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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 30, 1997
REGISTRATION NO. 333-23959
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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ADVANCED COMMUNICATION SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OR OTHER JURISDICTION
OF INCORPORATION OR ORGANIZATION)
7373
(PRIMARY STANDARD INDUSTRIAL
CLASSIFICATION CODE NUMBER)
54-1421222
(I.R.S. EMPLOYER
IDENTIFICATION NUMBER)
10089 LEE HIGHWAY
FAIRFAX, VA 22030
(703) 934-8130
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
GEORGE A. ROBINSON
PRESIDENT AND CHIEF EXECUTIVE OFFICER
ADVANCED COMMUNICATION SYSTEMS, INC.
10089 LEE HIGHWAY
FAIRFAX, VA 22030
(703) 934-8130
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF AGENT FOR SERVICE)
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Copies to:
PETER J. WALLISON, ESQ.
GIBSON, DUNN & CRUTCHER LLP
1050 CONNECTICUT AVENUE, N.W.
WASHINGTON, D.C. 20036-5306
TELEPHONE: (202) 955-8500
FACSIMILE: (202) 467-0539
PETER B. TARR, ESQ.
BRENT B. SILER, ESQ.
HALE AND DORR LLP
1455 PENNSYLVANIA AVENUE, N.W.
WASHINGTON, D.C. 20004-1008
TELEPHONE: (202) 942-8400
FACSIMILE: (202) 942-8484
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act of 1933 registration statement number
of the earlier effective registration statement for the same offering. [ ]
__________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act of 1933 registration statement number of the earlier effective
registration statement for the same offering. [ ] __________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED MAY 30, 1997
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. It is currently anticipated that the initial public offering price will
be between $8.50 and $10.50 per share. See "Underwriting" for a discussion of
the factors to be considered in determining the initial public offering price.
Application has been made to have the Common Stock approved for quotation on the
Nasdaq National Market under the trading symbol "ACSC."
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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.
<TABLE>
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PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT (1) COMPANY (2) STOCKHOLDERS
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share......................... $ $ $ $
- --------------------------------------------------------------------------------------------------
Total (3)......................... $ $ $ $
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</TABLE>
(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 $ , $ and
$ , 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 ,
1997.
A.G. EDWARDS & SONS, INC. FERRIS, BAKER WATTS
Incorporated
THE DATE OF THIS PROSPECTUS IS , 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."
2
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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 675-for-1 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
<TABLE>
<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. See "Management -- Stock Plans and Agreements."
4
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SUMMARY FINANCIAL DATA
<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)................................... 4,302 4,283
</TABLE>
<TABLE>
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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 $13,500
Total assets................................................................... 15,671 25,766
Total debt..................................................................... -- --
Stockholders' equity........................................................... 5,682 14,677
</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 an assumed initial public offering price of $9.50 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, at an
assumed initial public offering price of $9.50 per share and after deducting
the estimated underwriting discount and 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
7
<PAGE> 9
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
8
<PAGE> 10
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."
9
<PAGE> 11
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 $5.7 million in
net proceeds, based upon an assumed initial public offering price of $9.50 per
share, after
10
<PAGE> 12
deducting the Selling Stockholders' proportionate share of the estimated
underwriting discount. Following this offering, the current stockholders of the
Company will own Common Stock with a market value of approximately $30.1
million, based upon an assumed initial public offering price of $9.50 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 $6.91 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 to be 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> 13
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 $15.6
million ($18.9 million if the over-allotment option granted to the Underwriters
is exercised in full) after deducting the estimated underwriting discount and
estimated expenses to be paid by the Company and assuming an initial public
offering price of $9.50 per share. 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 29, 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> 14
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 15,644
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 14,677
-------- -------
Total capitalization..................................... $ 5,682 $14,677
======== =======
</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, at an assumed initial
public offering price of $9.50 per share and after deducting the estimated
underwriting discount and 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> 15
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 at an assumed initial public offering price of $9.50 per share (after
deducting the estimated underwriting discount and estimated offering expenses),
the pro forma net tangible book value would have been approximately $14.7
million, or $2.59 per share. This represents an immediate increase in pro forma
net tangible book value of $2.83 per share to existing stockholders and an
immediate dilution in pro forma net tangible book value of $6.91 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>
Assumed initial public offering price per share...................... $9.50
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................ 2.83
------
Pro forma net tangible book value per share after the offering....... 2.59
-----
Dilution per share to new investors.................................. $6.91
=====
</TABLE>
The following table sets forth, as of May 29, 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 (assuming an initial public offering price of $9.50 per
share and 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 0.9% $0.04
New investors............................. 1,850,000 32.7 17,575,000 99.1 $9.50
--------- ----- ----------- -----
Total................................ 5,663,750 100.0% $17,725,810 100.0%
========= ===== =========== =====
</TABLE>
The foregoing table assumes no exercise of stock options subsequent to May
29, 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> 16
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)................................... 4,302 4,283
</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 an assumed initial public offering price of $9.50 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> 17
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> 18
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> 19
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 1995. 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> 20
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> 21
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> 22
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> 23
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> 24
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> 25
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
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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.
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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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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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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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<PAGE> 35
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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<PAGE> 36
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........... 67 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> 37
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> 38
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.
37
<PAGE> 39
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.
38
<PAGE> 40
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> 41
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> 42
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> 43
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of May 29, 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 and Diane Hoffman.................. 135,000 3.5 23,000 112,000 2.0
</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> 44
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, the Company's authorized capital stock
will consist 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 nine
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
43
<PAGE> 45
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.
44
<PAGE> 46
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> 47
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. .......................................
Ferris, Baker Watts, Incorporated................................
---------
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 excess of $ per share. The Underwriters may allow and such
dealers may re-allow a concession not in excess of $ 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
46
<PAGE> 48
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 will be determined by negotiation among the Company and the
Representatives. Among the factors to be considered in determining such price
will be 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.
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.
47
<PAGE> 49
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> 50
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> 51
[This Page Intentionally Left Blank]
<PAGE> 52
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> 53
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.
May 5, 1997
F-2
<PAGE> 54
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> 55
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........................... 4,302 4,283
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 56
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> 57
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> 58
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 an
assumed initial public offering price of $9.50 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> 59
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> 60
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> 61
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> 62
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> 63
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> 64
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> 65
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> 66
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 March, 1997, the Board of Directors approved
a 675-for-1 stock split of the Common Stock, which was paid in the form of a
stock dividend to the stockholders effective May 5, 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> 67
- ------------------------------------------------------
------------------------------------------------------
- ------------------------------------------------------
------------------------------------------------------
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............................ 47
Experts.................................. 47
Available Information.................... 48
Glossary of Acronyms..................... 49
Index to Financial Statements............ F-1
</TABLE>
------------------
UNTIL , 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
, 1997
- ------------------------------------------------------
------------------------------------------------------
- ------------------------------------------------------
------------------------------------------------------
<PAGE> 68
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth an estimate of the expenses expected to be
incurred in connection with the issuance and distribution of the securities
being registered, other than underwriting compensation, all of which will be
paid by the Company:
<TABLE>
<S> <C>
Registration Fee -- Securities and Exchange Commission............ $ 9,583
Filing Fee -- National Association of Securities Dealers, Inc..... 3,663
Listing Fee -- Nasdaq National Market............................. 32,529
Transfer Agent and Registrar Fees and Expenses.................... 10,000
Blue Sky Fees and Expenses (including legal fees)................. 12,000
Legal Fees and Expenses........................................... 250,000
Accounting Fees and Expenses...................................... 250,000
Printing and Engraving Expenses................................... 125,000
Miscellaneous..................................................... 57,225
--------
Total........................................................ $750,000
========
</TABLE>
- ---------------
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company is organized under the laws of the State of Delaware. The DGCL
provides that a Delaware corporation has the power generally to indemnify its
directors, officers, employees and other agents (each, a "Corporate Agent")
against expenses and liabilities (including amounts paid in settlement) in
connection with any proceeding involving such person by reason of his being a
Corporate Agent, other than a proceeding by or in the right of the corporation,
if such person acted in good faith and in a manner he reasonably believed to be
in or not opposed to the best interests of the corporation and, with respect to
any criminal proceeding, such person had no reasonable cause to believe his
conduct was unlawful. In the case of an action brought by or in the right of the
corporation, indemnification of a Corporate Agent against expenses is permitted
if such person acted in good faith and in a manner he reasonably believed to be
in or not opposed to the best interests of the corporation; however, no
indemnification is permitted in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation,
unless and only to the extent that the Court of Chancery or the court in which
such proceeding was brought shall determine upon application that despite the
adjudication of liability, but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to such indemnification. To the
extent that a Corporate Agent has been successful on the merits of such
proceeding, whether or not by or in the right of the corporation, or in the
defense of any claim, issue or matter therein, the corporation is required to
indemnify the Corporate Agent for expenses in connection therewith. Expenses
incurred by a Corporate Agent in connection with a proceeding may, under certain
circumstances, be paid by the corporation in advance of the final disposition of
the proceeding as authorized by the board of directors. The power to indemnify
and advance the expenses under the DGCL does not exclude other rights to which a
Corporate Agent may be entitled to under the certificate of incorporation,
bylaws, agreement, vote of stockholders or disinterested directors or otherwise.
The Company's Amended and Restated Certificate of Incorporation and Amended
and Restated Bylaws provide for the indemnification of Corporate Agents for
certain expenses, judgments, fines and payments incurred by them in connection
with the defense or settlement of claims asserted against them in their
capacities as Corporate Agents to the fullest extent authorized by the DGCL,
provided that such indemnification is authorized (i) by a majority vote of the
directors who are not parties to the action, suit or proceeding, even though
less than a quorum, or (ii) if there are no such directors, or if such directors
so direct, by independent legal counsel in a written opinion, or (iii) by the
stockholders, or (iv) by a court of competent
II-1
<PAGE> 69
jurisdiction in the State of Delaware. To the extent, however, that a director
or officer of the Company has been successful on the merits or otherwise in
defense of any action, suit or proceeding described above, or in defense of any
claim, issue or matter therein, he or she shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him or her in
connection therewith, without the necessity of authorization in the specific
case. In addition, expenses incurred by a director or officer in defending or
investigating a threatened or pending action, suit or proceeding may be paid by
the Company, upon the determination by the Board of Directors, in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that he or she is not entitled to be
indemnified by the Company, provided the Company approves in advance counsel
selected by the director or officer, which approval shall not be unreasonably
withheld. The Company will also enter into indemnification agreements to the
same effect with each of its officers and directors.
The Company's Amended and Restated Certificate of Incorporation also
contains provisions which limit the personal liability of directors for monetary
damages for breach of their fiduciary duties as directors, except to the extent
such limitation of liability is prohibited by the DGCL. In accordance with the
DGCL, these provisions do not limit the liability of any director for any breach
of the director's duty of loyalty to the Company or its stockholders; for acts
of omissions not in good faith or which involve intentional misconduct or a
knowing violation of law; for certain unlawful payments of dividends or stock
repurchases under Section 174 of the DGCL; or for any transaction from which the
director derives an improper personal benefit. These provisions do not limit the
rights of the Company or any stockholder to seek an injunction or any other non-
monetary relief in the event of a breach of a director's fiduciary duty. In
addition, these provisions apply only to claims against a director arising out
of his or her role as a director and do not relieve a director from liability
for violations of statutory law, such as certain liabilities imposed on a
director under the federal securities laws.
Under the DGCL, a Delaware corporation has the power to purchase and
maintain insurance on behalf of any Corporate Agent against any liabilities
asserted against and incurred by him in such capacity, whether or not the
corporation has the power to indemnify him against such liabilities under the
DGCL. The Company intends to purchase directors' and officers' insurance.
Reference is made to Sections 102(b)(7) and 145 of the DGCL, in connection
with the above summary of indemnification, insurance and limitation of
liability.
The purpose of these provisions is to assist the Company in retaining
qualified individuals to serve as officers, directors or other Corporate Agents
of the Company by limiting their exposure to personal liability for serving as
such.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since October 1, 1993, the Company has issued and sold the following
unregistered securities (adjusted to give effect to the anticipated 675-for-1
stock split).
1. On October 26, 1993, the Company granted options to purchase, in
the aggregate, a total of 101,250 shares of Common Stock to Sharon Angelone
and Warren Willis, employees of the Company, and Douglas Benzel, a former
employee of the Company, at an exercise price of $0.70 per share.
2. On September 1, 1994, Douglas Benzel, a former employee of the
Company, and Warren Willis, an employee of the Company, exercised options
to purchase, in the aggregate, 13,500 shares of Common Stock, at an
exercise price of $0.70 per share.
3. On September 29, 1995, Sharon Angelone, an employee of the Company,
exercised an option to purchase 6,750 shares of Common Stock, at an
exercise price of $0.70 per share.
4. On July 15, 1996, the Company granted options to purchase, in the
aggregate, a total of 148,500 shares of Common Stock to 17 employees of the
Company, at an exercise price of $4.44 per share.
II-2
<PAGE> 70
5. On December 13, 1996, Douglas Benzel, a former employee of the
Company, exercised an option to purchase 27,000 shares of Common Stock, at
an exercise price of $0.70 per share.
6. On January 2, 1997, the Company granted options to purchase 115,000
shares of Common Stock to Dev Ganesan, Chief Financial Officer, at an
exercise price of $6.50 per share.
7. On February 13, 1997, Sharon Angelone, an employee of the Company,
exercised an option to purchase 27,000 shares of Common Stock, at an
exercise price of $0.70 per share.
8. On April 1, 1997, Warren Willis, an employee of the Company,
exercised an option to purchase 27,000 shares of Common Stock, at an
exercise price of $0.70 per share.
No underwriters were engaged in connection with the foregoing sales and/or
issuances of securities. Such sales were made in reliance upon the exemption
from the registration provisions of the Securities Act of 1933 set forth in Rule
701 and/or in Section 4(2) thereof as transactions not involving a public
offering. The respective purchasers thereof have acquired such shares for their
respective accounts without a view to the distribution thereof.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<C> <S>
1.1 -- Form of Underwriting Agreement.
3.1 -- Certificate of Incorporation of the Company.+
3.2 -- Bylaws of the Company.+
3.3 -- Amended and Restated Certificate of Incorporation of the Company.+
3.4 -- Amended and Restated Bylaws of the Company.+
4.1 -- Specimen Common Stock Certificate.
5.1 -- Opinion of Gibson, Dunn & Crutcher LLP.*
10.1 -- Employment Agreement, dated June 18, 1993, between the Company and Warren C.
Willis.+
10.2 -- Employment Agreement, dated as of January 2, 1997, between the Company and Dev
Ganesan.+
10.3 -- 1996 Stock Incentive Plan.+
10.4 -- 1997 Stock Incentive Plan.
10.5 -- Form of Indemnity Agreement between the Company and each of its directors and
executive officers.
10.6 -- Revolving Credit and Security Agreement and Revolving Promissory Note, dated as of
March 1, 1997, between First Union Commercial Corporation and the Company.+
10.7 -- Lease Agreement, dated July 16, 1993, including Amendment 1, dated December 1, 1993,
Amendment 2, dated January 15, 1994, and Amendment 3, dated March 15, 1994.+
10.8 -- Contract No. N00039-96-C-0066, effective March 14, 1996, by and between the Company
and Space and Naval Warfare Systems Command.**+
10.9 -- Contract No. N00039-96-C-0097, effective August 29, 1996, by and between the Company
and Space and Naval Warfare Systems Command.**+
10.10 -- Form of Tax Indemnification Agreement to be entered into by the Company and each of
its existing Stockholders.*
10.11 -- Stockholders Agreement.+
11.1 -- Computation of Per Share Earnings.
21.1 -- List of Subsidiaries of the Registrant.
23.1 -- Consent of Gibson, Dunn & Crutcher LLP (included in its opinion filed as Exhibit
5.1).*
23.2 -- Consent of Arthur Andersen LLP.
24.1 -- Power of Attorney.+
27.1 -- Financial Data Schedule for year ended September 30, 1996. (For SEC purposes only).+
27.2 -- Financial Data Schedule for three months ended December 31, 1996. (For SEC purposes
only).+
</TABLE>
- ---------------
* To be filed by amendment.
** Portions of this exhibit, as marked, have been omitted pursuant to a request
for confidential treatment and have been filed separately with the
Commission.
+ Previously filed.
II-3
<PAGE> 71
(b) Financial Statement Schedules
The financial statement schedules for which provision is made in the
applicable accounting regulations of the Commission are either not required
under the related instructions or are inapplicable, and therefore have been
omitted.
ITEM 17. UNDERTAKINGS.
The Company hereby undertakes to provide to the Underwriters at the closing
specified in the underwriting agreement, certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described in Item 14 above, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act of 1933 and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
The undersigned Registrant hereby undertakes (1) that for purposes of
determining any liability under the Securities Act of 1933, the information
omitted from the form of prospectus filed as part of a Registration Statement in
reliance upon Rule 430A and contained in a form of prospectus filed by the
Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act
of 1933 shall be deemed to be part of this Registration Statement as of the time
it was declared effective and (2) that for the purpose of determining any
liability under the Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new Registration Statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 72
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in Fairfax,
Virginia, on the 30th day of May, 1997.
ADVANCED COMMUNICATION SYSTEMS, INC.
By: /s/ GEORGE A. ROBINSON
-------------------------------------
GEORGE A. ROBINSON
Chairman, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- -------------------------------- -------------
<S> <C> <C>
/s/ GEORGE A. ROBINSON President, Chief Executive May 30, 1997
- --------------------------------------------- Officer and Chairman (Principal
GEORGE A. ROBINSON Executive Officer)
/s/ DEV GANESAN Chief Financial Officer May 30, 1997
- --------------------------------------------- (Principal Financial and
DEV GANESAN Accounting Officer)
/s/ CHARLES G. MARTINACHE Director May 30, 1997
- ---------------------------------------------
CHARLES G. MARTINACHE
/s/ THOMAS A. COSTELLO Director May 30, 1997
- ---------------------------------------------
THOMAS A. COSTELLO
</TABLE>
II-5
<PAGE> 73
ADVANCED COMMUNICATION SYSTEMS, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
PAGE IN
SEQUENTIAL
EXHIBIT NUMBERING
NO. SYSTEM
------- -----------
<C> <S> <C>
1.1 Form of Underwriting Agreement...................................
3.1 Certificate of Incorporation of the Company+.....................
3.2 Bylaws of the Company+...........................................
3.3 Amended and Restated Certificate of Incorporation of the
Company+.........................................................
3.4 Amended and Restated Bylaws of the Company+......................
4.1 Specimen Common Stock Certificate................................
5.1 Opinion of Gibson, Dunn & Crutcher LLP*..........................
10.1 Employment Agreement, dated June 18, 1993, between the Company
and Warren C. Willis+............................................
10.2 Employment Agreement, dated as of January 2, 1997, between the
Company and Dev Ganesan+.........................................
10.3 1996 Stock Incentive Plan+.......................................
10.4 1997 Stock Incentive Plan........................................
10.5 Form of Indemnity Agreement between the Company and each of its
directors and executive officers.................................
10.6 Revolving Credit and Security Agreement and Revolving Promissory
Note, dated as of March 1, 1997, between First Union Commercial
Corporation and the Company+.....................................
10.7 Lease Agreement, dated July 16, 1993, including Amendment 1,
dated December 1, 1993, Amendment 2, dated January 15, 1994, and
Amendment 3, dated March 15, 1994+...............................
10.8 Contract No. N00039-96-C-0066, effective March 14, 1996, by and
between the Company and Space and Naval Warfare Systems
Command**+.......................................................
10.9 Contract No. N00039-96-C-0097, effective August 29, 1996, by and
between the Company and Space and Naval Warfare Systems
Command**+.......................................................
10.10 Form of Tax Indemnification Agreement to be entered into by the
Company and each of its existing Stockholders*...................
10.11 Stockholders Agreement+..........................................
11.1 Computation of Per Share Earnings................................
21.1 List of Subsidiaries of the Registrant...........................
23.1 Consent of Gibson, Dunn & Crutcher LLP (included in its opinion
filed as Exhibit 5.1)*...........................................
23.2 Consent of Arthur Andersen LLP...................................
24.1 Power of Attorney+...............................................
27.1 Financial Data Schedule for year ended September 30, 1996. (For
SEC purposes only).+.............................................
27.2 Financial Data Schedule for three months ended December 31, 1996.
(For SEC purposes only).+........................................
</TABLE>
- ---------------
* To be filed by amendment.
** Portions of this exhibit, as marked, have been omitted pursuant to a request
for confidential treatment and have been filed separately with the
Commission.
+ Previously filed.
<PAGE> 1
2,500,000 SHARES
COMMON STOCK
($.01 PAR VALUE)
AGREEMENT AMONG UNDERWRITERS
____________________, 1997
A.G. Edwards & Sons, Inc.
Ferris, Baker Watts, Incorporated
As Representatives of the Several Underwriters
One North Jefferson Avenue
St. Louis, Missouri 63103
1. UNDERWRITING AGREEMENT. We understand that Advanced
Communication Systems, Inc., a Delaware corporation (the "Company"), and
certain shareholders of the Company (the "Selling Shareholders"), propose to
enter into an underwriting agreement in substantially the form attached (the
"Underwriting Agreement") with you and other prospective underwriters
(including us) (collectively, the "Underwriters") providing for the several
purchase by the Underwriters (a) from the Company of 1,850,000 shares of its
Common Stock, $.01 par value, and (b) from the Selling Shareholders of 650,000
shares of Common Stock, $.01 par value, of the Company upon the terms stated in
the Underwriting Agreement (such 2,500,000 shares of Common Stock are herein
referred to as the "Firm Shares"), in which we will agree in accordance with
the terms thereof to purchase the number of Firm Shares set forth opposite our
name in Schedule II thereto. In addition, the Company and the Selling
Shareholders propose to grant to the Underwriters, upon the terms stated in the
Underwriting Agreement, the right to purchase up to an additional 375,000
shares of Common Stock (the "Option Shares"), identical to the Firm Shares, for
the sole purpose of covering over-allotments in the sale of the Firm Shares.
We will agree in accordance with the terms of the Underwriting Agreement to
purchase our proportionate share of the Option Shares which you determine to be
purchased. The Firm Shares and the Option Shares are collectively referred to
herein as the "Shares."
2. REGISTRATION STATEMENT AND PROSPECTUS. The Shares are more
particularly described in a registration statement (Registration No. 333-___)
filed with the Securities and Exchange Commission (the "Commission") under the
Securities Act of 1933, as amended (the "Act"). Amendments to such
registration statement have been or are being filed, or a form of prospectus is
being filed pursuant to Rule 424(b) and Rule 430A under the Act, or a Term
Sheet or Abbreviated Term Sheet is being filed pursuant to Rule 424(b)(7) under
the Act, in which, with our consent hereby confirmed, we have been named as one
of the Underwriters of the
<PAGE> 2
Shares. A copy of the registration statement as filed and a copy of each
amendment as filed (excluding exhibits) have heretofore been delivered to us.
We confirm that we have examined the registration statement, including
amendments thereto, relating to the Shares, as filed with the Commission, that
we are willing to accept the responsibilities of an Underwriter under the Act
in respect of the registration statement, and we are willing to proceed with a
public offering of the Shares in the manner contemplated therein. The
registration statement and the related prospectus may be further amended, but
no such amendment or change shall release or affect our obligations hereunder
or under the Underwriting Agreement. As used herein, the terms "Registration
Statement," "Prospectus," "Preliminary Prospectus," "Term Sheet" and
"Abbreviated Term Sheet" shall have the same meanings as specified in the
Underwriting Agreement.
3. AUTHORITY OF A.G. EDWARDS & SONS, INC. AND FERRIS, BAKER
WATTS, INC. We hereby authorize you, acting on our behalf, as our
representatives (a) to complete, execute, and deliver the Underwriting
Agreement, to determine the public offering price of the Shares and the
underwriting discount with respect thereto and to make such variations, if any,
as in your judgment are appropriate and are not material, provided that the
respective amount of Shares set forth opposite our name in Schedule II thereto
shall not be increased without our consent, except as provided herein or in the
Underwriting Agreement, (b) to waive performance or satisfaction by the Company
or by the Selling Shareholders of obligations or conditions included in the
Underwriting Agreement if in your judgment such waiver will not have a material
adverse effect upon the interests of the Underwriters, and (c) to take such
actions as in your discretion may be necessary or advisable to carry out the
Underwriting Agreement, this Agreement, and the transactions for the accounts
of the several Underwriters contemplated thereby and hereby. We also authorize
you to determine all matters relating to the public advertisement of the
Shares.
4. PUBLIC OFFERING. We authorize you, with respect to any Shares
which we so agree to purchase, to reserve for sale, and on our behalf to sell,
to dealers selected by you (including you or any of the other Underwriters,
such dealers so selected being hereinafter called "Selected Dealers") and to
others all or part of our Shares as you may determine. Reservations for sales
to persons other than Selected Dealers shall be as nearly as practicable in
proportion to the respective underwriting obligations of the Underwriters,
unless you agree to a smaller proportion at the request of an Underwriter.
Reservations for sales to Selected Dealers need not be in such proportion. All
sales of reserved Shares shall be as nearly as practicable in proportion to the
respective reservations as calculated from day to day.
In your discretion, from time to time, you may add to the reserved
Shares any Shares retained by us remaining unsold, and you may upon our request
release to us any of our Shares reserved but not sold. Any Shares so released
shall not thereafter be deemed to have been reserved. Upon termination of this
Agreement, or prior thereto at your discretion, you shall deliver to our
account any of our Shares reserved but not sold and delivered, except that if
the aggregate of all reserved but unsold and undelivered Shares is less than
200,000 Shares, you are authorized to sell such Shares for the accounts of the
several Underwriters at such price or prices as you may determine.
<PAGE> 3
Sales of reserved Shares shall be made to Selected Dealers at the
public offering price less the Selected Dealers' Concession pursuant to the
Selected Dealer Agreement in substantially the form attached hereto, and to
others at the public offering price. Underwriters and Selected Dealers may
reallow a concession to other dealers as set forth in the Selected Dealer
Agreement.
After advice from you that the Shares are released for sale to the
public, we will offer to the public in conformity with the terms of the
offering set forth in the Prospectus such of our Shares as you advise us are
not reserved. We authorize you after the Shares are released for sale to the
public, in your discretion, to change the public offering price of the Shares
and the concession, and to buy Shares for our account from Selected Dealers at
the public offering price less such amount not in excess of the Selected
Dealers' Concession as you may determine.
Sales of Shares between Underwriters may be made with your prior
consent, or as you deem advisable for blue sky purposes.
We agree that we will not sell to any accounts over which we exercise
discretionary authority any Shares which we have agreed to purchase under the
Underwriting Agreement.
5. ADDITIONAL PROVISIONS REGARDING SALES. You may, in your
discretion, charge our account with an amount equal to the Selected Dealers'
Concession in respect of each Share purchased under the Underwriting Agreement
by you and not sold by you for our account (and each Share which you believe
has been substituted therefor) which may be delivered against a purchase
contract made by you for our account prior to the later of (a) the termination
of all of the provisions referred to in Section 10 hereof or (b) the covering
by you of any short position created by you for our account, or in lieu of such
charge, require us to repurchase on demand at the total cost thereof (including
commissions), plus transfer taxes, any such Share so delivered.
6. PAYMENT AND DELIVERY. At or before 9:00 a.m., New York City
time, on the Closing Date (as defined in the Underwriting Agreement) and on
each Option Closing Date (as defined in the Underwriting Agreement), we will
deliver to you at your office at 77 Water Street, New York, New York, a
certified or bank cashiers' check payable to your order, in clearing house
funds, in the amount equal to the initial offering price set forth in the
Prospectus less the Selected Dealers' Concession in respect of the number of
Firm Shares or Option Shares, as the case may be, to be purchased by us
pursuant to the Underwriting Agreement. We authorize you for our account to
make payment of the purchase price for the Shares to be purchased by us against
delivery to you of such Shares, and the difference between such price and the
amount of our check delivered to you therefor shall be credited to our account.
Unless we notify you at least two full business days prior to such Closing Date
to make other arrangements, you may, in your discretion, advise the Company and
the Selling Shareholders to prepare our certificates in our name. If you have
not received our funds as requested, you may in your discretion make such
payment on our behalf, in which event we will reimburse you promptly. Any such
payment by you shall not relieve us from any of our obligations hereunder or
under the Underwriting Agreement.
<PAGE> 4
We authorize you for our account to accept delivery of our Shares from
the Company and the Selling Shareholders and to hold such of our Shares as you
have reserved for sale to Selected Dealers and others and to deliver such
Shares against such sales. You will deliver to us our unreserved Shares as
promptly as practicable.
Notwithstanding the foregoing provisions of this Section 6, if you so
notify us, payment for and delivery of our Shares may be made through the
facilities of The Depository Trust Company, if we are a member, unless we have
otherwise notified you prior to a date to be specified by you, or, if we are
not a member, settlement may be made through a correspondent who is a member
pursuant to instructions we may send to you prior to such specified date.
As promptly as practicable after you receive payment for reserved
Shares sold for our account, you will remit to us the purchase price paid by us
for such Shares and credit or debit our account with the difference between the
sale price and such purchase price.
7. AUTHORITY TO BORROW. In connection with the transactions
contemplated in the Underwriting Agreement or this Agreement, we authorize you,
in your discretion, to advance your own funds for our account, charging current
interest rates, to arrange loans for our account and in connection therewith to
execute and deliver any notes or other instruments and hold or pledge as
security any of our Shares or any Common Stock of the Company purchased for our
account. Any lender may rely upon your instructions in all matters relating to
any such loan.
Any of our Shares and any Common Stock of the Company purchased for
our account held by you may from time to time be delivered to us for carrying
purposes, and any such securities will be delivered to you upon demand.
8. STABILIZATION AND OTHER MATTERS. We authorize you in your
discretion to make purchases and sales of the Common Stock of the Company for
our account in the open market or otherwise, for long or short account, on such
terms as you deem advisable and in arranging sales to over-allot. If you have
purchased Common Stock for stabilizing purposes prior to the execution of this
Agreement, such purchases shall be treated as having been made pursuant to the
foregoing authorization. We also authorize you, either before or after the
termination of the offering provisions of this Agreement, to cover any short
position incurred pursuant to this Section on such terms as you deem advisable.
All such purchases and sales and over-allotments shall be made for the accounts
of the several Underwriters as nearly as practicable in proportion to their
respective underwriting obligations. Our net commitment under this Section
(excluding any commitment incurred under the Underwriting Agreement upon
exercise of the right to purchase Option Shares) shall not, at the end of any
business day, exceed 15% of our maximum underwriting obligation. We will on
your demand take up and pay for at cost any Common Stock so purchased or sold
or over-allotted for our account, and, if any other Underwriter defaults in its
corresponding obligation, we will assume our proportionate share of such
obligation without relieving the defaulting Underwriter from liability. We
will be obligated in respect of purchases and sales made for our account
hereunder whether or not any proposed purchase of the Shares from the Company
and the Selling Shareholders is consummated. The
<PAGE> 5
existence of this provision is no assurance that the price of the Shares will
be stabilized or that, if stabilizing is commenced, it may not be discontinued
at any time.
We agree to advise you, from time to time upon your request, during
the term of this Agreement, of the number of Shares retained by us remaining
unsold, and will, upon your request, sell to you for the accounts of one or
more of the several Underwriters such number of such Shares as you may
designate at such prices, not less than the net price to Selected Dealers nor
more than the public offering price, as you may determine.
If you effect any stabilizing purchase pursuant to this Section 8, you
will notify us promptly of the date and time when the first stabilizing
purchase was effected and the date and time when stabilizing was terminated.
You will retain such information as is required to be retained by you as
"Manager" pursuant to Rule 17a-2 under the Securities Exchange Act of 1934, as
amended (the "1934 Act"). We agree that we will not effect any stabilizing
purchases without your express authorization, and, if any purchases are
effected, we agree to furnish to you not later than three business days
following the date upon which stabilization was commenced such information as
is required under Rule 17a-2(d).
With respect to the Underwriting Agreement, you are also authorized in
your discretion (a) to exercise the option therein as to all or any part of the
Option Shares, and to terminate such option in whole or in part prior to its
expiration, (b) to postpone the Closing Date and the Option Closing Date
referred to in the Underwriting Agreement, and any other time or date specified
therein, (c) to exercise any right of cancellation or termination, (d) to
arrange for the purchase by other persons (including yourselves or any other
Underwriter) of any Shares not taken up by any defaulting Underwriter, and (e)
to consent to such other changes in the Underwriting Agreement as in your
judgment do not materially adversely affect the substance of our rights and
obligations thereunder.
We further agree that (a) prior to the termination of this Agreement
we will not, directly or indirectly, bid for or purchase any Shares for our own
account, except as provided in this Agreement and in the Underwriting
Agreement, and (b) prior to the completion (as defined in Rule 10b-6 under the
1934 Act) of our participation in this distribution, we will otherwise comply
with Rule 10b-6.
9. ALLOCATION OF EXPENSES AND SETTLEMENT. We authorize you to
charge our account with (a) all transfer taxes on Shares purchased by us
pursuant to the Underwriting Agreement and sold by you for our account, (b)
Selected Dealers' Concessions in connection with the purchase, marketing and
sale of the Shares for our account, and (c) our proportionate share (based upon
our underwriting obligation) of all other expenses incurred by you under this
Agreement and in connection with the purchase, carrying, sale and distribution
of the Shares. Your determination of the amount and allocation of such
expenses shall be conclusive. In the event of the default of any Underwriter
in carrying out its obligations hereunder, the expenses chargeable to such
Underwriter pursuant to this Agreement and not paid by it, as well as any
additional losses or expenses arising from such default, may be proportionately
charged by you against the other Underwriters not so defaulting (including such
other persons who purchase
<PAGE> 6
Shares upon a default by an Underwriter pursuant to Section 11 hereof),
without, however, relieving such defaulting Underwriter from its liability
therefor.
As soon as practicable after termination of this Agreement, the
accounts hereunder will be settled, but you may reserve from distribution such
amount as you deem necessary to cover possible additional expenses. You may at
any time make partial distributions of credit balances or call for payment of
debit balances. Any of our funds in your hands may be held with your general
funds without accountability for interest. Notwithstanding the termination of
this Agreement or any settlement, we will pay (a) our proportionate share
(based on our underwriting obligation) of all expenses and liabilities which
may be incurred by or for the accounts of the Underwriters, including any
liability based on the claim that the Underwriters constitute an association,
unincorporated business or other separate entity, and of any expenses incurred
by you or any other Underwriter with your approval in contesting any such claim
or liability, and (b) any transfer taxes paid after such settlement on account
of any sale or transfer for our account.
10. TERMINATION. The offering provisions of this Agreement shall
terminate 30 days from the date hereof unless extended by you. You may extend
said provisions for a period or periods not exceeding an additional 30 days in
the aggregate, provided that the Selected Dealer Agreements, if any, are
similarly extended. Whether extended or not, said provisions may be terminated
in whole or in part by notice from you.
11. DEFAULT BY UNDERWRITERS. Default by one or more Underwriters
in respect of their obligations hereunder or under the Underwriting Agreement
shall not release us from any of our obligations or in any way affect the
liability of any defaulting Underwriter to the other Underwriters for damages
resulting from such default. In case of such default by one or more
Underwriters, you are authorized to increase, pro rata with other
non-defaulting Underwriters, the number of Shares which we shall be obligated
to purchase pursuant to the Underwriting Agreement, provided that the aggregate
amount of all such increases for our account shall not exceed our pro rata
share of 200,000 Shares; and you are further authorized to arrange, but shall
not be obligated to arrange, for the purchase by other persons, who may include
yourselves or other Underwriters, of all or a portion of any aggregate amount
not taken up. In the event any such arrangements are made, the respective
numbers of Shares to be purchased by the non-defaulting Underwriters and by any
such other persons shall be taken as the basis for the underwriting obligations
under this Agreement.
12. POSITION OF A.G. EDWARDS & SONS, INC. AND FERRIS, BAKER WATTS,
INC. Except as otherwise specifically provided in this Agreement, you shall
have full authority to take such action as you may deem advisable in respect of
all matters pertaining to the Underwriting Agreement and this Agreement and in
connection with the purchase, carrying, sale, and distribution of the Shares
(including authority to terminate the Underwriting Agreement as provided
therein). You shall be under no liability to us for or in respect of the value
of the Shares or the validity or the form thereof, the Registration Statement,
any Preliminary Prospectus, the Prospectus, the Underwriting Agreement, or
other instruments executed by the Company, the Selling Shareholders or
others; or for or in respect of the issuance, transfer, or delivery of the
Shares; or for the performance by the Company, the Selling Shareholders or
<PAGE> 7
others of any agreement on its or their part; nor shall you be liable under any
of the provisions hereof or for any matters connected herewith, except for your
own want of good faith, for obligations expressly assumed by you in this
Agreement and for any liabilities imposed upon you by the Act. No obligations
on your part shall be implied or inferred herefrom. Authority with respect to
matters to be determined by you, or by you and the Company and/or the Selling
Shareholders, pursuant to the Underwriting Agreement, shall survive the
termination of this Agreement.
In taking all actions hereunder, except in the performance of your own
obligations hereunder and under the Underwriting Agreement, you shall act only
as the representative of each of the Underwriters. The commitments and
liabilities of each of the several Underwriters are several in accordance with
their respective purchase obligations and are not joint or joint and several.
Nothing contained herein shall constitute the Underwriters partners or render
any of them liable to make payments otherwise than as herein provided. If for
federal income tax purposes the Underwriters should be deemed to constitute a
partnership, then each Underwriter elects to be excluded from the application
of Subchapter K, Chapter 1, Subtitle A, of the Internal Revenue Code of 1986,
as amended, and agrees not to take any position inconsistent with such
election. Each Underwriter authorizes A.G. Edwards & Sons, Inc., in its
discretion, on behalf of such Underwriter, to execute such evidence of such
election as may be required by the Internal Revenue Service.
13. COMPENSATION TO A.G. EDWARDS & SONS, INC. AND FERRIS, BAKER
WATTS, INC. As compensation for your services in connection with the purchase
of the Shares and the management of the public offering of the Shares, we agree
to pay you and authorize you to charge our account with an amount equal to
$____ per share of the Shares which we have agreed to purchase pursuant to the
Underwriting Agreement.
14. INDEMNIFICATION AND FUTURE CLAIMS. Each Underwriter,
including you, agrees to indemnify, hold harmless and reimburse each other
Underwriter and each person, if any, who controls any other Underwriter within
the meaning of Section 15 of the Act, and any successor of any other
Underwriter, to the extent that, and upon the terms upon which, each
Underwriter will be obligated pursuant to the Underwriting Agreement to
indemnify, hold harmless and reimburse the Company, its directors, officers,
and controlling persons, and the Selling Shareholders therein specified.
In the event that at any time any person other than an Underwriter
asserts a claim against one or more of the Underwriters or against you as
representatives of the Underwriters arising out of an alleged untrue statement
or omission in the Registration Statement (or any amendment thereto) or in any
Preliminary Prospectus or the Prospectus (or any amendment or supplement
thereto) or relating to any transaction contemplated by this Agreement, we
authorize you to make such investigation, to retain such counsel for the
Underwriters and to take such action in the defense of such claim as you may
deem necessary or advisable. You may settle such claim with the approval of a
majority in interest (based upon underwriting obligations) of the Underwriters.
We will pay our proportionate share (based upon our underwriting obligation) of
all expenses incurred by you (including the fees and expenses of counsel for
the Underwriters) in
<PAGE> 8
investigating and defending against such claim and our proportionate share of
the aggregate liability incurred by all underwriters in respect of such claim
(after deducting any contribution or indemnification obtained pursuant to the
Underwriting Agreement, or otherwise, from persons other than Underwriters),
whether such liability is the result of a judgment against one or more of the
Underwriters or the result of any such settlement. There shall be credited
against any amount paid or payable by us pursuant to this paragraph any loss,
damage, liability or expense which is incurred by us as a result of any such
claim asserted against us, and if such loss, claim, damage, liability, or
expense is incurred by us as a result of any such claim against us, and if such
loss, claim, damage, liability, or expense is incurred by us subsequent to any
payment by us pursuant to this paragraph, appropriate provision shall be made
to effect such credit, by refund or otherwise. Any Underwriter may retain
separate counsel at its own expense. A claim against or liability incurred by
a person who controls an Underwriter shall be deemed to have been made against
or incurred by such Underwriter. In the event of default by any Underwriter in
respect of its obligations under this Section, the non-defaulting Underwriters
shall be obligated to pay the full amount thereof in the proportions that their
respective underwriting obligations bear to the underwriting obligations of all
non-defaulting Underwriters, without relieving such defaulting Underwriter of
its liability hereunder. Our agreements contained in this Section will remain
in full force and effect regardless of any investigation made by or on behalf
of such other Underwriter or controlling person and will survive the delivery
of and payment for the Shares and the termination of this Agreement and the
similar agreements entered into with the other Underwriters.
15. BLUE SKY AND OTHER MATTERS. You will not have any
responsibility with respect to the right of any Underwriter or other person to
sell the Shares in any jurisdiction notwithstanding any information you may
furnish in that connection. We authorize you to file a New York Further State
Notice, if required, and to make and carry out on our behalf any agreements
which you may deem necessary in order to procure registration or qualification
of any of the Shares in any jurisdiction, and we will at your request make such
payments, and furnish to you such information, as you may deem required by
reason of any such agreements.
We authorize you to file on behalf of the several Underwriters with
the National Association of Securities Dealers, Inc. (the "NASD") such
documents and information, if any, which are available or have been furnished
to you for filing pursuant to the applicable rules, statements, and
interpretations of the NASD.
16. TITLE TO SHARES. The Shares purchased by the respective
Underwriters shall remain the property of such Underwriters until sold and no
title to any such Shares shall in any event pass to you by virtue of any of the
provisions of this Agreement.
17. CAPITAL REQUIREMENTS. We confirm that the incurrence by us of
our obligations under this Agreement and under the Underwriting Agreement will
not place us in violation of Rule 15c3-1 under the 1934 Act or of any
applicable rules relating to capital requirements of any securities exchange or
association to which we are subject.
<PAGE> 9
18. LIABILITY FOR FUTURE CLAIMS. Neither any statement by you of
any credit or debit balance in our account nor any reservation from
distribution to cover possible additional expenses relating to the Shares will
constitute any representation by you as to the existence or nonexistence of
possible unforeseen expenses or liabilities of or charges against the several
Underwriters. Notwithstanding the distribution of any net credit balance to
us, we will be and remain liable for, and will pay on demand, (a) our
proportionate share (based upon our underwriting obligation) of all expenses
and liabilities which may be incurred by or for the accounts of the
Underwriters, including any liability which may be incurred by the Underwriters
or any of them based on the claim that the Underwriters constitute an
association, unincorporated business, partnership, or any separate entity, and
(b) any transfer taxes paid after such settlement on account of any sale or
transfer for our account.
19. ACKNOWLEDGMENT OF REGISTRATION STATEMENT, ETC. We hereby
confirm that we have examined the Registration Statement (including any
amendments or supplements thereto) and Prospectus relating to the Shares filed
with the Commission, that we are willing to accept the responsibilities of an
underwriter thereunder and that we are willing to proceed as therein
contemplated. We confirm that we have authorized you to advise the Company on
our behalf (a) as to the statements to be included in any Preliminary
Prospectus and in the Prospectus (including any supplement thereto) relating to
the Shares, insofar as they relate to us, and (b) that there is no information
about us required to be stated in said Registration Statement or said
Preliminary Prospectus or the Prospectus (including any supplement thereto)
other than as set forth in the Underwriters' Questionnaire previously delivered
by us to you and the Company. We understand that the aforementioned documents
are subject to further change and that we will be supplied with copies of any
amendment or amendments to the Registration Statement and of any amended
Prospectus promptly, if and when received by you, but the making of such
changes and amendments will not release us or affect our obligations hereunder
or under the Underwriting Agreement.
20. NOTICES AND GOVERNING LAW. Any notice from you to us shall be
mailed, telephoned, or telegraphed to us at our address as set forth in the
Underwriters' Questionnaire. Any notice from us to you shall be deemed to have
been duly given if mailed, telephoned or telegraphed to you at One North
Jefferson Avenue, St. Louis, Missouri 63103, Attention: Syndicate. This
Agreement shall be governed by and construed in accordance with the laws of the
State of Missouri.
21. OTHER PROVISIONS. We represent that we are actually engaged
in the investment banking or securities business and that we are a member in
good standing of the NASD or, if we are not such a member, that we are a
foreign dealer not eligible for membership in the NASD and that we will not
offer or sell any Shares in, or to persons who are nationals or residents of,
the United States of America. In making sales of Shares, if we are such a
member, we agree to comply with all applicable rules of the NASD, including,
without limitation, the Interpretation of Rule 2110 of the NASD's Rules of
Conduct with respect to Free-Riding and Withholding (IM-2110-1) and Rule 2740
of such Rules, or if we are a foreign dealer, we agree to comply with such
Interpretation and Rules 2730, 2740 and 2750 of such Rules as though we were
such a member, and with Rule 2420 as that Rule applies to a non- member broker
or dealer in a foreign country.
<PAGE> 10
We confirm that you have heretofore delivered to us such number of copies of
the Prospectus as have been reasonably requested by us, and we further confirm
that we have complied and will comply with Rule 15c2-8 under the 1934 Act
concerning delivery of each Preliminary Prospectus and the Prospectus, and that
we will furnish to persons who receive a confirmation of sale (i) a copy of the
Prospectus filed pursuant to Rule 424(b) or Rule 424(c) under the Act or (ii)
if a Term Sheet or Abbreviated Term Sheet is used, a copy of the Term Sheet or
Abbreviated Term Sheet and the last Preliminary Prospectus filed with the
Commission prior to the time the Registration Statement became effective. We
are aware of our statutory responsibilities under the Act, and you are
authorized on our behalf to so advise the Commission.
22. COUNTERPARTS. This Agreement may be signed in any number of
counterparts which, taken together, shall constitute one and the same
instrument, and you may confirm the execution of such counterparts by facsimile
signature.
-----------------------------------
As Attorney-in-Fact for each of the
several Underwriters named in
Schedule II to the Underwriting
Agreement
Confirmed as of the date first above written.
A.G. Edwards & Sons, Inc.,
As Representative of the Several
Underwriters
By:
---------------------------------
Name:
Title:
Ferris, Baker Watts, Incorporated,
As Representative of the Several
Underwriters
By:
---------------------------------
Name:
Title:
<PAGE> 11
ADVANCED COMMUNICATION SYSTEMS, INC.
2,500,000 SHARES
COMMON STOCK
($.01 PAR VALUE)
SELECTED DEALER AGREEMENT
__________________, 1997
Underwriters represented by us have severally agreed to purchase from
the above-named company ("Company") and certain shareholders of the Company
(the "Selling Shareholders") the above shares of Common Stock ("Shares"). The
Shares are described in the enclosed Prospectus, the receipt of which you
hereby acknowledge.
1. OFFERING TO SELECTED DEALERS. The several Underwriters,
acting through us, are severally offering part of the Shares for sale to
certain dealers ("Selected Dealers"), as principals, subject to the terms and
conditions stated herein and in the Prospectus, at the public offering price
per Share set forth in the Prospectus, less the per Share concession set forth
in the Prospectus (such concession hereinafter referred to as the "Selected
Dealers' Concession"). Sales of Shares to you pursuant to such offering will
be evidenced by our written confirmation and will be on such terms and
conditions set forth therein and in the Prospectus. In purchasing Shares, you
will rely upon no statement whatsoever, written or oral, other than statements
in the Prospectus.
2. REOFFERING BY SELECTED DEALERS. We are advising you by
telegram of the method and terms of the offering. Acceptances of any reserved
Shares received at the office of A.G. Edwards & Sons, Inc., One North Jefferson
Avenue, St. Louis, Missouri 63103, after the time specified therefor in the
telegram and any order for additional Shares will be subject to rejection in
whole or in part. Subscription books may be closed by us at any time in our
discretion without notice and the right is reserved to reject any subscription
in whole or in part, but notification of allotments against and rejections of
subscriptions will be made as promptly as practicable.
We are advising you in such telegram of the release by us of the
Shares being sold by the Underwriters for public offering and of the public
offering price of the Shares. Upon receipt of such advice, the Shares
thereafter purchased by you hereunder are to be offered by you to the public at
the public offering price, subject to the terms thereof. You agree that in
selling Shares purchased hereunder you will comply with the applicable
requirements of the Securities Act of 1933, as amended, and the Securities
Exchange Act of 1934, as amended. Except as herein
<PAGE> 12
otherwise provided, Shares shall not be offered or sold by you below the public
offering price before the termination of this Agreement, except that a
concession from such public offering price of not in excess of the per Share
amount set forth in the Prospectus may be allowed to dealers who are actually
engaged in the investment banking or securities business, who execute the
written agreement prescribed by Rule 2740(c) of the Rules of Conduct of the
National Association of Securities Dealers, Inc. ("NASD") and who are members
in good standing of the NASD or foreign dealers, not eligible for membership in
the NASD, who represent to you that they will promptly reoffer the Shares at
the public offering price and will abide by the conditions with respect to
foreign brokers and dealers set forth in the first paragraph of Section 4
hereof.
It is assumed that Shares sold by you will be effectively placed for
investment. If we contract for or purchase in the open market or otherwise for
the account of any Underwriter any Shares sold to you and not effectively
placed for investment, we may charge you the Selected Dealers' Concession
originally allowed you on the Shares so repurchased, and you agree to pay such
amount to us on demand. Shares so delivered to you against any such repurchase
need not be the identical Shares originally purchased by you.
You will advise us upon request of Shares purchased by you remaining
unsold, and we shall have the right to repurchase such unsold Shares on demand
at the public offering price less all or part of the Selected Dealers'
Concession.
3. PAYMENT AND DELIVERY. Payment for Shares purchased by you
shall be made by you on such dates and at such places as we advise you, by
certified or bank cashiers' check payable to the order of A.G. Edwards & Sons,
Inc. in such clearing house funds as we advise, against delivery of such
Shares. Delivery instructions must be in our hands at the office of A.G.
Edwards & Sons, Inc., One North Jefferson Avenue, St. Louis, Missouri, 63103,
at such time as we request. Notwithstanding such provisions, if we so notify
you, payment for and delivery of Shares purchased by you hereunder may be made
through the facilities of the Depository Trust Company, if you are a member,
unless you have otherwise notified us prior to the date specified in our
telegram to you, or, if you are not a member, settlement may be made through a
correspondent who is a member pursuant to instructions which you will send to
us prior to such specified date.
The above payment shall be made at the public offering price, or if we
so advise you, at a net price equal to the public offering price less the
Selected Dealers' Concession. If payment is made by you at the public offering
price, the Selected Dealers' Concession payable to you hereunder shall be paid
promptly after the termination of this Agreement (or on such earlier date as we
may determine), except that such Concession may be withheld and cancelled, at
our discretion, as to Shares which we have repurchased as set forth in the
third paragraph of Section 2 hereof.
4. POSITION OF SELECTED DEALERS AND UNDERWRITERS. You represent
that you are actually engaged in the investment banking or securities business
and that you are a member in good standing of the NASD or that you are a
foreign dealer, not eligible for membership in the NASD, which agrees not to
offer or sell any Shares in, or to persons who are nationals or
<PAGE> 13
residents of, the United States of America. In making sales of Shares, if you
are such a member, you agree to comply with all applicable rules of the NASD,
including, without limitation, the Interpretation of Rule 2110 of the NASD's
Rules of Conduct with respect to Free-Riding and Withholding (IM-2110-1) and
Rule 2740 of such Rules, or, if you are a foreign dealer, you agree to comply
with such Interpretation and Rules 2730, 2740 and 2750 of such Rules as though
you were such a member, and with Rule 2420 as that Rule applies to a non-
member broker or dealer in a foreign country. You also confirm that you have
complied and will comply with the prospectus delivery requirements of Rule
15c2-8 under the Securities Exchange Act of 1934, as amended, in accordance
with your prior undertaking to do so, and that you will furnish to persons who
receive a confirmation of sale a copy of the Prospectus.
You are not authorized to give any information or make any
representations other than as contained in the Prospectus, or to act as agent
for any Underwriter or us. Nothing shall constitute the Selected Dealers an
association, unincorporated business or other separate entity or partners with
the several Underwriters, with us, or with each other, but you shall be liable
for your proportionate share of any tax, liability or expense based on any
claim to the contrary. Neither we nor any Underwriter shall be under any
liability to you, except for obligations expressly assumed by us in this
Agreement, and no obligations on our part shall be implied or inferred
herefrom.
5. BLUE SKY MATTERS. We will not have any responsibility with
respect to the right of any dealer to sell the Shares in any jurisdiction,
notwithstanding any information we may furnish in that connection. We have
filed a New York Further State Notice, if required.
6. NOTICES. All communications from you to us shall be addressed
to A.G. Edwards & Sons, Inc., One North Jefferson Avenue, St. Louis, Missouri
63103, Attention: Syndicate. Any notice from us to you shall be delivered,
mailed or telegraphed to you at the address to which this letter is mailed.
7. TERMINATION. This Agreement shall terminate 30 days after the
date hereof unless extended by us for a period or periods not exceeding an
additional 30 days in the aggregate, and, whether extended or not, may be
terminated by us at any time. Such termination shall not affect your
obligation to pay for any Shares purchased by you or any of the provisions of
Section 4 hereof.
Please confirm your agreement hereto by signing the duplicate copy of
this Agreement enclosed herewith and returning it to us at the address in
Section 6 above.
A.G. Edwards & Sons, Inc.
By:
------------------------------
Authorized Signatory
Ferris, Baker Watts, Incorporated
By:
------------------------------
Authorized Signatory
<PAGE> 14
______________________, 1997
A.G. Edwards & Sons, Inc.
Ferris, Baker Watts, Incorporated
as Representatives of the Several Underwriters
One North Jefferson
St. Louis, Missouri 63103
We hereby confirm our order for Common Stock, $.01 par value, of
Advanced Communication Systems, Inc. (the "Shares") for such number of Shares
specified in our order and under the terms and conditions contained in your
written confirmation of our purchase and the foregoing Agreement.
We hereby confirm our agreement to all the terms and conditions stated
in the foregoing Agreement. We acknowledge receipt of the Prospectus relating
to the above Shares and we further state that in entering this order we have
relied upon the Prospectus and no other statement whatsoever, written or oral.
We confirm that we are actually engaged in the investment banking or securities
business and are a member in good standing of the NASD or that we are a foreign
dealer, not eligible for membership in the NASD, which agrees not to offer or
sell any Shares in, or to persons who are nationals or residents of, the United
States of America. We agree that in making sales of Shares, if we are such a
member, we will comply with all applicable rules of the NASD, including,
without limitation, the Interpretation of Rule 2110 of the NASD's Rules of
Conduct with respect to Free-Riding and Withholding (IM-2110-1) and Rule 2740
of such Rules, or, if we are a foreign dealer, we will comply with such
Interpretation and Rules 2730, 2740 and 2750 of such Rules as though we were
such a member, and with Rule 2420 as that Rule applies to a non- member broker
or dealer in a foreign country. Further, we confirm that we have complied and
will comply with the prospectus delivery requirements of Rule 15c2-8 under the
Securities Exchange Act of 1934, as amended, and that we will furnish to
persons who receive a confirmation of sale a copy of the Prospectus.
--------------------------------------
(Please print or type name of firm)
By:
-----------------------------------
(Authorized Representative)
Dated: , 1997
-----------------
<PAGE> 15
HALE AND DORR
DRAFT
5/3/97
2,500,000 SHARES
COMMON STOCK
($.01 PAR VALUE)
UNDERWRITING AGREEMENT
_________________, 1997
A.G. Edwards & Sons, Inc.
Ferris, Baker Watts, Incorporated
As Representatives of the Several Underwriters
c/o A.G. Edwards & Sons, Inc.
One North Jefferson Avenue
St. Louis, Missouri 63103
The undersigned, Advanced Communication Systems, Inc., a
Delaware corporation (the "Company") and the persons listed on Schedule I
hereto (the "Selling Shareholders"), hereby address you as the representatives
(the "Representatives") of each of the persons, firms and corporations listed
on Schedule II hereto (collectively, the "Underwriters") and hereby confirm
their agreement with the several Underwriters as follows:
- 1 -
<PAGE> 16
1. DESCRIPTION OF SHARES. The Company proposes to issue
and sell to the Underwriters 1,850,000 shares of its Common Stock, par value
$.01 per share, and the Selling Shareholders propose to sell to the
Underwriters a total of 650,000 shares of the Company's Common Stock, par value
$.01 per share, as set forth on Schedule I hereto (such 2,500,000 shares of
Common Stock are herein referred to as the "Firm Shares"). Solely for the
purpose of covering over-allotments in the sale of the Firm Shares, the Company
further propose to grant to the Underwriters the right to purchase up to an
additional 375,000 Shares of Common Stock (the "Option Shares"), as provided in
Section 3 of this Agreement. The Firm Shares and the Option Shares are herein
sometimes referred to as the "Shares" and are more fully described in the
Prospectus hereinafter defined.
2. PURCHASE, SALE AND DELIVERY OF FIRM SHARES. On the
basis of the representations, warranties and agreements herein contained, but
subject to the terms and conditions herein set forth, the Company agrees and
each Selling Shareholder agrees, severally and not jointly, to sell to the
Underwriters, and each such Underwriter agrees, severally and not jointly, (a)
to purchase from the Company and from each of the Selling Shareholders, pro
rata, at a purchase price of $___ per share, the number of Firm Shares set
forth opposite the name of such Underwriter in Schedule II hereto and (b) to
purchase from the Company any additional number of Option Shares which such
Underwriter may become obligated to purchase pursuant to Section 3 hereof.
The Company and the Selling Shareholders will deliver
definitive certificates for the Firm Shares at the office of A.G. Edwards &
Sons, Inc., 77 Water Street, New York, New York ("Edwards' Office"), or such
other place as you and the Company may mutually agree upon, for the accounts of
the Underwriters against payment to the Company and the Selling Shareholders of
the purchase price for the Firm Shares sold by them to the several Underwriters
by wire transfer or certified or bank cashiers' check in clearing house (next
day available) funds payable to the order of the Company and the Selling
Shareholders, respectively, and delivered to One North Jefferson Avenue, St.
Louis, Missouri 63103, or at such other place as may be agreed upon between you
and the Company (the "Place of Closing"), at 10:00 a.m., St. Louis time, on
_____________, 1997, or at such other time and date not later than five full
business days
<PAGE> 17
HALE AND DORR
DRAFT
5/3/97
thereafter as you and the Company may agree, such time and date of payment and
delivery being herein called the "Closing Date."
The certificates for the Firm Shares so to be delivered will
be made available to you for inspection at Edwards' Office (or such other place
as you and the Company may mutually agree upon) at least one full business day
prior to the Closing Date and will be in such names and denominations as you
may request at least full business days prior to the Closing Date.
It is understood that an Underwriter, individually, may (but
shall not be obligated to) make payment on behalf of the other Underwriters
whose checks shall not have been received prior to the Closing Date for Shares
to be purchased by such Underwriter. Any such payment by an Underwriter shall
not relieve the other Underwriters of any of their obligations hereunder.
It is understood that the Underwriters propose to offer the
Shares to the public upon the terms and conditions set forth in the
Registration Statement hereinafter defined.
3. PURCHASE, SALE AND DELIVERY OF THE OPTION SHARES.
The Company hereby grants options to the Underwriters to purchase from it up to
375,000 Option Shares on the same terms and conditions as the Firm Shares;
provided, however, that such
- 3 -
<PAGE> 18
options may be exercised only for the purpose of covering any over-allotments
which may be made by them in the sale of the Firm Shares. No Option Shares
shall be sold or delivered unless the Firm Shares previously have been, or
simultaneously are, sold and delivered.
The options are exercisable on behalf of the several
Underwriters by you, as Representatives, at any time, and from time to time,
before the expiration of 30 days from the date of this Agreement, for the
purchase of all or part of the Option Shares covered thereby, by notice given
by you to the Company in the manner provided in Section 13 hereof, setting
forth the number of Option Shares as to which the Underwriters are exercising
the options, and the date of delivery of said Option Shares, which date shall
not be more than five business days after such notice unless otherwise agreed
to by the parties. You may terminate the options at any time, as to any
unexercised portion thereof, by giving written notice to the Company to such
effect.
You, as Representatives, shall make such allocation of the
Option Shares among the Underwriters as may be required to eliminate purchases
of fractional Shares.
Delivery of the Option Shares with respect to which the
options shall have been exercised shall be made to or upon your order at
Edwards' Office (or at such other place as you and the Company may mutually
agree upon), against payment by you of the per share purchase price to the
Company by wire transfer or certified or bank cashier's check or checks,
payable in clearing house (next day available) funds. Such payment and
delivery shall be made at 10:00 a.m., St. Louis time, on the date designated in
the notice given by you as above provided for, unless some other date and time
are agreed upon, which date and time of payment and delivery are called the
"Option Closing Date." The certificates for the Option Shares so to be
delivered will be made available to you for inspection at Edwards' Office at
least one full business day prior to the Option Closing Date and will be in
such names and denominations as you may request at least _____ full business
days prior to the Option Closing Date. On the Option Closing Date, the Company
shall provide the Underwriters with such representations, warranties, opinions
and covenants with respect to the Option Shares as are required to be delivered
on the Closing Date with respect to the Firm Shares.
<PAGE> 19
HALE AND DORR
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4. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE
COMPANY AND THE SELLING SHAREHOLDERS.
(a) The Company represents and warrants to and agrees with
each Underwriter that:
(i) A registration statement (Registration No.
333-_________) on Form S-1 with respect to the Shares,
including a preliminary prospectus, and such amendments to
such registration statement as may have been required to the
date of this Agreement, has been prepared by the Company
pursuant to and in conformity with the requirements of the
Securities Act of 1933, as amended (the "Act"), and the Rules
and Regulations (the "Rules and Regulations") of the
Securities and Exchange Commission (the "Commission")
thereunder and has been filed with the Commission under the
Act. Copies of such registration statement, including any
amendments thereto, each related preliminary prospectus
(meeting the requirements of Rule 430 or 430A of the Rules
and Regulations) contained therein, the exhibits, financial
statements and schedules have heretofore been delivered by
the Company to you. If such registration statement has not
become effective under the Act, a further amendment to such
registration statement, including a form of final prospectus,
necessary to permit such registration statement
- 5 -
<PAGE> 20
to become effective will be filed promptly by the Company
with the Commission. If such registration statement has
become effective under the Act, a final prospectus containing
information permitted to be omitted at the time of
effectiveness by Rule 430A of the Rules and Regulations will
be filed promptly by the Company with the Commission in
accordance with Rule 424(b) of the Rules and Regulations. The
term "Registration Statement" as used herein means the
registration statement as amended at the time it becomes or
became effective under the Act (the "Effective Date"),
including financial statements and all exhibits and, if
applicable, the information deemed to be included by Rule
430A of the Rules and Regulations. The term "Prospectus" as
used herein means (i) the prospectus as first filed with the
Commission pursuant to Rule 424(b) of the Rules and
Regulations or, (ii) if no such filing is required, the form
of final prospectus included in the Registration Statement at
the Effective Date or (iii) if a Term Sheet or Abbreviated
Term Sheet (as such terms are defined in Rule 434(b) and
434(c), respectively, of the Rules and Regulations) is filed
with the Commission pursuant to Rule 424(b)(7) of the Rules
and Regulations, the Term Sheet or Abbreviated Term Sheet and
the last Preliminary Prospectus filed with the Commission
prior to the time the Registration Statement became
effective, taken together. The term "Preliminary Prospectus"
as used herein shall mean a preliminary prospectus as
contemplated by Rule 430 or 430A of the Rules and Regulations
included at any time in the Registration Statement.
(ii) The Commission has not issued, and is not
to the knowledge of the Company threatening to issue, an
order preventing or suspending the use of any Preliminary
Prospectus or the Prospectus nor instituted proceedings for
that purpose. Each Preliminary Prospectus at its date of
issue, the Registration Statement and the Prospectus and any
amendments or supplements thereto contains or will contain,
as the case may be, all statements which are required to be
stated therein by, and in all material respects conform or
will conform, as the case may be, to the requirements of, the
Act and the Rules and Regulations. Neither the Registration
Statement nor any amendment thereto, as of the applicable
effective date, and neither the Prospectus nor any supplement
thereto contains or will contain, as the case
<PAGE> 21
HALE AND DORR
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may be, any untrue statement of a material fact or omits or
will omit to state any material fact required to be stated
therein or necessary to make the statements therein, in the
light of the circumstances under which they were made, not
misleading; provided, however, that the Company makes no
representation or warranty as to information contained in or
omitted from the Registration Statement or the Prospectus, or
any such amendment or supplement, in reliance upon, and in
conformity with, written information furnished to the Company
by or on behalf of the Underwriters specifically for use in
the preparation thereof.
(iii) The filing of the Registration Statement
and the execution and delivery of this Agreement have been
duly authorized by the Board of Directors of the Company;
this Agreement constitutes a valid and legally binding
obligation of the Company enforceable in accordance with its
terms (except to the extent the enforceability of the
indemnification and contribution provisions of Section 7
hereof may be limited by public policy considerations as
expressed in the Act as construed by courts of competent
jurisdiction, and except as enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium and other
laws affecting creditors' rights generally and by general
principles of equity); the issue and sale of the Shares by
- 7 -
<PAGE> 22
the Company and the performance of this Agreement and the
consummation of the transactions herein contemplated will not
result in a violation of the Company's articles of
incorporation or bylaws or result in a breach or violation of
any of the terms and provisions of, or constitute a default
under, or result in the creation or imposition of any lien,
charge or encumbrance upon any properties or assets of the
Company or its subsidiary under, any statute, or under any
indenture, mortgage, deed of trust, note, loan agreement,
sale and leaseback arrangement or other agreement or
instrument to which the Company or its subsidiary is a party
or by which they are bound or to which any of the properties
or assets of the Company or its subsidiary is subject, or any
order, rule or regulation of any court or governmental agency
or body having jurisdiction over the Company or its
subsidiary or their properties, except to such extent as does
not materially adversely affect the business of the Company
and its subsidiary taken as a whole; no consent, approval,
authorization, order, registration or qualification of or
with any court or governmental agency or body is required for
the consummation of the transactions herein contemplated,
except such as may be required by the National Association of
Securities Dealers, Inc. (the "NASD") or under the Act or
Rules and Regulations or any state securities laws.
(iv) Except as described in the Prospectus,
neither the Company nor its subsidiary has sustained since the
date of the latest audited financial statements included in
the Prospectus any material loss or interference with its
business from fire, explosion, flood or other calamity,
whether or not covered by insurance, or from any labor dispute
or court or governmental action, order or decree. Except as
contemplated in the Prospectus, subsequent to the respective
dates as of which information is given in the Registration
Statement and the Prospectus, the Company and its subsidiary
taken as a whole have not incurred any material liabilities or
material obligations, direct or contingent, other than in the
ordinary course of business, or entered into any material
transactions not in the ordinary course of business, and there
has not been any material change in the capital stock or
long-term debt of the Company and its subsidiary taken as a
whole or any material adverse change in the condition
(financial or
<PAGE> 23
HALE AND DORR
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other), net worth, business, affairs, management, prospects or
results of operations of the Company and its subsidiary taken
as a whole. The Company and its subsidiary have filed all
necessary federal, state and foreign income and franchise tax
returns and paid all taxes shown as due thereon; all tax
liabilities are adequately provided for on the books of the
Company and its subsidiary except to such extent as would not
materially adversely affect the business of the Company and
its subsidiary taken as a whole; the Company and its
subsidiary have made all necessary payroll tax payments and
are current and up-to-date as of the date of this Agreement;
and the Company and its subsidiary have no knowledge of any
tax proceeding or action pending or threatened against the
Company or its subsidiary which might materially adversely
affect their business or property.
(v) Except as described in the Prospectus,
there is not now pending or, to the knowledge of the Company
or the Selling Shareholders, threatened or contemplated, any
action, suit or proceeding to which the Company or its
subsidiary is a party before or by any court or public,
regulatory or governmental agency or body which might be
expected to result (individually or in the aggregate) in any
material adverse change in the condition (financial or other),
business or prospects of the Company and its
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<PAGE> 24
subsidiary taken as a whole, or might be expected to
materially and adversely affect (individually or in the
aggregate) the properties or assets thereof; and there are no
contracts or documents of the Company or its subsidiary which
would be required to be filed as exhibits to the Registration
Statement by the Act or by the Rules and Regulations which
have not been filed as exhibits to the Registration Statement.
(vi) The Company has duly and validly authorized
capital stock as described in the Prospectus; all outstanding
shares of Common Stock of the Company and the Shares conform,
or when issued will conform, to the description thereof in the
Registration Statement and the Prospectus and have been, or,
when issued and paid for will be, duly authorized, validly
issued, fully paid and nonassessable; and the issuance of the
Shares to be purchased from the Company hereunder is not
subject to preemptive rights.
(vii) The Company and its subsidiary have been
duly incorporated and are validly existing as corporations in
good standing under the laws of the states or other
jurisdictions in which they are incorporated, with full power
and authority (corporate and other) to own, lease and operate
their properties and conduct their businesses as described in
the Registration Statement; the Company and its subsidiary are
duly qualified to do business as foreign corporations in good
standing in each state or other jurisdiction in which their
ownership or leasing of property or conduct of business
legally requires such qualification, except where the failure
to be so qualified would not have a material adverse effect on
the ability of the Company and its subsidiary to conduct their
business as described in the Registration Statement; and the
outstanding shares of capital stock of the Company's
subsidiary have been duly authorized and validly issued, are
fully paid and nonassessable and are owned by the Company free
and clear of any mortgage, pledge, lien, encumbrance, charge
or adverse claim and are not the subject of any agreement or
understanding with any person; no options, warrants or other
rights to purchase, agreement or other obligations to issue or
other rights to convert any obligations into shares of capital
stock or ownership interests in the subsidiary are
<PAGE> 25
HALE AND DORR
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outstanding.
[(viii) Arthur Andersen LLP, the accounting firm which has
certified the financial statements filed with the Commission
as a part of the Registration Statement, is an independent
public accounting firm within the meaning of the Act and the
Rules and Regulations.]
(ix) The financial statements and schedules of the
Company, including the notes thereto, filed with and as a part
of the Registration Statement, are accurate in all material
respects and present fairly the consolidated financial
position of the Company as of the respective dates thereof and
the consolidated results of operations and statements of cash
flow for the respective periods covered thereby, all in
conformity with generally accepted accounting principles
except as otherwise disclosed in the Prospectus. The selected
financial data included in the Registration Statement and
Prospectus present fairly the information shown therein and
have been compiled on a basis consistent with that of the
audited financial statements in the Registration Statement and
Prospectus.
(x) Neither the Company nor its subsidiary is
in default with respect to any contract or agreement to which
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<PAGE> 26
it is a party; provided that this representation shall not
apply to defaults which in the aggregate are not materially
adverse to the condition, financial or other, or the business
or prospects of the Company and its subsidiary taken as a
whole.
(xi) Neither the Company nor its subsidiary is in
violation of any other laws, ordinances or governmental rules
or regulations to which it is subject, and neither the Company
nor its subsidiary has failed to obtain any other license,
permit, franchise, easement, consent, or other governmental
authorization necessary to the ownership, leasing and
operation of its properties or to the conduct of its business,
which violation or failure would materially adversely affect
the business, operations, affairs, properties, prospects,
profits or condition (financial or other) of the Company and
its subsidiary taken as a whole. Neither the Company nor its
subsidiary has, at any time during the past five years, (A)
made any unlawful contributions to any candidate for any
political office, or failed fully to disclose any contribution
in violation of law, or (B) made any payment to any state,
federal or foreign government official, or other person
charged with similar public or quasi-public duty (other than
payment required or permitted by applicable law).
(xii) Except as described in the Prospectus, the
Company and its subsidiary own or possess, or can acquire on
reasonable terms, adequate patents, patent licenses,
trademarks, service marks and trade names necessary to conduct
the business now operated by them, and neither the Company nor
its subsidiary has received any notice of infringement of or
conflict with asserted rights of others with respect to any
patents, patent licenses, trademarks, service marks or trade
names which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would have a material
adverse effect on the conduct of the business, operations,
financial condition or income of the Company and its
subsidiary taken as a whole.
(xiii) The Company and its subsidiary have good and
marketable title to all property owned by them, free and clear
of all liens, encumbrances, restrictions and defects except
such as are described in the Registration Statement
<PAGE> 27
HALE AND DORR
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or do not interfere with the use made and proposed to be made
of such property; and any property held under lease or
sublease by the Company or its subsidiary is held under valid,
subsisting and enforceable leases or subleases with such
exceptions as are not material and do not interfere with the
use made and proposed to be made of such property by the
Company and its subsidiary, and neither the Company nor its
subsidiary has any notice or knowledge of any material claim
of any sort which has been, or may be, asserted by anyone
adverse to the Company's or subsidiary's rights as lessee or
sublessee under any lease or sublease described above, or
affecting or questioning the Company's or its subsidiary's
rights to the continued possession of the leased or subleased
premises under any such lease or sublease in conflict with the
terms thereof.
(xiv) Except as described in the Prospectus,
there is no factual basis for any action, suit or other
proceeding involving the Company or its subsidiary or any of
their material assets for any failure of the Company or its
subsidiary, or any predecessor thereof, to comply with any
requirements of federal, state or local regulation relating to
air, water, solid waste management, hazardous or toxic
substances, or the protection of health or the environment.
Except as described in the Prospectus, none of the property
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<PAGE> 28
owned or leased by the Company or its subsidiary is, to the
best knowledge of the Company, contaminated with any waste or
hazardous substances, and neither the Company nor its
subsidiary may be deemed an "owner or operator" of a
"facility" or "vessel" which owns, possesses, transports,
generates or disposes of a "hazardous substance" as those
terms are defined in Section 9601 of the Comprehensive
Environmental Response, Compensation and Liability Act of
1980, 42 U.S.C. Section 9601 et seq.
(xv) No labor disturbance exists with the
employees of the Company or its subsidiary or is imminent
which would have a material adverse effect on the Company and
its subsidiary taken as a whole.
(xvi) The Company has not taken and will not take,
directly or indirectly, any action designed to or which might
reasonably be expected to cause or result in stabilization or
manipulation of the price of the Company's Common Stock, and
the Company is not aware of any such action taken or to be
taken by affiliates of the Company.
(xvii) The Company is not an "investment company"
or a company "controlled" by an "investment company" within
the meaning of the Investment Company Act of 1940, as amended.
(b) Each Selling Shareholder severally represents and
warrants to and agrees with each Underwriter and the Company that:
(i) All authorizations and consents necessary
for the execution and delivery by it of this Agreement and the
sale and delivery of the Shares to be sold by such Selling
Shareholder hereunder have been given and are in full force
and effect on the date hereof and will be in full force and
effect on the Closing Date (and, if applicable, the Option
Closing Date).
(ii) Such Selling Shareholder has, and on the
Closing Date (and, if applicable, the Option Closing Date)
will have good and valid title to the Shares to be sold by
such Selling Shareholder, free and clear of all liens,
mortgages, pledges, encumbrances, claims, equities and
security interests whatsoever, and will have, full right,
power and authority to enter into this Agreement and to sell,
assign,
<PAGE> 29
HALE AND DORR
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transfer and deliver the Shares to be sold by such Selling
Shareholder hereunder.
(iii) Upon delivery of and payment for such Shares
hereunder, the several Underwriters will acquire valid and
unencumbered title to such Shares to be sold by such Selling
Shareholder hereunder, free and clear of all liens, mortgages,
pledges, encumbrances, claims, equities and security interests
whatsoever.
(iv) The consummation by such Selling
Shareholder of the transactions contemplated herein and the
fulfillment by such Selling Shareholder of the terms hereof
will not result in a violation or breach of any terms or
provisions of, or constitute a default under, any indenture,
mortgage, deed of trust, note, loan agreement, sale and
leaseback arrangement or other agreement or instrument to
which such Selling Shareholder is a party, or of any order,
rule or regulation applicable to such Selling Shareholder of
any court or of any regulatory body of an administrative
agency or other governmental body having jurisdiction.
(v) Such Selling Shareholder has not taken and
will not take, directly or indirectly, any action designed to
or which might be reasonably expected to cause or result in
- 15 -
<PAGE> 30
stabilization or manipulation of the price of the Company's
Common Stock, and such Selling Shareholder is not aware of any
such action taken or to be taken by affiliates of such Selling
Shareholder.
(vi) When the Registration Statement becomes
effective and at all times subsequent thereto, such
information in the Registration Statement and Prospectus and
any amendments or supplements thereto as specifically refers
to such Selling Shareholder will not contain any untrue
statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the
statements therein not misleading.
(vii) Certificates in negotiable form
representing all of the Shares to be sold by such Selling
Shareholder hereunder have been placed in the custody of
__________________ (the "Custodian") under a Custody Agreement
(the "Custody Agreement"), duly executed and delivered by such
Selling Shareholder, with the Custodians having the authority
to deliver the Shares to be sold by such Selling Shareholder
hereunder, and that such Selling Shareholder has duly executed
and delivered a Power of Attorney (the "Power of Attorney")
appointing ______________ and _____________ as such Selling
Shareholder's attorneys-in-fact (the "Attorneys-in-Fact") with
the Attorneys-in-Fact having authority to execute and deliver
this Agreement on behalf of such Selling Shareholder, to
determine the purchase price to be paid by the Underwriters to
the Selling Shareholders as provided in Section 2, to
authorize the delivery of the Shares to be sold by it
hereunder and otherwise to act on behalf of such Selling
Shareholder in connection with the transactions contemplated
by this Agreement and such Custody Agreement.
(viii) The Shares represented by the certificates
held in custody for such Selling Shareholder under the Custody
Agreement are subject to the interests of the Underwriters
hereunder, and the arrangements made by such Selling
Shareholder for such custody, and the appointment by such
Selling Shareholder of the Custodians under the Custody
Agreement and of the Attorneys-in-Fact by the Power of
Attorney, are to that extent irrevocable.
<PAGE> 31
HALE AND DORR
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(ix) The obligations of such Selling Shareholders
hereunder shall not be terminated by operation of law, whether
by the death or incapacity of any individual Selling
Shareholder or by the occurrence of any other event, and if
any Selling Shareholder should die or become incapacitated, or
if any other such event should occur before the delivery of
the Shares hereunder, certificates representing the Shares
shall be delivered by or on behalf of each Selling Shareholder
in accordance with the terms and conditions of this Agreement
and of the Custody Agreement, and actions taken by the
Custodians pursuant to the Custody Agreement or by the
Attorneys-in-Fact pursuant to the Power of Attorney shall be
as valid as if such death, incapacity or other event had not
occurred, regardless of whether or not the Custodians or
Attorneys-in-Fact, or any of them, shall have received notice
of such death, incapacity or other event.
(x) Such Selling Shareholder is not prompted to
sell shares of Common Stock by any information concerning the
Company or its subsidiary which is not included in the
Registration Statement.
(c) Any certificate signed by any officer of the Company
and delivered to you or to counsel for the Underwriters shall be deemed a
representation and warranty by the Company to each Underwriter as
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<PAGE> 32
to the matters covered thereby; and any certificate signed by or on behalf of
the Selling Shareholders as such and delivered to you or to counsel for the
Underwriters shall be deemed a representation and warranty by the Selling
Shareholders to each Underwriter as to the matters covered thereby.
5. ADDITIONAL COVENANTS. The Company and, where
expressly indicated, the Selling Shareholders, covenant and agree with the
several Underwriters that:
(a) If the Registration Statement is not effective under
the Act, the Company will use its best efforts to cause the Registration
Statement to become effective as promptly as possible, and it will notify you,
promptly after it shall receive notice thereof, of the time when the
Registration Statement has become effective. The Company (i) will prepare and
timely file with the Commission under Rule 424(b) of the Rules and Regulations,
if required, a Prospectus containing information previously omitted at the time
of effectiveness of the Registration Statement in reliance on Rule 430A of the
Rules and Regulations or otherwise or a Term Sheet or Abbreviated Term Sheet,
as applicable; (ii) will not file any amendment to the Registration Statement
or supplement to the Prospectus of which the Underwriters shall not previously
have been advised and furnished with a copy or to which the Underwriters shall
have reasonably objected in writing or which is not in compliance with the
Rules and Regulations; and (iii) will promptly notify you after it shall have
received notice thereof of the time when any amendment to the Registration
Statement becomes effective or when any supplement to the Prospectus has been
filed.
(b) The Company will advise the Underwriters promptly,
after it shall receive notice or obtain knowledge thereof, of any request of
the Commission for amendment of the Registration Statement or for supplement to
the Prospectus or for any additional information, or of the issuance by the
Commission of any stop order suspending the effectiveness of the Registration
Statement or the use of the Prospectus or of the institution or threatening of
any proceedings for that purpose, and the Company will use its best efforts to
prevent the issuance of any such stop order preventing or suspending the use of
the Prospectus and to obtain as soon as possible the lifting thereof, if
issued.
(c) The Company will cooperate with the Underwriters and
their counsel in
<PAGE> 33
HALE AND DORR
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endeavoring to qualify the Shares for sale under the securities laws of such
jurisdictions as they may have designated and will make such applications, file
such documents, and furnish such information as may be necessary for that
purpose, provided the Company shall not be required to qualify as a foreign
corporation or to file a general consent to service of process in any
jurisdiction where it is not now so qualified or required to file such a
consent or to subject itself to taxation as doing business in any jurisdiction
where it is not now so taxed. The Company will, from time to time, file such
statements, reports, and other documents, as are or may be required to continue
such qualifications in effect for so long a period as the Underwriters may
reasonably request.
(d) The Company will deliver to, or upon the order of,
the Underwriters, without charge from time to time, as many copies of any
Preliminary Prospectus as they may reasonably request. The Company will
deliver to, or upon the order of, the Underwriters without charge as many
copies of the Prospectus, or as it thereafter may be amended or supplemented,
as they may from time to time reasonably request. The Company consents to the
use of such Prospectus by the Underwriters and by all dealers to whom the
Shares may be sold, both in connection with the offering or sale of the Shares
and for such other purposes and for such period of time thereafter as the
Prospectus is required by law to
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<PAGE> 34
be delivered in connection with the offering or sale of the Shares. The
Company will deliver to the Underwriters at or before the Closing Date two
signed copies of the Registration Statement and all amendments thereto
including all exhibits filed therewith, and will deliver to the Underwriters
such number of copies of the Registration Statement, without exhibits, and of
all amendments thereto, as they may reasonably request.
(e) If, during the period in which a prospectus is
required by law to be delivered by an Underwriter or dealer, any event shall
occur as a result of which, in the judgment of the Company or in your judgment
or in the opinion of counsel for the Underwriters, it becomes necessary to
amend or supplement the Prospectus in order to make the statements therein, in
light of the circumstances existing at the time the Prospectus is delivered to
a purchaser, not misleading, or, if it is necessary at any time to amend or
supplement the Prospectus to comply with any law, the Company promptly will
prepare and file with the Commission an appropriate amendment to the
Registration Statement or supplement to the Prospectus so that the Prospectus
as so amended or supplemented will not, in the light of the circumstances when
it is so delivered, be misleading, or so that the Prospectus will comply with
law.
(f) The Company will make generally available to its
shareholders and will file as an exhibit in a report pursuant to the Securities
Exchange Act of 1934, as amended (the "1934 Act"), as soon as it is practicable
to do so, but in any event not later than 15 months after the effective date of
the Registration Statement, an earnings statement in reasonable detail,
covering a period of at least 12 consecutive months beginning after the
effective date of the Registration Statement, which earnings statement shall
satisfy the requirements of Section 11(a) of the Act and Rule 158 of the Rules
and Regulations and will advise the Underwriters in writing when such statement
has been so made available.
(g) The Company will, for a period of five years from the
Closing Date, deliver to the Underwriters at their principal executive offices
a reasonable number of copies of annual reports, quarterly reports, current
reports and copies of all other documents, reports and information furnished by
the Company to its shareholders or filed with any securities exchange pursuant
to the requirements of such exchange or with the Commission pursuant to the Act
or the 1934 Act. The Company will deliver to the
<PAGE> 35
HALE AND DORR
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Underwriters similar reports with respect to any significant subsidiaries, as
that term is defined in the Rules and Regulations, which are not consolidated
in the Company's financial statements. Any report, document or other
information required to be furnished under this paragraph (g) shall be
furnished as soon as practicable after such report, document or information
becomes available.
(h) The Company will apply the proceeds from the sale of
the Shares as set forth in the description under "Use of Proceeds" in the
Prospectus, which description complies in all respects with the requirements of
Item 504 of Regulation S-K.
(i) The Company will supply you with copies of all
correspondence to and from, and all documents issued to and by, the Commission
in connection with the registration of the Shares under the Act.
(j) Prior to the Closing Date (and, if applicable, the
Option Closing Date), the Company will furnish to you, as soon as they have
been prepared, copies of any unaudited interim consolidated financial
statements of the Company and its subsidiaries for any periods subsequent to
the periods covered by the financial statements appearing in the Registration
Statement and the Prospectus.
(k) Prior to the Closing Date (and, if applicable, the
Option Closing Date),
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<PAGE> 36
neither the Company nor any Selling Shareholder will issue any press releases
or other communications directly or indirectly and will hold no press
conferences with respect to the Company or its subsidiary, the financial
condition, results of operations, business, properties, assets or liabilities
of the Company or its subsidiary, or the offering of the Shares, without your
prior written consent.
(l) The Company will use its best efforts to obtain
approval for, and maintain the quotation of the Shares on, the National
Association of Securities Dealers, Inc. Automated Quotation/National Market
System (the "Nasdaq/NMS").
(m) For a period of 180 days from the Effective Date, the
Company will not, and will use its best efforts to cause its directors and
officers to not, directly or indirectly sell, contract to sell or otherwise
dispose of any shares of the Company's Common Stock, any securities
exchangeable for Common Stock or any other rights to acquire such shares
without your prior written consent, except for the Shares sold hereunder and
except for sales of shares of Common Stock to the Company's employees pursuant
to the exercise of options under the Company's stock option plan.
(n) For a period of 180 days from the Effective Date, the
Selling Shareholders will not directly or indirectly sell, contract to sell or
otherwise dispose of any shares of the Company's Common Stock or rights to
acquire such shares without your prior written consent, except for the Shares
sold hereunder.
(o) The Company and its subsidiary will maintain and
keep accurate books and records reflecting their assets and maintain internal
accounting controls which provide reasonable assurance that (1) transactions
are executed in accordance with management's authorization, (2) transactions
are recorded as necessary to permit the preparation of the Company's financial
statements and to maintain accountability for the assets of the Company and its
subsidiaries, (3) access to the assets of the Company and its subsidiary is
permitted only in accordance with management's authorization, and (4) the
recorded accounts of the assets of the Company and its subsidiary are compared
with existing assets at reasonable intervals.
6. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The several
obligations of the Underwriters to purchase and pay for the Shares, as provided
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herein, shall be subject to the accuracy in all material respects, as of the
date hereof and as of the Closing Date (and, if applicable, the Option Closing
Date), of the representations and warranties of the Company and the Selling
Shareholders contained herein, to the performance in all material respects by
the Company and the Selling Shareholders of their covenants and obligations
hereunder, and to the following additional conditions:
(a) All filings required by Rule 424 and Rule 430A of the
Rules and Regulations shall have been made. No stop order suspending the
effectiveness of the Registration Statement, as amended from time to time,
shall have been issued and no proceeding for that purpose shall have been
initiated or, to the knowledge of the Company or any Underwriter, threatened or
contemplated by the Commission, and any request of the Commission for
additional information (to be included in the Registration Statement or the
Prospectus or otherwise) shall have been complied with to the reasonable
satisfaction of the Underwriters.
(b) No Underwriter shall have disclosed in writing to the
Company on or prior to the Closing Date (and, if applicable, the Option Closing
Date), that the Registration Statement or Prospectus or any amendment or
supplement thereto contains an untrue statement of fact which, in the opinion
of counsel to the Underwriters, is
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<PAGE> 38
material, or omits to state a fact which, in the opinion of such counsel, is
material and is required to be stated therein or is necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
(c) On the Closing Date (and, if applicable, the Option
Closing Date), you shall have received the opinion of Gibson, Dunn & Crutcher
LLP ("Gibson Dunn"), counsel for the Company, addressed to you and dated the
Closing Date (and, if applicable, the Option Closing Date), to the effect
that:
(i) The Company and its subsidiary have been
duly incorporated and are validly existing as corporations in
good standing under the laws of the states or other
jurisdictions in which they are incorporated, with full power
and authority (corporate and other) to own, lease and operate
their properties and conduct their business as described in
the Registration Statement; the Company and its subsidiary are
duly qualified to do business as foreign corporations in good
standing in each state or other jurisdiction in which their
ownership or leasing of property or conduct of business
legally requires such qualification, except where the failure
to be so qualified would not have a material adverse effect on
the ability of the Company and its subsidiary to conduct their
business as described in the Registration Statement; and the
outstanding shares of capital stock of the Company's
subsidiary have been duly authorized and validly issued, are
fully paid and nonassessable and, to the knowledge of such
counsel after due inquiry, are owned by the Company free and
clear of any mortgage, pledge, lien, encumbrance, charge or
adverse claim and are not the subject of any agreement or
understanding with any person; no options, warrants or other
rights to purchase, agreement or other obligations to issue or
other rights to convert any obligations into shares of capital
stock or ownership interests in the subsidiary are
outstanding.
(ii) The Company has duly and validly
authorized capital stock as set forth under the heading
"Capitalization" in the Prospectus; all outstanding shares
of Common Stock of the Company and the Shares conform to the
description thereof in the Prospectus under the heading
"Description of Capital Stock", and the outstanding shares
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HALE AND DORR
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of Common Stock have been duly authorized and are validly
issued, fully paid and non-assessable; the Shares to be
sold by the Company have been duly authorized and, when
delivered and paid for in accordance with this Agreement, will
be validly issued, fully paid and non-assessable, and the
shareholders of the Company have no preemptive rights with
respect to the Shares.
(iii) Such counsel has been advised by the staff
of the Commission that the Registration Statement has become
effective under the Act and, to the knowledge of such counsel
after due inquiry, no stop order suspending the effectiveness
of the Registration Statement has been issued and no
proceedings for that purpose have been instituted or are
pending or contemplated under the Act.
(iv) The Registration Statement and the
Prospectus, and each amendment or supplement thereto, as of
their respective effective or issue date, comply as to form
and appear on their face to be appropriately responsive in all
material respects to the requirements of the Act and the
applicable rules and regulations (except that such counsel
need express no opinion as to the financial statements or
other financial data).
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<PAGE> 40
(v) The descriptions in the Registration
Statement and Prospectus of contracts and other documents
filed as exhibits to the Registration Statement are accurate
in all material respects; all other material agreements
between the Company and third parties expressly referenced in
the Prospectus are legal, valid and binding obligations of the
Company.
(vi) No authorization, approval, consent,
order, registration or qualification of or with any court or
governmental body, authority or agency is required with
respect to the Company in connection with the transactions
contemplated by this Agreement, except such as may be required
under the Act or the Rules and Regulations or as may be
required by the NASD or under state securities laws in
connection with the purchase and distribution of the Shares by
the Underwriters.
(vii) The filing of the Registration Statement
has been duly authorized by the Board of Directors of the
Company. This Agreement has been duly authorized, executed
and delivered by the Company. The performance of this
Agreement and the consummation of the transactions herein
contemplated will not result in a violation of the Company's
articles of incorporation or bylaws or result in a breach or
violation of any of the terms and provisions of, or constitute
a default under, or result in the creation or imposition of
any lien, charge or encumbrance upon any properties or assets
of the Company and its subsidiary under, any statute, or under
any indenture, mortgage, deed of trust, note, loan agreement,
sale and leaseback arrangement, or any other agreement or
instrument known to such counsel after due inquiry to which
the Company or its subsidiary is a party or by which they are
bound or to which any of the properties or assets of the
Company or its subsidiary are subject, or any order, rule or
regulation known to such counsel after due inquiry of any
court or governmental agency or body having jurisdiction over
the Company or its subsidiary or their properties, except, in
the case of any such violation, breach, default, creation or
imposition, to such extent as does not materially adversely
affect the business of the Company and its subsidiary taken as
a whole.
(viii) To the knowledge of such counsel after due
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inquiry, (A) there are no material (individually, or in the
aggregate) legal, governmental or regulatory proceedings
pending or threatened to which the Company or its subsidiary
is a party or of which the business or properties of the
Company or its subsidiary is the subject which are not
disclosed in the Registration Statement and Prospectus; (B)
there are no contracts or documents of a character required to
be described in the Registration Statement or the Prospectus
or to be filed as an exhibit to the Registration Statement
which are not described or filed as required; and (C) there
are no statutes or regulations required to be described in the
Registration Statement or Prospectus which are not described
as required.
(ix) To the knowledge of such counsel after due
inquiry, the Company and its subsidiary hold all licenses,
certificates, permits and approvals from all state, federal
and other regulatory authorities, and have satisfied in all
material respects the requirements imposed by regulatory
bodies, administrative agencies or other governmental bodies,
agencies or officials, that are required for the Company and
its subsidiary lawfully to own, lease and operate its
properties and conduct its business as described in the
Prospectus, and, to the knowledge of such counsel after due
inquiry, each of the Company and its subsidiary is
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<PAGE> 42
conducting its business in compliance in all material respects
with all of the laws, rules and regulations of each
jurisdiction in which it conducts its business.
(x) The statements made in the Registration
Statement under the captions "Dividend Policy",
"Capitalization", "Description of Capital Stock", and "Certain
Charter and Bylaw Provisions", to the extent that they
constitute summaries of documents referred to therein or
matters of law or legal conclusions, have been reviewed by
such counsel and are accurate summaries and fairly present the
information disclosed therein.
(xi) The Company is not an "investment company"
or a company "controlled" by an "investment company" within
the meaning of the Investment Company Act of 1940, as amended.
Such counsel shall confirm that in the course of its duties in
connection with the preparation of the Registration Statement and Prospectus,
nothing came to such counsel's attention that would lead them to believe that
either the Registration Statement or Prospectus or any amendment or supplement
thereto (other than the financial statements or other financial data as to
which such counsel need express no opinion) contains any untrue statement of a
material fact or omits to state a material fact required to be stated therein
or necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading.
In rendering the foregoing opinion, such counsel may rely,
provided that the opinion shall state that you and they are entitled to so
rely, (1) as to matters involving laws of any jurisdiction other than the
Commonwealth of Virginia, the General Corporation Law of the State of Delaware
or the United States, upon opinions addressed to the Underwriters of other
counsel satisfactory to them and Hale and Dorr LLP ("Hale and Dorr"), counsel
to the Underwriters, and (2) as to all matters of fact, upon certificates and
written statements of the executive officers of, and accountants for, the
Company.
(d) On the Closing Date (and, if applicable, the Option
Closing Date), you shall have received the opinion of Gibson, Dunn & Crutcher
LLP, counsel to the Selling Shareholders, addressed to you and dated the
Closing Date (and, if applicable, the Option Closing Date),
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HALE AND DORR
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to the effect that:
(i) Each Selling Shareholder has duly
authorized, executed and delivered the Custody Agreement and
Power of Attorney, appointing __________________ as such
Selling Shareholder's Custodian with authority to take custody
of and deliver (a) the Shares as represented by certificates
on behalf of such Selling Shareholder in connection with the
transactions contemplated by this Agreement and (b) the
Custody Agreement, and appointing __________________ and
_____________ as such Selling Shareholder's attorneys-in-fact
with authority to execute and deliver this Agreement on behalf
of such Selling Shareholder and otherwise to act on behalf of
such Selling Shareholder in connection with the transactions
contemplated by this Agreement and the Power of Attorney.
(ii) This Agreement has been duly authorized,
executed and delivered on behalf of the Selling Shareholders,
and is a valid and legally binding obligation of the Selling
Shareholders enforceable in accordance with its terms (except
to the extent the enforceability of the indemnification
provisions of Section 7 hereof may be limited by public policy
considerations as expressed in the Act and as construed by
courts of competent jurisdiction and
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<PAGE> 44
except as enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium or other laws affecting
creditors' rights generally).
(iii) Each Selling Shareholder has full legal
right, power and authority, and any approval required by law
(other than as required by the Act, the NASD and state
securities and Blue Sky Laws) to sell, assign, transfer and
deliver the Shares to be sold by such Selling Shareholder.
(iv) No consent, approval, authorization or
order of any court, or governmental agency or body is required
for consummation of the transactions contemplated by this
Agreement in connection with the Shares to be sold by each
Selling Shareholder hereunder except such as may be required
under the Act or the Rules and Regulations or as may be
required by the NASD or under state securities laws.
(v) Each Selling Shareholder has good and
valid title to the Shares being sold by such Selling
Shareholder hereunder, free and clear of all liens, mortgages,
pledges, encumbrances, claims, equities and security
interests, and has transferred to the Underwriters good and
valid title to the Shares being sold by such Selling
Shareholder on the Closing Date (and, if applicable, the
Option Closing Date), free and clear of all liens, mortgages,
pledges, encumbrances, claims, equities and security interests
whatsoever.
In rendering the foregoing opinion, such counsel may rely,
provided that the opinion shall state that you and they are entitled to so
rely, (1) as to matters involving laws of any jurisdiction other than the
Commonwealth of Virginia or the United States, upon opinions addressed to the
Underwriters of other counsel satisfactory to them and to Hale and Dorr, and
(2) as to all matters of fact, upon certificates and written statements of the
Selling Shareholders.
(e) You shall have received on the Closing Date (and, if
applicable, the Option Closing Date), from Hale and Dorr, counsel to the
Underwriters, such opinion or opinions, dated the Closing Date (and, if
applicable, the Option Closing Date) with respect to the incorporation of the
Company, the validity of the Shares, the Registration Statement, the Prospectus
and other related matters
<PAGE> 45
HALE AND DORR
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as you may reasonably require; the Company and Selling Shareholders shall have
furnished to such counsel such documents as they reasonably request for the
purpose of enabling them to pass on such matters.
(f) You shall have received at or prior to the Closing
Date from Hale and Dorr a memorandum or memoranda, in form and substance
satisfactory to you, with respect to the qualification for offering and sale by
the Underwriters of the Shares under state securities or Blue Sky laws of such
jurisdictions as the Underwriters may have designated to the Company.
(g) On the business day immediately preceding the date of
this Agreement and on the Closing Date (and, if applicable, the Option Closing
Date), you shall have received from Arthur Andersen LLP, a letter or letters,
dated the date of this Agreement and the Closing Date (and, if applicable, the
Option Closing Date), respectively, in form and substance satisfactory to you,
confirming that they are independent public accountants with respect to the
Company within the meaning of the Act and the published Rules and Regulations,
and the answer to Item 509 of Regulation S-K set forth in the Registration
Statement is correct insofar as it relates to them, and stating to the effect
set forth in Schedule III hereto.
(h) Except as contemplated in the Prospectus, (i) neither
the Company nor
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<PAGE> 46
its subsidiary shall have sustained since the date of the latest audited
financial statements included in the Prospectus any loss or interference with
its business from fire, explosion, flood or other calamity, whether or not
covered by insurance, or from any labor dispute or court or governmental
action, order or decree; and (ii) subsequent to the respective dates as of
which information is given in the Registration Statement and the Prospectus,
neither the Company nor its subsidiary shall have incurred any liability or
obligation, direct or contingent, or entered into transactions, and there shall
not have been any change in the capital stock or long-term debt of the Company
and its subsidiaries or any change in the condition (financial or other), net
worth, business, affairs, management, prospects or results of operations of the
Company or its subsidiary, the effect of which, in any such case described in
clause (i) or (ii), is in your judgment so material or adverse as to make it
impracticable or inadvisable to proceed with the public offering or the
delivery of the Shares being delivered on such Closing Date (and, if
applicable, the Option Closing Date) on the terms and in the manner
contemplated in the Prospectus.
(i) There shall not have occurred any of the following:
(i) a suspension or material limitation in trading in securities generally on
the New York Stock Exchange or the American Stock Exchange or the establishing
on such exchanges by the Commission or by such exchanges of minimum or maximum
prices which are not in force and effect on the date hereof; (ii) a general
moratorium on commercial banking activities declared by either federal or state
authorities; (iii) the outbreak or escalation of hostilities involving the
United States or the declaration by the United States of a national emergency
or war, if the effect of any such event specified in this clause (iii) in your
judgment makes it impracticable or inadvisable to proceed with the public
offering or the delivery of the Shares in the manner contemplated in the
Prospectus; (iv) any calamity or crisis, change in national, international or
world affairs, act of God, change in the international or domestic markets, or
change in the existing financial, political or economic conditions in the
United States or elsewhere, if the effect of any such event specified in this
clause (iv) makes it impracticable or inadvisable to proceed with the public
offering or the delivery of the Shares in the manner contemplated in the
Prospectus; or (v) the enactment, publication, decree, or other promulgation of
any federal or state statute, regulation, rule, or order of any court or other
<PAGE> 47
HALE AND DORR
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governmental authority, or the taking of any action by any federal, state or
local government or agency in respect of fiscal or monetary affairs, if the
effect of any such event specified in this clause (v) in your judgment makes it
impracticable or inadvisable to proceed with the public offering or the
delivery of the Shares in the manner contemplated in the Prospectus.
(j) You shall have received certificates, dated the
Closing Date (and, if applicable, the Option Closing Date) and signed by the
President and the Chief Financial Officer of the Company stating that (i) they
have carefully examined the Registration Statement and the Prospectus as
amended or supplemented and nothing has come to their attention that would lead
them to believe that either the Registration Statement or the Prospectus, or
any amendment or supplement thereto as of their respective effective or issue
dates, contained, and the Prospectus as amended or supplemented at such Closing
Date, contains any untrue statement of a material fact, or omits to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading, and, that (ii) all representations and warranties made herein
by the Company are true and correct in all material respects at such Closing
Date, with the same effect as if made on and as of such Closing Date, and all
agreements herein to be performed by the Company on or prior to such Closing
Date have
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<PAGE> 48
been duly performed in all material respects.
(k) The Company and each of the Selling Shareholders
shall not have failed, refused, or been unable, at or prior to the Closing Date
(and, if applicable, the Option Closing Date) to have performed in all material
respects any agreement on their part to be performed or any of the conditions
herein contained and required to be performed or satisfied by them at or prior
to such Closing Date.
(l) The Company and the Selling Shareholders shall have
furnished to you at the Closing Date (and, if applicable, the Option Closing
Date) such other certificates as you may have reasonably requested as to the
accuracy, on and as of such Closing Date, of the representations and warranties
of the Company and the Selling Shareholders herein and as to the performance by
the Company and the Selling Shareholders of their obligations hereunder.
(m) The Shares shall have been approved for trading upon
official notice of issuance on the Nasdaq/NMS.
All such opinions, certificates, letters and documents will be
in compliance with the provisions hereof only if they are reasonably
satisfactory to you and to Hale and Dorr, counsel for the several Underwriters.
The Company and Selling Shareholders will furnish you with such conformed
copies of such opinions, certificates, letters and documents as you may
request.
If any of the conditions specified above in this Section 6
shall not have been satisfied at or prior to the Closing Date (and, if
applicable, the Option Closing Date) or waived by you in writing, this
Agreement may be terminated by you on notice to the Company and the Selling
Shareholders.
7. INDEMNIFICATION. (a) The Company will indemnify and
hold harmless each Underwriter and each person, if any, who controls any
Underwriter within the meaning of the Act, against any losses, claims, damages
or liabilities, joint or several, to which such Underwriter or such controlling
person may become subject, under the Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon an untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement, any Preliminary Prospectus, the
Prospectus, or any amendment or supplement thereto, or in any blue sky
application or other
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HALE AND DORR
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document executed by the Company or based on any information furnished in
writing by the Company, filed in any jurisdiction in order to qualify any or
all of the Shares under the securities laws thereof ("Blue Sky Application"),
or arise out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading; and will reimburse each Underwriter and each such controlling
person for any legal or other expenses reasonably incurred by such Underwriter
or such controlling person in connection with investigating or defending any
such loss, claim, damage, liability or action; provided, however, that the
Company shall not be liable in any such case to the extent that any such loss,
claim, damage or liability arises out of or is based upon an untrue statement
or alleged untrue statement or omission or alleged omission made in the
Registration Statement, such Preliminary Prospectus or the Prospectus, or such
amendment or supplement, or any Blue Sky Application in reliance upon and in
conformity with written information furnished to the Company by you or by any
Underwriter through you, specifically for use in the preparation thereof; and
provided, further, that if any Preliminary Prospectus or the Prospectus
contained any alleged untrue statement or allegedly omitted to state therein a
material fact required to be stated therein or necessary to make the statements
therein not
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<PAGE> 50
misleading and such statement or omission shall have been corrected in a
revised Preliminary Prospectus or in the Prospectus or in an amended or
supplemented Prospectus, the Company shall not be liable to any Underwriter or
controlling person under this subsection (a) with respect to such alleged
untrue statement or alleged omission to the extent that any such loss, claim,
damage or liability of such Underwriter or controlling person results from the
fact that such Underwriter sold Shares to a person to whom there was not sent
or given, at or prior to the written confirmation of such sale, such revised
Preliminary Prospectus or Prospectus or amended or supplemented Prospectus.
This indemnity agreement shall be in addition to any liabilities which the
Company may otherwise have.
(b) Each Selling Shareholder will indemnify and hold
harmless each Underwriter and each person, if any, who controls any Underwriter
within the meaning of the Act, against any losses, claims, damages or
liabilities, joint or several, to which such Underwriter or controlling person
may become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are
based upon any untrue statement or alleged untrue statement of any material
fact contained in the Registration Statement, any Preliminary Prospectus, the
Prospectus, or any amendment or supplement thereto, or any Blue Sky Application
or arise out of or are based upon the omission or the alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, in each case to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or omission or
alleged omission was made in the Registration Statement, such Preliminary
Prospectus or the Prospectus, or such amendment or supplement, or any Blue Sky
Application, in reliance upon and in conformity with written information
furnished to the Company or any Underwriter by such Selling Shareholder
specifically for use in the preparation thereof; and will reimburse any legal
or other expenses reasonably incurred by each Underwriter and each person, if
any, who controls any Underwriter within the meaning of the Act, in connection
with investigating or defending any such loss, claim, damage, liability or
action; provided, however, that the indemnity contained in this subsection (b)
with respect to any Preliminary Prospectus shall not inure to the benefit of
any Underwriter (or to the benefit of any person controlling such Underwriter)
in respect of any action or claim asserted by a
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HALE AND DORR
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person who purchased any Shares from such Underwriter, if, within the time
required by the Act such person was not sent or given a copy of the Prospectus,
as then amended or supplemented. This indemnity agreement shall be in addition
to any liabilities which the Selling Shareholders may otherwise have.
(c) Each Underwriter will indemnify and hold harmless the
Company, each of its directors, each of its officers who have signed the
Registration Statement and, each person, if any, who controls the Company
within the meaning of the Act, and each Selling Shareholder, against any
losses, claims, damages or liabilities, joint or several, to which the Company
or any such director, officer or controlling person or any such Selling
Shareholder may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise
out of or are based upon any untrue statement or alleged untrue statement of
any material fact contained in the Registration Statement, any Preliminary
Prospectus, the Prospectus, any amendment or supplement thereto, or any Blue
Sky Application or arise out of or are based upon the omission or the alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or
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<PAGE> 52
omission or alleged omission was made in the Registration Statement, such
Preliminary Prospectus or the Prospectus, such amendment or supplement, or any
Blue Sky Application in reliance upon and in conformity with written
information furnished to the Company by any such Underwriter specifically for
use in the preparation thereof; and will reimburse any legal or other expenses
reasonably incurred by the Company or any such director, officer or controlling
person or any such Selling Shareholder in connection with investigating or
defending any such loss, claim, damage, liability or action. This indemnity
agreement shall be in addition to any liabilities which the Underwriters may
otherwise have.
(d) Any party which proposes to assert the right to be
indemnified under this Section 7 shall, within ten days after receipt of notice
of commencement of any action, suit or proceeding against such party in respect
of which a claim is to be made against an indemnifying party under this Section
7, notify each such indemnifying party of the commencement of such action, suit
or proceeding, enclosing a copy of all papers served, but the omission so to
notify such indemnifying party of any such action, suit or proceeding shall not
relieve such indemnifying party from any liability which it may have to any
indemnified party otherwise than under this Section 7. In case any such
action, suit or proceeding shall be brought against any indemnified party and
it shall notify the indemnifying party of the commencement thereof, the
indemnifying party shall be entitled to participate in, and, to the extent that
it shall wish, jointly with any other indemnifying party, similarly notified,
to assume the defense thereof, with counsel reasonably satisfactory to such
indemnified party, and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party shall not be liable to such indemnified party for any legal
or other expenses, other than reasonable costs of investigation, subsequently
incurred by such indemnified party in connection with the defense thereof. The
indemnified party shall have the right to employ its own counsel in any such
action, but the fees and expenses of such counsel shall be at the expense of
such indemnified party unless (i) the employment of counsel by such indemnified
party at the expense of the indemnifying party has been authorized by the
indemnifying party, (ii) the indemnified party shall have been advised by such
counsel in a written opinion that there may be a conflict of interest between
the indemnifying party and the indemnified party in the conduct of
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the defense, or certain aspects of the defense, of such action (in which case
the indemnifying party shall not have the right to direct the defense of such
action with respect to those matters or aspects of the defense on which a
conflict exists or may exist on behalf of the indemnified party) or (iii) the
indemnifying party shall not in fact have employed counsel to assume the
defense of such action, in any of which events such fees and expenses to the
extent applicable shall be borne by the indemnifying party. An indemnifying
party shall not be liable for any settlement of any action or claim effected
without its consent. Each indemnified party, as a condition of such indemnity,
shall cooperate in good faith with the indemnifying party in the defense of any
such action or claim.
(e) If the indemnification provided for in this Section 7
is for any reason, other than pursuant to the terms thereof, judicially
determined (by the entry of a final judgment or decree by a court of competent
jurisdiction and the expiration of time to appeal or the denial of the last
right to appeal) to be unavailable to an indemnified party under subsections
(a), (b) or (c) above in respect of any losses, claims, damages or liabilities
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<PAGE> 54
(or actions in respect thereof) referred to therein, then each indemnifying
party shall, in lieu of indemnifying such indemnified party, contribute to the
amount paid or payable by such indemnified party as a result of such losses,
claims, damages or liabilities (or actions in respect thereof) in such
proportion as is appropriate to reflect the relative benefits received by the
Company, the Selling Shareholders and the Underwriters from the offering of the
Shares, provided, however, that for each of the Selling Shareholders, such
benefit shall include the amount paid, if any, to each such Selling Shareholder
from the proceeds from the offering (the "S Corporation Distribution"). If,
however, the allocation provided by the immediately preceding sentence is not
permitted by applicable law, then each indemnifying party shall contribute to
such amount paid or payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault, as applicable, of the Company, the Selling Shareholders and the
Underwriters in connection with the statements or omissions which resulted in
such losses, claims, damages or liabilities (or actions in respect thereof), as
well as other relevant equitable considerations. The relative benefits
received by, as applicable, the Company, the Selling Shareholders and the
Underwriters shall be deemed to be in the same proportion as the total net
proceeds from the offering (before deducting expenses) received by the Company
and the Selling Shareholders bear to the total underwriting discounts and
commissions received by the Underwriters, in each case as set forth in the
table on the cover page of the Prospectus, provided, however, that for each
Selling Shareholder, such proportion of the proceeds shall include the amount,
if any, paid to each such Selling Shareholder from the S Corporation
Distribution. The relative fault shall be determined by reference to, among
other things, whether the untrue statement of a material fact or the omission
or alleged omission to state a material fact relates to information supplied by
the Company, the Selling Shareholders or the Underwriters and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Company, the Selling Shareholders and
the Underwriters agree that it would not be just and equitable if contributions
pursuant to this subsection (e) were determined by pro rata allocation (even if
the Underwriters were treated as one entity for such purpose) or by any other
method of allocation which does not take account of the equitable
considerations referred to above in this subsection (e). The amount paid or
payable by an indemnified party as a result of the losses, claims, damages or
liabilities (or actions in respect thereof) referred to above in this
subsection (e) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with
<PAGE> 55
HALE AND DORR
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investigating or defending any such action or claim. Notwithstanding the
provisions of this subsection (e), no Underwriter shall be required to
contribute any amount in excess of the underwriting discounts and commissions
applicable to the Shares purchased by such Underwriter. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations in this subsection
(e) to contribute are several in proportion to their respective underwriting
obligations and not joint.
8. REPRESENTATIONS AND AGREEMENTS TO SURVIVE DELIVERY.
All representations, warranties, and agreements of the Company and the Selling
Shareholders contained in Sections 7 and 11 herein or in certificates delivered
pursuant hereto, and the agreements of the Underwriters contained in Section 7
hereof, shall remain operative and in full force and effect regardless of any
termination or cancellation of this Agreement or any investigation made by or
on behalf of any Underwriter or any controlling person, the Company or any of
its officers, directors or any controlling persons, or the Selling
Shareholders, and shall survive delivery of the Shares to the Underwriters
hereunder.
- 41 -
<PAGE> 56
9. SUBSTITUTION OF UNDERWRITERS. (a) If any Underwriter
shall default in its obligation to purchase the Shares which it has agreed to
purchase hereunder, you may in your discretion arrange for you or another party
or other parties to purchase such Shares on the terms contained herein. If
within thirty-six hours after such default by any Underwriter you do not
arrange for the purchase of such Shares, then the Company and the Selling
Shareholders shall be entitled to a further period of thirty-six hours within
which to procure another party or parties reasonably satisfactory to you to
purchase such Shares on such terms. In the event that, within the respective
prescribed periods, you notify the Company and the Selling Shareholders that
you have so arranged for the purchase of such Shares, or the Company and the
Selling Shareholders notify you that they have so arranged for the purchase of
such Shares, you or the Company and the Selling Shareholders shall have the
right to postpone the Closing Date for a period of not more than seven days, in
order to effect whatever changes may thereby be made necessary in the
Registration Statement or the Prospectus, or in any other documents or
arrangements, and the Company agrees to file promptly any amendments to the
Registration Statement or the Prospectus which in your opinion may thereby be
made necessary. The term "Underwriter" as used in this Agreement shall include
any persons substituted under this Section 9 with like effect as if such person
had originally been a party to this Agreement with respect to such Shares.
(b) If, after giving effect to any arrangements for the
purchase of the Shares of a defaulting Underwriter or Underwriters made by you
or the Company and the Selling Shareholders as provided in subsection (a)
above, the aggregate number of Shares which remains unpurchased does not exceed
one tenth of the total Shares to be sold on the Closing Date, then the Company
and the Selling Shareholders shall have the right to require each
non-defaulting Underwriter to purchase the Shares which such Underwriter agreed
to purchase hereunder and, in addition, to require each non-defaulting
Underwriter to purchase its pro rata share (based on the number of Shares which
such Underwriter agreed to purchase hereunder) of the Shares of such defaulting
Underwriter or Underwriters for which such arrangements have not been made; but
nothing herein shall relieve a defaulting Underwriter from liability for its
default.
(c) If, after giving effect to any arrangements for the
purchase of the
<PAGE> 57
HALE AND DORR
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Shares of a defaulting Underwriter or Underwriters made by you or the Company
and the Selling Shareholders as provided in subsection (a) above, the number of
Shares which remains unpurchased exceeds one tenth of the total Shares to be
sold on the Closing Date, or if the Company and the Selling Shareholders shall
not exercise the right described in subsection (b) above to require the
non-defaulting Underwriters to purchase Shares of the defaulting Underwriter or
Underwriters, then this Agreement shall thereupon terminate, without liability
on the part of any non-defaulting Underwriter or the Company and the Selling
Shareholders except for the expenses to be borne by the Company and the
Underwriters as provided in Section 11 hereof and the indemnity and
contribution agreements in Section 7 hereof; but nothing herein shall relieve a
defaulting Underwriter from liability for its default.
10. EFFECTIVE DATE AND TERMINATION. (a) This Agreement
shall become effective at 1:00 p.m., St. Louis time, on the first business day
following the effective date of the Registration Statement, or at such earlier
time after the effective date of the Registration Statement as you in your
discretion shall first release the Shares for offering to the public; provided,
however, that the provisions of Section 7 and 11 shall at all times be
effective. For the purposes of this Section 10(a), the Shares shall be deemed
to have been released to the public upon release by you of
- 43 -
<PAGE> 58
the publication of a newspaper advertisement relating to the Shares or upon
release of telegrams, facsimile transmissions or letters offering the Shares
for sale to securities dealers, whichever shall first occur.
(b) This Agreement may be terminated by you at any time
before it becomes effective in accordance with Section 10(a) by notice to the
Company and the Selling Shareholders; provided, however, that the provisions of
this Section 10 and of Section 7 and Section 11 hereof shall at all times be
effective. In the event of any termination of this Agreement pursuant to
Section 9 or this Section 10(b) hereof, the Company and the Selling
Shareholders shall not then be under any liability to any Underwriter except as
provided in Section 7 or Section 11 hereof.
(c) This Agreement may be terminated by you at any time
at or prior to the Closing Date by notice to the Company and the Selling
Shareholders if any condition specified in Section 6 hereof shall not have been
satisfied on or prior to the Closing Date. Any such termination shall be
without liability of any party to any other party except as provided in
Sections 7 and 11 hereof.
(d) This Agreement also may be terminated by you, by
notice to the Company and the Selling Shareholders, as to any obligation of
the Underwriters to purchase the Option Shares, if any condition specified in
Section 6 hereof shall not have been satisfied at or prior to the Option
Closing Date or as provided in Section 9 of this Agreement.
If you terminate this Agreement as provided in Sections 10(b),
10(c) or 10(d), you shall notify the Company and the Selling Shareholders by
telephone or telegram, confirmed by letter.
11. COSTS AND EXPENSES. The Company and the Selling
Shareholders will bear and pay the costs and expenses incident to the
registration of the Shares and public offering thereof, including, without
limitation, (a) the fees and expenses of the Company's accountants and the fees
and expenses of counsel for the Company, (b) the preparation, printing,
filing, delivery and shipping of the Registration Statement, each Preliminary
Prospectus, the Prospectus and any amendments or supplements thereto (except as
otherwise expressly provided in Section 5(d) hereof) and the printing, delivery
and shipping of this Agreement, the Agreement
<PAGE> 59
HALE AND DORR
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Among Underwriters, the Selected Dealer Agreement, Underwriters' Questionnaires
and Powers of Attorney and Blue Sky Memoranda, (c) the furnishing of copies of
such documents (except as otherwise expressly provided in Section 5(d) hereof)
to the Underwriters, (d) the registration or qualification of the Shares for
offering and sale under the securities laws of the various states, including
the reasonable fees and disbursements of Underwriters' counsel relating to such
registration or qualification, (e) the fees payable to the NASD and the
Commission in connection with their review of the proposed offering of the
Shares, (f) all printing and engraving costs related to preparation of the
certificates for the Shares, including transfer agent and registrar fees, (g)
all initial transfer taxes, if any, (h) all fees and expenses relating to the
authorization of the Shares for trading on Nasdaq/NMS, (i) all travel expenses,
including air fare and accommodation expenses, of representatives of the
Company in connection with the offering of the Shares and (j) all of the other
costs and expenses incident to the performance by the Company of the
registration and offering of the Shares; provided, however, that the
Underwriters will bear and pay the fees and expenses of the Underwriters'
counsel (other than fees and disbursements relating to the registration or
qualification of the Shares for offering and sale under the securities laws of
the various states), the Underwriters' out-of-pocket expenses, and any
- 45 -
<PAGE> 60
advertising costs and expenses incurred by the Underwriters incident to the
public offering of the Shares; and provided, further, that the Selling
Shareholders will bear and pay the fees and expenses of the Selling
Shareholders' counsel.
If this Agreement is terminated by you in accordance with the
provisions of Section 10(c), the Company shall reimburse the Underwriters for
all of their out-of-pocket expenses, including the reasonable fees and
disbursements of counsel to the Underwriters.
12. DEFAULT OF SELLING SHAREHOLDERS. Failure or refusal
by any of the Selling Shareholders to sell and deliver on the Closing Date the
Shares agreed to be sold and delivered by such Selling Shareholder shall in no
manner relieve the other Selling Shareholders or the Company of their
respective obligations under this Agreement. If any Selling Shareholder should
fail or refuse to sell and deliver his Shares, the remaining Selling
Shareholders shall have the right hereby granted to increase, pro rata or
otherwise, the number of Shares to be sold by them hereunder to the total
number of Shares to be sold by all Selling Shareholders as set forth in
Schedule I. If the remaining Selling Shareholders do not fully exercise the
right to increase the number of Shares to be sold by them, the Underwriters, at
your option, will have the right to elect to purchase or not to purchase the
Shares to be sold by the Company and the remaining Selling Shareholders. In
the event the Underwriters purchase the Shares of the Company and such other
Selling Shareholders pursuant to this Section 12, the Closing Date shall be
postponed for a period of not more than seven days in order that the
Registration Statement and Prospectus or other documents may be amended or
supplemented if and to the extent necessary under the provisions of the Act and
the Rules and Regulations or under the securities laws of any jurisdiction. If
the Underwriters determine not to purchase the Shares of the Company and the
other Selling Shareholders, if any, this Agreement shall terminate and neither
the Company nor the Underwriters nor any other Selling Shareholder shall be
under any obligation under this Agreement except as provided in Section 7
hereof and except for the obligation of the Company to pay for such expenses as
are set forth in Section 11 hereof. Nothing herein shall relieve a defaulting
Selling Shareholder from liability for his default or from liability under
Section 7 hereof or for expenses imposed by this Agreement upon such Selling
Shareholder.
<PAGE> 61
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13. NOTICES. All notices or communications hereunder,
except as herein otherwise specifically provided, shall be in writing and if
sent to the Underwriters shall be mailed, delivered, sent by facsimile
transmission, or telegraphed and confirmed c/o A.G. Edwards & Sons, Inc. at One
North Jefferson Avenue, St. Louis, Missouri 63103, Attention: Syndicate,
facsimile number (314) 289-7387, or if sent to the Company shall be mailed,
delivered, sent by facsimile transmission, or telegraphed and confirmed to the
Company at 10089 Lee Jackson Highway, Fairfax, Virginia 22030, Attention:
George A. Robinson, facsimile number (703) 934-8807, or if sent to any Selling
Shareholder shall be mailed, delivered, sent by facsimile transmission or
telegraphed and confirmed to such Selling Shareholder, c/o the Attorney-in-Fact
at _______________. Notice to any Underwriter pursuant to Section 7 shall be
mailed, delivered, sent by facsimile transmission, or telegraphed and confirmed
to such Underwriter's address as it appears in the Underwriters' Questionnaire
furnished in connection with the offering of the Shares or as otherwise
furnished to the Company and the Selling Shareholder.
14. PARTIES. This Agreement shall inure to the benefit
of and be binding upon the Underwriters and the Selling Shareholders, and the
Company and their respective successors and assigns. Nothing expressed or
mentioned in this Agreement is intended or shall be construed to give any
person, corporation or other entity, other
- 47 -
<PAGE> 62
than the parties hereto and their respective successors and assigns and the
controlling persons, officers and directors referred to in Section 7, any legal
or equitable right, remedy or claim under or in respect of this Agreement or
any provision herein contained; this Agreement and all conditions and
provisions hereof being intended to be and being for the sole and exclusive
benefit of the parties hereto and their respective successors and assigns and
said controlling persons and said officers and directors, and for the benefit
of no other person, corporation or other entity. No purchaser of any of the
Shares from any Underwriter shall be construed a successor or assign by reason
merely of such purchase.
In all dealings with the Company and the Selling Shareholders
under this Agreement you shall act on behalf of each of the several
Underwriters, the Company, and the Selling Shareholders shall be entitled to
act and rely upon any statement, request, notice or agreement on behalf of the
Underwriters, made or given by you on behalf of the Underwriters, as if the
same shall have been made or given in writing by the Underwriters.
15. COUNTERPARTS. This Agreement may be executed by any
one or more of the parties hereto in any number of counterparts, each of which
shall be deemed to be an original, but all such counterparts shall together
constitute one and the same instrument.
16. PRONOUNS. Whenever a pronoun of any gender or number
is used herein, it shall, where appropriate, be deemed to include any other
gender and number.
17. APPLICABLE LAW. This Agreement shall be governed by,
and construed in accordance with, the laws of the State of Missouri.
<PAGE> 63
HALE AND DORR
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If the foregoing is in accordance with your understanding,
please so indicate in the space provided below for that purpose, whereupon this
letter shall constitute a binding agreement among the Company, each of the
Selling Shareholders and the Underwriters.
-----------------------------------
By:
--------------------------------
Title:
-----------------------------
Selling Shareholders Named in
Schedule I Hereto
By:
--------------------------------
Attorney-in-Fact
- 49 -
<PAGE> 64
Accepted in St. Louis,
Missouri as of the date
first above written, on
behalf of ourselves and each
of the several Underwriters
named in Schedule II hereto.
A.G. EDWARDS & SONS, INC.
By:
----------------------------
Title:
-------------------------
<PAGE> 65
SCHEDULE I
<TABLE>
<CAPTION>
Number of
Selling Shareholders Firm Shares
- -------------------- -----------
<S> <C>
George A. and Barbara Robinson
Charles G. and Helen Martinache
Thomas A. and Margaret M. Costello
William and Diane Hoffman
Terrence E. and Diane M. Hileman, Jr.
Alvin L. Franson
Sharon K. Angelone
-------
Total 650,000
</TABLE>
- 1 -
<PAGE> 66
SCHEDULE II
<TABLE>
<CAPTION>
Name Number of Shares
- ---- ----------------
<S> <C>
A.G. Edwards & Sons, Inc. ..............
Ferris, Baker Watts, Incorporated ......
---------
Total ................................... 2,500,000
</TABLE>
- 1 -
<PAGE> 67
SCHEDULE III
Pursuant to Section 6(g) of the Underwriting Agreement, Arthur
Andersen LLP shall furnish letters to the Underwriters to the effect that:
(i) They are independent certified public
accountants with respect to the Company and its subsidiary within the meaning
of the Act and the applicable Rules and Regulations thereunder.
(ii) In their opinion, the financial statements
and any supplementary financial information and schedules audited (and, if
applicable, prospective financial statements and/or pro forma financial
information examined) by them and included in the Prospectus or the
Registration Statement comply as to form in all material respects with the
applicable accounting requirements of the Act and the applicable Rules and
Regulations thereunder; and, if applicable, they have made a review in
accordance with standards established by the American Institute of Certified
Public Accountants of the unaudited consolidated interim financial statements,
selected financial data, pro forma financial information, prospective financial
statements and/or condensed financial statements derived from audited financial
statements of the Company for the periods specified in such letter, as
indicated in their reports thereon, copies of which have been furnished to the
Representatives of the Underwriters (the "Representatives").
(iii) On the basis of limited procedures, not
constituting an audit in accordance with generally accepted auditing standards,
consisting of a reading of the unaudited financial statements and other
information referred to below, performing the procedures specified by the AICPA
for a review of interim financial information as discussed in SAS No. 71,
Interim Financial Information, on the latest available interim financial
statements of the Company and its subsidiary, inspection of the minute books of
the Company and its subsidiary since the date of the latest audited financial
statements included in the
<PAGE> 68
Prospectus, inquiries of officials of the Company and its subsidiary
responsible for financial and accounting matters and such other inquiries and
procedures as may be specified in such letter, nothing came to their attention
that caused them to believe that:
(A) any material modifications should be made to
the unaudited statements of consolidated income, statements of
consolidated financial position and statements of consolidated
cash flows included in the Prospectus for them to be in
conformity with generally accepted accounting principles, or
the unaudited statements of consolidated income, statements of
consolidated financial position and statements of consolidated
cash flows included in the Prospectus do not comply as to form
in all material respects with the applicable accounting
requirements of the Act and the related published Rules and
Regulations thereunder.
(B) any other unaudited income statement
data and balance sheet items included in the
Prospectus do not agree with the corresponding items
in the unaudited consolidated financial statements
from which such data and items were derived, and any
such unaudited data and items were not determined on
a basis substantially consistent with the basis for
the corresponding amounts in the audited consolidated
financial statements included in the Prospectus.
(C) the unaudited financial statements which were
not included in the Prospectus but from which were derived any
unaudited condensed financial statements referred to in Clause
(A) and any unaudited income statement data and balance sheet
items included in the Prospectus and referred to in Clause (B)
were not determined on a basis substantially consistent with
the basis for the audited consolidated financial statements
included in the Prospectus.
(D) any unaudited pro forma consolidated
condensed financial statements included in the
Prospectus do not comply as to form in all material
respects with the applicable accounting requirements
of the Act and the published rules and regulations
thereunder or the pro forma adjustments have not been
<PAGE> 69
properly applied to the historical amounts in the
compilation of those statements.
(E) as of a specified date not more than five
days prior to the date of such letter, there have been any
changes in the consolidated capital stock or any increase in
the consolidated long-term debt of the Company and its
subsidiaries, or any decreases in consolidated working
capital, net current assets or net assets or other items
specified by the Representative, or any changes in any items
specified by the Representative, in each case as compared with
amounts shown in the latest balance sheet included in the
Prospectus, except in each case for changes, increases or
decreases which the Prospectus discloses have occurred or may
occur or which are described in such letter.
(F) for the period from the date of the
latest financial statements included in the
Prospectus to the specified date referred to in
Clause (E) there were any decreases in consolidated
net revenues or operating profit or the total or per
share amounts of consolidated net income or any other
changes in any other items specified by the
Representative, in each case as compared with the
comparable period of the preceding year and with any
other period of corresponding length specified by the
Representative, except in each case for changes,
decreases or increases which the Prospectus discloses
have occurred or may occur or which are described in
such letter.
(iv) In addition to the audit referred to in their
report(s) included in the Prospectus and the limited procedures, inspection of
minute books, inquiries and other procedures referred to in paragraph (iii)
above, they have carried out certain specified procedures, not constituting an
audit in accordance with generally accepted auditing standards, with respect to
certain amounts, percentages and financial information specified by the
Representatives, which are derived from the general accounting records of the
Company and its subsidiary for
<PAGE> 70
the periods covered by their reports and any interim or other periods since the
latest period covered by their reports, which appear in the Prospectus, or in
Part II of, or in exhibits and schedules to, the Registration Statement
specified by the Representative, and have compared certain of such amounts,
percentages and financial information with the accounting records of the
Company and its subsidiaries and have found them to be in agreement.
<PAGE> 1
EXHIBIT 4.1
<TABLE>
<S> <C>
NUMBER SHARES
C
SEE REVERSE FOR
CERTAIN DEFINITIONS
CUSIP 00750X 10 9 [ADVANCED COMMUNICATION SYSTEMS, INC. LOGO]
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
ADVANCED COMMUNICATION SYSTEMS, INC.
TOTAL AUTHORIZED ISSUE 41,000,000 SHARES
40,000,000 SHARES $.01 PAR VALUE EACH 1,000,000 SHARES $.01 PAR VALUE EACH
COMMON STOCK PREFERRED STOCK
</TABLE>
THIS IS TO CERTIFY THAT _____________________________________ IS THE OWNER OF
________________________________________________________________________________
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK OF
ADVANCED COMMUNICATION SYSTEMS, INC.
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized Attorney upon surrender of this Certificate properly
endorsed. WITNESS, the seal of the Corporation and the signatures of its duly
authorized officers.
DATED
- ------------------------------ -------------------------------
SECRETARY PRESIDENT
<PAGE> 2
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT -....... Custodian.........
(Cust) (Minor)
TEN ENT - as tenants by the entireties under Uniform Gifts to Minors
Act .........................
JT TEN - as joint tenants with right of (State)
survivorship and not as tenants
in common
Additional abbreviations may also be used though not in the above list
</TABLE>
For value received _____ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING POSTAL ZIP CODE OF
ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares
- -------------------------------------------------------------------------
represented by the within Certificate, and do hereby irrevocably constitute and
appoint
Attorney
- ----------------------------------------------------------------------
to transfer the said Shares on the books of the within named Corporation with
full power of substitution in the premises.
Dated 19
------------------- -------
In presence of
------------------------------------------
- ---------------------------------
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT ALTERATION
OR ENLARGEMENT OR ANY CHANGE WHATEVER.
<PAGE> 1
EXHIBIT 10.4
ADVANCED COMMUNICATION SYSTEMS, INC.
1997 STOCK INCENTIVE PLAN
Section 1. Purpose
The purpose of this 1997 Stock Incentive Plan (the "Plan") is
to advance the interests of Advanced Communication Systems, Inc. by enhancing
its ability to attract and retain directors, executive officers and other key
employees, consultants and others who are in a position to contribute to the
Company's future growth and success.
Section 2. Definitions
"Award" means any Option, Stock Appreciation Right,
Performance Share, Restricted Stock or Unrestricted Stock awarded under the
Plan.
"Board" means the Board of Directors of the Company.
"Code" means the Internal Revenue Code of 1986, as amended
from time to time.
"Committee" means a committee of not less than two members of
the Board appointed by the Board to administer the Plan, provided that if and
when the Common Stock is registered under Section 12 of the Securities Exchange
Act of 1934, each member of the Committee shall be a "non-employee director"
within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934
("Rule 16b-3").
"Common Stock" or "Stock" means the Common Stock, $.01 par
value per share, of the Company.
"Company" means Advanced Communication Systems, Inc. and,
except where the content otherwise requires, all present and future
subsidiaries of the Company as defined in Sections 424(f) of the Code.
"Designated Beneficiary" means the beneficiary designated by a
Participant, in a manner determined by the Board, to receive amounts due or to
exercise rights of the Participant in the event of the Participant's death. In
the absence of an effective designation by a Participant, Designated
Beneficiary shall mean the Participant's estate.
"Fair Market Value" means, with respect to Common Stock or any
other property, the fair market value of such property as determined by the
Board in good faith or in the manner established by the Board from time to
time.
"Incentive Stock Option" means an option to purchase shares of
Common Stock awarded to a Participant under Section 6 which is intended to meet
the requirements of Section 422 of the Code or any successor provision.
<PAGE> 2
"Nonstatutory Stock Option" means an option to purchase shares
of Common Stock awarded to a Participant under Section 6 which is not intended
to be an Incentive Stock Option.
"Option" means an Incentive Stock Option or a Nonstatutory
Stock Option.
"Outside Director" means a non-employee director of the
Company.
"Participant" means a person selected by the Board to receive
an Award under the Plan.
"Performance Shares" mean shares of Common Stock which may be
earned by the achievement of performance goals awarded to a Participant under
Section 8.
"Reporting Person" means a person subject to Section 16 of the
Securities Exchange Act of 1934 or any successor provision.
"Restricted Period" means the period of time selected by the
Board during which shares subject to a Restricted Stock Award may be
repurchased by or forfeited to the Company.
"Restricted Stock" means shares of Common Stock awarded to a
Participant under Section 9.
"Stock Appreciation Right" or "SAR" means a right to receive
any excess in Fair Market Value of shares of Common Stock over the exercise
price awarded to a Participant under Section 7.
"Unrestricted Stock" means shares of Common Stock awarded to a
Participant under Section 9(c).
Section 3. Administration
The Plan will be administered by the Board. The Board shall
have authority to make Awards and to adopt, amend and repeal such
administrative rules, guidelines and practices relating to the Plan as it shall
deem advisable from time to time, and to interpret the provisions of the Plan.
The Board's decisions shall be final and binding. No member of the Board shall
be liable for any action or determination relating to the Plan made in good
faith. To the extent permitted by applicable law, the Board may delegate to
one or more executive officers of the Company the power to make Awards to
Participants who are not Reporting Persons and to make all determinations under
the Plan with respect thereto, provided that the Board shall fix the maximum
amount of such Awards to be made by such executive officers and a maximum
amount for any one Participant. To the extent permitted by applicable law, the
Board may appoint a Committee to administer the Plan and, in such event, all
references to the Board in the Plan shall mean such Committee or the Board.
All decisions by the Board or the Committee pursuant to the Plan shall be final
and binding on all persons having or claiming any interest in the Plan or in
any Award.
2
<PAGE> 3
Section 4. Eligibility
All of the Company's employees, officers, directors,
consultants and advisors who are expected to contribute to the Company's future
growth and success, other than persons who have irrevocably elected not to be
eligible, are eligible to be Participants in the Plan. Incentive Stock Options
may be awarded only to persons eligible to receive Incentive Stock Options
under the Code.
Section 5. Stock Available for Awards
(a) Subject to adjustment under subsection (b) below,
Awards may be made under the Plan for up to 450,000 shares of Common Stock. If
any Award in respect of shares of Common Stock expires or is terminated
unexercised or is forfeited, in whole or in part, for any reason, the shares
subject to such Award, to the extent of such expiration, termination or
forfeiture, shall again be available for award under the Plan, subject,
however, in the case of Incentive Stock Options, to any limitation required
under the Code. If shares of Stock are tendered to the Company in payment of
the exercise price of an Option pursuant to Section 6(a)(iv) or in satisfaction
of tax withholding requirements pursuant to Section 10(g), such tendered shares
shall again be available for subsequent Awards under the Plan; provided,
however, that (i) in no event shall the total number of shares issued pursuant
to the exercise of Incentive Stock Options under the Plan, on a cumulative
basis, exceed the maximum number of shares authorized for issuance under the
Plan exclusive of shares made available for issuance pursuant to this sentence
and (ii) shares made available for issuance pursuant to this sentence shall not
be available for Awards to Reporting Persons. Shares issued under the Plan may
consist in whole or in part of authorized but unissued shares or treasury
shares.
(b) If the Board, in its sole discretion, determines that
any stock dividend, extraordinary cash dividend, recapitalization,
reorganization, merger, consolidation, split-up, spin-off, combination or other
similar transaction affects the Common Stock such that an adjustment is
required in order to preserve the benefits or potential benefits intended to be
made available under the Plan, then the Board, subject, in the case of
Incentive Stock Options, to any limitation required under the Code, shall
equitably adjust any or all of (i) the number and kind of shares in respect of
which Awards may be made under the Plan, (ii) the number and kind of shares
subject to outstanding Awards, and (iii) the award, exercise or conversion
price with respect to any of the foregoing, and if considered appropriate, the
Board may make provision for a cash payment with respect to an outstanding
Award, provided that the number of shares subject to any Award shall always be
a whole number.
(c) The Board may grant Awards under the Plan in
substitution for stock and stock based awards held by employees of another
corporation who concurrently become employees of the Company as a result of a
merger or consolidation of the employing corporation with the Company or a
Subsidiary or the acquisition by the Company or a subsidiary of property or
stock of the employing corporation. The substitute Awards shall be granted on
such terms and conditions as the Board considers appropriate under the
circumstances.
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Section 6. Stock Options
(a) General.
(i) Subject to the provisions of the Plan, the Board may
award Incentive Stock Options and Nonstatutory Stock Options, and determine the
number of shares to be covered by each Option, the option price therefor and
the conditions and limitations applicable to the exercise of the Option. The
terms and conditions of Incentive Stock Options shall be subject to and comply
with Section 422 of the Code, or any successor provision, and any regulations
thereunder.
(ii) The Board shall establish the exercise price at the
time each Option is awarded. In the case of Incentive Stock Options, such
price shall not be less than 100% of the Fair Market Value of the Common Stock
on the date of award.
(iii) Each Option shall be exercisable at such times and
subject to such terms and conditions as the Board may specify in the applicable
Award or thereafter. The Board may impose such conditions with respect to the
exercise of Options, including conditions relating to applicable federal or
state securities laws, as it considers necessary or advisable.
(iv) Options granted under the Plan may provide for the
payment of the exercise price by delivery of cash or check in an amount equal
to the exercise price of such Options or, to the extent permitted by the Board
at or after the award of the Option, by (A) delivery of shares of Common Stock
owned by the optionee for at least six months (or such shorter period as is
approved by the Board), valued at their Fair Market Value, (B) delivery of a
promissory note of the optionee to the Company on terms determined by the
Board, (C) delivery of an irrevocable undertaking by a broker to deliver
promptly to the Company sufficient funds to pay the exercise price or delivery
of irrevocable instructions to a broker to deliver promptly to the Company cash
or a check sufficient to pay the exercise price, (D) payment of such other
lawful consideration as the Board may determine, or (E) any combination of the
foregoing.
(v) The Board may provide for the automatic award of an
Option upon the delivery of shares to the Company in payment of the exercise
price of an Option for up to the number of shares so delivered.
(vi) The Board may at any time accelerate the time at
which all or any part of an Option may be exercised.
(vii) For all purposes of the Plan and any Option granted
hereunder, "employment" shall be defined in accordance with the provisions of
Section 1.421-7(h) of the Income Tax Regulations (or any successor
regulations).
(b) Incentive Stock Options.
Options granted under the Plan which are intended to be
Incentive Stock Options shall be subject to the following additional terms and
conditions:
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(i) All Incentive Stock Options granted under the
Plan shall, at the time of grant, be specifically designated as such
in the option agreement covering such Incentive Stock Options. The
Option exercise period shall not exceed ten years from the date of
grant.
(ii) If any employee to whom an Incentive Stock
Option is to be granted under the Plan is, at the time of the grant of
such option, the owner of stock possessing more than 10% of the total
combined voting power of all (after taking into account the
attribution of Section 424(b) and of the Code), then the following
special provisions shall be applicable to the Incentive Stock Option
granted to such individual:
(x) The purchase price per share of the
Common Stock subject to such Incentive Stock Option
shall not be less than 110% of the Fair Market value
of one share of Common Stock at the time of grant;
and
(y) The option exercise period shall
not exceed five years from the date of grant.
(iii) For so long as the Code shall so provide,
options granted to any employee under the Plan (and any other
incentive stock option plans of the Company, if any) which are
intended to constitute Incentive Stock Options shall not constitute
Incentive Stock Options to the extent that such options, in the
aggregate, become exercisable for the first time in any one calendar
year for shares of Common Stock with an aggregate Fair Market Value
(determined as of the respective date or dates of grant) of more than
$100,000.
(iv) No Incentive Stock Option may be exercised
unless, at the time of such exercise, the Participant is, and has been
continuously since the date of grant of his or her Option, employed by
the Company, except that:
(x) an Incentive Stock Option may be
exercised within the period of three months after the
date the Participant ceases to be an employee of the
Company (or within such lesser period as may be
specified in the applicable option agreement),
provided that the agreement with respect to such
Option may designate a longer exercise period and
that the exercise after such three-month period shall
be treated as the exercise of a Nonstatutory Stock
Option under the Plan;
(y) if the Participant dies while in the
employ of the Company, or within three months after
the Participant ceases to be such an employee, the
Incentive Stock Option may be exercised by the
Participant's Designated Beneficiary within the
period of one year after the date of death (or within
such lesser period as may be specified in the
applicable Option agreement); and
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(z) if the Participant becomes disabled
(within the meaning of Section 22(e)(3) of the Code
or any successor provision thereto) while in the
employ of the Company, the Incentive Stock Option may
be exercised within the period of one year after the
date of disability (or within such lesser period as
may be specified in the Option agreement).
Notwithstanding the foregoing provisions, no Incentive Stock Option
may be exercised after its expiration date.
(v) Incentive Stock Options shall not be
assignable or transferable by the person to whom they are granted,
either voluntarily or by operation of law, except by will or the laws
of descent and distribution, and, during the life of the optionee,
shall be exercisable only by the optionee.
Section 7. Stock Appreciation Rights
(a) The Board may grant Stock Appreciation Rights
entitling recipients on exercise of the Stock Appreciation Right to receive an
amount, in cash or Stock or a combination thereof (such form to be determined
by the Board), determined in whole or in part by reference to appreciation in
the Fair Market Value of the Stock between the date of the Award and the
exercise of the Award. A Stock Appreciation Right shall entitle the
Participant to receive, with respect to each share of Stock as to which the
Stock Appreciation Right is exercised, the excess of the share's Fair Market
Value on the date of exercise over its Fair Market Value on the date the Stock
Appreciation Right was granted. The Board may also grant Stock Appreciation
Rights that provide that, following a change in control of the Company (as
defined by the Board at the time of the Award), the holder of such Stock
Appreciation Right will be entitled to receive, with respect to each share of
Stock subject to the Stock Appreciation Right, an amount equal to the excess of
a specified value (which may include an average of values) for a share of Stock
during a period preceding such change in control over the Fair Market Value of
a share of Stock on the date the Stock Appreciation Right was granted.
(b) Stock Appreciation Rights may be granted in tandem
with, or independently of, Options granted under the Plan. A Stock
Appreciation Right granted in tandem with an Option which is not an Incentive
Stock Option may be granted either at or after the time the Option is granted.
A Stock Appreciation Right granted in tandem with an Incentive Stock Option may
be granted only at the time the Option is granted.
(c) When Stock Appreciation Rights are granted in tandem
with Options, the following provisions will apply:
(i) The Stock Appreciation Right will be
exercisable only at such time or times, and to the extent, that the
related Option is exercisable and will be exercisable in accordance
with the procedure required for exercise of the related Option.
(ii) The Stock Appreciation Right will terminate
and no longer be exercisable upon the termination or exercise of the
related Option, except that a Stock
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Appreciation Right granted with respect to less than the full number
of shares covered by an Option will not be reduced until the number of
shares as to which the related Option has been exercised or has
terminated exceeds the number of shares not covered by the Stock
Appreciation Right.
(iii) The Option will terminate and no longer be
exercisable upon the exercise of the related Stock Appreciation Right.
(iv) The Stock Appreciation Right will be
transferable only with the related Option.
(v) A Stock Appreciation Right granted in tandem
with an Incentive Stock Option may be exercised only when the market
price of the Stock subject to the Option exceeds the exercise price of
such option.
(d) A Stock Appreciation Right not granted in tandem
with an Option will become exercisable at such time or times, and on such
conditions, as the Board may specify.
(e) The Board may at any time accelerate the time at
which all or any part of the Stock Appreciation Right may be exercised.
Section 8. Performance Shares
(a) The Board may make Performance Share Awards entitling
recipients to acquire shares of Stock upon the attainment of specified
performance goals. The Board may make Performance Share Awards independent of
or in connection with the granting of any other Award under the Plan. The
Board in its sole discretion shall determine the performance goals applicable
under each such Award, the periods during which performance is to be measured,
and all other limitations and conditions applicable to the awarded Performance
Shares; provided, however, that the Board may rely on the performance goals and
other standards applicable to other performance plans of the Company in setting
the standards for Performance Share Awards under the Plan.
(b) Performance Share Awards and all rights with respect
to such Awards may not be sold, assigned, transferred, pledged or otherwise
encumbered.
(c) A Participant receiving a Performance Share Award
shall have the rights of a stockholder only as to shares actually received by
the Participant under the Plan and not with respect to shares subject to an
Award but not actually received by the Participant. A Participant shall be
entitled to receive a stock certificate evidencing the acquisition of shares of
Stock under a Performance Share Award only upon satisfaction of all conditions
specified in the agreement evidencing the Performance Share Award.
(d) The Board may at any time accelerate or waive any or
all of the goals, restrictions or conditions imposed under any Performance
Share Award.
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Section 9. Restricted and Unrestricted Stock
(a) The Board may grant Restricted Stock Awards entitling
recipients to acquire shares of Stock, subject to the right of the Company to
repurchase all or part of such shares at their purchase price (or to require
forfeiture of such shares if purchased at no cost) from the recipient in the
event that conditions specified by the Board in the applicable Award are not
satisfied prior to the end of the applicable Restricted Period or Restricted
Periods established by the Board for such Award. Conditions for repurchase (or
forfeiture) may be based on continuing employment or service or achievement of
pre-established performance or other goals and objectives.
(b) Shares of Restricted Stock may not be sold, assigned,
transferred, pledged or otherwise encumbered, except as permitted by the Board,
during the applicable Restricted Period. Shares of Restricted Stock shall be
evidenced in such manner as the Board may determine. Any certificates issued
in respect of shares of Restricted Stock shall be registered in the name of the
Participant and, unless otherwise determined by the Board, deposited by the
Participant, together with a stock power endorsed in blank, with the Company
(or its designee). At the expiration of the Restricted Period, the Company
(or such designee) shall deliver such certificates to the Participant or if the
Participant has died, to the Participant's Designated Beneficiary.
(c) The Board may, in its sole discretion, grant (or sell
at a purchase price determined by the Board, which shall not be lower than 85%
of Fair Market Value on the date of sale) to Participants shares of Stock free
of any restrictions under the Plan ("Unrestricted Stock").
(d) The purchase price for each share of Restricted Stock
and Unrestricted Stock shall be determined by the Board of Directors and may
not be less than the par value of the Common Stock. Such purchase price may be
paid in the form of past services or such other lawful consideration as is
determined by the Board.
(e) The Board may at any time accelerate the expiration
of the Restricted Period applicable to all, or any particular, outstanding
shares of Restricted Stock.
Section 10. General Provisions Applicable to Awards
(a) Applicability of Rule 16b-3. Those provisions of the
Plan which make an express reference to Rule 16b-3 shall apply to the Company
only at such time as the Company's Common Stock is registered under the
Securities Exchange Act of 1934, or any successor provision, and then only to
Reporting Persons.
(b) Reporting Person Limitations. Notwithstanding any
other provision of the Plan, to the extent required to qualify for the
exemption provided by Rule 16b-3, (i) any Option, SAR, Performance Share Award
or other similar right related to an equity security issued under the Plan to a
Reporting Person shall not be transferable other than by will or the laws of
descent and distribution or pursuant to a qualified domestic relations order as
defined by the Code or Title I or the Employee Retirement Income Security Act
("ERISA"), or the rules thereunder, and
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shall be exercisable during the Participant's lifetime only by the Participant
or the Participant's guardian or legal representative, and (ii) the selection
of a Reporting Person as a Participant and the terms of his or her Award shall
be determined only in accordance with the applicable provisions of Rule 16b-3.
(c) Documentation. Each Award under the Plan shall be
evidenced by an instrument delivered to the Participant specifying the terms
and conditions thereof and containing such other terms and conditions not
inconsistent with the provisions of the Plan as the Board considers necessary
or advisable. Such instruments may be in the form of agreements to be executed
by both the Company and the Participant, or certificates, letters or similar
documents, acceptance of which will evidence agreement to the terms thereof and
of this Plan.
(d) Board Discretion. Each type of Award may be made
alone, in addition to or in relation to any other type of Award. The terms of
each type of Award need not be identical, and the Board need not treat
Participants uniformly. Except as otherwise provided by the Plan or a
particular Award, any determination with respect to an Award may be made by
the Board at the time of award or at any time thereafter.
(e) Termination of Status. Subject to the provisions of
Section 6(b)(iv), the Committee shall determine the effect on an Award of the
disability, death, retirement, authorized leave of absence or other termination
of employment or other status of a Participant and the extent to which, and the
period during which, the Participant's legal representative, guardian or
Designated Beneficiary may exercise rights under such Award.
(f) Adjustments. If at any time the shares of Common
Stock subject the Plan is changed into or exchanged for a different number or
kind of shares or securities, as the result of any one or more reorganizations,
recapitalizations, stock splits, reverse stock splits, stock dividends or
similar events, other than those events described by Section 10(g), an
appropriate adjustment shall be made in the number, exercise or sale price
and/or type of shares or securities for which Options, Performance Shares or
Stock Appreciation Rights may thereafter be granted and Restricted Stock or
Unrestricted Stock may thereafter be sold or granted under the Plan. The
Committee also shall designate the appropriate changes that shall be made in
Options, Performance Shares or Stock Appreciation Rights, or rights to purchase
Restricted Stock or Unrestricted Stock under the Plan, and the Committee may do
so either at the time of the Option, Performance Share or Stock Appreciation
Right is granted or Restricted Stock or Unrestricted Stock is offered or at
that time of the event causing the adjustment. Any such adjustment in
outstanding Options shall be made without changing the aggregate exercise price
applicable to the unexercised portions of such Options. Any such adjustments
in outstanding rights to purchase Restricted Stock or Unrestricted Stock shall
be made without changing the aggregate purchase price of such Restricted Stock
or Unrestricted Stock.
(g) Mergers, Etc. In the event of a consolidation,
merger or other reorganization in which all of the outstanding shares of Common
Stock are exchanged for securities, cash or other property of any other
corporation or business entity (an "Acquisition"), or in the event of a
liquidation of the Company, the Board of Directors of the Company, or the board
of directors of any corporation assuming the obligations of the Company, may,
in its
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discretion, take any one or more of the following actions as to outstanding
Awards: (i) provide that such Awards shall be assumed, or substantially
equivalent Awards shall be substituted, by the acquiring or succeeding
corporation (or an affiliate thereof) on such terms as the Board determines to
be appropriate, (ii) upon written notice to Participants, provide that all
unexercised Options or SARs will terminate immediately prior to the
consummation of such transaction unless exercised by the Participant within a
specified period following the date of such notice, (iii) in the event of an
Acquisition under the terms of which holders of the Common Stock of the Company
will receive upon consummation thereof a cash payment for each share
surrendered in the Acquisition (the "Acquisition Price"), make or provide for
a cash payment to Participants equal to the difference between (A) the
Acquisition Price times the number of shares of Common Stock subject to
outstanding Options or SARs (to the extent then exercisable at prices not in
excess of the Acquisition Price) and (B) the aggregate exercise price of all
such outstanding Options or SARs in exchange for the termination of such
Options and SARs, and (iv) provide that all or any outstanding Awards shall
become exercisable or realizable in full prior to the effective date of such
Acquisition.
(h) Withholding. The Participant shall pay to the
Company, or make provision satisfactory to the Board for payment of, any taxes
required by law to be withheld in respect of Awards under the Plan no later
than the date of the event creating the tax liability. In the Board's
discretion, and subject to such conditions as the Board may establish, such tax
obligations may be paid in whole or in part in shares of Common Stock,
including shares retained from the Award creating the tax obligation, valued at
their Fair Market Value. The Company may, to the extent permitted by law,
deduct any such tax obligations from any payment of any kind otherwise due to
the Participant.
(i) Foreign Nationals. Awards may be made to
Participants who are foreign nationals or employed outside the United States on
such terms and conditions different from those specified in the Plan as the
Board considers necessary or advisable to achieve the purposes of the Plan or
comply with applicable laws.
(j) Amendment of Award. The Board may amend, modify or
terminate any outstanding Award, including substituting therefor another Award
of the same or a different type, changing the date of exercise or realization
and converting an Incentive Stock Option to a Nonstatutory Stock Option,
provided that the Participant's consent to such action shall be required unless
the Board determines that the action, taking into account any related action,
would not materially and adversely affect the Participant.
(k) Cancellation and New Grant of Options. The Board of
Directors shall have the authority to effect, at any time and from time to
time, with the consent of the affected optionees, (i) the cancellation of any
or all outstanding Options under the Plan and the grant in substitution
therefor of new Options under the Plan covering the same or different numbers
of shares of Common Stock and having an option exercise price per share which
may be lower or higher than the exercise price per share of the canceled
Options or (ii) the amendment of the terms of any and all outstanding Options
under the Plan to provide an option exercise price per share which is higher or
lower than the then current exercise price per share of such outstanding
Options.
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(l) Conditions on Delivery of Stock. The Company will
not be obligated to deliver any shares of Stock pursuant to the Plan or to
remove restrictions from shares previously delivered under the Plan (i) until
all conditions of the Award have been satisfied or removed, (ii) until, in the
opinion of the Company's counsel, all applicable federal and state laws and
regulations have been complied with, (iii) if the outstanding Stock is at the
time listed on any stock exchange, until the shares to be delivered have been
listed or authorized to be listed on such exchange upon official notice of
notice of issuance, and (iv) until all other legal matters in connection with
the issuance and delivery of such shares have been approved by the Company's
counsel. If the sale of Stock has not been registered under the Securities Act
of 1933, as amended, the Company may require, as a condition to exercise of the
Award, such representations or agreements as the Company may consider
appropriate to avoid violation of such Act and may require that the
certificates evidencing such Stock bear an appropriate legend restricting
transfer.
Section 11. Terms, Conditions and Form of Outside Directors Options
(a) The Board may provide for options to be granted to
Outside Directors in consideration for their service to the Company. The Board
shall determine to which Outside Directors options shall be granted hereunder
(any such person, a "Participant"). The Board shall specify the number of
shares subject to each option grant provided for under this Section 11, or the
formula pursuant to which such number shall be determined, the Participants to
receive any such grant, the date of grant and the vesting and expiration terms
applicable to such options. The grant of options hereunder may, but need not,
be conditioned on the Outside Director electing to forego his right to all or
any part of his or her cash retainer or other fees. The maximum number of
shares of Common Stock subject to options granted under this Plan during any
calendar year to any person on account of his or her service as an Outside
Director, other than options that an Outside Director has elected to receive in
lieu of cash retainer or other fees, shall not exceed 20,000 shares. Each
option granted under this Section to Outside Directors shall be evidenced by a
written agreement in such form as the Board of Directors shall from time to
time approve, which agreements shall comply with and be subject to the terms
and conditions set forth in this Section 11.
(b) Option Exercise Price. The option exercise price per
share for each option granted under this Section 11 shall equal (i) the closing
price per share of the Company's Common Stock on the principal exchange on
which the Common Stock is listed, on the date of grant (or if no such price is
reported on such date, such price as reported on the nearest preceding date on
which such price is reported), (ii) if the Common Stock is not listed on an
exchange, the bid price per share of Common Stock at the close of trading on
the date of the grant, or (iii) if the Common Stock is not listed on an
exchange or otherwise publicly traded on the date of such grant, the fair
market value of the Company's Common Stock as last determined by the Board of
Directors of the Company.
(c) Options Non-Transferable. Each option granted under
the Plan by its terms shall not be transferable by the optionee otherwise than
by will or by the laws of descent and distribution, or pursuant to a qualified
domestic relations order (as defined in Section 414(p) of the Code) and shall
be exercised during the lifetime of the optionee only by such optionee.
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(e) Exercise Period. Each option may be exercised at any
time and from time to time, in whole or in part, prior to the fifth anniversary
of the date of grant, except that no option may be exercised more than three
months after the optionee ceases to serve as a director of the Company for any
reason.
(f) Exercise Procedure. Options may be exercised only by
written notice to the Company at its principal office accompanied by payment of
the full consideration for the shares as to which they are exercised.
(g) Payment of Purchase Price. Payment of the exercise
price may be made, at the election of the optionee, (i) by delivery of cash or
a check to the order of the Company in an amount equal to the exercise price,
(ii) by delivery to the Company of shares of Common Stock of the Company
already owned and held by the optionee for at least twelve months and having a
fair market value equal in amount to the exercise price of the options being
exercised, or (iii) by any combination of such methods of payment. The fair
market value of any shares of Common Stock which may be delivered upon exercise
of an option shall be determined by the Company as of the date that such shares
are delivered.
Section 12. Miscellaneous
(a) No Right to Employment or Other Status. No person
shall have any claim or right to be granted an Award, and the grant of an Award
shall not be construed as giving a Participant the right to continued
employment with or service for the Company. The Company expressly reserves
the right at any time to dismiss a Participant free from any liability or claim
under the Plan, except as expressly provided in the applicable Award.
(b) No Rights As Stockholder. Subject to the provisions
of the applicable Award, no Participant or Designated Beneficiary shall have
any rights as a stockholder with respect to any shares of Common Stock to be
distributed under the Plan until he or she becomes the record holder thereof.
(c) Exclusion from Benefit Computations. No amounts
payable upon exercise of Awards granted under the Plan shall be considered
salary, wages or compensation to Participants for purposes of determining the
amount or nature of benefits that Participants are entitled to under any
insurance, retirement or other benefit plans or programs of the Company.
(d) Effective Date and Term.
(i) Effective Date. The Plan shall become
effective when adopted by the Board of Directors, but no Incentive Stock Option
granted under the Plan shall become exercisable unless and until the Plan shall
have been approved by the Company's stockholders. If such stockholder approval
is not obtained within twelve months after the date of the Board's adoption of
the Plan, no Options previously granted under the Plan shall be deemed to be
Incentive Stock Options and no Incentive Stock Options shall be granted
thereafter. Amendments to the Plan not requiring stockholder approval
pursuant to Section 12(e) below shall become effective when adopted by the
Board of Directors; amendments requiring stockholder approval
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shall become effective when adopted by the Board of Directors, but no Incentive
Stock Option granted after the date of such amendment shall become exercisable
(to the extent that such amendment to the Plan was required to enable the
Company to grant such Incentive Stock Option to a particular optionee) unless
and until such amendment shall have been approved by the Company's
stockholders. If such stockholder approval is not obtained within twelve
months of the Board's adoption of such amendment, any Incentive Stock Options
granted on or after the date of such amendment shall terminate to the extent
that such amendment to the Plan was required to enable the Company to grant
such Option to a particular optionee. Subject to the limitations set forth in
this Section 11(d), Awards may be made under the Plan at any time after the
effective date and before the date fixed for termination of the Plan.
(ii) Termination. The Plan shall terminate upon
the earlier of (i) the close of business on the day next preceding the tenth
anniversary of the date of its adoption by the Board of Directors or (ii) the
date on which all shares available for issuance under the Plan shall have been
issued pursuant to Awards under the Plan. Awards outstanding on such date
shall continue to have force and effect in accordance with the provisions of
the instruments evidencing such Awards.
(e) Amendment of Plan. The Board may amend, suspend or
terminate the Plan or any portion thereof at any time, provided that no
amendment shall be made without stockholder approval if such approval is
necessary to comply with any applicable tax or regulatory requirement,
including any requirements for compliance with Rule 16b-3. Prior to any such
approval, Awards may be made under the Plan expressly subject to such approval.
(f) Governing Law. The provisions of the Plan shall be
governed by and interpreted in accordance with the laws of the Commonwealth of
Virginia.
Adopted by the Board of Directors
on March 25, 1997
Approved by the Stockholders on March 25, 1997
WA970900.015/4
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EXHIBIT 10.5
INDEMNITY AGREEMENT
This Indemnity Agreement (this "Agreement") is made and
entered into as of this ____ day of __________, 1997 by and between Advanced
Communication Systems, Inc., a Delaware corporation (the "Company"), and
_________________ ("Indemnitee").
WHEREAS, Indemnitee is currently serving as a director and/or
officer of the Company and/or, at the Company's request, as a director and/or
officer of another corporation, partnership, joint venture, trust or Other
Enterprise, and the Company wishes Indemnitee to continue in such capacity;
WHEREAS, the Amended and Restated Certificate of Incorporation
and Bylaws of the Company (the "Certificate of Incorporation") provide that the
Company shall indemnify, in the manner and to the fullest extent permitted by
the Delaware General Corporation Law (the "DGCL"), certain persons, including
directors and officers of the Company, against specified expenses and losses
arising out of certain threatened, pending or completed actions, suits or
proceedings;
WHEREAS, Indemnitee has indicated that he or she may not be
willing to continue to serve as a director and/or officer of the Company
and/or, at the Company's request, as a director and/or officer of another
corporation, partnership, joint venture, trust or Other Enterprise in the
absence of indemnification in addition to that provided in the Certificate of
Incorporation and Bylaws of the Company;
WHEREAS, Section 145(f) of the DGCL expressly recognizes that
the indemnification provisions of the DGCL are not exclusive of any other
rights to which a person seeking indemnification may be entitled under the
Certificate of Incorporation or Bylaws of the Company, an agreement providing
for indemnification, a resolution of stockholders or directors or otherwise;
WHEREAS, the Company, in order to induce Indemnitee to
continue to serve in such capacity, has agreed to provide Indemnitee with the
benefits contemplated by this Agreement, and, as a result of the provision of
such benefits, Indemnitee has agreed to continue to serve in such capacity;
WHEREAS, the Bylaws of the Company expressly recognize that
the indemnification provisions therein shall not be deemed exclusive of, and
shall not affect, any other rights to which a person seeking indemnification
may be entitled under any agreement; and
WHEREAS, this Agreement is being entered into pursuant to the
Certificate of Incorporation and Bylaws of the Company as permitted by the
DGCL, and as authorized by the stockholders of the Company.
NOW, THEREFORE, in consideration of the promises, conditions
and representations set forth herein, including Indemnitee's continued service
as a director and/or officer of the Company and/or, at the Company's request,
as a director and/or officer of another corporation, partnership, joint
venture, trust or Other Enterprise, the Company and Indemnitee hereby agree as
follows:
<PAGE> 2
Section 1. Definitions.
The following terms, as used herein, shall have the following
meanings:
(a) "Covered Claim" shall mean any claim against
Indemnitee based upon or arising out of any past, present or future act,
omission, neglect or breach of duty, including any actual or alleged error,
misstatement or misleading statement, which Indemnitee may commit, omit or
suffer while serving in his or her capacity as a director and/or officer of the
Company and/or, while serving at the request of the Company, as a director
and/or officer of another corporation, partnership, joint venture, trust or
Other Enterprise, provided that such claim:
(i) is not based upon and does not arise out of
Indemnitee gaining in fact any personal profit or advantage to which
Indemnitee is not legally entitled;
(ii) is not for an accounting of profits made from
the purchase or sale by Indemnitee of securities of the Company within
the meaning of Section 16(b) of the Securities Exchange Act of 1934,
as amended, or similar provisions of any state law; and
(iii) is not based upon and does not arise out of
Indemnitee's knowingly fraudulent, deliberately dishonest or willful
misconduct.
(b) "Determination" shall mean a determination, based
upon the facts known at the time, made by:
(i) the Board of Directors of the Company, by the
vote of a majority of the directors who are not parties to the
action, suit or proceeding in question, even though less than a
quorum;
(ii) if there are no such directors, or, if directed
by a majority of such disinterested directors, by independent legal
counsel in a written opinion (the independent legal counsel may be
outside counsel currently or previously employed by the Company,
provided that such counsel (x) has not provided legal services to the
Indemnitee, (y) does not regularly advise the directors or senior
management of the Company with respect to their actions, duties and
responsibilities, and (z) and has not provided legal services to the
Company or the Indemnitee with respect to the transaction or matter
out of which the action, suit or proceeding arose);
(iii) the stockholders of the Company; or
(iv) a court of competent jurisdiction in a final,
nonappealable adjudication.
(c) "Payment" shall mean any and all amounts which
Indemnitee is or becomes legally obligated to pay in connection with a Covered
Claim, including, without limitation, damages, judgments, amounts paid in
settlement, reasonable costs of investigation, reasonable fees and expenses of
attorneys, costs of investigative, judicial or administrative proceedings or
appeals and costs of attachment or similar bonds.
2
<PAGE> 3
(d) "Other Enterprises" shall include employee benefit
plans, and civic, non-profit, or charitable organizations, whether or not
incorporated.
(e) "serving at the request of the Company" shall mean
any service at the request or with the express or implied authorization of the
Company, as a director and/or officer of the Company, which imposes duties on,
or involves services by, Indemnitee with respect to a corporation or Other
Enterprise, its participants or beneficiaries; and if Indemnitee acted in good
faith and in a manner he or she reasonably believed to be in the interest of
the participants and beneficiaries of such Other Enterprises, he or she shall
be deemed to have acted in a manner "not opposed to the best interests of the
Company" as referred to in this Agreement.
Section 2. Indemnification.
(a) The Company shall indemnify and hold harmless
Indemnitee against and from any and all Payments to the extent that:
(i) the Company shall not have indemnified and
held harmless Indemnitee against and from such Payments otherwise than
pursuant to this Agreement;
(ii) Indemnitee shall not already have received
Payment on account of such Payments pursuant to one or more valid and
collectible insurance policies; and
(iii) such indemnification by the Company is not
unlawful.
(b) The Company shall have no obligation to indemnify
Indemnitee under this Agreement for any amounts paid in a settlement of any
action, suit or proceeding effected without the Company's prior written
consent. The Company shall not settle any claim in any manner that would
impose any obligation on Indemnitee without Indemnitee's prior written consent.
Indemnitee shall not unreasonably withhold his or her consent to any proposed
settlement.
Section 3. Indemnification Procedure; Advancements of Costs and Expenses.
(a) Promptly after receipt by Indemnitee of notice of the
commencement or threat of commencement of any action, suit or proceeding,
Indemnitee shall, if indemnification with respect thereto may be sought from
the Company under this Agreement, notify the Company thereof.
(b) If, at the time of receipt of such notice, the
Company has directors' and officers' liability insurance in effect, the Company
shall give prompt notice of the commencement of such action, suit or proceeding
to the insurers in accordance with the procedures set forth in the respective
policies in favor of Indemnitee. The Company shall thereafter take all
necessary or desirable action to cause such insurers to pay, on behalf of
Indemnitee, all Payments payable as a result of such action, suit or proceeding
in accordance with the terms of such policies.
(c) All costs and expenses, including reasonable fees and
expenses of attorneys, incurred by Indemnitee in defending or investigating
such action, suit or proceeding shall be paid by the Company in advance of the
final disposition of such action,
3
<PAGE> 4
suit or proceeding; provided, however, that no such costs or expenses shall be
paid by the Company if, with respect to such action, suit or proceeding, a
Determination is made that:
(i) Indemnitee did not act in good faith and in a
manner Indemnitee reasonably believed to be in or not opposed to the
best interests of the Company;
(ii) in the case of any criminal action or
proceeding, Indemnitee had reasonable cause to believe his or her
conduct was unlawful; or
(iii) Indemnitee intentionally breached his or her
duty to the Company or its stockholders.
Indemnitee hereby undertakes to and agrees that he or she will repay the
Company for any costs or expenses advanced by or on behalf of the Company
pursuant to this Section 3(c) if it shall ultimately be determined by a court
of competent jurisdiction in a final, nonappealable adjudication that
Indemnitee is not entitled to indemnification under this Agreement. The costs
or expenses advanced shall be repaid within sixty (60) days of such
adjudication.
(d) If the Company shall advance the costs and expenses
of any such action, suit or proceeding pursuant to Section 3(c) of this
Agreement, it shall be entitled to assume the defense of such action, suit or
proceeding, if appropriate, with counsel reasonably satisfactory to Indemnitee,
upon delivery to Indemnitee of written notice of its election so to do. After
delivery of such notice, the Company shall not be liable to Indemnitee under
this Agreement for any costs or expenses subsequently incurred by Indemnitee in
connection with such defense other than reasonable costs and expenses of
investigation; provided, however, that:
(i) Indemnitee shall have the right to employ
separate counsel in any such action, suit or proceeding provided that
the fees and expenses of such counsel incurred after delivery of
notice by the Company of its assumption of such defense shall be at
Indemnitee's own expense; and
(ii) the fees and expenses of counsel employed by
Indemnitee shall be at the expense of the Company if (x) the
employment of counsel by Indemnitee has previously been authorized by
the Company, (y) Indemnitee shall have reasonably concluded that there
may be a conflict of interest between the Company and Indemnitee in
the conduct of any such defense (provided that the Company shall not
be required to pay for more than one counsel to represent two or more
Indemnitees where such Indemnities have reasonably concluded that
there is no conflict of interest among them in the conduct of such
defense), or (z) the Company shall not, in fact, have employed counsel
to assume the defense of such action, suit or proceeding.
(e) All Payments on account of the Company's advancement
obligations under Section 3(c) of this Agreement shall be made within twenty
(20) days of Indemnitee's written request therefor. All other Payments on
account of the Company's obligations under this Agreement shall be made within
sixty (60) days of Indemnitee's written request therefor, unless a
Determination is made that the claims giving rise to Indemnitee's request are
not payable under this Agreement. Each request for Payment hereunder shall be
accompanied by evidence reasonably satisfactory to the Company of the
Indemnitee's incurrence of the costs and expenses for which such Payment is
sought.
4
<PAGE> 5
Section 4. Enforcement of Indemnification; Burden of Proof.
If a claim for indemnification or advancement of costs and
expenses under this Agreement is not paid in full by or on behalf of the
Company within the time period specified in Section 3(e) of this Agreement,
Indemnitee may at any time thereafter bring suit against the Company to recover
the unpaid amount of such claim. In any such action, if a prior Determination
has been made that such claim is not payable under this Agreement, the burden
of proving that indemnification is required under this Agreement shall be on
Indemnitee. If no such prior Determination shall have been made, the Company
shall have the burden of proving that indemnification is not required under
this Agreement.
Section 5. Rights Not Exclusive.
The rights to indemnification and advancement of costs and
expenses provided hereunder shall not be deemed exclusive of any other rights
to which Indemnitee may be entitled under any charter document, bylaw,
agreement, vote of stockholders or disinterested directors or otherwise.
Section 6. Subrogation.
In the event of Payment under this Agreement by or on behalf
of the Company, the Company shall be subrogated to the extent of such Payment
to all of the rights of recovery of Indemnitee, who shall execute all papers
that may be required and shall do all things that may be necessary to secure
such rights, including, without limitation, the execution of such documents as
may be necessary to enable the Company effectively to bring suit to enforce
such rights.
Section 7. Choice of Law.
This Agreement shall be governed by and construed and enforced
in accordance with the laws of the State of Delaware without regard to its
choice of law or conflict of law rules.
Section 8. Jurisdiction.
The Company and Indemnitee hereby irrevocably consent to the
jurisdiction of the Court of Chancery of the State of Delaware for all purposes
in connection with any action, suit or proceeding which arises out of or
relates to this Agreement, and agree that any action instituted under this
Agreement shall be brought only in the Court of Chancery of the State of
Delaware.
Section 9. Attorney's Fees.
If any action, suit or proceeding is commenced in connection
with or related to this Agreement, the prevailing party shall be entitled to
have its costs and expenses, including, without limitation, reasonable fees and
expenses of attorneys and reasonable expenses of investigation, paid by the
losing party.
5
<PAGE> 6
Section 10. Severability.
If any provision of this Agreement or the application of any
provision hereof to any person or circumstances is held invalid, the remainder
of this Agreement and the application of such provision to other persons or
circumstances shall not be affected.
Section 11. Successors and Assigns.
This Agreement shall be binding upon all successors and
assigns of the Company, including any transferee of all or substantially all of
its assets and any successor by merger or otherwise by operation of law, and
shall be binding upon and inure to the benefit of the heirs, executors and
administrators of Indemnitee.
Section 12. Descriptive Headings.
The descriptive headings in this Agreement are included for
the convenience of the parties only and shall not affect the construction of
this Agreement.
Section 13. Counterparts.
This Agreement may be executed in any number of counterparts,
all of which taken together shall constitute one document.
Section 14. Entire Agreement.
Subject to Section 2(b), this Agreement constitutes the entire
agreement of the parties relating to the subject matter hereof and shall
supersede all other agreements and understandings, if any, between the parties
with respect to the matters contemplated herein.
Section 15. Amendment.
No amendment, modification, termination or cancellation of
this Agreement shall be effective unless made in writing and signed by each of
the parties hereto.
IN WITNESS WHEREOF, the Company and Indemnitee have executed
this Agreement as of the day and year first above written.
THE COMPANY: Advanced Communication Systems, Inc.
By:
-----------------------------
Name:
Title:
INDEMNITEE: -----------------------------
WA970900.134/6+
6
<PAGE> 1
EXHIBIT 11.1 - COMPUTATION OF PER SHARE EARNINGS
Advanced Communication Systems, Inc.
Pro forma Net Income Per share
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Year Ended Six Months Ended
September 30, March 31,
1996 1997
--------------- -------------
<S> <C> <C>
Weighted average common stock outstanding 3,732,750 3,764,250
Common stock equivalent 75,330 25,110
Stock options issued during twelve months
immediately preceding the offering date (using the
treasury stock method and the estimated mid-point
of the proposed initial public offering price per share) 115,342 115,342
Stock issued to satisfy S corporation distribution in
excess of fiscal 1996 earnings based on the
estimated initial public offering price per share 378,421 378,421
--------------- -------------
Pro forma weighted average shares 4,301,545 4,283,024
=============== =============
Pro forma net income $ 1,162 $ 774
=============== =============
Pro forma net income per share $ 0.27 $ 0.18
=============== =============
</TABLE>
<PAGE> 1
Exhibit 21.1
LIST OF SUBSIDIARIES
Fairfax Communications Ltd., a private limited company organized under the laws
of England, doing business as Fairfax Communications Ltd.
WA971430.059/1
<PAGE> 1
EXHIBIT 23.2
Report of Independent Public Accountants
As independent public accountants, we hereby consent to the use of our report
(and to all references to our Firm) included in or made a part of this
registration statement.
/s/ Arthur Anderson LLP
Washington, DC
May 26, 1997
