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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 DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________.
Commission File Number: 000-24193
ATLANTIC DATA SERVICES, INC.
(Exact Name of Registrant as Specified in its Charter)
MASSACHUSETTS 04-2696393
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
ONE BATTERYMARCH PARK
QUINCY, MASSACHUSETTS 02169
(Address of Principal Executive Offices) (Zip Code)
(617) 770 - 3333
(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 January 31, 2000, there were 12,943,346 shares of the Registrant's Common
Stock, $.01 par value per share, outstanding.
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ATLANTIC DATA SERVICES, INC.
TABLE OF CONTENTS
Page
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PART I - FINANCIAL INFORMATION
ITEM 1: Financial Statements
Condensed Consolidated Balance Sheets as of December 31, 1999
(Unaudited) and March 31, 1999 3
Condensed Consolidated Statement of Operations for the Three
and Nine Months Ended December 31, 1999 and 1998 (Unaudited) 4
Condensed Consolidated Statement of Cash Flows for the Nine
Months Ended December 31, 1999 and 1998 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
ITEM 3: Quantitative and Qualitative Disclosures
about Market Risk 14
PART II - OTHER INFORMATION
ITEM 2: Changes in Securities and Use of Proceeds 16
ITEM 6: Exhibits and Reports on Form 8-K 17
SIGNATURES 18
EXHIBIT INDEX 19
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PART I
ITEM 1: FINANCIAL INFORMATION
ATLANTIC DATA SERVICES, INC.
Condensed Consolidated Balance Sheets
(in thousands, except per share data)
DECEMBER 31, MARCH 31,
1999 1999
----------- --------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $37,906 $37,326
Accounts receivable, net of allowances for doubtful
accounts of $725 at December 31, 1999 and March 31, 1999 3,293 7,037
Prepaid expenses 1,082 100
Deferred taxes 739 739
------- -------
Total current assets 43,020 45,202
Property and equipment, net 1,055 1,346
Other assets 183 213
------- -------
TOTAL ASSETS $44,258 $46,761
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 594 $ 1,193
Accrued expenses and other liabilities 3,417 4,393
Income taxes payable -- 417
------- -------
Total current liabilities 4,011 6,003
------- -------
Long-term liabilities -- 13
------- -------
Commitments
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000 authorized,
no shares issued or outstanding -- --
Common stock, $.01 par value, 60,000,000 shares
authorized, 13,055,346 shares issued and 12,943,346
outstanding at December 31, 1999 and 13,018,391 shares
issued and 12,906,391 outstanding at March 31, 1999 130 130
Additional paid-in capital 26,638 26,526
Retained earnings 13,504 14,114
Treasury stock (112,000 shares carried at cost) (25) (25)
------- -------
Total stockholders' equity 40,247 40,745
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $44,258 $46,761
======= =======
See accompanying Notes to Condensed Consolidated Financial Statements.
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ATLANTIC DATA SERVICES, INC.
Condensed Consolidated Statement of Operations
(in thousands, except per share data)
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------ ------------------
1999 1998 1999 1998
------- ------- ------- -------
Revenues $ 8,111 $18,731 $25,151 $54,364
Cost of revenues 5,902 10,891 19,518 31,393
------- ------- ------- -------
Gross profit 2,209 7,840 5,633 22,971
------- ------- ------- -------
Operating expenses:
Sales and marketing 888 1,252 2,288 4,064
General and administrative 1,788 2,269 5,639 6,822
------- ------- ------- -------
Total operating expenses 2,676 3,521 7,927 10,886
------- ------- ------- -------
Income (loss) from operations (467) 4,319 (2,294) 12,085
Interest income, net 452 356 1,297 870
------- ------- ------- -------
Income (loss) before provision (credit) for
income taxes (15) 4,675 (997) 12,955
Provision (credit) for income taxes (6) 2,022 (387) 5,575
------- ------- ------- -------
Net income (loss) $ (9) $ 2,653 $ (610) $ 7,380
======= ======= ======= =======
Basic earnings (loss) per share $ -- $ 0.21 $ (0.05) $ 0.60
======= ======= ======= =======
Diluted earnings (loss) per share $ -- $ 0.20 $ (0.05) $ 0.58
======= ======= ======= =======
Shares used in computing earnings per
share (basic) 12,943 12,854 12,906 12,335
======= ======= ======= =======
Shares used in computing earnings per
share (diluted) 12,943 13,292 12,906 12,752
======= ======= ======= =======
See accompanying Notes to Condensed Consolidated Financial Statements.
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ATLANTIC DATA SERVICES, INC.
Condensed Consolidated Statement of Cash Flows
(in thousands)
(unaudited)
NINE MONTHS ENDED
DECEMBER 31,
------------------
1999 1998
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ (610) $ 7,380
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 496 401
Provision for bad debts -- 350
Tax benefit from exercise of stock options 1 170
Change in assets and liabilities:
Accounts receivable 3,744 (2,113)
Prepaid expenses and other assets (952) (10)
Accounts payable (599) 138
Accrued expenses and other liabilities (976) 1,106
Billings in excess of costs and estimated
earnings on contracts -- (477)
Federal and state income taxes (417) (676)
------- -------
Net cash provided by operating activities 687 6,269
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (206) (781)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under capital lease obligation (13) (13)
Proceeds from exercise of stock options and employee
stock purchase plan 112 692
Net proceeds from initial public offering -- 23,371
------- -------
Net cash provided by financing activities 99 24,050
------- -------
Net increase in cash and cash equivalents 580 29,538
Cash and cash equivalents, beginning of period 37,326 3,401
------- -------
Cash and cash equivalents, end of period $37,906 $32,939
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Taxes $ 806 $ 6,444
======= =======
See accompanying Notes to Condensed Consolidated Financial Statements.
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ATLANTIC DATA SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
December 31, 1999
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared by Atlantic Data Services, Inc. (the "Company") in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting solely of normal
recurring adjustments) considered necessary for a fair presentation have been
included. Operating results for the nine-month period ended December 31, 1999
are not necessarily indicative of the results that may be expected for future
periods of the full fiscal year. These Condensed Consolidated Financial
Statements should be read in conjunction with the Consolidated Financial
Statements and related notes included in the Company's Annual Report on Form
10-K for the year ended March 31, 1999.
The balance sheet at March 31, 1999 has been derived from the audited financial
statements at that date, but does not include all the information and footnotes
required by generally accepted accounting principles for complete financial
statements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
The Company primarily derives its revenue from consulting services under time
and material billing arrangements. Under these arrangements, revenue is
recognized as the services are provided. Deferred revenue pertains to time and
material billing arrangements and represents cash collected in advance of the
performance of services.
Revenue on fixed price contracts is recognized using the percentage of
completion method of accounting and is adjusted monthly for the cumulative
impact of any revision in estimates. The Company determines the percentage of
its contracts by comparing costs incurred to date to total estimated costs.
Contract costs include all direct labor and expenses related to the contract
performance. An asset, "Costs and estimated earnings in excess of billings on
contracts," would represent revenues recognized in excess of amounts billed. The
liability, "Billings in excess of costs and estimated earnings on contracts,"
represents billings in excess of revenues recognized.
Included in revenues are reimbursable contract-related travel and entertainment
expenses, which are separately billed to clients.
Earnings Per Share
The Company follows Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("FAS 128"). FAS 128 requires the presentation of two
amounts, basic earnings per share and diluted earnings per share.
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3. EARNINGS PER SHARE
The following table sets forth the computation of basic earnings per share and
diluted earnings per share for the three and nine months ended December 31, 1999
and 1998:
THREE MONTHS ENDED
DECEMBER 31,
--------------------
1999 1998
------- -------
(in thousands, except
per share data)
Numerator:
Net income (numerator for basic earnings per share and
diluted earnings per share) $ (9) $ 2,653
------- -------
Denominator:
Denominator for basic earnings per share - weighted average
shares and special common shares 12,943 12,853
Effect of dilutive securities:
Employee stock options -- 439
------- -------
Denominator for diluted earnings per share - adjusted
weighted average and assumed conversions 12,943 13,292
------- -------
Basic earnings per share $ -- $ 0.21
======= =======
Diluted earnings per share $ -- $ 0.20
======= =======
NINE MONTHS ENDED
DECEMBER 31,
--------------------
1999 1998
------- -------
(in thousands, except
per share data)
Numerator:
Net income (numerator for basic earnings per share and
diluted earnings per share) $ (610) $ 7,381
------- -------
Denominator:
Denominator for basic earnings per share - weighted average
shares and special common shares 12,906 12,335
Effect of dilutive securities:
Employee stock options -- 416
------- -------
Denominator for diluted earnings per share - adjusted
weighted average and assumed conversions 12,906 12,751
------- -------
Basic earnings per share $ (0.05) $ 0.60
======= =======
Diluted earnings per share $ (0.05) $ 0.58
======= =======
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4. MAJOR CUSTOMERS
The nature of the Company's services results in the Company deriving significant
amounts of revenue from certain customers in a particular period. For the
quarter ended December 31, 1999, two customers accounted for 25.6% and 22.0% of
the Company's revenues. For the quarter ended December 31, 1998, four customers
accounted for 17.5%, 16.5%, 16.4% and 13.2% of the Company's revenues.
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ATLANTIC DATA SERVICES, INC.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Atlantic Data Services, Inc. provides information technology strategy consulting
and systems integration services to customers exclusively in the financial
services industry, primarily banks. Our service offerings are organized around
three primary practice areas: IT Strategy Consulting, Consolidations and
Conversions, and E-Commerce and Internet Banking.
We were organized in Massachusetts in 1980 to provide consulting services to
banks and bank service bureaus. Our revenues are derived primarily from
professional fees billed to customers on a time and materials basis, or in
certain instances on a fixed price basis. Included in revenues are reimbursable
contract-related travel and entertainment expenses, which are separately billed
to clients. Substantially all of our contracts, other than fixed price
contracts, are terminable by the customer following limited notice and without
significant penalty to the customer. Revenues from fixed price contracts
represented approximately 0.0% and 8.4% of our revenues for the quarters ended
December 31, 1999 and 1998, respectively.
We have derived, and expect to continue to derive, a significant portion of our
revenues from a relatively limited number of customers. Revenues from our five
largest customers for the quarters ended December 31, 1999 and 1998 were 70.6%
and 69.1%, respectively, as a percentage of revenues. For the quarter ended
December 31, 1999, Fleet Services Corporation, Citizens Banking Corporation,
Bank of Hawaii, Hudson United Bancorp, Inc. and UST Data Services accounted for
approximately 25.6%, 22.0%, 8.4%, 8.1% and 6.4%, respectively, of revenues. For
the quarter ended December 31, 1998, First Security Information Technology,
Inc., Associated Banc-Corp., National City Corporation, UST Data Services and
Susquehanna Bancshares Inc. accounted for approximately 17.5%, 16.5%, 16.4%,
13.2% and 5.5%, respectively, of revenues.
Cost of revenues consists primarily of salaries and employee benefits for
personnel dedicated to customer assignments, fees paid to subcontractors for
work performed in connection with customer assignments, and reimbursable
contract-related travel and entertainment expenses incurred by us in connection
with the delivery of our services.
Sales and marketing expenses consist primarily of salaries, employee benefits,
travel expenses and promotional costs. General and administrative expenses
consist primarily of expenses associated with our management, finance and
administrative groups, including recruiting, training, depreciation and
amortization and occupancy costs.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
This Report on Form 10-Q includes forward-looking statements. You can identify
these forward-looking statements when you see us using words such as "expect,"
"anticipate," "believe," "intend," "may," "predict," and other similar
expressions. These forward-looking statements cover, among other items: events,
conditions and financial trends that may effect the Company's future plans of
operation, business strategy, growth of operations and financial position,
including statements relating to capital expenditures, levels of professional
staff and sufficiency of cash and cash equivalent balances and the Year 2000
issue. Forward-looking statements are not guarantees of future performance and
are necessarily subject to a number of risks and uncertainties, some of which
are beyond our control. Actual results could differ materially from those
anticipated as a result of any of the following factors:
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- - variations in our revenues and operating results which could cause our
results of operations to be below the expectations of public market
analysts and investors;
- - our dependence on the financial services industry;
- - the concentration of our revenues from a relatively limited number of
customers;
- - our dependence on key personnel;
- - the availability of professional staff as our business involves the
delivery of professional services which is labor-intensive;
- - the management of our growth;
- - competition from other companies in the information technology and systems
integration market;
- - rapid technological change and our ability to develop information
technology solutions that keep pace with such changes;
- - our potential for contract liability;
- - the risks associated with fixed price contracts;
- - equity control by management;
- - the risks associated with potential acquisitions; and
- - the volatility of our stock price.
Because of these risks and uncertainties, the forward-looking events discussed
in this Report might not transpire.
VARIABILITY OF QUARTERLY OPERATING RESULTS
Variations in our revenues and operating results have occurred from quarter to
quarter and may continue to occur as a result of a number of factors. Quarterly
revenues and operating results can depend on:
- - the number, size and scope of customer projects commenced and completed
during a quarter;
- - changes in employee utilization rates;
- - changes in average billing rates;
- - the number of working days in a quarter;
- - the timing of introduction of new service offerings, both by us and our
competitors;
- - changes in pricing, both by us and our competitors;
- - loss of a significant customer;
- - loss of key personnel;
- - other factors that adversely impact the financial services industry; and
- - general economic conditions.
The timing of revenues is difficult to forecast because our sales cycle is
relatively long, ranging from one to nine months for new projects with existing
customers and three to nine months for new customers, and may depend on factors
such as the size and scope of projects or other factors that adversely impact
the financial services industry and general economic conditions. In addition,
the relatively long length of our sales cycle may negatively impact the
operating results for any particular quarter as a result of increased sales and
marketing expenses without associated increases in revenues in the particular
quarter. Furthermore, many of our projects are, and may be in the future,
terminable without customer penalty. An unanticipated termination of a major
project or loss of a major customer could require us to maintain or terminate
underutilized employees, resulting in a higher than expected number of
unassigned persons or higher than expected severance expenses.
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QUARTER ENDED DECEMBER 31, 1999 COMPARED TO QUARTER ENDED DECEMBER 31, 1998
REVENUES
Revenues decreased 56.7% for the quarter ended December 31, 1999 over the
quarter ended December 31, 1998, from $18.7 million to $8.1 million. This
decrease was primarily due to a decrease in volume of services delivered to
customers and a decrease in our utilization rate. We continue to experience
lower bookings and our financial results have been affected by the slowdown in
merger activity within the banking sector. Further, most of our clients have
completed their use of external resources for their Year 2000 projects, which
has also negatively impacted revenue generation.
COST OF REVENUES
Cost of revenues decreased 45.8% to $5.9 million from $10.9 million for the
quarter ended December 31, 1999 compared to the quarter ended December 31, 1998,
representing 72.8% and 58.1%, respectively, of revenues in each quarter. The
dollar decrease in cost of revenues was primarily due to a decrease in billable
personnel from 316 at December 31, 1998 to 174 at December 31, 1999. The
increase in cost of revenues as a percentage of revenues is due primarily to
decreased utilization rates.
SALES AND MARKETING
Sales and marketing expenses decreased 29.1% to $0.9 million from $1.3 million
for the quarter ended December 31, 1999 compared to the quarter ended December
31, 1998, representing 10.9% and 6.7% of revenues, respectively. This decrease
resulted primarily from a reduction in our sales and marketing group from 17
employees at December 31, 1998 to 15 employees at December 31, 1999, and the
decrease in sales commissions and travel related expenses for the sales group.
We expect our sales and marketing expenses to increase in absolute dollars as we
add sales and marketing staff and undertake marketing initiatives.
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased 21.2% to $1.8 million from $2.3
million for the quarter ended December 31, 1999 compared to the quarter ended
December 31, 1998, representing 22.0% and 12.1% of revenues, respectively. The
dollar decrease is primarily due to decreases in recruiting efforts for new
employees. The increase in general and administrative expenses as a percentage
of revenues reflects the significant decrease in revenues for the quarter ended
December 31, 1999 compared to the quarter ended December 31, 1998.
INTEREST INCOME, NET
Interest income, net increased $96,000 from $356,000 for the quarter ended
December 31, 1998 to $452,000 for the quarter ended December 31, 1999. This
increase was principally due to the increase in the amount of cash and cash
equivalents available for investment because of additional cash generated from
operations, as well as interest rate increases.
PROVISION (CREDIT) FOR INCOME TAXES
The provision (credit) for income taxes decreased $2.0 million to $6,000 from
$2.0 million for the quarter ended December 31, 1999 compared to the quarter
ended December 31, 1998, resulting in effective tax rates of (40.0)% and 43.3%,
respectively. The credit is the result of a net operating loss for the quarter
ended December 31, 1999. Our rate may vary from period to period based on doing
business in areas with varying state and local statutory income tax rates.
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NINE MONTHS ENDED DECEMBER 31, 1999 AND 1998
REVENUES
Revenues decreased 53.7% for the nine months ended December 31, 1999 over the
nine months ended December 31, 1998, from $54.4 million to $25.2 million. This
decrease was primarily due to a decrease in volume of services delivered to
customers and a decrease in our utilization rate. We continue to experience
lower bookings and our financial results have been affected by the slowdown in
merger activity within the banking sector. Further, many of our clients have
completed their use of external resources for their Year 2000 projects, which
has also negatively impacted revenue generation.
COST OF REVENUES
Cost of revenues decreased 37.8% to $19.5 million from $31.4 million for the
nine months ended December 31, 1999 compared to the nine months ended December
31, 1998, representing 77.6% and 57.7%, respectively, of revenues in each
period. The dollar decrease in cost of revenues was primarily due to a decrease
in billable personnel from 316 at December 31, 1998 to 174 at December 31, 1999.
The increase in cost of revenues as a percentage of revenues is due primarily to
decreased utilization rates.
SALES AND MARKETING
Sales and marketing expenses decreased 43.7% to $2.3 million from $4.1 million
for the nine months ended December 31, 1999 compared to the nine months ended
December 31, 1998, representing 9.1% and 7.5% of revenues, respectively. This
decrease resulted primarily from a reduction in our sales and marketing group
from 17 employees at December 31, 1998 to 15 employees at December 31, 1999, the
decrease in sales commissions, travel related expenses for the sales group, as
well as decreased investment in marketing initiatives. We expect our sales and
marketing expenses to increase in absolute dollars as we add sales and marketing
staff and undertake marketing initiatives.
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased 17.3% to $5.6 million from $6.8
million for the nine months ended December 31, 1999 compared to the nine months
ended December 31, 1998, representing 22.4% and 12.5% of revenues, respectively.
The dollar decrease is primarily due to decreases in recruiting efforts for new
employees. The increase in general and administrative expenses as a percentage
of revenues reflects the significant decrease in revenues for the nine months
ended December 31, 1999 compared to the nine months ended December 31, 1998.
INTEREST INCOME, NET
Interest income, net increased $427,000 from $870,000 for the nine months ended
December 31, 1998 to $1,297,000 for the nine months ended December 31, 1999.
This increase was principally due to the increase in the amount of cash and cash
equivalents available for investment because of the net proceeds received from
our initial public offering completed on May 28, 1998 of $23.4 million and
additional cash generated from operations.
PROVISION (CREDIT) FOR INCOME TAXES
The provision (credit) for income taxes decreased $6.0 million to $(0.4) million
from $5.6 million for the nine months ended December 31, 1999 compared to the
nine months ended December 31, 1998, resulting
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in effective tax rates of (38.8)% and 43.0%, respectively. Our rate may vary
from period to period based on doing business in areas with varying state and
local statutory income tax rates.
LIQUIDITY AND CAPITAL RESOURCES
We have no long-term debt and continue to operate primarily debt-free. Working
capital was $39.0 million at December 31, 1999. Our days sales in accounts
receivable at December 31, 1999 was 37 compared to 52 days at December 31, 1998.
The decrease in days sales outstanding was the result of increased emphasis on
collections as well as customers paying bills quicker due to Year 2000
uncertainties. While we believe that the risk with respect to collection of
accounts receivable is minimized by the creditworthiness of our customers,
primarily banks and other financial institutions, and our credit and collection
policies, there can be no assurance that we will not encounter collection
problems in the future. We attempt to further minimize this risk by performing
ongoing credit valuations of our customers and maintaining an allowance for
potential credit losses. We believe that our allowance for doubtful accounts and
collection policies are adequate.
Capital expenditures for the nine months ended December 31, 1999 of $206,000
were primarily to support our existing employees. Capital expenditures for the
remainder of fiscal 2000 are expected to be approximately $150,000 and will be
used principally for computers and other equipment.
We expect that existing cash and cash equivalent balances, together with cash
provided from operations, will be sufficient to meet the Company's working
capital and capital expenditure requirements for at least the next twelve
months.
To date, inflation has not had a material impact on the Company's financial
results.
IMPACT OF YEAR 2000
The Year 2000 issue is the result of computer programs using a two-digit format,
as opposed to four digits, to indicate the year. Computer systems based on a
two-digit format are unable to interpret dates beyond the year 1999 which could
cause a system failure or other computer errors, leading to disruptions in
operations. The Year 2000 problem affects virtually all computer systems,
processes, and products in all segments of the economy. We are aware of the
issues associated with the Year 2000 issue and believe there are three general
areas of potential exposure: (1) our own service offerings; (2) our internal
informational systems; and (3) the effects of third party compliance efforts. To
date, we have experienced no material adverse effect on any of our service
offerings or internal information systems, including any problems with third
party software, due to the transition to Year 2000.
- - Service Offerings and Products. We believe that our information technology
strategy consulting and systems integration services will not be affected
by the Year 2000 issue because such IT service offerings do not involve
computer processes that store or manipulate date-related fields. We will
continue to monitor newly developed or acquired IT service offerings and
products for Year 2000 compliance. In the event that any of our developed
or acquired IT service offerings or products are not Year 2000 compliant,
our sales may decline materially, customers and those with whom they do
business may assert product liability and other claims, and our business,
results of operations and financial condition would be materially and
adversely affected.
- - Internal Information Systems. We completed an assessment of our information
technology systems and non-IT systems (such as voice mail, telephone and
other systems containing embedded microprocessors). As a result of our
assessment, we remediated our voice mail, telephone system, corporate
workstation computers and their servers, making them Year 2000 compliant.
We scrutinized and tested for Year 2000 compliance both the accounting
software created by third parties and internally developed time and expense
reporting and project accounting software applications.
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For such third-party software applications, we obtained written
confirmation that the software applications are Year 2000 compliant. The
results of the independent testing of our third party payroll application
(ADP) was completed by ADP. We believe that our internally developed
applications are already Year 2000 compliant.
Expenses to date, plus the expenses we believe will be associated with
these efforts in the future, are not expected to be material and we have
provided for the enhancements of these systems in our operating and capital
budgets for the current fiscal year. However, if compliance efforts of
which we are not currently aware are required, or if the cost of any
required updating, modification or replacement of any of our IT systems
exceeds our estimates, the Year 2000 issue could have a material adverse
effect on our business, financial condition and results of operations.
- - Effects of Third Party Compliance. In addition to our internal systems, we
rely on third party relationships in the conduct of our business. For
example, third party vendors handle the payroll function for us, and we
also rely on the services of the landlord at our facility,
telecommunication companies, banks, utilities and commercial airlines,
among others. We have prepared contingency plans to mitigate the negative
effects on us in the event the Year 2000 issue results in the
unavailability of any of these services. However, contingency plans
developed by us may not prevent a service interruption on the part of one
or more of our third party vendors or suppliers. In addition, the failure
on the part of the accounting systems of our clients due to the Year 2000
issue could result in a delay in the payment of invoices issued by us for
services and expenses. A material service interruption from a material
vendor or supplier or a failure of the accounting systems of a significant
number of our clients would have a material adverse effect on our business,
financial condition and results of operations.
We have written contingency plans to address failures in our major IT and non-IT
systems. These plans include identification of major systems, dependencies on
third parties, and resources and strategies necessary to restore operations or
work around failures. The failure of our accounting systems resulting from a
Year 2000 related power system outage, particularly at the end of a fiscal
period, could represent a reasonably likely worst case scenario. Our contingency
plan provides for an alternate site that is equipped with back-up power systems
that can support the mission critical areas.
The information concerning our Year 2000 compliance effort includes
"forward-looking statements." Such forward-looking statements involve known and
unknown risks, uncertainties, and other factors that may cause actual events or
costs to be materially different than indicated by such forward-looking
statements. These factors include, among others, unanticipated costs of
remediation and replacement of our Year 2000 compliance efforts, and the failure
of our material suppliers and other strategic relationships to ensure Year 2000
compliance. Any estimates and projections described have been developed by
management and are based on our best judgments together with the information
that is available to date. Due to the many uncertainties surrounding the Year
2000 issue, our stockholders are cautioned not to place undue reliance on such
forward-looking statements.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion about our market risk disclosures involves
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements. As of December 31, 1999, we did not
use derivative financial instruments for speculative or trading purposes.
Interest Rate Risk
We invest our cash in corporate money market accounts and collateralized
repurchase agreements. These securities are not subject to interest rate risk
and will not fall in value if market interest rates increase.
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15
Foreign Currency Exchange Risk
The majority of our sales are denominated in U.S. dollars and take place in
North America. We do not believe foreign currency exchange rates or the
introduction of the Euro will have an impact on us.
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PART II
OTHER INFORMATION
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
(d) Use of Proceeds
On May 22, 1998, we commenced an initial public offering of 2,500,000 shares of
common stock, par value $.01 per share, pursuant to our final prospectus dated
May 22, 1998. The Prospectus was contained in our Registration Statement on Form
S-1, which was declared effective by the Securities and Exchange Commission (SEC
File No. 333-48703) on May 21, 1998. Of the 2,500,000 shares of Common Stock
offered, 2,000,000 shares were offered and sold by us and 500,000 shares were
offered and sold by certain stockholders of ADS. As part of the IPO, certain
stockholders of ADS granted the several underwriters, for whom BancAmerica
Robertson Stephens, BT Alex Brown and Adams, Harkness & Hill, Inc., acted as
representatives, an overallotment option to purchase up to an additional 375,000
shares of Common Stock (the "Underwriters' Option"). The IPO closed on May 28,
1998.
On June 22, 1998, the Representatives, on behalf of the several underwriters,
purchased 375,000 shares of Common Stock from certain stockholders of ADS
pursuant to the exercise of the Underwriters' Option.
The aggregate offering price of the IPO to the public was $32,500,000 (exclusive
of the Underwriters' Option), with proceeds to us and the selling stockholders,
after deduction of underwriting discounts, of $24,180,000 (before deducting
offering expenses payable by us) and $6,045,000, respectively. The aggregate
offering price of the Underwriters' Option exercised was $4,875,000, with
proceeds to the selling stockholders, after deduction of the underwriting
discounts and commissions, of $4,533,750.
The aggregate amount of expenses incurred by us through March 31, 1999 in
connection with the issuance and distribution of the shares of Common Stock
offered and sold in the IPO were approximately $3,084,000, including $2,275,000
in underwriting discounts and approximately $809,000 in other expenses. No
further expenses have been incurred.
None of the expenses paid by us in connection with the IPO or the exercise of
the Underwriters' Option were paid, directly or indirectly, to directors,
officers, persons owning ten percent or more of the our equity securities, or
affiliates of ADS.
The net proceeds to us from the IPO, after deducting underwriting discounts and
commissions and other expenses, were approximately $23,371,000.
From May 21, 1998 through December 31, 1999, we have applied approximately
$1,225,000 of the net proceeds from the IPO to working capital. We invested the
balance of such net proceeds primarily in money market accounts.
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ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirement 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.
ATLANTIC DATA SERVICES, INC.
Date: February 11, 2000 By: /s/ Robert W. Howe
--------------------------------------
Robert W. Howe
Chairman and Chief Executive Officer
Date: February 11, 2000 By: /s/ Paul K. McGrath
--------------------------------------
Paul K. McGrath
Senior Vice President and Chief
Financial Officer (Principal Financial
and Accounting Officer)
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EXHIBIT INDEX
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Page
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27.1 - Financial Data Schedule 20
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