Item 2. PROPERTIES.
The Company's headquarters and principal administrative, sales and marketing functions are located in approximately 25,150 square feet of leased space in Greenbelt, Maryland. This lease expires in December 2003. The Company leases office space in sixteen U.S. cities, as well as in Vancouver, British Columbia; Toronto, Ontario; Calgary, Alberta, and Moncton, New Brunswick, and Warwickshire, United Kingdom. Additionally, the Company shares offices with joint venture partner in Mexico City, Mexico. The Company anticipates that additional space will be required as business expands and believes that it will be able to obtain suitable space as needed.
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 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, 1999, there were 714 record holders of the Company's Common Stock based on information provided by the Company's transfer agent. The following table sets forth, for the periods indicated, the high and low closing sale prices for the Company's Common Stock.
-------------------- Quarter High Low ---------- -------------------- First $7.50 $3.25 Second 5.13 3.13 Third 4.00 2.63 Fourth 8.50 3.13
-------------------- Quarter High Low ---------- -------------------- First $11.81 $7.38 Second 9.63 4.50 Third 5.25 3.13 Fourth 4.63 2.38
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, 1999, 1998, 1997, 1996 and 1995 and the balance sheet data as of December 31, 1999, 1998, 1997, 1996 and 1995 have been derived from consolidated financial statements of the Company which have been audited by Deloitte & Touche LLP, independent auditors. The Company began its operations in 1993 as a division of OAO Corporation (OAO), was incorporated in March 1996 and was spun off from OAO Corporation in April 1996. In July 1998, the Company acquired OAO Services, Inc. from OAO Corporation.
(1) See Note 5 to Notes to Consolidated Financial Statements for information concerning calculation of basic and diluted net income per common share
Item 7.
Item 7.a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company conducts business in foreign countries, primarily Canada and the United Kingdom. Foreign currency transaction gains and losses were not material to the Company's results of operations for the year ended December 31, 1999 and 1998. The Company believes its foreign currency risk is related primarily to the difference between amounts the Company receives and disburses in Canada in U.S. Dollars from U.S. dollar denominated contracts. The Company does not expect the amount of foreign currency risk to be material in the future. To date, the Company has not entered into any significant foreign currency forward exchange contracts or other derivative financial instruments to hedge the effects of adverse fluctuations in foreign currency exchange rates.
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, 1999 and 1998, and the related consolidated statements of operations and comprehensive income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. Our audits also included the financial statement schedule on page 45. 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 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 misstatements. An audit includes examination, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of OAO Technology Solutions, Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects, the information set forth herein.
Deloitte & Touche LLP McLean, VA February 9, 2000
OAO TECHNOLOGY SOLUTIONS, INC. Consolidated Statements of Operations and Comprehensive Income (Dollars in thousands, except per share amounts)
The accompanying notes are an integral part of the consolidated financial statements.
OAO TECHNOLOGY SOLUTIONS, INC Consolidated Balance Sheets (Dollars in thousands)
The accompanying notes are in 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 Statement of Stockholders' Equity (Dollars and Shares in thousands)
For the years ended December 31, 1999, 1998 ,1997
The accompanying notes are in integral part of these consolidated financial statements.
OAO TECHNOLOGY SOLUTIONS, INC.
NOTES TO CONSOLIDATE FINANCIAL STATEMENTS
1. Description of Company and Corporate Organization
OAO Technology Solutions, Inc. (the "Company" or "OAOT") is a global enterprise-wide integrator of information technology solutions. The Company, along with its wholly owned subsidiaries, provides a wide range of outsourced information technology solutions and professional services. These services include the operation of large-scale service delivery centers and networks; distributed systems management; custom applications software development and maintenance; professional IT services; enterprise application solutions, integration, implementation and training services; web enablement and e-business solutions; and proprietary software solutions for the managed care marketplace. These services are provided through four business lines: Network and Systems Business Solutions, Professional Services, Healthcare IT Solutions, and E-Business Consulting Solutions.
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 Services, Inc.; Enterprise Technology Group, Inc.(ETG); OAO Canada Limited.; Canadian Network Resources, Ltd.; Canadian Resource Management, Ltd.; OAO Technology Solutions de Mexico, S.A. de C.V.; OAO/ICOR do Brasil Ltda.; and OAO/ICOR UK Ltd. All accounts of non-U.S. subsidiaries have been translated into U.S. dollars and are 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. Service revenues are generally recognized ratably over the period of the related contract. Revenue for fixed-price contracts is recorded on the basis of the estimated percentage of completion, based on costs incurred as compared to estimated costs at completion of the services rendered. Revenues under time-and-materials contracts are recorded at the contracted rates times the labor hours plus other direct costs as they are incurred. Losses, if any, 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) 97-2, "Software Revenue Recognition" and SOP 98-4 "Deferral of the Effective Date of a Provision of SOP 97-2, Software Revenue Recognition." Revenues earned under software license agreements with end-users are recognized when the software has been delivered and accepted by the customer, persuasive evidence of a contractual arrangement exists, the Company's fee is fixed or determinable, and collectibility is probable.
Maintenance and support revenues are recognized ratably over the term of the related agreements, which range from one to five years. Revenues from consulting services under time and materials contracts and for training are recognized as services are performed.
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, 1999 and 1998, the Company's cash equivalents consisted of overnight reverse repurchase agreements and demand deposits.
Property and Equipment
Property and equipment are 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 amortized 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.
Purchased and Developed Software Costs
Development costs incurred in the research and development of new software products and enhancements to existing software products are expensed as incurred until technological feasibility has been established. The Company considers technological feasibility to be established when all planning, designing, coding and testing have been completed according to design specifications. After technological feasibility is established, any additional costs are capitalized in accordance with Statement of Financial Accounting Standards (SFAS) No. 86 "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed." Purchased and developed software costs are amortized based on current and future revenue for each product with annual minimum amortization equal to the straight-line amortization over the remaining estimated economic life of the product. Amortization of such costs were $86,000 in 1999 and $0 in 1998.
Unearned Revenue
Unearned revenue at December 31, 1999 and 1998 represents prepayment for purchases of services that had not been rendered as of the respective dates.
Income Taxes
The provision for income taxes includes Federal, state and foreign income taxes currently payable plus the net change during the year in the deferred tax liability or asset. The current or deferred tax consequences of all events that have been recognized in the financial statements are measured based on provisions of enacted tax law to determine the amount of taxes payable or refundable in future periods.
Foreign Currency Translation
The assets and liabilities of the Company's foreign subsidiaries, whose functional currency is other than the U.S. dollar, are translated at the exchange rates in effect on the reporting date, and income and expenses are translated at the weighted average exchange rate during the period. Translation gains or losses are included as a component of stockholders' equity.
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.
Evaluation of Long-Lived Assets
In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," the Company evaluates the potential impairment of long-lived assets,
including goodwill, based on the projection of undiscounted cash flows whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. Management believes no material impairment of these assets exists at December 31, 1999.
Concentration of Risk
The Company has two strategic customers. One strategic customer accounted for 75.7%, 67.0% and 66.2%, and the other accounted for 15.9%, 23.4% and 24.1%, of total revenues for the years ended December 31, 1999, 1998 and 1997, respectively.
Financial instruments that potentially subject the Company to concentration of credit risk principally consist of accounts receivable and cash equivalents. The Company's two largest strategic customers accounted for approximately 61.9% and 22.1%, respectively, of accounts receivable as of December 31, 1999 and 53.7% and 30.7%, respectively, as of December 31, 1998. The Company did not have any other customers with balances in excess of 10.0% of accounts receivable as of December 31, 1999 and 1998, respectively. The Company performs ongoing credit evaluations of its customers, but generally does not require collateral to support customer receivables.
The Company has investments in overnight reverse repurchase agreements with a commercial bank. As of December 31, 1999 and 1998, the Company had invested approximately $8.5 and $6.0 million in overnight reverse repurchase agreements with this bank. The bank provides underlying collateral consisting of U.S. government securities which fully secures the carrying value of the reverse repurchase agreements. Because the transactions are entered into and settled daily, management believes that the risk of market value impairment on a given day is nominal.
Stock-Based Compensation
The Company follows the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." As permitted under this Statement, the Company continues to follow the accounting provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issue to Employees" for the recognition and measurement of employee stock-based compensation and, therefore, provides only the disclosures required under SFAS No. 123. Using the intrinsic method prescribed in APB Opinion No. 25, compensation costs are measured as the excess, if any, of the quoted market price of the Company's stock at the date of grant over the amount an employee must pay to acquire the stock.
Reclassifications
Certain amounts previously reported in the consolidated financial statements have been reclassified to conform to the current year presentation.
3. Supplemental Disclosure of Cash Flow Information
4. Acquisitions
OAO/ICOR UK Ltd. Acquisition
On May 27, 1999 the Company acquired the remaining 50% of the outstanding capital stock of OAO/ICOR UK Ltd. not already owned by the Company from Capita Business Services Limited, a registered English & Wales company. The Company paid $161,900 for the outstanding capital stock and $526,200 as repayment to Capita Business Services Limited for amounts due from OAO/ICOR UK Ltd. The acquisition was accounted for under the purchase method of accounting and the Company has included the results of operations of OAO/ICOR UK Ltd. as a consolidated entity from the effective date of the acquisition. The purchase resulted in an excess of purchase price over net assets acquired of approximately $501,000, which is being amortized on a straight-line basis over seven years. The Company previously used the equity method of accounting for the results of operations prior to this acquisition. Pro forma information related to this acquisition is not included herein as the acquisition was not material.
ETG, INC. Acquisition
Effective November 1, 1998, the Company entered into an agreement and plan of merger with ETG Acquisition Corporation, a wholly owned subsidiary of the Company with Enterprise Technology Group, Inc., a Delaware corporation (ETG) and ETG's three stockholders. In accordance with the agreement, ETG was merged with ETG Acquisition Corporation, with ETG Acquisition Corporation continuing on as the surviving corporation. By virtue of merger, the name of the surviving corporation was changed to Enterprise Technology Group, Inc. In January 2000 Enterprise Technology Group, Inc. was merged into OAO Technology Solutions, Inc.
Pursuant to the agreement and plan of merger the ETG stockholders exchanged all of the issued and outstanding stock of ETG, consisting of 1,000 shares of common stock, par value $.10 per share, for 222,222 shares of common stock, par value $.01 per share of the Company. The ETG stockholders were granted certain "piggy-back" registration rights whereby under certain circumstances, and subject to certain conditions, they may include these shares of OAOT common stock in any registration of shares of OAOT common stock. The Company's Chief Executive Officer was one of the ETG selling stockholders, and exchanged 500 shares of ETG common stock he owned for 111,111 shares of the Company's common stock. The Company, prior to the merger, provided ETG interest free advances totally approximately $216,000. Additionally at closing, the Company repaid ETG's stockholder loans of approximately $109,000.
The acquisition has been accounted for under the purchase method of accounting, thus the results of operations of the acquired company have been included in the consolidated financial statements from the date of acquisition. The purchase price was allocated based on the fair value of the assets acquired, including approximately $28,000 of cash, and the liabilities assumed at the date of acquisition. The purchase results in an excess of purchase price over net assets acquired of approximately $1.0 million, which is being amortized on a straight-line basis over seven years. Pro forma information related to this acquisition is not included herein as the acquisition was not material.
OAO Services, Inc. Acquisition
On July 24, 1998, the Company completed the acquisition of all of the outstanding capital stock of OAO Services, Inc., pursuant to a Stock Purchase Agreement dated July 24, 1998 among OAO Services, Inc., the Company, OAO and an individual stockholder (the individual stockholder together with OAO, the "Stockholders"). The acquisition was effective as of July 1, 1998.
Pursuant to the terms of the Stock Purchase Agreement, the purchase price payable by the Company to the Stockholders in connection with the acquisition included (i) cash in the amount of $2,305,000, subject to certain purchase price adjustments, (ii) the payment by OAOT to the bank of $4,561,000 for the retirement of outstanding debt under a financing agreement (of this amount, $3,465,611 is a retirement of the portion of the debt allocated to the Company, with the remainder being a payment of the balance allocated to OAO), and (iii) earn-out payments to the Stockholders in amounts equal to 10% of OAOT's pre-tax profit.
Under the terms of the Company's acquisition of OAO Services, Inc. from OAO and another stockholder of OAO Services, Inc., the Company is required to make earn-out payments in amounts equal to 10% of the Company's pre-tax profit in excess, if any, of $2 million subject to increases, for the three years ended December 31, 1999, 2000 and 2001. The aggregate earn-out payments shall not exceed $5 million. For the year ended December 31, 1999, the Company recognized $148,000 of earn-out payments due to OAO and the other stockholder. The amounts earned under this agreement increase the amount of goodwill recognized by this transaction.
Also on July 24, 1998, in connection with the acquisition of OAO Services, Inc. OAOT entered into an Administrative Services Agreement with OAO, under which OAO will provide OAO Services, Inc. with administrative support services through the earlier of the date that OAOT determines, at its sole discretion, that it no longer requires such services, or December 31, 1998. During the twelve-month period ended December 31, 1998, the Company incurred $364,000 of costs under this agreement.
Also, in connection with its purchase of OAO Services, Inc. from OAO, the Company loaned OAO approximately $2.5 million. The Company entered into a promissory note from OAO for this amount bearing interest at prime plus 2.0% due December 1, 1999. In December 1999, the Company and OAO modified the terms of the note to a demand note with an increased interest rate of prime plus 2.5% payable quarterly. The note has quarterly principal payments until demand. All other terms remain substantially unchanged. The Vice Chairman of the Board of Directors of the Company, and owner of approximately 18% of the outstanding shares of common stock of the Company has pledged as security approximately 1.3 million shares of Company stock.
The total purchase price of $2,305,000 consisted of a cash payment of $2,195,000 and other non-cash consideration of $110,000. The acquisition has been accounted for under the purchase method of accounting, and accordingly, the results of operations of OAO Services, Inc. have been included in the consolidated financial statements from the date of acquisition. The purchase price was allocated to the net assets and liabilities acquired based on their estimated fair values at the date of acquisition.
The purchase resulted in an excess of purchase price over net assets acquired of approximately $2.3 million, which is being amortized on a straight-line basis over ten years.
The unaudited pro forma information for the periods set forth below give effect to the OAO Services, Inc. acquisition as if it had occurred at the beginning of each period. The pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have been achieved had the acquisition been consummated as of that time (unaudited, dollars in thousands).
For the years ended December 31, 1998 1997 ------------------------------
Revenue $ 142,140 $ 146,312
Net (loss) income (2,986) 3,018
Basic (loss) earnings per share (0.18) 0.28
Diluted (loss) earnings per share (0.18) 0.27
DHR Technologies Acquisition
On April 2, 1998, the Company acquired certain assets and liabilities of DHR Technologies, Inc. (DHR) for approximately $1.1 million in cash. DHR, a Maryland-based information technology services company and software developer, provided technical services in a variety of disciplines, including object-oriented software engineering; World Wide Web/multimedia applications; training and consulting; and maintenance engineering. The acquisition has been accounted for under the purchase method of accounting; thus, the results of operations of the acquired company have been included in the consolidated financial statement
from the date of acquisition. The purchase price was allocated based on the fair value of the assets acquired, including among other assets, cash of approximately $162,000, and the liabilities assumed at the date of acquisition. The purchase resulted in an excess of purchase price over net liabilities acquired of approximately $1.5 million, which is being amortized on a straight-line basis over seven years. Pro forma information related to this acquisition is not included herein as the acquisition was not material.
OAO HealthCare Solutions, Inc. 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 value 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 seven years. Pro forma information related to this acquisition is not included herein as the acquisition was not material.
5. Net Income Per Common Share
Options to purchase approximately 1,244,071 shares of common stock at or greater than $4.21 were outstanding during 1999. Options to purchase 315,000 and 364,000 shares at $8.50 and $5.10 were outstanding during 1998 and 1997 respectively. These options 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.
6. Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The statement requires companies to recognize all derivatives as either assets or liabilities, with the instruments measured at fair value. The accounting for changes in fair value and gains or losses depends on the intended use of the derivative and its resulting designation. The statement was originally effective for fiscal years beginning after June 15, 1999. In June 1999, FASB delayed implementation of this statement by one year, to June 15, 2000. The Company will adopt SFAS No. 133 in the first quarter of 2001 and is evaluating the impact that implementation of this statement will have on its consolidated financial statements.
7. Comprehensive Income (Loss)
The Company's source of other comprehensive income (loss) other than net income is from foreign currency translation adjustments.
8. Unbilled Accounts Receivable
Unbilled accounts receivable 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. Unbilled accounts receivable as of December 31, 1999 and 1998 consisted of the following (in thousands):
During 1999 and 1998, the Company made provisions for uncollectible accounts related to certain billed and unbilled receivables totaling approximately $474,000 and $4.2 million, respectively.
9. Other Current Assets
The Company entered into a Value Added Industry Remarketer (VAIR) agreement with Siebel Systems, Inc., on August 31, 1999. As part of this agreement, the Company purchased software licenses for $5.1 million for resale to third parties. The software licenses were purchased with cash of $2.8 million and the Company's common stock. The common stock consisted of 228,800 shares with a guaranteed per share value of $10 at September 1, 2000. The difference, if any, between the share price at September 1, 2000 and the guaranteed price will be paid in cash. The balance of the licenses are included in other current assets on the consolidated balance sheet at December 31, 1999.
10. Property and Equipment
Property and equipment at December 31, 1999 and 1998 consisted of the following (in thousands):
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 property and equipment amounts at December 31, 1999 and 1998 are (in thousands):
11. Accrued Expenses
Accrued expenses at December 31, 1999 and 1998 consisted of the following (in thousands):
12. Credit Agreements
The Company entered into a $35 million combined revolving credit and term loan agreement (the "Agreement") with Bank of America on June 30, 1999. The Agreement provides a $15 million revolving line of credit ("Revolver") and a $20 million term loan facility. The Revolver provides for a commitment fee of 0.30% to 0.50% of the unused balance and interest at the prime rate or, at the Company's option, at LIBOR plus a 1.75% to 2.5% risk adjusted premium. The Revolver matures on May 31, 2002. The Agreement's term loan facility provides for a draw fee of 0.50% payable when drawn upon and interest at LIBOR plus a risk- adjusted premium. The term loan facility matures on May 31, 2001. Draws under the Agreement are limited to a multiple of earnings before interest, taxes, depreciation and amortization (EBITDA). The Company may convert the revolving line of credit to an asset-based loan limited to a percentage of eligible billed and unbilled trade receivables. The Agreement also requires maintenance of certain financial covenants, prohibits the payment of dividends and pledges all Company assets as collateral among other restrictions and replaces the Company's Revolving Credit Agreement with another bank. There were no borrowings outstanding under either credit arrangement for the years ended December 31, 1999 and 1998.
13. Lease Commitments
The Company leases furniture and equipment under capital lease arrangements. The Company also leases office space and office equipment under operating leases. The minimum fixed non-cancelable lease payments under the Company's lease commitments at December 31, 1999 are as follows (in thousands):
Capital Operating Lease Leases ------------------------- Future minimum lease payments: Year ended December 31: 2000 $ 68 $ 1,628 2001 59 1,492 2002 39 1,150 2003 - 953 2004 - 357 ---------------------- 166 $ 5,580 ========= Less amount representing interest (23) ------- Present value of lease payments 143 Current portion of capital leases (54) ======= Noncurrent portion of capital leases $ 89 =======
Capital lease obligations bearing interest at 9.43% to 11.85% have aggregate monthly payments of $9,187 and $3,475, respectively. A number of operating leases have escalation clauses for increases in real estate
taxes, operating costs and inflation, and various renewal options for up to five years. Rent expense for the years ended December 31, 1999, 1998 and 1997 approximated $1,707,000, $1,297,000 and $821,000, respectively.
14. Restructuring and Other Charges
During 1998, in connection with management plans to reduce costs and improve operating efficiencies, the Company recorded pre-tax restructuring charges of approximately $1,035,000. The restructuring costs relate primarily to involuntary employee termination benefits. Employee termination benefits include severance, wage continuation, outplacement services, and other benefits. All of the thirteen terminated employees were notified of their termination and the terms and condition for their severance in writing. Although some of the severance payments are being made in equal semi-monthly amounts up to a twelve-month period of the time, the terminated employee is not obligated to provide services after the date of termination. As of December 31, 1998, approximately $594,000 was recorded in accrued expenses.
During 1997, the Company began implementation of an enterprise-wide financial management project. The program included modules for general ledger, accounts receivable, accounts payable, project accounting, and human resources. During the third quarter of 1998, due to significant cost overruns and project definition changes, the Company hired an outside consultant to review the status of this project. Based on this review, the Company has completely abandoned the majority of the original software modules and the related implementation costs. Except for the human resources module, none of the remaining modules had been implemented, and all the related implementation software documentation for these abandoned modules have been discarded. As a result, the Company recorded a write-off of approximately $2.1 million related to this abandonment.
15. Stockholders' Equity
During 1999, the Board of Directors approved an increase in the number of authorized shares of common stock to 50 million shares, at a par value of $0.01 per share. In addition, the Board approved an increase in the number of authorized shares of preferred stock up to 10 million shares at a par value of $.01 per share, none of which have been issued.
On August 31, 1999 the Company issued 228,800 shares of common stock with a guaranteed market price of $10 per share to Siebel Systems, Inc. in exchange for certain Siebel software license applications for resale by the Company as part of its business. The Company has agreed to pay Siebel Systems, Inc. in cash the difference if the market price on September 1, 2000 is less than the guaranteed price of $10 per share. At December 31, 1999 the fair value of this guarantee of approximately $1.3 million is included in accrued expenses.
16. Stock-Based Compensation
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 original 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 for a maximum of 1.6 million shares of common stock in any one year. During 1999, the Board of Directors amended the Plan authorizing the issuance of an additional 3.4 million shares of common stock, for a total of 6.6 million authorized common shares. 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 stock options under APB Opinion No. 25, under which no compensation cost has been recognized. Pursuant to SFAS No. 123, the Company recognized approximately $42,000, $30,000 and $19,000 of compensation expense on options granted to non-employees for the years ended December 31, 1999, 1998 and 1997, respectively.
A summary of the Company's stock option plan changes for the years ended December 31, 1999, 1998, and 1997 is presented below:
For the year ended December 31, 1998, 800,366 incentive stock options with exercise prices ranging from $4.63 to $8.50 were re-priced to $3.50. These options are included in amounts granted and canceled in 1998.
The following summarizes information about the Company's stock options outstanding at December 31, 1999:
As of December 31, 1999, 1998 and 1997, options of 906,953; 670,322 and 550,104 were exercisable with a weighted average exercise price of $3.74, $3.53 and $3.58, respectively. As of December 31, 1999, 1998 and 1997, approximately 2.8 million, 200,000 and 1.2 million 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 1999, 1998 and 1997 respectively: risk-free interest rates of 5.50, 5.17 and 6.15 percent; no expected dividend yields; and expected lives of 5.0, 5.0 and 3.83 years, respectively. In 1999 and 1998, the expected volatility was 70% and 55%, respectively. As no grants were made in 1997 subsequent to the Company's Offering, no volatility was considered in the calculation for 1997. Using these assumptions, the fair value of the stock
options granted in 1999, 1998 and 1997 on a per share, weighted average basis was $2.94, $2.58 and $0.96, respectively, which would be amortized as compensation expense over the vesting period of the options.
Had compensation cost for these plans been recognized under SFAS No. 123, the Company's net income (loss) and earnings (loss) per share would have been reduced to the following pro forma amounts (in thousands, except per share data):
1999 1998 1997 ---------------------------------- Consolidated net income (loss): As reported $ 1,851 $ (3,498) $ 2,868 Pro forma $ 807 $ (4,563) $ 2,663 Basic net income (loss) per common share: As reported $ 0.11 $ (0.21) $ 0.27 Pro forma $ 0.05 $ (0.28) $ 0.25 Diluted net income (loss) per common share: As reported $ 0.11 $ (0.21) $ 0.26 Pro forma $ 0.05 $ (0.28) $ 0.24
17. Income Taxes
The Company's provision for income taxes for the years ended December 31, 1999, 1998 and 1997 consisted of the following (in thousands):
1999 1998 1997 ---------------------------- Current: Federal $ 615 $ (134) $ 829 Foreign 605 (410) 481 State 128 (6) 136 ---------------------------- Total current provision (benefit) 1,348 (550) 1,446 Deferred: Federal 167 (1,153) 411 State 39 (178) 55 ---------------------------- Total deferred (benefit) provision 206 (1,331) 466 ---------------------------- Total provision (benefit) $ 1,554 $(1,881) $ 1,912 ----------------------------
The provision (benefit) for income taxes differs from the amount computed by applying the statutory Federal income tax rate as follows:
1999 1998 1997 -------------------------- Expected statutory amount 34.0% (34.0)% 34.0% Nondeductible expense 0.8 (1.3) 1.4 Foreign income taxes 7.7 -- -- State income taxes, net of federal benefit 3.1 (1.5) 4.6 Other -- 1.8 -- -------------------------- Effective rate 45.6% (35.0)% 40.0% ----------------------------
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and amounts used for income tax purposes. The tax effects of significant temporary differences that comprise the deferred tax assets and liabilities at December 31, 1999 and 1998 are as follows (in thousands):
1999 1998 ------------------------ Deferred tax assets: Bad debt $ 510 $ 974 Accrued employee benefits 169 100 Goodwill 202 94 Charitable contributions 69 -- Severance -- 59 Other expense items 195 -- Depreciation -- 29 ------------------------ Total deferred tax assets 1,145 1,256 Deferred tax liabilities (114) (120) ------------------------ Net deferred tax assets $ 1,031 $ 1,136 ----------------------------
18. Employee Benefit Plans
Effective September 30, 1996, the Company established a 40l(k) Plan, the OAO International Corporation Employee Savings Plan, (the "40l(k) Plan"). On December 1, 1997, the 401(k) Plan name subsequently changed to the OAO Technology Solutions Employee Savings Plan shortly after the Company changed its name on July 7, 1997. The 40l(k) Plan covers substantially all of the Company's U.S. employees. Participants may contribute to the 401(k) 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 $649,000, $586,000 and $353,000 in 1999, 1998 and 1997, respectively.
Effective January 16, 1995, the Company established the OAO Canada Limited Employee Retirement Savings Plan (the "RRSP Plan"). The RRSP Plan covers substantially all of the Company's Canadian employees. Participants may contribute to the RRSP Plan an amount between 1% and 18% of their total annual compensation. The Company makes matching contributions of 50% of each participant's contributions up to 5%. Company matching contributions amounted to approximately $115,000, $102,000 and $103,000 in 1999, 1998 and 1997, respectively.
The Company's Board of Directors adopted, and the Company's Stockholders approved, the Company's Employee Stock Purchase Plan (ESPP) on May 21, 1998, with a total of 1,000,000 shares reserved for issuance thereunder. The ESPP enables substantially all employees in the United States and Canada to subscribe to purchase shares of common stock on a quarterly basis. The purchase price is determined as the lower of 85% of the fair market value of the shares on the first day of the quarter or 85% of the fair market value of the shares on the last trade day of the quarter. During 1999 the Company issued 210,021 shares at an average price per share of $2.75 and during 1998 no shares were issued.
19. Segment and Geographic Information
The Company manages its business segments primarily by service line. The names of the Company's reportable segments have been changed in 1999 to better represent the services provided; however, the composition of the reported segments have not been changed, except as described below. The Company's reportable segments are Network and Systems Business Solutions, formerly Managed Services; Professional Services, formerly Staff Augmentation; E-Business Consulting Solutions, formerly ERP; Healthcare IT Solutions remained unchanged. In addition, the Company's custom application development and maintenance (ADM) product has been reclassified into the E-Business Consulting Solutions segment in 1999, from the Network and Systems Business Solutions segment. The effect of the reclassification was to increase the E-Business Consulting Solutions segment and decrease the Network and Systems Business Solutions segment revenues by $4.62 million and $1.47 million in 1999 and 1998, respectively, gross loss by $2.57 million and $1.31 million in 1999 and 1998, respectively, and segment assets by $2.46 million and $350,000 in 1999 and 1998, respectively. The 1998 results have been reclassified to conform to 1999, while the 1997 results were not affected.
Network and Systems Business Solutions includes data-center operations management, distributed systems management, and other IT services.
Professional Services are provided by OAO Services, Inc, a wholly owned subsidiary. OAO Services, Inc. provides technical IT skills to strategic customers nationwide on a time and materials basis. Highly skilled professionals are provided to augment the client's staffing or to respond to requirements that cannot be sufficiently defined to permit fixed prices.
E-Business Consulting Solutions provides entire life cycle services for organizations. These services range from initial business process modeling and development, through system installation and implementation and custom software application development and maintenance. The Company's service line is dedicated to implementing and supporting systems from Siebel Systems, NCR, SAP and Microsoft. This segment also provides third party vendor packaged software including Siebel Systems, SAP and Microsoft, IBM and Rational on both a licensed and ASP basis.
Healthcare IT Solutions provides proprietary software products and business solutions for healthcare organizations. OAO HealthCare Solutions, Inc., a wholly owned subsidiary, provides full service solutions via its proprietary MC400 software on a one-time license and ASP basis. This includes product development, customer service, and installation service, training and ongoing support.
The accounting policies of the various segments are the same as those described in the "Summary of Significant Account Policies," Note 2. The Company evaluates the performance of each segment based on segment revenues and gross profit. Segment gross profit includes only direct costs. Sales, general and administrative costs are currently not allocated to each segment.
Summary information by segment as of and for the years ended December 31, 1999, 1998 and 1997 is as follows (in thousands):
1999 1998 1997 ----------------------------------- NETWORK and SYSTEMS BUSINESS SOLUTIONS Revenues $ 67,117 $ 73,465 $ 76,729 Gross profit 14,136 14,396 15,768 Segment assets 24,496 24,281 39,351 PROFESSIONAL SERVICES Revenues 64,126 30,461 4,185 Gross profit 6,074 2,920 1,216 Segment assets 14,025 12,981 2,399 E-BUSINESS CONSULTING SOLUTIONS Revenues 8,353 3,289 -- Gross (loss) (4,226) (2,671) -- Segment assets 9,786 3,420 -- HEALTHCARE IT SOLUTIONS Revenues 10,566 6,127 3,752 Gross profit 2,514 1,592 1,800 Segment assets 5,958 2,556 5,250 SEGMENT TOTALS Revenues $ 150,162 $ 113,342 $ 84,666 Gross profit 18,498 16,237 18,784 Segment assets 54,265 43,238 47,000
The following table reconciles reportable gross profit and segment assets to the Company's consolidated totals. Selling, general and administrative expenses; restructuring and other charges; and interest and other income and expenses are not allocated to segments.
The Company generated substantially all of its revenues in the United States and Canada during the three years ended December 31, 1999. The following represents a summary of information by geographic area (in thousands):
For the years ended December 31, 1999 1998 1997 ----------------------------------- Revenues: United States $ 131,261 $ 93,066 $ 64,080 Canada 16,029 20,193 20,421 Other consolidated entities 2,872 83 165 ----------------------------------- $ 150,162 $ 113,342 $ 84,666 ----------------------------------- Income (loss) before income taxes: United States $ 4,722 $ (4,435) $ 5,011 Canada (1,575) (964) 1,501 Other consolidated entities 258 20 (1,732) ----------------------------------- $ 3,405 $ (5,379) $ 4,780 ----------------------------------- Identifiable assets: United States $ 51,702 $ 46,879 $ 47,413 Canada 9,493 5,258 3,798 Other consolidated entities 160 (1,019) (869) ----------------------------------- $ 61,355 $ 51,118 $ 50,342 -----------------------------------
Sales between geographic areas are not material. Costs related to business development in international locations other than Canada of approximately $1.8 million have been included in "Other Consolidated Entities" for the year ended December 31, 1997. Identifiable assets are those assets used in the operations in each geographic area.
20. Related Party Transactions
The Company has entered into an administrative service agreement with Safeguard Scientifics, Inc., which provides for payment of a maximum administrative fee of 1.0% of gross revenues per year, not to exceed $500,000. The Company expensed an administrative fee of $500,000 to operations for each of the years ended December 31, 1999, 1998 and 1997, respectively, in connection with this agreement. In addition to the administrative fee, the Company has reimbursed travel expenses and paid other professional services pass through fees of $3,000, $160,000 and $76,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
Prior to the July 1998 acquisition of OAO Services, Inc., the Company and OAO Services, Inc., a subsidiary of OAO, were related parties, as a common group of stockholders held a substantial ownership interest in both companies. During the first half of 1998, and for the year ended December 31, 1997, the Company served as a subcontractor on several contracts with OAO Services, Inc. Total revenues recorded under these contracts amounted to $494,000 and $4.2 million for the six month period ended June 30, 1998, and the year ended December 31, 1997, respectively. All inter-company receivables as of December 31, 1998 had been eliminated.
During 1999, 1998 and 1997, the Company served as a subcontractor on several contracts with OAO. Revenues under these contracts totaled $949,000, $291,000 and $299,000 for the years ended December 31, 1999, 1998 and 1997, respectively. The Company had $660,000, $298,000 and $159,000 in billed receivables due from OAO as of December 31, 1999, 1998 and 1997, respectively. The Company had $2,000, $0 and $139,000 of unbilled receivables related to services provided to OAO as of December 31, 1999, 1998 and 1997, respectively.
In connection with the acquisition of ETG, the ETG stockholders, including the Company's Chief Executive Officer, were granted certain "piggy-back" registration rights whereby under certain circumstances, and subject to certain conditions, they may include these shares of OAOT common stock in any registration of shares of OAOT common stock. The Company's Chief Executive Officer, as one of the ETG selling stockholders, received 111,111 shares of the Company's common stock in exchange for his 500 shares of ETG common stock. Prior to the merger, the Company provided ETG interest free advances totaling approximately $216,000. Additionally at closing, the Company repaid ETG's stockholder loans of approximately $109,000.
On July 14, 1999 the Chief Executive Officer of the Company acquired 750,000 shares of common stock of the Company, $.01 par value, at $3.91 per share, in exchange for a $2.9 million full recourse note, bearing interest of 5.82% due July 14, 2004. The shares were also pledged as security interest to the Company. The Chief Executive Officer has personally guaranteed the note.
21. Commitments and Contingencies
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.
22. Quarterly Financial Data (Unaudited)
Set forth below are selected unaudited financial statements of operations 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 statement 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.
Earnings per share calculations for each of the quarters are based on weighted average number of shares outstanding in each period. Diluted earnings per share calculations adjust net earnings for the dilutive effect of common stock equivalents. Therefore, the sum of the quarters may not necessarily equal the year-to-date earnings per share.
OAO TECHNOLOGY SOLUTIONS, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS For the years ended December 31, 1999, 1998, 1997 and 1996
(A) Reflected on the Balance Sheet as a reduction of Accounts Receivable.
(B) A reduction of accounts receivable purchased in the acquisition of certain assets of UniHealth Investment Company (see Note 4 in the Notes to Consolidated Financial Statements) for the year ended December 31, 1997. A reduction of accounts receivable purchased in acquisition of certain assets of OAO Services, Inc. for the year ended December 31, 1998.
(C) A recovery of revenue.
(D) Reduced accounts receivable and allowance for uncollectible items.
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 12, 2000 (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.
(a)(1) Financial Statements
The financial statements listed in the accompanying Table of Contents to Consolidated Financial Statements are filed as part of this Form 10-K, commencing on page 23.
(a)(2) Schedules
The following consolidated financial statement schedule of the Company is filed as part of this Form 10-K.
Schedule II - Valuation and Qualifying Accounts
(a)(3) Exhibits
The exhibits are listed in the index to Exhibits appearing below.
(b) No reports were filed on Form 8-K during the last quarter of fiscal 1999.
(c) Exhibits
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
OAO Technology Solutions, Inc.
March 24, 2000 By: /s/ Gregory A. Pratt --------------------- Gregory A. Pratt Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.