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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended MARCH 31, 1999 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: 000-24193
ATLANTIC DATA SERVICES, INC.
(Exact Name of Registrant as Specified in its Charter)
MASSACHUSETTS 04-2696393
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
ONE BATTERYMARCH PARK, QUINCY, MASSACHUSETTS 02169
(Address of Principal Executive Offices) (Zip Code)
(617) 770 - 3333
(Registrant's Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act: NONE.
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
(Title of Class)
Indicate by checkmark 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 checkmark 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 the 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 the voting stock held by non-affiliates of the
Company was approximately $16,549,724 on June 4, 1999 based on the last reported
sale price of the Company's Common Stock on the Nasdaq National Market on June
4, 1999 of $4.00 per share. There were 12,906,391 shares of Common Stock issued
and outstanding as of June 4, 1999.
DOCUMENTS INCORPORATED BY REFERENCE - The Registrant intends to file a
definitive proxy statement pursuant to Regulation 14A within 120 days of the end
of the fiscal year ended March 31, 1999. Portions of such proxy statement are
incorporated by reference into Part III of this report.
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ATLANTIC DATA SERVICES, INC.
ANNUAL REPORT ON FORM 10-K
FOR THIS FISCAL YEAR ENDED MARCH 31, 1999
FORWARD LOOKING STATEMENTS
This Report includes forward-looking statements which are made pursuant to the
safe-harbor of the Private Securities Litigation Reform Act of 1995. You can
identify these forward-looking statements when you see us using words such as
"expect," "anticipate," "believe," "intend," "may," "predict," and other similar
expressions. These forward-looking statements cover, among other items: events,
conditions and financial trends that may effect the Company's future plans of
operation, business strategy, growth of operations and financial position,
including statements relating to new customer opportunities and replacement of
lost revenue, and the Year 2000 issue. Any forward-looking statements are not
guarantees of future performance and are necessarily subject to a number of
risks and uncertainties, some of which are beyond our control. Actual results
could differ materially from those anticipated as a result of any of the factors
described under "Certain Factors That May Affect Future Operating Results"
included elsewhere in this Report. Because of these risks and uncertainties, the
forward-looking events discussed in this Report might not transpire.
PART I
ITEM 1: BUSINESS
A. GENERAL
Atlantic Data Services, Inc. ("We" or "ADS"), provides information technology
("IT") strategy consulting and systems integration services to customers
exclusively in the financial services industry, primarily banks. We offer IT
solutions to the business challenges faced by financial services companies
through our in-depth financial services experience, technological expertise and
project management skills. Our service offerings are organized around four
practice areas: IT Strategy Consulting, Consolidations and Conversions, Year
2000 Resolution, and Electronic Commerce and Home Banking.
The business challenges created by deregulation and consolidation, coupled with
the need to maintain existing systems and incorporate new technologies, have
forced banks to turn to third party IT providers for assistance in developing IT
solutions to meet their changing needs. Because of the critical importance of
their IT systems, banks seek to engage IT service providers who have in-depth
knowledge of their systems and business processes and who can assume
responsibility for project management and delivery. IT service providers working
with banks must possess extensive experience in the financial services industry
and be fluent in both traditional legacy systems and newer technologies.
However, there is a shortage of professionals who have this combination of
skills. While many banks are concluding that using outside specialists enables
them to develop better IT solutions in less time and to reduce implementation
risks, most IT consulting firms do not have the specialized knowledge of the
financial services industry necessary to assist banks in rapidly and
cost-effectively meeting their business challenges.
We enable our customers to leverage their existing IT systems and personnel to
compete more effectively, to rapidly assimilate changing technologies and to
meet their evolving business needs in a timely and cost-effective manner. We
work closely with our customers' management and IT personnel from diagnostic and
strategic planning through project completion. Our IT professionals have
extensive experience in the diverse technical environments, legacy hardware
platforms, programming languages, and software used by banks, as well as newer
technologies including client/server applications and the Internet. In addition,
we have developed proprietary tools and methodologies designed to reduce the
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risks inherent in complex systems implementations. We work closely with our
customers to determine the appropriate resources and staffing to assign to their
projects and deploy our staff from throughout the United States to meet a
customer's needs.
PRACTICE AREAS
We offer and deliver our services through four practice areas that address the
major areas of interest and activity of our customers. These four practice areas
are:
IT Strategy Consulting. We provide business solutions and assist customers in
managing change within their operational and technical environment. Our
solutions-oriented consulting begins with an overall assessment of the
customer's current situation and identifies potential IT risks, opportunities
and alternatives. Once the initial evaluation is complete, we create an itemized
list of deliverables and tasks and assume responsibility for the delivery of the
targeted solution. Our project managers, practice managers, business analysts
and technical specialists work in close cooperation with our customer's IT staff
to create, manage and execute the specific plans designed to meet the project
objectives. Throughout the process, we provide ongoing review and reporting on
the schedule, deliverables and budget agreed upon at project commencement.
Consolidations and Conversions. We assist our customers who have acquired other
institutions in consolidating redundant operations or upgrading legacy systems
to new technology applications. We have developed the Conversion Productivity
Tool ("CPT"), a proprietary software program that automates the most important
aspects of the data conversion process. We generally enter into short-term,
non-exclusive license agreements with our customers to use CPT at the customers'
worksite for the purpose of these engagements. CPT assists our business analysts
in mapping the customer's business products and data elements of the
application. Our business analysts use CTP to input the conversion rules, to
analyze the relationship between the inbound and target systems, and to test and
execute the conversion automatically. We also use a comprehensive conversion
project methodology that allows the project team to interact with the customer's
staff and bring a set of professional disciplines and methodologies to these
complex projects.
Year 2000 Resolution. We have developed a set of proprietary tools and
methodologies which address not only our customer's data processing
requirements, but also the risks that the Year 2000 problem presents to the
customer's entire business. Our Year 2000 projects are divided into three
phases, each of which has specified activities and deliverables: (i) Risk
Assessment and Project Definition; (ii) Component Remediation; and (iii)
Component Testing and Reintegration. We review the risks in each functional area
of our customer's operations to determine where and how a Year 2000 failure
could occur and its expected impact on the customer. From these findings, a
triage analysis is made to prioritize the possible failures that could have the
greatest customer impact. Remediation solutions are then defined and we
determine an appropriate resolution, which may include a customized solution, a
replacement strategy or a third party "factory" solution.
Electronic Commerce and Home Banking. We provide consulting and application
development services to financial services institutions in the field of
electronic commerce and home banking. Electronic commerce and home banking is
intended to provide fully integrated financial services to the consumer by
offering access to financial products and services from a wide variety of
delivery channels. We assist our customers in undertaking this migration by
providing consulting services in four major areas: (i) identification or
experimentation with new electronic delivery channels, including Internet-based
offerings through home computers; (ii) merging of new service offerings as
market trends and customer focused solutions become apparent and available;
(iii) integration of new offerings into the financial institution's complex
environment of core applications, payment systems and settlement and accounting
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operations; and (iv) restructuring of a customer's backroom operations to
reflect and support the changing mix of transactions and delivery channels.
B. CUSTOMERS
Our customers consist primarily of banks and other financial services companies
located in the United States and Canada. The following is a list of
representative customers during fiscal 1999:
ABN-AMRO Information Technology Services National City Corporation
Associated Banc-Corp. NationsBank Corporation (Barnett Bank)
First Security Information Technology, Inc. People's Heritage Bank
Fleet Services Corporation Susquehanna Bancshares, Inc.
Keane, Inc. UST Data Services, Inc.
We have derived and expect to continue to derive a significant portion of our
revenues from a relatively limited number of customers. For example, our five
largest customers in fiscal 1999, First Security Information Technology, Inc.,
National City Corporation, Associated Banc-Corp., UST Data Services, Inc. and
Susquehanna Bancshares Corp., accounted for approximately 18.4%, 16.4%, 13.8%,
9.6% and 5.6%, respectively, of revenues. In fiscal 1998, Associated BancCorp.,
First Security Information Technology, Inc., National City Corporation,
NationsBank Corp. and ABN-AMRO Information Technology Services accounted for
approximately 17.4%, 13.7%, 13.3%, 10.1% and 10.0%, respectively, of revenues.
Because a significant portion of our revenues are derived from services related
to deregulation and consolidation activities in the financial services industry,
changes in the regulatory environment or a reduction in consolidation activity
have in the past, and may in the future, have a material adverse effect on our
business, financial condition and results of operations. In addition, the loss
of a major customer or termination of a major project as a result of an
acquisition of a customer by an organization to which the Company does not
currently provide services could have a material adverse effect on our business,
financial condition and results of operations.
For example, in December 1998 we announced that National City Corporation, which
accounted for 16.4% and 13.3% of our revenues in fiscal 1999 and 1998,
respectively, decided not to extend its contract with us beyond December 31,
1998. Although our largest customers have varied from period to period, we
anticipate that our results of operations will continue to significantly depend
upon revenues of a small number of customers. We cannot assure you that our
major customers will continue to purchase our services at current levels, if at
all, or that we will be able to replace revenues from such customers with
revenues from other customers. The loss of, or a significant reduction in
revenues from, any of our major customers could materially adversely affect our
business, financial condition and results of operations.
C. SALES AND MARKETING
We market and sell our services directly through our professional sales and
marketing staff and senior management operating principally from our offices in
Quincy, Massachusetts. As of March 31, 1999, we had twelve persons engaged in
sales and marketing activities.
Our senior business development representatives are assigned to a limited number
of customers to foster an in-depth understanding of each customer's individual
needs and build a long-term customer relationship. We attempt to develop
customer relationships through a carefully coordinated effort between our sales
and professional services staff. Initial sales calls are made at the customer's
senior management level and followed up by detailed presentations targeted to
their specific needs.
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We employ a variety of business development and marketing techniques to
communicate directly with current and prospective customers, including targeted
print and direct mail advertisements; participation in financial services
industry trade shows and conferences; and our web site. In addition, we maintain
relationships with key industry research groups such as the Tower Group, the
American Bankers Association, and the Information Technology Association of
America.
As part of our sales and marketing strategy, we intend, from time to time, to
partner with other IT consulting firms, including in some instances our
competitors, and to explore relationships with certain third party software
providers to the financial services market. We believe these relationships may
result in increased direct client referrals and enhanced industry recognition.
We also believe these relationships will enable us to broaden our customer base,
increase our competitiveness and maintain our technological leadership through
access to the most current information and training on leading software and
information systems.
D. EMPLOYEES
As of March 31, 1999, we had 314 full time employees, of which 270 were project
personnel, 32 employees were in finance and administration and 12 were in
business development. As of March 31, 1998, we had 295 full time employees. None
of our employees are subject to a collective bargaining agreement. We believe
relations with our employees are good.
During fiscal 1999, we experienced lower than anticipated bookings and an
interim fall off in business with major banking institutions. As a result, in an
effort to bring expenses more in line with expected near-term revenue, we
reduced our headcount by 65 people (or 21% of the total workforce) effective
April 30, 1999. At May 31, 1999, we had 243 full time employees.
E. INTELLECTUAL PROPERTY RIGHTS
Our success is dependent upon certain proprietary methodologies and software
tools, including our Engagement Management Methodology, Conversion Productivity
Tool and Year 2000 Methodology, that we use in providing services to customers.
Our business also includes developing custom software for various customers.
Ownership of such software is generally assigned to the customer, and we retain
no right, title or interest in it.
We rely on a combination of trade secret, nondisclosure and other contractual
arrangements and copyright and trademark laws to protect our proprietary rights.
We currently hold no patents or registered copyrights. We generally enter into
confidentiality agreements with our outside consultants, customers and potential
customers and limit access to and distribution of our proprietary information.
While we do not usually enter into confidentiality agreements with our
employees, such employees are generally required to sign confidentiality
agreements in connection with specific client engagements. There is no assurance
that these steps will be adequate to deter misappropriation of our proprietary
information or of our customers or that we will be able to detect unauthorized
use of, and take appropriate steps to enforce, our intellectual property rights.
In the future, litigation may be necessary to enforce and protect our trade
secrets, copyrights and other intellectual property or proprietary rights. We
may also be subject to litigation to defend against claimed infringement or to
determine the scope and validity of the intellectual property or proprietary
rights of others. Although we are not aware that our services, trademarks or
other proprietary rights infringe upon the proprietary rights of others, there
is no assurance that third parties will not assert infringement claims against
us and that such claims will not result in a material adverse effect on our
business, financial condition and results of operations. Any litigation
concerning our use of technology could result in
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substantial cost to us in defending such actions and divert our attention from
operations, either of which could have a material adverse effect on our
business, financial condition or results of operations.
F. COMPETITION
The IT and systems integration market, especially in the financial services
industry, includes a large number of competitors and is subject to rapid
technological and market changes. We compete for customer projects and
experienced personnel with a number of companies having significantly greater
financial, technical and marketing resources and revenues. Many of these
competitors also have greater name recognition in the financial services
industry. Our competitors operate in a variety of market segments including
systems consulting and integration, application software, professional services
(such as computer equipment companies like International Business Machines
Corporation), multinational accounting firms, and general management consulting
firm (such as Andersen Consulting, Computer Sciences Corporation and Electronic
Data Systems Corporation). In addition, the custom software development market
is highly fragmented with numerous firms, many of which focus on their
respective local markets. We also face competition from internal IT departments
of our customers.
We expect to experience increasing competition from companies offering
established integration services and new service offerings and technologies. In
addition, current and potential competitors may make strategic acquisitions or
establish cooperative relationships among themselves or with others thereby
increasing their ability to expand or increase their service offerings to
address the needs of our existing or prospective customers. Accordingly, it is
possible that new competitors or alliances among current and new competitors may
emerge and rapidly gain significant market share. Increased competition could
result in lower utilization rates, billing rate reductions, fewer customer
engagements, reduced gross margins, and loss of market share for us, any of
which could materially adversely affect our business, financial condition and
results of operations.
We believe the principal competitive factors in our market are knowledge of the
financial services industry, responsiveness to customer needs, quality of
service, project management capability, technical expertise and price. We
believe we compete favorably in most of these areas and excel in the depth of
industry knowledge and experience we bring to our financial services customers.
We believe our ability to compete also depends in part on factors outside of our
control, including the ability of our competitors to attract, motivate and
retain project managers and other personnel.
To be successful in the future, we must respond promptly and effectively to
customer demands, technological changes and competitors' innovations. Our
competitors may be able to respond more quickly to new and emerging technologies
and changes in services offerings to prospective customers. There is no
assurance that we will be able to compete successfully with existing or new
competitors or that competition will not have a material adverse effect on our
business, financial condition and results of operations.
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ITEM 2: PROPERTIES
Our headquarters and administrative, sales and marketing operations are in
Quincy, Massachusetts in a leased facility consisting of approximately 27,000
square feet. We have the right of first refusal to lease any additional space
becoming available in part of the premises. Although this lease expires on March
31, 2000, we have an option to extend it for an additional five-year term upon
nine months notice prior to the lease term's expiration.
ITEM 3: LEGAL PROCEEDINGS
We are not a party to any litigation that we believe could have a material
adverse effect on our business, financial condition and results of operations.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during the fourth
quarter of the year ended March 31, 1999.
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PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
We effected our initial public offering of our Common Stock on May 21, 1998 at a
price to the public of $13.00 per share. As of June 4,1999, there were
approximately 162 stockholders of record. Our stock is currently included in the
Nasdaq National Market system under the symbol "ADSC."
The following table sets forth, on a per share basis for the periods shown, the
range of high and low bid prices of our Common Stock as reported on the Nasdaq
National Market. The quotations represent interdealer quotations, without
adjustments for retail mark-ups, mark-downs, or commissions, and may not
necessarily represent actual transactions.
High Low
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Fiscal Year 1999:
First Quarter (May 21 - June 30, 1998) $19.8750 $12.3750
Second Quarter (July 1 - Sept. 30, 1998) 19.3125 9.6250
Third Quarter (Oct. 1 - Dec. 31, 1998) 25.0000 6.8750
Fourth Quarter (Jan. 1 - March 31, 1999) 14.3750 3.4688
Dividend Policy
In fiscal 1998 and 1997, we paid aggregate cash dividends of $3.0 million and
$1.5 million, respectively, in each case to holders of the Company's Special
Common Stock and Common Stock. We do not intend to pay cash dividends in the
foreseeable future. The payment of any future dividends will be at the
discretion of our Board of Directors and will depend upon, among other things,
future earnings, operations, capital requirements of the Company, business
conditions and contractual restrictions on payment of dividends, if any.
Use of Proceeds
On May 22, 1998, we commenced an initial public offering ("IPO") of 2,500,000
shares of common stock, par value $.01 per share (the "Common Stock"), pursuant
to our final prospectus dated May 22, 1998 (the "Prospectus"). The Prospectus
was contained in our Registration Statement on Form S-1, which was declared
effective by the Securities and Exchange Commission (SEC File No. 333-48703) on
May 21, 1998. Of the 2,500,000 shares of Common Stock offered, 2,000,000 shares
were offered and sold by us and 500,000 shares were offered and sold by certain
stockholders of ADS. As part of the IPO, certain stockholders of ADS granted the
several underwriters, for whom BancAmerica Robertson Stephens, BT Alex Brown and
Adams, Harkness & Hill, Inc., acted as representatives (the "Representatives"),
an overallotment option to purchase up to an additional 375,000 shares of Common
Stock (the "Underwriters' Option"). The IPO closed on May 28, 1998.
On June 22, 1998, the Representatives, on behalf of the several underwriters,
purchased 375,000 shares of Common Stock from certain stockholders of ADS
pursuant to the exercise of the Underwriters' Option.
The aggregate offering price of the IPO to the public was $32,500,000 (exclusive
of the Underwriters' Option), with proceeds to us and the selling stockholders,
after deduction of underwriting discounts, of $24,180,000 (before deducting
offering expenses payable by us) and $6,045,000, respectively. The
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aggregate offering price of the Underwriters' Option exercised was $4,875,000,
with proceeds to the selling stockholders, after deduction of the underwriting
discounts and commissions, of $4,533,750.
The aggregate amount of expenses incurred by us through March 31, 1999 in
connection with the issuance and distribution of the shares of Common Stock
offered and sold in the IPO were approximately $3,084,000, including $2,275,000
in underwriting discounts and approximately $809,000 in other expenses.
None of the expenses paid by us in connection with the IPO or the exercise of
the Underwriters' Option were paid, directly or indirectly, to directors,
officers, persons owning ten percent or more of the our equity securities, or
affiliates of ADS.
The net proceeds to us from the IPO, after deducting underwriting discounts and
commissions and other expenses, were approximately $23,371,000.
From May 21, 1998 through March 31, 1999, we applied approximately $1,019,000 of
the net proceeds from the IPO to working capital. We invested the balance of
such net proceeds primarily in Money Market Accounts.
ITEM 6: SELECTED FINANCIAL DATA
The selected financial data presented below as of and for the fiscal years ended
March 31, 1999, 1998, 1997, 1996 and 1995 have been derived from our
consolidated financial statements, which have been audited by
PricewaterhouseCoopers LLP and Ernst & Young LLP, independent accountants. This
data should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations," our Consolidated Financial
Statements and related notes thereto, and other financial information appearing
elsewhere in this Form 10-K. All amounts are in thousands except per share data.
YEAR ENDED MARCH 31,
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1999 1998 1997 1996 1995
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Consolidated Income Statement Data:
Total revenue $66,763 $42,830 $23,843 $20,052 $14,624
Income from operations 12,362 8,303 3,185 2,627 1,536
Net income 7,759 4,898 2,041 2,343 2,131
Basic earnings per share 0.62 0.49 .20 .24 .21
Diluted earnings per share 0.60 0.49 .20 .24 .21
Shares used in computing earnings
per share (basic) 12,468 9,952 9,952 9,952 9,952
Shares used in computing earnings
per share (diluted) 12,855 9,952 9,952 9,952 9,952
------------------------------------------------------------------------
Consolidated Balance Sheets Data:
Cash and cash equivalents $37,326 $ 3,401 $ 2,653 $ 2,231 $ 4,436
Working capital 39,199 7,480 5,069 4,641 6,595
Total assets 46,761 14,485 8,201 7,470 9,196
Total stockholders' equity 40,745 8,683 5,816 5,275 6,932
Cash dividends paid -- 3,000 1,500 4,000 --
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FORWARD LOOKING STATEMENTS
This Report includes forward-looking statements which are made pursuant to the
safe-harbor of the Private Securities Litigation Reform Act of 1995. You can
identify these forward-looking statements when you see us using words such as
"expect," "anticipate," "believe," "intend," "may," "predict," and other similar
expressions. These forward-looking statements cover, among other items: events,
conditions and financial trends that may effect the Company's future plans of
operation, business strategy, growth of operations and financial position,
including statements relating to new customer opportunities and replacement of
lost revenue, and the Year 2000 issue. Any forward-looking statements are not
guarantees of future performance and are necessarily subject to a number of
risks and uncertainties, some of which are beyond our control. Actual results
could differ materially from those anticipated as a result of any of the factors
described under "Certain Factors That May Affect Future Operating Results"
included elsewhere in this Report. Because of these risks and uncertainties, the
forward-looking events discussed in this Report might not transpire.
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We provide IT strategy consulting and systems integration services to customers
exclusively in the financial services industry, primarily banks. Our service
offerings are organized around four practice areas: IT Strategy Consulting,
Consolidations and Conversions, Year 2000 Resolution and Electronic Commerce and
Home Banking.
Our revenues are derived primarily from professional fees billed to customers on
a time and materials basis, or in certain instances on a fixed price basis.
Included in revenues are reimbursable contract-related travel and entertainment
expenses, which are separately billed to clients. Substantially all of our
contracts, other than fixed price contracts, are terminable by the customer
following limited notice and without significant penalty to the customer.
Revenues from fixed price contracts represented approximately 5.4% and 12.1% of
the Company's revenues for the fiscal years ended March 31, 1999 and 1998,
respectively.
Revenues from our five largest customers in fiscal 1999, 1998 and 1997 were
63.8%, 64.5% and 54.0%, respectively, as a percentage of revenues. In fiscal
1999, First Security Information Technology, Inc., National City Corporation,
Associated Banc-Corp., UST Data Services, Inc. and Susquehanna Bancshares Corp.
accounted for approximately 18.4%, 16.4%, 13.8%, 9.6% and 5.6%, respectively, of
revenues. In fiscal 1998, Associated Banc-Corp., First Security Information
Technology, Inc., National City Corporation, Nations Bank Corp. and ABN-AMRO
Information Technology Services accounted for approximately 17.4%, 13.7, 13.3%,
10.1% and 10.0%, respectively, of revenues. In fiscal 1997, First Security
Information Technology, Inc., Citizens Savings Bank and Citizens Trust Company,
Fleet Services Corporation, Electronic Payments Services, Inc. and Associated
Banc-Corp. accounted for 18.8%, 12.4%, 7.8%, 7.5% and 7.5%, respectively, of
revenues. Because a significant portion of our revenues are derived from
services related to deregulation and consolidation activities in the financial
services industry, changes in the regulatory environment or a reduction in
consolidation activity have in the past, and could in the future, have a
material adverse effect on our business, financial condition and results of
operations. In addition, the loss of a major customer or termination of a major
project as a result of an acquisition of a customer by an organization to which
the Company does not currently provide services could have a material adverse
effect on our business, financial condition and results of operations. On
December 21, 1998, we announced that one of our major customers, National City
Corporation, would not be extending its contract with us beyond December 31,
1998. For the nine months ended December 31, 1998, this customer accounted for
approximately 19.8% of our revenues. Substantially all of our revenues are
derived from customers located in North America.
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Cost of revenues consists primarily of salaries and employee benefits for
personnel dedicated to customer assignments, fees paid to subcontractors for
work performed in connection with customer assignments, and reimbursable
contract-related travel and entertainment expenses incurred in connection with
the delivery of our services. Customer project margins and personnel utilization
percentages are the most significant variables in determining our income from
continuing operations. We manage our personnel utilization rates by monitoring
personnel needs and generally adjust personnel levels based on specific project
requirements. The number of staff assigned to particular projects may vary
widely depending on the size, duration, degree of completion and complexity of
each engagement. Delays in project completion and in implementation may result
in periods when personnel are not assigned to active projects and, accordingly,
result in lower average utilization rates during such periods, which could have
a materially adverse effect on our operating results. In addition, we must
maintain appropriate numbers of senior professionals both to oversee existing
engagements and for business development activities.
Sales and marketing expenses consist primarily of salaries, employee benefits,
travel expenses and promotional costs. General and administrative expenses
consist primarily of expenses associated with our management, finance and
administrative groups, including recruiting, training, depreciation and
amortization, and occupancy costs.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain financial
data as a percentage of revenues:
YEAR ENDED MARCH 31,
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1999 1998 1997
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Revenues 100.0% 100.0% 100.0%
Cost of revenues 61.5 56.6 63.8
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Gross profit 38.5 43.4 36.2
Operating expenses:
Sales and marketing 6.7 8.7 6.3
General and administrative 13.3 15.3 16.6
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Total operating expenses 20.0 24.0 22.9
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Income from operations 18.5 19.4 13.3
Interest income 1.9 0.3 0.5
------------------------------------------
Income from continuing operations before
provision for income taxes 20.4 19.7 13.8
Provision for income taxes 8.8 8.3 5.7
Discontinued operations, net of tax -- -- 0.5
------------------------------------------
Net income 11.6% 11.4% 8.6%
==========================================
RECENT DEVELOPMENTS
During the second half of fiscal 1999, we experienced lower than anticipated
bookings and our financial results have been, and continue to be, effected by a
slowdown in merger and consolidation activity within the banking and financial
services sector. In addition, many of our clients are nearing completion of
their Y2K projects which is having a negative impact on revenues in the near
term. Further, on December 21, 1998, we announced that one of our major
customers, National City Corporation, would not be extending its contract with
us beyond December 31, 1998. For the nine months ended December 31, 1998, this
customer accounted for approximately 19.8% of our revenues. As a result of
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these factors, we expect, at least through the remainder of calendar 1999, that
we will continue to experience lower revenue growth rates compared to prior
fiscal years and will likely have revenue less than the corresponding quarters
in the prior fiscal year which, in turn, will have an adverse impact on our
earnings. In an effort to bring expenses more in line with expected near term
revenue, the Company reduced its headcount by sixty-five people (or
approximately 21% of total workforce) effective April 30, 1999. At May 31, 1999,
we had a total of 243 full time employees.
VARIABILITY OF OPERATING RESULTS
Variations in our revenues and operating results have occurred from quarter to
quarter and may continue to occur as a result of a number of factors. Quarterly
revenues and operating results can depend on:
* the number, size and scope of customer projects commenced and completed
during a quarter,
* changes in employee utilization rates,
* changes in average billing rates,
* the number of working days in a quarter,
* the timing of introduction of new service offerings, both by us and our
competitors,
* changes in pricing, both by us and our competitors,
* loss of a significant customer,
* loss of key personnel,
* other factors that adversely impact the financial services industry, and
* general economic conditions.
The timing of revenues is difficult to forecast because our sales cycle is
relatively long, ranging from one to six months for new projects with existing
customers and three to six months for new customers, and may depend on factors
such as the size and scope of projects or other factors that adversely impact
the financial services industry and general economic conditions. In addition,
the relatively long length of our sales cycle may negatively impact the
operating results for any particular quarter as a result of increased sales and
marketing expenses without associated increases in revenues in the particular
quarter. Furthermore, many of our projects are, and may be in the future,
terminable without customer penalty. An unanticipated termination of a major
project or loss of a major customer could require us to maintain or terminate
underutilized employees, resulting in a higher than expected number of
unassigned persons or higher than expected severance expenses.
YEAR ENDED MARCH 31, 1999 COMPARED TO YEAR ENDED MARCH 31, 1998
REVENUES
Revenues increased 55.9% for the year ended March 31, 1999 compared to the year
ended March 31, 1998, to $66.8 million from $42.8 million. This increase was
primarily due to an increase in volume of services delivered to customers and an
increase in the average billing rate.
COST OF REVENUES
Cost of revenues increased 69.6% to $41.1 million in fiscal 1999 compared to
$24.2 million in fiscal 1998, representing 61.5% and 56.6% of revenues,
respectively. The dollar increase in cost of revenues was primarily due to an
increase in the average number of billable personnel from 219 for fiscal 1998 to
301 for fiscal 1999. The increase in cost of revenues as a percentage of
revenues is due primarily to decreased utilization rates. Based on current
industry conditions, we expect that decreased utilization rates will continue
into fiscal year 2000.
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SALES AND MARKETING
Sales and marketing expenses increased 19.6% to $4.5 million in fiscal 1999
compared to $3.7 million in fiscal 1998, representing 6.7% and 8.7% of revenues,
respectively. The overall dollar increase resulted primarily from an increase in
travel related expenses. The decrease in sales and marketing as a percentage of
revenues reflects the significant increase in revenue for fiscal 1999 compared
to fiscal 1998.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased 34.7% to $8.8 million in fiscal
1999 compared to $6.6 million in fiscal 1998, representing 13.3% and 15.3% of
revenues, respectively. The overall dollar increase is primarily due to
increases in recruiting, occupancy and equipment costs to support the Company's
expansion during the year, as well as costs associated with being a public
company. The decrease in general and administrative expenses as a percentage of
revenues reflects the significant increase in revenue for fiscal 1999 compared
to fiscal 1998.
INTEREST INCOME
Interest income increased $1.1 million to $1.3 million in fiscal 1999 compared
to $142,000 for fiscal 1998. This increase was primarily due to the increase in
the amount of cash and cash equivalents available for investment through the net
proceeds received from the our initial public offering completed on May 28, 1998
of $23.4 million and cash generated from operations of $10.8 million.
PROVISION FOR INCOME TAXES
The provision for income taxes increased $2.3 million to $5.9 million in fiscal
1999 compared to $3.5 million in fiscal 1998, resulting in effective tax rates
of 43% and 42%, respectively. Our tax rate may vary from period to period based
on our expansion into areas with varying state and local statutory income tax
rates. The increase in the effective tax rate is primarily due to differences in
applicable state income tax rates.
YEAR ENDED MARCH 31, 1998 COMPARED TO YEAR ENDED MARCH 31, 1997
REVENUES
Revenues increased 79.6% for fiscal 1998 compared to fiscal 1997, to $42.8
million from $23.8 million. This increase was primarily due to an increase in
volume of services delivered to customers and an increase in the average billing
rate.
COST OF REVENUES
Cost of revenues increased 59.2% to $24.2 million in fiscal 1998 compared to
$15.2 million for fiscal 1997, representing 56.6% and 63.8%, respectively, of
revenues in each period. The dollar increase in cost of revenues was primarily
due to an increase in billable personnel from 148 at March 31, 1997 to 275 at
March 31, 1998. The decrease in cost of revenues as a percentage of revenues is
due to increased utilization rates and billing rate increases.
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SALES AND MARKETING
Sales and marketing expenses increased 150.3% to $3.7 million in fiscal 1998
compared to $1.5 million for fiscal 1997, representing 8.7% and 6.3% of
revenues, respectively. This increase resulted primarily from our decision to
expand our sales and marketing group from eight employees at March 31, 1997 to
seventeen employees at March 31, 1998.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased 66.4% to $6.6 million in fiscal
1998 compared to $3.9 million for fiscal 1997, representing 15.3% and 16.6% of
revenues, respectively. The overall dollar increase is primarily due to
increases in recruiting, occupancy and equipment costs to support our expansion
during the period. The decrease in general and administrative expenses as a
percentage of revenues reflects the significant increase in revenues for fiscal
1998 compared to fiscal 1997.
PROVISION FOR INCOME TAXES
The provision for income taxes increased $2.2 million to $3.5 million for the
year ended March 31, 1998 from $1.3 million for the year ended March 31, 1997,
resulting in effective tax rates of 42% and 41.2%, respectively. Our tax rate
may vary from period to period based on our expansion into areas with varying
state and local statutory income tax rates. The increase in the effective tax
rate is primarily due to differences in applicable state income tax rates.
LIQUIDITY AND CAPITAL RESOURCES
During the first quarter of fiscal 1999, we completed our initial public
offering ("IPO") of 2,875,000 shares of which 2,000,000 shares were offered by
the Company at a price of $13 per share (including 375,000 shares offered under
an overallotment option). Our net proceeds after deducting underwriting
discounts, commissions and offering expenses were approximately $23.4 million.
In addition to the IPO, we generated $10.8 million in cash flows from operations
in fiscal 1999.
We have no long-term debt and continue to operate primarily debt-free. Working
capital increased to $39.2 million at March 31, 1999 compared to $7.5 million at
March 31, 1998. This increase was primarily due to an increase in cash of $33.9
million. Net proceeds from the IPO of $23.4 million contributed to the increase
in cash as well as increased profitability. Our days sales in accounts
receivable at March 31, 1999 was 51 compared to 56 days at March 31, 1998. The
decrease in days sales outstanding was the result of increased emphasis on
collections. While we believe that the risk with respect to collection of
accounts receivable is minimized by the creditworthiness of our customers,
primarily banks and other financial institutions, and our credit and collection
policies, there can be no assurance that we will not encounter collection
problems in the future. We attempt to further minimize this risk by performing
ongoing credit valuations of our customers and maintaining an allowance for
potential credit losses. We believe that our allowance for doubtful accounts and
collection policies are adequate.
Capital expenditures were approximately $1 million and $600,000 for fiscals 1999
and 1998, respectively, and were used principally for computer and other
equipment software and to a lesser extent leasehold improvements. For fiscal
2000, capital expenditures are expected to be approximately $700,000, and will
be used principally for computers and other equipment.
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We expect that existing cash and cash equivalent balances, together with cash
provided from operations, will be sufficient to meet the Company's working
capital and capital expenditure requirements for at least the next twelve
months.
To date, inflation has not had a material impact on the Company's financial
results.
IMPACT OF YEAR 2000
The Year 2000 issue is the result of computer programs using a two-digit format,
as opposed to four digits, to indicate the year. Computer systems based on a
two-digit format will be unable to interpret dates beyond the year 1999 which
could cause a system failure or other computer errors, leading to disruptions in
operations. The Year 2000 problem affects virtually all computer systems,
processes, and products in all segments of the economy. We are aware of the
issues associated with the Year 2000 issue and believe there are three general
areas of potential exposure: (1) our own service offerings; (2) our internal
informational systems; and (3) the effects of third party compliance efforts.
Based on our analysis through March 31, 1999, we do not believe that the Year
2000 issue will materially affect our business.
* Service Offerings and Products. We believe that our information technology
("IT") strategy consulting and systems integration services will not be
affected by the Year 2000 issue because such IT service offerings do not
involve computer processes that store or manipulate date-related fields. We
will continue to monitor newly developed or acquired IT service offerings
and products for Year 2000 compliance. In the event that any of our
developed or acquired IT service offerings or products are not Year 2000
compliant in a timely manner, our sales may decline materially, customers
and those with whom they do business may assert product liability and other
claims, and our business, results of operations and financial condition
would be materially and adversely affected.
* Internal Information Systems. We have conducted an assessment of our
information technology systems and non-IT systems (such as voice mail,
telephone and other systems containing embedded microprocessors). As a
result of our assessment, we have remediated our voice mail, telephone
system, corporate workstation computers and their servers, making them Year
2000 compliant. We determined during this assessment that our mission
critical focus would be the accounting and finance area. As a result, we
have scrutinized and tested for Year 2000 compliance both the accounting
software created by third parties and internally developed time and expense
reporting and project accounting software applications. For such
third-party software applications, we have obtained written confirmation
that the software applications are Year 2000 compliant. We also expect that
results of the independent testing of our third party payroll application
(ADP) will be completed by ADP on schedule. We believe that our internally
developed applications are already Year 2000 compliant and testing of the
mission critical areas, as outlined above, will be completed by June 30,
1999.
Based on currently available information, expenses to date, plus the
expenses we believe will be associated with these efforts in the future,
will be immaterial and have provided for the enhancements of these systems
in our operating and capital budgets for the current fiscal year. However,
if compliance efforts of which we are not currently aware are required and
are not completed on time, or if the cost of any required updating,
modification or replacement of any of our IT systems exceeds our estimates,
the Year 2000 issue could have a material adverse effect on our business,
financial condition and results of operations.
* Effects of Third Party Compliance. In addition to our internal systems, we
rely on third party relationships in the conduct of our business. For
example, third party vendors handle the payroll
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function for us, and we also rely on the services of the landlord at our
facility, telecommunication companies, banks, utilities and commercial
airlines, among others. We have obtained assurances from our landlord and
our material vendors and suppliers that there will be no interruption of
service as a result of the Year 2000 issue. We have prepared contingency
plans to ameliorate the negative effects on us in the event the Year 2000
issue results in the unavailability of any of these services. However,
contingency plans developed by us may not prevent a service interruption on
the part of one or more of our third party vendors or suppliers. In
addition, the failure on the part of the accounting systems of our clients
due to the Year 2000 issue could result in a delay in the payment of
invoices issued by us for services and expenses. A material service
interruption from a material vendor or supplier or a failure of the
accounting systems of a significant number of our clients would have a
material adverse effect on our business, financial condition and results of
operations.
We have prepared written contingency plans to address failures in our major IT
and non-IT systems. These plans include identification of major systems,
dependencies on third parties, and resources and strategies necessary to restore
operations or work around failures. The failure of our accounting systems
resulting from a Year 2000 related power system outage, particularly at the end
of a fiscal period, could represent a reasonably likely worst case scenario. Our
contingency plan provides for an alternate site that is equipped with back-up
power systems that can support the mission critical areas.
The information concerning our Year 2000 compliance effort includes
"forward-looking statements." Such forward-looking statements involve known and
unknown risks, uncertainties, and other factors that may cause actual events or
costs to be materially different than indicated by such forward-looking
statements. These factors include, among others, unanticipated costs of
remediation and replacement of our Year 2000 compliance efforts, our inability
to meet our targeted dates as scheduled and the failure of our material
suppliers and other strategic relationships to ensure Year 2000 compliance. Any
estimates and projections described have been developed by management and are
based on our best judgments together with the information that is available to
date. Due to the many uncertainties surrounding the Year 2000 issue, our
stockholders are cautioned not to place undue reliance on such forward-looking
statements.
CERTAIN FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
The following important factors, among others, could cause actual results to
differ materially from those contained in forward-looking statements made in
this Annual Report on Form 10-K or presented elsewhere by management from time
to time.
Variability of Quarterly Operating Results - Variations in our revenues and
operating results have occurred from quarter to quarter and may continue to
occur as a result of a number of factors. Quarterly revenues and operating
results can depend on:
* the number, size and scope of customer projects commenced and completed
during a quarter,
* changes in employee utilization rates,
* changes in average billing rates,
* the number of working days in a quarter,
* the timing of introduction of new service offerings, both by us and our
competitors,
* changes in pricing, both by us and our competitors,
* loss of a significant customer,
* loss of key personnel,
* other factors that adversely impact the financial services industry, and
* general economic conditions.
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Additionally, we have experienced difficulty forecasting the timing of revenues
because the length of our sales cycle ranges from one to six months for new
projects with existing customers and three to six months for new customers. In
addition, the relatively long length of our sales cycle may negatively impact
the operating results for any particular quarter as a result of increased sales
and marketing expenses without associated increases in revenues in that
particular quarter.
Because a high percentage of our expenses are relatively fixed, a variation in
the timing of the initiation or the completion of customer projects,
particularly at or near the end of a quarter, can cause us to have significant
variations in operating results from quarter to quarter and can result in
losses. We attempt to manage our personnel utilization rates by closely
monitoring project timetables and staffing requirements for new projects. While
we must adjust our professional staff to reflect active projects, we must
maintain a sufficient number of senior professionals to oversee existing
customer projects and participate with our sales force in securing new customer
projects. Furthermore, we may experience a significant time lag between the date
we hire professional staff and the date they become fully productive. The rate
at which new professional staff become productive could cause us to have
material fluctuations in quarterly results of operations. Additionally, to the
extent such increased operating expenses precede or are not subsequently
followed by increased revenues, our business, financial condition and results of
operations could be materially adversely affected. Many of our projects are, and
may be in the future, terminable without customer penalty. A customer's
unanticipated termination of a major project or the loss of a major customer
could require us to maintain or terminate underutilized employees, causing us to
have a higher than expected number of unassigned persons or higher than expected
severance expenses.
Due to all of the foregoing factors, our results of operations may at times be
below the expectations of public market analysts and investors. In such event
our stock price could be materially adversely affected.
Dependence on the Financial Services Industry - We derive substantially all of
our revenues from customers in the financial services industry, primarily banks.
Furthermore, we expect that we will continue to derive substantially all of our
revenues from such customers for the foreseeable future. Accordingly,
unfavorable economic conditions which adversely impact the financial services
industry could have a material adverse effect on our business, financial
condition and results of operations. For example, the financial services
industry has experienced and may continue to experience cyclical fluctuations in
profitability. These fluctuations have in the past, and may in the future,
affect our customers' willingness or ability to fund projects for which we may
be engaged. In addition, because we derive a significant portion of our revenues
from services related to the deregulation and consolidation of the financial
services industry, regulatory changes or a reduction in consolidation activity
have in the past, and may in the future, have a material adverse effect our
business, financial condition and results of operations.
Concentration of Revenues; Dependence on Major Customers - We have derived and
expect to continue to derive a significant portion of our revenues from a
relatively limited number of customers. For example, our five largest customers
in fiscal 1999, First Security Information Technology, Inc., National City
Corporation, Associated Banc-Corp., UST Data Services, Inc. and Susquehanna
Bancshares Corp., accounted for approximately 18.4%, 16.4%, 13.8%, 9.6% and
5.6%, respectively, of revenues. In fiscal 1998, Associated BancCorp., First
Security Information Technology, Inc., National City Corporation, NationsBank
Corp. and ABN-AMRO Information Technology Services accounted for approximately
17.4%, 13.7%, 13.3%, 10.1% and 10.0%, respectively, of revenues. Because a
significant portion of our revenues are derived from services related to
deregulation and consolidation activities in the financial services industry,
changes in the regulatory environment or a reduction in consolidation activity
have in the past, and may in the future, have a material adverse effect on our
business, financial condition and results of operations. In addition, the loss
of a major customer or termination of a major project as a
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result of an acquisition of a customer by an organization to which the Company
does not currently provide services could have a material adverse effect on our
business, financial condition and results of operations. Substantially all of
our revenues are derived from customers located in North America.
Additionally, we may be materially adversely affected by the loss of a major
customer or termination of a major project as a result of an acquisition of a
customer by an organization to which we do not currently provide services. For
example, in December 1998 we announced that National City Corporation, which
accounted for 16.4% and 13.3% of our revenues in fiscal 1999 and 1998,
respectively, decided not to extend its contract with us beyond December 31,
1998. Although our largest customers have varied from period to period, we
anticipate that our results of operations will continue to significantly depend
upon revenues of a small number of customers. We cannot assure you that our
major customers will continue to purchase our services at current levels, if at
all, or that we will be able to replace revenues from such customers with
revenues from other customers. The loss of, or a significant reduction in
revenues from, any of our major customers could materially adversely affect our
business, financial condition and results of operations.
Risk of Fixed Price Contracts - Revenues from fixed price contracts represented
approximately 5.4% and 12.1% of our revenues for fiscal 1999 and 1998,
respectively. In making proposals for fixed priced contracts, we rely on
estimated costs for completing the projects. These estimates reflect, among
other things, our calculations of the effectiveness of our technology and
services as applied to a particular project. Any unexpected costs or
unanticipated delays in connection with our performance of fixed price contracts
could materially adversely effect our business, financial condition and results
of operations.
Dependence on the Year 2000 Market; Reductions in Year 2000 Spending by Our
Customers - A portion of our revenue growth in fiscal 1999 and 1998 resulted
from our customer's increased demand for services relating to the diagnosis and
resolution of the Year 2000 problem. However, in fiscal 1999 we saw a
significant slowdown in Year 2000 spending by financial services companies. In
addition, we anticipate this demand will continue to diminish through the
remainder of calendar 1999 and after the year 2000 as many customers resolve
their Year 2000 issues. Due to these factors, we cannot predict the market for
Year 2000 products and services. The failure of growth in the market for Year
2000 products and services could adversely affect our business, financial
condition and results of operations.
Dependence on Key Personnel - Our success depends to a significant extent upon a
number of key management personnel, including our Chairman and Chief Executive
Officer, Robert W. Howe, and our President and Chief Operating Officer, William
H. Gallagher. The loss of either executive could materially adversely affect our
business, financial condition and results of operations. We have employment
agreements with each of these individuals, and with Senior Vice President,
Finance and Administration and Chief Financial Officer, Paul K. McGrath,
Executive Vice President and Director of Operations, Peter A. Cahill and Senior
Vice President, Corporate Development, Paul James Lynch. These agreements
include certain restrictive covenants relating to non-disclosure of confidential
business information and our right to inventions and technical improvements made
by the employee. Such covenants are beneficial to us. The agreements also
prohibit the employee from soliciting our employees or customers for a period of
two years after any termination of the employee's employment, but otherwise do
not contain non-competition provisions. Additionally, we have purchased $5.5
million in key man insurance policies on the life of each of Mr. Howe and Mr.
Gallagher.
Availability of Professional Staff - Our business involves the delivery of
professional services which is labor-intensive. Thus, our success depends in
large part on our ability to attract, train, motivate and retain highly skilled
employees. Many companies seek to hire qualified project managers causing them
to be in great demand and likely to remain a limited resource for the
foreseeable future. We cannot assure you that we will be able to attract
sufficient numbers of highly skilled employees and/or retain our
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existing project managers and other senior personnel. The loss of some or all of
our senior staff could materially adversely affect our business, financial
condition and results of operations, including our ability to secure and
complete customer projects on a timely basis.
Management of Growth - During fiscal 1999, our staff increased from 295 at March
31, 1998 to over 350 employees at September 30, 1998. We ended fiscal year 1999
with 314 employees. To effectively manage such growth and change, we need to
continue to improve our operational, financial, and other internal systems, and
to attract, train, motivate, manage and retain our employees. If we are unable
to manage growth effectively, or if our new employees do not achieve anticipated
performance levels, our business, financial condition and results of operations
could be materially adversely affected.
Competition - Many companies compete against us in the information technology
and systems integration market, especially in the financial services industry.
Additionally, rapid technological and market changes occur frequently. We
compete for customer projects and experienced personnel against a number of
companies with significantly greater financial, technical and marketing
resources and revenues than us. Many of these competitors also have greater name
recognition in the financial services industry. Our competitors operate in a
variety of market segments including:
* systems consulting and integration,
* application software,
* professional services (such as computer equipment companies like
International Business Machines Corporation),
* multinational accounting firms, and
* general management consulting firms (such as Andersen Consulting, Computer
Sciences Corporation and Electronic Data Systems Corporation).
In addition, numerous firms, many with focused local markets, have highly
fragmented the custom software development market. Additionally, we also face
competition from internal information technology departments of our customers.
In the future, we expect to experience increasing competition from companies
offering established integration services and new service offerings and
technologies. In addition, strategic acquisitions or cooperative relationships
among our current or potential competitors may increase their ability to expand
or increase their service offerings to address the needs of our existing or
prospective customers. Accordingly, new competitors or alliances among current
and new competitors, may emerge and rapidly gain significant market share. Such
increased competition could result in:
* lower utilization rates,
* billing rate reductions,
* fewer customer engagements, and
* reduced gross margin and loss of market share for the Company,
any of these factors could materially adversely affect our business, financial
condition and results of operations.
To be successful in the future we must respond promptly and effectively to
customer demands, technological changes and competitors' innovations. We may not
be able to respond as quickly as our competitors to new or emerging technologies
and changes in customer requirements. Furthermore, we may be unable to devote as
many resources as our competitors to the development, promotion and sale of new
service offerings to prospective customers. We cannot assure you that we will
successfully compete
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with existing or new competitors or that such competition will not effect our
business, financial condition and results of operations.
Rapid Technological Change - Our success depends in part on our ability to
develop information technology solutions that keep pace with rapid changes in
computer technology, evolving industry standards and changing customer needs and
preferences. In particular, our future success depends upon our ability to
develop and introduce new service offerings, improve existing service offerings
and develop and maintain the skills necessary to keep pace with changing
technologies. We cannot assure you that we will be successful in developing,
introducing and marketing such service offerings on a timely and cost-effective
basis, or that the market will accept such service offerings, if developed. In
addition, we cannot assure you that our products will not become uncompetitive
or obsolete as a result of products, technologies or service offerings developed
by others. Our failure to address these challenges could materially adversely
affect our business, financial condition and results of operations.
Potential for Contract Liability; Project Risks - Our services, especially
solutions addressing the Year 2000 problem, involve key aspects of our
customers' businesses and computer systems. A customer could assert a claim
against us as a result of a system failure regardless of our actual
responsibility for such failure. We attempt to contractually limit our liability
for damages arising from negligent acts, errors, mistakes or omissions in
rendering our services. Despite this precaution, we cannot assure you that the
limitations of liability set forth in our contracts will be enforceable or will
protect us from liability for damages. Additionally, we maintain general
liability insurance coverage, including coverage for errors and omissions in
excess of the applicable deductible amount. However, we cannot assure you that
we will be able to obtain such coverage on acceptable terms, or in sufficient
amounts to cover one or more large claims, or that the insurer will not deny us
coverage on a future claim. The successful assertion of one or more large claims
against us that exceed available insurance coverage, or the occurrence of
changes in our insurance policies, including premium increases or the imposition
of large deductible or co-insurance requirements, could materially adversely
affect our business, financial condition and results of operations.
Furthermore, we would incur substantial costs and possibly suffer a diversion of
management's attention from operations if litigation, regardless of its outcome,
were to occur. Any contract liability claim or litigation against us could,
therefore, materially adversely affect our business, financial condition and
results of operations. Because many of our projects are mission-critical
projects for major financial institutions, our failure or inability to meet a
customer's expectations could seriously damage our reputation and affect our
ability to attract new business.
Control by Management - Our executive officers and directors (and their
affiliates) beneficially own approximately 68.7% of our outstanding common
stock. Thus, while the members of our management have not entered into any
agreement regarding the voting of their common stock, if they were to vote
together, they could effectively control the outcome of matters requiring a
stockholder vote, including the election of directors, adopting or amending
provisions of our articles of organization and by-laws, and approving mergers or
other similar transactions, such as sales of substantially all of our assets.
Because of this control possible acquirors may be discouraged from entering into
transactions involving an actual or potential change of control, including
transactions in which a possible acquiror might offer you a premium for your
shares over then current market prices. In addition, certain investors may only
be willing to pay a reduced price for shares of our common stock because of such
management control. Furthermore, our articles of organization do not provide for
cumulative voting in the election of directors.
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Potential Acquisitions - In our normal course, we evaluate potential
acquisitions of businesses and technologies that could complement or expand our
business. The risks associated with acquisitions include:
* the retention of personnel,
* diversion of management's attention,
* unexpected liabilities, and
* tax and accounting issues.
If we were to complete an acquisition, we cannot assure you that we would be
able to successfully integrate the acquired business or technologies into our
existing business and operations. In addition, we cannot assure you that the
acquisition of any business or technology will cause us to successfully develop
new service offerings, or that any such service offerings, if developed, will
achieve market acceptance or profitability. If we consummate one or more
significant acquisitions in which the consideration consists of stock, or is
financed with the net proceeds of the issuance of stock, you may suffer a
significant dilution of your equity interest.
Additionally, if we were to complete an acquisition to expand internationally,
our business may be subject to a variety of risks affecting international
operations, including:
* difficulties in collecting accounts receivable,
* potentially longer payment cycles,
* increased costs associated with maintaining international marketing
efforts,
* currency fluctuations,
* exchange rates,
* changes in regulatory requirements, and
* difficulties in enforcement of contractual obligations and intellectual
property rights.
Thus, we cannot assure you that our business, financial condition or results of
operations will not be materially adversely affected by a potential acquisition.
Volatility of Stock Price - The market price of the shares of common stock may
be volatile and subject to wide fluctuations in response to the following
factors:
* variations in operating results,
* announcements of technological innovations or new services by us or our
competitors,
* changes in financial estimates by securities analysts, or
* other events or factors.
In addition, the financial markets have experienced significant price and volume
fluctuations that have especially affected the market prices of equity
securities of many information technology companies. Often these fluctuations
have been unrelated to the operating performance of such companies or have
resulted from the failure of such companies to meet market expectations in a
particular quarter. Broad market fluctuations, or any failure of our operating
results to meet market expectations in a particular quarter, may materially
adversely affect the market price of your shares of common stock. In the past,
following periods of volatility in the market price of a company's securities,
stockholders have sometimes instituted a securities class action suit against
such company. If such litigation were to arise against us it could result in
substantial costs and a diversion of management attention and resources. This
could materially adversely affect our business, financial condition and results
of operations.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion about our market risk disclosures involves
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements. As of March 31, 1999, we did not
use derivative financial instruments for speculative or trading purposes.
Interest Rate Risk
We invest our cash in corporate money market accounts and collateralized
repurchase agreements. These securities are not subject to interest rate risk
and will not fall in value if market interest rates increase.
Foreign Currency Exchange Risk
The majority of our sales are denominated in U.S. dollars and take place in
North America. We do not believe foreign currency exchange rates or the
introduction of the Euro will have an impact on us.
22
23
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants - PricewaterhouseCoopers LLP..............................................24
Report of Independent Auditors - Ernst & Young LLP..........................................................25
Consolidated Balance Sheets as of March 31, 1999 and 1998...................................................26
Consolidated Statements of Income for the Years Ended March 31, 1999, 1998 and 1997.........................27
Consolidated Statements of Stockholders' Equity for the Years Ended March 31, 1999,
1998 and 1997............................................................................................28
Consolidated Statements of Cash Flows for the Years Ended March 31, 1999, 1998 and
1997......................................................................................................29
Notes to Consolidated Financial Statements..................................................................30
Schedules:
Schedule II - Valuation and Qualifying Accounts........................................................40
23
24
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Atlantic Data Services, Inc.
In our opinion, the accompanying consolidated balance sheet as of March 31, 1999
and the related consolidated statements of income, stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Atlantic Data Services, Inc. and its subsidiary (the "Company") at March 31,
1999, and the results of their operations and their cash flows for the year then
ended, in conformity with generally accepted accounting principles. In addition,
in our opinion, the financial statement schedule listed in the accompanying
index presents fairly, in all material respects, the information set forth
therein for the year ended March 31, 1999 when read in conjunction with the
related consolidated financial statements. These financial statements and the
financial statement schedule are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements and
the financial statement schedule based on our audit. We conducted our audit of
these statements in accordance with generally accepted auditing standards, which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 26, 1999
24
25
Report of Independent Auditors
Board Directors
Atlantic Data Services, Inc.
We have audited the accompanying consolidated balance sheet of Atlantic Data
Services, Inc. as of March 31, 1998 and the related consolidated statements of
income, stockholders' equity, and cash flows for each of the two years in the
period ended March 31, 1998. Our audit also included the financial statement
schedule listed in the index at Item 14. These financial statements and schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Atlantic Data Services, Inc. at March 31, 1998, and the consolidated results of
its operations and its cash flows for each of the two years in the period ended
March 31, 1998 in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
April 13, 1998
25
26
ATLANTIC DATA SERVICES, INC.
Consolidated Balance Sheets
(in thousands, except share data)
MARCH 31, MARCH 31,
1999 1998
- -----------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $37,326 $ 3,401
Accounts receivable, net of allowances for doubtful accounts
of $725 and $375 at March 31, 1999 and 1998, respectively 7,037 9,100
Prepaid expenses 100 462
Deferred taxes 739 284
- -----------------------------------------------------------------------------------------------------------------------
Total current assets 45,202 13,247
Property and equipment, net 1,346 995
Other assets 213 243
- -----------------------------------------------------------------------------------------------------------------------
Total assets $46,761 $14,485
=======================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,193 $ 1,061
Accrued expenses and other liabilities 4,393 3,236
Billings in excess of costs and estimated earnings -- 640
Income taxes payable 417 830
- -----------------------------------------------------------------------------------------------------------------------
Total current liabilities 6,003 5,767
- -----------------------------------------------------------------------------------------------------------------------
Long-term liabilities 13 35
- -----------------------------------------------------------------------------------------------------------------------
Commitments
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000 authorized, no shares
issued or outstanding -- --
Common stock, $.01 par value, 60,000,000 shares authorized,
13,018,391 shares issued and 12,906,391 outstanding at March 31, 1999 and
11,746,840 shares authorized, 6,847,960 shares issued
and outstanding at March 31, 1998 130 68
Class A common stock, $.01 par value, no shares authorized, issued
or outstanding at March 31, 1999 and 1,694,800 shares
authorized, 928,790 shares issued and 816,790 outstanding at
March 31, 1998 -- 9
Special common stock, $.01 par value, no shares authorized, issued
or outstanding at March 31, 1999 and 3,104,080 shares
authorized, issued and outstanding at March 31, 1998 -- 31
Additional paid-in capital 26,526 2,245
Retained earnings 14,114 6,355
Treasury stock (112,000 shares carried at cost) (25) (25)
- -----------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 40,745 8,683
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $46,761 $14,485
=======================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
26
27
ATLANTIC DATA SERVICES, INC.
Consolidated Statements of Income
(in thousands, except per share data)
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, MARCH 31, MARCH 31,
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
Revenues $66,763 $42,830 $23,843
Cost of revenues 41,083 24,223 15,218
- ---------------------------------------------------------------------------------------------------------------------
Gross profit 25,680 18,607 8,625
- ---------------------------------------------------------------------------------------------------------------------
Operating expenses:
Sales and marketing 4,469 3,737 1,493
General and administrative 8,849 6,567 3,947
- ---------------------------------------------------------------------------------------------------------------------
Total operating expenses 13,318 10,304 5,440
- ---------------------------------------------------------------------------------------------------------------------
Income from operations 12,362 8,303 3,185
Interest income, net 1,261 142 115
- ---------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes 13,623 8,445 3,300
Provision for income taxes 5,864 3,547 1,359
Gain on disposal of the on-line processing
division, less applicable income taxes of
$70 in 1997 -- -- 100
- ---------------------------------------------------------------------------------------------------------------------
Net income $ 7,759 $ 4,898 $ 2,041
=====================================================================================================================
Basic earnings per share $ 0.62 $ 0.49 $ 0.20
=====================================================================================================================
Diluted earnings per share $ 0.60 $ 0.49 $ 0.20
=====================================================================================================================
Shares used in computing earnings per
share (basic) 12,468 9,952 9,952
=====================================================================================================================
Shares used in computing earnings per
share (diluted) 12,855 9,952 9,952
=====================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
27
28
ATLANTIC DATA SERVICES, INC.
Consolidated Statements of Stockholders' Equity
(in thousands, except share data)
CLASS A SPECIAL
COMMON STOCK COMMON STOCK COMMON STOCK ADDITIONAL TREASURY STOCK
------------------ ----------------- ------------------- PAID-IN RETAINED --------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31,
1996 6,847,960 $ 68 394,800 $4 3,104,080 $31 $1,281 $ 3,916 112,000 $(25) $ 5,275
Dividends paid -- -- -- -- -- -- -- (1,500) -- -- (1,500)
Net income -- -- -- -- -- -- -- 2,041 -- -- 2,041
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31,
1997 6,847,960 68 394,800 4 3,104,080 31 1,281 4,457 112,000 (25) 5,816
Dividends paid -- -- -- -- -- -- -- (3,000) -- -- (3,000)
Shares issued under
stock option plans -- -- 533,990 5 -- -- 581 -- -- -- 586
Income tax benefit
from exercise of stock
options -- -- -- -- -- -- 383 -- -- -- 383
Net income -- -- -- -- -- -- -- 4,898 -- -- 4,898
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31,
1998 6,847,960 68 928,790 9 3,104,080 31 2,245 6,355 112,000 (25) 8,683
Conversion of Class A
Common Stock and
Special Common Stock
to Common Stock 4,032,870 40 (928,790) (9) (3,104,080) (31) -- -- -- -- --
Issuance of Common
Stock, net of
issuance costs 2,000,000 20 -- -- -- -- 23,351 -- -- -- 23,371
Shares issued under
stock option plans 137,561 2 -- -- -- -- 839 -- -- -- 841
Income tax benefit
from exercise of stock
options -- -- -- -- -- -- 91 -- -- -- 91
Net income -- -- -- -- -- -- -- 7,759 -- -- 7,759
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31,
1999 13,018,391 $130 -- -- -- -- $26,526 $14,114 112,000 $(25) $40,745
====================================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
28
29
ATLANTIC DATA SERVICES, INC.
Consolidated Statements of Cash Flows
(in thousands)
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, MARCH 31, MARCH 31,
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,759 $ 4,898 $ 2,041
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 668 262 150
Deferred taxes (455) (119) (61)
Provision for bad debts 350 144 120
Other -- -- (186)
Tax benefit from exercise of stock options 91 383 --
Change in assets and liabilities:
Accounts receivable 1,713 (4,830) (325)
Prepaid expenses and other assets 392 (385) 28
Accounts payable 132 660 67
Accrued expenses and other liabilities 1,157 1,523 183
Billings in excess of costs and estimated earnings on
contracts (640) 472 138
Federal and state income taxes (413) 781 (180)
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 10,754 3,789 1,975
- -------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,019) (608) (221)
Proceeds from the disposition of the on-line processing division -- -- 186
- -------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,019) (608) (35)
- -------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under capital lease obligation (22) (19) (18)
Proceeds from exercise of stock options under stock option plans 841 586 --
Net proceeds from initial public offering 23,371 -- --
Dividends paid -- (3,000) (1,500)
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 24,190 (2,433) (1,518)
- -------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 33,925 748 422
Cash and cash equivalents, beginning of year 3,401 2,653 2,231
- -------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 37,326 $ 3,401 $ 2,653
=========================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Taxes $ 6,689 $ 2,566 $ 1,697
=========================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
29
30
ATLANTIC DATA SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
1. DESCRIPTION OF BUSINESS
Atlantic Data Services, Inc. ("ADS" or the "Company"), provides information
technology ("IT") strategy consulting and systems integration services to
customers exclusively in the financial services industry, primarily banks. The
Company offers IT solutions to the business challenges faced by financial
services companies through our in-depth financial services experience,
technological expertise and project management skills. The Company's service
offerings are organized around four practice areas: IT Strategy Consulting,
Consolidations and Conversions, Year 2000 Resolution, and Electronic Commerce
and Home Banking.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Atlantic Data
Services, Inc. and its wholly owned subsidiary ADS Securities Corp.
(collectively "the Company"). All intercompany accounts and transactions have
been eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original
maturity date of three months or less to be cash equivalents. Cash equivalents
consist of money market accounts and repurchase agreements which are
collateralized by U.S. Treasury Securities and controlled by major financial
institutions. These investments are subject to minimal credit and market risk.
At March 31, 1999 and 1998, cash equivalents were comprised of money market
funds totaling approximately $25,188,000 and $0, respectively, and repurchase
agreements totaling approximately $11,857,000 and $3,835,000, respectively. At
March 31, 1999 and 1998, cash equivalents are classified as available-for-sale
and recorded at cost, which approximates fair value.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to credit risk
consist primarily of cash equivalents and accounts receivable. The risk with
respect to cash equivalents is minimized by the Company's policies in which
investments have relatively short maturities and are only placed with highly
rated issuers. A significant portion of the Company's revenues and accounts
receivable are derived from services provided to banks and other financial
institutions. The risk with respect to accounts receivable is minimized by
creditworthiness of the Company's customers and the Company's credit and
collection policies. The Company performs ongoing credit evaluations of its
customers, generally does not require collateral, and maintains allowances for
potential credit losses which, when realized, have been within the range of
management's expectations.
Revenue Recognition
The Company primarily derives its revenue from consulting services under time
and material billing arrangements. Under these arrangements, revenue is
recognized as the services are provided. Deferred revenue pertains to time and
material billing arrangements and represents cash collected in advance of the
performance of services.
30
31
Revenue on fixed price contracts is recognized using the percentage of
completion method of accounting and is adjusted monthly for the cumulative
impact of any revision in estimates. The Company determines the percentage of
completion of its contracts by comparing costs incurred to date to total
estimated costs. Contract costs include all direct labor and expenses related to
the contract performance. Losses, if any, are provided for in the period in
which the loss is determined. "Billings in excess of costs and estimated
earnings," represents billings in excess of revenues recognized.
Included in revenues are reimbursable contract-related travel and entertainment
expenses of $9,413,000, which are separately billed to clients.
Property and Equipment
Property and equipment are stated at cost, less depreciation. Depreciation
expense is recognized using the straight-line method over the estimated useful
lives of the related assets. When assets are sold or retired, the related costs
and accumulated depreciation are removed from the accounts and any resulting
gain or loss is reflected in operations.
Leases
Leases are recorded as capital or operating leases. Any lease where
substantially all of the benefits and risks related to the ownership of the
leased asset are transferred to the lessee, as defined by Statement of Financial
Accounting Standards ("SFAS") No. 13, "Accounting for Leases," is accounted for
as if the asset were acquired and as if the obligation were assumed as of the
date of the lease. All other leases are recorded as operating leases, whereby
the related costs are charged to income on a straight-line basis over the lesser
of the lease term or the useful life of the lease.
Stock-Based Compensation
The Company grants stock options for a fixed number of shares to employees with
an exercise price equal to the fair value of the shares at the date of the
grant. The Company accounts for stock options granted to employees in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations, and applies the disclosure only
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" (see Note
7).
Segment Information
During the fiscal year ended March 31, 1999, the Company adopted SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information." SFAS 131
prescribes the use of the "management" approach whereby the Company's reportable
segments are established based on the internal reporting that is used by
management for making operating decisions and assessing performance. Also
required by SFAS No. 131 are disclosures about products and services, geographic
areas and major customers. The adoption of SFAS No. 131 did not affect the
results of operations or the financial position of the Company (see Note 11).
Earnings per Common Share
The Company follows Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("FAS 128"). FAS 128 requires the presentation of two
amounts, basic earnings per share and diluted earnings per share. During fiscal
1998 and 1997, the two class method of computing earnings per share was used
because Common Stock and Special Common Stock share ratably in dividends when
declared, while Class A Common Stock is not entitled to receive dividends.
Accordingly, earnings per share are equal for Common Stock and Special Common
Stock. No earnings have been allocated to Class A Common Stock. Basic earnings
per share is calculated by
31
32
dividing net income by the weighted average number of shares of Common Stock and
Special Common Stock outstanding during the period. Diluted earnings per share
is computed using the weighted average number of Common Stock and Special Common
Stock outstanding during the period, plus the dilutive effect of common stock
equivalents.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to the prior period financial
statements to conform to current presentation. These reclassifications did not
affect the Company's results of operations or financial position.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
USEFUL LIFE MARCH 31, MARCH 31,
IN YEARS 1999 1998
------------------------ -----------------------------------
(in thousands)
Computer equipment and software 2-5 $ 1,811 $ 1,147
Office furniture and equipment 5-7 609 459
Leasehold improvements Lease Term 506 418
Building 31.5 183 183
-----------------------------------
3,109 2,207
Accumulated depreciation and amortization (1,763) (1,212)
-----------------------------------
$ 1,346 $ 995
===================================
Of the amounts provided above for office furniture and equipment, approximately
$100,000 is held under capital lease at March 31, 1999 and 1998. Accumulated
amortization on office furniture and equipment held under capital lease totaled
approximately $87,000 and $50,000 at March 31, 1999 and 1998, respectively.
4. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the following:
MARCH 31, MARCH 31,
1999 1998
-----------------------------------
(in thousands)
Accrued payroll $2,216 $1,937
Accrued medical 578 379
Compensated absences 257 223
Other 1,342 697
-----------------------------------
$4,393 $3,236
===================================
32
33
5. INCOME TAXES
Significant components of the provision for income taxes are presented below (in
thousands):
CONTINUING DISCONTINUED
OPERATIONS OPERATIONS CONSOLIDATED
------------------------------------------------------------------------
(in thousands)
FISCAL YEAR 1999:
Current:
Federal $5,193 $ -- $5,193
State 1,172 -- 1,172
Deferred:
Federal (404) -- (404)
State (97) -- (97)
------------------------------------------------------------------------
$5,864 $ -- $5,864
========================================================================
FISCAL YEAR 1998:
Current:
Federal $2,880 $ -- $2,880
State 786 -- 786
Deferred:
Federal (94) -- (94)
State (25) -- (25)
------------------------------------------------------------------------
$3,547 $ -- $3,547
========================================================================
FISCAL YEAR 1997:
Current:
Federal $1,201 $ 53 $1,254
State 217 19 236
Deferred:
Federal (50) (1) (51)
State (9) (1) (10)
------------------------------------------------------------------------
$1,359 $ 70 $1,429
========================================================================
The reconciliation of the consolidated effective tax rate of the Company for the
years ended March 31, 1999, 1998 and 1997 is as follows:
1999 1998 1997
-----------------------------------------------------------------------------------
(in thousands)
Pretax income $13,623 100% $8,445 100% $3,470 100%
===================================================================================
Statutory income tax rate $ 4,768 35% $2,871 34% $1,180 34%
State taxes, net of federal benefit 699 5 502 6 149 4
Permanent differences 256 2 153 2 96 3
Other 141 1 21 -- 4 --
-----------------------------------------------------------------------------------
Total provision $ 5,864 43% $3,547 42% $1,429 41%
===================================================================================
33
34
The effect of temporary differences and carryforwards that give rise to deferred
tax assets are as follows:
MARCH 31, MARCH 31,
1999 1998
-------------------------------------
(in thousands)
Allowance for doubtful accounts $291 $150
Compensated absence accrual 103 89
Depreciation 113 67
Other accruals 345 45
-------------------------------------
$852 $351
=====================================
The Company continually reviews the recoverability of its deferred tax assets
and would, if necessary, establish a valuation allowance if it is more likely
than not that such deferred tax assets will not be realized. At March 31, 1999
and 1998, management believes that it is more likely than not that the tax
benefit will be realized for its deferred tax assets.
6. STOCKHOLDERS' EQUITY
On May 21, 1998, the Company commenced an initial public offering ("IPO") of
2,500,000 shares of Common Stock, generating proceeds of $23,371,000, net of
underwriting commissions and other expenses incurred in connection with the
offering. Of the 2,500,000 shares of Common Stock offered, 2,000,000 shares were
offered and sold by the Company and 500,000 shares were offered and sold by
certain selling stockholders. In addition, certain underwriters exercised an
option to purchase an additional 375,000 shares of Common Stock from selling
stockholders in June 1998.
In connection with the IPO, all issued and outstanding shares of Class A Common
Stock and Special Common Stock converted into 4,032,870 shares of Common Stock
on a share-for-share basis.
Holders of the Common Stock are entitled to one vote per share and to receive
dividends, when and if declared by the Company's Board of Directors.
Prior to the conversion, holders of the Special Common Stock were entitled to
one vote per share and to receive dividends, when and if declared by the
Company's Board of Directors. In addition, holders of the Special Common Stock
were entitled to a liquidation preference of $0.91 per share.
Holders of the Class A Common Stock were not entitled to vote or to receive
dividends.
In October 1997, the Company's Board of Directors voted to increase the number
of authorized shares of Common Stock, Class A Common Stock and Special Common
Stock to 11,746,840, 1,694,800 and 3,104,080, respectively, and approved a
28-for-1 stock split of the Common Stock, Class A Common Stock and Special
Common Stock in the form of a stock dividend. The accompanying consolidated
financial statements have been restated to give effect to the stock split for
all years presented.
During the years ended March 31, 1998 and 1997, the Company paid dividends of
$0.30 and $0.15, respectively, per share, to the holders of the Special Common
Stock and Common Stock.
34
35
7. STOCK OPTION PLANS
Key Person Stock Plan
In March 1985, the Board of Directors approved the Company's Key Person Stock
Plan (the "Key Person Plan") and authorized that 560,000 shares of Class A
Common Stock be reserved for issuance under such plan. Under the terms of the
Key Person Plan, the Company is authorized to sell shares at the then fair
market value of Class A Common Stock to officers and other key employees of and
consultants to the Company. To date, 394,800 have been issued under the Key
Person Plan, of which an aggregate 112,000 shares were repurchased by the
Company and are held in treasury at March 31, 1999 and 1998. No Class A Common
Stock was issued pursuant to this plan during the years ended March 31, 1999,
1998 and 1997. At March 31, 1999, 165,200 shares of Common Stock were available
for future issuance; however, the Company does not intend to issue additional
shares under the Key Person Plan.
Incentive Stock Option Plan
On January 26, 1993, the Board of Directors approved the Company's 1992
Incentive Stock Option Plan (the "1992 Plan"). Under the terms of the 1992 Plan,
the Company is authorized to grant incentive stock options to purchase shares of
Class A Common Stock to officers and other employees of and consultants to the
Company. The aggregate number of shares of Class A Common Stock which may be
issued pursuant to the Plan is 812,000. Vesting is determined by the Board of
Directors. All options issued in 1997 were to employees and vested immediately
upon issuance. In connection with the conversion of Class A Common Stock to
Common Stock as part of the IPO, all options granted under the 1992 Plan were
converted to options to purchase Common Stock on May 28, 1998. At March 31,
1999, no options were available for future grant under the 1992 Plan.
1997 Stock Plan
In October 1997, the Board of Directors approved the Company's 1997 Stock Plan
(the "Plan"), and authorized that 500,000 shares of Class A Common Stock be
reserved for issuance under such plan. Under the terms of the Plan, the Company
is authorized to grant incentive stock options and non-qualified stock options,
as well as awards and direct purchases of Class A Common Stock to employees,
consultants, directors and officers of the Company. In March 1998, the Board of
Directors voted to amend the Stock Plan to provide, among other things, that the
number of shares reserved for issuance under the Stock Plan be increased from
500,000 shares of Class A Common Stock to 1,500,000 shares of Class A Common
Stock. In connection with the Conversion of Class A Common Stock to Common Stock
as part of the IPO, all options granted and available for grant under the Plan
were converted to options to purchase Common Stock on May 28, 1998. In March
1999, the Board voted to increase the authorized number of shares for issuance
to 3,000,000.
1998 Employee Stock Purchase Plan
The 1998 Employee Stock Purchase Plan (the "1998 Plan"), provides for the grant
of rights to eligible employees on a semi-annual basis to purchase shares of the
Company's Common Stock. The 1998 Plan allows eligible employees to purchase up
to 500 shares at the lessor of (1) 85% of the average market price of the Common
Stock on the first business day of the Payment Period and (2) 85% of the average
market price of the Common Stock on the last business day of the Payment Period.
The participant can contribute up to 10% of total compensation to the 1998 Plan.
35
36
The option activity for the years ended March 31, 1999, 1998 and 1997 was as
follows:
1999 1998 1997
---------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------------------------------------------------------------------------------------------
Outstanding options at
beginning of year 649,510 $ 6.41 812,000 $ 0.91 140,000 $0.91
Granted 1,502,500 7.70 371,500 7.91 672,000 0.91
Exercised (63,260) 6.01 (533,990) 1.11 -- --
Cancelled (180,625) 12.98 -- -- -- --
---------------------------------------------------------------------------------------------
Outstanding options at
end of year 1,908,125 $ 6.23 649,510 $ 6.41 812,000 $0.91
=============================================================================================
Exercisable at end of year 542,000 $ 4.98 503,760 $ 4.05 812,000 $0.91
=============================================================================================
Available for future grant
at end of year 1,306,625 -- 128,500 -- -- --
=============================================================================================
Weighted average fair
value of options granted
during the year $4.29 $1.07 $0.06
=============================================================================================
The following table summarizes stock options outstanding at March 31, 1999.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------------------------------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- -------------------------------------------------------------------------------------------------------------------------------
$ 0.91 277,000 6.44 $ 0.91 277,000 $ 0.91
4.25 60,000 8.78 4.25 30,000 4.25
5.06 1,050,000 9.94 5.06 -- 5.06
9.00 222,500 6.98 9.00 189,500 9.00
13.00 131,625 9.14 13.00 25,500 13.00
13.44 73,000 9.16 13.44 -- 13.44
14.13 60,000 9.53 14.13 20,000 14.13
15.00 34,000 9.47 15.00 -- 15.00
------------- ----------------
$0.91 - $15.00 1,908,125 8.94 $ 6.23 542,000 $ 4.98
============= ================
Pro forma information regarding net income and earnings per share is required by
SFAS 123, and has been determined as if the Company had accounted for its
employee share options under the fair value method of that Statement. The fair
value for employee options granted during this year was estimated at the date of
grant using a Black-Scholes option pricing model with the following assumptions:
36
37
FOR THE YEAR ENDED
-----------------------------------------------------------------
MARCH 31, MARCH 31, MARCH 31,
1999 1998 1997
-----------------------------------------------------------------
Risk free interest rate 4.2 - 6.7% 5.3 - 6.6% 5.3 - 6.6%
Volatility 80% -- --
Dividend yield -- -- --
Expected life in years 4 years 3 years 3 years
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period, which includes actual
accelerated vesting entitlements during the year.
The Company's pro forma information follows (in thousands except for earnings
per share information):
FOR THE YEAR ENDED
-----------------------------------------------------------------
MARCH 31, MARCH 31, MARCH 31,
1999 1998 1997
-----------------------------------------------------------------
Pro forma net income $6,267,000 $4,726,000 $2,011,000
=================================================================
Pro forma earnings per share (basic) $ 0.50 $ 0.47 $ 0.20
=================================================================
Pro forma earnings per share (diluted) $ 0.49 $ 0.47 $ 0.20
=================================================================
The effect on net income and earnings per share may not be indicative of the
effects in future years as options vest over several years and the Company
continues to grant stock options to new employees.
8. EARNINGS PER SHARE
The following table sets forth per share earnings for the year ended March 31,
1999.
YEAR ENDED
MARCH 31, 1999
--------------------
Numerator:
Net income (numerator for earnings per common share and earnings per common share
assuming dilution) $ 7,759,472
Denominator:
Denominator for basic earnings per share - weighted average shares 12,467,620
Effect of dilutive securities:
Employee stock options 387,006
--------------------
Denominator for diluted earnings per share - adjusted weighted average
shares and assumed conversions 12,854,626
====================
Basic earnings per share $ 0.62
====================
Diluted earnings per share $ 0.60
====================
In addition, as of March 31, 1999, there were outstanding options to purchase
1,631,125 shares that are potentially dilutive.
The following table sets forth the computation of earnings per share of Common
Stock and Special Common Stock from continuing operations for the years ended
March 31, 1998 and 1997:
37
38
1998 1997
------------------------------------
Numerator:
Income from continuing operations (numerator for earnings
per common share) $ 4,898,000 $ 1,941,000
------------------------------------
Dividends declared
Common Stock (2,064,288) (1,032,144)
Special Common Stock (935,712) (467,856)
------------------------------------
(3,000,000) (1,500,000)
------------------------------------
Undistributed earnings $ 1,898,000 $ 441,999
====================================
Denominator for earnings per common share - weighted
average shares 9,952,040 9,952,040
Undistributed earnings per common share - Common Stock
and Special Common Stock $ 0.19 $ 0.05
Assumed distribution of earnings - Common Stock and
Special Common Stock 0.30 0.15
------------------------------------
Earnings per common share from continuing operations - Common
Stock and Special Common Stock $ 0.49 $ 0.20
====================================
Earnings per common share from continuing operations has been calculated under
the two-class method for Common Stock and Special Common Stock. Class A Common
Stock does not share in dividends with Common Stock and Special Common Stock,
and therefore does not share in earnings. There were no dilutive securities
outstanding at March 31, 1998 or 1997.
9. MAJOR CUSTOMERS
The nature of the Company's services results in the Company deriving significant
amounts of revenue from certain customers in a particular year. For the year
ended March 31, 1999, three customers accounted for 18.4%, 16.4% and 13.8% of
the Company's revenues. At March 31, 1999, these customers represented 29.7%,
1.1% and 6.4% of accounts receivable. For the year ended March 31, 1998, five
customers accounted for 17.4%, 13.7%, 13.3%, 10.1% and 10.0% of the Company's
revenues. At March 31, 1998, these customers represented 13.6%, 19.8%, 22.3%,
2.6% and 12.3% of accounts receivable. For the year ended March 31, 1997, two
customers accounted for 18.8% and 12.4% of the Company's revenues.
10. EMPLOYEE RETIREMENT PLAN
The Company maintains a defined contribution retirement plan under Section
401(k) of the Internal Revenue Code for eligible employees (the "401(k) Plan").
The 401(k) Plan is funded by employee contributions of up to 15% of gross
compensation and by discretionary Company contributions. In accordance with the
provisions of the 401(k) Plan, employees may make tax-deferred contributions and
the Company, at its discretion, may match 50% of employee contributions up to 5%
of their earnings. The Company may also elect to make additional contributions
to the plan. Company contributions vest ratably over five years of employment.
Company contributions amounted to $477,365, $301,300 and $83,062 for the years
ended March 31, 1999, 1998 and 1997, respectively.
11. SEGMENT INFORMATION
The Company operates in a single business segment which offers similar products
and services. The Company's products are similar in nature, providing
information technology strategy consulting and systems integration services to
customers exclusively in the financial services industry, with a primary focus
on banks.
38
39
12. COMMITMENTS
The Company leases its facilities and other equipment under operating leases.
Rent expense recognized under these leases during the fiscal years ended March
31, 1999, 1998 and 1997 totaled approximately $519,000, $500,000 and $438,000,
respectively. Future minimum lease payments due under noncancelable operating
and capital leases are as follows:
OPERATING CAPITAL
---------------- ----------------
(in thousands)
Year ending March 31:
2000 $500 $ 22
2001 15 13
---------------- ----------------
Total minimum lease payments $515 35
================
Amount representing interest (2)
----------------
33
Current portion of capital lease (included in
accrued expenses) (20)
----------------
Long-term portion of capital lease $ 13
================
13. DISCONTINUED OPERATIONS
During September 1994, the Company approved a plan and entered into an agreement
with a third party that called for the Company to discontinue its on-line
processing division (the "Agreement"). The Company ceased all operations of the
on-line processing division in June 1995. Subsequent to June 1995, the Company
did not manage any part of the business and was no longer subject to any of its
risks. Pursuant to the Agreement, the Company was entitled to receive up to
$400,000 in payments from the third party, of which all such payments totaling
approximately $351,000 were received by November 1996. The contingent payments
were structured such that the first payment was to be paid three months after
the former on-line processing division's customers became customers of the third
party. The amount of the payment was calculated as a percentage of revenue
earned by the third party from the transferred customer base. The second and
final payment was calculated based on annualized revenue generated from the
transferred customer base only if the customer had not notified the third party
of its intention to terminate the relationship after one year.
14. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents unaudited quarterly financial information for the
years ended March 31, 1999 and 1998 (in thousands, expect per share data):
FOR THE QUARTERS ENDED
-------------------------------------------------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1998 1998 1998 1999
-------------------------------------------------------------------------------
Revenue $17,446 $18,186 $18,731 $12,400
Income from operations 3,608 4,157 4,319 278
Net income 2,162 2,565 2,653 379
Basis earnings per share $ 0.19 $ 0.20 $ 0.21 $ 0.03
Diluted earnings per share $ 0.18 $ 0.19 $ 0.20 $ 0.03
39
40
FOR THE QUARTERS ENDED
-------------------------------------------------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1997 1997 1997 1998
-------------------------------------------------------------------------------
Revenue $8,231 $9,118 $10,870 $14,611
Income from operations 1,626 1,784 2,136 2,757
Net income 958 1,051 1,268 1,621
Basic earnings per share $ 0.10 $ 0.11 $ 0.13 $ 0.16
Diluted earnings per share $ 0.10 $ 0.11 $ 0.13 $ 0.16
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
The following schedule depicts the allowance for doubtful accounts for the years
ended March 31, 1997, 1998 and 1999 (in thousands):
CHARGED TO
BALANCE AT CHARGED TO OTHER BALANCE AT
ALLOWANCE FOR DOUBTFUL BEGINNING COST AND ACCOUNTS - END OF
ACCOUNTS OF PERIOD EXPENSES WRITE-OFFS PERIOD
- ----------------------------------------------------------------------------------------------------------------------
Year Ended March 31, 1997 $113 $120 $2 $231
Year Ended March 31, 1998 231 144 -- 375
Year Ended March 31, 1999 375 352 2 725
ITEM 9: CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES
On September 3, 1998, the Company engaged PricewaterhouseCoopers LLP as
independent auditors for the fiscal year ending March 31, 1999 and dismissed
Ernst & Young LLP ("E&Y") effective immediately. This action was taken upon the
unanimous approval of the Audit Committee of the Board of Directors.
During the fiscal years ended March 31, 1997 and March 31, 1998, respectively,
and subsequent interim period, there were no disagreements between the Company
and E&Y on any matters of accounting principles or practices, financial
statement disclosure or auditing scope or procedure which, if not resolved to
the satisfaction of E&Y would have caused E&Y to make reference to the matter in
their report. During the fiscal years ended March 31, 1997 and March 31, 1998,
respectively, and the subsequent interim period, there were no "reportable
events" as that term is described in Item 304(a)(1)(v) of Regulation S-K. The
reports of E&Y on the Company's financial statements for the fiscal years 1997
and 1998 did not contain an adverse opinion or a disclaimer of opinion and were
not qualified or modified as to uncertainty, audit scope or accounting
principles.
The Company has not consulted PricewaterhouseCoopers LLP regarding the
application of accounting principles to any specified transactions or the type
of audit opinion that might be rendered on the Company's financial statements
during the Company's two fiscal years ended March 31, 1997 and 1998.
40
41
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information under the Sections "Election of Directors," "Occupations of
Directors and Executive Officers," and "16(a) Beneficial Ownership Reporting
Compliance," of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on July 28, 1999, to be filed with the Commission not
later than 120 days after the close of the Company's fiscal year ended March 31,
1999, is hereby incorporated by reference.
ITEM 11: EXECUTIVE COMPENSATION
The information under the Sections "Compensation and Other Information
Concerning Directors and Officers" and "Stock Performance Graph" of the
Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held
on July 28, 1999, to be filed with the Commission not later than 120 days after
the close of the Company's fiscal year ended March 31, 1999, is hereby
incorporated by reference.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the Section "Securities Ownership of Certain Beneficial
Owners and Management" of the Registrant's Proxy Statement for the Annual
Meeting of Stockholders to be held on July 28, 1999, to be filed with the
Commission not later than 120 days after the close of the Company's fiscal year
ended March 31, 1999, is hereby incorporated by reference.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the Sections "Compensation and Other Information
Concerning Directors and Officers" and "Certain Relationships and Related
Transactions" of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on July 28, 1999, to be filed with the Commission not
later than 120 days after the close of the Company's fiscal year ended March 31,
1999, is hereby incorporated by reference.
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
The following documents are filed as part of this Form 10-K:
1. Financial Statements - See "Index to Consolidated Financial Statements" at
Item 8 and incorporated herein by reference.
2. Financial Statement Schedules - Schedule II - Valuation and Qualifying
Accounts is listed in the Index to Consolidated Financial Statements, is
included on page 40 and is filed as part of this report. All other
schedules to the consolidated financial statements are omitted as the
required information is either inapplicable or presented in the financial
statements or related notes.
3. Exhibits - The Exhibits which are filed with this Report or which are
incorporated by reference herein are set forth in the Exhibit Index which
appears on page 43 hereof.
4. Reports on Form 8-K - None.
41
42
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.
ATLANTIC DATA SERVICES, INC. DATE
By: /s/ Robert W. Howe June 25, 1999
-------------------------------
Chairman of the Board and
Chief Executive Officer
We, the undersigned officers and directors of Atlantic Data Services, Inc.,
hereby severally constitute and appoint Robert W. Howe and Paul K. McGrath, and
each of them singly, our true and lawful attorneys, with full power to them and
each of them singly, to sign for us in our names in the capacities to do all
things in our names and on our behalf in such capacities to enable Atlantic Data
Services, Inc. to comply with the provisions of the Securities Exchange Act of
1934 and all requirements of the Securities Exchange Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Robert W. Howe Chairman of the Board and Chief June 25, 1999
--------------------------- Executive Officer (Principal Executive
(Robert W. Howe) Officer)
/s/ William H. Gallagher President, Chief Operating Officer June 25, 1999
--------------------------- and Director
(William H. Gallagher)
/s/ Paul K. McGrath Senior Vice President and Chief June 25, 1999
--------------------------- Financial Officer (Principal Financial
(Paul K. McGrath) and Accounting Officer)
/s/ Richard D. Driscoll Director June 25, 1999
---------------------------
(Richard D. Driscoll)
/s/ David C. Hodgson Director June 25, 1999
---------------------------
(David C. Hodgson)
/s/ Lee M. Kennedy Director June 25, 1999
---------------------------
(Lee M. Kennedy)
/s/ George F. Raymond Director June 25, 1999
---------------------------
(George F. Raymond)
42
43
EXHIBIT INDEX
No. Description
- --------------------------------------------------------------------------------
3.01 Second Amended and Restated Articles of Organization of the Company
[Incorporated by reference to the Company's Registration Statement on
Form S-1 filed March 26, 1998 (File No. 333-48703)]
3.02 Second Amended and Restated By-Laws of the Company [Incorporated by
reference to the Company's Registration Statement on Form S-1 filed
March 26, 1998 (File No. 333-48703)]
4.01 Specimen Certificate for Shares of the Company's Common Stock
[Incorporated by reference to the Company's Registration Statement on
Form S-1 filed March 26, 1998 (File No. 333-48703)]
10.01+ Key Person Stock Plan [Incorporated by reference to the Company's
Registration Statement on Form S-1 filed March 26, 1998 (File No.
333-48703)]
10.02+ Amended and Restated 1992 Incentive Stock Option Plan [Incorporated by
reference to the Company's Registration Statement on Form S-1 filed
March 26, 1998 (File No. 333-48703)]
10.03+ Form of Incentive Stock Option Agreement for Shares Issued Under the
Amended and Restated 1992 Incentive Stock Option Plan [Incorporated by
reference to the Company's Registration Statement on Form S-1 filed
March 26, 1998 (File No. 333-48703)]
10.04+ Amended and Restated 1997 Stock Plan [Incorporated by reference to the
Company's Registration Statement on Form S-1 filed March 26, 1998
(File No. 333-48703)]
10.05+ Form of Incentive Stock Option Agreement under the Amended and
Restated 1997 Stock Plan [Incorporated by reference to the Company's
Registration Statement on Form S-1 filed March 26, 1998 (File No.
333-48703)]
10.06+ Form of Non-Qualified Stock Option Agreement under the Amended and
Restated 1997 Stock Plan [Incorporated by reference to the Company's
Registration Statement on Form S-1 filed March 26, 1998 (File No.
333-48703)]
10.07+ 1998 Employee Stock Purchase Plan [Incorporated by reference to the
Company's Registration Statement on Form S-1 filed March 26, 1998
(File No. 333-48703)]
10.08+ Employment Agreement between the Company and Robert W. Howe dated
March 25, 1998 [Incorporated by reference to the Company's
Registration Statement on Form S-1 filed March 26, 1998 (File No.
333-48703)]
10.09+ Employment Agreement between the Company and William H. Gallagher
dated March 25, 1998 [Incorporated by reference to the Company's
Registration Statement on Form S-1 filed March 26, 1998 (File No.
333-48703)]
10.10+ Employment Agreement between the Company and Paul K. McGrath dated
March 25, 1998 [Incorporated by reference to the Company's
Registration Statement on Form S-1 filed March 26, 1998 (File No.
333-48703)]
10.11+ Employment Agreement between the Company and Peter A. Cahill dated
March 25, 1998 [Incorporated by reference to the Company's
Registration Statement on Form S-1 filed March 26, 1998 (File No.
333-48703)]
10.12+ Employment Agreement between the Company and David E. Olsson dated
March 25, 1998 [Incorporated by reference to the Company's
Registration Statement on Form S-1 filed March 26, 1998 (File No.
333-48703)]
10.13*+ Employment Agreement between the Company and Paul James Lynch dated
October 12, 1998
10.14 Registration Rights Agreement dated March 25, 1998 by and among the
Company and Certain Stockholders [Incorporated by reference to the
Company's Registration Statement on Form S-1 filed March 26, 1998
(File No. 333-48703)]
10.15 Lease Agreement between the Company and National Fire Protection
Association dated April 1, 1995, as amended July 31, 1998 and January
15, 1997 [Incorporated by reference to the Company's Registration
Statement on Form S-1 filed March 26, 1998 (File No. 333-48703)]
43
44
No. Description
- --------------------------------------------------------------------------------
10.16* Third Amendment - Lease Agreement between the Company and National
Fire Protection Association dated October 15, 1998
10.17* Fourth Amendment - Lease Agreement between the Company and National
Fire Protection Association dated May 1, 1999
21.01* Subsidiaries of the Company
23.01* Consent of PricewaterhouseCoopers LLP
23.02* Consent of Ernst & Young LLP
24.01* Power of Attorney (included on Signature Page hereto)
27.01* Financial Data Schedule
- ---------------
*Filed herewith
+Indicates management contract or a compensatory plan, contract or arrangement.
44