0000891554-98-001023 10-Q 4 19980630 19980814 NASD OAO TECHNOLOGY SOLUTIONS INC 0001043476 7373 521973990 DE 1231 10-Q 34 000-23173 98689299 7500 GREENWAY CENTER DR GREENBELT MD 20770 3014860400 7500 GREENWAY CENTER DRIVE GREEENBLET MD 20770 10-Q 1 QUARTERLY REPORT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ to ______________ Commission file number 0-23173 OAO TECHNOLOGY SOLUTIONS, INC. (Exact name of registrant as specified in its charter) Delaware 52-1973990 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 7500 Greenway Center Drive Greenbelt, Maryland 20770 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (301) 486-0400 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of August 12, 1998, the registrant had outstanding 16,427,567 shares of its Common Stock, par value $0.01 per share. OAO TECHNOLOGY SOLUTIONS, INC. Quarterly Report on Form 10-Q for the Quarterly Period Ended June 30, 1998 INDEX
Page Reference -------------- PART I - FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS Consolidated Balance Sheets as of June 30, 1998 (unaudited) and December 31, 1997.....................................................................3 Consolidated Statements of Operations (unaudited) for the Three Months and Six Months Ended June 30, 1998 and 1997...............................................4 Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 1998 and 1997................................................................5 Notes to Consolidated Financial Statements (unaudited)................................6 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ........................................................................9 PART II - OTHER INFORMATION................................................................. 13 Item 1. Legal Proceedings Item 2. Changes in Securities and Use of Proceeds Item 3. Default Upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K SIGNATURES...................................................................................14
2 PART I - FINANCIAL INFORMATION Item 1. Financial Statements OAO TECHNOLOGY SOLUTIONS, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share data)
June 30, 1998 December 31, (Unaudited) 1997 ----------- ----------- ASSETS Current Assets: Cash and cash equivalents $ 17,589 $ 22,221 Accounts receivable: Billed, net of allowance for uncollectible accounts of $933 and $50, respectively 11,598 12,146 Unbilled, net of allowance for uncollectible accounts of $2,127 and $239, respectively 4,040 9,400 Other current assets 3,132 875 ------- ------- Total current assets 36,359 44,642 Property and equipment, net 6,130 4,611 Deposits and other assets 395 753 Goodwill 1,852 336 ------- ------- Total assets $ 44,736 $ 50,342 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 640 $ 3,773 Accrued expenses 6,635 5,720 Notes payable -- 378 Other current liabilities 242 970 Current maturities of capital lease obligations 323 552 ------- ------- Total current liabilities 7,840 11,393 Capital lease obligations, net of current portion 791 883 Commitments and Contingencies Stockholders' Equity: Common Stock, par value $0.01 per share, authorized, 25,000,000; 16,404,150 and 16,285,050 issued and outstanding at June 30, 1998 and December 31, 1997, respectively 164 163 Additional paid-in capital 34,741 34,454 Deferred compensation (195) (76) Stockholders' receivable (4) (133) Retained earnings 1,624 3,658 Unrealized (loss) on foreign currency translation (225) -- ------- ------- Total stockholders' equity 36,105 38,066 ------- ------- Total liabilities and stockholders' equity $ 44,736 $ 50,342 ======== ========
The accompanying notes are an integral part of these consolidated statements. 3 OAO TECHNOLOGY SOLUTIONS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (Dollars in thousands, except per share data)
Three Months Ended Six Months Ended June 30, June 30, ------------------------- ------------------------- 1998 1997 1998 1997 ---- ---- ---- ---- Revenues $ 20,340 $ 20,177 $ 43,346 $ 39,338 Direct Costs 18,009 15,953 36,733 30,773 -------- -------- -------- -------- Gross Profit 2,331 4,224 6,613 8,565 Selling, General and Administrative 6,705 2,996 10,108 6,315 -------- -------- -------- -------- (Loss) Income from Operations (4,374) 1,228 (3,495) 2,250 Interest and Other (Income) Expense, net (195) 82 (381) 87 -------- -------- -------- -------- (Loss) Income Before Income Taxes (4,179) 1,146 (3,114) 2,163 Income Tax (Benefit) Provision (1,507) 498 (1,080) 931 -------- -------- -------- -------- Net (Loss) Income $ (2,672) $ 648 $ (2,034) $ 1,232 ========= ======== ======== ======== Net (Loss) Income Per Common Share: Diluted $ (0.16) $ 0.06 $ (0.12) $ 0.12 ========= ======= ======== ======= Basic $ (0.16) $ 0.06 $ (0.12) $ 0.12 ========= ======= ======== ======= Weighted Average Number of Common Shares Outstanding: Diluted 16,392 10,187 16,346 10,133 ======= ====== ====== ====== Basic 16,392 10,000 16,346 10,000 ======= ====== ====== ======
The accompanying notes are an integral part of these consolidated statements. 4 OAO TECHNOLOGY SOLUTIONS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands)
Six Months Ended June 30, ------------------------- 1998 1997 ---- ---- Cash flows from operating activities: Net (Loss) Income $ (2,034) $ 1,232 Adjustments to reconcile net (loss) income to net cash used in operating activities: Depreciation and amortization 435 210 Increase in the allowance for uncollectible accounts 2,771 -- Changes in assets and liabilities, net of effects of acquisition: Accounts receivable 3,299 (6,297) Other current assets (2,254) (257) Deposits and other assets 328 (107) Accounts payable (4,046) 322 Accrued expenses 915 1,260 Other current liabilities (728) 388 ------ ------ Net cash used in operating activities (1,314) (3,249) ------ ------ Cash flows from investing activities: Acquisition of DHR Technologies, net of cash acquired (938) -- Purchases of property and equipment (1,745) (1,412) ------ ------ Net cash used in investing activities (2,683) (1,412) ------ ------ Cash flows from financing activities: Borrowings under revolving credit agreement -- 4,175 Proceeds from the exercise of stock options 160 -- Payments on stockholders' receivable 129 -- Payments on capital lease obligations (321) -- Payments on notes payable (378) -- ------ ------ Net cash (used in) provided by financing activities (410) 4,175 ------ ------ Effect of exchange rate changes on cash (225) -- Net decrease in cash and cash equivalents (4,632) (486) Cash and cash equivalents, beginning of period 22,221 876 ------ ------ Cash and cash equivalents, end of period $ 17,589 $ 390 ======== ======== Supplemental Disclosures of Cash Flow Information Cash payments for income taxes $ 645 $ 535
The accompanying notes are an integral part of these consolidated statements. 5 OAO TECHNOLOGY SOLUTIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES OAO Technology Solutions, Inc. (the "Company") along with its wholly owned subsidiaries, provides a wide range of information technology ("IT") solutions and professional services, including systems and software engineering; the operation of large-scale megaplexes and networks; distributed systems management; applications development and maintenance; staffing augmentation services; enterprise resource planning, integration, implementation and training services; as well as state-of-the-art software systems for the managed care marketplace. The condensed consolidated financial statements included herein have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and include, in the opinion of management, all adjustments, consisting of normal, recurring adjustments, necessary for a fair presentation of interim period results. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The Company believes that its disclosures are adequate to make the information presented not misleading. These condensed financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K. The results of operations for the three and six month periods ended June 30, 1998, are not necessarily indicative of the results to be expected for the full year. 2. CREDIT AGREEMENTS The Company currently has a $10.0 million revolving credit agreement (the "Agreement") with a commercial bank. Advances under the Agreement are limited to 80% of certain eligible accounts receivable of the Company. The Company also has a $750,000 line of credit (the "Line") with the same bank which has the same terms as the Agreement. There currently are no outstanding borrowings under either the Agreement or the Line. The Company is required to maintain certain financial and other covenants under these facilities. The Company was not in compliance with certain covenants as of June 30, 1998, and is in the process of obtaining waivers from the bank for those covenants until the terms of the existing Agreement can be renegotiated. 3. EARNINGS PER SHARE Basic earnings per share has been calculated as net earnings divided by weighted-average common shares outstanding, while diluted earnings per share has been computed as net earnings divided by weighted average common and diluted shares outstanding. For the three and six months ended June 30, 1998, common equivalents of 781,000 and 857,000, respectively, were anti-dilutive and therefore not included in the calculation of diluted earnings per share. For the three and six months ended June 30, 1997, the Company's diluted shares outstanding were 187,000 and 133,000, respectively, to arrive at total common and dilutive shares outstanding of 10,187,000 and 10,133,000, respectively. Shares outstanding are computed using the weighted-average number of shares of common and common equivalent shares, which consist of stock options, for each period. 4. COMPREHENSIVE (LOSS) INCOME In 1998, the Company adopted Statement of Financial Accounting Standard ("SFAS") No. 130, "Reporting Comprehensive Income" which was effective for fiscal years beginning after December 15, 1997. Comprehensive income is the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. The Company's source of other comprehensive income other than net 6 income, is from foreign currency translation adjustments which are disclosed separately in the Stockholders' Equity section of the Consolidated Balance Sheets. There were no adjustments to net income to arrive at comprehensive income for the three or six months ended June 30, 1997. Comprehensive loss was $(2.9) million and $(2.3) million for the three and six months ended June 30, 1998. 5. ACQUISITIONS 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, provides 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 statements from the date of acquisition. The purchase price was allocated based on the fair values of the assets acquired, including among other assets approximately $162,000 of cash, and the liabilities assumed at the date of acquisition. The purchase resulted in an excess of purchase price over net assets acquired of approximately $1.5 million, 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. 6. SUBSEQUENT EVENT -- ACQUISITION On July 24, 1998, the Company entered into a Stock Purchase Agreement (the "Agreement") with the shareholders of OAO Services, Inc. ("Services") for the purchase of all of the outstanding shares of capital stock of Services in a cash transaction. The Company and Services, a subsidiary of OAO Corporation ("OAO"), are related parties as a common group of shareholders hold a substantial ownership interest in both companies. Services, a nationwide provider of IT staffing augmentation services, supplies technically skilled personnel on a contract basis, and had revenues of approximately $28.6 million for the six months ended June 30, 1998. Substantially all of Services revenues have been derived from IBM Global Services. The acquisition will be accounted for under the purchase method of accounting, thus the results of operations of the acquired company will be included in the consolidated financial statements from the date of acquisition. The purchase price of approximately $2.3 million in cash is subject to adjustment based on a balance sheet audit of Services, and will be allocated based on the fair values of the assets acquired and the liabilities assumed as of the date of acquisition. In addition, the Company retired approximately $4.6 million of Service's working capital financing in connection with the acquisition. Furthermore, the Agreement provides for an earn-out provision payable in installments at the end of each of the fiscal years ending December 31, 1999, 2000 and 2001. This earn-out provision, which may not exceed $5.0 million, will be determined using an agreed upon formula based upon pretax results of the Company during the earn-out period. The financial statements for Services and pro forma financial information for the Company and Services will be filed subsequent to completion of the Services' balance sheet audit. During the three and six months ended June 30, 1998 and 1997, the Company served as a subcontractor on several contracts with Services. Total revenues recorded under these contracts amounted to $221,000 and $600,000, respectively, for the three and six months ended June 30, 1998, and $884,000 and $1.8 million for the same prior year periods. At June 30, 1998 and 1997, the Company has $831,000 and $727,000 of billed receivables and $0 and $230,000 of unbilled receivables, respectively, which are due from Services. At the date of its investment in the Company, April 8, 1996, Safeguard Scientifics, Inc. ("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 7 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. In connection with the acquisition of Services by the Company, the right granted through the agreement dated July 11, 1997 to the Company and Safeguard was waived. 8 Item 2. OAO TECHNOLOGY SOLUTIONS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following should be read in conjunction with the Consolidated Financial Statements of the Company and Notes thereto included elsewhere in this quarterly report. This report contains certain forward-looking statements that involve risks and uncertainties. Future events and the Company's actual results could differ materially from the results reflected in these forward-looking statements. Factors that might cause such a difference include, but are not limited to, dependence on key strategic customers, limited ability to establish new strategic partner relationships, risks associated with fixed-price contracts, ability to sustain and manage growth, variability of quarterly operating results, dependence on key personnel, competition, and risks associated with international sales. Overview The Company provides a wide range of outsourced IT solutions and professional services, including the operation of large-scale data center complexes and networks ("Megacenter Operations"), distributed systems management ("DSM"), staffing services and other IT services. The Company provides these services to strategic clients ("Strategic Clients") as part of an IT outsourcing team serving engagement clients ("Engagement Clients"), who are the ultimate end-users of the services. Engagement Clients include, among many others, Sears, Blue Cross/Blue Shield and Boeing. In addition, the Company provides consulting services and software to managed care organizations through its Healthcare division ("Healthcare"). During the first half of 1998, the Company has invested approximately $887,000 in the development of a new line of business, Applications Development and Maintenance ("ADM"), by opening centers in Ontario and New Brunswick, Canada devoted solely to the provision of these services (the "Northshore Solution"). Additionally, on July 24, 1998, the Company completed its acquisition of OAO Services, Inc. ("Services"), a nationwide provider of staffing augmentation services. Results of Operations Revenues The Company's revenue increased approximately 0.5% and 10.2%, respectively, to $20.3 million and $43.3 million for the three and six months ended June 30, 1998 compared to $20.2 million and $39.3 million for the same prior year periods. Revenue from Healthcare increased 30.0% and 133.3% to $1.3 million and $4.2 million, respectively, for the three and six months ended June 30, 1998 from approximately $1.0 million and $1.8 million for the same prior year periods. The increase in revenue from Healthcare is attributable to approximately $980,000 and $3.2 million of revenue during the three and six months ended June 30, 1998 from the Company's subsidiary, OAO HealthCare Solutions, which sells the MC400 software package and was acquired by the Company in November 1997. Revenues and earnings from the Company's Healthcare division declined from the first quarter of 1998 to the second quarter due to sales and delivery resource constraints which have been addressed by the Company in order to position the division for growth and to meet demand for the MC400 product. Revenue from one of the Company's strategic clients increased 65.0% and 90.5%, respectively, to $6.6 million and $14.1 million for the three and six months ended June 30, 1998, compared to approximately $4.0 million and $7.4 million for the same prior year periods. Due to the second quarter expiration of certain projects, third and fourth quarter 1998 revenues are expected to decrease compared to the first two quarters of the current year. The increases in revenue from Healthcare and one of the Company's strategic clients were offset by the decrease in revenue from one of the Company's other strategic clients. For the three and six months ended June 30, 1998, the other strategic client's revenue decreased 20.8% and 21.3%, respectively, to $11.4 million and $22.9 million for the three and six months ended June 30, 1998 compared to $14.4 million and $29.1 9 million for the same prior year periods. This decrease is due to a combination of pricing pressures resulting in revenue reductions on three continuing contracts; the elimination of approximately $2.5 million in revenue from a non-recurring project which occurred during the first half of 1997; and the expiration of approximately five projects during the current year. In March 1998, the Company announced a new initiative to provide certain ADM services to the client. This new line of business has provided approximately $408,000 and $530,000 in revenue for the three and six months ended June 30, 1998. While the Company is continuing to participate in proposal efforts with the client, and will continue to pursue the expansion of the NorthShore Solution both with the client and other customers, it expects the pricing pressures and certain contract expirations to continue. Accordingly, revenue from the client could potentially continue to decrease. On July 24, 1998, the Company entered into a Stock Purchase Agreement (the "Agreement") with the shareholders of OAO Services, Inc. ("Services") for the purchase of all of the outstanding shares of capital stock of Services in a cash transaction. Services, a nationwide provider of IT staffing augmentation services, supplies technically skilled personnel on a contract basis, and had revenues of approximately $28.6 million for the six months ended June 30, 1998. Substantially all of Services revenues have been derived from one customer. The acquisition will be accounted for under the purchase method of accounting, thus the results of operations of the acquired company will be included in the consolidated financial statements from the date of acquisition. The purchase price of approximately $2.3 million in cash is subject to adjustment based on a balance sheet audit of Services, and will be allocated based on the fair values of the assets acquired and the liabilities assumed as of the date of acquisition. In addition, the Company retired approximately $4.6 million of Service's working capital financing in connection with the acquisition. Furthermore, the Agreement provides for an earn-out provision payable in installments at the end of each of the fiscal years ending December 31, 1999, 2000 and 2001. This earn-out provision, which may not exceed $5.0 million, will be determined using an agreed upon formula based upon pretax results of the Company during the earn-out period. Direct Costs The Company's direct costs increased 12.5% and 19.2%, respectively, to $18.0 million and $36.7 million for the three and six months ended June 30, 1998, compared to $16.0 million and $30.8 million for the same prior year periods. Direct costs consist primarily of direct labor cost and related fringe benefit costs. As a percentage of revenue, direct costs increased to 88.5% and 84.7% for the three and six months ended June 30, 1998, compared to 79.1% and 78.2% for the comparable periods in 1997. Gross margin for the Healthcare division was $(465,000) and $1.3 million or (35.8)% and 31.0% of the related revenues for the three and six months ended June 30, 1998, compared to $317,000 and $736,000 or 31.7% and 40.9% of the related revenues for the same prior year periods. Healthcare margins for the six months ended June 30,1998, increased from the prior year period due to the acquisition of MC400 in November 1997. Healthcare margins decreased from the first to second quarter of 1998 primarily due to fewer high margin software sales which resulted from the lack of delivery resources for the product. Additionally, the Company incurred costs to build the sales, marketing and development infrastructure to alleviate the delivery constraints in order to meet the demand for MC400 and position the division for growth. Gross margins for the Company's business with its two primary strategic clients was $3.1 million and $5.3 million or 17.2% and 14.3% of the related revenues for the three and six months ended June 30, 1998, respectively, compared to $3.7 million and $7.7 million or 20.1% and 21.1% of the related revenues for the same prior year periods. Margins related to the Company's business with the clients decreased as a result of pricing pressures on continuing projects which accelerated during the first quarter of 1998, and due to the expiration of several projects during the current year. In addition, margins were adversely impacted by approximately $887,000 of start-up costs incurred year to date related to the Northshore Solution project. These costs are expected to continue at a declining rate for the remainder of 1998. Selling, General and Administrative Expenses Selling, general and administrative expenses increased 123.3% and 60.3% for the three and six months ended June 30, 1998 to $6.7 million and $10.1 million, respectively, compared to $3.0 million and $6.3 million for the same prior year periods. As a percentage of revenues, these costs increased to 33.0% and 23.3%, respectively, for the three and six months ended June 30, 1998, compared to 14.8% and 16.1% for the same prior year periods. 10 The increases are due to provisions for uncollectible accounts receivable of approximately $3.1 million, and accruals for severance costs which were recorded during the second quarter of 1998. During this period, the Company executed certain aggressive cost reduction initiatives. The Company expects to continue to pursue additional such initiatives in the third quarter which could result in initial one-time costs. Interest Income, Expense and Tax Benefit, Provision Interest and other income primarily represents income earned on the proceeds from the Company's Initial Public Offering completed on December 4, 1997. The Company's effective tax rate for the three and six months ended June 30, 1998 of 36.1% and 34.7%, respectively, decreased from 43.5% and 43.0% for the same prior year periods due to a change in the distribution of income among various tax jurisdictions and certain nondeductible charges. Liquidity and Capital Resources Cash and cash equivalents were $17.6 million at June 30, 1998, and $22.2 million at December 31, 1997. Cash flows used in operations were $1.3 million for the six months ended June 30, 1998 and $3.2 million for the six months ended June 30, 1997. The Company primarily funded its uses of cash in 1998 from operations and the proceeds received from the Offering, and in 1997 from borrowings under the Company's credit facility prior to the completion of the Offering. The use of cash in operations for the six months ended June 30, 1998, was primarily the result of the loss incurred reduced by non-cash charges, net of the related tax benefits. The Company's business is not capital intensive, and expenditures in any given year are ordinarily not significant. Capital expenditures in the first six months of 1998 included expenditures associated with the development of a new operational, administrative and financial information system. The Company expects to incur additional capitalized costs associated with the development and implementation of the new management information systems through the fourth quarter of 1998. The Company currently has a $10.0 million revolving credit agreement (the "Agreement") with a commercial bank. Advances under the Agreement are limited to 80% of certain eligible accounts receivable of the Company. The Company also has a $750,000 line of credit (the "Line") with the same bank which has the same terms as the Agreement. There currently are no outstanding borrowings under either the Agreement or the Line. The Company is required to maintain certain financial and other covenants under these facilities. The Company was not in compliance with certain covenants as of June 30, 1998, and is in the process of obtaining waivers from the bank for those covenants until the terms of the existing Agreement can be renegotiated. The Company currently anticipates that its existing cash balances as well as cash generated from operations will be sufficient to satisfy its operating cash needs for the foreseeable future. The Company believes that additional bank credit would be available to fund such operating and capital requirements if the Company's cash needs expand more rapidly than expected. In addition, the Company could consider seeking additional public or private debt or equity financing to fund future growth opportunities. No assurance can be given, however, that such bank credit or debt or equity financing will be available to the Company on terms and conditions acceptable to the Company, if at all. Recent Authoritative Pronouncements Effective January 1, 1998, the Company adopted Statement of Position ("SOP") 97-2, "Software Revenue Recognition" which is effective for all software transactions the Company enters into subsequent to December 15, 1997. The adoption of this statement did not have a material effect on the Company's financial position. In 1997 and 1998, the Financial Accounting Standards Board ("FASB") issued pronouncements relating to the presentation and disclosure of information related to segment data and the disclosure of information about pensions and other postretirement benefits, respectively. The Company is required to adopt the provisions of these 11 pronouncements, if applicable, for the year ending December 31, 1998. The adoption of these pronouncements will not have an impact on the Company's financial position and results of operations, but may change the presentation of certain of the Company's Notes to the Consolidated Financial Statements. In March, 1998, the American Institute of Certified Public Accountants ("AICPA") issued SOP 98-5, "Reporting on the Costs of Start-Up Activities," which requires costs of start-up activities and organization costs to be expensed as incurred. This SOP is effective for financial statements for fiscal years beginning after December 15, 1998. The Company is currently assessing the impact of early application of the SOP. 12 PART II - OTHER INFORMATION Item 1. Legal Proceedings - Not Applicable Item 2. Changes in Securities and Use of Proceeds - Not Applicable Item 3. Default Upon Senior Securities - Not Applicable Item 4. Submission of Matters to a Vote of Security Holders The information required by this Item is incorporated by reference to the Registrant's definitive Proxy Statement for the Annual Meeting of Stockholders held on May 21, 1998 filed with the Commission April 20, 1998. Item 5. Other Information. Stockholders intending to present proposals at the next Annual Meeting of Stockholders to be held in 1999 must notify the Company of the proposal no later than December 21, 1998 if they wish to include the proposal on the Company's proxy card and, along with any supporting statement, in the Company's proxy statement. As to any proposal presented by a stockholder at the Annual Meeting of Stockholders that has not been included in the Proxy Statement, the management proxies will be allowed to use their discretionary voting authority unless notice of such proposal is received by the Company no later than March 6, 1999. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit Page No. Description No. ---------- ---------------------------------------------------------- --------- 10.5 Employment agreement between Gregory Pratt and the 15 - 26 Company, dated as of June 25, 1998 11.1 Statement Regarding Computation of Earnings Per Share. (1) 27 27.1 Financial Data Schedule. (1) 28 ---------- (1) Filed herewith. (b) Reports on Form 8-K 1. The Company filed a Form 8-K with the Commission on June 29, 1998 to report its announcement of the appointment of a new Chief Executive Officer, the signing of letters of intent to acquire two companies, and the expected loss for the second quarter of 1998. No financial statements were filed with this report. 2. The Company filed a Form 8-K with the Commission on August 7, 1998 to report its acquisition of all of the outstanding capital stock of OAO Services, Inc., a District of Columbia corporation (see Footnote 6 in the Notes to Consolidated Financial Statements), pursuant to the Stock Purchase Agreement dated as of July 24, 1998 among the Company, OAO Corporation and William R. Hill. 13 SIGNATURES Pursuant to the requirements of the Securities and 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. (Registrant) Date: 8/14/98 By: /s/ Gregory A. Pratt ---------------------------------- Gregory A. Pratt Chief Executive Officer and President Date: 8/14/98 By: /s/ Samuel D. Horgan ---------------------------------- Samuel D. Horgan Chief Financial Officer 14
EX-10.5 2 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT (Gregory Pratt) AGREEMENT, made as of this 25th day of June, 1998, by and between OAO Technology Solutions, Inc., a Delaware corporation (the "Corporation"), and Gregory Pratt ("Employee"). W I T N E S S E T H : WHEREAS, the Corporation is engaged in the business of providing a full range of outsourcing, systems reengineering and systems integration services; WHEREAS, the Corporation desires to employ Employee as President and Chief Executive Officer of the Corporation in connection with the conduct of the business of the Corporation, and Employee desires to accept such employment on the terms and conditions herein set forth; NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements hereinafter set forth, the parties hereto, intending legally to be bound, hereby agree as follows: 1. Employment. The Corporation hereby employs Employee as its President and Chief Executive Officer, and Employee hereby accepts such employment, upon the terms and conditions hereinafter set forth. 2. Term. The employment of Employee under this Agreement shall be on an "at will" basis. 3. Office and Duties. (a) During the term hereof, Employee shall serve as President and Chief Executive Officer of the Corporation. Subject to the Bylaws of the Corporation and the direction of the Board of Directors of the Corporation, Employee shall perform such duties as are customary for a President and Chief Executive Officer of businesses in the United States similar in kind and size to the Corporation, and such other duties as may from time to time be assigned to him by the Directors of the Corporation. (b) During the term hereof, Employee shall use his best efforts to carry out his duties and responsibilities hereunder and devote his entire working time to the business and affairs of the Corporation and shall not, in any advisory or other capacity, work for any other individual, firm or company without first having obtained the written consent of the Corporation; provided, however, that Employee may engage in investment activities so long as they do not materially interfere with the performance of his duties hereunder. 15 (c) During the term hereof, the principal place of employment of Employee shall be the Corporation's headquarters in Greenbelt, Maryland, or such other locations as may be selected for the Corporation's facilities, although it is understood that in connection with his duties under this agreement, Employee will be required to travel to and perform services at other locations. (d) Employee represents and warrants to the Corporation that he is not subject or a party to any employment agreement, non-competition covenant, non-disclosure agreement or other agreement, covenant, understanding or restriction which would prohibit Employee from executing this Agreement and performing fully his duties and responsibilities hereunder, or which would in any manner, directly or indirectly, limit or affect the duties and responsibilities which may now or in the future be assigned to Employee by the Corporation. (e) Employee agrees to cooperate at the request of the Corporation in any efforts to obtain "key-man" life insurance on Employee's life. 4. Compensation. As compensation for the services to be rendered hereunder by Employee, the Corporation agrees to pay or provide to Employee: (a) Salary. A basic salary for such services at the annual rate of $250,000, payable in semi-monthly installments in accordance with the normal payroll policies of the Corporation. This rate of compensation shall be reviewed by the Board of Directors at least once per fiscal year. (b) Bonus. Employee shall be eligible to earn an incentive bonus of up to 100% of the base salary, subject to the achievement of certain company and individual milestones determined annually by the Compensation Committee of the board of Directors. (c) Restricted Stock. Upon commencement of employment, Employee shall purchase and the Corporation shall sell 750,000 shares of common stock of the Corporation at a per share price equal to then current market price of the common stock. The Corporation will have the right to repurchase 100% of the shares at the lesser of the exercise price and the then current fair market value upon any termination of employment on or before June 30, 1999, and reducing by 25% on each July 1 thereafter, provided, that if the Corporation terminates the Employee without cause, the repurchase right shall be further reduced by the pro rata portion of the next scheduled reduction. This repurchase right will expire in the event the stock closing price is $25 or more for 20 consecutive trading days. The Corporation will provide Employee with a full-recourse five-year loan with interest at the Federal statutory rate to cover the purchase price of the shares. The loan will be secured by a pledge of the shares, and will be payable in full upon a termination of Employee's employment. The restricted stock will be subject to the terms and conditions of the Plan. 16 (d) Benefits. For the term hereof, and thereafter to the extent provided in Exhibit A, the Corporation shall provide Employee with the benefits (the "Benefits") specified or referred to in Exhibit A. 5. Termination of Employment. (a) The Corporation may terminate this Agreement with cause immediately upon written notice to Employee. "Termination for cause" shall mean discharge by the Corporation on the following grounds: (i) Employee's conviction in a court of law of any crime or offense, which conviction makes him unfit for continuing employment, prevents him from effective management of the Corporation or materially adversely affects the reputation or business activities of the Corporation. (ii) Dishonesty or willful misconduct which materially, adversely affects the reputation or business activities of the Corporation and which continues after written notice thereof to Employee. (iii) Substance abuse, including abuse of alcohol or use of illegal narcotics, and other drugs or substances, for which Employee fails to undertake and maintain treatment after 15 days after requested by the Corporation, or misappropriation of funds. (iv) Employee's continuing material failure or refusal to perform his duties in accordance with the terms of this Agreement or to carry out in all material respects the lawful directives of the Board of Directors; provided that discharge pursuant to this subparagraph (iii) shall constitute discharge for cause only if Employee has first received written notice from the Board of Directors of the Corporation stating with specificity the nature of such failure or refusal and, if requested by Employee within 10 days thereafter, Employee is afforded a reasonable opportunity to be heard before the Board. Upon such termination for cause, Employee shall lose all right, title and interest in and to all payments required to be made in accordance with the provisions of this Agreement, and the Corporation shall have no further obligation to Employee hereunder, except for compensation pursuant to Paragraphs 4(a) and 4(d) to which Employee is entitled through the date of termination, bonus compensation to which Employee is entitled for and in respect of the preceding fiscal year if not theretofore paid, and any benefits referred to in Exhibit A hereof to which Employee has a vested right under the terms and conditions of the plan or program pursuant to which such benefits were granted. 17 (b) The Corporation may terminate the Employee without cause at any time. In the event of termination of Employee without cause, the Corporation shall pay or provide to Employee (in addition to the salary, bonus and other compensation to which Employee shall be entitled or shall have earned pursuant to Paragraph 4 hereof through the date of such termination and any benefits referred to in Exhibit A hereof in which Employee has a vested right under the terms and conditions of the plan or program pursuant to which such benefits were granted), (i) the basic salary pursuant to the provisions of Paragraph 4(a) hereof for a period of 12 months from the effective date of such termination, payable ratably over such 12 month period, and (ii) the benefits referred to in Exhibit A hereof (excluding the 401K plan and country club dues) for a period of 12 months from the effective date of such termination. (c) Employee may terminate this Agreement by resignation and giving the Corporation three (3) months' notice. The Corporation can waive this notice and agree with Employee to an earlier termination date. Upon termination by Employee, all obligations of the Corporation and Employee under this Agreement will cease as of the date of final termination, except as provided in Section 8 below. 6. Restrictive Covenants and Confidentiality; Injunctive Relief. (a) Employee agrees, as a condition to the Corporation agreeing to employ Employee and to the performance by the Corporation of its obligations hereunder, particularly its obligations under Paragraph 4 hereof, that during the term of Employee's employment with the Corporation and for a period of one (1) year thereafter, or such lesser term, but not less than 6 months, as the Board of Directors may determine within 60 days of any such termination, Employee shall not, without prior written approval of the Board of Directors of the Corporation, directly or indirectly through any other person, firm or company, whether individually or in conjunction with any other person, or as an employee, agent, consultant, representative, partner or holder of any interest in any other person, firm, company or other association: (i) solicit, entice or induce any Customer (as defined below) to become a client, customer, OEM, distributor or reseller of any other person, firm or company with respect to products and/or services then sold or under development by the Corporation or to cease doing business with the Corporation, and Employee shall not approach any such person, firm or company for such purpose or authorize or knowingly approve the taking of such actions by any other person; or (ii) solicit, entice or induce any person who presently is or at any time during the term hereof shall be an employee of the Corporation to become employed by any other person, firm or company or to leave their employment with the Corporation, and Employee shall not approach any such employee for such purpose or authorize or knowingly approve the taking of such actions by any other person. For purposes of this Paragraph 5, a Customer means any person or entity which at the time of determination shall be, or shall have been within two years prior to such time, a client, customer, OEM, distributor or reseller of the Corporation. 18 Nothing in the foregoing shall prohibit Employee from investing in the securities of any company having securities listed on a national securities exchange, provided that such investment does not exceed 5% of any class of securities of any company engaged in business in competition with the Corporation, and provided that such ownership represents a passive investment and that neither Employee nor any group of persons including him, in any way, either directly or indirectly, manages or exercises control of any such company, guarantees any of its financial obligations, otherwise takes any part in its business, other than exercising his rights as a shareholder, or seeks to do any of the foregoing. (b) Employee acknowledges that during the term of his employment, he will have access to confidential information of the Corporation, including information about "Developments" (as defined in Paragraph 7 below), business plans, costs, customers, profits, markets, sales, products, key personnel, pricing policies, operational methods and other business affairs and methods and other information not available to the public or in the public domain (hereinafter referred to as "Confidential Information"). In recognition of the foregoing, Employee covenants and agrees that, except as required by his duties to the Corporation, Employee will keep secret all Confidential Information of the Corporation and will not, directly or indirectly, either during the term of his employment hereunder or at any time thereafter while such Confidential Information remains confidential, disclose or disseminate to anyone or make use of, for any purpose whatsoever except for the benefit of the Corporation in the course of his employment, any Confidential Information, and upon termination of his employment, Employee will promptly deliver to the Corporation all tangible materials and objects containing Confidential Information (including all copies thereof, whether prepared by Employee or others) which he may possess or have under his control. The term "Confidential Information" shall not include any information which can be demonstrated (i) to be generally known in the industry or to the public other than through breach of Employee's obligations hereunder, (ii) to have been in Employee's possession prior to his employment with the Corporation and not assigned to the Corporation, or (iii) to have been disclosed to Employee by an independent third party not under any obligation of confidentiality. 19 (c) Employee represents (i) that his experience and capabilities are such that the restrictions contained herein will not prevent him from obtaining employment or otherwise earning a living at the same general economic benefit as reasonably required by him and (ii) that he has, prior to the execution of this Agreement, reviewed this Agreement thoroughly with his legal counsel. (d) Employee acknowledges that the restrictions contained in this Paragraph 6 are reasonable and necessary to protect the legitimate business interests of the Corporation and that the Corporation would not have entered into this Agreement in the absence of such restrictions. By reason of the foregoing, Employee agrees that if he violates any of the provisions of this Paragraph 6, the Corporation would sustain irreparable harm and, therefore, irrevocably and unconditionally (i) agrees that in addition to any other remedies which the Corporation may have under this Agreement or otherwise, all of which remedies shall be cumulative, the Corporation shall be entitled to apply to any court of competent jurisdiction for preliminary and permanent injunctive relief and other equitable relief, (ii) that such relief and any other claim by the Corporation pursuant hereto may be brought in the United States District Court for the District of Delaware, or if such court does not have subject matter jurisdiction or will not accept jurisdiction, in any court of general jurisdiction in Delaware; (iii) consents to the non-exclusive jurisdiction of any such court in any such suit, action or proceeding, and (iv) waives any objection which Employee may have to the laying of venue of any such suit, action or proceeding in any such court. Employee also irrevocably and unconditionally consents to the service of any process, pleadings, notices or other papers in a manner permitted by the notice provisions hereof. In the event that any of the provisions of this Paragraph 6 hereof should ever be adjudicated to exceed the time, geographic, product or service, or other limitations permitted by applicable law in any jurisdiction, then such provisions shall be deemed reformed in such jurisdiction to the maximum time, geographic, product or service, or other limitations permitted by applicable law. (e) Employee agrees that the Corporation may provide a copy of this Paragraph 6 to any business or enterprise (i) which the Employee may directly or indirectly own, manage, operate, finance, join, control or participate in the ownership, management, operation, financing, or control of, or (ii) with which he may be connected with as an officer, director, employee, partner, principal, agent, representative, consultant or otherwise, or in connection with which he may use or permit his name to be used; provided, however, that this provision shall not apply as to subparagraph (a) or (b) after expiration of the time periods set forth therein or with respect to any activities, entities or persons excluded by the terms hereof. Employee will provide the names and addresses of any of such persons or entities as the Corporation may from time to time reasonably request. 20 (f) In the event of any breach or violation of the restriction contained in subparagraph (a) above, the period therein specified shall abate during the time of any violation thereof and that portion remaining at the time of commencement of any violation shall not begin to run until such violation has been fully and finally cured. 7. Ownership of Inventions and Ideas. Employee acknowledges that the Corporation shall be the sole owner of all the results and proceeds of Employee's service hereunder, including but not limited to, all patents, patent applications, patent rights, formulas, copyrights, inventions, developments, discoveries, other improvements, data, documentation, drawings, charts, and other written, audio and/or visual materials relating to equipment, methods, products, processes, or programs in connection with or useful to the Corporation's business (collectively, the "Developments") which Employee, by himself or in conjunction with any other person, may conceive, make, acquire, acquire knowledge of, develop or create during the term of Employee's employment hereunder, free and clear of any claims by Employee (or any successor or assignee of him) of any kind or character whatsoever other than Employee's right to compensation hereunder. Employee acknowledges that all copyrightable Developments shall be considered works made for hire under the Federal Copyright Act. Employee hereby assigns and transfers his right, title and interest in and to all such Developments, and agrees that he shall, at the request of the Corporation, execute or cooperate with the Corporation in any patent applications, execute such assignments, certificates or other instruments, and do any and all other acts, as the Board of Directors of the Corporation from time to time reasonably deems necessary or desirable to evidence, establish, maintain, perfect, protect, enforce or defend the Corporation's right, title and interest in or to any such Developments. 8. Survival. The provisions of Paragraphs 6, 7 and 9 shall survive the termination of this Agreement for any reason whatsoever. 21 9. Dispute Resolution. (a) Good-Faith Negotiations. If any dispute arises under this Agreement that is not settled promptly in the ordinary course of business, the parties shall seek to resolve any such dispute between them, first, by negotiating promptly with each other in good faith in face-to-face negotiations. If the parties are unable to resolve the dispute between them within 20 business days (or such period as the parties shall otherwise agree) through these face-to-face negotiations, then the controversy or claim shall be settled by arbitration conducted on a confidential basis, under the U.S. Arbitration Act, if applicable, and the then current Commercial Arbitration Rules of the American Arbitration Association (the "Association") strictly in accordance with the terms of this Agreement and the substantive law of the State of Delaware. The arbitration shall be conducted at the Association's regional office located closest to Corporation's principal place of business by one arbitrator experienced in employment matters. Judgment upon the arbitrator's award may be entered and enforced in any court of competent jurisdiction. Neither party shall institute a proceeding hereunder unless at least 10 days prior thereto such party shall have given written notice to the other party of its intent to do so. 22 (b) Notwithstanding the foregoing, the Corporation shall not be precluded hereby from securing equitable remedies in courts of any jurisdiction, including, but not limited to, temporary restraining orders and preliminary injunctions to protect its rights and interests but shall not be sought as a means to avoid or stay arbitration. 10. Miscellaneous. (a) Any notice authorized or required to be given or made by or pursuant to this Agreement shall be made in writing and either personally delivered or mailed by overnight express mail to the respective address of the party to receive such notice, which address is the one designated below the name of such party on the signature page hereof, or to such other address as a party may specify by notice to the other parties hereto. (b) This Agreement cancels and supersedes any and all prior agreements and understandings between or among any or all of the parties hereto with respect to the employment by or obligations of Employee to any thereof. This Agreement constitutes the entire agreement among the parties with respect to the matters herein provided, and no modification or waiver of any provision hereof shall be effective unless in writing and signed by the parties hereto. (c) All of the terms and provisions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective heirs, executors, administrators, legal representatives, successors and assigns of the parties hereto, except that the duties and responsibilities of Employee hereunder are of a personal nature and shall not be assignable or delegable in whole or in part by Employee. (d) Employee agrees that the obligations of the Corporation hereunder shall be limited to the Corporation only, and Employee agrees that he shall not bring any claim or suit against any director or shareholder of the Corporation or any other person other than the Corporation for any breach or default by the Corporation of its obligations hereunder. 23 (e) If any provision of this Agreement or application thereof to anyone or under any circumstances is adjudicated to be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect any other provision or application of this Agreement which can be given effect without the invalid or unenforceable provision or application and shall not invalidate or render unenforceable such provision or application in any other jurisdiction. (f) No remedy conferred upon any party by this Agreement is intended to be exclusive of any other remedy, and each and every such remedy shall be cumulative and shall be in addition to any other remedy given hereunder or now or hereafter existing at law or in equity. No delay or omission by any party in exercising any right, remedy or power hereunder or existing at law or in equity shall be construed as a waiver thereof, and any such right, remedy or power may be exercised by the party possessing the same from time to time and as often as may be deemed expedient or necessary by such party in its sole discretion. (g) This Agreement may be executed in several counterparts, each of which is an original. It shall not be necessary in making proof of this Agreement or any counterpart hereof to produce or account for any of the other counterparts. (h) In the event of a lawsuit or arbitration by either party to enforce any provisions of this Agreement, the prevailing party shall be entitled to recover reasonable costs, expenses and attorney's fees from the other party. 24 11. Controlling Law. The validity, interpretation, construction, performance and enforcement of this Agreement shall be governed by the laws of the State of Delaware. IN WITNESS WHEREOF, Employee has hereunto set his hand and the Corporation has caused this instrument to be duly executed as of the day and year first above written. Witness: Employee: ------------------------- ------------------------- Gregory A. Pratt 1125 Kaolin Rd. Kennett Square, PA 19348 OAO Technology Solutions, Inc. ------------------------- By: ------------------------------ Secretary Title: 7500 Greenway Center, 16th Floor Greenbelt, MD 20770-3522 Attention: Chairman of the Board 25 Exhibit A Benefits 1. Group Insurance. The Corporation shall provide to Employee and his family the group life, health, dental and disability insurance coverage that the Corporation makes available to its most senior executives from time to time. For purposes of this Exhibit A, the term "family" shall mean the spouse of the Employee and his dependent children who may be insured from time to time as dependents under such policies of the Corporation. 2. Automobile. The Corporation will provide Employee with a company car or a car allowance, not to exceed $800 per month. Employee shall be responsible for the payment of all insurance, maintenance, repairs, gasoline and other reasonable and necessary costs incident to the operation of such automobile. 3. Expenses. It is contemplated that, in connection with his employment hereunder, Employee may be required to incur reasonable business, entertainment and travel expenses. The Corporation agrees to reimburse Employee in full for all such reasonable and necessary business, entertainment and travel expenses incurred or expended by him in connection with the performance of his duties hereunder; provided Employee submits to the Corporation vouchers or expense statements satisfactorily evidencing such expenses as may be reasonably required by the Corporation and such expenses are in accordance with any corporate policy with respect thereto. 4. Vacation. Employee shall be entitled to a paid vacation (taken consecutively or in segments) of 4 weeks during each fiscal year, adjusted pro rata for any partial fiscal year during the term hereof. Such vacation may be taken at such times as is reasonably consistent with proper performance by Employee of his duties and responsibilities hereunder. 5. 401K Plan. Employee will be eligible to participate in the Corporation's 401K plan immediately through voluntary contributions, which the Corporation will match $.20 for each $1.00 contributed by Employee up to the limits contained in the Corporation's plan. 6. Other Benefits. The Corporation will pay for one reasonable annual country club membership fee for Employee. Nothing contained herein shall be deemed to limit or affect the right of Employee to receive additional bonuses or other forms of additional compensation or to participate in any retirement, disability, profit sharing, stock option, cash or stock bonus or other plan or arrangement, or in any other benefits now or hereafter provided by the Corporation for its employees or executives at the sole discretion of the Board of Directors of the Corporation. 26 EX-11 3 COMPUTATION OF EARNINGS PER SHARE 11.1 STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE Basic earnings per share has been calculated as net earnings divided by weighted-average common shares outstanding, while diluted earnings per share has been computed as net earnings divided by weighted average common and diluted shares outstanding. For the three and six months ended June 30, 1998, all common equivalents of 781,000 and 857,000, respectively, were anti-dilutive and therefore not included in the calculation of diluted earnings per share. For the three and six months ended June 30, 1997, the Company's diluted shares outstanding were 187,000 and 133,000, respectively, to arrive at total common and dilutive shares outstanding of 10,187,000 and 10,133,000, respectively. Shares outstanding are computed using the weighted-average number of shares of common and common equivalent shares, which consist of stock options, for each period. 27 EX-27 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFOMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 17,589 0 18,698 (3,060) 0 3,132 6,130 0 44,736 7,840 791 0 0 164 35,941 44,736 0 43,346 0 36,733 10,108 0 381 (3,114) (1,080) (2,034) 0 0 0 (2,034) (0.12) (0.12) Shown net of allownace for uncollectible accounts on face of Consolidated Balance Sheet. Shown in this Financial Data Schedule net of related accumulated depreciation for consistency with Consolidated Balance Sheet. Represents the long-term portion of capital lease obligations. Represents interest income of the Company.