least three
members of the board of directors that are neither executive officers of the
Company nor affiliated with JFLEI, Terrapin Partners or their affiliates.
Additionally,
40
the Company agreed that during the term of the Stockholders Agreement it would
not approve any "Material Transaction" without the consent of at least a
majority of the members of the Independent Committee. A "Material Transaction"
is defined to mean (i) any transaction or series of related transactions between
the Company and Terrapin Partners, JFLEI or their affiliates (A) with a value in
excess of $375,000 in the aggregate or (B) which is reasonably likely to have a
material effect on the Company's business, financial condition, results of
operations or prospects or (ii) any reverse stock split by the Company of its
voting securities.
Further, Terrapin Partners, JFLEI and their affiliates agreed, subject to the
exceptions contained in the following paragraph, not to (1) acquire any voting
securities or any rights to acquire voting securities of the Company except the
8,925,214 shares over which Terrapin Partners acquired beneficial ownership upon
consummation of the transactions on October 22, 2001, (2) enter into any merger,
tender offer or similar transaction involving the Company or acquire any portion
of the business or assets of the Company unless (A) all holders of voting
securities of the Company are treated equally in terms of the consideration to
be received by such holders and (B) the transaction is not entered into with
Terrapin Partners, JFLEI or their affiliates or any other person acting in
concert with Terrapin Partners, JFLEI or their affiliates, (3) participate in
any solicitation of proxies for the removal of any member of the Independent
Committee or (4) take any action challenging the validity or enforceability of
the provisions described in item 1, 2 and 3 above.
Notwithstanding the foregoing, Terrapin Partners and its affiliates are entitled
to purchase voting securities of the Company (1) through open-market
transactions not to exceed 5% of the voting securities of the Company in the
aggregate and (2) if (a) such purchase is made as a result of a transaction (or
a series of transactions) in which Terrapin Partners or its affiliates acquire
or offer to acquire all of the outstanding voting securities of the Company, (b)
the consideration to be paid for the voting securities is deemed to be fair from
a financial point of view in an opinion issued by an investment banking firm
retained by the Independent Committee and (c) the transaction is approved by the
holders of a majority of the outstanding voting securities of the Company
(excluding for the purposes of such calculation any voting securities owned by
Terrapin Partners, JFLEI or their affiliates or any other person acting in
concert with Terrapin Partners, JFLEI and their affiliates).
The Stockholders Agreement terminates upon the earlier of (1) October 22, 2004,
(2) with respect to any voting securities beneficially owned by Terrapin
Partners, upon the transfer of such voting securities to a person other than
JFLEI or any Restricted Transferee (as defined in the Stockholders Agreement),
(3) the date on which Terrapin Partners, together with JFLEI and any Restricted
Transferee, shall cease to beneficially own voting securities of the Company
representing at least 15% of the total voting power of the Company; and (4) the
date on which the Company files a Form 15 with the Securities Exchange
Commission, the filing of which was approved by at least a majority of the
members of the Independent Committee.
Effective October 22, 2001, the Company entered into a Management Agreement with
JFL that provides for payment of an administrative and consulting fee of
$375,000 per year, plus the reimbursement of reasonable out-of-pocket expenses.
The Company incurred $72,000 related to this agreement during 2001. The
Management Agreement has a two-year term, but will automatically renew for
successive two-year terms in the absence of written notice from one party given
to the other at least one year prior to the scheduled termination date. In
addition, the Management Agreement automatically terminates upon the sale of all
or substantially all of the capital stock or assets of the Company to an
unaffiliated third party.
In addition, in connection with Terrapin Partners' transactions, the Company
paid legal and other administrative expenses on behalf of the Company, Terrapin
Partners and certain members of Terrapin Partners totaling approximately
$281,000 in 2001. 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. During 2001, the
note was amended to, among other things, (i) extend the maturity date to July
14, 2008 and (ii) provide for the substitution of collateral, whereby the
750,000 shares of the Company's common stock were released to Mr. Pratt in
exchange for the pledge of 750,000 common units of Terrapin Partners Holding
Company LLC.
On November 1, 2001, the Chief Executive Officer was granted the right to
purchase up to 750,000 shares of the Company's common stock at a price of $1.65
per share, in exchange for a $1.2 million full recourse note. This right cannot
be exercised prior to April 23, 2002. This right is included in the Company's
stock option disclosures (see Note 13.)
41
16. 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.
In September 2001, the Company filed suit against Siebel Software, Inc.
("Siebel") seeking reimbursement from Siebel for: i) certain unsold software
which OAOT purchased under a License Agreement and Value Added Industry
Remarketer Agreement (see Note 6), and ii) related maintenance and training
fees. The suit alleges Siebel's breach of the implied duty of good faith and
lack of fair dealing under these agreements. Prior to filing suit, OAOT gave
Siebel notice that Siebel was in material default under the agreements, and
terminated both agreements. The outcome of this claim cannot be reasonably
predicted at this time.
42
17. Quarterly Financial Data (Unaudited)
Set forth below is a summary of the unaudited quarterly results of operations
for the years ended December 31, 2001 and 2000 (in thousands, except per share
amounts):
2001 Quarters Ended
March 31 June 30(1) Sept. 30 Dec. 31(2)
-------- -------- -------- --------
Revenues $ 39,515 $ 40,380 $ 40,331 $ 42,874
Gross profit $ 6,514 $ 2,555 $ 8,097 $ 9,403
Net income (loss) $ 346 $ (3,271) $ 766 $ (1,354)
Net income (loss) per common share:
Basic and diluted $ 0.02 $ (0.18) $ 0.04 $ (0.07)
2000 Quarters Ended
March 31 June 30 Sept. 30 Dec. 31
-------- -------- -------- --------
Revenues $ 38,545 $ 39,695 $ 36,674 $ 37,671
Gross profit $ 5,350 $ 7,326 $ 5,770 $ 6,234
Net income $ 709 $ 738 $ 183 $ 138
Net income per common share:
Basic and diluted $ 0.04 $ 0.04 $ 0.01 $ 0.01
(1) Gross profit for the quarter ended June 30, 2001 includes the write-down of
prepaid software licenses of approximately $5.1 million, see Note 6 for more
information. In addition, net loss for the quarter ended June 30, 2001 includes
a write-down of an investment totaling approximately $0.4 million. See Note 8
for more information.
(2) Net loss for the quarter ended December 31, 2001 includes the write-down of
impaired assets and other costs of approximately $2.9 million. See Note 8 for
more information.
43
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 Shareholders to be held on May 17, 2002 (the "Proxy Statement"), entitled
"Election of Directors -- Nominees," "Executive Officers" and "Common Stock
Ownership of Principal Shareholders 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 MANAGEMENT.
The information required by this Item is incorporated by reference to the
section of the Proxy Statement entitled "Common Stock Ownership of Principal
Shareholders 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.
44
PART IV
Item 14. EXHIBITS 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 21.
(a) (3) Exhibits
The exhibits are listed in the index to Exhibits appearing below.
(b) (1) On November 6, 2001, the Registrant filed a Current Report on Form 8-K
to report under Item 5 (Other Events) that on October 22, 2001, Terrapin
Partners Subsidiary LLC acquired all 5.7 million shares of OAOT common
stock held by Safeguard Scientifics, Inc. and two of its affiliates.
(2) On November 9, 2001, the Registrant filed an Amendment No. 1 to Current
Report on Form 8-K/A to file under Item 7 (Financial Statements, Pro Forma
Financial Information and Exhibits) historical financial statements of
EZ-CAP, a division of QuadraMed Corporation, and pro forma financial
information reflecting the acquisition of EZ-CAP, a division of QuadraMed
Corporation.
(c) Exhibits
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)
45
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 Asset Purchase Agreement, dated August 16, 2001, among the
Company, QuadraMed Corporation and affiliates. (11)
10.17 First Amendment, effective August 29, 2001, to the Credit
Agreement dated June 30, 1999 by and among OAO Technology
Solutions, Inc. and its subsidiaries and Bank of America, N.A.
(successor in interest to NationsBank, N.A.) (14)
10.18 First Amendment, dated October 18, 2001, to Amended and Restated
OAO Technology Solutions, Inc. Restricted Stock Grant Letter.
Date of grant : July 14, 1999 issued to Gregory A. Pratt.(1)
10.19 Second Amended and Restated Term Note dated July 14, 1999 between
the Company and Gregory A. Pratt.(1)
10.20 Second Amended and Restated Pledge Agreement dated October 18,
2001 between the Company and Gregory A. Pratt.(1)
10.21 Employment Agreement between Gregory Pratt and the Company dated
December 1, 2001.(1)
10.22 Professional Services Agreement between Cecil Barker and the
Company dated January 1, 2002.(1)
10.23 Management Agreement between J.F.Lehman & Company and OAOT dated
January 1, 2002.(1)
10.24 Employment Agreement between Jeffrey Fox and the Company dated
October 22, 2001.(1)
10.25 Customer Solutions Agreement between International Business
Machines Corporation and OAOT dated December 29, 1998.(1)
10.26 Stockholder agreement dated October 22, 2001, by and among OAO
Technology Solutions, Inc., Terrapin Partners Subsidiary LLC, and
J.F. Lehman Equity Investors I, L.P.(1)
21.1 Subsidiaries of the Registrant. OAO HealthCare Solutions, Inc.,
OAO Services, Inc., OAO Systems, Inc., OAO Technology Solutions
(Canada) Inc., OAO Technology Solutions Europe B.V., OAO
Technology Solutions de Mexico, S.A. de C.V., OAO Technology
Solutions UK Limited, OAO Health Services Processing, Inc.,
Canadian Resource Management, Ltd., Canadian Network Resources,
Ltd., OAO Transition, LLC.
23.1 Independent Auditors' Consent. (1)
99.1 Press Release dated August 16, 2001. (11)
99.2 Press Release dated October 23, 2001. (12)
99.3 Financial Statements of the EZ-CAP division of QuadraMed
Corporation. Balance Sheets as of June 30, 2001 and 2000 and
December 31, 2000 and 1999 and Statements of Income and Cash
flows for the Six Months Ended June 30, 2001 and 2000 and the
Years Ended December 31, 2000 and 1999. (13)
99.4 Pro forma combined condensed financial information with respect
to the registrant and the EZ-CAP division of QuadraMed
Corporation as of June 30, 2001 and for the six months ended June
30, 2001 and the year ended December 31, 2000. (13)
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 8-K, filed on September 14,
2001.
(12) Incorporated by reference to the Company's Form 8-K, filed on November 6,
2001.
(13) Incorporated by reference to the Company's Form 8-K/A, filed on November 9,
2001.
(14) Incorporated by reference to the Company's Form 10-Q, filed on November 14,
2001.
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 27, 2002 By: /s/ Gregory A. Pratt
---------------------
Gregory A. Pratt
President and Chief Executive Officer
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 President and Chief Executive
- -------------------------- Officer, Director
Gregory A. Pratt (Principal Executive Officer) March 27, 2002
/s/ J. Jeffrey Fox Senior Vice President of Finance March 27, 2002
- -------------------------- and Chief Financial Officer
J. Jeffrey Fox
/s/ John F. Lehman Chairman of the Board of Directors March 27, 2002
- --------------------------
John F. Lehman
/s/ Cecile D. Barker Vice Chairman of the Board of
- -------------------------- Directors, Director March 27, 2002
Cecile D. Barker
/s/Yvonne Brathwaite Burke Director March 27, 2002
- --------------------------
Yvonne Brathwaite Burke
/s/ Frank B. Foster, III Director March 27, 2002
- --------------------------
Frank B. Foster, III
/s/ Richard B. Lieb Director March 27, 2002
- --------------------------
Richard B. Lieb
/s/ Louis N. Mintz Director March 27, 2002
- --------------------------
Louis N. Mintz
48