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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 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: 0-22737
ADVANCED COMMUNICATION SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 54-1421222
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
10089 LEE HIGHWAY, FAIRFAX, VIRGINIA 22030
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE AND ZIP CODE)
(703) 934-8130
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
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 THE CLOSE OF BUSINESS ON FEBRUARY 1, 1999, THE REGISTRANT HAD OUTSTANDING
8,674,761 SHARES OF COMMON STOCK, PAR VALUE $.01 PER SHARE.
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ADVANCED COMMUNICATION SYSTEMS, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of December 31, 1998
and September 30, 1998 3
Condensed Consolidated Statements of Operations for the Three
Months Ended December 31, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended December 31, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
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ADVANCED COMMUNICATION SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
DECEMBER 31, SEPTEMBER 30,
1998 1998
---- ----
ASSETS
Current assets:
Cash and cash equivalents ............................................... $1,806 $2,457
Contract receivables .................................................... 61,897 54,059
Other receivables ....................................................... 606 286
Prepaid expenses ........................................................ 1,112 958
Inventories ............................................................. 500 583
--------- ---------
Total current assets ................................................. 65,921 58,343
--------- ---------
Property and equipment, net ............................................. 8,157 8,044
Other assets:
Other related party receivables ......................................... 86 88
Software development costs, net ......................................... 3,649 3,186
Intangibles, net ........................................................ 54,360 49,726
Other non-current assets ................................................ 325 348
--------- ---------
Total other assets ................................................... 58,420 53,348
--------- ---------
Total assets ...................................................... $132,498 $119,735
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt ....................................... $90 $87
Obligations under capital lease ......................................... 962 1,100
Accounts payable ........................................................ 11,330 9,577
Accrued expenses and other current liabilities .......................... 20,632 22,772
Billings in excess of revenue ........................................... 896 1,208
Income taxes payable .................................................... 762 1,104
Deferred income tax liability ........................................... 1,847 1,059
--------- ---------
Total current liabilities ............................................ 36,519 36,907
Obligations under capital lease - long-term ............................. 118 523
Deferred income tax liability - long-term ............................... 903 858
Long-term debt .......................................................... 48,553 36,564
--------- ---------
Total liabilities .................................................... 86,093 74,852
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized,
no shares issued and outstanding ...................................... - -
Common stock, $.01 par value, 40,000,000 shares authorized,
11,450,000 shares issued at December 31, 1998 and
September 30, 1998 ..................................................... 115 115
Paid-in-capital ......................................................... 41,328 41,105
Retained earnings ....................................................... 5,286 3,991
Less - Treasury stock, 2,823,824 shares at December 31, 1998
and 2,854,887 shares at September 30, 1998 ............................ (324) (328)
--------- ---------
Total stockholders' equity ........................................... 46,405 44,883
--------- ---------
Total liabilities and stockholders' equity ........................ $132,498 $119,735
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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ADVANCED COMMUNICATION SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
DECEMBER 31,
------------
1998 1997
---- ----
Revenues ..................................................... $47,524 $14,170
Direct costs ................................................. 32,195 9,131
Indirect, general and administrative expenses................. 12,373 3,933
-------- --------
Income from operations ....................................... 2,956 1,106
Other expense, net ........................................... (847) (78)
-------- --------
Income before taxes .......................................... 2,109 1,028
Income tax expense ........................................... 836 374
-------- --------
Net income ................................................... $1,273 $654
======== ========
Net income per share - basic ................................. $0.15 $0.10
======== ========
Net income per share - diluted ............................... $0.15 $0.10
======== ========
Weighted average shares outstanding - basic .................. 8,620 6,352
======== ========
Weighted average shares outstanding - diluted ................ 8,708 6,480
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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ADVANCED COMMUNICATION SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
DECEMBER 31,
------------
1998 1997
---- ----
Cash flow from operating activities:
Net income ........................................................... $1,273 $654
Adjustments to reconcile net income to net cash provided
by (used in) operating activities-
Depreciation and amortization .................................. 876 187
Changes in assets and liabilities:
Contract receivables ..................................... (7,838) (1,661)
Other receivables ........................................ (320) 3
Prepaid expenses ......................................... (154) (133)
Income taxes receivable .................................. - 220
Inventories .............................................. 83 (70)
Other related party receivables .......................... 2 (32)
Other assets ............................................. 23 (10)
Accounts payable ......................................... 1,753 (1,142)
Accrued expenses and other current liabilities ........... (2,140) (2,023)
Billings in excess of revenue ............................ (312) 18
Income taxes payable ..................................... 491 -
-------- --------
Net cash used in operating activities ............... (6,263) (3,989)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment .................................. (601) (235)
Capitalized software development costs ............................... (463) (239)
Increase in intangible assets ........................................ (5,000) -
-------- --------
Net cash used in investing activities ................ (6,064) (474)
-------- --------
Cash flows from financing activities:
Net costs incurred in sale of common stock ........................... (5) (11)
Net borrowings repaid ................................................ (8) (20)
Net borrowings under line of credit .................................. 12,000 1,961
Net repayments of obligations under capital leases ................... (543) -
Sale of treasury stock ............................................... 232 40
-------- --------
Net cash provided by financing activities ............ 11,676 1,970
-------- --------
Net decrease in cash ................................................. (651) (2,493)
Cash and cash equivalents, beginning of period ....................... 2,457 2,744
-------- --------
Cash and cash equivalents, end of period ............................. $1,806 $251
======== ========
Income taxes paid .................................................... $339 $119
======== ========
Interest paid ........................................................ $884 $78
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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ADVANCED COMMUNICATION SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated balance sheet as of December 31, 1998
and the statements of operations and cash flows for all periods presented have
been prepared by Advanced Communication Systems, Inc. ("the Company"), and have
not been audited. These financial statements, in the opinion of management,
include all adjustments, consisting of normal recurring adjustments, necessary
for a fair presentation of the financial position, results of operations and
cash flows for all periods presented. These condensed consolidated financial
statements should be read in conjunction with the financial statements and notes
thereto for the fiscal year ended September 30, 1998 included in the Company's
Annual Report on Form 10-K. Interim operating results are not necessarily
indicative of operating results for the full year.
2. MANAGEMENT'S 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
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
3. RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income".
This statement establishes standards for reporting and display of comprehensive
income and its components. SFAS No. 130 is effective for the Company's fiscal
year 1999 and requires the restatement of all previously reported information
for comparative purposes. The Company does not have any material transactions
required to be reported under SFAS No. 130 and therefore this statement does not
have a material impact on the Company's financial position, statement of
operations or cash flows.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information". This statement requires that financial
information be reported on the basis used internally for evaluating segment
performance and deciding how to allocate resources to segments. SFAS No. 131 is
effective for the Company's fiscal year 1999 and requires restatement of all
previously reported information for comparative purposes. Management of the
Company has not yet finalized how its segments shall be reported or whether and
to what extent segment information will differ from the information currently
presented. The Company believes that the impact of adopting SFAS No. 131 is not
material.
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4. ACQUISITION
In June 1998, the Company acquired all the outstanding shares of SEMCOR, Inc.
("SEMCOR") for a preliminary purchase price of $38,100,000 in cash and
additional contingent payments based on the achievement of certain financial
goals for the six-month period ended December 31, 1998, up to a maximum of
$5,000,000, and the twelve-month period ending December 31, 1999, up to a
maximum of $10,000,000. SEMCOR successfully achieved the financial goals for the
six-month ended December 31, 1998 as outlined in the stock purchase agreement
and accordingly the selling shareholders earned the maximum $5,000,000 which is
being carried as intangible assets (goodwill).
5. LONG-TERM DEBT
Long-term debt consisted of the following:
DECEMBER 31, SEPTEMBER 30,
1998 1998
---- ----
Line of credit:
$50,000,000 line of credit, $45,000,000 at September 30, 1998,
with a commercial bank expiring February 28, 2000........................ $47,000 $35,000
Long-term debt:
Note payable to bank, interest at 9.9%, due February
2005, secured by a First Deed of Trust on an office building............. 961 964
Note payable to Urban Business Development Corporation, interest
at 8.575%, due January 2015, guaranteed by the Small Business
Administration and secured by a Second Deed of Trust on an
office building.......................................................... 682 687
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48,643 36,651
Less current maturities.................................................. (90) (87)
--------- ---------
$48,553 $36,564
========= =========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements based on management's
current expectations, estimates and projections about the Company's industry,
management's beliefs and certain assumptions made by management. These
forward-looking statements involve risks and
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uncertainties, and actual results may differ materially from those anticipated
or expressed in such statements. Potential risks and uncertainties include,
among others, those set forth in the Company's annual report on Form 10-K, as
filed with the Securities and Exchange Commission. Except as required by law,
the Company undertakes no obligation to update any forward-looking statement,
whether as a result of new information, future events or otherwise.
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data as a
percentage of revenues for the periods indicated:
THREE MONTHS
ENDED DECEMBER 31,
-----------------------------------------------
1998 1997
---------------- ------------------
Revenues................................... 100.0 % 100.0 %
Direct costs............................... 67.7 64.4
Indirect, general and administrative....... 26.0 27.8
---------------- ------------------
Income from operations..................... 6.3 7.8
Other income (expense), net................ (1.8) (0.6)
---------------- ------------------
Income before taxes........................ 4.5 7.2
Provision for income taxes................. 1.8 2.6
---------------- ------------------
Net income................................. 2.7 % 4.6 %
================ ==================
THREE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
1997
Revenues increased 235.4%, or $33.4 million, to $47.5 million for the three
months ended December 31, 1998, from $14.2 million for the same period in 1997.
The increase was principally due to an increase in revenues resulting primarily
from the Company's acquisitions of Advanced Management, Incorporated ("AMI") and
SEMCOR and from an increase in systems integration revenue.
Direct costs include labor costs, related fringe benefits, subcontract costs,
material costs and other non-overhead costs directly related to a contract.
Direct costs increased to $32.2 million for the three months ended December 31,
1998 from $9.1 million for the same period in 1997 due primarily to increased
revenues from the Company's acquisitions. Direct costs, expressed as a
percentage of revenues, increased to 67.7% for the three months ended December
31, 1998 from 64.4% for the same period in 1997, primarily because SEMCOR, the
Company's most recent acquisition, has traditionally experienced higher direct
costs relative to revenues. Additionally, there was an increase in the
proportion of revenues derived from systems integration services. These services
generally have higher direct costs than the other services the Company provides
because the contracts generally require the Company to purchase hardware
components as part of the services.
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Indirect, general and administrative expenses include fringe benefits, overhead,
selling and administrative costs, depreciation and amortization, bid and
proposal costs and research and development expenses. Indirect expense increased
to $12.4 million for the three months ended December 31, 1998 from $3.9 million
for the same period in 1997. The increase was due primarily to the higher level
of revenues discussed above. Indirect expenses, expressed as a percentage of
revenues, decreased to 26.0% from 27.8% for the three months ended December 31,
1998, due to the higher proportion of systems integration revenues, which
typically have lower associated indirect expenses, partially offset by an
increase in amortization of intangible assets resulting from the Company's
acquisitions.
Income from operations increased 167.3%, to $3.0 million for the three months
ended December 31, 1998, from $1.1 million for the same period in 1997,
primarily due to increased operating results from the Company's acquisitions of
AMI and SEMCOR. As a percentage of revenues, income from operations decreased to
6.3% for the three months ended December 31, 1998, from 7.8% for the comparable
period in the prior year, attributable principally to the traditionally lower
operating margin experienced by SEMCOR and to the increase in amortization of
intangible assets resulting from the Company's acquisitions.
Other expense, net, consists of interest expense, offset in part by interest
income from short-term deposits of cash and other sources of non-operating
income. Interest expense was $884,000 and $89,000 for the three month periods
ended December 31, 1998 and 1997, respectively. The increase in interest expense
resulted primarily from the amounts borrowed to fund the SEMCOR acquisition.
Interest income was $1,000 and $11,000 for the three months ended December 31,
1998 and 1997, respectively.
The Company's effective tax rate was 39.6% and 36.4%, respectively, for the
three months ended December 31, 1998 and 1997. The increase is primarily due to
higher effective state income tax rates.
LIQUIDITY AND CAPITAL RESOURCES
The Company used cash from operating activities of $6.3 million for the three
months ended December 31, 1998, resulting primarily from net income, increases
in contract receivables and decreases in accrued expenses and other current
liabilities. The increase in contract receivables was due to higher revenue
levels during the period. For the three months ended December 31, 1997, the
Company used cash from operating activities which amounted to $4.0 million,
resulting primarily from net income, increases in contract receivables,
decreases in accounts payable and partially offset by increases in accrued
expenses. Included in contract receivables at December 31, 1998, is a
contractual obligation of the Australian Navy in the amount of $1.7 million. The
Australian Navy is contesting this obligation and the Company plans to
vigorously pursue all available remedies to enforce payment of such amount.
The principal uses of cash for investing activities was for the payment of the
balance of the preliminary adjusted purchase price for the acquisition of
SEMCOR, the purchase of property and equipment and the investment in capitalized
software development. Pursuant to the stock purchase agreement, the preliminary
purchase price of $38.1 million was subject to adjustment
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based on the net equity on SEMCOR's closing date balance sheet. Additionally,
the Company agreed to pay the former shareholders of SEMCOR up to $1.25 million
for certain tax liabilities incurred pursuant to Section 338(h)(10) of the
Internal Revenue Code. In October 1998, the Company paid the balance of the
adjusted preliminary purchase price, in the amount of $3.8 million and in
December 1998 paid $1.25 million for the selling shareholders' income tax
liabilities. Purchases of computers and other equipment totaled $601,000 and
$235,000 for the three months ended December 31, 1998 and 1997, respectively.
Further, the Company invested $463,000 and $239,000 for the three months ended
December 31, 1998 and 1997, respectively, in software development costs,
primarily for its latest Microsoft Exchange-based product, Information 2000 and
its software product for patient education, Impact, for the three months ended
December 31, 1998.
In June 1998, the Company's line of credit arrangement with a commercial bank,
consisting to two credit facilities, was increased from $35 million to $45
million to finance the acquisition of SEMCOR. The first facility, in an amount
up to $20 million, may be used to finance acquisitions, working capital, and
other corporate purposes, and bears interest at either the bank's prime rate or
at a London interbank offered rate ("LIBOR") for one, two or three month
periods, plus a percentage, not more than 2.2%, which depends on the Company's
historical performance. The second facility, in an amount up to $25 million, may
be used to finance acquisitions, and bears interest at either the bank's prime
rate or at a LIBOR rate plus a percentage, not more than 2.45%, which depends on
the Company's historical financial performance. The credit agreement contains
various covenants requiring the Company and its subsidiaries, on a consolidated
basis, to maintain certain financial ratios, including debt to net income,
minimum net income and minimum net worth. The credit agreement also prohibits
the payment of dividends.
The line of credit arrangement was increased to $50 million in December 1998 and
to $60 million in February 1999. The current credit arrangement is subject to
similar terms and conditions as the original arrangement that was entered into
in February 1998 and expires in February 2002. As of December 31, 1998 the
outstanding balance on the credit facilities was $47 million.
The Company currently anticipates that its current cash balances, amounts
available under its credit facilities and net cash provided by operating
activities will be sufficient to meet its working capital and capital
expenditure requirements for at least the next twelve months. Inflation did not
have a material impact on the Company's revenues or income from operations for
the three months ended December 31, 1998 or 1997.
YEAR 2000 DISCLOSURE
OVERVIEW
As is true for most companies, the Year 2000 computer problem creates a risk for
the Company. If systems do not correctly recognize the date information when the
year changes to 2000, there could be an adverse impact on the Company's
operations. The risk exists primarily in four areas;
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the Company's internal systems, third parties with which the Company has a
material relationship, Company products and Company Year 2000 services.
In response to the Year 2000 problem and the associated risks, the Company has
developed a comprehensive compliance program to evaluate, address and remedy the
date related problems with respect to the Company's internal systems, third
party relationships, Company products and services. The compliance program is
managed by the Company's Chief Technical Officer, and is tailored after the
guidance promulgated by the General Accounting Office (GAO) in their
publication, Year 2000 Computing Crisis: An Assessment Guide and by the
Department of the Navy Year 2000 Action Plan.
The Company has adopted the following five-phase approach that was endorsed by
the GAO and recognized by the U.S. Congress:
AWARENESS PHASE. The Company's management is familiarized with the scope of
the Year 2000 impact, the problem is defined, compliance standards are
established and an overall strategy is developed. A Year 2000 program team is
formed to organize and implement the Company's Year 2000 compliance program.
ASSESSMENT PHASE. The Year 2000 team determines the impact on the Company's
systems, tools, products and contracts. The team creates an inventory and
evaluation of systems that support the core business sectors. Third party
service providers are contacted concerning their compliance with the Year 2000
problem with regard to the products and services they provide. The team then
prioritizes the conversion or replacement of existing systems that are confirmed
to be Year 2000 non-compliant.
RENOVATION PHASE. The Year 2000 program team rectifies the problems
discovered in the assessment phase by modifying or replacing systems that are
Year 2000 non-compliant.
VALIDATION PHASE. The renovated or replaced systems, applications and
databases are tested and certified as Year 2000 compliant.
IMPLEMENTATION PHASE. The renovated or replaced systems are fully
implemented and extensive testing is performed to insure coordination with other
systems and databases. Backup and recovery plans are put in place.
The Company anticipates that it will have all internal Year 2000 solutions in
place by July 1, 1999. Internal solutions include information technology systems
such as local and wide area network systems and non-IT systems such as embedded
micro-controllers within facility, security, telephone and other systems.
The Company is assessing the status of third parties with which it has a
material relationship. Third parties include vendors and suppliers of essential
hardware, software and services and Company customers who may fund Year 2000
compliance efforts in lieu of contracting services to the Company.
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The Company is assessing the status of its products and Year 2000-related
services. The Company also performs Year 2000-related services for both
government and industry and is assessing the potential risk to the Company of
performing these services and is taking action to mitigate these risks as they
are identified.
COST FOR YEAR 2000 COMPLIANCE
The Company estimates the cost for Year 2000 compliance to be $550,000. To date,
the Company has spent approximately $123,000.
YEAR 2000 RISKS
The Company believes that its Year 2000 compliance plan is a comprehensive one.
The Company, however, may not be able to identify or remedy all Year 2000
compliance issues with respect to its internal systems, suppliers, customers,
products and services. As a result, the Year 2000 problem could have a
materially adverse effect on the Company's financial condition or results of
operations.
CONTINGENCY PLANS
The Company currently is developing contingency plans. The Company anticipates
that its internal systems will be Year 2000 compliant by July 1, 1999. The
status of third parties with which the Company has a material relationship and
the Companies products and services are being assessed. The Company will
continue to develop contingency plans as required to mitigate the effects of
delays, if any, in internal systems compliance, third party business
interruption, non-compliant Company products and risks associated with providing
Year 2000-related services.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibit 11.1 Statement Regarding Computation of Per Share Earnings
Exhibit 27.1 Financial Data Schedule
(b) Reports on Form 8-K - None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: February 12, 1999 ADVANCED COMMUNICATION SYSTEMS, INC.
/S/ George A. Robinson
--------------------------------
George A. Robinson
Chairman, President
and Chief Executive Officer
/S/ Dev Ganesan
--------------------------------
Dev Ganesan
Executive Vice President, Chief
Financial Officer and Treasurer
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