UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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 September 30, 2005
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 000-30271
PARADIGM HOLDINGS, INC.
(Exact Name of Registrant as Specified in its Charter)
Wyoming 83-0211506
------- ----------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
2600 Tower Oaks Blvd. Suite 500,
Rockville, Maryland 20852
--------------------------------------------------
(Address of principal executive offices, zip code)
Registrants' telephone number, including area code: (301) 468-1200
--------------
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Shares of common stock outstanding on October 1, 2005 were 20,003,368.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION..................................................3
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)..................................3
CONSOLIDATED BALANCE SHEETS.......................................3
CONSOLIDATED STATEMENT OF OPERATIONS..............................5
CONSOLIDATED STATEMENT OF CASH FLOWS..............................7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS........................8
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..............................14
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.......22
ITEM 4: CONTROLS AND PROCEDURES..........................................22
PART II: OTHER INFORMATION....................................................23
ITEM 1: LEGAL PROCEEDINGS................................................23
ITEM 6: EXHIBITS.........................................................24
SIGNATURES....................................................................26
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
PARADIGM HOLDINGS, INC.
(FORMERLY PARADIGM SOLUTIONS CORPORATION)
CONSOLIDATED BALANCE SHEETS
9/30/05 12/31/04
(Unaudited)
- -------------------------------------- ------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,131,176 $ 179,389
Accounts receivable - contracts 13,318,851 11,478,901
Inventory, net -- 616,020
Prepaid expenses 153,251 4,239,770
Other current assets 529,287 89,890
------------ ------------
TOTAL CURRENT ASSETS 15,132,565 16,603,970
------------ ------------
PROPERTY AND EQUIPMENT, AT COST
Furniture and fixtures 153,546 124,845
Equipment 844,841 1,043,725
Software 542,932 221,965
Leasehold improvements 121,000 121,000
------------ ------------
TOTAL PROPERTY AND EQUIPMENT 1,662,319 1,511,535
Less: Accumulated depreciation (693,339) (504,348)
------------ ------------
NET PROPERTY AND EQUIPMENT 968,980 1,007,187
------------ ------------
OTHER ASSETS
Deposits 83,382 77,182
------------ ------------
TOTAL ASSETS $ 16,184,927 $ 17,688,339
============ ============
The accompanying Notes to Consolidated Financial Statements are an integral part
of these financial statements.
3
PARADIGM HOLDINGS, INC.
(FORMERLY PARADIGM SOLUTIONS CORPORATION)
CONSOLIDATED BALANCE SHEETS
9/30/05 12/31/04
(Unaudited)
- -------------------------------------- ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdraft $ 1,477,238 $ 1,046,160
Note payable - line of credit 3,182,712 3,220,072
Capital lease payable 11,476 --
Accounts payable and accrued expenses 4,432,705 5,476,967
Accrued salaries and related liabilities 2,022,913 1,812,545
Deferred income taxes 515,167 527,000
Deferred revenue 466,318 1,749,410
------------ ------------
TOTAL CURRENT LIABILITIES 12,108,529 13,832,154
------------ ------------
LONG-TERM LIABILITIES
Deferred rent 149,871 144,435
Capital lease payable, net of current portion 24,293 --
Deferred income taxes, net of current portion 842,979 1,356,000
------------ ------------
TOTAL LIABILITIES 13,125,672 15,332,589
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock - $.01 par value, 50,000,000
shares authorized, 20,003,368 shares
issued and outstanding 200,034 200,034
Retained earnings 2,859,221 2,155,716
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 3,059,255 2,355,750
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 16,184,927 $ 17,688,339
============ ============
The accompanying Notes to Consolidated Financial Statements are an integral part
of these financial statements.
4
PARADIGM HOLDINGS, INC.
(FORMERLY PARADIGM SOLUTIONS CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
------------------------- -------------------------
Three Months Ended Nine Months Ended
RESTATED RESTATED
Sept 30, Sept 30, Sept 30, Sept 30,
2005 2004 2005 2004
- ------------------------------------------------- ----------- ----------- ----------- -----------
Contract Revenue
Service contracts $10,524,664 $10,149,144 $31,691,621 $29,741,366
Repair and maintenance contracts 5,018,669 6,443,460 14,527,534 16,233,988
----------- ----------- ----------- -----------
Total contract revenue 15,543,333 16,592,604 46,219,155 45,975,354
----------- ----------- ----------- -----------
Cost of revenue
Service contracts 8,417,929 8,396,336 25,603,568 25,475,741
Repair and maintenance contracts 4,699,727 6,200,501 13,528,080 14,880,293
----------- ----------- ----------- -----------
Total cost of revenue 13,117,656 14,596,837 39,131,648 40,356,034
----------- ----------- ----------- -----------
Gross margin 2,425,677 1,995,767 7,087,507 5,619,320
Selling, general and administrative 1,996,307 2,216,522 5,876,367 6,106,561
----------- ----------- ----------- -----------
Income (loss) from operations 429,370 (220,755) 1,211,140 (487,241)
----------- ----------- ----------- -----------
Other (expense) income
Interest income 2,703 4,670 9,015 10,642
Other income 162 185 501 529
Interest expense (53,396) (13,969) (154,961) (46,052)
----------- ----------- ----------- -----------
Total other (expense) income (50,531) ( 9,114) (145,445) (34,881)
----------- ----------- ----------- -----------
Net income (loss) before income taxes $ 378,839 $ (229,869) $ 1,065,695 $ (522,123)
----------- ----------- ----------- -----------
Provision for income taxes 131,452 25,368 362,190 29,850
----------- ----------- ----------- -----------
Net income (loss) $ 247,387 $ (255,237) $ 703,505 $ (551,973)
----------- ----------- ----------- -----------
Basic and diluted net income (loss) per
common share $ 0.01 $ (0.01) $ 0.04 $ (0.03)
----------- ----------- ----------- -----------
Basic and diluted weighted average common shares
used to compute net income (loss) per share 20,003,368 17,500,000 20,003,368 17,500,000
----------- ----------- ----------- -----------
5
Pro-forma income tax provision (benefit) 131,452 (73,000) 362,190 (183,110)
----------- ----------- ----------- -----------
Pro-forma net income (loss) $ 247,387 $ (156,869) $ 703,505 $ (339,013)
----------- ----------- ----------- -----------
Pro-forma basic and diluted net income (loss) per
common share $ 0.01 $ (0.01) $ 0.04 $ (0.02)
----------- ----------- ----------- -----------
Pro-forma basic and diluted weighted average common
shares used to compute net income (loss) per share 20,003,368 17,500,000 20,003,368 17,500,000
----------- ----------- ----------- -----------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these financial statements.
6
PARADIGM HOLDINGS, INC.
(FORMERLY PARADIGM SOLUTIONS CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
RESTATED
Nine Months Ended September 30, 2005 2004
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 703,505 $ (551,973)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation 275,053 219,158
Loss on sale and disposal of assets 40,722 --
Deferred income taxes (524,854) --
(INCREASE) DECREASE IN
Accounts receivable - contracts (1,839,949) 4,284,897
Inventory, net (32,914) (42,617)
Prepaid expenses 4,086,518 1,576,900
Other current assets 10,603 (7,736)
Deposits (6,200) --
(DECREASE) INCREASE IN
Accounts payable and accrued expenses (1,044,262) (2,189,221)
Accrued salaries and related liabilities 210,367 1,090,521
Deferred revenue (1,283,092) 215,559
Deferred rent 5,436 14,711
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 600,933 4,610,199
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (337,808) (276,369)
Proceeds from sale of assets 300,000 --
------------ ------------
NET CASH USED BY INVESTING ACTIVITIES (37,808) (276,369)
CASH FLOWS FROM FINANCING ACTIVITIES
Bank overdraft 431,078 (695,980)
Payments on capital lease (5,056)
Proceeds from line of credit 32,289,074
Payments on line of credit (32,326,434) (3,000,000)
------------ ------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 388,662 (3,695,980)
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 951,787 637,850
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 179,389 17,891
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,131,176 $ 655,741
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Assets sold in exchange for a note receivable $ 750,000
============ ============
Cash paid for income taxes $ 212,205 $ 29,850
============ ============
Cash paid for interest $ 154,961 $ 46,053
============ ============
Equipment purchased under capital lease $ 40,825 $
============ ============
The accompanying Notes to Consolidated Financial Statements are an integral part
of these financial statements.
7
PARADIGM HOLDINGS, INC.
(FORMERLY PARADIGM SOLUTIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION
Paradigm Holdings, Inc. ("PDHO"), formerly Cheyenne Resources, Inc., was
incorporated in the state of Wyoming on November 17, 1970. On November 3, 2004,
Paradigm Holdings, Inc. entered into an Agreement and Plan of Reorganization
with Paradigm Solutions Merger Corp. ("Merger Sub"), Paradigm Solutions
Corporation ("PSC"), and the shareholders of PSC. Pursuant to the Agreement and
Plan of Reorganization, the Merger Sub was merged with and into PSC, which was
the surviving corporation, and became a wholly owned subsidiary of PDHO. In
consideration of the merger, the PSC shareholders exchanged 13,699, or 100%, of
their common stock for 17,500,000 shares of common stock of PDHO.
Although PDHO is the legal acquirer in the acquisition, and remains the
registrant with the SEC, under generally accepted accounting principles, the
acquisition was accounted for as a reverse acquisition, whereby PSC is
considered the "acquirer" of PDHO for financial reporting purposes. The
following factors were considered: 1) PSC's shareholders controlled more than
50% of the post acquisition combined entity, 2) management, after the
acquisition, is that of PSC, 3) PDHO had no assets and an immaterial amount of
liabilities as of the acquisition date, and 4) continuing operations of the
business are that of PSC.
Effective November 3, 2004, PDHO conducts business through its wholly owned
subsidiary Paradigm Solutions Corporation. On December 17, 2004, PSC formed a
wholly owned subsidiary, Paradigm Solutions International, Inc. ("PSI"). The
accompanying consolidated financial statements include the accounts of PDHO, PSC
and PSI (collectively, the "Company"). All significant inter-company balances
and transactions have been eliminated in consolidation.
The Company is a full-service information technology (IT) and business solutions
provider offering a wide range of technical support and management services to
improve the operational efficiency of government and industry. The Company
graduated from the Small Business Administration's 8(a) Business Development
program on October 13, 2004. Today, the Company possesses a portfolio of
flexible contract vehicle arrangements to expedite delivery of information
technology services and solutions to clients across the federal government.
The consolidated condensed financial statements included herein have been
prepared by Paradigm Holdings, Inc. (the Company) without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States have been condensed or omitted pursuant to such rules and
regulations; however, the Company believes that the disclosures are adequate to
make the information presented not misleading. The condensed financial
statements included herein should be read in conjunction with the financial
statements and the notes thereto included in the Company's 2004 Form 10-K.
In the opinion of the registrant, the accompanying financial statements contain
all adjustments (consisting of only normal recurring accruals) necessary to
present fairly the financial position of the Company at September 30, 2005 and
December 31, 2004, its results of operations for the quarter and nine months
ended September 30, 2005 and September 30, 2004, and its cash flows for the nine
months ended September 30, 2005 and September 30, 2004.
SUBSEQUENT EVENTS
On October 14, 2005, Paradigm Holdings, Inc., a Wyoming corporation ("Paradigm
Holdings"), Paradigm Solutions International, Inc., a Maryland corporation and
wholly-owned subsidiary of Paradigm Holdings ("PSI"), Blair Management Services,
Inc. t/d/b/a Blair Technology Group, a Pennsylvania corporation ("Blair") and
the shareholders of Blair (collectively, the "Shareholders") consummated a
merger transaction pursuant to the terms of that certain Merger Agreement (the
"Merger Agreement"), whereby Blair was merged with and into PSI. PSI is the
8
surviving corporation and will continue its corporate existence under the laws
of the State of Maryland as a wholly-owned subsidiary of Paradigm Holdings.
Pursuant to the Merger Agreement, the Shareholders exchanged all of the issued
and outstanding capital stock of Blair in exchange for (i) One Million Dollars
(US $1,000,000) and (ii) five hundred thousand shares of common stock, par value
$0.001 per share, of Paradigm Holdings (the "Shares"). Pursuant to the Merger
Agreement and an Escrow Agreement entered into by the parties, sixty thousand
(60,000) of the Shares will be held in escrow for a period of one (1) year from
the date of closing subject to the terms and conditions of the Merger Agreement.
In addition, under the terms of the Merger Agreement, Paradigm Holdings will
issue to the Shareholders up to an additional 350,000 shares of common stock of
Paradigm Holdings pursuant to an earn-out provision.
At the closing of the merger, PSI entered into employment agreements with
Messrs. Kristofco, Duffy and Fochler.
DESCRIPTION OF CRITICAL ACCOUNTING POLICIES
The preparation of these consolidated financial statements are prepared in
accordance with accounting principles generally accepted in the United States,
which require our management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting periods. On an ongoing basis,
management evaluates its estimates including those related to contingent
liabilities, revenue recognition, and other intangible assets. Management bases
its estimates on historical experience and on various other factors that are
believed to be reasonable at the time the estimates are made. Actual results may
differ from these estimates under different assumptions or conditions.
Our management routinely makes judgments and estimates about the effects of
matters that are inherently uncertain. As the number of variables and
assumptions affecting the probable future resolution of the uncertainties
increase, these judgments become even more subjective and complex. We have
identified certain accounting policies, described below, that are the most
important to the portrayal of our current financial condition and results of
operations.
USE OF ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenue from time and materials contracts is recognized as costs are incurred at
amounts represented by the agreed-upon billing amounts.
Fixed price labor hour and level of effort contracts involve defined numbers of
hours or categories of personnel. Revenue on fixed unit price contracts, where
specific units of output under service agreements are delivered, is recognized
as units are delivered based on the specific price per unit. Fixed price
maintenance contracts are recognized as revenue on a pro-rata basis over the
life of the contract.
In certain arrangements, the Corporation enters into contracts that include the
delivery of a combination of two or more of its service offerings. Such
contracts are divided into separate units of accounting and revenue is
recognized separately, and in accordance with, the Corporation's revenue
recognition policy for each element.
Software revenue recognition is in accordance with AICPA Statement of Position
97-2. Since the Company has not established VSOE, recognition of revenue from
the sale of licenses is over the term of the contract.
9
Revenue from cost-type contracts is recognized as costs are incurred on the
basis of direct costs plus allowable operating costs and expenses and an
allocable portion of the fixed fee.
The Company is subject to audits from federal government agencies. The Company
has reviewed its contracts and determined there is no material risk of financial
adjustments due to government audit. To date, we have not had any adjustments as
a result of a government audit of our contracts.
Revenue recognized on contracts for which billings have not yet been presented
to customers is included in the Accounts Receivable - contracts classification
on the accompanying Balance Sheets.
Deferred revenue relates to contracts for which customers pay in advance for
services to be performed at a future date. The Corporation recognizes deferred
revenue attributable to our maintenance contracts over the related service
periods, which run through 2005. Revenue related to our OpsPlanner offering,
including consulting, software subscriptions and technical support, is deferred
and recognized over the appropriate contract service period. These payments are
nonrefundable.
COST OF REVENUE
Cost of revenue for service contracts consist primarily of labor, consultant,
subcontract, materials, travel expenses and an allocation of indirect costs
attributable to the performance of the contract.
Cost of revenue for repair and maintenance contracts consist primarily of labor,
consultant, subcontract, materials, travel expenses and an allocation of
indirect costs attributable to the performance of the contract.
MAJOR CUSTOMERS
During the nine months ended September 30, 2005 and 2004, the Company's revenues
generated from five major customers, totaled 98% and 99% of total revenue,
respectively. The Company's accounts receivable related to these five major
customers were 98% and 99% of total accounts receivable at the end of the
respective periods. The Company defines major customer as a government agency or
individual commercial customer.
INVENTORY
Inventory consists of replacement printer parts and is stated at the lower of
cost or market using the FIFO method. As of September 30, 2005, the Company had
no inventory remaining.
INCOME TAXES
Prior to November 5, 2004, Paradigm Solutions Corporation was treated as an S
Corporation, and therefore, did not pay Federal and state corporate income taxes
since the tax attributes of the entity were reported on the stockholders' tax
returns. Paradigm Solutions Corporation filed its income tax returns on the cash
basis of accounting, whereby revenue was recognized when received and expenses
were recognized when paid. Effective November 5, 2004, Paradigm Solutions
Corporation revoked its S-Corporation status and therefore is subject to income
taxes at the corporate level.
Deferred income taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their financial
reporting amounts at each year end based on enacted tax laws and statutory tax
rates applicable to the periods in which the differences are expected to affect
taxable earnings. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount more likely than not to be realized.
PRO FORMA FINANCIAL DATA:
The unaudited pro forma information for the periods set forth below is based on
the operations of Paradigm Solutions Corporation and is prepared as if the
Corporation had been a C Corporation at the beginning of each
10
period. The effective tax rate of 38.6% reflects federal taxes of 34% and state
taxes, net of Federal benefit. There are no significant permanent differences in
any of the periods presented.
Three Months Ended Nine Months Ended
STATEMENT OF OPERATION DATA: Restated Restated
(in thousands, except per share data) Sept 30, 2005 Sept 30, 2004 Sept 30, 2005 Sept 30, 2004
------------- ------------- ------------- -------------
Net income (loss) before income taxes 379 (230) 1,066 (522)
Income tax provision 132 (73) 362 (183)
(benefit)
Net income 247 (157) 704 (339)
(loss)
Basic and diluted net income (loss) per common $ 0.01 $ (0.01) $ 0.04 $ (0.02)
share
Weighted average common shares outstanding 20,003 17,500 20,003 17,500
2. COMPENSATION AND EMPLOYMENT AGREEMENTS
On September 28, 2005, Mr. Sawchak and Paradigm Holdings entered into an
Employment Agreement with an effective date of September 19, 2005. The agreement
has a term of two years and is renewable for additional terms of one (1) year
unless either party provides the other with notice at least ninety (90) days
prior to the date the employment term would otherwise renew. Paradigm Holdings
can terminate the agreement by providing at least thirty (30) days' advance
written notice to Mr. Sawchak. In the event that Paradigm Holdings terminates
the agreement, other than in connection with a change of control of Paradigm
Holdings and other than for cause, Paradigm Holdings is obligated to continue to
pay Mr. Sawchak's base salary and benefits for a period that is the greater of:
(i) the remainder of the initial employment term or (ii) twelve (12) months from
the date of termination. In addition, in the event Paradigm Holdings terminates
the agreement, other than in connection with a change of control or for cause,
any and all options granted to Mr. Sawchak will become automatically and
immediately vested and exercisable. Under the agreement, Mr. Sawchak receives
$200,000 in annual salary and is entitled to participate in any health
insurance, accident insurance, hospitalization insurance, life insurance,
pension, or any other similar plan or benefit provided by Paradigm Holdings to
its executives or employees generally, including any stock option plan.
Effective April 1, 2005, Samar Ghadry and Paradigm Solutions Corporation, a
wholly-owned subsidiary of Paradigm Holdings, entered into a Letter Agreement
pursuant to which Ms. Ghadry and Paradigm Solutions Corporation agreed and
acknowledged that Ms. Ghadry's employment with Paradigm Solutions Corporation
ended effective April 1, 2005. Pursuant to the terms of the Letter Agreement,
Paradigm Solutions Corporation agreed to pay Ms. Ghadry severance pay in an
amount equal to Ms. Ghadry's base pay for nine months in accordance with
Paradigm Solutions Corporation's normal payroll practices. Paradigm Solutions
Corporation agreed to pay Ms. Ghadry a bonus for the first quarter of 2005 equal
to $20,250. In addition, Paradigm Holdings agreed to register 1,575,000 shares
of common stock owned by Ms. Ghadry. Further, Ms. Ghadry agreed that she will
not, except with the prior written approval of Paradigm Holdings, engage in a
disposition with respect to 100% of these shares until the earlier to occur of:
(i) the date of the closing of a financing through the sale of debt or equity
securities in which Paradigm Holdings receives in one or a series of
transactions gross proceeds in an amount equal to at least $3 million or (ii)
September 30, 2005. Ms. Ghadry also agreed that, when she is able to sell her
shares of common stock, that she will not sell more than 2,000 shares in any
single business day; however, in the event the average daily volume of the
shares of Paradigm Holdings' common stock exceeds 10,000 shares for a period of
5 consecutive business days, Ms. Ghadry may sell up to an aggregate of 4,000
shares per day, commencing on the first business day thereafter and continuing
so long as the average 5-day daily volume continues to exceed 10,000 shares. Ms.
Ghadry and Paradigm Holdings agreed that, to the extent allowed by law and with
the express written approval of the President and Chief Operating Officer of
Paradigm Holdings, Ms. Ghadry may sell her shares to a bona fide purchaser in a
private placement provided such purchaser agrees to be subject to the terms of
the Letter Agreement.
11
3. CONTRACT STATUS
The Company has authorized but uncompleted contracts on which work is in
progress at September 30, 2005 approximately, as follows:
Total contract prices of initial contract awards, including
exercised options and approved change orders (modifications) $ 184,193,000
Completed to date (157,814,000)
- -------------------------------------------------------------------------------
AUTHORIZED BACKLOG $ 26,379,000
=============
The foregoing contracts contain unfunded and unexercised options not reflected
in the above amounts of approximately $75,409,000.
4. NOTE PAYABLE - LINE OF CREDIT
On July 28, 2005, the Company entered into a two year Loan and Security
Agreement with Chevy Chase Bank that provides for a revolving line of credit
facility of up to $9 million. The agreement became effective August 4, 2005. The
revolving line of credit will be used to borrow revolving loans for working
capital and general corporate purposes.
The revolving loans under the Chevy Chase Bank Loan and Security Agreement are
secured by a first priority lien on substantially all of the assets of the
Company, excluding intellectual property and real estate. Under the agreement,
the line is due on demand and interest is payable monthly depending on the
Corporation's leverage ratio at the LIBOR rate plus the applicable spread which
ranges from 2.25% to 3.00%. Under the terms of the agreement, the Corporation
may borrow up to the lesser of $9,000,000 or 90% of eligible U.S. Government
receivables plus 80% of eligible commercial receivables plus 75% of the
aggregate amount of billable but unbilled accounts to a maximum of $3,000,000.
The Loan and Security Agreement requires that the Company maintain the following
covenants and ratios: (1) minimum tangible net worth of $2,000,000 plus 50% of
Company's net income for each fiscal year beginning with fiscal year ending
December 31, 2005; (2) debt coverage ratio of not less than 1.500 to 1.000; (3)
maximum leverage ratio of 5.50 to 1.00, which will be decreased to 5.25 to 1.00
by December 31, 2005 and 4.00 to 1.00 by December 31, 2006. All working capital,
as it relates to these covenants and ratio requirements will be evaluated as of
quarter-end. The Company was in compliance with all covenant requirements as of
September 30, 2005.
The Loan and Security Agreement contains events of default that include among
other things, non-payment of principal, interest or fees, violation of
covenants, inaccuracy of representations and warranties, cross default to
certain other indebtedness, bankruptcy and insolvency events, change of control
and material judgments. Upon occurrence of an event of default, Chevy Chase Bank
is entitled to, among other things, accelerate all obligations of the Company
and sell the Company's assets to satisfy the Company's obligations under the
Loan and Security Agreement.
The Company terminated its line of credit agreement with SunTrust Bank effective
September 1, 2005.
5. RESTATEMENTS
The Company has restated certain financial statements to resolve the following
items:
o Break-out expenses previously reported as "Other Operating Costs and
Expenses" into Cost of Revenue and Selling, General and
Administrative expenses. Although there is no impact on total
revenue, net income or earnings-per-share, the gross margin for each
year reported has changed.
o For the nine months ended September 30, 2004, the Company restated
Revenue and Cost of Revenue balances for our federal maintenance
contracts and federal service contracts. The adjustment had no
impact on total revenue, net income or earnings-per-share.
12
o The Company restated the results of the first, second and third
quarters of 2004, as reported in the Company's SB-2 filing on
February 11, 2005, to recognize revenue in the proper periods on the
Department of Treasury LTMCC contract.
13
PARADIGM HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This quarterly report contains forward-looking statements. These statements
relate to future events or our future financial performance. In some cases, you
can identify forward-looking statements by terminology such as "may," "will,"
"should," "could," "forecasts," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential," "see," "target," "projects," "position,"
or "continue" or the negative of such terms and other comparable terminology.
These statements reflect our current expectations, estimates, and projections.
These statements are not guarantees of future performance and involve risks,
uncertainties, and assumptions that are difficult to predict. Actual events or
results may differ materially from what is expressed or forecasted in these
forward-looking statements. We disclaim any intention or obligation to update
any forward-looking statement.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Paradigm Holdings Inc. is an information technology and business solutions
provider specializing in information technology infrastructure and software
engineering support services, business continuity planning and emergency
management services and software to government and commercial clients. Paradigm
Holdings, Inc. is comprised of two operating subsidiaries, Paradigm Solutions
Corporation and Paradigm Solutions International.
Paradigm Solutions Corporation is the federal subsidiary whose core competencies
are in mission critical systems that focus on key federal agencies such as
Justice, Treasury and Homeland Security. Paradigm Solutions International is the
newly formed commercial subsidiary whose core competencies are developing and
delivering continuity and information technology security/risk management
consulting for both commercial businesses and government agencies. Our
innovations in business continuity development, planning, and information
technology security have positioned us to become a leader in the fragmented
Business Continuity and Continuity of Operations industry.
We derive substantially all of our revenues from fees for information technology
solutions and services. We generate these fees from contracts with various
payment arrangements, including time and materials contracts, fixed-price
contracts and cost-reimbursable contracts. We typically issue invoices monthly
to manage outstanding accounts receivable balances. We recognize revenues on
time and materials contracts as the services are provided. We recognize revenues
on fixed-price contracts using the percentage of completion method as services
are performed over the life of the contract, based on the costs we incur in
relation to the total estimated costs. We recognize and make provisions for any
anticipated contract losses at the time we know and can estimate them.
Fixed-price contracts are attractive to clients and, while subject to increased
risks, provide opportunities for increased margins. We recognize revenues on
cost-reimbursable contracts as services are provided. These revenues are equal
to the costs incurred in providing these services plus a proportionate amount of
the fee earned. We have historically recovered all of our costs on
cost-reimbursable contracts, which means we have lower risk and our margins are
lower on these contracts. For the nine months ended September 30, 2005, our
business was comprised of 58% fixed price, 27% time and material, and 15%
cost-reimbursable contracts.
Our historical revenue growth is attributable to various factors, including an
increase in the size and number of projects for existing and new clients. During
the nine months ended September 30, 2005, contracts with the federal government
and contracts with prime contractors of the federal government accounted for
approximately 99% of our revenues. During that same period, our five largest
clients generated approximately 98% of our revenues. In most of these
engagements, we retain full responsibility for the end-client relationship and
direct and manage the activities of our contract staff.
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Paradigm Solutions Corporation utilized the Small Business Administration (SBA)
8(a) Business Development Program to access the federal marketplace starting in
October of 1995 and graduated from the program in October of 2004. The term
"graduate" is used to refer to a Participant's exit from the 8(a) BD Program at
the expiration of the Participant's term, thus the business is no longer
considered 8(a). This program, allowed the business to build a base of business
with various federal civilian agencies. The backlog of federal business under
this program will continue until the contracts end, after which we will pursue
several avenues to maintain the business we believe is important to our strategy
in this marketplace. This includes either migrating this work to other
government contract vehicles, if allowed by the customer, or taking on a
subcontractor role when the business comes up for re-compete and teaming with a
SBA business who would be the prime. SBA 8(a) contracts which provide 8%, 64%
and 28% of our current SBA 8(a) revenues will come up for renewal in 2005, 2006
and 2007, respectively.
Due to our graduation from the Small Business Administration 8(a) Business
Development Program, we are no longer classified as a small disadvantaged
business by the federal government. Accordingly, we will no longer have access
to contract vehicles set aside for 8(a) businesses. As of October 2004, Paradigm
Solutions Corporation began competing solely in the open marketplace for federal
business. We have a history of winning contracts in "full and open"
competitions, including contracts at the Department of Housing and Urban
Development, Department of Treasury and the Department of Commerce. Paradigm
Solutions will continue to aggressively pursue opportunities in the federal and
commercial marketplace. We believe we can mitigate the impact of transitioning
from the 8(a) program through the acquisition of new contract vehicles and the
expansion of work with current customers.
Our most significant expense is direct costs, which consist primarily of direct
labor, subcontractors, materials, equipment, travel and an allocation of
indirect costs including fringe. The number of subcontract and consulting
employees assigned to a project will vary according to the size, complexity,
duration and demands of the project.
Selling, general and administrative expenses consist primarily of costs
associated with our executive management, finance and administrative groups,
human resources, marketing and business development resources, employee
training, occupancy costs, R&D expenses, depreciation and amortization, travel,
and all other corporate costs.
Other income and expense consists primarily of interest income earned on our
cash, interest payable on our revolving credit facility, cash equivalents and
marketable securities.
Description Of Critical Accounting Policies
Management's Discussion and Analysis of Financial Condition and Results of
Operations discuss our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these consolidated financial
statements requires management to make estimates and judgments that affect the
reported amount of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the reporting period. On an
ongoing basis, management evaluates its estimates including those related to
contingent liabilities, revenue recognition, and other intangible assets.
Management bases its estimates on historical experience and on various other
factors that are believed to be reasonable at the time the estimates are made.
Actual results may differ from these estimates under different assumptions or
conditions. Management believes that our critical accounting policies which
require more significant judgments and estimates in the preparation of our
consolidated financial statements are revenue recognition, costs of revenues,
and property and equipment.
Revenue Recognition
Services are performed under contracts that may be categorized into three
primary types: time and materials, cost-plus reimbursement and firm fixed price.
Revenue for time and materials contracts is recognized as labor is incurred at
fixed hourly rates, which are negotiated with the customer, plus the cost of any
allowable material costs and out-of-pocket expenses. Time and materials
contracts are typically more profitable than cost-plus contracts because of our
ability to negotiate rates and manage costs on those contracts. Revenue is
recognized under cost-plus contracts on the basis of direct and operating costs
and expenses incurred plus a negotiated profit calculated as a percentage of
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costs or as performance-based award fee. Cost-plus type contracts provide
relatively less risk than other contract types because we are reimbursed for all
direct costs and certain operating costs and expenses, such as overhead and
general and administrative expenses, and are paid a fee for work performed. For
certain cost plus type contracts, which are referred to as cost-plus award fee
type contracts, we recognize the expected fee to be awarded by the customer at
the time such fee can be reasonably estimated, based on factors such as our
prior award experience, communications with the customer regarding our
performance, including any interim performance evaluations rendered by the
customer or our average historical award fee rate for the company. The Company
has two basic categories of fixed price contract: fixed unit price and fixed
price-level of effort. Revenues on fixed unit price contracts, where specific
units of output under service agreements are delivered, are recognized as units
are delivered based on the specific price per unit. Revenue on fixed price
maintenance contracts is recognized on a pro-rata basis over the length of the
service period. Revenue for the fixed price level of effort contacts is
recognized based upon the number of units of labor actually delivered multiplied
by the agreed rate for each unit of labor.
Contract revenue recognition inherently involves estimation. Examples of such
estimates include the level of effort needed to accomplish the tasks under the
contract, the cost of those efforts, and a continual assessment of our progress
toward the completion of the contract. From time to time, circumstances may
arise which require us to revise our estimated total revenue or costs.
Typically, these revisions relate to contractual changes. To the extent that a
revised estimate affects contract revenue or profit previously recognized, we
record the cumulative effect of the revision in the period in which it becomes
known. In addition, the full amount of an anticipated loss on any type of
contract is recognized in the period in which it becomes known. We may be
exposed to variations in profitability if we encounter variances from estimated
fees earned under cost plus-award fee contracts and estimated costs under fixed
price contracts.
Costs Of Revenues
Our costs are categorized as direct or selling, general & administrative
expenses. Direct costs are those that can be identified with and allocated to
specific contracts and tasks. They include labor, subcontractor costs,
consultant fees, travel expenses, materials and an allocation of indirect costs.
Indirect costs consist primarily of fringe benefits (vacation time,
medical/dental, 401K plan matching contribution, tuition assistance, employee
welfare, worker's compensation and other benefits), intermediate management and
certain other non-direct costs which are necessary to provide direct labor.
Indirect costs, to the extent that they are allowable, are allocated to
contracts and tasks using appropriate government-approved methodologies. Costs
determined to be unallowable under the Federal Acquisition Regulations cannot be
allocated to projects. Our principal unallowable costs are interest expense and
certain general and administrative expenses. A key element to be successful in
our business is our ability to control indirect and unallowable costs, enabling
us to profitably execute our existing contracts and successfully bid for new
contracts. Costs of revenues are considered to be a critical accounting policy
because of the direct relationship to revenue recognized.
Property And Equipment
Property and equipment are recorded at the original cost to the corporation and
are depreciated using straight-line methods over established useful lives of
three to seven years. Software is recorded at original cost and depreciated on
the straight-line basis over three years. Leasehold improvements are recorded at
the original cost and are depreciated on the straight-line over the life of the
lease.
Recent Accounting Pronouncements
New accounting pronouncements that have a current or future potential impact on
our financial statements are as follows:
Summary of Statement No. 123 (Revised 2004)
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Share-Based Payment
This Statement is a revision of FASB Statement No. 123, Accounting for
Stock-Based Compensation. This Statement supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees, and its related implementation
guidance.
Scope of this Statement
This Statement establishes standards for the accounting for transactions in
which an entity exchanges its equity instruments for goods or services. It also
addresses transactions in which an entity incurs liabilities in exchange for
goods or services that are based on the fair value of the entity's equity
instruments or that may be settled by the issuance of those equity instruments.
This Statement focuses primarily on accounting for transactions in which an
entity obtains employee services in share-based payment transactions. This
Statement does not change the accounting guidance for share-based payment
transactions with parties other than employees provided in Statement 123 as
originally issued and EITF Issue No. 96-18, "Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services." This Statement does not address the accounting for
employee share ownership plans, which are subject to AICPA Statement of Position
93-6, Employers' Accounting for Employee Stock Ownership Plans. The Company does
not believe that FASB Statement No. 123R will have a material effect on its
financial statements.
Results of Operations
The following discussion and analysis should be read in conjunction with our
Condensed Consolidated Financial Statements and related notes included elsewhere
in this Quarterly Report on Form 10-Q and with our Consolidated Financial
Statements and the information under the heading "Management's Discussion and
Analysis of Financial Condition and Results of Operations," which are included
in our Annual Report on Form 10-K for the fiscal year ended December 31, 2004.
The following table sets forth certain items from our consolidated statements of
operations for the periods indicated.
Three Months Ended September 30, Nine Months Ended September 30,
(Dollars in Restated Restated Restated Restated
thousands) 2005 2004 2005 2004 2005 2004 2005 2004
------- ------- ------ ------- ------- ------- ------ -------
Revenue $15,543 $16,593 100.0% 100.0% $46,219 $45,975 100.0% 100.0%
Cost of 13,118 14,597 84.4 88.0 39,132 40,356 84.7 87.8
Revenue ------- ------- ------ ------ ------- ------- ------ ------
Gross 2,425 1,996 15.6 12.0 7,087 5,619 15.3 12.2
Margin
Selling, General & Administrative 1,996 2,217 12.8 13.3 5,876 6,106 12.7 13.3
------- ------- ------ ------ ------- ------- ------ ------
Income (loss) from 429 (221) 2.8 (1.3) 1,211 (487) 2.6 (1.1)
Operations
Other (expense) (51) (9) (0.3) (0.0) (145) (35) (0.3) (0.0)
income
Income tax (benefit)provision 131 (73)* 0.9 (0.4) 362 (183)* 0.8 (0.4)
------- ------- ------ ------ ------- ------- ------ ------
Net Income (loss) $247 ($157)* 1.6% (0.9%) $704 ($339)* 1.5% (0.7%)
* proforma
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The table below sets forth, for the periods indicated the service mix in revenue
with related percentages of total revenue.
Three Months Ended September 30, Nine Months Ended September 30,
(Dollars in thousands) Restated Restated Restated Restated
2005 2004 2005 2004 2005 2004 2005 2004
------- ------- ------ ------ ------- ------- ------ ------
Federal Service Contracts $10,366 $10,149 66.7% 61.2% $31,140 $29,731 67.4% 64.7%
Federal Repair & Maintenance 5,019 6,444 32.3 38.8 14,528 16,234 31.4 35.3
Contracts
Commercial Contracts 158 0 1.0 0.0 551 10 1.2 0.0
------- ------- ------ ------ ------- ------- ------ ------
Total $15,543 $16,593 100.0% 100.0% $46,219 $45,975 100.0% 100.0%
Revenue
Our revenues and operating results may be subject to significant variation from
quarter to quarter depending on a number of factors, including the progress of
contracts, revenues earned on contracts, the number of billable days in a
quarter, the timing of the pass-through of other direct costs, the commencement
and completion of contracts during any particular quarter, the schedule of the
government agencies for awarding contracts, the term of each contract that we
have been awarded and general economic conditions. Because a significant portion
of our expenses, such as personnel and facilities costs, are fixed in the short
term, successful contract performance and variation in the volume of activity as
well as in the number of contracts commenced or completed during any quarter may
cause significant variations in operating results from quarter to quarter.
The Federal Government's fiscal year ends September 30. If a budget for the next
fiscal year has not been approved by that date, our clients may have to suspend
engagements that we are working on until a budget has been approved. Such
suspensions may cause us to realize lower revenues in the fourth quarter of the
year. Further, a change in presidential administrations and in senior government
officials may negatively affect the rate at which the Federal Government
purchases technology.
As a result of the factors above, period-to-period comparisons of our revenues
and operating results may not be meaningful. You should not rely on these
comparisons as indicators of future performance as no assurances can be given
that quarterly results will not fluctuate, causing a possible material adverse
effect on our operating results and financial condition.
Comparison of the Three Months Ended September 30, 2005 and 2004
Revenue. For the three months ended September 30, 2005, our revenues decreased
9.4% to $15.5 million from $16.6 million for the same period in 2004. The
decrease in revenue was due to hardware and software purchases related to a
system upgrade during the three months ended September 30, 2004 by our federal
repair and maintenance customer. We did not experience, nor do we expect,
additional system upgrade activity during the fiscal year ended December 31,
2005 for our federal repair and maintenance customer. The decrease in federal
repair and maintenance revenue was partially off-set by slightly higher revenue
from our federal service contracts business of $0.2 million and commercial
business revenue of $0.2 million.
Cost of Revenue. Cost of revenue includes direct labor, materials, subcontracts
and an allocation of indirect costs. Generally, changes in cost of revenue are
correlated to changes in revenue as resources are consumed in the production of
that revenue. For the three months ended September 30, 2005, cost of revenue
decreased 10.0% to $13.1 million from $14.6 million for the same period in 2004.
As a percentage of revenue, cost of revenue was 84.4% for the three months ended
September 30, 2005 as compared to 88.0% for the three months ended September 30,
2004. The decrease in cost of revenue was primarily attributable to the decrease
in federal repair and maintenance revenue related to system upgrades performed
in 2004.
Gross Margin. For the three months ended September 30, 2005, gross margin
increased 21.5% to $2.4 million from $2.0 million for the same period in 2004.
Gross margin as a percentage of revenues increased to 15.6% for the three
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months ended September 30, 2005 from 12.0% for the three months ended September
30, 2004. Gross margin, as it relates to our federal service contract business,
increased 20.2% to $2.1 million from $1.8 million for the same period in 2004.
The increase was primarily due to lower operating expenses on our fixed price
federal service contracts and a slight increase in overall federal service
revenue. Gross margin, as it relates to our federal maintenance contracts,
increased 31.3% to $0.3 million from $0.2 million for the same period in 2004.
The increase in gross margin is primarily attributable to lower expenses as we
have outsourced a portion of our maintenance efforts to a third party vendor
effective July 1, 2005.
Selling, General & Administrative Expenses. For the three months ended September
30, 2005, selling, general and administrative expenses decreased by 10.0% to
$2.0 million from $2.2 million for the same period in 2004. As a percentage of
revenue, selling, general and administrative expenses decreased to 12.8% from
13.3% for the same period in 2004. The decrease is primarily attributable to
$0.2 million in expenses incurred during the three months ended September 30,
2004 related to the acquisition of Cheyenne Resources.
Net Income. For the three months ended September 30, 2005, net income increased
to $0.2 million from pro-forma ($0.2) million for the same period in 2004. This
increase was due to the increases in gross margin and decreased selling, general
and administrative expenses as discussed above.
Comparison of the Nine Months Ended September 30, 2005 and 2004
Revenue. For the nine months ended September 30, 2005, our revenues increased
0.5% to $46.2 million from $46.0 million for the same period in 2004. This
increase is due to additional task order work from our Housing and Urban
Development client of $1.5 million, new revenue from sales of our OpsPlanner
software and services of $0.6 million, which was partially off-set by a decrease
of $1.7 million in our maintenance and repair business with our Internal Revenue
Service client.
Cost of Revenue. Cost of revenue includes direct labor, materials, subcontracts
and an allocation of indirect costs. Generally, changes in cost of revenue are
correlated to changes in revenue as resources are consumed in the production of
that revenue. For the nine months ended September 30, 2005, cost of revenue
decreased 3.0% to $39.1 million from $40.4 million for the same period in 2004.
As a percentage of revenue, cost of revenue was 84.7% for the nine months ended
September 30, 2005 as compared to 87.8% for the nine months ended September 30,
2004. Cost as a percentage of revenue decreased due to lower operating expenses
on our fixed price federal service contracts and an increase in our commercial
software and services revenue, which has higher gross margins than our federal
business. The decreases in cost as a percentage of revenue attributable to our
federal service contracts and commercial business were partially off-set by
incremental hardware expense on our federal service and repair and maintenance
business.
Gross Margin. For the nine months ended September 30, 2005, gross margin
increased 26.1% to $7.1 million from $5.6 million for the same period in 2004.
Gross margin as a percentage of revenues increased to 15.3% for the nine months
ended September 30, 2005 from 12.2% for the nine months ended September 30,
2004. Gross Margin, as it relates to our federal service contracts, increased
42.7% to $6.1 million from $4.3 million for the same period in 2004. This
increase is due to lower operating expenses on our fixed price federal service
contracts and an increase in our total federal services revenue. Gross Margin,
as it relates to our federal maintenance contracts, decreased 26.2% to $1.0
million from $1.4 million for the same period in 2004. The decrease in gross
margin is due to incremental hardware expense during the quarters ended March 31
and June 30, 2005 and the overall decrease in federal maintenance contract
revenue.
Selling, General & Administrative Expenses. For the nine months ended September
30, 2005, selling, general and administrative expenses decreased 3.8% to $5.9
million from $6.1 million for the same period in 2004. As a percentage of
revenue, selling, general and administrative expenses decreased to 12.7% for the
nine months ended September 30, 2005 from 13.3% for the same period in 2004. The
decrease is primarily attributable to $0.2 million in expenses incurred during
the three months ended September 30, 2004 related to the acquisition of Cheyenne
Resources.
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Net Income. For the nine months ended September 30, 2005, net income increased
to $0.7 million from pro-forma ($0.3) million for the same period in 2004. This
increase was due to the increase in gross margin and decrease in selling,
general and administrative expenses as discussed above.
Liquidity and Capital Resources
Our primary liquidity needs are financing the cost of operations, capital
expenditures and servicing our debt. Our sources of liquidity are our existing
cash, cash generated from operations, and cash available from borrowings under
our revolving credit facility. We have historically financed our operations
through our existing cash, cash generated from operations and cash available
from borrowings under our revolving credit facility. Based upon the current
level of operations, we believe that cash flow from operations, together with
borrowings available from our existing business, are adequate to meet our future
liquidity needs for the next twelve months.
For the nine months ended September 30, 2005 the Company generated $1.0 million
in cash and cash equivalents versus $0.6 million for the same period in 2004.
For the nine months ended September 30, 2005, net cash provided by operations
was $0.6 million compared to $4.6 million for the same period in 2004. The
lesser amount of net cash from operations of $4.0 million was primarily due to
the increase in accounts receivable mainly related to our Department of Treasury
client, partially offset by a reduction in prepaid expenses mainly related to
our IRS LTMCC customer contract and lesser decreases in deferred revenues and
accounts payable as compared to the same period in 2004.
Accounts receivable increased by $1.8 million for the nine months ended
September 30, 2005 versus a decrease of $4.3 million for the same period in
2004. The increase in 2005 is primarily attributable to the timing of invoice
payments related to our Department of Treasury and Homeland Security client. The
Company believes accounts receivables balances for both customers will return to
normal levels during the three months ended December 31, 2005. The decrease in
accounts receivable for 2004 was attributable to increased concentration on the
collection of receivables during the three months ended September 30, 2004.
Prepaid expenses, which are primarily associated with our IRS LTMCC contract,
decreased by $4.1 million versus a decrease of $1.6 million in 2004 as the
Company fulfilled the obligations of the contract.
Deferred revenue for the nine months ended September 30, 2005 decreased by $1.3
million compared to an increase of $0.2 million for the same period in 2004. The
decrease is primarily related to the Company's IRS LTMCC and Aventis contracts.
The deferred revenue for IRS LTMCC is associated with the amortization of
software maintenance revenue related to system upgrades, involving additional
software licenses or new software products, and annual software maintenance
contracts purchased in October 2003 and 2004. Software maintenance contracts are
purchased annually by our client during the three months ending December 31 and
amortized over the contract period. The timing and amount of deferred revenue
will be dependent on the customer's installed base and the timing of additional
software purchases related to system upgrades outside of the normal purchasing
cycle. At this time, we do not anticipate additional upgrades for the fiscal
year ended December 31, 2005. It is the Company's practice to invoice the full
contract value at project inception for our commercial contracts. Aventis, our
largest commercial contract, was invoiced during the three months ended
September 30, 2004. Deferred revenue has decreased due to the fulfillment of
services during the nine months ended September 30, 2005.
Accounts payable decreased by $1.0 million for the nine months ended September
30, 2005 versus a decrease of $2.2 million for the same period in 2004. The
decrease is due to system upgrade and software maintenance related invoices
associated with our IRS LTMCC contract, which were accrued during the three
months ending December 31 but paid during the nine months ended September 30 of
2004 and 2005.
Net cash used by investing activities was $0.0 million for the nine months ended
September 30, 2005 versus $0.3 million for the same period in 2004. The use of
cash relates to the purchase of capital equipment in support of operations. The
Company received proceeds from the sale of assets of $0.3 million during the
nine months ended September 30, 2005.
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Net cash provided by financing activities was $0.4 million for the nine months
ended September 30, 2005, which relates to proceeds from the line of credit to
fund operations. Net cash used of $3.7 million for the same period in 2004 was
related to payments on the Company's line of credit
On July 28, 2005, the Company entered into a two year Loan and Security
Agreement with Chevy Chase Bank that provides for a revolving line of credit
facility of up to $9 million. The agreement became effective August 4, 2005.
The revolving line of credit will be used to borrow funds for working capital
and general corporate purposes.
The revolving loans under the Chevy Chase Bank Loan and Security Agreement are
secured by a first priority lien on substantially all of the assets of the
Company, excluding intellectual property and real estate. Under the agreement,
the line is due on demand and interest is payable monthly depending on the
Corporation's leverage ratio at the LIBOR rate plus the applicable spread which
ranges from 2.25% to 3.00%. Under the terms of the agreement, the Corporation
may borrow up to the lesser of $9,000,000 or 90% of eligible U.S. Government
receivables plus 80% of eligible commercial receivables plus 75% of the
aggregate amount of billable but unbilled accounts to a maximum of $3,000,000.
The Loan and Security Agreement requires that the Company maintain the following
covenants and ratios: (1) minimum tangible net worth of $2,000,000 plus 50% of
Company's net income for each fiscal year beginning with fiscal year ending
December 31, 2005; (2) debt coverage ratio of not less than 1.500 to 1.000; (3)
maximum leverage ratio of 5.50 to 1.00, which will be decreased to 5.25 to 1.00
by December 31, 2005 and 4.00 to 1.00 by December 31, 2006. All working capital,
as it relates to these covenants and ratios requirements will be evaluated as of
quarter-end. The Company was in compliance with all covenant requirements as of
September 30, 2005.
The Loan and Security Agreement contains events of default that include among
other things, non-payment of principal, interest or fees, violation of
covenants, inaccuracy of representations and warranties, cross default to
certain other indebtedness, bankruptcy and insolvency events, change of control
and material judgments. Upon occurrence of an event of default, Chevy Chase Bank
is entitled to, among other things, accelerate all obligations of the Company
and sell the Company's assets to satisfy the Company's obligations under the
Loan and Security Agreement.
The Company terminated its line of credit agreement with SunTrust Bank effective
September 1,2005.
Subsequent Events
On October 14, 2005, Paradigm Holdings, Inc., a Wyoming corporation ("Paradigm
Holdings"), Paradigm Solutions International, Inc., a Maryland corporation and
wholly-owned subsidiary of Paradigm Holdings ("PSI"), Blair Management Services,
Inc. t/d/b/a Blair Technology Group, a Pennsylvania corporation ("Blair") and
the shareholders of Blair (collectively, the "Shareholders") consummated a
merger transaction pursuant to the terms of that certain Merger Agreement (the
"Merger Agreement"), whereby Blair was merged with and into PSI. PSI is the
surviving corporation and will continue its corporate existence under the laws
of the State of Maryland as a wholly-owned subsidiary of Paradigm Holdings.
Pursuant to the Merger Agreement, the Shareholders exchanged all of the issued
and outstanding capital stock of Blair in exchange for (i) One Million Dollars
(US $1,000,000) and (ii) five hundred thousand shares of common stock, par value
$0.001 per share, of Paradigm Holdings (the "Shares"). Pursuant to the Merger
Agreement and an Escrow Agreement entered into by the parties, sixty thousand
(60,000) of the Shares will be held in escrow for a period of one (1) year from
the date of closing subject to the terms and conditions of the Merger Agreement.
In addition, under the terms of the Merger Agreement, Paradigm Holdings will
issue to the Shareholders up to an additional 350,000 shares of common stock of
Paradigm Holdings pursuant to an earn-out provision.
At the closing of the merger, PSI entered into employment agreements with
Messrs. Kristofco, Duffy and Fochler.
For the year ended December 31, 2004, Blair generated $4.5 million in revenue
and $0.4 million in net income (unaudited).
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ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk relates to change in interest rates for borrowing
under our revolving credit facility. These borrowings bear interest at a fixed
rate plus LIBOR, a variable rate. We do not use derivative financial instruments
for speculative or trading purposes. We invest our excess cash in short-term,
investment grade, interest-bearing securities.
ITEM 4: CONTROLS AND PROCEDURES
(A) Evaluation Of Disclosure Controls And Procedures
As of the quarter ended September 30, 2005, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
Principal Executive Officer and Principal Financial Officer of the effectiveness
of the design and operation of the Company's disclosure controls and procedures.
The Company's disclosure controls and procedures are designed to provide a
reasonable level of assurance of achieving the Company's disclosure control
objectives. Except as discussed below, the Company's Principal Executive Officer
and Principal Financial Officer have concluded that the Company's disclosure
controls and procedures are, in fact, effective at this reasonable assurance
level as of the quarter ended September 30, 2005. In addition, the Company
reviewed its internal controls, and there have been no significant changes in
its internal controls or in other factors that could significantly affect those
controls subsequent to the date of their last evaluation or from the end of the
reporting period to the date of this Form 10-Q.
During the quarter ended September 30, 2005, the Company employed an
insufficient complement of personnel with an appropriate level of experience and
training in the area of external financial reporting commensurate with the
Company's financial reporting requirements. On September 19, 2005, the Company
hired a new Vice President and Chief Financial Officer.
In addition, the Company reviewed its internal controls, and there have been no
significant changes in its internal controls or in other factors that could
significantly affect those controls subsequent to the date of their last
evaluation or from the end of the reporting period to the date of this Form
10-Q.
(B) Changes In Internal Controls Over Financial Reporting
In connection with the evaluation of the Company's internal controls during the
Company's quarter ended September 30, 2005, the Company's Principal Executive
Officer and Principal Financial Officer have determined that there are no
changes to the Company's internal controls over financial reporting that has
materially affected, or is reasonably likely to materially effect, the Company's
internal controls over financial reporting.
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PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
None.
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ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K
Exhibit No. Description Location
- ---------- ------------------------------------------------------- ---------------------------------------------
10.1 Merger Agreement, dated October 12, 2005, by and Incorporated by reference to Exhibit 99.1 to
among Paradigm Holdings, Paradigm Solutions Registrant's current report on Form 8-K filed
International, Inc. ("PSI"), Blair Management Services, with the Commission on October 20, 2005.
Inc. t/d/b/a Blair Technology Group ("Blair") and the
Shareholders of Blair
10.2 Escrow Agreement, dated October 12, 2005, by and Incorporated by reference to Exhibit 99.2 to
among Paradigm Holdings, PSI, the Shareholders of Registrant's current report on Form 8-K filed
Blair and Kirkpatrick & Lockhart Nicholson Graham LLP with the Commission on October 20, 2005.
10.3 Employment Agreement, dated October 12, 2005, by and Incorporated by reference to Exhibit 99.3 to
between PSI and Tom Kristofco. Registrant's current report on Form 8-K filed
with the Commission on October 20, 2005.
10.4 Employment Agreement, dated October 12, 2005, by and Incorporated by reference to Exhibit 99.4 to
between PSI and Robert Duffy. Registrant's current report on Form 8-K filed
with the Commission on October 20, 2005.
10.4 Employment Agreement, dated October 12, 2005, by and Incorporated by reference to Exhibit 99.5 to
between PSI and Steve Fochler. Registrant's current report on Form 8-K filed
with the Commission on October 20, 2005.
31.1 Certification of CEO pursuant to Rule 13a-14(a)/15d-14(a), Provided herewith
as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 Certification of CFO pursuant to Rule 13a-14(a)/15d-14(a), Provided herewith
as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.1 Certification of CEO pursuant to 18 U.S.C. Section 1350, Provided herewith
as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
32.2 Certification of CFO pursuant to 18 U.S.C. Section 1350, Provided herewith
as adopted pursuant to Section 906 of the Sarbanes-Oxley
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(b) Reports on Form 8-K
Report Date Item No. Description
August 8, 2005 Item 1.01 On August 8, 2005, Paradigm Holdings filed a current report on Form 8-K
to disclose a two year Loan and Security Agreement with Chevy Chase
Bank that provides for a revolving line of credit facility of up to $9 million.
August 15, 2005 Item 5.02 On August 15, 2005 Paradigm Holdings filed a current report on Form 8-K
to disclose that Mark Serway resigned as Senior Vice President, Chief
Financial Officer and a member of Board of Directors.
September 9, 2005 Item 5.02 On September 9, 2005, Paradigm Holdings filed a current report on Form 8-K
to disclose the appointment of Richard P. Sawchak as Vice President and
Chief Financial Officer, effective September 19, 2005.
September 28, 2005 Item 1.01 On September 28, 2005, Paradigm Holdings filed a current report on Form 8-K
to disclose Richard Sawchak and the Company had entered into an employment
agreement with an effective date of September 19, 2005.
October 20, 2005 Item 1.01 On October 20, 2005 Paradigm Holdings filed a current report on Form 8-K
to disclose the consummation of a merger transaction, whereby Blair
Management Services t/d/b/a Blair Technology Group was merged into
Paradigm Solutions International, a wholly owned subsidiary of Paradigm
Holdings Inc.
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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.
PARADIGM HOLDINGS, INC.
(Registrant)
By: /S/ RAYMOND A. HUGER By: /S/ RICHARD SAWCHAK
--------------------------- -------------------------
Raymond A. Huger Richard Sawchak
Chief Executive Officer Chief Financial Officer
26