UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
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 000-30271
PARADIGM HOLDINGS, INC.
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(Exact Name of Registrant as Specified in its Charter)
Wyoming 83-0211506
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(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
2600 Tower Oaks Blvd. Suite 500,
Rockville, Maryland 20852
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(Address of principal executive offices, zip code)
Registrants' telephone number, including area code: (301) 468-1200
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Shares of common stock outstanding on May 1, 2005 were 20,003,368.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION..................................................1
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)..................................1
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...............................2
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........6
ITEM 4: CONTROLS AND PROCEDURES...........................................6
PART II: OTHER INFORMATION.....................................................7
ITEM 1: LEGAL PROCEEDINGS.................................................7
ITEM 6: EXHIBITS..........................................................7
SIGNATURES.....................................................................8
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
FINANCIAL STATEMENTS
PARADIGM HOLDINGS, INC.
(FORMERLY PARADIGM SOLUTIONS CORPORATION)
TABLE OF CONTENTS
Page
FINANCIAL STATEMENTS
Consolidated Balance Sheets F-1
Consolidated Statements of Operations F-3
Consolidated Statements of Cash Flows F-4
Notes to Consolidated Financial Statements F-5
PARADIGM HOLDINGS, INC.
(FORMERLY PARADIGM SOLUTIONS CORPORATION)
CONSOLIDATED BALANCE SHEETS
3/31/05 12/31/04
(Unaudited) (Note 1)
- -------------------------------------- ------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 246,761 $ 179,389
Accounts receivable - contracts 11,451,321 11,478,901
Inventory, net 697,198 616,020
Prepaid expenses 3,010,374 4,239,770
Other current assets 80,257 89,890
------------ ------------
TOTAL CURRENT ASSETS 15,485,911 16,603,970
------------ ------------
PROPERTY AND EQUIPMENT, AT COST
Furniture and fixtures 126,384 124,845
Equipment 1,086,486 1,043,725
Software 302,481 221,965
Leasehold improvements 121,000 121,000
------------ ------------
TOTAL PROPERTY AND EQUIPMENT 1,636,351 1,511,535
------------ ------------
Less: Accumulated depreciation (590,599) (504,348)
------------ ------------
NET PROPERTY AND EQUIPMENT 1,045,752 1,007,187
------------ ------------
OTHER ASSETS
Deposits 77,182 77,182
------------ ------------
TOTAL ASSETS $ 16,608,845 $ 17,688,339
============ ============
The accompanying Notes to Consolidated Financial Statements are an integral part
of these financial statements.
F-1
PARADIGM HOLDINGS, INC.
(FORMERLY PARADIGM SOLUTIONS CORPORATION)
CONSOLIDATED BALANCE SHEETS
3/31/05 12/31/04
(Unaudited) (Note 1)
- -------------------------------------------------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdraft $ 1,046,773 $ 1,046,160
Note payable - line of credit 3,775,354 3,220,072
Capital lease payable 4,671
Accounts payable and accrued expenses 4,259,141 5,476,967
Accrued salaries and related liabilities 2,224,813 1,812,545
Deferred income taxes 564,750 527,000
Deferred revenue 819,539 1,749,410
----------- -----------
TOTAL CURRENT LIABILITIES 12,695,041 13,832,154
----------- -----------
LONG-TERM LIABILITIES
Deferred rent 146,247 144,435
Capital lease payable, net of current portion 13,185
Deferred income taxes, net of current portion 1,186,500 1,356,000
----------- -----------
TOTAL LIABILITIES 14,040,973 15,332,589
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock - $.01 par value, 50,000,000
shares authorized, 20,003,368 shares
issued and outstanding 200,034 200,034
Retained earnings 2,367,838 2,155,716
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 2,567,872 2,355,750
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $16,608,845 $17,688,339
=========== ===========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these financial statements.
F-2
PARADIGM HOLDINGS, INC.
(FORMERLY PARADIGM SOLUTIONS CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Quarters Ended March 31, 2005 2004
- ------------------------------------------------------------------ ------------ ------------
Contract Revenue
Service contracts $ 9,278,118 $ 8,903,677
Repair and maintenance contracts 5,856,319 5,207,494
------------ ------------
Total contract revenue 15,134,437 14,111,171
------------ ------------
Cost of revenue
Service contracts 6,717,380 6,620,895
Repair and maintenance contracts 4,239,989 4,033,606
------------ ------------
Total cost of revenue 10,957,369 10,654,501
------------ ------------
Gross margin 4,177,068 3,456,670
Indirect costs 3,794,454 3,595,237
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Income (loss) from operations 382,614 (138,567)
------------ ------------
Other (expense) income
Interest income 4,272 4,633
Other income 168 80
Interest expense (39,801) (15,831)
------------ ------------
Total other (expense) income (35,361) (11,118)
------------ ------------
Net income (loss) before income taxes $ 347,253 $ (149,685)
------------ ------------
Provision for income taxes 135,130 3,636
------------ ------------
Net income (loss) $ 212,123 $ (153,321)
------------ ------------
Basic and diluted net income (loss) per common share $ 0.01 $ (0.01)
------------ ------------
Basic and diluted weighted average common shares used
to compute net income (loss) per share 20,003,368 17,500,000
------------ ------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these financial statements.
F-3
PARADIGM HOLDINGS, INC.
(FORMERLY PARADIGM SOLUTIONS CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Quarters Ended March 31, 2005 2004
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 212,123 $ (153,321)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET
CASH (USED)PROVIDED BY OPERATING ACTIVITIES:
Depreciation 86,251 87,418
(INCREASE) DECREASE IN
Accounts receivable - contracts 27,580 4,877,771
Inventory, net (81,178) (139,853)
Prepaid expenses 1,229,396 608,662
Other current assets 9,633 (2,987)
Deposits
(DECREASE) INCREASE IN
Accounts payable and accrued expenses (1,217,826) (1,379,046)
Accrued salaries and related liabilities 412,267 149,030
Deferred income taxes (131,750)
Deferred revenue (929,871) (2,296,973)
Deferred rent 1,812
------------ ------------
NET CASH(USED)PROVIDED BY OPERATING ACTIVITIES (381,563) 1,750,701
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (106,025) (98,369)
------------ ------------
NET CASH USED BY INVESTING ACTIVITIES (106,025) (98,369)
CASH FLOWS FROM FINANCING ACTIVITIES
Bank overdraft 614
Payments on capital lease (936)
Proceeds from line of credit 11,003,964 9,075,337
Payments on line of credit (10,448,682) (10,077,488)
------------ ------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 554,960 (1,002,151)
------------ ------------
NET INCREASE IN CASH 67,372 650,181
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 179,389 17,891
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 246,761 $ 668,072
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for income taxes $ 300 $ 3,636
============ ============
Cash paid for interest $ 39,801 $ 15,831
============ ============
Equipment purchased under capital lease $ 18,791 $
============ ============
The accompanying Notes to Consolidated Financial Statements are an integral part
of these financial statements
F-4
PARADIGM HOLDINGS, INC.
(FORMERLY PARADIGM SOLUTIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION
Paradigm Holdings, Inc. ("PDHO"), formerly Cheyenne Resources, Inc., was
incorporated in the state of Wyoming on November 17, 1970. On November 3, 2004,
Paradigm Holdings, Inc. entered into an Agreement and Plan of Reorganization
with Paradigm Solutions Merger Corp. ("Merger Sub"), Paradigm Solutions
Corporation ("PSC"), and the shareholders of PSC. Pursuant to the Agreement and
Plan of Reorganization, the Merger Sub was merged with and into PSC, which was
the surviving corporation, and became a wholly owned subsidiary of PDHO. In
consideration of the merger, the PSC shareholders exchanged 13,699, or 100%, of
their common stock for 17,500,000 shares of common stock of PDHO.
Although PDHO is the legal acquirer in the acquisition, and remains the
registrant with the SEC, under generally accepted accounting principles, the
acquisition was accounted for as a reverse acquisition, whereby PSC is
considered the "acquirer" of PDHO for financial reporting purposes. The
following factors were considered: 1) PSC's shareholders controlled more than
50% of the post acquisition combined entity, 2) management, after the
acquisition, is that of PSC, 3) PDHO had no assets and an immaterial amount of
liabilities as of the acquisition date, and 4) continuing operations of the
business are that of PSC.
Effective November 3, 2004, PDHO conducts business through its wholly owned
subsidiary Paradigm Solutions Corporation. On December 17, 2004, PSC formed a
wholly owned subsidiary, Paradigm Solutions International, Inc. ("PSI"). PSI had
no activity during 2004 or 2005. The accompanying consolidated financial
statements include the accounts of PDHO, PSC and PSI (collectively, the
"Company"). All significant inter-company balances and transactions have been
eliminated in consolidation.
The Company is a full-service information technology (IT) and business solutions
provider offering a wide range of technical support and management services to
improve the operational efficiency of government and industry. The Company
graduated from the Small Business Administration's 8(a) Business Development
program on October 13, 2004. Today, the Company possesses a portfolio of
flexible contract vehicles arrangements to expedite delivery of information
technology services and solutions to clients across the federal government.
The consolidated condensed financial statements included herein have been
prepared by Paradigm Holdings, Inc. (the Company) without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States have been condensed or omitted pursuant to such rules and
regulations; however, the Company believes that the disclosures are adequate to
make the information presented not misleading. The condensed financial
statements included herein should be read in conjunction with the financial
statements and the notes thereto included in the Company's 2004 Form 10-K.
In the opinion of the registrant, the accompanying financial statements contain
all adjustments (consisting of only normal recurring accruals) necessary to
present fairly the financial position of the Company at March 31, 2005 and
December 31, 2004, its results of operations for the three months ended March
31, 2005 and March 31, 2004, and its cash flows for the three months ended March
31, 2005 and March 31, 2004.
DESCRIPTION OF CRITICAL ACCOUNTING POLICIES
The preparation of these consolidated financial statements are prepared in
accordance with accounting principles generally accepted in the United States,
which require our management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting periods.
On an ongoing basis, management evaluates its estimates including those related
to uncollected accounts receivable, contingent liabilities, revenue recognition,
and other intangible assets. Management bases its estimates on historical
experience and on various other factors that are believed to be reasonable at
the time the estimates are made. Actual results may differ from these estimates
under different assumptions or conditions.
Our management routinely makes judgments and estimates about the effects of
matters that are inherently uncertain. As the number of variables and
assumptions affecting the probable future resolution of the uncertainties
increase, these judgments become even more subjective and complex. We have
identified certain accounting policies, described below, that are the most
important to the portrayal of our current financial condition and results of
operations.
USE OF ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenue from time and materials contracts is recognized as costs are incurred at
amounts represented by the agreed-upon billing amounts. Fixed price labor hour
and level of effort contracts involving defined numbers of hours or categories
of personnel are accounted as costs are incurred at amounts representing
agreed-upon billing amounts. Fixed price maintenance contracts are recognized as
revenue on a pro-rata basis over the life of the contract.
In certain arrangements, the Company enters into contracts that include the
delivery of a combination of two or more of its service offerings. Such
contracts are divided into separate units of accounting and revenue is
recognized separately, and in accordance with, the Company's revenue recognition
policy for each element.
Software revenue recognition is in accordance with AICPA Statement of Position
97-2. Revenue from the sale of licenses is recognized upon shipment when the
price is fixed and collection is probable. Software revenues are not significant
for any of the periods presented.
Revenue from cost-type contracts is recognized as costs are incurred on the
basis of direct costs plus allowable indirect costs and an allocable portion of
the fixed fee.
Revenue recognized on contracts for which billings have not yet been presented
to customers is included in the Accounts Receivable - contracts classification
on the accompanying Balance Sheets.
Deferred revenue relates to contracts for which customers pay in advance for
services to be performed at a future date. The Company recognizes deferred
revenue over the related contract service periods, which run through 2005. These
payments are nonrefundable.
COST OF REVENUE
Cost of revenue for service contracts consist primarily of labor, consultant,
subcontract, and other costs attributable to the performance of the contract.
Cost of revenue for repair and maintenance contracts consist primarily of
subcontract, labor, and other costs attributable to the performance of the
contract.
MAJOR CUSTOMERS
During the quarters ended March 31, 2005 and 2004, the Company's revenues
generated from five major customers, totaled 69% and 90% of total revenue,
respectively. The Company's accounts receivable related to these five major
customers were 78% and 80% of total accounts receivable at the end of the
respective quarters. The Company defines major customers by government agency.
INVENTORY
Inventory consists of replacement printer parts and is stated at the lower of
cost or market using the FIFO method.
INCOME TAXES
Prior to November 5, 2004, Paradigm Solutions Corporation was treated as an S
Corporation, and therefore, did not pay Federal and state corporate income taxes
since the tax attributes of the entity were reported on the stockholders' tax
returns. Paradigm Solutions Corporation filed its income tax returns on the cash
basis of accounting, whereby revenue was recognized when received and expenses
were recognized when paid. Effective November 5, 2004, Paradigm Solutions
Corporation revoked its S-Corporation status and therefore is subject to income
taxes at the corporate level.
Deferred income taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their financial
reporting amounts at each year end based on enacted tax laws and statutory tax
rates applicable to the periods in which the differences are expected to affect
taxable earnings. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount more likely than not to be realized.
PRO FORMA FINANCIAL DATA:
The unaudited pro forma information for the periods set forth below is based on
the operations of Paradigm Solutions Corporation and is prepared as if the
Corporation had been a C Corporation at the beginning of each period assuming a
tax provision of 38.6%.
March 31, March 31,
2005 2004
STATEMENT OF OPERATION DATA: (Pro forma) (Pro forma)
------------------------
(in thousands, except per share data)
Contract revenue $ 15,134 $ 14,111
Net income (loss) before income taxes 347 (150)
Income tax provision (benefit) 135 (58)
Net income (loss) 212 (92)
Basic and diluted net income (loss) per common share $ 0.01 $ (.01)
Weighted average common shares outstanding 20,003,368 17,500,000
2. COMPENSATION AND EMPLOYMENT AGREEMENTS
Effective April 1, 2005, Samar Ghadry and Paradigm Solutions Corporation, a
wholly-owned subsidiary of Paradigm Holdings, entered into a Letter Agreement
pursuant to which Ms. Ghadry and Paradigm Solutions Corporation agreed and
acknowledged that Ms. Ghadry's employment with Paradigm Solutions Corporation
ended effective April 1, 2005. Pursuant to the terms of the Letter Agreement,
Paradigm Solutions Corporation agreed to pay Ms. Ghadry severance pay in an
amount equal to Ms. Ghadry's base pay for nine months in accordance with
Paradigm Solutions Corporation's normal payroll practices. Paradigm Solutions
Corporation agreed to pay Ms. Ghadry a bonus for the first quarter of 2005 equal
to $20,250. In addition, Paradigm Holdings agreed to register 1,575,000 shares
of common stock owned by Ms. Ghadry. Further, Ms. Ghadry agreed that she will
not, except with the prior written approval of Paradigm Holdings, engage in a
disposition with respect to 100% of these shares until the earlier to occur of:
(i) the date of the closing of a financing through the sale of debt or equity
securities in which Paradigm Holdings receives in one or a series of
transactions gross proceeds in an amount equal to at least $3 million or (ii)
September 30, 2005. Ms. Ghadry also agreed that, when she is able to sell her
shares of common stock, that she will not sell more than 2,000 shares in any
single business day; however, in the event the average daily volume of the
shares of Paradigm Holdings' common stock exceeds 10,000 shares for a period of
5 consecutive business days, Ms. Ghadry may sell up to an aggregate of 4,000
shares per day, commencing on the first business day thereafter and continuing
so long as the average 5-day daily volume continues to exceed 10,000 shares. Ms.
Ghadry and Paradigm Holdings agreed that, to the extent allowed by law and with
the express written approval of the President and Chief Operating Officer of
Paradigm Holdings, Ms. Ghadry may sell her shares to a bona fide purchaser in a
private placement provided such purchaser agrees to be subject to the terms of
the Letter Agreement.
3. CONTRACT STATUS
The Company has authorized but uncompleted contracts on which work is in
progress at March 31, 2005 approximately, as follows:
2005
--------------
Total contract prices of initial contract awards,
including exercised options and approved change
orders (modifications) $ 170,035,000
Completed to date (128,044,000)
- --------------------------------------------------------------------------------
AUTHORIZED BACKLOG $ 41,991,000
=============
The foregoing contracts contain unfunded and unexercised options not reflected
in the above amounts of approximately $85,542,000.
PARADIGM HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This quarterly report contains forward-looking statements. These
statements relate to future events or our future financial performance. In some
cases, you can identify forward-looking statements by terminology such as "may,"
"will," "should," "could," "forecasts," "expects," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential," "see," "target," "projects,"
"position," or "continue" or the negative of such terms and other comparable
terminology. These statements reflect our current expectations, estimates, and
projections. These statements are not guarantees of future performance and
involve risks, uncertainties, and assumptions that are difficult to predict.
Actual events or results may differ materially from what is expressed or
forecasted in these forward-looking statements. We disclaim any intention or
obligation to update any forward-looking statement.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Paradigm Holdings Inc. is an information technology and business
solutions provider specializing in information technology infrastructure and
software engineering support services, business continuity planning and
emergency management services and software to government and commercial clients.
Paradigm Holdings, Inc. is comprised of two operating subsidiaries, Paradigm
Solutions Corporation and Paradigm Solutions International.
Paradigm Solutions Corporation is the federal subsidiary whose core
competencies are in mission critical systems that focus on key federal agencies
such as Justice, Treasury and Homeland Security. Paradigm Solutions
International is the newly formed commercial subsidiary whose core competencies
are developing and delivering continuity and information technology
security/risk management consulting for commercial businesses. We believe that
our innovations in business continuity development, planning, and information
technology security have positioned us to become a leader in the fragmented
Business Continuity and Continuity of Operations industry.
We derive substantially all of our revenues from delivery of
information technology solutions and services. We generate revenue from
contracts with various payment arrangements, including fixed-price contracts,
time and materials contracts and cost-reimbursable contracts. During the three
months ended March 31, 2005, revenues from these contract types were
approximately 61%, 25%, and 14%, respectively of total revenues. During the
three months ended March 31, 2004, revenues from these contract types were
approximately 51%, 30%, and 19%, respectively of total revenues. We typically
issue invoices monthly to manage outstanding accounts receivable balances. We
recognize revenues on time and materials contracts as the services are provided.
The Company has two basic categories of fixed price contract; fixed unit price;
fixed price-level of effort. Revenues on fixed unit price contracts, where
specific units of output under service agreements are delivered, is recognized
as units are delivered based on the specific price per unit. Revenue on fixed
price maintenance contracts is recognized on a pro-rata basis over the length of
the service period. Revenue for the fixed price level of effort contacts is
recognized based upon the number of units of labor actually delivered multiplied
by the agreed rate for each unit of labor. Fixed-price contracts are attractive
to clients and, while subject to increased risks, provide opportunities for
increased margins. We recognize revenues on cost-reimbursable contracts as
services are provided. These revenues are equal to the costs incurred in
providing these services plus a proportionate amount of the fee earned. We have
historically recovered all of our costs on cost-reimbursable contracts, which
means we have lower risk and our margins are lower on these contracts.
Our historical revenue growth is attributable to various factors,
including an increase in the size and number of projects for existing and new
clients. During the three months ended March 31, 2005, contracts with the
federal government and contracts with prime contractors of the federal
government accounted for approximately 95% of our revenues. During that same
period, our five largest clients, all agencies of the federal government,
generated approximately 93% of our revenues. In most of these engagements, we
retain full responsibility for the end-client relationship and direct and manage
the activities of our contract staff.
Our most significant expense is direct costs, which consist primarily
of project personnel salaries, consultants, subcontractors and direct expenses
incurred to complete projects. The number of consulting employees assigned to a
project will vary according to the size, complexity, duration and demands of the
project.
Indirect costs include fringe benefit expenses, overhead expenses and
SG&A expenses consisting primarily of costs associated with our executive
management, finance and administrative groups, human resources, marketing and
business development resources, employee training, occupancy costs, R&D
expenses, depreciation and amortization, travel, and all other overhead and
corporate costs.
Other income consists primarily of interest income earned on our cash
and cash equivalents.
Description of Critical Accounting Policies
Management's Discussion and Analysis of Financial Condition and Results
of Operations discuss our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these consolidated financial
statements requires management to make estimates and judgments that affect the
reported amount of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the reporting period. On an
ongoing basis, management evaluates its estimates including those related to
uncollected accounts receivable, contingent liabilities, revenue recognition,
and other intangible assets. Management bases its estimates on historical
experience and on various other factors that are believed to be reasonable at
the time the estimates are made. Actual results may differ from these estimates
under different assumptions or conditions. Management believes that our critical
accounting policies which require more significant judgments and estimates in
the preparation of our consolidated financial statements are revenue
recognition, costs of revenues, accounts receivables and property and equipment.
Revenue Recognition
Refer to overview section regarding the Company's revenue recognition.
Costs of Revenues
Our costs are categorized as either direct or indirect costs. Direct
costs are those that can be identified with and allocated to specific contracts
and tasks. They include labor, subcontractor costs, consultant fees, travel
expenses and materials. Indirect costs are either overhead or general and
administrative expenses and also include fringe (vacation time, medical/dental,
401K plan matching contribution, tuition assistance, employee welfare, worker's
compensation and other benefits) associated with direct and indirect labor.
Indirect costs cannot be identified with specific contracts or tasks, and to the
extent that they are allowable, they are allocated to contracts and tasks using
appropriate government-approved methodologies. Costs determined to be
unallowable under the Federal Acquisition Regulations cannot be allocated to
projects. Our principal unallowable costs are interest expense and certain
general and administrative expenses. We believe a key element to be successful
in our business is our ability to control indirect and unallowable costs,
enabling us to profitably execute our existing contracts and successfully bid
for new contracts. Costs of revenues are considered to be a critical accounting
policy because of the direct relationship to revenue recognized.
Accounts Receivable
Accounts receivable are attributable to trade receivables in the
ordinary course of business. We maintain reserves for uncollectible accounts
receivable which may arise in the normal course of business. Historically, we
have not had significant write-offs of uncollectible accounts receivable.
However, we do perform work on many contracts and task orders, where on occasion
issues may arise, which would lead to accounts receivable not being fully
collected.
Property and Equipment
Property and equipment are recorded at the original cost to the
corporation and are depreciated using straight-line methods over established
useful lives of three to seven years. Software is recorded at original cost and
depreciated on the straight-line basis over three years. Leasehold improvements
are recorded at the original cost and are depreciated on the straight-line over
the life of the lease.
Results of Operations
The following discussion and analysis should be read in conjunction
with our Condensed Consolidated Financial Statements and related notes included
elsewhere in this Quarterly Report on Form 10-Q and with our Consolidated
Financial Statements and the information under the heading "Management's
Discussion and Analysis of Financial Condition and Results of Operations," which
are included in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2004.
The following table sets forth certain items from our consolidated
statements of operations for the periods indicated.
Three Months
Ended March 31, Change
----------------- -----------------
(Dollars in thousands) 2005 2004 Dollars Percent
------ ------ ------- -------
Revenue 15,134 14,111 1,023 7.2%
Cost of Revenue 10,957 10,654 303 2.8%
Gross Margin 4,177 3,457 720 20.8%
Indirect Cost & Selling Expenses 3,794 3,595 199 5.5%
Income (loss) from Operations 383 (138) 521 377.5%
Total other (expense) income (35) (11) (24) 218.2%
Income tax (benefit)provision 135 4 131 3275.0%
Net Income (loss) 212 (153) 365 238.6%
The table below sets forth, for the periods indicated the service mix
in revenue with related percentages of total revenue.
Three Months
Ended March 31,
----------------------------------
(Dollars in Thousands) 2005 % 2004 %
------ ----- ------ ------
Federal Service Contracts 9,003 59.5% 8,899 63.1%
Federal Repair & Maintenance Contracts 5,856 38.7% 5,207 36.9%
Commercial Service Contracts 275 1.8% 5 0.0%
Total Revenue 15,134 100.0% 14,111 100.0%
Our revenues and operating results may be subject to significant
variation from quarter to quarter depending on a number of factors, including
the progress of contracts, revenues earned on contracts, the number of billable
days in a quarter, the timing of the pass-through of other direct costs, the
commencement and completion of contracts during any particular quarter, the
schedule of the government agencies for awarding contracts, the term of each
contract that we have been awarded and general economic conditions. Because a
significant portion of our expenses, such as personnel and facilities costs, are
fixed in the short term, successful contract performance and variation in the
volume of activity as well as in the number of contracts commenced or completed
during any quarter may cause significant variations in operating results from
quarter to quarter.
The Federal Government's fiscal year ends September 30. If a budget for
the next fiscal year has not been approved by that date, our clients may have to
suspend engagements that we are working on until a budget has been approved.
Such suspensions may cause us to realize lower revenues in the fourth quarter of
the year. Further, a change in presidential administrations and in senior
government officials may negatively affect the rate at which the Federal
Government purchases technology.
As a result of the factors above, period-to-period comparisons of our
revenues and operating results may not be meaningful. You should not rely on
these comparisons as indicators of future performance as no assurances can be
given that quarterly results will not fluctuate, causing a possible material
adverse effect on our operating results and financial condition.
Comparison of the Three Months Ended March 31, 2005 and 2004
Revenue. For the three months ended March 31, 2005, our revenues
increased 7.2% to $15.1 million from $14.1 million for the same period in 2004.
This increase in revenue primarily reflects an increase in organic growth from
our Housing and Urban Development client. We define organic growth as the
increase in revenues excluding the revenues associated with acquisitions,
divestitures and closures of businesses in comparable periods. In addition to
this organic growth, $0.3 million of new revenue can be associated with sale of
the commercial OpsPlanner product and services.
Cost of Revenue. Cost of revenue includes direct labor and other direct
costs such as materials and subcontracts. Generally, changes in cost of revenue
are correlated to changes in revenue as resources are consumed in the production
of that revenue. For the three months ended March 31, 2005, cost of revenue
increased 2.8% to $11.0 million from $10.7 for the same period in 2004. This
increase was attributable primarily to the increase in revenue. As a percentage
of revenue, cost of revenue was 72.4% for the three months ended March 31, 2005
as compared to 75.5% for the three months ended March 31, 2004. This decrease in
cost as a percentage of revenue was primarily due to the incremental commercial
OpsPlanner product and services sales that generate higher gross margin then our
federal service and repair and maintenance business.
Gross Margin. For the three months ended March 31, 2005, gross margin
increased 20.8% to $4.2 million from $3.5 million for the same period in 2004.
Gross margin as a percentage of revenues increased to 27.6% in for the three
months ended March 31, 2005 from 24.5% for the three months ended March 31,
2004. This overall increase in gross margin was a result of operational cost
efficiencies and a favorable mix of business.
Indirect Costs. For the three months ended March 31, 2005, indirect
expenses increased 5.5% to $3.8 million from $3.6 million for the same period in
2004. These expenses grew at a rate slightly greater than the growth rate in
revenue mainly due to increases in the costs of fringe benefits, primarily in
the areas of payroll taxes and health insurance.
Net Income. For the three months ended March 31, 2005, net income
increased to $0.2 million from ($0.2) million in for the same period in 2004.
This increase was a due to the increases in revenue and gross margin as
discussed above.
Liquidity and Capital Resources
Our primary liquidity needs are the financing of working capital and
capital expenditures. We have historically relied primarily on cash flow from
operations and borrowing under our credit facility to provide for our cash
needs.
Net cash used by operations was $.4 million for the three months ended
March 31, 2005 was attributable to a decrease in prepaid expenses offset by
decreases in accounts payable, deferred income taxes and deferred revenue. Net
cash provided by operations of $1.8 million for the three months ended March 31,
2004 was attributable to a decrease in accounts receivable offset by a decreases
in accounts payable and deferred revenue.
Net cash used by investing activities was $.1 million for the three
months ended March 31, 2005 and for the same period in 2004. This use of cash
relates to the capital equipment in support of operations.
Net cash provided by financing activities was $.6 million for the three
months ended March 31, 2005 which is related to proceeds for the line of credit
to fund operations. Net cash used by financing activities of $1.0 million for
the three months ended March 31, 2004 is related to the reduction of the line of
credit.
We have a line of credit arrangement with SunTrust Bank which expires
on June 30, 2005. Under the agreement the line is due on demand and interest is
payable monthly depending on our leverage ratio at the LIBOR rate plus the
applicable spread which ranges from 1.95% to 3.50%. The line of credit is
secured by substantially all of our assets. Under the terms of the agreement, we
may borrow up to the lesser of $5,000,000 or 85% of eligible Government
receivables plus 75% of eligible commercial receivables. The line of credit
agreement contains certain financial covenants, including minimum quarterly net
income, minimum tangible net worth ratio and a debt coverage ratio, with which
we were in compliance during the period ending March 31, 2005.
We intend to, and expect over the next twelve months to be able to,
fund our operating cash, capital expenditure and debt service requirements
through cash flow from operations and borrowings under our Credit Facility. Over
the longer term, our ability to generate sufficient cash flow from operations to
make scheduled payments on our debt obligations will depend on our future
financial performance, which will be affected by a range of economic,
competitive and business factors, many of which are outside our control.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk relates to change in interest rates for
borrowing under our revolving credit facility. These borrowings bear interest at
a fixed rate plus LIBOR, a variable rate. We do not use derivative financial
instruments for speculative or trading purposes. We invest our excess cash in
short - term, investment grade, interest -bearing securities.
ITEM 4: CONTROLS AND PROCEDURES
(A) Evaluation Of Disclosure Controls And Procedures
As of the end of the period covered by this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's Principal Executive Officer and Principal Financial Officer of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. The Company's disclosure controls and procedures are designed to
provide a reasonable level of assurance of achieving the Company's disclosure
control objectives. The Company's Principal Executive Officer and Principal
Financial Officer have concluded that the Company's disclosure controls and
procedures are, in fact, effective at this reasonable assurance level as of the
period covered. In addition, the Company reviewed its internal controls, and
there have been no significant changes in its internal controls or in other
factors that could significantly affect those controls subsequent to the date of
their last evaluation or from the end of the reporting period to the date of
this Form 10-Q.
(B) Changes In Internal Controls Over Financial Reporting
In connection with the evaluation of the Company's internal controls
during the Company's quarter ended March 31, 2005, the Company's Principal
Executive Officer and Principal Financial Officer have determined that there are
no changes to the Company's internal controls over financial reporting that has
materially affected, or is reasonably likely to materially effect, the Company's
internal controls over financial reporting.
PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
Paradigm Solutions Corporation involved in litigation, case number
04-32079, filed February 24, 2005 in the district of New Jersey, both potential
and actual, arising from a contractual agreement between Paradigm and
Norvergence, Inc. ("Norvergence"). Paradigm entered into an agreement with
Norvergence for the provision of telecommunication equipment and services in
June, 2003. Under the agreement, Norvergence promised to supply all of
Paradigm's telecommunication needs for a period of 60 months for the sum of
$2,151.75 per month. Soon after executing the agreement with Paradigm,
Norvergence sold a portion of the rights to those payments to a third party, CIT
Technology Financial Services, Inc. ("CIT"). In July, 2004, Norvergence was
forced into bankruptcy by its creditors and, soon thereafter, Paradigm's
telecommunication services provided under the Norvergence agreement were
terminated. Paradigm has taken the position that Norvergence utilized fraud and
deception to obtain the agreement from Paradigm and has ceased paying either
Norvergence or CIT.
Paradigm has filed an unsecured claim in the Norvergence bankruptcy in
the amount of $314,572.89 plus interest and attorney's fees. The claim is based
upon claims under the N.J.S.A. 56:8-1 et. seq. (which provides for treble
damages), common law fraud and breach of contract. At this juncture of the
bankruptcy proceeding, it seems unlikely that Paradigm will recover a
significant portion of its claim or any interest or attorney's fees. Paradigm
also has potential exposure to a lawsuit from CIT. Paradigm has accrued the sum
of $59,229.98. CIT has not yet sued Paradigm, but has threatened to do so.
Paradigm intends to vigorously contest any suit against it by CIT.
ITEM 6: EXHIBITS
The exhibits required by this item are set forth on the Index to
Exhibits attached hereto.
EXHIBIT INDEX
Exhibit No. Description
31.1 Certification of CEO pursuant to Rule 13a-14(a)/15d-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of CFO pursuant to Rule 13a-14(a)/15d-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of CEO pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of CFO pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PARADIGM HOLDINGS, INC.
(Registrant)
By: /S/ RAYMOND A. HUGER By: /S/ MARK A SERWAY
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Raymond A. Huger Mark A. Serway
Chief Executive Officer Chief Financial Officer