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Filed Pursuant to Rule 424(b)(4)
Registration Statement # 333-23959
2,500,000 SHARES
ADVANCED COMMUNICATION SYSTEMS, INC.
COMMON STOCK
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Of the 2,500,000 shares of Common Stock (the "Common Stock") offered
hereby, 1,850,000 shares are being sold by Advanced Communication Systems, Inc.
(the "Company") and 650,000 shares are being sold by the Selling Stockholders.
See "Principal and Selling Stockholders." The Company will receive no proceeds
from the sale of shares by the Selling Stockholders.
Prior to the offering, there has been no public market for the Common
Stock. See "Underwriting" for a discussion of the factors considered in
determining the initial public offering price. The Common Stock has been
approved for quotation on the Nasdaq National Market under the trading symbol
"ACSC," subject to official notice of issuance.
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SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN MATTERS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT (1) COMPANY (2) STOCKHOLDERS
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<S> <C> <C> <C> <C>
Per Share......................... $7.50 $0.525 $6.975 $6.975
- --------------------------------------------------------------------------------------------------
Total (3)......................... $18,750,000 $1,312,500 $12,903,750 $4,533,750
==================================================================================================
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(1) The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities
under the Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting estimated offering expenses of $750,000, all of which will
be paid by the Company.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 375,000 additional shares of Common Stock on the same terms and
conditions as set forth above solely to cover over-allotments, if any. If
such option is exercised in full, the total Price to Public, Underwriting
Discount and Proceeds to Company will be $21,562,500, $1,509,375 and
$15,519,375, respectively. See "Underwriting."
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The Common Stock is offered by the several Underwriters, subject to prior
sale, when, as and if issued to and accepted by them and subject to certain
conditions. The Underwriters reserve the right to withdraw, cancel or modify
such offer or to reject any orders in whole or in part. It is expected that
delivery of the shares of Common Stock will be made on or about July 2, 1997.
A.G. EDWARDS & SONS, INC. FERRIS, BAKER WATTS
Incorporated
THE DATE OF THIS PROSPECTUS IS JUNE 27, 1997
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DESCRIPTION OF GRAPHIC
The chart is comprised of three rows of two boxes each. The top left box
has a drawing of a satellite dish under the words "Communication Systems." The
top right box contains three bullet points: "Engineering;" "Program Planning &
Management;" and "Communication Networks." The middle left box contains six
bullet points: "Information Management Systems;" "Networks;" "Database
Services;" "Internet/Intranet Services;" "Web Page Development;" and "Multimedia
Products." The middle right box contains the words "Information Technology" over
a drawing of information being transmitted from a ship at sea to shore via
satellite. The bottom left box contains a drawing of a puzzle piece inscribed
"ACS" superimposed over photos of a ship at sea and a computer, under the words
"Systems Integration." The bottom right box contains four bullet points: "VME
Applications;" "BGIXS-II & Pelican;" "ISALTS;" and "Value Added Resales."
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CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING
SYNDICATE COVERING TRANSACTIONS AND THE IMPOSITION OF A PENALTY BID. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
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PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified
in its entirety by, the more detailed information and the Financial Statements
and Notes thereto appearing elsewhere in this Prospectus. Investors should
consider carefully the risk factors related to the purchase of the Common Stock
of the Company. See "Risk Factors." Unless otherwise indicated, the information
in this Prospectus assumes that the Underwriters' over-allotment option will not
be exercised and gives effect to a stock split of the Common Stock, to be paid
in the form of a stock dividend. References herein to fiscal years are to the
Company's fiscal year which ends on September 30 of each year. For example, the
twelve months ended September 30, 1996 are referred to herein as fiscal 1996. A
glossary of acronyms used in this Prospectus appears on page 49.
THE COMPANY
Advanced Communication Systems, Inc. provides communications and
information technology services and solutions, predominantly to U.S. government
agencies and to a lesser extent commercial and international customers. The
Company operates primarily in three interrelated areas: communication systems
design and support, information technology services ("IT Services") and systems
integration. The Company believes that, from its inception in 1987, it has been
a leader in U.S. Navy satellite communications ("SATCOM"). Recently, using its
information management capabilities in such areas as network and database design
and support, the Company has begun to expand its services to the U.S. military.
In addition, it is using these capabilities to develop business with other
federal agencies, state and local governments and commercial and international
customers. In fiscal 1996, revenues from commercial and international customers
accounted for approximately 10.0% of the Company's revenues. Revenues have
increased each year since fiscal 1987 and grew at a compound annual rate of
36.3% during the last five fiscal years, reaching $31.7 million for fiscal 1996.
Additionally, for the six-month period ended March 31, 1997, the Company's
revenues grew 62.1% over the comparable six-month period of the prior year,
reaching $21.1 million. The Company's total funded and unfunded backlog was
$139.2 million as of September 30, 1996. (See "Business -- Backlog.")
The three main areas of the Company's business are as follows:
- COMMUNICATION SYSTEMS. The Company designs, engineers, develops,
integrates, installs and operates satellite and computer-based
communication systems. It provides SATCOM engineering and technical
services and program and system support primarily to program
directorates and field activities of the U.S. Navy. Recently, the
Company has expanded its communication systems business capabilities
to provide a full range of systems engineering procurement and
technical support for the Command, Control, Communication, Computer
and Intelligence ("C4I") initiatives of the Department of Defense (the
"DOD"). In addition, the Company has expanded its staff to include
experts in program and financial management, and now provides support
in these areas to its communication systems customers. The Company
believes this combination of skills and capabilities is one of the
factors that distinguishes it from its competitors in the
communication systems business. For fiscal 1996, the Company's
communication systems business represented 64.5% of revenues.
- IT SERVICES. The Company provides a full range of services and
support in the areas of information management technology, information
processing, network design and operations, database design and
management, Internet and intranet services and multimedia training
services. It provides these services to a wide range of customers,
including the DOD, other federal agencies and commercial enterprises.
The advanced technical capabilities gained by the Company while
performing services for government customers has provided expertise in
the information technology area, which the Company is leveraging to
develop its commercial business. The Company is currently focusing on
expanding its IT Services to commercial and international customers.
For fiscal 1996, the Company's IT Services business represented 25.3%
of revenues.
- SYSTEMS INTEGRATION. The Company provides systems integration
services for communication systems and, to a lesser extent, acts as a
value-added reseller of computer hardware and software to both
government and commercial customers. The Company's strategy in this
business area is to concentrate on providing total communication
systems integration solutions. Most of this
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communication systems integration business is performed under its
contract (the "GSA Schedule Contract") with the General Services
Administration ("GSA"), which permits the Company to sell approved
products to U.S. government agencies and contractors without
competitive bidding. The Company's systems integration business
represented 10.2% of revenues for fiscal 1996 and 23.7% of revenues
for the six-month period ended March 31, 1997.
Growth in the Company's business is being driven in part by the increasing
trend in government and commercial organizations to focus on their core
competencies and to outsource non-core functions such as information technology.
In addition, the U.S. military is placing greater emphasis on increasing
productivity while using fewer resources by employing systems that act as "force
multipliers." Solutions and technologies such as those offered by the Company
permit the use of fewer personnel and assets and result in more effective
performance at lower levels of spending. Federal Sources, Inc., an independent
market research firm specializing in the U.S. federal market, estimates that the
U.S. government has budgeted $26.5 billion in its fiscal year 1997 for
information technology services and products. In addition, the fiscal year 1997
DOD budget for information technology in the classified command, control and
communication market is estimated to be approximately $9.8 billion. The Company
believes that the commercial information technology market is significantly
larger than the government market.
The Company believes it has established a reputation in the industry for
delivering creative solutions to complex problems through the use of highly
skilled personnel and the most current technology. The Company has managed large
and complex federal contracts and believes this capability positions it to
capitalize on the future growth in outsourcing, both in the United States and
internationally. To do so, the Company plans to employ the following strategies:
(i) maintain leadership in the military SATCOM industry; (ii) expand existing
services and customer base; (iii) develop additional commercial business; and
(iv) expand through strategic acquisitions and the use of teaming relationships.
Advanced Communication Systems, Inc. is a Delaware corporation incorporated
in 1987. Its principal executive offices are located at 10089 Lee Highway,
Fairfax, Virginia 22030, and its telephone number is (703) 934-8130.
THE OFFERING
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<S> <C>
Common Stock offered by the Company..................... 1,850,000 shares
Common Stock offered by the Selling Stockholders........ 650,000 shares
Common Stock to be outstanding after the offering (1)... 5,663,750 shares
Use of Proceeds......................................... Payment of S corporation distributions,
repayment of debt and general corporate
purposes, including possible
acquisitions. See "Use of Proceeds."
Proposed Nasdaq National Market symbol.................. "ACSC"
</TABLE>
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(1) Does not include an aggregate of 713,500 shares of Common Stock reserved for
issuance by the Company upon the exercise of stock options. As of the date
of this Prospectus, there were options to purchase 263,500 shares of Common
Stock outstanding. Also does not give effect to the anticipated repurchase
by the Company of 8,750 shares of Common Stock to be repurchased from a
former employee at the initial public offering price per share pursuant to a
Stock Redemption Agreement. See "Management -- Stock Plans and Agreements"
and Note 9 of Notes to Financial Statements.
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SUMMARY FINANCIAL DATA
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SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
-------------------------------------------------- ------------------
1992 1993 1994 1995 1996 1996 1997
------ ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................ $8,679 $12,223 $19,106 $23,724 $31,665 $13,036 $21,130
Direct costs............................ 4,881 7,050 11,418 14,815 19,307 7,195 14,746
Indirect, general and administrative
expenses.............................. 3,194 4,612 7,177 8,202 10,253 4,774 5,025
------ ------- ------- ------- ------- ------- -------
Income from operations.................. 604 561 511 707 2,105 1,067 1,359
Other income (expense), net............. (49) (78) (73) (133) (200) (101) (90)
------ ------- ------- ------- ------- ------- -------
Net income.............................. $ 555 $ 483 $ 438 $ 574 $ 1,905 $ 966 $ 1,269
====== ======= ======= ======= ======= ======= =======
PRO FORMA STATEMENT OF OPERATIONS DATA (1):
Net income before taxes................. $ 555 $ 483 $ 438 $ 574 $ 1,905 $ 966 $ 1,269
Income taxes............................ 222 193 175 229 743 386 495
------ ------- ------- ------- ------- ------- -------
Net income.............................. $ 333 $ 290 $ 263 $ 345 $ 1,162 $ 580 $ 774
====== ======= ======= ======= ======= ======= =======
Net income per share (2)................ $ 0.27 $ 0.18
====== =====
Weighted average shares outstanding
(2)................................... 4,361 4,346
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MARCH 31, 1997
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PRO FORMA
ACTUAL AS ADJUSTED (3)
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(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital................................................................ $ 3,680 $10,059
Total assets................................................................... 15,671 22,325
Total debt..................................................................... -- --
Stockholders' equity........................................................... 5,682 11,236
</TABLE>
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(1) For all periods presented, 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 federal and state income
taxes based on estimated tax rates, as if the Company had not elected S
corporation status for the periods indicated. See "S Corporation
Distribution and Termination of S Corporation Status."
(2) The pro forma weighted average shares outstanding is based on: (i) the
weighted average shares outstanding during the period, assuming the dilutive
effect of all options outstanding; (ii) stock options issued during the
twelve months immediately preceding the offering (using the treasury stock
method and the initial public offering price of $7.50 per share) for all
periods presented; and (iii) the assumed sale of a sufficient number of
shares of Common Stock necessary to provide funds to make a distribution of
all undistributed S corporation earnings as of March 31, 1997 in excess of
fiscal 1996 earnings.
(3) Gives effect to: (i) a distribution to the Company's current stockholders of
undistributed S corporation earnings, which totaled approximately $5.5
million as of March 31, 1997; (ii) the recording of a $1.1 million deferred
tax liability, which would have been required had the Company terminated its
S corporation status as of March 31, 1997; and (iii) the sale of the
1,850,000 shares of Common Stock offered by the Company hereby, after
deducting the underwriting discount and estimated offering expenses, and the
receipt of the net proceeds therefrom. The Company intends to structure the
S corporation distribution so that no deferred tax liability will be
recorded in connection with the termination of the Company's S corporation
status. The Company estimates that the actual amount of the S corporation
distribution will be between $6.5 million and $6.9 million. See "S
Corporation Distribution and Termination of S Corporation Status."
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RISK FACTORS
Prospective investors should carefully consider the following risk factors
relating to the Company and the Common Stock, in addition to the other
information contained in this Prospectus. Certain statements contained in this
Prospectus that are not related to historical results are forward-looking
statements. Actual results may differ materially from those projected or implied
in the forward-looking statements. Factors that could cause or contribute to
such differences include, but are not limited to, the following risk factors.
CONCENTRATION OF REVENUES
For fiscal 1994, 1995 and 1996 and the six months ended March 31, 1997,
approximately 100%, 99%, 90% and 94%, respectively, of the Company's revenues
were derived from contracts or subcontracts funded by the U.S. government,
virtually all of which were funded by the DOD. The Company expects that U.S.
government contracts are likely to continue to account for a significant portion
of its revenues in the future. Accordingly, the Company's financial performance
may be adversely affected by changing U.S. government procurement practices and
policies and declines in U.S. defense spending. Among the factors that could
have a material adverse effect upon the Company's ability to win new contracts
with the U.S. government, or retain existing contracts, are budgetary
constraints, changes in government funding levels, programs, policies or
requirements, technological developments, the adoption of new laws or
regulations and general economic conditions. In addition, certain of the
Company's contracts individually contribute a significant percentage of its
revenues. For fiscal 1996, one contract with the U.S. Navy generated
approximately 28% of the Company's revenues. For the six-month period ended
March 31, 1997, a different contract with the U.S. Navy generated approximately
36% of the Company's revenues. The Company's five largest contracts generated
approximately 69% and 83% of its revenues, respectively, for the same periods.
Although the Company intends to expand its non-military and non-government
sales, a relatively small number of large U.S. government contracts are likely
to continue to account for a significant percentage of the Company's revenues in
the future. Termination of these contracts or the Company's inability to renew
or replace them when they expire could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business -- Government Contracts."
GOVERNMENT CONTRACTING RISKS
Government contracts, including the GSA Schedule Contract, by their terms,
generally can be terminated at any time by the government without cause. If a
government contract is so terminated, the Company generally would be entitled to
receive compensation for the services provided or costs incurred up to the time
of termination and a negotiated amount of the profit on the contract to the date
of termination. Termination of any of its large government contracts could have
a material adverse effect on the Company's business, financial condition and
results of operations.
Government contracts require compliance with various contract provisions
and procurement regulations. The adoption of new or modified procurement
regulations could have a material adverse effect on the Company's business,
financial condition and results of operations or increase its costs of competing
for or performing government contracts. Any violation of these regulations could
result in the termination of the contracts, imposition of fines and/or debarment
from award of additional government contracts. Most government contracts are
subject to modification or termination in the event of changes in funding, and
the Company's contract costs and revenues are subject to adjustment as a result
of audits by the Defense Contract Audit Agency (the "DCAA") and other government
auditors. The award of government contracts also is subject to protest by
competitors which can result in the re-opening of the bidding process,
unanticipated legal costs or the award of a contract to a competitor.
Government contracts generally are awarded to the Company through a formal
competitive bidding process in which the Company has many competitors. Upon
expiration, government contracts may be subject to a competitive rebidding
process. There can be no assurance that the Company will be successful in
winning contract awards or renewals in the future. The Company's failure to
renew or replace such contracts when they expire could have a material adverse
effect on its business, financial condition and results of operations.
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A significant portion of the Company's revenues in fiscal 1996
(approximately 45%) and in the six months ended March 31, 1997 (approximately
23%) was generated by U.S. government contracts awarded to the Company through
small business set-aside programs. The Company no longer is eligible to
participate in some of these programs and, as its revenues and size expand, it
will lose its eligibility to participate in more of these programs. There can be
no assurance that the Company will be able to replace revenues from these
contracts.
The Company also derives significant revenues from sales under the GSA
Schedule Contract. For fiscal 1996 and the six months ended March 31, 1997,
approximately 9% and 26%, respectively, of the Company's revenues were derived
from contracts under the GSA Schedule. The government has no obligation to
purchase any significant amount of goods or services under the contract and
there can be no assurance as to the actual level of sales that will be derived
from this contract. The GSA Schedule Contract is a fixed price contract, which
imposes greater financial risk on the Company than a cost reimbursement or time
and materials contract. Failure to anticipate technical problems, estimate costs
accurately or control costs during performance of a fixed price contract may
reduce the Company's profit or cause a loss. In addition, the GSA Schedule
Contract is a one year contract, renewable annually by the government. There can
be no assurance that the GSA Schedule Contract will be renewed, and the
Company's inability to renew or replace the GSA Schedule Contract could have a
material adverse effect on its business, financial condition and results of
operations. See "Business -- Government Contracts."
BACKLOG NOT INDICATIVE OF REVENUES
Many of the Company's contracts are multi-year contracts and contracts with
option years, and portions of these contracts are carried forward from one year
to the next as part of the Company's contract backlog. The estimated backlog
under a government contract is not necessarily indicative of revenues that will
actually be realized under that contract. Congress normally appropriates funds
for a given program on a fiscal year basis, even though actual contract
performance may take many years. As a result, contracts ordinarily are only
partially funded at the time of award, and additional monies are normally
committed to the contract by the procuring agency as appropriations are made by
Congress in subsequent fiscal years. There can be no assurance that Congress
will appropriate funds or that procuring agencies will commit funds to the
Company's contracts for their anticipated terms. In addition, most of the
Company's government contracts have a base term of one year and a number of
option years. There can be no assurance that the government will extend a
contract through its option years. Many of the Company's large contracts require
that the Company supply services upon request, and the Company receives no
payments under these contracts until such services are requested and performed.
There can be no assurance that cancellations or scope adjustments of these
contracts might not occur or that the Company's services under these contracts
will be requested at the anticipated levels in the future. See
"Business -- Government Contracts" and "Business -- Backlog."
VARIABILITY OF QUARTERLY OPERATING RESULTS
The Company's revenues and earnings may fluctuate from quarter to quarter
based on such factors as the number, size and scope of projects, expenditures
required by the Company, delays, employee utilization rates, adequacy of
provisions for losses, accuracy of estimates of resources required to complete
ongoing projects and general economic conditions. Demand for the Company's
products and services in each of the markets it serves can vary significantly
from quarter to quarter due to revisions in customer budgets or schedules and
other factors beyond the Company's control. Due to all of the foregoing factors,
it is possible that in some future period the Company's results of operations
will fall below the expectations of securities analysts and investors. In this
event, the market price of the Common Stock would likely be materially adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Quarterly Results of Operations."
NEED TO ATTRACT AND RETAIN PROFESSIONAL STAFF
The Company's success will depend in part upon its ability to attract,
retain, train and motivate highly skilled employees, particularly in the area of
information technology. There is significant competition for
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employees with the communication and information technology skills required to
perform the services the Company offers. In addition, the Company must often
comply with provisions in government contracts which require employment of
persons with specified levels of education, work experience and security
clearances. There can be no assurance that the Company will be successful in
attracting a sufficient number of highly skilled employees in the future. None
of the Company's key personnel are subject to noncompetition agreements. The
loss of its key technical personnel or its inability in the future to attract
key employees or to relocate them as required by customers could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Employees."
INTERNATIONAL EXPANSION
As part of its growth strategy, the Company is seeking opportunities to
expand into international markets. To date, the Company has limited experience
in marketing and distributing its products internationally. International
business accounted for 7% of the Company's revenues for fiscal 1996 and 4% for
the six months ended March 31, 1997. In marketing its products and services
internationally, the Company will face new competitors, some of which may have
established a strong presence in those markets. In addition, the ability of the
Company to market its products in foreign countries will be dependent on the
Company's ability to adapt its products to operate in foreign languages and to
provide the functionality desired by customers in those countries. There can be
no assurance that the Company will be successful in so adapting its products. In
addition to the uncertainty as to the Company's ability to establish an
international presence, there are certain difficulties and risks inherent in
doing business on an international level, such as compliance with regulatory
requirements and changes in these requirements, export restrictions, tariffs and
other trade barriers, limited protection of intellectual property rights,
difficulties in staffing and managing international operations, longer payment
cycles, problems in collecting accounts receivable, political instability,
fluctuations in currency exchange rates and potentially adverse tax
consequences. There can be no assurance that one or more of these factors will
not have a material adverse effect on any international operations established
by the Company, and consequently, on the Company's business, financial condition
and results of operations. See "Business -- Business Strategy."
RISKS ASSOCIATED WITH ENTRY INTO COMMERCIAL BUSINESS
The Company is pursuing a strategy to increase the sales of its services in
the commercial market, although the Company and its management have limited
experience in this market. To date, the Company's sales to customers other than
the U.S. government have been made almost exclusively to military agencies of
other countries and to a lesser extent civilian buyers. Commercial contracts
accounted for 3% of the Company's revenues for fiscal 1996 and 2% for the six
months ended March 31, 1997. There can be no assurance that the Company will be
able to compete successfully in the civilian markets or continue to make sales
to defense agencies outside the United States.
Most of the Company's existing commercial contracts are fixed price
contracts, and the Company expects this will continue to be true with respect to
new commercial contracts. The Company may fail to anticipate technical problems,
estimate costs accurately or control costs during performance of a fixed price
contract, any of which may reduce the Company's profit or cause a loss under
such contracts. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Overview," "Business -- Business Strategy" and
"Business -- Government Contracts."
RISKS ASSOCIATED WITH ACQUISITION STRATEGY
A part of the Company's business strategy calls for growth through
acquisitions, although to date it has not completed any. Identifying and
pursuing future acquisition opportunities will require a significant amount of
management time and skill. There can be no assurance that the Company will be
able to identify suitable acquisition candidates, consummate any acquisition on
acceptable terms or successfully integrate acquired business operations. Future
acquisitions may entail the payment of consideration in excess of book value,
may result in the issuance of additional shares of the Company's Common Stock or
the incurrence of additional
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indebtedness and could have a dilutive effect on the Company's net income per
share. See "Business -- Business Strategy."
MANAGEMENT OF GROWTH
The Company's revenues have increased over the past five fiscal years at a
compound annual rate of 36.3%. Continued growth could place a significant strain
on the Company's limited personnel, management, financial controls and other
resources. The Company's ability to manage any future expansion effectively will
require it to attract, retain, train, motivate and manage new employees
successfully, to integrate new management and employees into its overall
operations and to continue to improve its operational, financial and management
systems and controls and facilities. The Company's failure to manage any
expansion effectively could have a material adverse effect on the Company's
business, financial condition and results of operations.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant degree on its key management
personnel, especially George A. Robinson, Charles G. Martinache, Thomas A.
Costello and Dev Ganesan. The loss of any one of these individuals could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company does not have employment agreements with any
of these individuals, except for Mr. Ganesan. See "Management -- Employment
Agreements." It maintains key man life insurance policies on Messrs. Robinson,
Martinache and Costello, each in the amount of $1,000,000.
COMPETITION
The Company experiences significant competition in all of the areas in
which it does business. In general, the markets in which it competes are not
dominated by a single company or a small number of companies; instead, a large
number of companies offer services that overlap and are competitive with those
offered by the Company. Many of its competitors are significantly larger and
have greater financial resources than the Company, and some of these competitors
are divisions or subsidiaries of large, diversified companies that have access
to the financial resources of their parent companies. The Company believes that
the principal competitive factors in the businesses in which it operates are
technical understanding, management capability, past contract performance,
personnel qualifications and price. In the federal government market,
procurement reforms over the past years have increased the importance of a
contractor's past performance in deciding new bid awards. There can be no
assurance that the Company will be able to compete successfully. See
"Business -- Competition."
PROPRIETARY INFORMATION
Much of the Company's business is derived from work product, software
programs, methodologies and other information in which it has a proprietary
interest. Although the Company seeks to protect this data with trademarks,
copyrights and confidentiality agreements, there can be no assurance that these
measures will prevent the unauthorized disclosure or use of the Company's
technical knowledge, practices or procedures, or that others may not
independently develop similar knowledge, practices or procedures. In addition,
the government may acquire certain proprietary rights to software programs and
other products that result from the Company's services under government
contracts or subcontracts and may disclose such information to third parties,
including competitors of the Company. Disclosure or loss of control over its
proprietary information could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company may also be
subject to litigation to defend against claimed infringement of the rights of
others or to determine the scope and validity of the intellectual property
rights of others. Any such litigation would be costly and divert management's
attention, either of which could have a material adverse effect on the Company's
business, financial condition and results of operations. Adverse determinations
in such litigation could result in the loss of the Company's proprietary rights,
subject the Company to significant liabilities, require the Company to seek
licenses from third parties or prevent the Company from selling its services,
any one of which could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Intellectual
Property."
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CONTROL BY EXECUTIVE OFFICERS AND DIRECTORS; ANTI-TAKEOVER PROVISIONS
Upon the consummation of this offering, the founders and principal officers
of the Company, Messrs. George A. Robinson, Charles G. Martinache and Thomas A.
Costello, will beneficially own 50.1% of the outstanding shares of Common Stock.
Messrs. Robinson, Martinache and Costello, individually and as trustees for
certain trusts, also have entered into a Stockholders Agreement pursuant to
which each has agreed to vote the shares beneficially owned by him to elect each
of the others as a director of the Company and to vote on other matters as a
block as determined by a majority vote of their shares. This will permit Messrs.
Robinson, Martinache and Costello to control votes on matters that require
approval of the Company's stockholders. Purchasers of the Common Stock will be
minority stockholders of the Company and, although entitled to vote on any
matters that require stockholder approval, will not control the outcome of these
votes. See "Management -- Stockholders Agreement" and "Principal and Selling
Stockholders."
Upon the closing of the offering, the directors of the Company will be
authorized to issue, without stockholder approval, up to 1,000,000 shares of
Preferred Stock. Such Preferred Stock may have rights senior to the Common
Stock. This Preferred Stock may have the effect of delaying or preventing a
change in control, may decrease the amount of earnings and assets available for
distribution to the holders of the Common Stock or may adversely affect the
rights and powers, including voting rights, of the holders of the Common Stock.
In certain circumstances, such issuance could have the effect of decreasing the
market price of the Common Stock. Further, certain provisions of Delaware law,
including Section 203 of the Delaware General Corporation Law ("DGCL"), could
delay or make more difficult a merger, tender offer or proxy contest involving
the Company. See "Description of Capital Stock -- Preferred Stock" and
"Description of Capital Stock -- Certain Provisions of Delaware Law."
TERMINATION OF SUBCHAPTER S CORPORATION STATUS; PAYMENT OF SUBSTANTIAL OFFERING
PROCEEDS TO CURRENT STOCKHOLDERS
Since October 1989, the Company has been treated for federal and certain
state income tax purposes as a Subchapter S corporation under the Internal
Revenue Code of 1986, as amended (the "Code"). Prior to the closing of this
offering, the Company will terminate its status as an S corporation (the
"Termination Date") and will declare a dividend to stockholders of record in an
amount equal to the lesser of $6.9 million and the actual amount of
undistributed S corporation earnings as of the Termination Date (the "S
Corporation Distribution"). As of March 31, 1997, the Company's undistributed S
corporation earnings equaled approximately $5.5 million. The Company estimates
that the actual amount of the S Corporation Distribution will be between $6.5
million and $6.9 million. The S Corporation Distribution will be paid using
receivables, cash on hand, borrowings under the existing line of credit and, if
necessary, additional short-term borrowings. Any amounts so borrowed will be
repaid using a portion of the net proceeds of this offering. Purchasers of
Common Stock in this offering will not receive any portion of this dividend. The
Company intends to structure the S Corporation Distribution so that no deferred
tax liability will be recorded in connection with the termination of the S
corporation status. Had the Company terminated its S corporation status at March
31, 1997, the amount of deferred tax liability would have been $1.1 million. As
of the Termination Date, the Company will no longer be an S corporation and,
accordingly, will become subject to federal and state income taxes. See "S
Corporation Distribution and Termination of S Corporation Status" and "Use of
Proceeds."
BENEFITS OF THE OFFERING TO CURRENT STOCKHOLDERS
The current stockholders of the Company will receive certain benefits from
the sale of the Common Stock offered hereby. The offering will establish a
public market for the Common Stock and provide increased liquidity to the
current stockholders for the shares of Common Stock that they will own after the
offering, subject to certain limitations. See "Shares Eligible for Future Sale."
The Company intends to use a portion of the net proceeds of the offering to fund
the S Corporation Distribution, which the Company estimates will be between $6.5
million and $6.9 million, and to repay any borrowings incurred to fund the S
Corporation Distribution. See "S Corporation Distribution and Termination of S
Corporation Status" and "Use of Proceeds." The Selling Stockholders will sell
650,000 shares of Common Stock in the offering and will receive $4.5 million in
net proceeds, after deducting the Selling Stockholders' proportionate share of
the underwriting
10
<PAGE> 11
discount. Following this offering, the current stockholders of the Company will
own Common Stock with a market value of approximately $23.7 million, based upon
the initial public offering price of $7.50 per share.
SHARES ELIGIBLE FOR FUTURE SALE
Upon the closing of this offering, the Company will have 5,663,750 shares
of Common Stock outstanding. The 2,500,000 shares of Common Stock sold in this
offering will be freely tradable without restriction or limitation under the
Securities Act of 1933, except for shares purchased by "affiliates" (as defined
under the Securities Act of 1933). All of the remaining 3,163,750 shares of
Common Stock will become eligible for sale 90 days following the date of this
Prospectus, subject in some cases to the volume and other limitations of Rule
144 under the Securities Act. All of these shares are subject to lock-up
agreements under which their holders have agreed not to sell or otherwise
dispose of any of their shares for a period of 180 days after the date of this
Prospectus, without the prior written consent of A.G. Edwards & Sons, Inc. Upon
completion of this offering, the Company will have 713,500 shares of Common
Stock reserved for issuance upon the exercise of stock options, of which 263,500
shares are subject to currently outstanding options. Following the completion of
this offering, the Company intends to file one or more registration statements
on Form S-8 to register these shares. Sales of substantial amounts of Common
Stock in the public markets, pursuant to Rule 144 or otherwise, or the
availability of such shares for sale could adversely affect the prevailing
market prices for the Common Stock and impair the Company's ability to raise
additional capital through the sale of equity securities in the future. See
"Management -- Stock Plans and Agreements" and "Shares Eligible for Future
Sale."
DILUTION
Purchasers of Common Stock in this offering will experience an immediate
and substantial dilution of $5.52 per share in the pro forma net tangible book
value of their Common Stock. See "Dilution."
ABSENCE OF A PUBLIC MARKET; DETERMINATION OF OFFERING PRICE; VOLATILITY OF STOCK
PRICE
Prior to this offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price will be determined
through negotiations between the Company and representatives of the
Underwriters. See "Underwriting" for a discussion of factors considered in
determining the initial public offering price. There can be no assurance that a
regular trading market for the Common Stock will develop after this offering or,
if developed, that a public trading market can be sustained. The initial public
offering price will not necessarily reflect, and may be higher than, the market
price of the Common Stock after the offering. There has historically been
significant volatility in the market price of securities of technology
companies. In addition, the stock market in recent years has experienced
significant price and volume fluctuations that often have been unrelated or
disproportionate to the operating performance of particular companies. Many
factors that have influenced trading prices, such as actual or anticipated
operating results, growth rates, changes in estimates by analysts, market
conditions in the industry, announcements by competitors, regulatory actions and
general economic conditions, will vary from period to period. As a result of the
foregoing, the Company's operating results from time to time may be below the
expectations of securities analysts and investors. Any such event would likely
result in a material adverse effect on the market price of the Common Stock. See
"Underwriting."
PAYMENT OF DIVIDENDS
Other than the S Corporation Distribution, the Company does not anticipate
declaring or paying cash dividends in the foreseeable future. In addition, the
Company's existing credit facility contains provisions which could have the
effect of limiting its ability to pay cash dividends. See "Dividend Policy."
11
<PAGE> 12
S CORPORATION DISTRIBUTION
AND TERMINATION OF S CORPORATION STATUS
Prior to this offering, the Company has been treated as a Subchapter S
corporation under the Code for federal and certain state income tax purposes. As
a result, the Company's earnings were taxed for federal and certain state tax
purposes directly to its stockholders. Effective as of the Termination Date, the
Company's status as an S corporation will be terminated and the Company will
become subject to federal and state income taxes.
Prior to the offering, the Board of Directors intends to declare a dividend
to the existing stockholders in an amount equal to the lesser of $6.9 million
and the actual amount of undistributed S corporation earnings. As of March 31,
1997, undistributed S corporation earnings approximated $5.5 million. The
Company estimates that the actual amount of the S Corporation Distribution will
be between $6.5 million and $6.9 million. The Company will pay approximately 90%
of the estimated amount of the S Corporation Distribution on the Termination
Date using Company receivables, cash on hand, borrowings under the existing line
of credit and, if necessary, additional short-term borrowings. Any amounts so
borrowed will be repaid using a portion of the net proceeds of this offering.
The balance of the S Corporation Distribution will be paid when the actual
amount is calculated. See "Use of Proceeds."
In connection with the S Corporation Distribution, the Company and each of
the stockholders receiving a portion of the S Corporation Distribution will
enter into cross-indemnification agreements pursuant to which the Company will
indemnify each stockholder and each stockholder will indemnify the Company from
and against adverse tax effects resulting from the reallocation of income and
expenses between Subchapter S corporation and Subchapter C corporation tax
years.
The Company intends to structure the S Corporation Distribution so that no
deferred tax liability will be recorded in connection with the S corporation
termination. Had the Company terminated its S corporation status at March 31,
1997, the amount of such deferred tax liability would have been $1.1 million.
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the
1,850,000 shares of Common Stock offered by it hereby are estimated to be $12.2
million ($14.8 million if the over-allotment option granted to the Underwriters
is exercised in full) after deducting the underwriting discount and estimated
expenses to be paid by the Company. The Company will not receive any of the
proceeds from the sale of the 650,000 shares of Common Stock offered by the
Selling Stockholders.
The Company intends to use the net proceeds of the offering to fund the S
Corporation Distribution and to repay the outstanding balance on its line of
credit, if any, including any amounts used to fund the S Corporation
Distribution, and any additional borrowings incurred by the Company to fund the
S Corporation Distribution. The Company's outstanding principal line of credit
bears interest at the bank's prime rate plus a percentage, not more than 0.25%,
which depends on the Company's historical financial performance, and matures on
February 28, 1998. Borrowings under the bank line of credit to date have been
used for working capital. There was no debt outstanding under the line of credit
as of May 31, 1997.
The remainder of the net proceeds received by the Company from the offering
will be used for working capital and general corporate purposes, including
possible acquisitions of businesses complementary to the Company's businesses.
The Company does not currently have any agreements or commitments with respect
to any potential acquisitions, nor are any negotiations regarding any
acquisitions ongoing. Pending such uses, the Company intends to invest the net
proceeds from the offering in investment grade, interest-bearing instruments.
12
<PAGE> 13
DIVIDEND POLICY
The Company historically has made distributions to its stockholders related
to its S corporation status and the resulting tax payment obligations imposed on
its stockholders, including a total of $27,650 since October 1, 1994. Other than
the S Corporation Distribution, the Company does not anticipate declaring or
paying cash dividends in the foreseeable future. In addition, the Company's
existing credit facility contains provisions which could have the effect of
limiting its ability to pay cash dividends, other than the S Corporation
Distribution.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1997 on an actual and pro forma as adjusted basis. This table should
be read in conjunction with the Consolidated Financial Statements and related
Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1997
----------------------------
PRO FORMA
ACTUAL AS ADJUSTED (1)
-------- ---------------
(IN THOUSANDS)
<S> <C> <C>
Total long-term debt............................................... $ -- $ --
-------- -------
Stockholders' equity (2):
Preferred stock, $.01 par value, 1,000,000 shares authorized,
no shares issued and outstanding, actual and pro forma as
adjusted..................................................... -- --
Common Stock, $.01 par value, 40,000,000 shares authorized,
6,750,000 shares issued, 3,786,750 outstanding, actual,
8,600,000 shares issued, 5,636,750 outstanding, pro forma as
adjusted (3)................................................. 67 86
Paid-in capital and accretion................................. 16,506 12,203
Retained earnings............................................. 5,789 (811)
Adjustment for redemption value greater than amounts paid in
by stockholders.............................................. (16,438) --
Less cost of 2,963,250 shares of treasury stock............... (242) (242)
-------- -------
Total stockholders' equity.................................. 5,682 11,236
-------- -------
Total capitalization..................................... $ 5,682 $11,236
======== =======
</TABLE>
- ---------------
(1) Gives effect to: (i) a distribution to the Company's current stockholders of
undistributed S corporation earnings, which totaled approximately $5.5
million as of March 31, 1997; (ii) the recording of a $1.1 million deferred
tax liability, which would have been required had the Company terminated its
S corporation status as of March 31, 1997; (iii) the sale of the 1,850,000
shares of Common Stock offered by the Company hereby, after deducting the
underwriting discount and estimated offering expenses, and the receipt of
the net proceeds therefrom; and (iv) the cancellation of Stock Redemption
Agreements, resulting in elimination of the adjustment for redemption value
greater than amounts paid in by stockholders. The Company intends to
structure the S Corporation Distribution so that no deferred tax liability
will be recorded in connection with the termination of the S corporation
status. The Company estimates that the actual amount of the S Corporation
Distribution will be between $6.5 million and $6.9 million. See "S
Corporation Distribution and Termination of S Corporation Status" and Note 9
of Notes to Financial Statements.
(2) Gives effect to an amendment to the Company's Certificate of Incorporation
which authorizes Preferred Stock and increases the number of authorized
shares of Common Stock.
(3) Does not include an aggregate of 740,500 shares of Common Stock reserved for
issuance at March 31, 1997 by the Company upon the exercise of stock
options, of which 27,000 have been issued upon the exercise of an option
subsequent to March 31, 1997. As of the date of this Prospectus, there were
options outstanding to purchase 263,500 shares of Common Stock at a weighted
average price of $5.34 per share, none of which are currently exercisable.
13
<PAGE> 14
DILUTION
Purchasers of the Common Stock offered hereby will experience an immediate
and substantial dilution in the pro forma net tangible book value of their
Common Stock from the assumed initial public offering price. The net tangible
book value of the Company as of March 31, 1997 was $5.7 million, or $1.49 per
share. Net tangible book value per share represents the amount of total tangible
assets less total liabilities, divided by the number of shares of Common Stock
outstanding, including the effect of 27,000 shares of Common Stock which were
issued pursuant to the exercise of stock options in April 1997. The pro forma
net tangible book deficit of the Company as of March 31, 1997, after giving
effect to the distribution of undistributed S corporation earnings, which were
$5.5 million at March 31, 1997, and the related provision for deferred income
taxes, would have been $(918,000), or $(0.24) per share. After giving effect to
the sale by the Company of the 1,850,000 shares of Common Stock offered by it
hereby (after deducting the underwriting discount and estimated offering
expenses), the pro forma net tangible book value would have been approximately
$11.2 million, or $1.98 per share. This represents an immediate increase in pro
forma net tangible book value of $2.22 per share to existing stockholders and an
immediate dilution in pro forma net tangible book value of $5.52 per share to
purchasers of Common Stock in this offering. The following table illustrates
this per share dilution in pro forma net tangible book value per share:
<TABLE>
<S> <C> <C>
Initial public offering price per share.............................. $7.50
Net tangible book value per share at March 31, 1997............. $ 1.49
Decrease attributable to pro forma adjustments.................. (1.73)
------
Pro forma net tangible book value per share at March 31, 1997... (0.24)
Increase per share attributable to new investors................ 2.22
------
Pro forma net tangible book value per share after the offering....... 1.98
-----
Dilution per share to new investors.................................. $5.52
=====
</TABLE>
The following table sets forth, as of June 25, 1997, certain information
with respect to the number of shares acquired, total consideration paid and the
average price paid per share by existing stockholders and by purchasers of the
shares offered hereby (before deducting the estimated underwriting discount):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- ---------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders..................... 3,813,750 67.3% $ 150,810 1.1% $0.04
New investors............................. 1,850,000 32.7 13,875,000 98.9 $7.50
--------- ----- ----------- -----
Total................................ 5,663,750 100.0% $14,025,810 100.0%
========= ===== =========== =====
</TABLE>
The foregoing table assumes no exercise of stock options subsequent to June
25, 1997 or of the Underwriters' over-allotment option. As of the date of this
Prospectus, there were options outstanding to purchase 263,500 shares of Common
Stock at a weighted average price of $5.34 per share, none of which are
presently exercisable. To the extent such options become exercisable and are
exercised, there will be further dilution to new shareholders.
The sale of shares by the Selling Stockholders in this offering will reduce
the number of shares held by existing stockholders to 3,163,750 shares, or
approximately 55.9% of the total number of shares of Common Stock outstanding
immediately after this offering (52.4% if the Underwriters' over-allotment
option is exercised in full), and will increase the number of shares held by new
investors to 2,500,000 shares, or 44.1% of the total number of shares of Common
Stock outstanding immediately after this offering (47.6% if the Underwriters'
over-allotment option is exercised in full). See "Principal and Selling
Stockholders."
14
<PAGE> 15
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the Financial Statements and the Notes thereto included elsewhere herein. The
Statement of Operations Data set forth below with respect to fiscal 1994, 1995
and 1996 and the Balance Sheet Data as of September 30, 1995 and 1996 are
derived from, and are qualified by reference to, the financial statements of the
Company audited by Arthur Andersen LLP included elsewhere in this Prospectus.
The Statement of Operations Data set forth below with respect to fiscal 1992 and
1993 and the Balance Sheet Data as of September 30, 1992, 1993 and 1994 are
derived from reviewed financial statements of the Company not included in the
Prospectus. The unaudited Statement of Operations Data for the six months ended
March 31, 1996 and 1997 and the Balance Sheet Data as of March 31, 1997 are
derived from the unaudited financial statements of the Company included
elsewhere in this Prospectus, which, in the opinion of management, have been
prepared on the same basis as the audited financial statements and contain all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the results of operations for such periods.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
-------------------------------------------------- ------------------
1992 1993 1994 1995 1996 1996 1997
------ ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................ $8,679 $12,223 $19,106 $23,724 $31,665 $13,036 $21,130
Direct costs............................ 4,881 7,050 11,418 14,815 19,307 7,195 14,746
Indirect, general and administrative
expenses.............................. 3,194 4,612 7,177 8,202 10,253 4,774 5,025
------ ------- ------- ------- ------- ------- -------
Income from operations.................. 604 561 511 707 2,105 1,067 1,359
Other income (expense), net............. (49) (78) (73) (133) (200) (101) (90)
------ ------- ------- ------- ------- ------- -------
Net income.............................. $ 555 $ 483 $ 438 $ 574 $ 1,905 $ 966 $ 1,269
====== ======= ======= ======= ======= ======= =======
PRO FORMA STATEMENT OF OPERATIONS DATA (1):
Net income before taxes................. $ 555 $ 483 $ 438 $ 574 $ 1,905 $ 966 $ 1,269
Income taxes............................ 222 193 175 229 743 386 495
------ ------- ------- ------- ------- ------- -------
Net income.............................. $ 333 $ 290 $ 263 $ 345 $ 1,162 $ 580 $ 774
====== ======= ======= ======= ======= ======= =======
Net income per share (2)................ $ 0.27 $ 0.18
======= =======
Weighted average shares outstanding
(2)................................... 4,361 4,346
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------------------------------- MARCH 31,
1992 1993 1994 1995 1996 1997
------ ------- ------- ------- ------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.............................. $2,234 $ 2,231 $ 2,616 $ 2,716 $ 5,387 $ 3,680
Total assets................................. 3,710 4,454 6,798 6,987 13,118 15,671
Total debt................................... 1,135 1,359 2,031 1,821 2,688 --
Stockholders' equity......................... 1,313 1,626 2,006 2,497 4,375 5,682
</TABLE>
- ---------------
(1) For all periods presented, 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 federal and state income
taxes based on estimated tax rates, as if the Company had not elected S
corporation status for the periods indicated. See "S Corporation
Distribution and Termination of S Corporation Status."
(2) The pro forma weighted average shares outstanding is based on: (i) the
weighted average shares outstanding during the period, assuming the dilutive
effect of all options outstanding; (ii) stock options issued during the
twelve months immediately preceding the offering (using the treasury stock
method and the initial public offering price of $7.50 per share) for all
periods presented; and (iii) the assumed sale of a sufficient number of
shares of Common Stock necessary to provide funds to make a distribution of
all undistributed S corporation earnings as of March 31, 1997 in excess of
fiscal 1996 earnings.
15
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company provides communications and information technology services and
solutions, predominantly to U.S. government agencies and to a lesser extent
commercial and international customers. The Company operates primarily in three
interrelated areas: communication systems design and support, IT Services and
systems integration. The Company has been profitable since its inception in
1987, and has achieved a compound annual growth rate in revenues of 36.3% over
the past five fiscal years. With revenues of $31.7 million, fiscal 1996 was the
ninth consecutive year of revenue growth.
The Company's expansion has been achieved entirely through internal growth.
Prior to fiscal 1994, virtually all of the Company's revenues were derived from
contracts with the U.S. Navy for systems engineering, design, integration,
services and support for satellite communications. Beginning in fiscal 1994, the
Company began to develop applications for its technical capabilities outside its
traditional U.S. Navy business. For example, the Company's GSA Schedule Contract
has fueled significant growth in the systems integration area as the U.S.
government's trend toward using readily available software and hardware expands
the need for systems integration services, such as those offered by the Company.
The Company's backlog, including both funded and unfunded backlog, was
$139.2 million at September 30, 1996. Two five-year U.S. Navy contracts awarded
in fiscal 1996 involve services estimated at approximately $120 million and were
the main contributors to the recent increase in backlog. Many of the Company's
contracts are funded from year to year, based primarily on the procuring
company's or agency's fiscal requirements. The Company believes that
approximately 26% of its backlog as of September 30, 1996 will result in
revenues in fiscal 1997. See "Risk Factors -- Backlog Not Indicative of
Revenues" and "Business -- Backlog."
Revenues, by dollar and percentage, from the Company's three interrelated
areas and three major types of customer are given below:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, SIX MONTHS ENDED MARCH 31,
-------------------------------------------------- --------------------------------
1994 1995 1996 1996 1997
-------------- -------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SERVICES PROVIDED
Communication Systems... $16,046 84% $17,785 75% $20,422 65% $ 8,267 63% $12,415 59%
IT Services............. 3,059 16 4,634 19 8,008 25 3,900 30 3,697 17
Systems Integration..... 1 0 1,305 6 3,235 10 869 7 5,018 24
------- --- ------- --- ------- --- ------- --- ------- ---
Total.......... $19,106 100% $23,724 100% $31,665 100% $13,036 100% $21,130 100%
======== ==== ======== ==== ======== ==== ======== ==== ======== ====
CUSTOMER TYPE
U.S. Government......... $19,011 100% $23,483 99% $28,606 90% $11,406 87% $19,929 94%
Commercial.............. 95 0 219 1 849 3 322 3 403 2
International........... -- -- 22 0 2,210 7 1,308 10 798 4
------- --- ------- --- ------- --- ------- --- ------- ---
Total.......... $19,106 100% $23,724 100% $31,665 100% $13,036 100% $21,130 100%
======== ==== ======== ==== ======== ==== ======== ==== ======== ====
</TABLE>
The Company's operating margin is affected by, among other things, the mix
of contract types (cost reimbursement, fixed price or time and materials) as
well as the proportion of revenues from higher margin commercial and
international sales. A significant portion of the Company's contracts are cost
reimbursement contracts, under which the Company is reimbursed for all actual
costs, plus a fee or profit. The financial risks under these contracts generally
are lower than those associated with other types of contracts, and margins also
are typically lower. An increasing portion of the Company's services are
provided under fixed price contracts. Such contracts carry higher financial
risks because the Company must deliver the contracted services below the fixed
price in order to earn a profit. For those companies with low cost structures,
these contracts offer the
16
<PAGE> 17
opportunity for higher profit margins. The following table summarizes the
percentage of revenues attributable to each contract type for the periods
indicated:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
SEPTEMBER 30, MARCH 31,
------------------- ------------
1994 1995 1996 1996 1997
--- --- --- --- ---
<S> <C> <C> <C> <C> <C>
Cost reimbursement........................ 92% 77% 68% 65% 62%
Fixed price............................... 3 16 25 27 32
Time and materials........................ 5 7 7 8 6
--- --- --- --- ---
Total........................... 100% 100% 100% 100% 100%
=== === === === ===
</TABLE>
Revenues on cost plus fixed fee contracts are recognized to the extent of
costs incurred plus a proportionate amount of fees earned. Revenues on time and
materials contracts are recognized at the contractual rates as labor hours and
direct expenses are incurred. Revenues on fixed price contracts are recognized
on the percentage-of-completion method based on costs incurred in relation to
total estimated costs.
The Company's three significant U.S. Navy communication systems contracts
and programs accounted for approximately 52.1% of revenues for the six months
ended March 31, 1997. See "Business -- Company Operations -- Communication
Systems." Although the Company intends to expand its commercial and
international sales, a relatively small number of contracts are likely to
continue to account for a significant portion of the Company's future revenues.
For fiscal 1996 and the six months ended March 31, 1997, approximately 9% and
26%, respectively, of the Company's revenues were derived from sales under the
GSA Schedule Contract. The GSA Schedule Contract is a one-year contract,
renewable annually by the government. Termination of any of these contracts or
the Company's inability to renew or replace them when they expire could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company generally uses commercially available products in its systems
integration business, which are generally available from several sources. The
Company has generally been able to obtain adequate supplies from its current
suppliers in a timely manner. The Company believes that, in most cases,
alternate vendors can be found if its current suppliers are unable to fulfill
its needs.
The Company has developed, or is in the process of developing,
communication systems and software products which have both military and
commercial applications. These include the Virtual Program Office, BGIXS, ISALTS
and Pelican. In addition, the Company is evaluating possible replacement
technologies being developed by others for the VersaModule European technology.
Although the Company will continue to incur costs relating to these and other
products, the Company does not expect additional enhancements and marketing
efforts to have a material impact on its future financial condition or results
of operations. See "Business -- Products."
During fiscal 1996 and the six months ended March 31, 1997, revenues from
international business amounted to 7% and 4%, respectively, of revenues. The
vast majority of the Company's international business revenues are derived from
sales of the Company's products to foreign navies and the performance of
services related to such sales. Because international business to date has had
higher profit margins than U.S. government business, an inability to obtain
future international business could adversely affect the Company's financial
condition and results of operations. Because both the Company's expenses and its
revenues from its international business are generally denominated in U.S.
dollars, the Company does not believe that its operations are subject to
material risks associated with currency fluctuations.
Since October 1989, the Company has elected to be treated, for federal and
certain state income tax purposes, as an S corporation under the Code. As a
result, the Company's earnings have been taxed, for federal and certain state
income tax purposes, directly to the Company's stockholders rather than to the
Company. The Company will terminate its S corporation status on the Termination
Date and will distribute 90% of the S Corporation Distribution immediately prior
to the offering. The Company will distribute the balance of the S Corporation
Distribution as soon as the actual amount is calculated. The Company estimates
that the actual amount of the S Corporation Distribution will be between $6.5
million and $6.9 million. The
17
<PAGE> 18
Company intends to structure the S Corporation Distribution so that no deferred
tax liability will be recorded in connection with the termination of the S
corporation status. See "S Corporation Distribution and Termination of S
Corporation Status."
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data as a
percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
------------------------- ---------------
1994 1995 1996 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues........................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Direct costs....................................... 59.8 62.4 61.0 55.2 69.8
Indirect, general and administrative expenses...... 37.6 34.6 32.4 36.6 23.8
----- ----- ----- ----- -----
Income from operations............................. 2.6 3.0 6.6 8.2 6.4
Other income (expense), net........................ (0.4) (0.6) (0.6) (0.8) (0.4)
Net income......................................... 2.2 2.4 6.0 7.4 6.0
===== ===== ===== ===== =====
Pro forma income taxes............................. 0.9 1.0 2.3 3.0 2.4
Pro forma net income............................... 1.3% 1.4% 3.7% 4.4% 3.6%
===== ===== ===== ===== =====
</TABLE>
SIX MONTHS ENDED MARCH 31, 1997 COMPARED TO SIX MONTHS ENDED MARCH 31, 1996
Revenues increased 62.1%, or $8.1 million, to $21.1 million for the six
months ended March 31, 1997, from $13.0 million for the same period in 1996. The
increase was due to a $4.0 million increase in revenues from communication
systems and IT Services, primarily under contracts with the U.S. Navy, and a
$4.1 million increase in revenues from systems integration services.
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 $14.7 million for the six months ended March
31, 1997 from $7.2 million for the same period in 1996. Direct costs, expressed
as a percentage of revenues, increased to 69.8% for the six months ended March
31, 1997 from 55.2% for the same period in 1996, primarily due to an increased
proportion of revenues coming from systems integration services. These services
have higher direct costs 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 expenses
increased to $5.0 million for the six months ended March 31, 1997 from $4.8
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, decreased to 23.8% for the six months ended March 31,
1997 from 36.6% for the six months ended March 31, 1996, due to the higher
proportion of systems integration revenues, which typically have lower
associated indirect expenses.
Income from operations increased 27.4%, to $1.4 million for the six months
ended March 31, 1997, from $1.1 million for the same period in 1996, primarily
due to increased revenues from U.S. Navy contracts and systems integration. As a
percentage of revenues, income from operations decreased to 6.4% for the six
months ended March 31, 1997, from 8.2% for the comparable period in the prior
year, primarily attributable to international revenues from the sale of ISALTS
products at a significantly higher margin in the same period in 1996.
Other income (expense), net, consists of interest expense, offset in part
by interest income from short-term deposits of cash. Interest expense was
$134,000 and $127,000 for the six month periods ended March 31, 1997 and 1996,
respectively. Interest income was $44,000 and $26,000 during the six month
periods ended March 31, 1997 and 1996, respectively.
18
<PAGE> 19
The Company's pro forma effective tax rate was 39.0% and 40.0% for the
three month periods ended March 31, 1997 and 1996, respectively.
FISCAL 1996 COMPARED TO FISCAL 1995
Revenues increased 33.3%, or $7.9 million, to $31.7 million for fiscal
1996, from $23.7 million for fiscal 1995. The increase was due to a $6.0 million
increase in revenues from communication systems and IT Services, primarily under
contracts with the U.S. Navy, and a $1.9 million increase in revenues from
systems integration services.
Direct costs increased to $19.3 million for fiscal 1996 from $14.8 million
for fiscal 1995. Direct costs, expressed as a percentage of revenues, decreased
to 61.0% for fiscal 1996 from 62.4% for fiscal 1995, primarily due to increased
revenues from international fixed price contracts which generally have lower
direct costs as a percentage of revenues. This decrease was partially offset by
the higher direct costs attributable to systems integration services.
Indirect expenses increased to $10.3 million for fiscal 1996 from $8.2
million for fiscal 1995. The increase was due primarily to the higher level of
revenues discussed above. Indirect expenses, expressed as a percentage of
revenues, decreased to 32.4% for fiscal 1996 from 34.6% for fiscal 1995, because
a higher proportion of revenues came from systems integration services.
Income from operations increased 197.7%, to $2.1 million for fiscal 1996,
from $707,000 for fiscal 1995. As a percentage of revenues, income from
operations increased to 6.6% in fiscal 1996 from 3.0% in fiscal 1995. This
increase was due primarily to a shift in the Company's revenue mix, with an
increased proportion of revenues coming from higher margin international,
systems integration and commercial sales.
Interest expense was $257,000 and $185,000 for fiscal 1996 and 1995,
respectively. Interest income was $57,000 and $52,000 for fiscal 1996 and 1995,
respectively.
The Company's pro forma effective tax rate was 39.0% and 40.0% for fiscal
1996 and 1995, respectively.
FISCAL 1995 COMPARED TO FISCAL 1994
Revenues increased 24.1%, or $4.6 million, to $23.7 million for fiscal
1995, from $19.1 million for fiscal 1994. This increase was due to a $3.3
million increase in revenues from communication systems and IT Services,
primarily under contracts with the U.S. Navy, and a $1.3 million increase in
revenues from the newly developed systems integration business.
Direct costs increased to $14.8 million for fiscal 1995 from $11.4 million
for fiscal 1994. Direct costs, expressed as a percentage of revenues, increased
to 62.4% for fiscal 1995, from 59.8% for fiscal 1994, primarily due to a higher
proportion of revenues coming from systems integration services.
Indirect expenses increased to $8.2 million for fiscal 1995 from $7.2
million for fiscal 1994. The increase was due primarily to the higher level of
revenues discussed above. Indirect expenses, expressed as a percentage of
revenues, decreased to 34.6% for fiscal 1995, from 37.6% for fiscal 1994, due to
the higher proportion of systems integration revenues.
Income from operations increased 38.4%, to $707,000 for fiscal 1995, from
$511,000 in fiscal 1994. As a percentage of revenues, income from operations
increased to 3.0% in fiscal 1995, from to 2.6% in fiscal 1994 due primarily to
increased revenues from systems integration and commercial business.
Interest expense was $185,000 and $125,000 during fiscal 1995 and 1994,
respectively. Interest income was $52,000 for both fiscal 1995 and 1994.
The Company's pro forma effective tax rate was 40.0% for both fiscal 1995
and 1994.
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth certain unaudited statement of operations
data for the last nine quarters, and such data expressed as a percentage of
revenues for each quarter. This data has been derived from the Company's
unaudited quarterly financial statements. In management's opinion, these
quarterly financial
19
<PAGE> 20
statements have been prepared on a basis consistent with the audited financial
statement contained elsewhere herein, and include all adjustments, consisting
only of normal recurring adjustments, which the Company considers necessary for
a fair presentation of the information presented, when read in conjunction with
the Company's audited Financial Statements and Notes thereto appearing elsewhere
in this Prospectus. The results of operations for any quarter and any
quarter-to-quarter trends are not necessarily indicative of the results to be
expected for any future periods. See "Risk Factors -- Variability of Quarterly
Operating Results."
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------------------------------------------
FISCAL 1995 FISCAL 1996 FISCAL 1997
------------------------------------------ ------------------------------------------ --------------------
DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1994 1995 1995 1995 1995 1996 1996 1996 1996 1997
-------- -------- -------- --------- -------- -------- -------- --------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues......... $4,512 $5,371 $6,495 $ 7,346 $5,775 $7,261 $7,215 $11,415 $9,066 $12,064
Direct costs..... 2,688 3,283 4,285 4,559 3,331 3,864 4,475 7,638 6,038 8,708
Indirect, general
and
administrative
expenses....... 1,664 1,980 2,047 2,511 2,027 2,748 2,358 3,121 2,442 2,583
-------- -------- -------- --------- -------- -------- -------- --------- -------- ---------
Income from
operations..... 160 108 163 276 417 649 382 656 586 773
======= ======== ======= ======== ======= ======== ======= ======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
(AS A PERCENTAGE OF REVENUES)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues......... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Direct costs..... 59.6 61.1 66.0 62.1 57.7 53.2 62.0 66.9 66.6 72.2
Indirect, general
and
administrative
expenses....... 36.9 36.9 31.5 34.1 35.1 37.9 32.7 27.4 26.9 21.4
-------- -------- -------- --------- -------- -------- -------- --------- -------- ---------
Income from
operations..... 3.5% 2.0% 2.5% 3.8% 7.2% 8.9% 5.3% 5.7% 6.5% 6.4%
======= ======== ======= ======== ======= ======== ======= ======== ======= ========
</TABLE>
The Company's revenues and earnings may fluctuate from quarter to quarter
based on such factors as the number, size and scope of projects, expenditures
required by the Company, delays, employee utilization rates, adequacy of
provisions for losses, accuracy of estimates of resources required to complete
ongoing projects and general economic conditions. Demand for the Company's
products and services in each of the markets it serves can vary significantly
from quarter to quarter due to revisions in customer budgets or schedules and
other factors beyond the Company's control. Additionally, a change in revenue
mix from quarter to quarter may result in fluctuating earnings, as experienced
by the Company on the sale of higher margin products to international customers
in the quarters ending December 31, 1995 and March 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
Since the Company's inception in 1987, it has generally financed its
working capital needs through internally generated funds, periodically
supplemented by borrowings under the Company's revolving credit facility with a
commercial bank.
The Company generated cash flow from operating activities of $3.2 million
for the six months ended March 31, 1997, resulting primarily from net income,
increases in accounts payable and accrued expenses, partially offset by
increases in contract receivables. The increase in contract receivables was due
to increased revenues from the two large U.S. Navy contracts awarded to the
Company during fiscal 1996 and from systems integration and resale business
under the GSA Schedule Contract. For the six months ended March 31, 1996, net
cash used in operating activities amounted to $1.1 million, resulting primarily
from increases in contract receivables and decreases in accounts payable and
accrued expenses, partially offset by net income.
The Company generated cash flow from operating activities of $165,000,
$545,000 and $469,000 for fiscal 1996, 1995 and 1994, respectively. Net cash
provided by operating activities for fiscal 1996 resulted primarily from net
income and increases in accounts payable and accrued expenses, partially offset
by increases in contract receivables. Net cash provided by operating activities
in fiscal 1995 was primarily the result of net income, non-cash charges and
increases in accrued expenses, partially offset by increases in contract
receivables and decreases in accounts payable. Net cash provided by operating
activities for fiscal 1994 was due to net income and increases in accounts
payable and accrued expenses, partially offset by increases in contract
receivables.
20
<PAGE> 21
The principal use of cash for investing activities has been for the
purchase of computers and equipment. These purchases totaled $370,000, $270,000
and $382,000 for fiscal 1996, 1995 and 1994, respectively, and $350,000 and
$200,000 for the six months ended March 31, 1997 and 1996, respectively.
Further, the Company invested $240,000 and $446,000 in software development
costs for its SALTS products in fiscal 1995 and 1994, respectively.
During 1996, the Company had a line of credit with a commercial bank under
which it could borrow up to a maximum of $4.0 million. In March 1997, the
Company extended the line under more favorable terms. The new line permits
borrowing up to $5.0 million and bears interest, payable monthly, at the bank's
prime rate plus a percentage, not more than 0.25%, that depends on the Company's
historical financial performance. The line of credit expires on February 28,
1998. Borrowings are limited by specified percentages of specific contract
receivables and are secured by contract receivables. The credit agreement
contains various covenants requiring the Company to maintain certain financial
ratios, including tangible net worth, liabilities to tangible net worth, funded
debt to operating cash flow and debt service. The agreement also restricts the
payment of dividends. As of the end of fiscal 1996, the Company was in
compliance with all covenants contained in such agreement. As of March 31, 1997,
there was no debt outstanding under the Company's revolving credit facility.
The Company leases office space from 10089 Management, L.L.C., a Virginia
limited liability company ("10089 Management"), which has as its majority
members Messrs. Robinson, Martinache and Costello, the principal stockholders
and directors and officers of the Company. The Company had guaranteed 10089
Management's bank borrowings, but this guaranty will be terminated upon the
closing of this offering. See "Certain Transactions -- Transactions with
Directors and Executive Officers."
Inflation did not have a material impact on the Company's revenues or
income from operations in fiscal 1996, 1995 and 1994 and the six months ended
March 31, 1997 and 1996.
The Company currently anticipates that the net proceeds from this offering,
together with its current cash balances, amounts available under its credit
facility and net cash provided by operating activities, will be sufficient to
meet its working capital and capital expenditure requirements for at least the
next twelve months.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 123, "Accounting for Stock
Based Compensation" was issued in October 1995. The Company adopted the new
standard for fiscal 1996. This standard establishes the fair value based method
(the "SFAS 123 Method") rather than the intrinsic value based method as the
preferred accounting methodology for stock based compensation arrangements.
Entities are allowed to: (i) continue to use the intrinsic value based
methodology in their basic financial statements and provide in the footnotes pro
forma net income and earnings per share information as if the SFAS 123 Method
had been adopted; or (ii) adopt the SFAS 123 Method. The Company adopted this
statement by providing the required pro forma disclosures in the footnotes. See
Note 9 of Notes to Financial Statements.
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
changes the reporting requirements for earnings per share ("EPS") for publicly
traded companies by replacing primary EPS with basic EPS and changing the
disclosures associated with this change. The Company is required to adopt this
standard in fiscal 1998 and is currently evaluating the impact of this standard.
21
<PAGE> 22
BUSINESS
OVERVIEW
Advanced Communication Systems, Inc. provides communications and
information technology services and solutions, predominantly to U.S. government
agencies and to a lesser extent commercial and international customers. The
Company operates primarily in three interrelated areas: communication systems
design and support, IT Services and systems integration. The Company believes
that, from its inception in 1987, it has been a leader in U.S. Navy SATCOM.
Recently, using its information management capabilities in such areas as network
and database design and support, the Company has begun to expand its services to
the U.S. military and to develop business with other federal agencies, state and
local governments and commercial and international customers.
The Company believes that the following key attributes, in addition to
enabling it to maintain its strong position in the military SATCOM market, will
enhance its ability to expand its business.
SATCOM EXPERTISE. The Company believes that it is recognized as a leader
in systems engineering for U.S. Navy SATCOM and related systems technology. The
senior management of the Company has extensive experience in the technical and
managerial aspects of the Navy SATCOM business. While the Company initially
developed a staff of highly qualified communications engineers and systems
analysts to provide state-of-the-art engineering and technical support services,
it has expanded its staff to include experts in program and financial management
as well as professional support personnel with backgrounds in communication
systems. The Company believes this combination of skills and capabilities is one
of the key factors that distinguishes it from its competitors in the
communication systems market and has enabled it to retain customers such as the
U.S. Navy.
ABILITY TO APPLY TECHNOLOGY. The Company believes it has a reputation in
the industry for delivering creative solutions to complex problems through the
application of the most current technology available. Its technical specialties
cover a broad range of emerging technologies, such as computer-aided logistics
support, data security, rapid system development techniques, rapid massive data
transfer techniques and client/server applications. The Company intends to
continue its policy of ongoing development of new products and services.
ABILITY TO PROVIDE COST EFFECTIVE, TOTAL SOLUTIONS. The Company offers its
customers a full spectrum of information technology services, permitting the
tailoring of its offerings to customers' changing needs. It has developed a
number of readily available commercial software solutions that permit it to
provide quick, cost-effective solutions to its customers. Because the Company
has access to different products from many vendors, it is able to objectively
select the best products for the unique needs of its customers.
EXTENSIVE PROJECT MANAGEMENT EXPERIENCE. The Company believes that its
extensive experience with large and complex federal contracts has contributed to
its reputation for excellence in project management. The Company believes this
capability will position it to capitalize on the future growth in outsourcing,
both in the United States and internationally.
INDUSTRY OVERVIEW
For the past several years, a significant trend in both government and
business has been to seek greater productivity with fewer resources. Government
and business organizations increasingly have focused on their core competencies
and functions, and have begun to outsource non-core functions, such as
information technology and program management, in order to reduce staff and
overhead, use resources more efficiently and acquire expertise on an as-needed
basis. The outsourcing of information technology functions has given rise to a
significant opportunity for private contractors to offer services and support to
governments and businesses.
Federal Sources, Inc., an independent market research firm specializing in
the U.S. federal market, estimates that the U.S. government has budgeted $26.5
billion in its fiscal year 1997 for information
22
<PAGE> 23
technology services and products. Estimates for domestic commercial information
technology products and services are reported to be significantly larger than
those for the U.S. government's requirements.
The U.S. military is also seeking greater productivity through systems that
act as "force multipliers." These are solutions and technologies that enable
fewer personnel and assets and lower levels of military spending to produce more
effective performance. To further this strategy, military agencies are relying
on communications products and systems, such as those that provide secure and
reliable transmission of voice and data in demanding environments. In its fiscal
year 1997, the DOD budget for information technology in the classified command,
control and communications market is estimated to be $9.8 billion.
The federal government also is refocusing how it selects
contractors -- using a "best value" approach rather than price as the
determining factor, an approach the commercial sector has used for some time.
Under the best value approach, the government selects service providers based on
technical merit, reputation and past performance, not merely on price. Since the
late 1980s, the U.S. government also has made use of fewer, but larger-scale,
procurements to meet its information technology requirements, requiring
companies to have greater financial and technical resources in order to
participate in competitive bids. Companies have responded to this trend either
by increased use of teaming agreements among several firms in order to fulfill
the requirements of the larger procurements or through strategic mergers and
acquisitions of complementary businesses to consolidate operations and efforts
and permit competition against larger companies.
Government and business organizations also are increasingly demanding that
information technology systems be designed for interoperability with commercial
off-the-shelf computer hardware and software products and that such products be
usable with existing legacy systems. In addition, concerns over excessive
development costs and the rapid pace of technological change have led both
government and business organizations to demand flexible systems created by
adapting commercial off-the-shelf software and hardware, rather than systems
that have been built to customized specifications. This emphasis on system
flexibility using readily available commercial products creates extensive
systems integration opportunities.
BUSINESS STRATEGY
To capitalize on opportunities created by these industry developments, the
Company has adopted the following business strategies.
MAINTAIN LEADERSHIP IN MILITARY SATCOM INDUSTRY. Since its inception, the
Company has focused on being a leader in the military SATCOM industry. It now
seeks to expand its services in this market by continuing its early
identification of program needs, its support of government program offices in
formulating requirements and its incremental investments in development of lower
cost military products with shorter delivery times. The Company also believes it
can leverage its expertise with the U.S. Navy SATCOM to expand its presence as a
military SATCOM provider both within the Navy and other branches of the DOD.
EXPAND EXISTING SERVICES AND CUSTOMER BASE. The Company plans to continue
to expand its capabilities into new but related areas of technology which the
Company believes will allow it to both further penetrate its existing customer
base and develop new customers. For example, the Company has developed and is
marketing high speed data transfer technology and is currently enhancing that
technology to include high frequency communication capability with Internet and
intranet access. The Company's strategy also involves expanding its customer
base beyond the DOD. In particular, the Company seeks to capitalize on the U.S.
government's trend toward using readily available commercial products and
systems integration services by offering such products and services through its
GSA Schedule Contract. Finally, the Company plans to expand its services and
customer base by marketing internationally the technologies and capabilities it
has developed while performing U.S. military contracts. For example, the Company
has been successful in selling its Streamlined Automated Logistics Transmission
System ("SALTS") technology, which was originally developed for U.S. Navy
communication uses, to the United Kingdom Royal Navy (the "UK Royal Navy") and
the Royal Australian Navy.
DEVELOP ADDITIONAL COMMERCIAL BUSINESS. While servicing its government
customers, the Company has developed many advanced technical capabilities in
areas such as networking, local area network ("LAN")
23
<PAGE> 24
and wide area network ("WAN") services and database design and support. The
Company's strategy is to apply these skills and capabilities in selected
commercial markets, especially small and medium-sized businesses that are
outsourcing their increasingly complex information technology needs. For
example, the Company has used its information technology capabilities to
transfer the information technology operations of a large electric power company
from an old operating system with limited applications to a new operating system
with a wide range of office automation tools and flexible remote access, using
the World Wide Web. The Company has added experienced marketing staff to assist
its expansion into this market.
EXPAND THROUGH STRATEGIC ACQUISITIONS AND THE USE OF TEAMING
RELATIONSHIPS. Strategic acquisitions are an integral component of the
Company's growth strategy. Although it has not made any acquisitions to date,
the Company periodically evaluates potential acquisitions of businesses,
technologies and products which are complementary to its core communication
business. The Company believes that acquisitions will allow it to develop
technical services it does not currently provide, to target markets it does not
currently serve, to gain industry knowledge in such markets and to develop
relationships with additional customers. Additionally, the Company is pursuing
teaming relationships with significant industry participants in order to enhance
its ability to participate in additional large and complex procurement programs.
The Company currently participates in such programs, as both prime contractor
and subcontractor, with such major contractors as Computer Sciences Corporation
and Booz-Allen and Hamilton, Inc.
COMPANY OPERATIONS
The Company operates primarily in three interrelated areas: communication
systems, IT Services and systems integration.
COMMUNICATION SYSTEMS
The Company believes it is recognized as a leader in the SATCOM industry,
providing technical and program management services and support for satellite
communication systems to the U.S. military. It provides SATCOM engineering and
technical services and program and system support primarily to various program
directorates and field activities of the U.S. Navy. While the Company initially
developed a staff of highly qualified communications engineers and systems
analysts to provide state-of-the-art engineering and technical support services,
it has expanded its staff to include experts in program and financial management
as well as professional support personnel with backgrounds in communication
systems. The Company believes this combination of skills and capabilities is one
of the key factors that distinguishes it from its competitors in the
communication systems market. For fiscal 1996, the Company's communication
systems business represented 64.5% of revenues.
ENGINEERING. The Company provides comprehensive communications engineering
support to assist in the development of military communication systems. Many of
its contracts are not project specific, but require that it provide technical
services and support to a variety of projects and programs being run by a
particular Navy office. In particular instances, the Company may perform some or
all of the technical engineering and other support for a specific U.S. Navy
program or system, or may provide technical review and support services to
assist the Navy in evaluating or assessing engineering tasks. These services
cover a full range of engineering and technical support, including requirements
analyses, design, hardware and software engineering, studies and development.
The Company's skills and experience permit it to apply innovative solutions
to communications engineering problems. For example, the Company has developed
receiver, modulator and coder design alternatives for a major U.S. Navy
communication system and has defined satellite payload modifications for a major
military satellite program. The Company's expertise in both military and
commercial satellite programs has enabled it to develop innovative military uses
of commercial satellite systems. For instance, the Company developed the concept
which permitted the U.S. Navy to conduct its first worldwide video
teleconference, simultaneously linking all European, Atlantic and Pacific
commanders by satellite with the Pentagon and a major command ship at sea. In
addition, the Company's engineers have operational experience to translate a
user's requirements into practical technical specifications for a communication
system. This experience has
24
<PAGE> 25
enabled the Company's engineers to analyze major Navy communication systems,
such as High Speed Fleet Broadcast and the Communication Support System, and
project future needs and technology requirements. The Company's capability to
conduct high level theoretical engineering tasks, coupled with an intimate
knowledge of the system under investigation, permits the Company to assist its
customers in avoiding costly troubleshooting efforts on communication problems
related to natural phenomena. Many of these concepts and techniques which were
developed for the U.S. Navy have natural extensions to other military and
commercial applications.
As an extension of the Company's capability to provide total engineering
solutions, the Company supports communication systems after development with a
complete set of in-service engineering skills, which include planning for and
conducting installation, testing operational performance and providing training
and maintenance assistance. It provides this engineering support for a wide
variety of communications equipment, such as antennas, receivers, processors and
complete systems. For example, the Company provides installation check-out for
the U.S. Navy's extra high frequency terminals installed on-board ships and also
provides training for ship and submarine crews in their operation, both in port
and, when appropriate, at sea.
PROGRAM PLANNING AND MANAGEMENT. The Company assists DOD program managers
in planning and managing all facets of defense and military programs and
hardware procurement, from determining needs and objectives through development,
acquisition, integration, testing and fielding. These services include
procurement planning and management, financial management, cost estimating and
control and production support.
The Company has a staff specializing in financial management who have
worked with government managers in the Executive Office of the President,
national budget offices, Congressional committees, the Office of the Secretary
of Defense and the Office of the Secretary of the Navy. This staff has supported
several domestic and international government and commercial customers in
communication systems and other areas. The Company has tailored a variety of
project management techniques and tools to customer needs, such as developing
networks which enable simultaneous progressive tracking of over 100 acquisition
documents and developing dependency schedules to track the progress of
industrial manufacturing processes for a major U.S. Navy weapons system. The
dependency schedules were used to identify a production schedule problem for a
shipboard weapons control system, to conduct analyses of the system and to
develop a work-around alternative to maintain the schedule.
Additionally, the Company provides program support to U.S. and foreign
governments in the sale of U.S. military equipment to foreign governments. The
Company believes that this area of expertise presents significant potential for
growth as foreign governments upgrade their communication system capabilities.
The Company has established a presence in this niche market with its experience
in foreign military sales, including advising on compliance with licensing and
security requirements, preparing technical documentation, forecasting and
tracking equipment deliveries and funding obligations, providing program and
financial reviews and reconciling and closing foreign military sales cases. It
prepares schedules of available equipment and provides data for existing and new
technologies, recommendations for release of hardware and software, and guidance
on approval or disapproval of commercial export license requests. This
experience is also being applied to provide direct sales to foreign governments.
See "Business -- Products."
The Company's network management and satellite communications expertise
also permit it to develop systems for business users in geographically dispersed
locations. The Company believes that office locations of companies will continue
to become more geographically dispersed and that the commercial market for
systems to link these offices can be a significant opportunity for future
growth. The Company has created a product called Virtual Program Office ("VPO")
to capitalize on this emerging market of geographically dispersed companies. VPO
is a suite of user-friendly management tools designed to enable real-time voice,
video and data communications among geographically dispersed organizations and
users. Implemented as a business process reengineering strategy, VPO includes
Lotus Notes groupware, desktop video teleconferencing and a series of customized
integrated data management solutions.
25
<PAGE> 26
The following are significant communication systems contracts and programs,
which also include IT Services, emphasizing the nature of the Company's
interrelated business areas:
- The Company is the prime contractor under a five-year cost plus fixed
fee contract awarded by the U.S. Navy in March 1996 to provide
technical engineering and other support services to a U.S. Navy
command. Although there can be no assurance that the contract will
develop as it expects, the Company believes the contract has a
potential value of approximately $84 million over the five-year period
of the contract, which expires in fiscal 2001. The contract team
includes, as subcontractors, Computer Sciences Corporation, Booz-Allen
and Hamilton, Inc., Integrated Systems Control, Inc.,
Tele-Consultants, Inc. and others.
- The Company is the prime contractor under a five-year cost plus fixed
fee contract awarded by the U.S. Navy in August 1996 to provide
program management support, financial management support, cost and
schedule analysis, information management support, foreign military
sales support, installation and inventory management and configuration
management for the PD 70 Integrated Command, Control, Communication,
Computers and Intelligence ("IC4I") project and staff offices.
Although there can be no assurance that the contract will develop as
it expects, the Company believes that the contract could have a
potential value of approximately $36 million over the five-year
period, which expires in fiscal 2001.
- The Company is the prime contractor under a five-year cost plus fixed
fee contract awarded by the U.S. Navy that commenced in October 1993,
to provide program management support, financial management support,
cost and schedule analysis, configuration management for communication
systems, equipment integration support, specification and
standardization support, integrated logistics management support and
information management support to the Information Transfer Systems
Directorate of a U.S. Navy command. Although there can be no assurance
that the contract will develop as it expects, the Company believes
that the contract could have a potential value in excess of
approximately $8 million over the remaining two years of the contract,
which expires in fiscal 1998.
INFORMATION TECHNOLOGY SERVICES
Through its IT Services business, the Company offers a broad array of
professional information technology services and information systems to
commercial and government markets. The IT Services offered by the Company
include information management systems design and integration; LAN/WAN design,
installation and support; database design and real-time database management;
Internet and intranet services; and multi-media training development. The
advanced technical capabilities gained by the Company while performing services
for government customers has provided expertise in the information technology
area, which the Company is leveraging to develop its commercial business. The
Company is currently focusing on expanding its customer base to include
commercial and international customers. For fiscal 1996, the Company's IT
Services business represented 25.3% of revenues.
The Company designs and implements information management systems that
enable its customers to create integrated productivity software and
communication tools which allow uninterrupted transmission of information
throughout a customer's infrastructure. The Company has been designated as a
Microsoft Solution Provider, a Lotus Business Partner and a Novell Authorized
Reseller, designations which permit the Company to pursue some business
opportunities not available to all competitors because these certifications
frequently are cited as eligibility requirements for commercial bids.
The Company plans and creates conceptual designs, system designs and system
updates, including identifying functional requirements and creating database,
system and subsystem specifications. It performs feasibility and cost-benefit
studies on system alternatives and presents recommendations. It recently won a
competitively awarded contract to conduct a system design and requirements study
for the City of Imperial Beach, California. The Company believes that there is a
substantial demand for these kinds of services and is actively seeking to market
them to small and midsize companies and to municipalities.
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<PAGE> 27
The Company also provides office automation system services. It analyzes
current office functions and matches them with appropriate office software and
provides integrated office tools to permit data sharing and improve office
efficiency. The Company established the first office automation system for a
major program directorate of the U.S. Navy ten years ago, using a central
computer with multiple processors and work station terminals, applying
then-available technology to an office environment. As it continued to provide
network services for that office, improving the system through advances in
technology, the Company implemented and now supports a 250 station LAN with five
servers. The Company has applied that same technology to several commercial
customers.
Additionally, the Company provides technical assistance to end users on
system configuration issues, software upgrades and functionality. In 1993, the
Company was awarded a contract to operate the network used by the International
Joint Commission, a quasi-government organization of the U.S. and Canada charged
with protecting the environmental conditions along the border between the two
countries. After successful completion of that three year contract, the Company
was awarded a multi-year contract to continue the network support with expanded
work scope, including software application training.
The Company provides a full range of database support using innovative
solutions to manage databases and present the information back to a variety of
end users at the level and detail specific to their needs. The Company has
extensive expertise in developing and implementing plans to migrate data from
legacy systems to modern technology products, as well as the design and
implementation of new applications. The Company recently completed a major
database task for the U.S. Army to provide access to Army databases using a data
warehousing approach. The Company believes that this successful implementation
will result in additional contracts from the U.S. Army to extend the data
warehousing to additional databases.
The Company has extensive hands-on experience designing complex management,
program and financial databases and graphical user interfaces ("GUI"). The
Defense Technical Information Center ("DTIC") awarded a contract to the Company
to provide a user-friendly interface to be used world-wide to access and search
the DTIC database, which contains data on virtually every technical study
completed for the Department of Defense. The Company has continued to receive
assignments to implement additional GUIs for the DTIC.
To permit its customers to communicate more efficiently, the Company
develops and implements both external (Internet) and internal (intranet)
connectivity solutions. It conducts needs analyses to define specific objectives
for web sites; designs marketing objectives and strategies; provides design
services for the appearance of web sites; provides technical and project
management services and support; hosts customer web sites on its server; and
provides web site promotional services to create the desired site traffic. An
example of a web page developed and hosted by the Company is the Children's
Hospice International home page, which can be viewed at
http://www.chionline.org.
The Company offers a wide range of training services utilizing innovative
techniques and tools, such as computer based training ("CBT") aids, training
videos and on-line performance tools, to promote increased productivity and
efficient use of installed systems. It prepares and conducts CBT seminars for
government and commercial customers and has developed CBT programs covering a
wide variety of subjects as required by customers, including, for example,
identifying persons driving while under the influence of alcohol (for the
National Highway Traffic Safety Administration) and training seamen on the
operation of on-board submarine communication systems. Activities the Company
undertakes as part of its multi-media training services include developing
customized training concepts and plans, including undertaking front-end analyses
of a customer's business and business processes to identify training
requirements and the appropriate training media; developing user and
administrator guides as well as self study work books, wall charts, training
videos and other materials; and surveying and updating curricula for training
courses.
SYSTEMS INTEGRATION
The Company provides systems integration for communication systems and to a
lesser extent acts as a value-added reseller of computer hardware, software and
integrated systems to both government and commercial customers. Sales to
government customers are through the Company's GSA Schedule Contract.
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<PAGE> 28
Sales to commercial customers also are through the GSA Schedule Contract (to
government contractors) or through direct contracts with other commercial
customers. The Company supports the systems and products it sells by providing
its customers a wide range of services, including employee training,
maintenance, repair and user assistance. The Company offers individual
components of its systems and other products from various vendors for resale
through the GSA Schedule Contract. The resale business often provides the
opportunity for additional systems integration business. The Company's systems
integration business represented 10.2% of revenues for fiscal 1996 and 23.7% of
revenues for the six month period ended March 31, 1997. See "-- Government
Contracts."
The Company believes that a market opportunity has developed as government
and commercial customers have begun to migrate to systems composed of commercial
off-the-shelf hardware and software components. Its strategy has been to
anticipate the systems needs of customers and to develop systems using readily
available commercial hardware and software. This strategy differs from that of
many of the Company's reseller competitors, which traditionally provide
individual hardware and software items for resale without integration, and many
of its integration competitors, which traditionally have developed entire
systems. The Company concentrates on relatively low quantity procurements which
are not cost-competitive for large systems integration companies, applying
system knowledge gained through following technology trends and providing ease
of procurement through a GSA Schedule Contract for government customers and
direct purchase for commercial customers. A recent example of this strategy
resulted in the sale to the U.S. Navy of over $4.0 million of integration work
for extra high frequency communications controllers.
The Company believes it has been successful as a system integrator because
it has targeted certain technologies and systems to offer through the GSA
Schedule Contract. Expecting that many government agencies were planning to use
VersaModule European ("VME") technology, the Company focused on offering VME
products and systems, which provide users with a versatile modular computer
system that allows users to combine products and functions. However, recognizing
that technology changes constantly, the Company is now targeting replacement
technology for some of the VME applications and will offer further technology
advances as appropriate. Because of the nature of this systems integration work,
the Company does not have a large investment in VME plant or equipment and can
continue to provide VME technology while pursuing additional technologies.
PRODUCTS
The Company has developed a set of communication systems and software
products which have both military and commercial applications. The Company has
identified potential applications for existing technology, developed systems to
implement the identified applications and then expanded the systems, using the
original technology, into multiple-use products. This process permits the
Company to sell products and systems off-the-shelf or to adapt them to specific
applications, depending on the needs of customers.
SALTS
The Company believes that its International Streamlined Automated Logistics
Transmission Systems ("ISALTS") and its Commercial Streamlined Automated
Logistics Transmission System ("CSALTS") programs, both of which are based on
the SALTS technology, are examples of its ability to adapt its military
expertise to commercial uses. The Company's SALTS technology is designed to
provide military and commercial organizations with the ability to store and
forward large amounts of administrative and logistics data in a compressed,
secure format using many forms of communication media. SALTS provides a near
real-time means of communicating mass data at minimum cost.
The SALTS technology originally was developed by the U.S. Navy as an
alternative data transmission system so that the transmission of logistics and
administrative data would not interfere with the transmission of tactical data
during the Persian Gulf war. Following the Persian Gulf war, the Navy contracted
with the Company to operate and enhance the SALTS system. Subsequently, the
Company has customized versions of SALTS for other specialized applications. For
example, the Army's 18th Airborne Corps and the troops occupying Haiti used it
to exchange accounting data. In addition, SALTS successfully conveyed mission
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support data during other major military operations and disaster relief efforts.
The Company's first commercial application of the SALTS technology was the
Company's USO-GRAM program, introduced in 1994, under which sailors at sea and
persons on shore can exchange e-mail messages.
The ISALTS and CSALTS programs are the Company's major commercial
applications of its SALTS technology. The Company has developed proprietary
ISALTS software which it is marketing to friendly foreign governments for their
military data transmission needs. The Company also provides readily available
commercial hardware, installation and ongoing maintenance, software upgrades and
other support services for its ISALTS customers. To date, the Company has
installed an ISALTS system for the UK Royal Navy and is in the process of
installing an ISALTS system for the Royal Australian Navy.
BGIXS
BGIXS ("Battle Group Information Exchange System") was developed by the
Company as a way to permit reliable and efficient data communication (as
compared to text communication only) between land, sea and air units in
half-duplex mode using a hub/spoke architecture. First marketed in 1993, BGIXS
uses commercial off-the-shelf technology to permit PC-to-PC transfer of tactical
data between a headquarters host and supporting forces using satellite links.
Additionally, BGIXS permits rapid file transfer with guaranteed delivery and
provides multimedia capability. The U.S. Navy and the UK Royal Navy have
purchased BGIXS systems, and the Company is actively marketing the product to
other foreign military organizations in friendly countries.
PELICAN
Pelican, which is currently under development, will couple the data
transfer capabilities of BGIXS with high frequency radio communications to
provide an integrated, self-contained communication system to those
organizations using high frequency radio rather than satellite communications.
Pelican is based on a commercial open systems architecture using readily
available commercial hardware and software that provides data compression and
packetization for efficient transmission. The Pelican communication protocol
provides maximum operational flexibility through the use of multiple modes of
transmission, on-demand push/pull of files to a distant host, store and forward
file transfer and silent broadcast by the distant host. Pelican is expected to
be available for sale in the second half of fiscal 1997.
SALTS, BGIXS and Pelican illustrate the Company's ability to build systems
to satisfy a particular customer's needs and then use the same technology in a
refined and augmented form to create salable products for a different, and
potentially wider, customer base. The Company believes that these technologies
have significant commercial applications.
FINANCIAL MANAGEMENT SOFTWARE
The Company develops and offers a variety of software products used to
support customers' financial functions. These include: PRECEPT 5000, a cost
estimating tool; FMIS, an Oracle-based financial management system; FTS, an
application for financial tracking which can be coupled with FMIS for a broader
financial management and tracking system; and EMT, an engineering management
tool that has functionality similar to FTS and can be tied to FMIS. These
software products can be customized or adapted to meet a particular customer's
needs.
MARKETING
The Company's operations group is primarily responsible for marketing its
services and products, including the development and execution of marketing
plans, proposal presentations and the performance of related tasks. The
Company's marketing activities are conducted by its professional managers who
have technical expertise and whose efforts are supplemented by the Company's
staff of engineers, scientists and analysts. Company personnel use customer
contacts, attend new business briefings sponsored by government agencies and
review publications such as Commerce Business Daily for contracting
opportunities and to learn
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of new business opportunities. The Company also participates in several major
trade shows, both domestic and international, that showcase applicable
technologies.
One of the Company's primary marketing strategies is to anticipate and
understand the changing needs of its customers and then to be prepared to meet
those needs as they arise in new programs or in new program functions. The
Company believes that its experience in providing services to the U.S. Navy
enhances its ability to understand and anticipate the U.S. Navy's needs. The
Company emphasizes customer satisfaction, as evidenced by its ability to retain
customers such as the U.S. Navy since the Company's inception. It recently won a
major contract recompetition as the prime contractor on an engineering services
and support contract for which it originally served as a subcontractor. Under
this recompete contract, the Navy awarded the extension to the Company as the
prime contractor, although the Company is substantially smaller than the prime
contractors on the original contracts.
GOVERNMENT CONTRACTS
In general, the Company's business with the government (as both a prime
contractor and a subcontractor) is performed under cost reimbursement contracts,
time and materials contracts or fixed price contracts. Cost reimbursement
contracts, including cost plus fixed fee contracts, provide for the
reimbursement of costs (to the extent allowed under federal regulations) plus
the payment of a fixed fee. Under time and materials contracts, the Company is
reimbursed for labor hours at negotiated hourly billing rates and is reimbursed
(without fee) for travel and other direct expenses at actual cost plus applied
indirect, general and administrative expense. Under fixed price contracts, it
agrees to perform certain work for a fixed price and, accordingly, realizes the
benefit or detriment to the extent that the actual cost of performing the work
differs from the contract price. The majority of the Company's revenues from
government contracts are derived from cost plus fixed fee contracts.
The Company has several multi-year contracts with U.S. government agencies
to provide communication systems services and support, information technology
services and systems integration services and support. Typically, these
contracts require the Company to provide a broad range of services and support,
as requested by the customer, which may include systems engineering, production
support, management information systems services and support and program
operational support. Each contract generally provides an estimate of the number
of staff years that the government agency believes will be utilized each year
under the contract. The Company receives specific work assignments under the
contract on an as-identified basis through the issuance by the government of
task orders setting out the specific work to be performed, the staff years
allocated to the task and the estimated cost, fee and travel allocated to such
task. Payments are made to the Company incrementally during the performance of
each task. In order to plan for orderly performance under a contract, it is not
unusual, prior to or at the commencement of each government fiscal year during
the term of the contract, for the government and the Company to define proposed
tasks to be completed under the contract during the coming fiscal year.
Under the Company's GSA Schedule Contract, government agencies may
purchase, at prices approved by the GSA, hardware and software integration,
systems engineering, automated data processing services, hardware and software,
repair (service and parts) and training, without further competitive bidding.
Products that the Company can provide under the GSA Schedule Contract must be
approved by the GSA prior to being offered to end-users. Also, at the time the
contract was initially awarded and at each contract renewal, prices to end-users
under the contract are set for the duration of the contract at a specified level
or specified levels varying over time. The contract is a fixed price contract
and does not have any pre-set delivery schedules or obligation to purchase any
significant amount of goods or services. The GSA Schedule Contract is renewable
annually and the current contract term expires in March 1998. The Company
believes that the GSA Schedule Contract will be renewed, although there can be
no assurance to this effect.
The Company's contracts and subcontracts with federal government agencies
are competitively bid and awarded on the basis of technical merit, personnel
qualifications, experience and price. The Company's business, financial
condition and results of operations could be materially affected by changes in
procurement policies, a reduction in funds available for the services provided
by it and other risks generally associated with
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federal government contracts. New government contract awards also are subject to
protest by competitors at the time of award which can result in the re-opening
of the bidding process or the award of a contract to a competitor. None of the
Company's current government contracts is the subject of a bid protest; however,
there can be no assurance that government contracts awarded to it in the future
will not be challenged by competitors.
A significant portion of the Company's revenues in fiscal 1996
(approximately 45%) and in the six months ended March 31, 1997 (approximately
23%) was generated by U.S. government contracts awarded to the Company through
small business set-aside programs. The Company no longer is eligible to
participate in some of these programs and, as its revenues and size expand, it
will lose its eligibility to participate in more of these programs. There can be
no assurance that the Company will be able to replace revenues from these
contracts.
The Company's contractual costs and revenues also are subject to audits and
adjustments by negotiation between it and the DCAA and other government
auditors. As part of the audit process, the DCAA verifies that all charges made
by a contractor against a contract are legitimate and appropriate. Audits may
result in recalculation of contract revenues and non-reimbursement of some
contract costs and fees. The Company was audited by DCAA for contract
performance through fiscal 1994 under all of its government contracts, which
resulted in immaterial adjustments to its revenues under the contracts audited.
However, there can be no assurance that future audits will not result in
material adjustments to the Company's revenues.
The Company's contracts with the government and its subcontracts with
government prime contractors are subject to termination for the convenience of
the government; termination, reduction or modification in the event of change in
the government's requirements or budgetary constraints; and, when it
participates as a subcontractor, termination for the failure or inability of the
prime contractor to perform its prime contract. If a termination for the
convenience of the government occurs, the government generally is obligated to
pay the costs incurred by the Company under the contract plus a pro rata fee
based upon the work completed.
In addition to the right to terminate, government contracts are conditioned
upon the continuing availability of Congressional appropriations. Congress
usually appropriates funds on a fiscal year basis even though contract
performance may take several years. Consequently, at the outset of a major
program, the contract is usually incrementally funded, and additional funds are
normally committed to the contract by the procuring agency as appropriations are
made by Congress for future fiscal years. In addition, contractors often
experience revenues uncertainties during the first quarter of the government's
fiscal year (beginning October 1) until differences between budget requests and
appropriations are resolved. To date, Congress has funded all years of the
multi-year major program contracts for which the Company has served as prime
contractor or a subcontractor, although there can be no assurance that this will
be the case in the future.
INTERNATIONAL CONTRACTS
The Company's international business is generally performed under fixed
price contracts. International business accounted for 7% of the Company's
revenues for fiscal 1996. The vast majority of the Company's international
business revenues are derived from sales of the Company's products, such as
ISALTS and BGIXS, to foreign navies and the performance of services related to
such sales.
As part of its growth strategy, the Company is seeking opportunities to
expand further into international markets. To date, the Company has limited
experience in marketing and distributing its products internationally. The
Company has one senior marketing employee dedicated to marketing and customer
support for international business. See "Risk Factors -- International
Expansion."
COMMERCIAL CONTRACTS
Commercial contracts accounted for 3% of the Company's revenues for fiscal
1996. The majority of the Company's revenues from commercial contracts are
earned in the information technology area. Typically, these contracts require
the Company to complete a specific task or provide a defined range of services
and support, such as designing and implementing information management systems;
planning and creating
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conceptual designs, systems designs and system updates; performing feasibility
and cost-benefit studies on system alternatives; and providing office automation
system services and training services which utilize innovative techniques and
tools. Payments are made to the Company incrementally during the performance of
each specific work assignment.
The Company is currently focusing on expanding its customer base and
increasing the sales of its services in the commercial market, although the
Company and its management have limited experience in this market. To date, the
Company's sales to customers other than the U.S. government have been made
almost exclusively to military agencies of other countries and to a lesser
extent civilian buyers.
Most of the Company's existing commercial contracts are fixed price
contracts, and the Company expects this will continue to be true with respect to
new commercial contracts. The Company may fail to anticipate technical problems,
estimate costs accurately or control costs during performance of a fixed price
contract, any of which may reduce the Company's profit or cause a loss under the
contracts.
BACKLOG
Many of the Company's contracts are multi-year contracts and contracts with
option years, and portions of these contracts are carried forward from one year
to the next as part of the Company's contract backlog. The Company's total
contract backlog represents management's estimate of the aggregate unearned
revenues expected to be earned by the Company over the life of all of its
contracts, including option periods. Because many factors affect the scheduling
of projects, there can be no assurance as to when revenues will be realized on
projects included in the Company's backlog. In addition, although contract
backlog represents only business which is considered to be firm, there can be no
assurance that cancellations or scope adjustments will not occur. The majority
of backlog represents contracts under the terms of which cancellation by the
customer would entitle the Company to all or a portion of its costs incurred and
potential fees to the date of cancellation.
Many of the Company's contracts are funded from year to year, based
primarily on the procuring company's or agency's fiscal requirements. This
results in two different categories of contract backlog: funded and unfunded
backlog. "Funded backlog" represents the sum of contract amounts for which funds
have been specifically obligated to contracts by customers, which in the case of
a U.S. government contract requires appropriation by the U.S. Congress to the
applicable agency and allocation to the contract by the agency. "Unfunded
backlog" represents future contract or option amounts that have not been
specifically obligated by customers. "Backlog" is the total of funded and
unfunded backlog.
The following table summarizes the Company's funded and unfunded backlog at
the dates indicated:
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------------
1994 1995 1996
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
BACKLOG COMPONENT
Funded....................................... $ 5,303 $ 3,255 $ 6,437
Unfunded..................................... 35,556 29,920 132,803
------- ------- --------
Total.............................. $40,859 $33,175 $139,240
======= ======= ========
</TABLE>
The Company believes that approximately 26% of its backlog as of September
30, 1996 will result in revenues in fiscal 1997. However, the Company also
believes that backlog is not necessarily indicative of future revenues. The
Company's backlog typically is subject to large variations from quarter to
quarter as existing contracts are renewed or new contracts are awarded.
Additionally, all U.S. government contracts included in backlog, whether funded
or unfunded, may be terminated at the convenience of the government.
COMPETITION
The Company experiences significant competition in all of the areas in
which it does business. In general, the markets in which it competes are not
dominated by a single company or a small number of companies; instead, a large
number of companies offer services that overlap and are competitive with those
offered by the
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Company. Many of its competitors are significantly larger and have greater
financial resources than the Company, and some of these competitors are
divisions or subsidiaries of large, diversified companies that have access to
the financial resources of their parent companies. There can be no assurance
that the Company will be able to compete successfully.
Because its communication systems business is specialized and the Company
is a leader in the portion of the communication business it pursues, the market
for this business is somewhat less competitive than the markets for its systems
integration and IT Services businesses. In SATCOM systems and services, the
Company competes against technical services companies in the defense industry,
including Computer Sciences Corporation, Science Applications International
Corporation, Booz-Allen and Hamilton, Inc. and SEMCOR. In its other business
areas, the Company competes against a vast array of computer manufacturers,
systems integrators and product resellers and distributors. In the IT Services
area, the Company frequently teams as a subcontractor on large procurement
programs with one of its larger competitors since it can be very expensive to
bid as a prime contractor on such large procurement programs.
The Company believes that the principal competitive factors in the
businesses in which it operates are technical understanding, management
capability, past contract performance, personnel qualifications and price. In
the federal government market, procurement reforms over the past years have
increased the importance of a contractor's past performance in deciding new bid
awards.
INTELLECTUAL PROPERTY
The Company relies on a combination of contractual rights, copyrights,
trademarks and technical measures to establish and protect the ideas, concepts
and documentation of its proprietary technology and know-how. All of its current
employees have executed confidentiality agreements, and the Company includes
confidentiality and non-competition covenants in its software licensing
agreements and consulting agreements.
The Company believes that product recognition is an important competitive
factor in the information technology industry. Accordingly, it promotes the
ISALTS(TM), CSALTS(R), PRECEPT(TM) and FMIS(TM) names in connection with its
marketing activities and holds a U.S. trademark registration for the CSALTS name
and copyrights for several software products, including ISALTS, CSALTS, PRECEPT,
FMIS, BGIXS(TM) and others. The intellectual property protections employed by
the Company, however, may not afford complete protection, particularly in
foreign markets, and there can be no assurance that third parties will not
independently develop such know-how or obtain access to its know-how, ideas,
concepts and documentation.
Although the Company believes that its technology has been developed
independently and does not infringe on the proprietary rights of others, there
can be no assurance that the technology does not and will not infringe or that
third parties will not assert infringement claims against the Company in the
future. In the case of infringement, the Company would, under certain
circumstances, be required to modify its products or obtain a license. There can
be no assurance that it would be able to do either in a timely manner, upon
acceptable terms and conditions, or at all, or that it will have the financial
or other resources necessary to defend successfully a proprietary rights
infringement action. Failure to do any of the foregoing could have a material
adverse effect on the Company. Furthermore, if its products or technologies are
deemed to infringe upon the rights of others, it could become liable for
damages, which could have a material adverse effect on the Company.
The Company may also be subject to litigation to defend against claimed
infringement of the rights of others or to determine the scope and validity of
the intellectual property rights of others. Any such litigation would be costly
and would divert management's attention, either of which could have a material
adverse effect on the Company's business, financial condition and results of
operations. Adverse determinations in such litigation could result in the loss
of the Company's proprietary rights, subject the Company to significant
liabilities, require the Company to seek licenses from third parties or prevent
the Company from selling its services, any one of which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
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EMPLOYEES
The Company believes that is its employees and their knowledge and
capabilities are a major asset. The Company has been successful in attracting
and retaining employees skilled in its core business competencies. As of March
31, 1997, approximately 19% of the Company's technical employees had advanced
degrees. The Company intends to continue to employ highly skilled personnel, as
well as personnel knowledgeable concerning the needs and operations of its major
customers.
As of March 31, 1997, the Company employed 310 people, 272 of whom were
directly involved in computer and information systems programming, design and
engineering, and 38 of whom were in executive and administrative functions. The
Company believes that its relations with its employees are good. None of the
Company's employees are covered by collective bargaining agreements.
FACILITIES
The Company's headquarters occupies approximately 22,200 square feet at
10089 Lee Highway, Fairfax, Virginia. This space is provided under the terms of
a lease from 10089 Management, a related party to the Company, that expires
August 31, 2003. See "Certain Transactions -- Transactions with Directors and
Executive Officers." In the United States, the Company occupies approximately
79,000 square feet in offices in Fairfax, Virginia; Arlington, Virginia;
Virginia Beach, Virginia; Charleston, South Carolina; and San Diego, California.
The Company also maintains an office near Plymouth, England. The Company
believes that its current facilities are adequate for its existing needs and
that additional suitable space will be available as required.
LEGAL PROCEEDINGS
The Company currently is not a party to any material legal proceedings.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth certain information regarding the directors,
nominee directors, executive officers and other key employees of the Company:
<TABLE>
<CAPTION>
AGE POSITION
--- ---------------------------------------------------------------
<S> <C> <C>
DIRECTORS AND EXECUTIVE
OFFICERS:
George A. Robinson............ 59 President, Chief Executive Officer and Chairman of the Board of
Directors
Charles G. Martinache......... 56 Executive Vice President, Chief Operating Officer and Director
Thomas A. Costello............ 49 Executive Vice President, Chief Technology Officer, Secretary,
Treasurer and Director
Dev Ganesan................... 38 Chief Financial Officer
Wayne Shelton................. 64 Nominee Director(1)
KEY EMPLOYEES:
Warren C. Willis.............. 57 Senior Vice President and Director of Washington Operations
Sharon K. Angelone............ 38 Vice President and Director of Charleston Operations
Raymond E. Shutters........... 65 Director of West Coast Operations
William S. Hoffman............ 56 Vice President and Chief Engineer
Kevin R. Adams................ 40 Vice President and Director of ACS Technologies
J. Herbert Dahm............... 59 Director of International Operations
Kevin S. Hopkins.............. 42 Assistant Vice President
</TABLE>
- ---------------
(1) Mr. Shelton has been nominated to act as a Director of the Company effective
upon the completion of the offering and has consented to be named as such
herein.
GEORGE A. ROBINSON. Mr. Robinson was a founder of the Company and has
served as President, Chief Executive Officer and Chairman of the Board of
Directors of the Company since its inception in 1987. From 1986 to 1987, Mr.
Robinson held the position of Vice President for East Coast Operations of
Advanced Digital Systems, Inc., a military communication software development
company. Prior to working at Advanced Digital Systems, Inc., Mr. Robinson spent
over 20 years as a civilian employee in the U.S. Navy Satellite communication
program, most recently as Deputy Director.
CHARLES G. MARTINACHE. Mr. Martinache was a founder of the Company and has
served as Chief Operating Officer and a Director of the Company since 1987. From
1987 to July 1992, Mr. Martinache also held the office of Vice President, and in
July 1992 was made Executive Vice President. From 1986 to 1987, Mr. Martinache
was a program manager for Advanced Digital Systems, Inc. Prior to that, Mr.
Martinache served 23 years in the U.S. Navy as a cryptologic officer.
THOMAS A. COSTELLO. Mr. Costello was a founder of the Company and has
served as Secretary, Treasurer and a Director of the Company since 1987. From
1987 to 1994, Mr. Costello held the positions of Senior Vice President and
Technical Director, and in 1995 was made Executive Vice President and Chief
Technology Officer of the Company. From 1983 to 1987, Mr. Costello was a Senior
Systems Engineer for Advanced Digital Systems, Inc. where, among other things,
he led the Integrated Navy SATCOM Architecture study to upgrade existing
information exchange subsystems.
DEV GANESAN. Mr. Ganesan joined the Company in February 1997 as Chief
Financial Officer. From June 1994 to January 1997, Mr. Ganesan was employed by
GSE Systems, Inc., a publicly held international software systems and technology
solutions developer, as Vice President of Finance and Accounting. From 1990 to
June 1994, Mr. Ganesan served as the Treasurer and Corporate Controller of U.S.
Lime & Minerals,
35
<PAGE> 36
Inc., a publicly held mineral resources company. From 1987 to 1990, Mr. Ganesan
was with Deloitte & Touche, most recently as an audit manager.
WAYNE SHELTON. Mr. Shelton has been nominated to serve on the Board of
Directors effective upon the completion of the offering. Since January 1995, he
has served as president of Hughes Information Systems and as a senior vice
president of Hughes Aircraft Company. From December 1990 to January 1995, Mr.
Shelton was president of Hughes Information Technology Corporation and corporate
vice president of Hughes Aircraft Company.
WARREN C. WILLIS. Mr. Willis joined the Company in August 1993 as Senior
Vice President and Director of Washington Operations. Prior to joining the
Company, Mr. Willis spent over 24 years managing SATCOM acquisition programs for
the U.S. Navy. From October 1992 to July 1993, he served as the Chief Engineer
for a U.S. Navy communications directorate, and from October 1990 to September
1992 he was the Deputy Program Manager for the U.S. Navy SATCOM program office.
SHARON K. ANGELONE. Ms. Angelone has been employed by the Company since
its inception in 1987 and has served in a variety of positions. Since July 1992,
Ms. Angelone has served as a Vice President and the Director of Charleston
Operations. From September 1986 to July 1987, Ms. Angelone was a Senior
Financial Analyst at Advanced Digital Systems, Inc.
RAYMOND E. SHUTTERS. Mr. Shutters joined the Company in June 1996 as the
Director of West Coast Operations. From August 1995 to May 1996, Mr. Shutters
was a member of the C4I technical staff of Sciences Application International
Corporation. From 1959 to August 1995, Mr. Shutters was employed at the Navy
Research and Development Laboratory Center ("NRaD"). From 1987 to March 1993,
Mr. Shutters was Head of the Surveillance Department at NRaD where he was
responsible for managing the undersea, surface and aerospace surveillance and
research and development programs. In March 1993, Mr. Shutters was promoted to
Deputy Executive Director and Business Manager of NRaD, a position which he held
until August 1995.
WILLIAM S. HOFFMAN. Mr. Hoffman has been employed by the Company since its
founding in 1987 and has served as Vice President and Chief Engineer since 1990.
From 1983 to 1987, Mr. Hoffman was Senior Systems Engineer at Advanced Digital
Systems, Inc. where he headed a team of software engineering professionals who
provided direct systems engineering and program management support to a U.S.
Navy satellite communications program office.
KEVIN R. ADAMS. Mr. Adams joined the Company in September 1993 as a
Systems Engineer, and in September 1994 he was made Manager of VME Technologies.
In April 1996, Mr. Adams was promoted to Director of ACS Technologies, a
business unit of the Company focusing on systems integration work, and in May
1997, Mr. Adams was appointed to the position of Vice President of the Company.
From December 1991 to August 1993, Mr. Adams was employed as an engineer by
VisiCom Laboratories, Inc., a software development company.
J. HERBERT DAHM. Mr. Dahm joined the Company in July 1993 as the Director
of International Operations. From October 1990 to July 1993, Mr. Dahm served in
the U.S. Navy where he helped to deploy SALTS systems throughout the Navy.
KEVIN S. HOPKINS. Mr. Hopkins joined the Company in April 1997 as
Assistant Vice President and JMCOMMS Program Manager. From 1995 to 1997, Mr.
Hopkins served as Managing Director at Darlington, Inc. From 1993 to 1995, he
was the General Manager at Scientific Research Corp. ("SRC"). Both Darlington
and SRC provide communication systems and integration and development services
to high technology engineering programs. Prior to this, Mr. Hopkins served in
the U.S. Navy for 18 years as a cryptologic officer.
------------------------
The Company intends to add an additional independent member to its Board of
Directors within 90 days after the date of this Prospectus. It will be necessary
for the Company to appoint this director within the 90-day time period in order
to maintain its Nasdaq National Market listing. Failure to appoint an additional
independent director could result in a delisting of the Common Stock from the
Nasdaq National Market.
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<PAGE> 37
The Bylaws of the Company provide that the number of members of the Board
of Directors shall be determined by the resolution of the Board. Each director
is elected for a one-year term at each annual meeting of the stockholders.
Officers are elected by the Board of Directors. Each officer serves at the
discretion of the Board of Directors. There are no family relationships among
any of the directors or executive officers.
STOCKHOLDERS AGREEMENT
On May 2, 1997, Messrs. Robinson, Martinache and Costello, individually and
as trustees of certain trusts, entered into a Stockholders Agreement pursuant to
which each has agreed to vote the shares beneficially owned by him to elect each
other as directors of the Company and on other matters as a block as determined
by the affirmative vote of the majority of their shares. The Stockholders
Agreement remains in effect until the earliest to occur of: (i) the mutual
consent of the parties, (ii) only one of Messrs. Robinson, Martinache or
Costello continues to beneficially own any Common Stock and (iii) Messrs.
Robinson, Martinache and Costello as a group beneficially own less than forty
percent (40%) of the outstanding Common Stock. This Stockholders Agreement will
allow Messrs. Robinson, Martinache and Costello to control votes on matters that
require approval of the Company's stockholders.
COMMITTEES OF THE BOARD OF DIRECTORS
Prior to the offering, the Company did not have any committees of its Board
of Directors. Upon consummation of this offering, the Board of Directors will
establish a Compensation Committee and an Audit Committee. The Compensation
Committee will be comprised of Mr. Shelton and the other independent director
and will have the authority to determine the compensation of the Company's
executive officers and to administer the 1996 Stock Incentive Plan. The Audit
Committee will be composed of Mr. Shelton, the other independent director and
one additional director. The Audit Committee will have the authority to make
recommendations concerning the engagement of independent public accountants,
review with the independent public accountants the plan and results of the audit
engagement, review the independence of the independent public accountants,
consider the range of audit and non-audit fees and review the adequacy of the
Company's internal accounting controls.
DIRECTOR COMPENSATION
Directors who are employees of the Company do not receive any compensation
for their service as directors. Following this offering, the Company expects to
pay each director who is not an employee of the Company a retainer and a stipend
for attending each meeting of the Board of Directors, in an amount not yet
determined, and will reimburse each such director for his out-of-pocket expenses
for attending these meetings. At the discretion of the Board of Directors,
independent directors will be granted options to purchase Common Stock at the
then-prevailing fair market value during each calendar year in which such
director serves on the Board of Directors.
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<PAGE> 38
EXECUTIVE COMPENSATION
The following table presents certain information concerning compensation
earned for services rendered in all capacities to the Company for the year ended
September 30, 1996 by the Chief Executive Officer and each of the other
executive officers (the "Named Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
NAME AND -------------------- ALL OTHER
PRINCIPAL POSITIONS SALARY(1) BONUS COMPENSATION
- --------------------------------------------------------- -------- ------- ------------
<S> <C> <C> <C>
George A. Robinson....................................... $250,000 $79,440 $ 4,333(2)
President, Chief Executive Officer and Chairman of the
Board of Directors
Charles G. Martinache.................................... 225,000 79,440 23,233(3)
Executive Vice President, Chief Operating Officer and
Director
Thomas A. Costello....................................... 225,000 79,440 4,967(2)
Executive Vice President, Chief Technology Officer,
Secretary, Treasurer and Director
</TABLE>
- ---------------
(1) Effective July 1, 1997, the annual salaries of Messrs. Robinson, Martinache
and Costello will be reduced to $200,000, $175,000 and $175,000,
respectively.
(2) Represents matching 401(k) plan contributions by the Company.
(3) Includes matching 401(k) plan contribution by the Company of $4,967 and
$18,266 in moving expenses paid by the Company.
None of the Named Officers were granted options to purchase shares of the
Company's Common Stock in fiscal 1996, exercised options in fiscal 1996 or held
options to purchase shares of Common Stock as of September 30, 1996.
BONUS PLAN
The Company currently has a bonus plan in effect that provides bonuses to
covered persons based on a percentage of revenues of the Company. The Company
intends to terminate this bonus plan simultaneously with the completion of the
offering and have the Compensation Committee to be formed following completion
of the offering make recommendations on a new bonus plan for the Company's
officers.
EMPLOYMENT AGREEMENTS
Mr. Ganesan serves as the Chief Financial Officer of the Company pursuant
to the terms of an employment agreement which continues in effect until Mr.
Ganesan's termination or separation from the Company. Under the terms of the
employment agreement, Mr. Ganesan receives an annual salary of $120,000 and was
given a one-time signing bonus of $25,000 upon commencing work with the Company
on February 1, 1997. Mr. Ganesan is eligible to receive a first-year bonus of
$25,000 upon the accomplishment of certain mutually agreed upon objectives. In
addition, under the terms of the employment agreement, Mr. Ganesan received
options to purchase 115,000 shares of the Company's Common Stock. Such options
have an exercise price of $6.50 per share, a term of eight years and become
exercisable in four equal annual installments beginning on January 1, 1998.
Mr. Willis serves as Senior Vice President and the Director of Washington
Operations pursuant to the terms of an employment agreement which continues in
effect until Mr. Willis' termination or separation from the Company. Under the
terms of the employment agreement, Mr. Willis currently receives an annual
salary of approximately $129,000 and an annual bonus based on a designated
percentage of Washington Operations Area revenues. In addition, Mr. Willis is
eligible to receive bonus amounts based on the accomplishment of specific
objectives.
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<PAGE> 39
There are no other employment agreements in effect with respect to any
directors, officers or employees of the Company.
STOCK PLANS AND AGREEMENTS
1996 STOCK INCENTIVE PLAN
The 1996 Stock Incentive Plan of the Company (the "1996 Plan") was adopted
by the Company's Board of Directors in July 1996. The 1996 Plan permits the
Company to grant options, stock appreciation rights, "performance" awards and
restricted and unrestricted stock to purchase up to 337,500 shares of Common
Stock to participants in the 1996 Plan. Options for a total of 263,500 shares of
Common Stock were granted under the 1996 Plan, all of which remain outstanding.
None of the options granted under the 1996 Plan currently are exercisable;
148,500 of the options become exercisable in three equal annual installments
commencing October 1, 1997; the balance become exercisable in four equal annual
installments commencing on January 1, 1998. The Board of Directors has
determined not to award any additional options or other rights or awards under
the 1996 Plan.
1997 STOCK INCENTIVE PLAN
The 1997 Stock Incentive Plan of the Company (the "1997 Plan") was adopted
by the Company's Board of Directors effective March 1997 and approved by the
Company's stockholders as of March 25, 1997. The Company has reserved 450,000
shares of Common Stock for issuance pursuant to grants under the 1997 Plan. To
date, no grants have been made under the 1997 Plan. The 1997 Plan has a term of
10 years. The 1997 Plan provides for the grant of stock options, stock
appreciation rights, restricted stock or "performance shares" to directors,
employees (including officers) and consultants of the Company and its
subsidiaries. Pursuant to the 1997 Plan, options may be incentive stock options
within the meaning of Section 422 of the Code or nonstatutory stock options,
although incentive stock options may be granted only to employees. Generally,
options granted under the 1997 Plan are immediately exercisable but remain
subject to repurchase by the Company for all exercised unvested shares under a
vesting schedule established by the Board or committee. All incentive stock
options are nontransferable other than by will or the laws of descent and
distribution.
STOCK OPTION AGREEMENTS
The Company has entered into nonqualified option agreements with three
employees, providing for the purchase of an aggregate of 101,250 shares of
Common Stock, all of which have been exercised as of the date of this
Prospectus. These options were not granted under any stock option plan. The per
share exercise price of such options was at least 100% of the fair market value
of a share of Common Stock as of the respective dates of grant.
TERMINATION AGREEMENTS
Immediately prior to the consummation of the offering, the Company, Messrs.
Robinson, Martinache and Costello, as the majority stockholders, and Sharon K.
Angelone, Douglas A. Benzel, Thomas and Margaret M. Costello and the trusts
controlled by them, Alvin L. Franson, Terrence E. and Diane M. Hileman, Jr.,
William and Diane Hoffman, Charles and Helen Martinache and the trusts
controlled by them, George and Barbara Robinson and the trusts controlled by
them, and Warren C. Willis will enter into Termination Agreements pursuant to
which certain Stock Redemption Agreements previously entered into by and between
the Company and each other party to the Termination Agreements will be
terminated.
INDEMNIFICATION ARRANGEMENTS
Prior to the completion of this offering, the Company will enter into
indemnification agreements pursuant to which it will agree to indemnify certain
of its directors and officers against judgments, claims, damages, losses and
expenses incurred as a result of the fact that any director or officer, in his
capacity as such, is made or threatened to be made a party to any suit or
proceeding. Such persons will be indemnified to the fullest extent now or
hereafter permitted by the DGCL, as amended. The indemnification agreements will
provide for
39
<PAGE> 40
the advancement of certain expenses to such directors and officers in connection
with any such suit or proceeding. The Company will amend and restate its
Certificate of Incorporation and Bylaws to provide for the indemnification of
the Company's directors and officers to the fullest extent permitted by the
DGCL.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors has not had a Compensation Committee prior to this
offering, and the functions of the Compensation Committee have been performed by
the Board of Directors as a whole. The Compensation Committee will be formed
following the closing of the offering. For information concerning certain
transactions and relationships among the Company and the current members of the
Board of Directors, see "Certain Transactions."
40
<PAGE> 41
CERTAIN TRANSACTIONS
TRANSACTIONS WITH DIRECTORS AND EXECUTIVE OFFICERS
In 1993, the Company entered into a ten year lease with 10089 Management,
the members of which include, among others, Messrs. Robinson, Martinache and
Costello, who collectively own 91% of 10089 Management. Under the terms of the
lease, the Company leases approximately 22,200 square feet at 10089 Lee Highway,
Fairfax, Virginia from 10089 Management for use as the Company's headquarters at
a current rental rate of approximately $26,000 per month. The monthly rental
rate increases annually based upon the annual increase in the Consumer Price
Index. The Company, as tenant, also pays for insurance for the premises and for
increases in real estate taxes over 1993 real estate taxes for the building. The
lease expires on August 31, 2003. This arrangement, in contrast to outright
ownership of the building by the Company, enables the Company to allocate the
cost of its facilities to its government contracts. The Company believes that
the terms of the lease, including the rental rate, are at least as favorable to
the Company as those which could have been negotiated with an unaffiliated third
party.
10089 Management purchased the Company's headquarters building in 1993
using, in part, a loan in the amount of $1,125,000 from a third party
institutional lender, which loan is guaranteed by the Company. In March 1997,
the loan agreement was amended to cancel the guarantee upon an initial public
offering resulting in net proceeds to the Company of at least $10,000,000. Also
in connection with 10089 Management's acquisition of the Company's headquarters
building, the Company lent to each of Messrs. Robinson, Martinache and Costello
approximately $119,000 for use as part of the purchase price for the building.
The outstanding balance of principal and accrued interest in respect of these
loans as of March 31, 1997 was $449,000. All loans are evidenced by promissory
notes accruing interest at a rate of 7.0% per annum. The promissory notes all
become due and payable in August 1998, but will be repaid in full from the
proceeds received by the makers from the S Corporation Distribution. See "S
Corporation Distribution and Termination of S Corporation Status."
Mr. Martinache received a loan from the Company in 1996 in the amount of
$50,000, bearing interest at a rate equal to 8.75% per annum. The term of the
loan is five years and the loan is secured by a recorded lien against Mr.
Martinache's home in Charleston, South Carolina. Mr. Martinache has agreed to
repay this loan in full with proceeds received by him from the S Corporation
Distribution. See "S Corporation Distribution and Termination of S Corporation
Status."
FAIRFAX COMMUNICATIONS LTD.
Effective as of April 1, 1997, Fairfax Communications Ltd., a private
limited company organized under the laws of England ("Fairfax Communications
Ltd."), became a subsidiary of the Company pursuant to a transaction in which
the Company purchased all of its outstanding shares of stock. Each of Messrs.
Robinson, Martinache and Costello had owned 26.8% of the outstanding share
capital of Fairfax Communications Ltd. The Company purchased all of the ordinary
shares of Fairfax Communications Ltd. for $46,500 in a transaction intended to
qualify as a tax free reorganization under the Code. The proceeds of the sale
will be distributed to the stockholders of Fairfax Communications Ltd., which
stockholders include, among others, Messrs. Robinson, Martinache and Costello,
who each will receive $12,500. Revenues and operating income of Fairfax
Communications Ltd. for fiscal 1996 were $97,000 (unaudited) and $4,000
(unaudited), respectively. As of September 30, 1996 and March 31, 1997, the
Company had receivables of $54,000 and $162,000, respectively, due from Fairfax
Communications Ltd. for payroll services which the Company performs on its
behalf.
S CORPORATION DISTRIBUTION
A portion of the proceeds of this offering will be used to fund the S
Corporation Distribution. See "S Corporation Distribution and Termination of S
Corporation Status."
41
<PAGE> 42
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of June 25, 1997 by (i) each person
known by the Company to beneficially own five percent or more of the outstanding
shares of Common Stock, (ii) each director and Named Officer of the Company,
(iii) all executive officers and directors as a group and (iv) all Selling
Stockholders. The address of the stockholders listed below as beneficially
owning more than five percent of the Common Stock is that of the Company's
principal executive offices. Except as indicated in the footnotes to the table,
the persons named in the table have sole voting and investment power with
respect to all shares beneficially owned.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES TO BE
OWNED PRIOR TO BENEFICIALLY OWNED
OFFERING NUMBER OF AFTER OFFERING (1)
-------------------- SHARES --------------------
NAME NUMBER PERCENT OFFERED NUMBER PERCENT
- --------------------------------------------- --------- ------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
EXECUTIVE OFFICERS, DIRECTORS AND 5%
STOCKHOLDERS:
George A. and Barbara Robinson (2)......... 1,147,500 30.1% 200,000 947,500 16.7%
Charles G. and Helen Martinache (3)........ 1,147,500 30.1 200,000 947,500 16.7
Thomas A. and Margaret M. Costello (4)..... 1,147,500 30.1 200,000 947,500 16.7
All executive officers and directors as a
group (4 persons)....................... 3,442,500 90.3 600,000 2,842,500 50.1
OTHER SELLING STOCKHOLDERS:
Sharon K. Angelone......................... 33,750 * 5,000 28,750 *
Alvin L. Franson........................... 67,500 1.8 11,000 56,500 1.0
Terrence E. and Diane M. Hileman, Jr....... 67,500 1.8 11,000 56,500 1.0
William Hoffman............................ 67,500 1.8 23,000 44,500 *
</TABLE>
- ---------------
* Represents less than 1%.
(1) Assumes no exercise of the Underwriters' over-allotment options.
(2) Shares beneficially owned prior to the offering and beneficially owned after
the offering include 473,750 and 473,750 shares owned by the Robinson 1997
Trust No. 1 and the Robinson 1997 Trust No. 2, respectively, of which George
A. Robinson is the sole trustee.
(3) Shares beneficially owned prior to the offering and beneficially owned after
the offering include 216,000 and 216,000 shares owned by the Martinache 1997
Trust No. 1 and the Martinache 1997 Trust No. 2, respectively, of which
Charles G. Martinache is the sole trustee.
(4) Shares beneficially owned prior to the offering and beneficially owned after
the offering include 300,000 and 300,000 shares owned by the Costello 1997
Trust No. 1 and the Costello 1997 Trust No. 2, respectively, of which
Margaret M. Costello and Thomas A. Costello are trustees.
42
<PAGE> 43
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 40,000,000 shares of
Common Stock, par value $.01 per share, and 1,000,000 shares of Preferred Stock,
par value $.01 per share. The following brief description of the Company's
capital stock does not purport to be complete and is subject in all respects to
applicable law and the provisions of the Company's Certificate of Incorporation
and Bylaws, copies of which have been filed as exhibits to the Registration
Statement of which this Prospectus is a part. Immediately prior to the closing
of this offering, the Company will have 3,813,750 shares of Common Stock
outstanding, held of record by sixteen stockholders.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters to be voted on by stockholders. There is no cumulative
voting with respect to the election of directors, with the result that holders
of more than 50% of the shares voted for the election of directors can elect all
of the directors. The holders of Common Stock are entitled to receive dividends
ratably when, as and if declared by the Board of Directors out of funds legally
available therefor. In the event of liquidation, dissolution or winding up of
the Company, the holders of Common Stock are entitled to share ratably in all
assets remaining available for distribution to them after payment of liabilities
and after provision has been made for each class of stock, if any, having
preference over the Common Stock. The outstanding shares of Common Stock are,
and the shares offered by the Company in this offering will be, when issued and
paid for, fully paid and nonassessable. Holders of Common Stock do not have
preemptive rights. The rights, preferences and privileges of holders of Common
Stock are subject to, and may be adversely affected by, the rights of the
holders of shares of any series of Preferred Stock which the Company may
designate and issue in the future.
Upon completion of this offering, the Company's existing stockholders will
beneficially own 55.9% of the outstanding shares of Common Stock (52.4% if the
Underwriters' over-allotment option is exercised in full) and will therefore be
able to elect the entire Board of Directors and control all matters submitted to
stockholders for a vote. In addition, the three major stockholders, Messrs.
Robinson, Martinache and Costello, individually and as trustees of certain
trusts, have entered into a Stockholders Agreement pursuant to which each has
agreed to vote the shares beneficially owned by him to elect each other as
directors and to vote their shares on other matters as a block as determined by
majority vote of their shares. This Stockholders Agreement will allow Messrs.
Robinson, Martinache and Costello to control votes on matters that require
stockholder approval. See "Management -- Stockholders Agreement."
PREFERRED STOCK
Preferred Stock may be issued from time to time in one or more classes or
series with such designations, powers, preferences, rights, qualifications,
limitations and restrictions as may be fixed by the Company's Board of Directors
without stockholder approval. The Board of Directors could issue the Preferred
Stock with voting and/or conversion rights and thereby dilute the voting power
and equity of the holders of the Common Stock and adversely effect the market
price of such stock. The issuance of Preferred Stock could also be used as an
antitakeover measure by the Company without any further action by the
stockholders. The Company has no present plans to issue shares of Preferred
Stock.
CERTAIN PROVISIONS OF DELAWARE LAW
The Company is a Delaware corporation and is subject to Section 203 of the
DGCL ("Section 203"). In general, Section 203 prevents an "interested
stockholder" (defined generally as a person owning 15% or more of the Company's
outstanding voting stock) from engaging in a "business combination" (as defined
in Section 203) with the Company for three years following the date that person
became an interested stockholder unless: (i) before that person became an
interested stockholder, the Board approved the transaction in which the
interested stockholder became an interested stockholder or approved the business
combination; (ii) upon completion of the transaction that resulted in the
interested stockholders becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the Company
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<PAGE> 44
outstanding at the time the transaction commenced (excluding stock held by
directors who are also officers of the Company and by employee stock plans that
do not provide employees with the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange offer);
or (iii) on or following the date on which that person became an interested
stockholder, the business combination is approved by the Company's Board and
authorized at a meeting of stockholders by the affirmative vote of the holders
of at least 66.7% of the outstanding voting stock of the Company not owned by
the interested stockholder.
Under Section 203, these restrictions do not apply to certain business
combinations proposed by an interested stockholder following the announcement or
notification of one of certain extraordinary transactions involving the Company
and a person who was not an interested stockholder during the previous three
years or who became an interested stockholder with the approval of a majority of
the directors who were directors before any person became an interested
stockholder in the previous three years or who were recommended for election or
elected to succeed such directors by a majority of such directors then in
office.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock will be Continental
Stock Transfer & Trust Company.
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<PAGE> 45
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have outstanding
5,663,750 shares of Common Stock (assuming no exercise of the underwriters'
over-allotment option or options outstanding under the Company's stock option
plans). Of these shares, the 2,500,000 shares sold in this offering will be
freely tradable without restriction or further registration under the Securities
Act of 1933, unless they are purchased by "affiliates" of the Company as that
term is defined in Rule 144 under the Securities Act of 1933 (which sales would
be subject to certain limitations and restrictions described below). All of the
remaining 3,163,750 shares of Common Stock may be sold in the public market
commencing 90 days following the date of this Prospectus, subject in some cases
to the volume and other limitations of Rule 144 promulgated under the Securities
Act of 1933. The holders of all of these remaining shares have executed 180-day
lock-up agreements with A.G. Edwards & Sons, Inc. See "Underwriting."
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned shares for at least one year (including the holding
period of any prior owner except an affiliate) is entitled to sell in "brokers'
transactions" or to market makers, within any three-month period a number of
shares that does not exceed the greater of (i) one percent of the number of
shares of Common Stock then outstanding (approximately 57,000 shares immediately
after this offering) or (ii) the average weekly trading volume in the Common
Stock during the four calendar weeks preceding the required filing of a Form 144
with respect to such sale. Sales under Rule 144 are subject to the availability
of current public information about the Company. Under Rule 144(k), a person who
is not deemed to have been an affiliate of the Company at any time during the 90
days preceding a sale, and who has beneficially owned the shares proposed to be
sold for at least two years, is entitled to sell such shares without having to
comply with the manner of sale, public information, volume limitation or notice
filing provisions of Rule 144. Under Rule 701 under the Securities Act, persons
who purchase shares upon exercise of options granted prior to this offering are
entitled to sell such shares 90 days after this offering in reliance on Rule
144, without having to comply with the holding period requirements of Rule 144
and, in the case of nonaffiliates, without having to comply with the volume
limitation or notice filing provisions of Rule 144.
After the completion of this offering, the Company intends to file one or
more registration statements on Form S-8 under the Securities Act to register an
aggregate of 713,500 shares of Common Stock subject to outstanding stock options
and Common Stock issuable pursuant to the Company's stock option plans. After
the date of such filing, if not otherwise subject to a lock-up agreement, shares
purchased pursuant to these plans generally would be available for resale in the
public market. The Company has outstanding options to purchase an aggregate of
263,500 shares of Common Stock, none of which are currently exercisable. See
"Management -- Stock Plans and Agreements."
45
<PAGE> 46
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Company and the Selling Stockholders have agreed to sell to each
of the underwriters named below (the "Underwriters"), for whom A.G. Edwards &
Sons, Inc. and Ferris, Baker Watts, Incorporated are acting as representatives
(the "Representatives"), and each of the Underwriters has severally agreed to
purchase from the Company and the Selling Stockholders, the respective number of
shares of Common Stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
----------------------------------------------------------------- ---------
<S> <C>
A.G. Edwards & Sons, Inc. ....................................... 763,500
Ferris, Baker Watts, Incorporated................................ 763,500
Alex. Brown & Sons Incorporated.................................. 50,000
Credit Lyonnais Securities (USA) Inc. ........................... 50,000
Donaldson, Lufkin & Jenrette Securities Corporation.............. 50,000
Goldman, Sachs & Co. ............................................ 50,000
Hambrecht & Quist LLC............................................ 50,000
Lehman Brothers Inc. ............................................ 50,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated............... 50,000
Oppenheimer & Co., Inc. ......................................... 50,000
PaineWebber Incorporated......................................... 50,000
Prudential Securities Incorporated............................... 50,000
Anderson & Strudwick Inc. ....................................... 25,000
William Blair & Company, L.L.C. ................................. 25,000
First Albany Corporation......................................... 25,000
First of Michigan Corporation.................................... 25,000
Friedman, Billings, Ramsey & Co., Inc. .......................... 25,000
Hanifen, Imhoff Inc.............................................. 25,000
Legg Mason Wood Walker Incorporated.............................. 25,000
McDonald & Company Securities, Inc. ............................. 25,000
Morgan Keegan & Company, Inc. ................................... 25,000
Needham & Company, Inc. ......................................... 25,000
Pennsylvania Merchant Group Ltd.................................. 25,000
Raymond James & Associates, Inc. ................................ 25,000
The Robinson-Humphrey Company, Inc............................... 25,000
Scott & Stringfellow, Inc........................................ 25,000
Stephens Inc. ................................................... 25,000
Unterberg Harris................................................. 25,000
Wheat, First Securities, Inc. ................................... 25,000
Brean Murray & Co., Inc.......................................... 12,000
Brad Peery Inc. ................................................. 12,000
Sanders Morris Mundy Inc. ....................................... 12,000
Starr Securities, Inc. .......................................... 12,000
---------
Total.................................................. 2,500,000
========
</TABLE>
In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase all 2,500,000 shares of
Common Stock offered hereby if any such shares of Common Stock are purchased. In
the event of a default by any Underwriter, the Underwriting Agreement provides
that, in certain circumstances, purchase commitments of the non-defaulting
Underwriters may be increased or the Underwriting Agreement may be terminated.
The Company and the Selling Stockholders have been advised by the
Representatives that the several Underwriters propose initially to offer such
shares of Common Stock to the public at the public offering price set forth on
the cover page of this Prospectus, and to certain dealers at such price less a
concession not in
46
<PAGE> 47
excess of $0.30 per share. The Underwriters may allow and such dealers may
re-allow a concession not in excess of $0.10 per share to other dealers. After
the initial public offering, the public offering price and such concessions may
be changed.
The Company has granted to the Underwriters an option, expiring 30 days
from the date of this Prospectus, to purchase up to an aggregate of 375,000
additional shares of Common Stock at the public offering price less underwriting
discount set forth on the cover page of this Prospectus. The Underwriters may
exercise such option solely to cover overallotments, if any, made in connection
with the sale of shares of Common Stock that the Underwriters have agreed to
purchase. To the extent the Underwriters exercise such option, each of the
Underwriters will have a firm commitment, subject to certain conditions, to
purchase a number of option shares proportionate to such Underwriter's initial
commitment.
The Company has agreed that it will not sell, without the consent of A.G.
Edwards & Sons, Inc., any Common Stock or any securities convertible into Common
Stock, during the 180 days following the date of this Prospectus except for the
Common Stock offered in this offering. In addition, each current stockholder of
the Company, including each officer and director and the Selling Stockholders,
has agreed not to sell, without the consent of A.G. Edwards & Sons, Inc., any
Common Stock for the 180 day period. A.G. Edwards & Sons, Inc. will not consent
to any shortening of such periods unless, in its judgment, the timing of the
sales and the number of shares of Common Stock sold as a result of any such
consent would not have a material adverse effect on the market for the Common
Stock. In such event, such sales would not necessarily be preceded by a public
announcement by the Company or A.G. Edwards & Sons, Inc. that such consent has
been given.
Prior to the offering, there has been no public market for the Common
Stock. The initial public offering price for the shares of Common Stock included
in this offering has been determined by negotiation among the Company and the
Representatives. Among the factors considered in determining such price were the
history of and prospects for the Company's business and the industry in which it
operates, an assessment of the Company's management, past and present revenues
and earnings of the Company, the prospects for growth of the Company's revenues
and earnings and currently prevailing conditions in the securities markets,
including current market valuations of publicly traded companies which are
comparable to the Company.
The Representatives have advised the Company that they do not intend to
confirm sales to any account over which they exercise discretionary authority.
In connection with the offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which such persons may bid for or
purchase Common Stock for the purpose of stabilizing its market price. The
Underwriters also may create a short position for the account of the
Underwriters by selling more Common Stock in connection with the offering than
they are committed to purchase from the Company and the Selling Shareholders,
and in such case may purchase Common Stock in the open market following
completion of the offering to cover all or a portion of such short position. The
Underwriters may also cover all or a portion of such short position, up to
375,000, shares of Common Stock, by exercising the Underwriters' over-allotment
option referred to above. In addition, A.G. Edwards & Sons, Inc., on behalf of
the Underwriters, may impose "penalty bids" under contractual arrangements with
the Underwriters whereby it may reclaim from an Underwriter (or dealer
participating in the offering) for the account of the other Underwriters, the
selling concession with respect to Common Stock that is distributed in the
offering but subsequently purchased for the account of the Underwriters in the
open market. Any of the transactions described in this paragraph may result in
the maintenance of the price of the Common Stock at a level above that which
might otherwise prevail in the open market. None of the transactions described
in this paragraph is required, and, if they are undertaken, they may be
discontinued at any time.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933.
47
<PAGE> 48
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for the
Company by Gibson, Dunn & Crutcher LLP, Washington, D.C. Certain legal matters
relating to the offering will be passed upon for the Underwriters by Hale and
Dorr LLP, Washington, D.C.
EXPERTS
The audited financial statements of the Company for the three years ended
September 30, 1996 included in this Prospectus have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their report, and
are included herein in reliance upon the authority of said firm as experts in
giving such reports.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (the "Registration
Statement," which term shall include all amendments, exhibits, annexes and
schedules thereto) under the Securities Act of 1933 with respect to the shares
of Common Stock offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement. Certain items are omitted
in accordance with the rules and regulations of the Commission. For further
information with respect to the Company and the Common Stock offered hereby,
reference is hereby made to such Registration Statement, including exhibits,
schedules and reports filed as part thereof. Statements contained in this
Prospectus as to the contents of any contract or other document are not
necessarily complete, and in each instance, reference is made to the copy of
such contract or document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference. The
Registration Statement, including the exhibits and schedules thereto, may be
inspected without charge at the public reference facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room 1204, Washington,
D.C. 20549, and at the Commission's Regional Offices located at Seven World
Trade Center, 13th Floor, New York, New York, 10048 and the Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of
such material may be obtained at prescribed rates by mail from the Public
Reference Section of the Commission, Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549. The Commission maintains a web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission, including
the Company. The address is http://www.sec.gov.
The Company intends to furnish to its stockholders annual reports
containing financial statements audited by an independent accounting firm and
quarterly reports containing unaudited financial information for the first three
quarters of each fiscal year.
48
<PAGE> 49
GLOSSARY OF ACRONYMS
<TABLE>
<CAPTION>
ACRONYM DEFINITION PAGE
- ------------- ----------------------------------------------------------------------- -----
<S> <C> <C>
BGIXS Battle Group Information Exchange System............................... 29
C4I command, control, communications, computer and intelligence............ 3
CBT computer based training................................................ 27
CSALTS Commercial Streamlined Automated Logistics Transmission System......... 28
DCAA Defense Contract Audit Agency.......................................... 6
DGCL Delaware General Corporation Law....................................... 10
DOD Department of Defense.................................................. 3
DTIC Defense Technical Information Center................................... 27
GSA General Services Administration........................................ 4
GUI graphical user interface............................................... 27
integrated command, control, communications, computers and
IC4I intelligence........................................................... 26
ISALTS International Streamlined Automated Logistics Transmission System...... 28
IT Services information technology services........................................ 3
LAN local area network..................................................... 23
NRaD Navy Research and Development Laboratory Center........................ 36
SALTS Streamlined Automated Logistics Transmission System.................... 23
SATCOM satellite communications............................................... 3
VME Versa-Module European.................................................. 28
VPO Virtual Program Office................................................. 25
WAN wide area network...................................................... 24
</TABLE>
49
<PAGE> 50
[This Page Intentionally Left Blank]
<PAGE> 51
ADVANCED COMMUNICATION SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.............................................. F-2
Balance Sheets as of September 30, 1995 and 1996 and March 31, 1997 (unaudited)....... F-3
Statements of Operations for the Years Ended September 30, 1994, 1995 and 1996 and the
Six Month Periods Ended March 31, 1996 and 1997 (unaudited)......................... F-4
Statements of Changes in Stockholders' Equity for the Years Ended September 30, 1994,
1995 and 1996 and the Six Month Periods Ended March 31, 1996 and 1997 (unaudited)... F-5
Statements of Cash Flows for the Years Ended September 30, 1994, 1995 and 1996 and the
Six Month Periods Ended March 31, 1996 and 1997 (unaudited)......................... F-6
Notes to Financial Statements......................................................... F-7
</TABLE>
F-1
<PAGE> 52
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Advanced Communication Systems, Inc.:
We have audited the accompanying balance sheets of Advanced Communication
Systems, Inc. (a Delaware corporation), as of September 30, 1995 and 1996, and
the related statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended September 30, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Advanced Communication Systems,
Inc. as of September 30, 1995 and 1996, and the results of its operations and
its cash flows for each of the three years in the period ended September 30,
1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Washington, D.C.
June 25, 1997
F-2
<PAGE> 53
ADVANCED COMMUNICATION SYSTEMS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
SEPTEMBER 30, MARCH 31,
----------------- MARCH 31, 1997
1995 1996 1997 (NOTE 2)
------ ------- ---------- ----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE
DATA)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 592 $ 1,177 $ 1,413 $ 1,413
Contract receivables................................... 4,659 9,987 11,544 11,544
Other receivables...................................... 51 69 197 197
Prepaid expenses....................................... 83 208 515 515
------ ------- ---------- ----------
Total current assets.............................. 5,385 11,441 13,669 13,669
------ ------- ---------- ----------
Property and equipment, net............................ 463 571 788 788
Other assets:
Notes receivable, stockholders......................... 393 443 443 443
Other related party receivables........................ 101 138 261 261
Software development costs, net........................ 598 461 393 393
Other assets........................................... 47 63 117 117
------ ------- ---------- ----------
Total other assets................................ 1,139 1,105 1,214 1,214
------ ------- ---------- ----------
Total assets................................. $6,987 $13,117 $ 15,671 $ 15,671
====== ======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................... $ 686 $ 2,125 $ 4,403 $ 4,403
Accrued expenses....................................... 1,602 3,476 5,050 5,050
Billings in excess of revenue.......................... 283 362 445 445
Income taxes payable................................... 7 -- -- --
Deferred income tax liability.......................... 91 91 91 366
Payable to stockholders................................ -- -- -- 5,500
------ ------- ---------- ----------
Total current liabilities......................... 2,669 6,054 9,989 15,764
Line of credit......................................... 1,821 2,688 -- --
Deferred income tax liability.......................... -- -- -- 825
------ ------- ---------- ----------
Total liabilities................................. 4,490 8,742 9,989 16,589
------ ------- ---------- ----------
Commitments and contingencies (Notes 7, 9, 10 and 11)
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, 6,750,000 shares issued at September 30,
1995 and 1996, and March 31, 1997.................... 67 67 67 67
Paid-in capital and accretion.......................... 5,457 16,506 16,506 68
Retained earnings (deficit)............................ 2,642 4,520 5,789 (811)
Adjustment for redemption value greater than amounts
paid in by stockholders.............................. (5,389) (16,438) (16,438) --
Less -- Treasury stock, 3,017,250 shares at September
30, 1995 and 1996, and 2,963,250 shares at March 31,
1997, at cost........................................ (280) (280) (242) (242)
------ ------- ---------- ----------
Total stockholders' equity (deficit).............. 2,497 4,375 5,682 (918)
------ ------- ---------- ----------
Total liabilities and stockholders' equity... $6,987 $13,117 $ 15,671 $ 15,671
====== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE> 54
ADVANCED COMMUNICATION SYSTEMS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
----------------------------- ----------------------
1994 1995 1996 1996 1997
------- ------- ------- ----------- -------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues..................................... $19,106 $23,724 $31,665 $13,036 $21,130
Direct costs................................. 11,418 14,815 19,307 7,195 14,746
Indirect, general and administrative
expenses................................... 7,177 8,202 10,253 4,774 5,025
------- ------- ------- ------- -------
Income from operations....................... 511 707 2,105 1,067 1,359
Interest expense............................. (125) (185) (257) (127) (134)
Other income, net............................ 52 52 57 26 44
------- ------- ------- ------- -------
Net income................................... $ 438 $ 574 $ 1,905 $ 966 $ 1,269
======= ======= ======= ======= =======
Pro forma statements of operations data
(unaudited): (Note 2)
Net income, as reported................. $ 1,905 $ 1,269
Pro forma income tax provision.......... 743 495
------- -------
Pro forma net income.................... $ 1,162 $ 774
======= =======
Pro forma net income per share.......... $ 0.27 $ 0.18
======= =======
Pro forma weighted average shares
outstanding........................... 4,361 4,346
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 55
ADVANCED COMMUNICATION SYSTEMS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADJUSTMENT FOR
REDEMPTION
VALUE GREATER
COMMON STOCK THAN AMOUNTS
------------------ PAID-IN RETAINED PAID IN BY TREASURY
SHARES AMOUNT CAPITAL EARNINGS STOCKHOLDERS STOCK TOTAL
--------- ------ ------- -------- --------------- -------- ------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1993.... 6,750,000 $ 67 $ 3,780 $1,630 $ (3,712) $ (139) $1,626
Net income....................... -- -- -- 438 -- -- 438
Sale of treasury stock........... -- -- -- -- -- 10 10
Purchase of treasury stock....... -- -- -- -- -- (68) (68)
Adjustment for redemption value
greater than amounts paid in by
stockholders................... -- -- 1,084 -- (1,084) -- --
-------- --- ------- ------ -------- ----- ------
BALANCE AT SEPTEMBER 30, 1994.... 6,750,000 67 4,864 2,068 (4,796) (197) 2,006
Net income....................... -- -- -- 574 -- -- 574
Sale of treasury stock........... -- -- -- -- -- 5 5
Purchase of treasury stock....... -- -- -- -- -- (88) (88)
Adjustment for redemption value
greater than amounts paid in by
stockholders................... -- -- 593 -- (593) -- --
-------- --- ------- ------ -------- ----- ------
BALANCE AT SEPTEMBER 30, 1995.... 6,750,000 67 5,457 2,642 (5,389) (280) 2,497
Net income....................... -- -- -- 1,905 -- -- 1,905
Stockholder distributions........ -- -- -- (27) -- -- (27)
Adjustment for redemption value
greater than amounts paid in by
stockholders................... -- -- 11,049 -- (11,049) -- --
-------- --- ------- ------ -------- ----- ------
BALANCE AT SEPTEMBER 30, 1996.... 6,750,000 67 16,506 4,520 (16,438) (280) 4,375
Net income (unaudited)........... -- -- -- 1,269 -- -- 1,269
Sale of treasury stock
(unaudited).................... -- -- -- -- -- 38 38
-------- --- ------- ------ -------- ----- ------
BALANCE AT MARCH 31, 1997
(unaudited).................... 6,750,000 $ 67 $16,506 $5,789 $ (16,438) $ (242) $5,682
======== === ======= ====== ======== ===== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 56
ADVANCED COMMUNICATION SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
--------------------------- ------------------
1994 1995 1996 1996 1997
------- ----- ------- ------- -------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income....................................... $ 438 $ 574 $ 1,905 $ 966 $ 1,269
Adjustments to reconcile net income to net cash
provided by operating activities --
Depreciation and amortization.................. 181 330 402 181 201
Loss on property and equipment................. -- 4 2 -- --
Changes in assets and liabilities:
Contract receivables........................ (1,307) (282) (5,328) (1,656) (1,557)
Other receivables........................... (12) (3) (18) (24) (128)
Prepaid expenses............................ (103) 50 (125) (62) (307)
Other related party receivables............. (48) (53) (37) (14) (123)
Other assets................................ 28 17 (21) (75) (54)
Accounts payable............................ 644 (476) 1,439 (410) 2,278
Accrued expenses............................ 635 306 1,874 (157) 1,574
Billings in excess of revenue............... 13 78 79 164 83
Income taxes payable........................ -- 7 (7) (7) --
Deferred income taxes payable............... -- (7) -- 7 --
------- ----- ------- ------- -------
Net cash provided by (used in)
operating activities................. 469 545 165 (1,087) 3,236
------- ----- ------- ------- -------
Cash flows from investing activities:
Collection (advances) of loans to stockholders... -- 7 (50) -- --
Purchases of property and equipment.............. (382) (270) (370) (200) (350)
Capitalized software development costs........... (446) (240) -- -- --
Insurance proceeds from loss of property and
equipment...................................... -- 23 -- -- --
------- ----- ------- ------- -------
Net cash used in investing
activities........................... (828) (480) (420) (200) (350)
------- ----- ------- ------- -------
Cash flows from financing activities:
Net borrowings (repayments) under line of
credit......................................... 672 (209) 867 1,314 (2,688)
Purchase of treasury stock....................... (68) (88) -- -- --
Sale of treasury stock........................... 10 5 -- -- 38
Stockholders' distributions...................... -- -- (27) -- --
------- ----- ------- ------- -------
Net cash provided by (used in)
financing activities................. 614 (292) 840 1,314 (2,650)
------- ----- ------- ------- -------
Net increase (decrease) in cash.................. 255 (227) 585 27 236
Cash and cash equivalents, beginning of year..... 564 819 592 592 1,177
------- ----- ------- ------- -------
Cash and cash equivalents, end of year........... $ 819 $ 592 $ 1,177 $ 619 $ 1,413
======= ===== ======= ======= =======
Supplemental disclosures of cash flow
information:
Cash paid during the year for --
Interest....................................... $ 125 $ 175 $ 251 $ 101 $ 134
======= ===== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 57
ADVANCED COMMUNICATION SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION:
Advanced Communication Systems, Inc. (the "Company") was incorporated in 1987 in
the state of Delaware. The Company provides communications and information
technology services and solutions, predominantly to U.S. government agencies and
to a lesser extent commercial and international customers. The Company focuses
its operations in three interrelated areas: communication systems design and
support, information technology services and systems integration. See Risk
Factors on Pages 6 to 11 of this Registration Statement.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRO FORMA NET INCOME PER SHARE (UNAUDITED)
Pro forma net income is based on the assumption that the Company's S corporation
status was terminated at the beginning of each 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 each period.
The pro forma weighted average shares outstanding is based on: (i) the weighted
average shares outstanding during the period assuming the dilutive effect of all
options outstanding; (ii) stock options issued during the twelve months
immediately preceding the offering date (using the treasury stock method and the
initial public offering price of $7.50 per share) for all periods presented; and
(iii) the assumed sale of a sufficient number of shares of the Company's common
stock necessary to fund the distribution of all undistributed S corporation
earnings as of March 31, 1997 in excess of fiscal 1996 earnings. (Note 11)
Pro forma fully diluted net income per share approximates primary net income per
share for all periods presented.
PRO FORMA BALANCE SHEET (UNAUDITED)
The pro forma balance sheet gives effect to: (i) a distribution of $5,500,000 to
the Company's shareholders, representing estimated S corporation accumulated
earnings as of March 31, 1997, assuming the Company had terminated its S
corporation status as of that date; (ii) the creation of a deferred tax
liability of $1,100,000 assuming the Company had terminated its S corporation
status as of March 31, 1997; and (iii) the cancellation of the Stock Redemption
Agreements, resulting in elimination of the adjustment for redemption value
greater than amounts paid in by stockholders. (Note 11)
INTERIM REPORTING
The financial information as of March 31, 1997 and for the six months ended
March 31, 1996 and 1997 has been prepared by the Company, without audit, and
includes, in the opinion of management, all adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation of the interim period
results. Operating results for any interim period are not necessarily indicative
of the results for any other period or for an entire year.
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
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-7
<PAGE> 58
ADVANCED COMMUNICATION SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
REVENUE RECOGNITION
The Company provides services, primarily to the U.S. government, on a
contractual basis. Revenue on cost plus fixed fee contracts is recognized to the
extent of costs incurred plus a proportionate amount of fees earned. Revenue on
time and materials contracts is recognized at the contractual rates as labor
hours and direct expenses are incurred. Revenue on fixed price contracts is
recognized on the percentage-of-completion method based on costs incurred in
relation to total estimated costs. Anticipated contract losses are recognized as
soon as they become known and estimable.
The Company also provides off-the-shelf hardware and software products to the
U.S. government under the GSA Schedule Contract and to commercial companies.
Related revenue is recognized when products are shipped or when customers have
accepted the products, depending on contractual terms.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to significant
concentrations of credit risk consist of cash and cash equivalents and contract
receivables. The Company maintains cash and cash equivalents in a high credit
quality financial institution. The credit risk with respect to accounts
receivable is mitigated because the majority of the Company's contract
receivables are due from agencies of the U.S. government.
For the years ending September 30, 1994, 1995, 1996 and for the six months ended
March 31, 1996 and 1997, approximately $19,011,000, $23,483,000, $28,607,000,
$11,406,000, and $19,929,000, respectively, of the Company's revenues were
derived from contracts or subcontracts funded by the U.S. government, virtually
all of which were funded by the Department of Defense.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include short-term investments with original
maturities of three months or less.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and are depreciated over their
estimated useful lives, five to seven years, using an accelerated method.
Leasehold improvements are amortized on a straight-line basis over the shorter
of the useful life of the asset or the lease terms.
SOFTWARE DEVELOPMENT COSTS
In compliance with Statement of Financial Accounting Standards ("SFAS") No. 86,
Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed, certain software development costs are capitalized in the accompanying
balance sheets. Capitalization of software development costs begins upon the
establishment of technological feasibility. Capitalization ceases and
amortization of capitalized costs begins when the software product is
commercially available for general release to customers. Amortization of
capitalized software development costs is computed using the straight-line
method over the remaining estimated economic life of the product, not to exceed
five years.
RESEARCH AND DEVELOPMENT EXPENSES
The Company expenses research and development costs as they are incurred.
Research and development expenses for all periods presented were not material.
F-8
<PAGE> 59
ADVANCED COMMUNICATION SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets, including software development costs
and property and equipment, for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be fully
recoverable. To determine recoverability of its long-lived assets, the Company
evaluates the probability that future undiscounted net cash flows, without
interest charges, will be less than the carrying amount of the assets. The
Company has determined that as of September 30, 1995 and 1996 and March 31,
1997, there has been no impairment in the carrying value of long-lived assets.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments are defined as cash, evidence of an ownership interest in
an entity, or a contract that imposes an obligation to deliver cash or other
financial instruments to a second party. The carrying amounts of current assets
and current liabilities in the accompanying financial statements approximate
fair value due to the short maturity of these instruments. As of September 30,
1996, the fair value of the stockholders' notes receivable approximated $416,000
based on the Company's borrowing rate of 8.75%. The line of credit has a
floating interest rate that varies with current indices, and, as such, the
recorded value approximates fair value.
INCOME TAXES
From inception through September 30, 1989, the Company was subject to corporate
income taxes. On October 1, 1989, the Company elected to be treated as an S
corporation under Subchapter S of the Internal Revenue Code. The Company
recorded a deferred tax liability for the built-in gain on the cumulative
accrual to cash difference as of September 30, 1989. As of September 30, 1996,
the deferred tax liability remaining is $91,000.
As an S corporation, the Company's earnings have been taxed, for federal and
certain state income tax purposes, directly to the Company's stockholders rather
than to the Company. Therefore, no provision for income taxes has been provided
in the accompanying statements of operations.
In connection with the proposed initial public offering (Note 11), the Company
will terminate its S corporation status and will become subject to corporate
income taxes. Accordingly, the accompanying consolidated statements of
operations include unaudited pro forma adjustments for income tax expense, which
would have been recorded had the Company been subject to federal and state
corporate income taxes.
A pro forma deferred tax liability, resulting primarily from accrual to cash
differences, has been recorded as if the Company terminated its S corporation
status on March 31, 1997. The actual deferred tax liability may differ from the
pro forma liability based on the differences in financial reporting and tax
basis assets and liabilities at the date of termination of the Company's S
corporation status. Upon termination, the actual deferred tax liability will be
recorded as a nonrecurring charge and will be payable in equal installments over
the next four years.
F-9
<PAGE> 60
ADVANCED COMMUNICATION SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. CONTRACT RECEIVABLES:
Contract receivables consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------- MARCH 31,
1995 1996 1997
------ ------ ------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
U.S. government:
Amounts billed................................ $2,422 $4,103 $ 2,057
Recoverable costs and accrued profit on
progress completed; not billed.............. 2,146 5,187 8,181
------ ------ ------------
Subtotal................................. 4,568 9,290 10,238
Commercial customers:
Amounts billed................................ 65 123 119
Recoverable costs and accrued profit on
progress completed; not billed.............. 26 574 1,187
------ ------ ------------
Subtotal................................. 91 697 1,306
------ ------ ------------
Total.................................... $4,659 $9,987 $ 11,544
====== ====== =========
</TABLE>
4. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------- MARCH 31,
1995 1996 1997
------ ------ ------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Furniture and equipment............................ $1,185 $1,561 $ 1,916
Leasehold improvements............................. 27 13 8
------ ------ ------------
1,212 1,574 1,924
Less -- Accumulated depreciation and
amortization..................................... 749 1,003 1,136
------ ------ ------------
Total property and equipment, net.................. $ 463 $ 571 $ 788
====== ====== =========
</TABLE>
5. SOFTWARE DEVELOPMENT COSTS:
Software development costs consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------- MARCH 31,
1995 1996 1997
------ ------ ------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Cost............................................... $ 685 $ 685 $ 686
Accumulated amortization........................... 87 224 293
------ ------ ------------
Total software development costs, net.............. $ 598 $ 461 $ 393
====== ====== =========
</TABLE>
Software development costs capitalized were $446,000 and $240,000 in the years
ended September 30, 1994 and 1995, respectively. Amortization expense for the
years ended September 30, 1994, 1995, 1996 and the six months ended March 31,
1996 and 1997 were $0, $88,000, $137,000, $68,000 and $68,000, respectively.
F-10
<PAGE> 61
ADVANCED COMMUNICATION SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. ACCRUED EXPENSES:
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------- MARCH 31,
1995 1996 1997
------ ------ -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Accrued salaries, benefits and related taxes..... $ 636 $ 833 $ 833
Accrued vacation................................. 357 411 389
Accrued bonuses.................................. 415 387 292
Accrued subcontractor costs...................... 126 1,726 3,180
Other............................................ 68 119 356
------ ------ -----------
Total accrued expenses........................... $1,602 $3,476 $ 5,050
====== ====== =========
</TABLE>
7. RELATED-PARTY TRANSACTIONS:
In 1993, the Company entered into a ten-year lease with a real estate management
company ("10089 Management") to lease its headquarters facility. The owners of
10089 Management include the principal stockholders of the Company. The lease
requires current rental payments of approximately $26,000 per month, increased
annually based on the Consumer Price Index, and expires on August 31, 2003.
10089 Management purchased the headquarters facility, using in part a loan of
$1,125,000 from a third-party lender, which is guaranteed by the Company. In
March 1997, the loan agreement was amended to cancel the guarantee upon an
initial public offering resulting in net proceeds to the Company of at least
$10,000,000. The mortgage requires monthly principal payments of $6,000 plus
interest and a balloon payment for the balance of $750,000 in 1998. The
outstanding balance as of September 30, 1995 and 1996, and March 31, 1997, was
$969,000, $894,000 and $856,000, respectively. The remaining purchase price was
financed through promissory notes from various stockholders due to the Company.
Stockholders' notes receivable at September 30, 1995 and 1996 and March 31, 1997
were $393,000, $443,000 and $443,000, respectively. The loans bear interest at
rates ranging from 7.0% to 8.75% per annum and have maturity dates ranging from
1998 to 2001. Interest is due annually on the anniversary date of the loans,
with principal due at maturity. One loan for $50,000 is secured by a lien on
real estate. Accrued interest receivable at September 30, 1995 and 1996 and
March 31, 1997 of $56,000, $83,000 and $99,000, respectively, is included in
other related-party receivables in the accompanying balance sheets.
The Company also provides management services for 10089 Management at no cost.
Included in other related-party receivables are amounts due from the 10089
Management for reimbursable operating expenses paid for by the Company. The
reimbursable operating expenses included in other related-party receivables at
September 30, 1995 and 1996 and March 31, 1997 were $46,000, $0 and $0,
respectively.
A common group of stockholders hold a substantial interest in both Fairfax
Communications Ltd., and the Company. As of September 30, 1996 and March 31,
1997, the Company had a receivable of $54,000 and $162,000, respectively, due
from Fairfax Communications Ltd. for payroll services which the Company performs
on its behalf. (Note 11)
8. LINE OF CREDIT:
The Company had a line of credit arrangement with a commercial bank under which,
at December 31, 1996, it could borrow up to a maximum of $4,000,000. The
borrowings were limited by 80% of the eligible receivables, as defined, and 90%
of eligible government receivables, as defined, and bore interest at the bank's
F-11
<PAGE> 62
ADVANCED COMMUNICATION SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. LINE OF CREDIT -- (CONTINUED)
prime rate plus 1/2%, payable monthly. The borrowings were collateralized by
contract receivables, and the credit arrangement contained affirmative and
negative covenants, including, among other things, financial covenants regarding
maintenance of stated amount of debt to net worth, specific liquidity and
solvency ratios. The line was to expire on February 28, 1997. In March 1997, the
Company extended the arrangement through February 28, 1998, and, accordingly,
the line has been classified as long-term debt. The new line is for $5,000,000,
bears interest at the bank's prime rate plus a percentage, not more than 0.25%
and currently zero, that is based on the Company's historical financial
performance and expires on February 28, 1998. Borrowings under the new line are
collateralized by contract receivables. The agreement contains various covenants
requiring the Company to maintain certain financial ratios, each as defined,
including tangible net worth, liabilities to tangible net worth, funded debt to
operating cash flow and debt service. The agreement also restricts the payment
of dividends.
At September 30, 1995 and 1996 and March 31, 1997, the Company had $1,821,000,
$2,688,000 and $0, respectively, outstanding under this arrangement. For the
years ended September 30, 1994, 1995 and 1996 and the six months ended March 31,
1996 and 1997, interest expense under this line of credit was $125,000,
$185,000, $249,000, $114,000 and $134,000, respectively, at weighted average
interest rates of 7.21%, 9.20%, 8.87%, 9.02% and 8.70%, respectively.
9. STOCKHOLDERS' EQUITY:
STOCK REDEMPTION AGREEMENTS
All of the outstanding shares of common stock and options, upon exercise, are
subject to Stock Redemption Agreements. Under certain circumstances, the Company
is required to buy back the stock at a price equal to fair value, as determined
by the Board of Directors. Adjustment for redemption value greater than amounts
paid in by stockholders represents the change in the redemption value per share
of outstanding Common Stock in each period. The redemption value per share,
based on the fair market value, was $1.48, $4.44 and $4.44 as of September 30,
1995 and 1996 and March 31, 1997, respectively. The Stock Redemption Agreements
will be terminated in connection with the initial public offering. All treasury
stock purchases were a result of the provisions of these Stock Redemption
Agreements.
STOCK PLANS AND AGREEMENTS
The 1996 Stock Incentive Plan of the Company (the "1996 Plan") was adopted by
the Company's Board of Directors and approved by the Company's stockholders
effective July 1996. The Company may grant options, stock appreciation rights,
"performance" awards and restricted and unrestricted stock (collectively, the
"Awards") to purchase up to 337,500 shares of Common Stock to participants in
the 1996 Plan. The 1996 Plan has a term of 10 years. Options granted under the
1996 Plan can have an exercise period of up to 10 years. The 1996 Plan provides
for the grant of stock options to directors, employees (including officers) and
consultants of the Company and its subsidiaries. Pursuant to the 1996 Plan,
options may be incentive stock options within the meaning of Section 422 of the
Code or nonstatutory stock options, although incentive stock options may be
granted only to employees. All incentive stock options are nontransferable other
than by will or the laws of descent and distribution.
In 1996, the Board of Directors granted options under the 1996 Plan to purchase
148,500 shares of Common Stock. These options have an exercise price of $4.44
per share and become exercisable in three equal annual increments beginning on
October 1, 1997, and the options expire on the earlier of January 1, 2000 or
termination of employment.
On January 2, 1997, the Company granted a stock option under the 1996 Plan to
purchase 115,000 shares of Common Stock. The option has an exercise price of
$6.50 per share, a term of eight years and becomes
F-12
<PAGE> 63
ADVANCED COMMUNICATION SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. STOCKHOLDERS' EQUITY -- (CONTINUED)
exercisable in four equal annual installments beginning on January 1, 1998. This
option has been included in the weighted average shares outstanding computation
for all periods presented.
Options under the 1996 Plan were granted with exercise prices at or above fair
value on the date of grant as determined by an independent appraisal and,
therefore, no compensation expense has been recognized.
The Board of Directors has determined not to grant any additional awards under
the 1996 Plan.
The Company has entered into nonqualified option agreements with various
employees. The per share exercise price of such options was at least 100% of the
fair market value, as determined by the Board of Directors, of a share of Common
Stock as of the respective dates of grant. Shares purchased through the exercise
of these options are subject to Stock Repurchase Agreements.
In 1993, the Board of Directors granted options to purchase 101,250 shares of
Common Stock to various employees. The employees were fully vested in the
options upon granting, and the options expire on the earlier of January 1, 1998
or termination of employment. As of September 30, 1994, 1995 and 1996, these
options were exercisable in the amounts of 87,750, 81,000 and 81,000 shares,
respectively. All sales of treasury stock were a result of the exercise of
options.
The following table summarizes the activity of all the Company's stock options:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
EXERCISE PRICE
NUMBER PRICE PER PER
OF SHARES SHARE SHARE
--------- -------------- --------
<S> <C> <C> <C>
Shares under option, September 30, 1993..... 101,250 $0.70 $ 0.70
Options exercised...................... (13,500) 0.70 0.70
--------- -------------- --------
Shares under option, September 30, 1994..... 87,750 0.70 0.70
Options exercised...................... (6,750) 0.70 0.70
--------- -------------- --------
Shares under option, September 30, 1995..... 81,000 0.70 0.70
Options granted........................ 148,500 4.44 4.44
Options exercised...................... -- 0.70 0.70
--------- -------------- --------
Shares under option, September 30, 1996..... 229,500 0.70 - 4.44 3.12
Options granted (unaudited)............ 115,000 6.50 6.50
Options exercised (unaudited).......... (54,000) 0.70 0.70
--------- -------------- --------
Shares under option, March 31, 1997
(unaudited)............................ 290,500 $0.70 - $6.50 $ 4.91
======= =========== =======
</TABLE>
Options outstanding at September 30, 1996 had a weighted average remaining
contractual life of 2.73 years. The fair value per share of all options issued
in 1996, estimated on the date of grant using the Black-Scholes option pricing
model, is $1.76.
The Company adopted the disclosure requirements of SFAS No. 123, Accounting for
Stock-Based Compensation, effective for the Company's September 30, 1996
financial statements. The Company applies Accounting Principles Board Opinion
No. 25 and related interpretations in accounting for its stock plans. No
compensation cost has been recognized for its stock plans based on the intrinsic
value of the stock options at date of grant (i.e., the difference between the
exercise price and the fair value of the Common Stock). Had compensation cost
for the Company's stock-based compensation plans been determined based on the
fair value at the grant dates under those plans consistent with the method of
FASB Statement 123, the Company's
F-13
<PAGE> 64
ADVANCED COMMUNICATION SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. STOCKHOLDERS' EQUITY -- (CONTINUED)
pro forma net income and pro forma net income per share would have been reduced
to the amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
1996
-------------
<S> <C>
Pro forma net income (in thousands) --
As reported................................................ $ 1,162
SFAS No. 123 pro forma..................................... $ 881
Pro forma net income per share --
As reported................................................ $ 0.27
SFAS No. 123 pro forma..................................... $ 0.21
</TABLE>
The fair value of each option is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions used for
grants in 1996: no dividend yield; expected volatility of 49.5%; risk-free
interest rates of approximately 6.3%; and expected lives of three years. The
volatility factor was based on the volatility percentage of comparable publicly
traded companies because the Company, as a private company, does not have a
sufficient history of stock transactions.
10. COMMITMENTS AND CONTINGENCIES:
LEASE COMMITMENTS
The Company leases office space and equipment under various operating lease
agreements expiring through August 2003. Most leases include a provision for
annual rent adjustments based on changes in various economic indices. Future
minimum lease payments under noncancelable operating leases as of September 30,
1996 were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30, (IN THOUSANDS)
-------------------------------------------------------------- ---------------
<S> <C>
1997.......................................................... $ 1,432
1998.......................................................... 1,060
1999.......................................................... 772
2000.......................................................... 463
2001.......................................................... 361
Thereafter.................................................... 714
-------
Total.................................................... $ 4,802
========
</TABLE>
During 1993, the Company entered into a lease agreement for office space with a
related party which includes the principal stockholders of the Company (Note 7).
For the years ended September 30, 1994, 1995 and 1996 and the six months ended
March 31, 1996 and 1997, rent expense related to this lease totaled $278,000,
$299,000, $309,000, $149,000 and $158,000, respectively. Amounts representing
aggregate rent expense on all operating leases, excluding the related party
lease, totaled $940,000, $1,014,000 and $1,183,000 for the years ended September
30, 1994, 1995 and 1996, and $532,000 and $526,000 for the six months ended
March 31, 1996 and 1997, respectively.
PROFIT-SHARING PLAN
The Company provides a profit-sharing plan (401(k) plan) which covers
substantially all employees. Under the terms of the plan, the Company may make
discretionary profit-sharing contributions and discretionary
F-14
<PAGE> 65
ADVANCED COMMUNICATION SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
matching contributions, each determined annually by the Board of Directors.
Contributions charged to expense for the years ended September 30, 1994, 1995
and 1996, and for the six months ended March 31, 1996 and 1997 were $247,000,
$320,000, $368,000, $163,000 and $60,000, respectively.
11. SUBSEQUENT EVENTS:
RECAPITALIZATION AND STOCK SPLIT
On May 5, 1997, the Company amended and restated its Certificate of
Incorporation to increase the number of authorized shares to 40,000,000 shares
of Common Stock, par value $.01 per share, and 1,000,000 shares of Preferred
Stock, par value $.01 per share. In June, 1997, the Board of Directors approved
a stock dividend having the effect of a 6,750-for-1 stock split of the Common
Stock, which was paid to the stockholders effective June 25, 1997. The change in
the Company's Common Stock for the stock dividend has been given retroactive
effect for all periods presented.
1997 STOCK INCENTIVE PLAN
The 1997 Stock Incentive Plan of the Company (the "1997 Plan") was adopted by
the Company's Board of Directors effective March 1997 and by the Company's
stockholders on March 25, 1997. The Company may grant options, stock
appreciation rights, "performance" awards and restricted and unrestricted stock
(collectively, the "Awards") to purchase up to 450,000 shares of Common Stock to
participants in the 1997 Plan. To date, no Awards have been granted under the
1997 Plan. The 1997 Plan has a term of 10 years. Options granted under the 1997
Plan can have an exercise period of up to 10 years. The 1997 Plan provides for
the grant of stock options to directors, employees (including officers) and
consultants of the Company and its subsidiaries. Pursuant to the 1997 Plan,
options may be incentive stock options within the meaning of Section 422 of the
Code or nonstatutory stock options, although incentive stock options may be
granted only to employees. All incentive stock options are nontransferable other
than by will or the laws of descent and distribution.
ACQUISITION
As of April 1, 1997, the Company acquired all the outstanding stock of Fairfax
Communication Ltd. for a cash price of $46,500. Revenues and operating income of
Fairfax Communications Ltd. for the year ended September 30, 1996 were $97,000
(unaudited) and $4,000 (unaudited), respectively.
EVENTS RELATED TO AN INITIAL PUBLIC OFFERING
The Company contemplates an initial public offering of approximately 1,850,000
shares of Common Stock. In connection with the initial public offering,
subsequent to September 30, 1996, the following transactions are anticipated to
occur:
(i) termination of S corporation status and creation of a deferred tax
liability to the extent that financial reporting net assets exceed tax
basis net assets (Note 2);
(ii) distribution to the current stockholders of undistributed S corporation
earnings (Note 2);
(iii) elimination of the guarantee on the debt of a related party (Note 7);
(iv) cancellation of all Stock Redemption Agreements (Note 9); and
(v) repayment of all related party notes (Note 7).
F-15
<PAGE> 66
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDERS OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF ANY OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON
STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY THE SHARES OF COMMON STOCK BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN
WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR
TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................... 3
Risk Factors............................. 6
S Corporation Distribution and
Termination of S Corporation Status.... 12
Use of Proceeds.......................... 12
Dividend Policy.......................... 13
Capitalization........................... 13
Dilution................................. 14
Selected Financial Data.................. 15
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................. 16
Business................................. 22
Management............................... 35
Certain Transactions..................... 41
Principal and Selling Stockholders....... 42
Description of Capital Stock............. 43
Shares Eligible for Future Sale.......... 45
Underwriting............................. 46
Legal Matters............................ 48
Experts.................................. 48
Available Information.................... 48
Glossary of Acronyms..................... 49
Index to Financial Statements............ F-1
</TABLE>
------------------
UNTIL JULY 22, 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
2,500,000 SHARES
ADVANCED COMMUNICATION SYSTEMS, INC.
COMMON STOCK
------------------------
PROSPECTUS
------------------------
A.G. EDWARDS AND SONS, INC.
FERRIS, BAKER WATTS
Incorporated
JUNE 27, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
