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, 1997
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 December 31, 1997, the registrant had outstanding
6,514,000 shares of Common Stock, par value $.01 per share.
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, 1997
and September 30, 1997 3
Condensed Consolidated Statements of Operations for the Three
Months Ended December 31, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended December 31, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
ADVANCED COMMUNICATION SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
December 31, September 30,
1997 1997
------------- ------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents..................... $251 $2,744
Contract receivables.......................... 22,713 17,643
Other receivables............................. 151 154
Income taxes receivable....................... 309 529
Prepaid expenses.............................. 349 296
Inventories................................... 614 544
------------- ------------
Total current assets........................ 24,387 21,910
------------- ------------
Property and equipment, net................... 4,792 1,261
Other assets:
Other related party receivables............... 118 86
Goodwill, net................................. 2,839 1,706
Software development costs, net............... 1,155 950
Deferred tax asset............................ 147 147
Other assets.................................. 201 152
------------- ------------
Total other non-current assets.............. 4,460 3,041
------------- ------------
Total assets............................... $33,639 $26,212
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt............. $1,964 $ -
Accounts payable.............................. 2,137 3,321
Accrued expenses and other liabilities........ 7,827 8,838
Billings in excess of revenue................. 243 225
------------- ------------
Total current liabilities..................... 12,171 12,384
Long-term debt................................ 2,512 -
Deferred income taxes......................... 1,141 -
------------- ------------
Total liabilities........................... 15,824 12,384
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, 9,450,000 shares issued
at December 31,1997 and 8,975,000
shares issued at September 30,1997.......... 95 90
Paid-in-capital............................... 17,693 14,409
Retained earnings............................. 276 (382)
Less - Treasury stock, 2,936,000 shares at
December 31, 1997 and 2,945,000 shares at
September 30, 1997.......................... (249) (289)
------------- ------------
Total stockholders' equity.................. 17,815 13,828
------------- ------------
Total liabilities and stockholders'equity.. $33,639 $26,212
============= ============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
ADVANCED COMMUNICATION SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Three months ended
December 31,
-------------------------
1997 1996
------------ ------------
(Unaudited)
Revenues..................................... $14,170 $9,066
Direct costs................................. 9,131 6,038
Indirect, general & administrative........... 3,933 2,442
------------ ------------
Income from operations....................... 1,106 586
Other expense................................ (78) (48)
------------ ------------
Income before taxes.......................... 1,028 538
Income tax expense........................... 374 -
------------ ------------
Net income................................... $654 $538
============ ============
Net income per share - basic................. $0.10
============
Net income per share - diluted............... $0.10
============
Weighted average shares outstanding - basic... 6,352
============
Weighted average shares outstanding - diluted. 6,480
============
Pro forma statement of operations data:
Net income as reported...................... $538
Pro forma income tax provision (Note 1)..... 210
------------
Pro forma net income........................ $328
============
Pro forma net income per share - basic...... $0.08
============
Pro forma net income per share - diluted.... $0.08
============
Pro forma weighted average shares
outstanding - basic...................... 4,246
Pro forma weighted average shares ============
outstanding -diluted..................... 4,346
============
Note 1 - Prior to June 25, 1997, the Company elected to be treated as an S
corporation and was not subject to federal and certain state income taxes. The
pro forma statement of operations data reflects taxes based on applicable rates
as if the Company has not elected S corporation status for the period presented.
The accompanying notes are an integral part of these
condensed consolidated financial statements.
ADVANCED COMMUNICATION SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Three months ended
December 31,
---------------------------
1997 1996
------------ ------------
(Unaudited)
Cash flow from operating activities:
Net income..................................... $654 $538
Adjustments to reconcile net income to net
cash provided by operating activities-
Depreciation and amortization............... 187 99
Changes in assets and liabilities:
Contract receivables..................... (1,661) (532)
Other receivables........................ 3 (68)
Income taxes receivable.................. 220 -
Prepaid expenses......................... (133) 31
Inventories.............................. (70) -
Other related party receivables.......... (32) 6
Other assets............................. (10) (193)
Accounts payable......................... (1,142) (1,580)
Accrued expenses......................... (2,023) 1,328
Billings in excess of revenue............ 18 35
------------ ------------
Net cash used in operating activities... (3,989) (336)
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment........ (235) (187)
Capitalized software development costs..... (239) -
------------ ------------
Net cash used in investing activities.... (474) (187)
------------ ------------
Cash flows from financing activities:
Net costs incurred in sale of common stock. (11) -
Net repayments from borrowings............. (20) -
Net proceeds under lines of credit......... 1,961 229
Sale of treasury stock..................... 40 19
------------ ------------
Net cash provided by financing activities 1,970 248
------------ ------------
Net decrease in cash....................... (2,493) (275)
Cash and cash equivalents, beginning of
period................................ 2,744 1,177
------------ ------------
Cash and cash equivalents, end of period... $251 $902
============ ============
Income taxes paid.......................... $119 $0
============ ============
Interest paid.............................. $78 $62
=========== ============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
ADVANCED COMMUNICATION SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
(Unaudited)
1. Basis of Presentation
The accompanying condensed consolidated balance sheet as of December 31, 1997
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, 1997 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. Provision for Income Taxes
Prior to June 25, 1997, the Company elected to be treated as an S corporation
and was not subject to federal and certain state income taxes. As a result, no
provision for federal or state income taxes has been included in the historical
statements of operations prior to June 25, 1997. On June 25, 1997, in connection
with the initial public offering the S corporation status was terminated,
thereby subjecting future income of the Company to federal and state income
taxes at the corporate level. Subsequent to June 25, 1997, the Company has
provided for federal and state income taxes in the statements of operations
based on the effective tax rate.
4. Pro Forma Net Income Per Share
Pro forma net income is based on the assumption that the Company's S corporation
status was terminated at the beginning of the year. Pro forma net income per
share has been computed by dividing pro forma net income by the pro forma
weighted average number of common shares outstanding during the period.
5. Recently Issued Financial Accounting Standards
The Company adopted the Financial Accounting Standards Board Statement of
Financial Accounting Standards (SFAS) No. 128, Earnings per Share, for the three
months ended December 31, 1997. SFAS No. 128 requires the Company to present
basic and diluted net income per share on the face of the income statement.
Basic net income per share is computed by dividing net income by the
weighted-average number of common shares outstanding for the period. Diluted net
income per share is computed by dividing net income by the sum of the
weighted-average number of common shares outstanding for the period end plus the
assumed exercise of all dilutive securities, such as stock options. Diluted net
income per share for the periods presented is not materially different for net
income per share reported under Accounting Principles Board Opinion No. 15.
6. Acquisition
Effective October 31, 1997, the Company acquired all of the outstanding shares
of common stock of Integrated Systems Control, Inc. ("ISC"), in exchange for
475,000 shares of the Company's common stock. The acquisition has been accounted
for as a purchase, and accordingly, the total purchase price has been allocated
among the acquired assets in accordance with the provisions of Accounting
Principles Board Opinion No. 16. The excess of the purchase price over the fair
market value of the assets acquired is being classified as intangible assets,
principally goodwill, and will be amortized over its estimated useful life of 30
years.
The following unaudited pro forma summary presents information as if the
acquisition had occurred at the beginning of each fiscal year. The pro forma
information does not necessarily reflect the actual results that would have
occurred nor is it necessarily indicative of future results of operations of the
combined companies.
(unaudited)
September 30,
1997 1996
--------------- --------------
(in thousands, except per share data)
Revenues................................ $64,374 $42,352
Net income.............................. $1,168 $1,433
Net income per share - basic............ $0.23 $0.31
Net income per share - diluted.......... $0.22 $0.30
7. Notes Payable and Long-Term Debt
Notes payable and long-term debt consisted of the following at December 31,
1997:
Balance at
December 31,
1997
----------------
Lines of credit: (in thousands)
Lines of credit with commercial banks, interest
ranges from prime to prime plus one-half
percent, maximum borrowing of $6.5 million,
secured by all assets, expiring in February
1998 and January 1999.............................. $2,595
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........................ 974
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........................................... 701
Note payable to bank, interest at 9.25%, due April
2000, secured by accounts receivable, equipment
and other assets.................................... 158
Note payable to bank, interest at 8.75%, due April
1999, secured by accounts receivable, equipment
and other assets.................................... 48
----------------
4,476
Less current maturities......................... (1,964)
----------------
$2,512
================
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 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 under
the "Risk Factors" section of the Company's final prospectus dated June 27,
1997, 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,
---------------------------------
1997 1996
------------ ------------
Revenues............................. 100.0 % 100.0 %
Direct costs......................... 64.4 66.6
Indirect, general and administrative. 27.8 26.9
------------ ------------
Income from operations............... 7.8 6.5
Other expense, net................... (0.6) (0.6)
------------ ------------
Income before taxes.................. 7.2 5.9
Provision for income taxes........... 2.6 -
------------ ------------
Net income........................... 4.6 % 5.9 %
============ ============
Pro forma tax provision.............. 2.3
Pro forma net income................. 3.6 %
============
Three Months Ended December 31, 1997 Compared to Three Months Ended
December 31, 1996
Revenues increased 56.3%, or $5.1 million, to $14.2 million for the three months
ended December 31, 1997, from $9.1 million for the same period in 1996. The
increase was principally due to an increase in revenues from communication
systems, primarily under contracts with the U.S. Navy, resulting from the
Company's acquisitions of RF Microsystems, Inc. and ISC.
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 $9.1 million for the three months ended December 31,
1997 from $6.0 million for the same period in 1996 due primarily to increased
revenues from the Company's acquisitions. Direct costs, expressed as a
percentage of revenues, decreased to 64.4% for the three months ended December
31, 1997 from 66.6% for the same period in 1996, primarily due to a decrease in
the proportion of revenues coming from systems integration services. These
services 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.
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 $3.9 million for the three months ended December 31, 1997 from $2.4 million
for the same period in 1996. The increase was due primarily to the higher level
of revenues discussed above. Indirect expenses, expressed as a percentage of
revenues, increased to 27.8% from 26.9% for the three months ended December 31,
1997, due to the higher proportion of communication systems revenues, which
typically have higher associated indirect expenses.
Income from operations increased 88.7%, to $1.1 million for the three months
ended December 31, 1997, from $586,000 for the same period in 1996, primarily
due to increased communication systems revenues from U.S. Navy contracts. As a
percentage of revenues, income from operations increased to 7.8% for the three
months ended December 31, 1997, from 6.5% for the comparable period in the prior
year, principally attributable to increased revenues from fixed price and
time-and-materials type contracts which typically carry higher margins.
Other expense, net, consists of interest expense, offset in part by interest
income from short-term deposits of cash. Interest expense was $89,000 and
$64,000 for the three month periods ended December 31, 1997 and 1996,
respectively. Interest income was $11,000 and $16,000 for the three months ended
December 31, 1997 and 1996, respectively.
The Company's effective tax rate was 36.4% for the three months ended December
31, 1997. The Company's pro forma effective tax rate was 39.0% for the three
months ended December 31, 1996.
Liquidity and Capital Resources
The Company used cash from operating activities of $4.0 million for the three
months ended December 31, 1997, resulting primarily from net income, increases
in contract receivables and decreases in accrued expenses and accounts payable.
The increase in contract receivables was due to increased revenues from the two
large U.S. Navy contracts awarded to the Company during fiscal 1997. For the
three months ended December 31, 1996, the Company used cash from operating
activities which amounted to $336,000, resulting primarily from net income,
increases in contract receivables, decreases in accounts payable and partially
offset by increases in accrued expenses.
The principal use of cash for investing activities was for the purchase of
computers and equipment. These purchases totaled $235,000 and $187,000 for the
three months ended December 31, 1997 and 1996, respectively. Further, the
Company invested $239,000 in software development costs for its latest Microsoft
Exchange-based product, ISALTS 2000, in the three months ended December 31,
1997.
The Company currently has a lines of credit with commercial banks under which it
can borrow up to a maximum of $6.5 million. As of December 31, 1997, $2.6
million was outstanding under these facilities. One of the Company's lines of
credit for $5.0 million is due to expire in February 1998. The Company is in the
process of replacing this facility.
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 11.2 Statement Regarding Computation of Pro
Forma Per Share Earnings
Exhibit 27.1 Financial Data Schedule
(b) (i) On November 17, 1997, the Company filed a current report
on Form 8-K, Item 2, containing a press release dated
November 6, 1997, reporting that the Company signed a
definitive agreement to acquire all the outstanding shares
of Integrated Systems Control, Inc. in exchange for 475,000
shared of its common stock.
(ii) On November 25, 1997, the Company filed a current
report on Form 8-K/A, containing the financial statements
and pro forma financial information required by Item 7 of
Form 8-K with respect to the September 12, 1997 acquisition
of all the outstanding shares of RF Microsystems, Inc. from
REMEC, Inc.
(iii) On December 5, 1997, the Company filed a current
report on Form 8-K, Item 5, reporting that on November 29,
1997, it completed the acquisition of Integrated Systems
Control, Inc. pursuant to a Stock Purchase Agreement dated
October 31, 1997.
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 17, 1998 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