Item 2. PROPERTIES.
The Company's headquarters and principal administrative, sales and marketing functions are located in approximately 14,100 square feet of leased space in Greenbelt, Maryland. This lease expires in December 2003. The Company leases office space in thirteen U.S. cities, as well as in Vancouver, British Columbia; Toronto, Ontario; Calgary, Alberta; Sau Paulo, Brazil; and Mexico City, Mexico. Additionally, the Company shares an office with a joint venture partner in London, England.
The Company anticipates that additional space will be required as business expands and believes that it will be able to obtain suitable space as needed. In addition, the Company intends to open offices during the next 24 months in Continental Europe and the Asia-Pacific Rim to complement its current international offices.
Item 3.
Item 3. LEGAL PROCEEDINGS.
The Company believes that there are no claims or actions against the Company the ultimate disposition of which will have a material adverse effect on the Company's results of operations or consolidated financial position.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
Item 5.
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Stock Data: The Company's Common Stock, par value $0.01 per share, commenced trading on the NASDAQ National Market tier of The NASDAQ Stock Market on October 22, 1997, under the symbol "OAOT." As of December 31, 1997, there were 1,204 record holders of the Company's Common Stock based on information provided by the Company's transfer agent. The following table sets forth, for the periods indicated, the high and low closing prices for the Company's Common Stock.
--------------------- Quarter High Low ---------- --------- Fourth $ 12 1/2 $ 8 1/2
The Company has not paid cash dividends on its Common Stock to date. It is the present policy of the Company to retain future earnings to finance the growth and development of its business, and therefore the Company does not anticipate paying cash dividends on its Common Stock in the foreseeable future. Furthermore, certain financial covenants in the Company's bank credit agreement restrict the Company's ability to pay cash dividends.
Item 6.
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The selected consolidated financial data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements of the Company and the Notes thereto included elsewhere in this Form 10-K. The statement of operations data for the years ended December 31, 1997, 1996, 1995 and 1994, and the balance sheet data as of December 31, 1997, 1996, 1995 and 1994 have been derived from consolidated financial statements of the Company which have been audited by Deloitte & Touche LLP, independent auditors. The statement of operations data for the year ended December 31, 1993 and the balance sheet data as of December 31, 1993 have been derived from the Company's unaudited consolidated financial statements which, in the opinion of management, include all significant, normal and recurring adjustments necessary for a fair presentation of the financial position and results of operations for such unaudited period.
- ----------- (1) The Company's initial year of operations began in 1993 as a division of OAO Corporation. The Company was incorporated in March 1996 and was spun off from OAO Corporation in April 1996. As these were entities under common control, the merger was accounted for similar to that of a pooling-of-interests and as a result, the financial statements of the Company have been presented at historical cost since its inception in 1993. See Notes 1 and 2 to the Consolidated Financial Statements.
(2) See Note 4 to Notes to Consolidated Financial Statements for information concerning calculation of diluted and basic net income per common share.
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis is provided to increase the understanding of, and should be read in conjunction with, the Financial Statements and Notes thereto found in Item 8
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Consolidated Financial Statements of OAO Technology Solutions, Inc. and Subsidiaries are filed as part of this form 10-K.
Schedules not listed above have been omitted because they are not applicable or the information required to be set forth therein is included in the financial statements or the notes thereto.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of OAO Technology Solutions, Inc.:
We have audited the accompanying consolidated balance sheets of OAO Technology Solutions, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements 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 financial statements referred to above present fairly, in all material respects, the financial position of OAO Technology Solutions, Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles.
Deloitte & Touche LLP Washington, D.C. February 10, 1998
OAO TECHNOLOGY SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in Thousands, Except Per Share Amounts)
* Pro forma
The accompanying notes are an integral part of these consolidated financial statements.
OAO TECHNOLOGY SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS (Dollars in Thousands)
The accompanying notes are an integral part of these consolidated financial statements.
OAO TECHNOLOGY SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars In Thousands)
The accompanying notes are an integral part of these consolidated financial statements.
OAO TECHNOLOGY SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Dollars and Shares in Thousands)
The accompanying notes are an integral part of these consolidated financial statements.
OAO TECHNOLOGY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF COMPANY AND CORPORATE ORGANIZATION
OAO Technology Solutions, Inc. (the "Company") along with its wholly owned subsidiaries, provides a wide range of outsourced information technology solutions and professional services, including the operation of large-scale data center complexes and networks, distributed systems management, staffing services and other information technology services.
The Company's business began in January 1993, as a separate business division of OAO Corporation ("OAO"), an organization that provides IT services to governmental entities. OAO formed the Company as a separate business division in order to provide IT solutions and services to corporate clients. The Company became a wholly-owned subsidiary of OAO when it was incorporated in September 1995. The Company was re-incorporated in the State of Delaware in March 1996. In April 1996, the Company was spun-off from OAO.
Subsequently, on April 8, 1996, Safeguard Scientifics, Inc. ("Safeguard") invested $5.0 million in the Company in exchange for 5.0 million shares of common stock, which represented 50% of the common stock outstanding as of that date.
The accompanying financial statements reflect the Company's operations since its formation as a division of OAO. Prior to the spin-off and recapitalization as a new company in April, 1996, the Company's financial statements include allocations of indirect costs of OAO, primarily rent and administrative costs, of approximately $484,000 and $2.2 million for the years ended December 31, 1996 and 1995, respectively. These allocations have been based on the relative sales and labor costs of the Company as compared to the total sales and labor costs of OAO and its subsidiaries. Such allocations were consistent with that required by the Defense Contract Audit Agency in connection with the administration of OAO's U.S. government contracts and are considered reasonable by management. In connection with the spin-off and subsequent investment by Safeguard, certain obligations to the Company from OAO as of the date of the spin-off, in the amount of $2.6 million were forgiven by the Company and treated as a distribution to OAO. This transaction has been reflected in the accompanying financial statements as a reduction of stockholders' equity at the date of the spin-off.
Subsequent to the spin-off in 1996, the Company was charged administrative fees by OAO of approximately $600,000 through September 30, 1996, for administration of the accounting and human resource functions. No additional fees have been charged by OAO subsequent to September 30, 1996. Such charges were negotiated with OAO based on the charges for such services under the allocation methodology prior to the spin-off and are considered reasonable by management.
On October 22, 1997, the Company filed a registration statement for the Initial Public Offering (the "Offering") of approximately 6.7 million shares of the Company's common stock. Of these shares, the Company sold 6.2 million shares and three existing shareholders sold 485,000 shares.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. The accompanying consolidated financial statements include the accounts of OAO Technology Solutions, Inc. and its wholly owned subsidiaries: OAO Systems; Inc.; OAO Healthcare Solutions, Inc.; OAO Canada, Ltd.; Canadian Network Resources, Ltd.;
Canadian Resources Management, Ltd.; OAO of Mexico, S.A. de C.V.; OAO Brazil, LTDA; and OAO UK Limited. All accounts of non-U.S. subsidiaries have been translated into U.S. dollars and included in the consolidated financial statements. All intercompany accounts and transactions have been eliminated.
Revenue Recognition. The Company provides services under contracts, primarily to large commercial customers. Revenue is recognized on the majority of fixed price contracts for services over the term of the contract. Revenue under other fixed price contracts is recognized on the basis of the estimated percentage of completion of services rendered. Revenues under time-and-materials contracts are recorded at the contracted rates times the labor hours plus other direct costs as incurred. Anticipated losses on all contracts are recognized as soon as they become known.
The Company accounts for software revenues in accordance with the American Institute of Certified Public Accountants' ("AICPA") Statement of Position ("SOP") 91-1, "Software Revenue Recognition." Revenues earned under software license agreements with end users are generally recognized when the software has been shipped, payment is due within one year, collectibility is probable, and there are no significant obligations remaining.
Unearned Revenue. Unearned revenue at December 31, 1997 and 1996, represents prepayment for purchases of services that had not been rendered as of the respective dates.
Cash and Cash Equivalents. The Company considers all securities with a remaining maturity of three months or less at the date of purchase to be cash equivalents. At December 31, 1997, the Company's cash equivalents consisted of overnight reverse repurchase agreements and demand deposits.
Property and Equipment. Property and equipment is recorded at cost. The cost of office furniture, computer and office equipment, and purchased software is depreciated from the date of installation using the straight-line method over the estimated useful lives of the assets, which range from three to five years. Included in property and equipment are leasehold improvements and leased equipment, which are depreciated using the straight-line method over the shorter of their estimated useful lives or the term of the related leases. Software development costs incurred for products to be used internally are capitalized and are amortized on a straight line basis over five years. Capitalized software costs are included in property and equipment in the accompanying consolidated balance sheet. Amortization of these costs commences upon completion of the implementation of the software.
Income Taxes. The provision for income taxes includes Federal and state income taxes currently payable plus the net change during the year in the deferred tax liability or asset. The current or deferred tax consequences of all events that have been recognized in the financial statements are measured based on provisions of enacted tax law to determine the amount of taxes payable or refundable in future periods.
Currency Translation. The assets and liabilities of the Company's foreign subsidiaries whose functional currency is other than the U.S. Dollar are translated at the exchange rates in effect on the reporting date, and income and expenses are translated at the weighted average exchange rate during the period. The net effect of such translation gains and losses, as well as transaction gains and losses, were not material.
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 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.
Concentration of Risk. The Company's largest customer accounted for approximately 66%, 82%, and 89% of total revenues for the years ended December 31, 1997, 1996, and 1995, respectively. In addition, one other customer accounted for approximately 24%, 11% and 5% of total revenues for the years ended December 31, 1997, 1996 and 1995 respectively.
Financial instruments that potentially subject the Company to concentration of credit risk principally consist of accounts receivable and cash equivalents. The Company's largest customer accounted for approximately 30% and 76% of accounts receivable as of December 31, 1997 and 1996, respectively. In addition, other customers with balances in excess of 10% accounted for approximately 46% and 19% of accounts receivable as of December 31, 1997 and 1996, respectively. The Company performs ongoing credit evaluations of its customers, but generally does not require collateral to support customer receivables. Losses on uncollectible accounts have consistently been within management's expectations.
The Company has investments in overnight reverse repurchase agreements with a commercial bank. As of December 31, 1997 and 1996, the Company had invested approximately $20.9 million and $0 in overnight reverse repurchase agreements with this bank. The bank provides underlying collateral consisting of U.S government securities which fully secures the carrying value of the reverse repurchase agreements. Because the transactions are entered into and settled daily, management believes that the risk of market value impairment on a given day is nominal.
Stock-Based Compensation. In 1996, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation." As permitted under this Statement, the Company continues to follow the accounting provisions of Accounting Principles Board ("APB") Opinion No. 25 for the recognition and measurement of employee stock-based compensation and therefore provides only the disclosures required under SFAS No. 123.
3. ACQUISITION
In November 1997, the Company acquired certain assets of UniHealth Investment Company, a division of UniHealth, Inc., for approximately $398,000 in cash. This division produces a software product named MC400 which assists managed care organizations in the administration of benefits structures and provider contracts. This acquisition has been accounted for under the purchase method of accounting, and accordingly, the results of operations of the acquired division have been included in the consolidated financial statements from the date of acquisition. The purchase price was allocated based on the fair values of the acquired assets and assumed liabilities at the date of acquisition. The purchase resulted in an excess of purchase price over net assets acquired of approximately $340,000, which is being amortized on a straight-line basis over 7 years. Pro forma information related to this acquisition is not included herein as the acquisition was not material.
4. NET INCOME PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 128, "Earnings Per Share." This statement requires dual presentation of basic and diluted earnings per share on the face of the income statement. Basic earnings per share excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. SFAS No. 128 is effective for fiscal years ending after December 15, 1997, and accordingly, has been adopted by the Company as of December 31, 1997.
Calculation of basic and diluted net income per common share for the year ended December 31, 1996, is on a pro forma basis based upon operations for the period, assuming the incorporation, spin-off and the issuance of the common stock all took place on January 1, 1996. For the period ended December 31, 1997, and 1996, the weighted average number of shares outstanding for the calculation of diluted net income per common share includes 604,000 and 498,000 potentially dilutive shares from employee stock options outstanding, respectively. The Company uses the treasury stock method to calculate the potential dilution of employee stock options. For the years ended December 31, 1997 and 1996, net income available to common stockholders was not affected by the Company's potentially dilutive securities.
Comparative net income per common share data have been restated for prior periods. In connection therewith, common stock and options issued within one year prior to the original filing of the Company's Offering at prices below the Offering price, which had previously been considered outstanding for all periods presented, have been reflected in the computations of basic and diluted net income per common share in accordance with SFAS No. 128 and Securities and Exchange Commission Staff Accounting Bulletin No. 98, issued February 3, 1998. Such common stock and options have been treated as outstanding only since issuance.
Options to purchase 364,247 and 76,667 shares of common stock at $5.10 and $5.00, respectively, were outstanding during the second half of 1997 but were not included in the computation of diluted net income per common share because the options' exercise prices were greater than the average market price of the common shares. The options were still outstanding at December 31, 1997.
5. RECENT AUTHORITATIVE PRONOUNCEMENTS
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information about Capital Structure." The Company is required to adopt the provisions of this Statement for the year ending December 31, 1998. This Statement extends the previous requirements to disclose certain information about an entity's capital structure found in APB Opinions No.10, "Omnibus Opinion-1996," No. 15, "Earnings per Share," and FASB Statement No. 47, "Disclosure of Long-Term Obligations," for entities that were subject to the requirements of those standards. As the Company has been subject to the requirements of each of those standards, adoption of SFAS No. 129 will have no impact on the Company's financial statements.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for the reporting and display of comprehensive income and its components in the financial statements. The Company is required to adopt the provisions of the statement for fiscal periods beginning after December 15, 1997. The Statement may require the Company to make additional disclosures.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which requires the Company to present certain information about operating segments and related information, including geographic and major customer data, in its financial statements and in condensed financial statements for interim periods. The Company is required to adopt the provisions of the Statement for the year ending December 31, 1998. The Statement may require the Company to make additional disclosures.
In October 1997, the AICPA issued SOP 97-2, "Software Revenue Recognition." This SOP provides guidance on recognizing revenue on software transactions, and is effective for transactions entered into in fiscal years beginning after December 15, 1997. The Company believes the adoption of this SOP will not have a material impact its financial statements.
6. UNBILLED ACCOUNTS RECEIVABLE
Unbilled receivables at December 31, 1997 and 1996 consisted of the following (in thousands):
1997 1996 --------- --------- Unbilled receivables pending receipt of contractual authorization of billing $ 500 $ 1,900 Services performed in excess of billings 8,900 2,931 --------- --------- Total unbilled accounts receivable $ 9,400 $ 4,831 ========= =========
Unbilled receivables include certain costs and a portion of the fee and expected profit, which is billable upon completion of the contracts or the completion of certain tasks under terms of the contracts. Revenues have therefore been recognized under the percentage of completion method for services performed which are not billable under the terms of certain contracts. Additionally, since the Company receives requests to perform services on an as-needed basis and must immediately respond to these requests, the administrative processing to create the applicable purchase orders may occur after services have actually been provided. The majority of the unbilled receivables at December 31, 1997 is expected to be billed within the next twelve months. At December 31, 1997 and 1996, unbilled receivables are net of a reserve for uncollectible accounts of $239,000 and $400,000, respectively.
7. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1997 and 1996, consisted of (in thousands):
1997 1996 --------- --------- Furniture and equipment $ 1,461 $ 820 Leasehold improvements 308 47 Leased equipment 1,846 578 Capitalized software 1,844 430 --------- --------- 5,459 1,875 Less accumulated depreciation and amoritization (848) (491 --------- --------- Net property and equipment $ 4,611 $ 1,384 ========= =========
The Company leases furniture, equipment and automobiles, and financed certain leasehold improvements under capital leases. The capitalized costs and related accumulated amortization, included in the amounts above, at December 31, 1997 and 1996, are (in thousands):
1997 1996 --------- --------- Leased equipment $ 1,846 $ 578 Leasehold improvements 205 19 Less accumulated depreciation and amoritization (319) (191) --------- --------- $ 1,732 $ 406 ========= =========
8. ACCRUED EXPENSES
Accrued expenses at December 31, 1997 and 1996, consisted of (in thousands):
1997 1996 --------- --------- Accrued salaries, bonuses, and other employee benefits $ 3,321 $ 2,222 Payroll taxes and amounts withheld from employees 858 746 Other accrued foreign taxes 295 -- Accrued equipment purchases 577 -- Other 669 713 --------- --------- Total accrued expenses $ 5,720 $ 3,681 ========= =========
9. CREDIT AGREEMENTS
The Company has a $10.0 million Revolving Credit Agreement (the "Agreement") with a bank. The Agreement, which matures on May 31, 1999, provides for a commitment fee of 0.375% on the unused portion and interest at the prime rate or, at the Company's option, at the bank's overnight base rate plus 2%, or LIBOR plus 2%. Borrowings under the Agreement are limited to a percentage of eligible billed receivables. The Agreement also requires the maintenance of certain financial covenants and prohibits the payment of dividends. Additionally, the Company has a $750,000 line of credit (the "Line") with the same bank and the same terms as the Agreement. Total borrowings under the Agreement and the Line were $6.8 million during the year, with no outstanding amounts at December 31, 1997.
10. CAPITAL LEASE OBLIGATIONS
Capital lease obligations consists of the following at December 31, 1997 and 1996:
1997 1996 --------- --------- (in thousands) Capital lease obligations bearing interest at 5.00% to 11.72%, aggregate monthly payments of approximately $53,000 $ 1,435 $ 476 Less current portion of capital lease obligations (552) (190) --------- --------- Long term portion of capital lease obligations $ 883 $ 286 ========= =========
Future payments under the capital lease obligations are summarized below (in thousands):
Capital Year ended December 31, Leases - ----------------------- -------- 1998 $ 609 1999 517 2000 344 2001 105 2002 50 Thereafter 45 -------- 1,670 Less amounts representing interest (235) -------- Total $ 1,435 ========
11. STOCKHOLDERS' EQUITY
During 1997, the Board of Directors approved an increase in the number of authorized shares of common stock to 25.0 million shares, a par value of $0.01 per share, and a split of all shares of common stock at a ratio of 1.6667 to one. All share amounts have been restated to give effect to the stock split. In addition, the Board authorized the issuance of 5.0 million shares of preferred stock, of which none have been issued.
In 1996, the Company adopted the 1996 Equity Compensation Plan (the "Plan") under which the Company is authorized to grant stock options to employees, officers, directors, and consultants. The Plan provides for the issuance of up to 3.2 million shares of common stock pursuant to the grant of incentive stock options, nonqualified stock options, stock appreciation rights, and restricted stock awards. Generally, these options vest ratably over a four or five year period and expire six to ten years after the date of grant. The exercise price of options granted under the Plan is equal to the estimated fair market value on the date of grant. The Company accounts for employee options under APB Opinion No. 25, under which no compensation cost has been recognized. Pursuant to SFAS No. 123, the Company recognized approximately $19,000 of compensation expense on options granted to Advisory Council members for the year ended December 31, 1997.
A summary of the status of the Company's stock option plan at December 31, 1997 and 1996 and changes during the years then ended is presented below.
As of December 31, 1997 and 1996, 550,104 and 102,020 options, respectively, were exercisable with a weighted average exercise price of $3.58 and $2.00, respectively. As of December 31, 1997 and 1996, 1.2 million and 383,334 options were available for grant, respectively.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 1997 and 1996, respectively: risk-free interest rates of 6.15 and 5.94 percent; no expected dividend yields; and expected lives of 3.83 and 6.00 years. As no grants were made subsequent to the Company's Offering, no volatility was considered in the calculation for 1997 or 1996. Using these assumptions, the fair value of the stock options granted in 1997 and 1996 on a per share, weighted average basis was $0.96 and $1.02, respectively, which would be amortized as compensation expense over the vesting period of the options.
Had compensation cost for these plans been recognized under SFAS No. 123, the Company's net income and earnings per share would have been reduced to the following pro forma amounts (in thousands, except per share data).
1997 1996 ---------- --------- Net income: As reported $ 2,868 $ 1,810 Pro forma $ 2,663 $ 1,647 Diluted net income per common share: As reported $ 0.26 $ 0.17 Pro forma $ 0.24 $ 0.16 Basic net income per common share: As reported $ 0.27 $ 0.18 Pro forma $ 0.25 $ 0.16
12. INCOME TAXES
The Company's provision for income taxes for the years ended December 31, 1997, 1996 and 1995, consisted of the following (in thousands):
The provision for income taxes differs from the amount computed by applying the statutory federal income tax rate as follows:
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and amounts used for income tax purposes.
The tax effect of significant temporary differences that comprise the deferred tax assets and liabilities at December 31, 1997 and 1996, are as follows (in thousands):
13. EMPLOYEE BENEFIT PLANS
In 1996, the Company approved the temporary adoption of the OAO Corporation Employee Savings Plan as the employee savings plan. Effective September 30, 1996, the Company established a separate 401(k) Plan, the OAO International Corporation Employee Savings Plan (the "401(k) Plan"), and completed the rollover of assets held under the OAO Corporation Employee Savings Plan to the new plan. The 401(k) Plan covers substantially all of the Company's U.S. employees. Participants may contribute to the Plan an amount between 1% and 15% of their total annual compensation. The Company makes matching contributions of 20% of each participant's contributions up to 10%. Company matching contributions amounted to approximately $353,000 and $201,000 in 1997 and 1996, respectively.
14. GEOGRAPHIC AREA INFORMATION
The Company generated substantially all of its revenues in the United States and Canada during the three years ended December 31, 1997. The following represents a summary of information by geographic area (in thousands):
Sales between geographic areas are not material. Costs related to business development in international locations other than Canada of approximately $1.8 million and $3.1 million, respectively, have been included in "Other Consolidated Entities" for the years ended December 31, 1997 and 1996. Prior to 1996, costs incurred in this area were not significant. Identifiable assets are those assets used in the operations in each geographic area.
15. RELATED PARTY TRANSACTIONS
The Company and OAO Services, Inc. ("Services"), a subsidiary of OAO, are related parties as a common group of shareholders hold a substantial ownership interest in both companies. During 1997 and 1996, the Company served as a subcontractor on several contracts with Services. Total revenues recorded under these contracts amounted to $4.2 million and $1.6 million, respectively, for the years ended December 31, 1997 and 1996. At December 31, 1997 and 1996, the Company has $1.9 million and $764,000 of billed receivables and $502,000 and $297,000 of unbilled receivables, respectively, which are due from Services.
At the date of its investment in the Company, April 8, 1996 (Note 1), Safeguard paid $5.0 million to Services, in return for a grant by Services to the Company of an option to purchase at anytime through April 8, 2000, all of the shares of common stock of Services at an exercise price based on revenues and earnings levels of Services for the 12 months prior to the date of exercise.
Pursuant to the terms of an agreement dated July 11, 1997, the Services' option was canceled in consideration of the right granted to the Company and Safeguard to receive certain future payments in the event of any sale of OAO and Services or any public offering by OAO which occurs prior to April 8, 2000. In each instance, the minimum amount to be received by the Company would be $500,000, with the potential for a higher amount based on the value of the transaction.
The Company has entered into an administrative services agreement with Safeguard, which provides for payment of a maximum fee of 1% of gross revenues per year, not to exceed $125,000 for the six months ended September 30, 1996, and $500,000 per year thereafter. The Company charged $500,000 and $250,000 to operations for the years ended December 31, 1997 and 1996, respectively, in connection with this agreement.
16. COMMITMENTS AND CONTINGENCIES
The Company has entered into long-term lease agreements for office space and equipment. The minimum fixed rental commitments related to all noncancelable operating leases are approximately as follows (in thousands):
Operating Year ended December 31, Leases ----------------------- ---------- 1998 $ 821 1999 603 2000 554 2001 415 2002 367 Thereafter 367 ---------- Total minimum lease payments $ 3,127 ==========
A number of these leases have escalation clauses for increases in real estate taxes, operating costs, and inflation and provide various renewal options up to five years. Rent expense for the years ended December 31, 1997, 1996, and 1995, approximated $821,000, $355,000, and $118,000, respectively.
The Company is involved in various litigation arising in the normal course of business. In management's opinion, the Company's ultimate liability or loss, if any, resulting from this litigation will not have a material adverse effect on the accompanying financial statements.
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
Set forth below are selected unaudited financial statements of operations data for the last eight fiscal quarters of the Company. In Management's opinion, the results below have been prepared on the same basis as the audited financial statements contained herein and include all material adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the information for the periods. Results of any one or more quarters are not necessarily indicative of annual results or continuing trends.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
- ----------- (A) Reflected on the Balance Sheet as a reduction of Accounts Receivable (B) Provided as a reduction of revenue for the year ended December 31, 1996. Provided as a reduction of accounts receivable purchased in the acquisition of certain assets of UniHealth Investment Company (see Note 3 in the Notes to Consolidated Financial Statements) for the year ended December 31, 1997. (C) Provided as a recovery of revenue.
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item is incorporated by reference to the sections of the Registrant's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 21, 1998 (the "Proxy Statement"), entitled "Election of Directors - Nominees," "Executive Officers" and "Common Stock Ownership of Principal Stockholders and Management - Compliance with Section 16(a) Beneficial Ownership Reporting Compliance," to be filed with the Commission.
Item 11.
Item 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the sections of the Proxy Statement entitled "Election of Directors Compensation of Directors" and "Executive Compensation and Other Information," to be filed with the Commission.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANGEMENT.
The information required by this Item is incorporated by reference to the section of the Proxy Statement entitled "Common Stock Ownership of Principal Stockholders and Management," to be filed with the Commission.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated by reference to the sections of the Proxy Statement entitled "Election of Directors Nominees" and "Executive Compensation and Other Information - Compensation Committee Interlocks and Insider Participation," to be filed with the Commission.
PART IV
Item 14.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
- ---------- (1) Filed herewith. (2) Incorporated by reference to the Company's Registration Statement on Form S-1(Registration No. 333-00796) declared effective on October 22, 1997. (3) Confidential Treatment Requested. The entire agreement has been filed separately with the Securities and Exchange Commission.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
OAO Technology Solutions, Inc.
By: /s/ William R. Hill ---------------------------- William R. Hill Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
EXHIBITS
- ---------- (1) Filed herewith. (2) Incorporated by reference to the Company's Registration Statement on Form S-1(Registration No. 333-00796) declared effective on October 22, 1997. (3) Confidential Treatment Requested. The entire agreement has been filed separately with the Securities and Exchange Commission.