SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
| For the quarterly period ended September 30, 2002 |
OR
| [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
| For the transition period from _______________ to _______________ . |
Commission File Number: 000-24193
| ATLANTIC DATA SERVICES, INC. |
| (Exact Name of Registrant as Specified in its Charter) |
| Massachusetts | 04-2696393 | |
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification Number) |
| One Batterymarch Park |
| Quincy, Massachusetts 02169 |
| (Address of Principal Executive Offices) (Zip Code) |
| (617) 770 3333 |
| (Registrant’s Telephone Number, Including Area Code) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
As of November 1, 2002, there were 13,045,245 shares of the Registrant’s Common Stock, $.01 par value per share, outstanding.
ATLANTIC DATA SERVICES, INC.
TABLE OF CONTENTS
| Page | ||||||
PART I — FINANCIAL INFORMATION |
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ITEM 1: Financial Statements |
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Condensed Consolidated Balance Sheets as of September 30, 2002 (Unaudited) |
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and March 31, 2002 |
3 | |||||
Condensed Consolidated Statements of Operations for the Three and Six Months
Ended September 30, 2002 and 2001 (Unaudited) |
4 | |||||
Condensed Consolidated Statements of Cash Flows for the Six Months
Ended September 30, 2002 and 2001 (Unaudited) |
5 | |||||
Notes to Condensed Consolidated Financial Statements |
6 | |||||
ITEM 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations |
11 | |||||
ITEM 3: Quantitative and Qualitative Disclosures about Market Risk |
16 | |||||
ITEM 4: Controls and Procedures |
16 | |||||
PART II — OTHER INFORMATION |
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ITEM 4: Submission of Matters to Vote of Security Holders |
17 | |||||
ITEM 6: Exhibits and Reports on Form 8-K |
17 | |||||
SIGNATURES |
18 | |||||
CERTIFICATIONS |
19 | |||||
EXHIBIT INDEX |
21 | |||||
2
PART I
Item 1: Financial Statements
ATLANTIC DATA SERVICES, INC.
Condensed Consolidated Balance Sheets
(in thousands, except per share data)
| September 30, | March 31, | ||||||||||
| 2002 | 2002 | ||||||||||
| (Unaudited) | |||||||||||
Assets |
|||||||||||
Current assets: |
|||||||||||
Cash and cash equivalents |
$ | 23,628 | $ | 15,457 | |||||||
Short-term investments |
11,103 | 16,601 | |||||||||
Accounts receivable, net of allowances for doubtful accounts
of $300 at September 30, 2002 and $375 at March 31, 2002 |
1,688 | 3,170 | |||||||||
Tax receivable |
1,764 | 1,764 | |||||||||
Deferred tax assets |
1,020 | 1,020 | |||||||||
Prepaid expenses |
215 | 260 | |||||||||
Total current assets |
39,418 | 38,272 | |||||||||
Property and equipment, net |
261 | 308 | |||||||||
Other assets |
183 | 182 | |||||||||
Total assets |
$ | 39,862 | $ | 38,762 | |||||||
Liabilities
and stockholders’ equity |
|||||||||||
Current
liabilities: |
|||||||||||
Accounts payable |
$ | 246 | $ | 455 | |||||||
Accrued expenses and other liabilities |
1,459 | 2,055 | |||||||||
Deferred revenue |
372 | 531 | |||||||||
Billings in excess of costs and estimated earnings |
— | 12 | |||||||||
Federal and state income taxes payable |
229 | — | |||||||||
Total current liabilities |
2,306 | 3,053 | |||||||||
Commitments |
|||||||||||
Stockholders’ equity: |
|||||||||||
Preferred stock, $.01 par value, 1,000,000 authorized, no shares
issued or outstanding |
— | — | |||||||||
Common stock, $.01 par value, 60,000,000 shares authorized,
13,157,245 shares issued and 13,045,245 outstanding at September 30, 2002 and 13,151,123 shares issued and
13,039,123 outstanding at March 31, 2002 |
131 | 131 | |||||||||
Additional paid-in capital |
27,574 | 27,565 | |||||||||
Retained earnings |
9,876 | 8,038 | |||||||||
Treasury stock (112,000 shares carried at cost) |
(25 | ) | (25 | ) | |||||||
Total stockholders’ equity |
37,556 | 35,709 | |||||||||
Total liabilities and stockholders’ equity |
$ | 39,862 | $ | 38,762 | |||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
3
ATLANTIC DATA SERVICES, INC.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(Unaudited)
| Three Months Ended | Six Months Ended | ||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||
| 2002 | 2001 | 2002 | 2001 | ||||||||||||||||
Revenues |
$ | 5,886 | $ | 5,150 | $ | 12,820 | $ | 9,704 | |||||||||||
Cost of revenues |
3,134 | 3,424 | 6,910 | 7,181 | |||||||||||||||
Gross profit |
2,752 | 1,726 | 5,910 | 2,523 | |||||||||||||||
Operating expenses: |
|||||||||||||||||||
Sales and marketing |
334 | 792 | 873 | 1,790 | |||||||||||||||
General and administrative |
1,035 | 1,379 | 2,575 | 2,962 | |||||||||||||||
Restructuring expense |
— | — | — | 925 | |||||||||||||||
Total operating expenses |
1,369 | 2,171 | 3,448 | 5,677 | |||||||||||||||
Income (loss) from operations |
1,383 | (445 | ) | 2,462 | (3,154 | ) | |||||||||||||
Interest income, net |
171 | 299 | 357 | 671 | |||||||||||||||
Write-down of investment |
— | (3,000 | ) | — | (3,000 | ) | |||||||||||||
Income (loss) from continuing operations before
provision for income taxes |
1,554 | (3,146 | ) | 2,819 | (5,483 | ) | |||||||||||||
Provision for income taxes |
590 | — | 1,046 | 386 | |||||||||||||||
Income (loss) from continuing operations |
964 | (3,146 | ) | 1,773 | (5,869 | ) | |||||||||||||
Discontinued operations: |
|||||||||||||||||||
Income (loss) on disposal of business |
25 | (497 | ) | 101 | (497 | ) | |||||||||||||
Tax benefit (provision) |
(9 | ) | — | (36 | ) | — | |||||||||||||
| 16 | (497 | ) | 65 | (497 | ) | ||||||||||||||
Net income (loss) |
$ | 980 | $ | (3,643 | ) | $ | 1,838 | $ | (6,366 | ) | |||||||||
Earnings (loss) per share from continuing operations: |
|||||||||||||||||||
Basic |
$ | 0.07 | $ | (0.24 | ) | $ | 0.14 | $ | (0.45 | ) | |||||||||
Diluted |
$ | 0.07 | $ | (0.24 | ) | $ | 0.13 | $ | (0.45 | ) | |||||||||
Earnings (loss) per share from discontinued operations: |
|||||||||||||||||||
Basic |
$ | 0.00 | $ | (0.04 | ) | $ | 0.00 | $ | (0.04 | ) | |||||||||
Diluted |
$ | 0.00 | $ | (0.04 | ) | $ | 0.00 | $ | (0.04 | ) | |||||||||
Earnings (loss) per share from net income: |
|||||||||||||||||||
Basic |
$ | 0.08 | $ | (0.28 | ) | $ | 0.14 | $ | (0.49 | ) | |||||||||
Diluted |
$ | 0.07 | $ | (0.28 | ) | $ | 0.14 | $ | (0.49 | ) | |||||||||
Shares used in computing earnings (loss) per share
(basic) |
13,039 | 13,023 | 13,039 | 13,023 | |||||||||||||||
Shares used in computing earnings (loss) per share
(diluted) |
13,208 | 13,023 | 13,212 | 13,023 | |||||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
4
ATLANTIC DATA SERVICES, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
| Six Months Ended | ||||||||||
| September 30, | ||||||||||
| 2002 | 2001 | |||||||||
Cash flows from operating activities: |
||||||||||
Net income (loss) |
$ | 1,838 | $ | (6,366 | ) | |||||
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities: |
||||||||||
Depreciation and amortization |
140 | 167 | ||||||||
Discontinued operations |
(65 | ) | 497 | |||||||
Deferred taxes |
— | 464 | ||||||||
Provision for bad debts |
75 | (75 | ) | |||||||
Write-down of investment |
— | 3,000 | ||||||||
Change in assets and liabilities (net of effect of acquisition
and disposition): |
||||||||||
Accounts receivable |
1,407 | 117 | ||||||||
Prepaid expenses and other assets |
(24 | ) | 270 | |||||||
Accounts payable |
(204 | ) | 66 | |||||||
Accrued expenses and other liabilities |
(359 | ) | (939 | ) | ||||||
Deferred revenue |
(159 | ) | — | |||||||
Billings in excess of costs and estimated earnings |
(12 | ) | 37 | |||||||
Federal and state income taxes payable |
196 | — | ||||||||
Net cash provided by (used in) operating activities of continuing
operations |
2,833 | (2,762 | ) | |||||||
Cash flows from investing activities: |
||||||||||
Purchase of short-term investments |
(3,022 | ) | (9,115 | ) | ||||||
Sale and maturities of short-term investments |
8,499 | — | ||||||||
Purchase of property and equipment |
(13 | ) | (12 | ) | ||||||
Net cash provided by (used in) investing activities of continuing
operations |
5,464 | (9,127 | ) | |||||||
Cash flows from financing activities: |
||||||||||
Proceeds from exercise of stock options under stock option plans |
9 | 17 | ||||||||
Net cash provided by financing activities |
9 | 17 | ||||||||
Net cash provided by (used in) continuing operations |
8,306 | (11,872 | ) | |||||||
Net cash used in discontinued operations |
(135 | ) | (2,382 | ) | ||||||
Net decrease in cash and cash equivalents |
8,171 | (14,254 | ) | |||||||
Cash and cash equivalents, beginning of period |
15,457 | 36,655 | ||||||||
Cash and cash equivalents, end of period |
$ | 23,628 | $ | 22,401 | ||||||
Supplemental disclosure of cash flow information: |
||||||||||
Cash
paid during the period for taxes |
$ | 862 | $ | 40 | ||||||
Supplemental
disclosure of non-cash investing activities: |
||||||||||
Acquisition of assets with warrant |
$ | — | $ | 647 | ||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
5
ATLANTIC DATA SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2002
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared by Atlantic Data Services, Inc. (the “Company”) in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting solely of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended September 30, 2002 are not necessarily indicative of the results that may be expected for future periods of the full fiscal year. These Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2002.
The balance sheet at March 31, 2002 has been derived from the audited financial statements at that date, but does not include all the information and footnotes required by generally accepted accounting principles for complete financial statements.
2. Summary of Significant Accounting Policies
Revenue Recognition
The Company primarily derives its revenue from consulting services under time and material billing arrangements. Under these arrangements, revenue is recognized as the services are provided. Deferred revenue pertains to time and material billing arrangements and represents cash collected in advance of the performance of services.
Revenue on fixed price contracts is recognized using the percentage of completion method of accounting and is adjusted monthly for the cumulative impact of any revision in estimates. The Company determines the percentage of its contracts by comparing costs incurred to date to total estimated costs. Contract costs include all direct labor and expenses related to the contract performance. An asset, “Costs and estimated earnings in excess of billings on contracts,” would represent revenues recognized in excess of amounts billed. The liability, “Billings in excess of costs and estimated earnings,” represents billings in excess of revenues recognized.
Included in revenues are reimbursable contract-related travel and entertainment expenses of $743,000 and $909,000 for the quarters ended September 30, 2002 and 2001, respectively, and $1,613,000 and $1,529,000 for the six months ended September 30, 2002 and 2001, respectively, which are separately billed to clients.
Earnings Per Share
The Company follows Statement of Financial Accounting Standards No. 128, “Earnings Per Share” (“SFAS 128”). SFAS 128 requires the presentation of two amounts, basic earnings per share and diluted earnings per share.
6
Short-Term Investments
Short-term investments consist primarily of high-grade commercial paper, municipal bonds and corporate debt with original maturities at the date of purchase greater than three months and less than twelve months. All short-term investments have been classified as held to maturity and are carried at amortized cost, which approximates fair value, due to the short period of time to maturity.
3. Earnings Per Share
The following table sets forth the computation of basic earnings per share and diluted earnings per share for the three months ended September 30, 2002 and 2001:
| Three Months Ended | ||||||||||
| September 30, | ||||||||||
| 2002 | 2001 | |||||||||
| (in thousands, except | ||||||||||
| per share data) | ||||||||||
Numerator for earnings (loss) per common share and
earnings (loss) per common share assuming dilution: |
||||||||||
Income (loss) from continuing operations |
$ | 964 | $ | (3,146 | ) | |||||
Income (loss) from discontinued operations |
16 | (497 | ) | |||||||
Net income (loss) |
$ | 980 | $ | (3,643 | ) | |||||
Denominator: |
||||||||||
Denominator for basic earnings per share— weighted average shares |
13,039 | 13,023 | ||||||||
Effect of dilutive securities: |
||||||||||
Employee stock options |
169 | — | ||||||||
Denominator for diluted earnings per share— adjusted
weighted average and assumed conversions |
13,208 | 13,023 | ||||||||
Basic earnings (loss) per share: |
||||||||||
Continuing operations |
$ | 0.07 | $ | (0.24 | ) | |||||