<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the fiscal year ended: September 30, 1997 Commission File Number: 0-22737
ADVANCED COMMUNICATION SYSTEMS, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 54-1421222
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)
10089 Lee Highway, Fairfax, Virginia 22030
(Address of principal executive office) (Zip Code)
703-934-8130
Registrant's telephone number, including
area code:
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Securities registered pursuant to Section 12
(b) of the Act:
NONE
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of class)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No _
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the registrant's voting stock held by persons
considered by the registrant for the purpose to be non-affiliates of the
registrant on December 10, 1997, computed with reference to the closing price of
the Common Stock on the Nasdaq National Market as reported for December 10,
1997, was $37,633,000.
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As of the close of business December 10, 1997, the registrant had
outstanding 6,514,000 shares of Common Stock, par value $.01 per share.
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Documents Incorporated By Reference
Certain information called for by Part III of the Form 10-K will either be
filed with the Commission under Regulation 14A under the Securities Exchange Act
of 1934 or by amendment to this Form 10-K, in either case on or before January
28, 1998.
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PART I
Item 1. Business.
General
Advanced Communication Systems, Inc. ("ACS" or the "Company") provides
communications and information technology services ("IT 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 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 and to develop business with other federal agencies, state and
local governments and commercial and international customers. The Company has
been profitable since its inception in 1987, and has achieved a compound annual
growth rate in revenues of 43.2% over the past five fiscal years. With revenues
of $52.2 million, fiscal 1997 was the tenth consecutive year of revenue growth.
In 1997, the Company consummated the initial public offering of its Common
Stock, selling 2,225,000 shares of Common Stock, including the underwriter's
overallotment option of 375,000 shares, for $7.50 per share. The initial public
offering resulted in net proceeds to the Company of approximately $14.4 million
after deducting underwriting discounts and offering expenses payable by the
Company.
The Company acquired RF Microsystems, Inc. ("RFM") on September 12, 1997
and Integrated Systems Control, Inc. ("ISC") on November 26, 1997 . See
"Business -- Recent Acquisitions."
Business Areas
The three main areas of the Company's business are as follows:
o 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 1997, the Company's communication systems business
represented 59.1% of revenues.
o 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 1997, the Company's IT Services business represented 14.5% of
revenues.
o 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 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 26.4% of revenues for fiscal 1997.
Industry Overview
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 $28 billion in its fiscal year 1998 for information
technology services and products. In addition, the fiscal year 1998 DOD budget
for information technology in the classified command, control and communication
market is estimated to be approximately $10 billion. The Company believes that
the commercial information technology market is significantly larger than the
government market.
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.
Expand through strategic acquisitions and the use of teaming relationships.
Strategic acquisitions are an integral component of the Company's growth
strategy. The Company believes that acquisitions will allow it to develop
technical services and products it does not currently provide, to target markets
it does not currently serve and, with our increased capabilities, successfully
pursue larger communication and IT Services opportunities. 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.
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") 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.
Recent Acquisitions
Since its initial public offering in July 1997, the Company made the
following acquisitions. These businesses bring new strengths to ACS's technical
capabilities, while also extending the Company's customer and geographic reach.
The Company believes that these acquisitions are major steps in its strategy to
consolidate its superior communication and IT Services capabilities.
RF Microsystems, Inc.
The Company completed the acquisition of RFM, a wholly-owned subsidiary of
REMEC, Inc., on September 12, 1997 for $5.0 million in cash. RFM provides
technical and engineering services to the DOD in the areas of communications,
navigation, electronic warfare and digital signal systems. Headquartered in San
Diego, RFM has operations in San Diego, Los Angeles, and the Washington, D.C.
area. Its clients include the Naval Research and Development Center, the Air
Force Space and the Missile Center, the Naval Air Weapons Center - Aircrafts
Division, and the Naval Undersea Warfare Center.
Integrated Systems Control, Inc.
On November 26, 1997, the company acquired all of the outstanding shares of
Common Stock of ISC in exchange for 475,000 shares of the Company's Common
Stock. ISC provides technical and engineering services to the DOD, primarily the
U.S. Navy, in the areas of communications and information technology.
Headquartered in Virginia Beach, Virginia, ISC has operations in Virginia Beach,
San Diego, Charleston, and the Washington, D.C. area and lends support services
from a number of sites worldwide, including Japan, Bahrain, Honolulu, Italy, and
Guam. Among others, its clients include Space and Naval Warfare Systems Command
and Centers, Defense Information Systems Agency Joint Interoperability
Engineering Office, Naval Air Systems Command, U.S. Coast Guard, and NATO.
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 1997, the Company's communication
systems business represented 59.1% 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 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.
The following are significant communication systems contracts and programs,
which also include IT Services, emphasizing the nature of the Company's
interrelated business areas:
o 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., Tele-Consultants,
Inc. and others.
o 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.
o 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 $3
million over the remaining one year 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 1997, the Company's IT
Services business represented 14.5% 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.
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 DOD. 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. 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 26.4% of revenues for fiscal 1997.
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.
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
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.
The Company is currently developing its latest version of ISALTS, ISALTS
2000. This is Microsoft Exchange-based and thus takes advantage of existing
commercial off-the-shelf technology, while adding significant messaging, file
transfer and database query capabilities. The product is expected to be released
and available for sale early 1998.
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 couples 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.
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 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 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 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.
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:
September 30,
-----------------------------------
1995 1996 1997
---- ---- ----
(in thousands)
Backlog Component
Funded............................. $ 3,255 $ 6,437 $ 5,323
Unfunded........................... 29,920 132,803 141,314
------- -------- --------
Total.............................. $33,175 $139,240 $146,637
======= ======== ========
The Company believes that approximately 37% of its backlog as of September
30, 1997 will result in revenues in fiscal 1998. 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 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.
Employees
The Company believes that 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. 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 November 30, 1997, the Company employed 529 people, 439 of whom were
directly involved in computer and information systems programming, design and
engineering, and 90 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.
There is significant competition for employees with the communication and
information technology skills required to perform the services the Company
offers. 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.
Item 2. Description of Property.
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, L.L.C., a Virginia limited liability company
("10089 Management") and a related party to the Company, that expires August 31,
2003. In the United States, the Company occupies approximately 83,400 square
feet in offices in Fairfax, Virginia; Arlington, Virginia; Alexandria, Virginia;
Virginia Beach, Virginia; Charleston, South Carolina; San Diego, California; El
Segundo, California; Colorado Springs, Colorado; and Lusby, Maryland. 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.
Item 3. Legal Proceedings.
The Company currently is not a party to any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted during the fourth quarter of fiscal year 1997 to
a vote of security holders.
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.
The Company's Common Stock has been traded on the Nasdaq National Market
(Symbol: ACSC) since June 27, 1997. As of December 10, 1997, there were 53
shareholders of record of Common Stock. The Company believes that, as of
December 10, 1997, there were approximately 3,400 beneficial owners of Common
Stock.
The following table sets forth the high and low sales prices of the Common
Stock of the Company as reported by the Nasdaq National Market for each of the
quarters indicated. Pricing information for previous quarters is not available
as the Company's Common Stock was not publicly traded prior to June 27, 1997.
High Low
1997
3rd Quarter $8 1/4 $7 1/2
4th Quarter $13 $7 1/2
Dividend Policy
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 "Note 10 of the Consolidated Financial Statements."
Recent Sales of Unregistered Securities
In November 1997, the Company issued 475,000 shares of Common Stock to the
shareholders of ISC in connection with its acquisition of all the outstanding
shares of ISC Common Stock. The offering was exempt from registration under
Section 4(2) of the Securities Act of 1933 as a transaction not involving any
public offering. See "Business -- Recent Acquisitions."
Uses of Proceeds from Registered Securities
Information regarding use of proceeds from the July 1997 initial public
offering is given below:
Effective Date of Registration
Statement (Reg. No. 333-23959): June 26, 1997
Offering Date (1): June 27, 1997
Names of managing underwriters: A.G. Edwards & Sons, Inc.
Ferris, Baker Watts
Title of each class of securities registered: Common Stock, par value $0.01
Company and selling shareholders:
Amount of shares registered and sold
Company 2,225,000
Selling shareholders 650,000
Aggregate offering price of shares
registered and sold
Company $16,687,500
Selling shareholders $ 4,875,000
Actual offering expenses (2):
Underwriting discounts and commissions $ 1,168,125
Other expenses $ 1,155,956
Total expenses $ 2,324,081
Net proceeds after expenses: $14,363,419
Use of proceeds:
S corporation distribution (3) $ 6,624,409
Acquisitions $ 5,160,000
Working capital and general
corporate purposes $ 2,579,010
(1) The offering terminated after the sale of all securities that were
registered under the Registration Statement
(2) All expenses were direct payments to others.
(3) The S corporation distribution was made to the then-existing
shareholders of the Company, including George A. Robinson, Charles G.
Martinache and Thomas A. Costello.
<PAGE>
Item 6. Selected Financial Information.
Year Ended September 30,
1993 1994 1995 1996 1997(3)
----- ----- ----- ----- ------
(in thousands, except per share data)
Statement of Operations Data:
Revenues..................... $12,223 $19,106 $23,724 $31,665 $52,194
Direct costs................. 7,050 11,418 14,815 19,307 37,687
Indirect, general and
administrative expenses..... 4,612 7,177 8,202 10,253 11,128
------ ------ ------ ------ ------
Income from operations....... 561 511 707 2,105 3,379
Other income (expense), net.. (78) (73) (133) (200) 17
Provision for income taxes... - - - - (484)
------- ------- -------- -------- --------
Net income................... $ 483 $ 438 $ 574 $ 1,905 $ 2,912
======= ======= ======== ======== ========
Pro Forma Statement of Operations Data (1):
Net income before taxes...... 483 438 574 $ 1,905 $ 3,396
Income taxes................. 193 175 229 743 1,305
------- ------- ------- ------- -------
Net income................... $ 290 $ 263 345 1,162 2,091
======= ======== ======= ======= =======
Net income per share(2)...... $ 0.27 $ 0.44
======= =======
Weighted average shares
outstanding(2).............. 4,361 4,767
-----------------------------------------------------------------------
September 30,
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(in thousands)
Balance Sheet Data:
Working capital ....... $ 2,231 $ 2,616 $ 2,716 $ 5,387 $ 9,526
Total assets........... 4,454 6,798 6,987 13,117 26,212
Total debt ............ 1,359 2,031 1,821 2,688 --
Stockholders' equity... 1,626 2,006 2,497 4,375 13,828
(1) Prior to June 25, 1997, the Company elected to be treated as an S
corporation and was not subject to federal and certain state income taxes.
The pro forma statement of operations data reflects federal and state income
taxes based on applicable rates as if the Company had not elected S
corporation status for the periods indicated.
(2) The pro forma weighted average shares outstanding is based on: (i) the
weighted average shares outstanding during the period, assuming the dilutive
effect of all options outstanding; (ii) stock options issued during the
twelve months immediately preceding the offering (using the treasury stock
method and the initial public offering price of $7.50 per share) for all
periods presented through the date of the offering; and (iii) the assumed
sale of a sufficient number of shares of Common Stock necessary to fund the
distribution of all undistributed S corporation earnings in excess of the
preceeding twelve months earnings, through the date of the offering.
(3) Excludes a one-time, non-cash charge of acquired in-process research and
development costs incurred in connection with acquisition of RFM totaling
$1.9 million and the related tax benefit of $234,000 or $0.25 per share on
an after tax basis.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements based on
management's current expectations, estimates and projections about the Company's
industry, management's beliefs and certain assumptions made by management. These
forward-looking statements involve risks and uncertainties, and actual results
may differ materially from those anticipated or expressed in such statements.
Potential risks and uncertainties include, among others, those set forth under
the "Risk Factors" section of the Company's final prospectus dated June 27,
1997, as filed with the Commission. Except as required by law, the Company
undertakes no obligation to update any forward-looking statement, whether as a
result of new information, future events or otherwise.
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 43.2% over
the past five fiscal years. With revenues of $52.2 million, fiscal 1997 was the
tenth consecutive year of revenue growth.
The Company's expansion has been achieved substantially 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
$146.6 million at September 30, 1997. 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 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.
Revenues, by dollar and percentage, from the Company's three interrelated
areas and three major types of customer are given below:
Year Ended September 30,
1995 1996 1997
---- ---- ----
(dollars in thousands)
Services Provided
Communication Systems ... $17,785 75% $20,422 65% $30,854 59%
IT Services.............. 4,634 19 8,008 25 7,563 15
Systems Integration...... 1,305 6 3,235 10 13,777 26
------- ---- ------- ---- ------- ----
Total $23,724 100% $31,665 100% $52,194 100%
======= ==== ======= ==== ======= ====
Customer Type
U.S. Government.......... $23,483 99% $28,607 90% $48,284 92%
Commercial .............. 219 1 848 3 1,997 4
International ........... 22 0 2,210 7 1,913 4
------- ---- ------- ---- ------- ----
Total.................... $23,724 100% $31,665 100% $52,194 100%
======= ==== ======= ==== ======= ====
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 opportunity for higher profit margins. The following
table summarizes the percentage of revenues attributable to each contract type
for the periods indicated:
Year Ended
September 30,
1995 1996 1997
---- ---- ----
Cost reimbursement.. 77% 68% 59%
Fixed price......... 16 25 35
Time and materials.. 7 7 6
--- --- ---
Total............. 100% 100% 100%
=== === ===
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 51% of revenues for fiscal 1997.
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 1997,
approximately 26% 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.
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.
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.
Approximately 23% of the Company's revenues in fiscal 1997 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 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.
During fiscal 1997, revenues from international business amounted to 3.7% 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.
A part of the Company's business strategy calls for growth through
acquisitions. The Company has successfully completed two acquisitions, RFM in
September 1997 and ISC in November 1997. Since the respective dates of the
acquisitions, the Company has integrated these acquired entities in order to
draw on the Company's base of technical expertise and capabilities in designing
solutions for government and commercial clients. 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 indebtedness and could have a dilutive effect on the Company's net
income per share.
The Company's revenues have increased over the past five fiscal years at a
compound annual rate of 43.2%. 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.
Results of Operations
The following table sets forth certain statement of operations data as a
percentage of revenues for the periods indicated:
Year Ended September 30,
1995 1996 1997
---- ---- ----
Revenues ............................... 100.0% 100.0% 100.0%
Direct costs ........................... 62.4 61.0 72.2
Indirect, general and administrative
expenses ............................... 34.6 32.4 21.3
Acquired in-process R&D costs .......... - - 3.7
----- ----- -----
Income from operations.................. 3.0 6.6 2.8
Other income (expense), net............. (0.6) (0.6) --
----- ----- -----
Net income.............................. 2.4 6.0 2.8
Pro forma income taxes.................. 1.0 2.3 1.0
----- ----- -----
Pro forma net income.................... 1.4% 3.7% 1.8%
===== ===== =====
Fiscal 1997 Compared to Fiscal 1996
Revenues increased 64.8%, or $20.5 million, to $52.2 million for fiscal
1997, from $31.7 million for fiscal 1996. The increase was due to a $10.0
million increase in revenues from communication systems and IT Services,
primarily under contracts with the U.S. Navy, and a $10.5 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 $37.7 million for fiscal 1997 from $19.3
million for fiscal 1996. Direct costs, expressed as a percentage of revenues,
increased to 72.2% for fiscal 1997 from 61.0% for fiscal 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 $11.1 million for fiscal 1997 from $10.3 million for fiscal 1996.
The increase was due primarily to the higher level of revenues discussed above.
Indirect expenses, expressed as a percentage of revenues, decreased to 21.3% for
fiscal 1997 from 32.4% for fiscal 1996, due to the higher proportion of systems
integration revenues, which typically have lower associated indirect expenses.
Based on the results of a third-party appraisal, the Company recorded a
write-off of $1.9 million in the fourth quarter of 1997 to expense in-process
research and development costs related to the acquisition of RFM. In the opinion
of the management and the appraiser, the acquired in-process research and
development had not yet reached technological feasibility and had no alternative
future uses.
Income from operations decreased 30.2%, to $1.5 million for fiscal 1997,
from $2.1 million for fiscal 1996, primarily due to the above-mentioned $1.9
million in-process research and development write-off incurred in connection
with the RFM acquisition. Excluding the $1.9 million write-off, income from
operations increased 60.5%, to $3.4 million for fiscal 1997. This increase is
primarily due to increased revenues from U.S. Navy contracts and systems
integration. Excluding the in-process research and development write-off, as a
percentage of revenues, income from operations decreased slightly to 6.5% for
fiscal 1997, from 6.6% for fiscal 1996, primarily attributable to lower
high-margin international revenues.
Other income (expense), net, consists of interest expense offset by interest
income from short-term deposits of cash. Interest expense was $136,000 and
$257,000 for fiscal 1997 and 1996, respectively. Interest income was $153,000
and $57,000 for fiscal 1997 and 1996, respectively. The increase in interest
income and decrease in interest expense during fiscal 1997 was attributable to
the paydown of debt and short-term investments of initial public offering
proceeds.
The Company's pro forma effective tax rate was 38.4% and 39.0% for fiscal
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.
Quarterly Results of Operations
The following tables set forth certain unaudited statement of operations
data for the last eight 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 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 herein. 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.
<TABLE>
<CAPTION>
Three Months Ended
Fiscal 1996 Fiscal 1997
--------------------------- ----------------------------------
Dec. Mar. June. Sept. Dec. Mar. June Sept.
31, 31, 30, 30, 31, 31, 30, 30,
1995 1996 1996 1996 1996 1997 1997 1997
---- ---- ---- ----- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues......................$5,775 $7,261 $7,215 $11,415 $9,066 $12,064 $14,379 $16,685
Direct costs.................. 3,331 3,864 4,475 7,638 6,038 8,708 10,432 12,509
Indirect, general and
administrative expenses..... 2,027 2,748 2,358 3,121 2,442 2,583 3,040 3,063
Acquired in-process R&D costs. - - - - - - - 1,910
----- ----- ----- ------ ----- ------ ------ ------
Income from operations........ 417 649 382 656 586 773 907 (797)
===== ===== ===== ====== ===== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
(as a percentage of revenues)
<S> <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%
Direct costs................... 57.7 53.2 62.0 66.9 66.6 72.2 72.6 75.0
Indirect, general and
administrative expenses...... 35.1 37.9 32.7 27.4 26.9 21.4 21.1 18.4
Acquired in-process R&D costs.. - - - - - - - 11.4
------ ------ ------ ------ ------ ------ ------ ------
Income from operations...... 7.2% 8.9% 5.3% 5.7% 6.5% 6.4% 6.3% (4.8)%
====== ====== ====== ====== ====== ====== ====== ======
</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, general economic conditions and acquisition related charges.
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, supplemented by borrowings
under the Company's revolving credit facility with a commercial bank.
The Company used cash from operating activities of $1.6 million for fiscal
1997, resulting primarily from net income, increases in accounts payable and
accrued expenses, 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.
The Company generated cash flow from operating activities of $165,000 and
$545,000 for fiscal 1996 and 1995, 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.
The principal use of cash for investing activities has been for the purchase
of computers and equipment. These purchases totaled $678,000, $370,000 and
$270,000 for fiscal 1997, 1996 and 1995, respectively. Further, the Company
invested $626,000, $-0- and $240,000 in software development costs for its SALTS
products in fiscal 1997, 1996 and 1995, respectively.
In March 1997, the Company extended its line of credit 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 all assets
including inventory, contract receivables and intangibles. 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 1997, the Company was in
compliance with all covenants contained in such agreement. As of September 30,
1997, there was no debt outstanding under the Company's revolving credit
facility.
The Company leases office space from 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 was terminated
upon the closing of the initial public offering.
The Company consummated the initial public offering of its Common Stock in
July 1997, selling 2,225,000 shares of Common Stock, including the underwriter's
overallotment option of 375,000 shares, for $7.50 per share. The initial public
offering resulted in net proceeds to the Company of approximately $14.4 million
after deducting underwriting discounts and offering expenses payable by the
Company.
In connection with the termination of the Company's S corporation status and
its initial public offering, the Board of Directors declared a $6.6 million
dividend of its previously undistributed S corporation earnings in June 1997.
The distribution was made as follows: $3.4 million, in kind, in the form of
contract receivables in June 1997, and $3.2 million in cash in July 1997.
The Company is regularly evaluating potential acquisition candidates. In
September 1997, the Company acquired all of the outstanding capital stock of RFM
for $5.0 million in cash. The acquisition has been accounted for as a purchase,
and the financial results of RFM have been included in the results of operations
from the date of acquisition. The total purchase price has been allocated to the
acquired assets and liabilities assumed at their estimated fair values in
accordance with the provisions of Accounting Principles Board Opinion No. 16.
The estimated excess of the purchase price over the net assets acquired is being
carried as goodwill, in the amount of $1,671,000, which will be amortized over
its estimated useful life of fifteen years. The consolidated statement of
operations includes a $1.9 million charge taken at the time of the acquisition
for acquired research and development costs related to acquired technology that
has not reached technological feasibility and that has no alternative future
use. In April 1997, the Company acquired Fairfax Communications, Ltd. for
$46,500 in cash. See "Note 4 of the Consolidated Financial Statements."
Subsequent to the year end, in November 1997, the Company acquired all of the
outstanding capital stock of ISC in exchange for 475,000 shares of the Company's
Common Stock. See "Note 4 of the Consolidated Financial Statements."
The Company currently anticipates that, 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. Inflation did not
have a material impact on the Company's revenues or income from operations in
fiscal 1997, 1996 and 1995.
Recently Issued Financial Accounting Standards
Effective for fiscal 1998, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation", and, as permitted by this standard, will continue to
apply the recognition and measurement principles of Accounting Principles Board
Opinion No. 25 to its stock options. This statement requires footnote disclosure
of the pro forma impact on net income and earnings per share of the compensation
cost that would have been recognized if the fair value of all stock-based awards
was recorded in the income statement. See "Note 12 of the Consolidated Financial
Statements."
In March 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings Per Share" which simplifies the standards for computing EPS previously
found in Accounting Principles Board Opinion No. 15 and makes them comparable to
international EPS standards. The Statement is effective for financial statements
issued for periods ending after December 15, 1997. Had this statement been
effective for the years ended September 30, 1997 and 1996, earnings would have
been presented as follows:
Year ended September 30 1997 1996
----------------------- ---- ----
EPS-basic ......................... $0.20 $0.28
EPS-diluted ....................... 0.19 0.27
In June 1997, the Financial Accounting Standards Board (FASB) issued two
SFASs: SFAS No. 130, "Reporting Comprehensive Income", and SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information". As
specified by these statements, the Company will apply these statements beginning
in fiscal 1999 and reclassify its financial statements for earlier periods
provided for comparative purposes.
SFAS 130 establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains, and losses) in a full set
of general-purpose financial statements. This statement requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements.
SFAS 131 establishes standards for the way that the public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. This Statement supersedes FASB Statement
No. 14, "Financial Reporting for Segments of a Business Enterprise", but retains
the requirement to report information about major customers. It amends FASB No.
94, "Consolidation of All Majority-Owned Subsidiaries", to remove the special
disclosure requirements for previously unconsolidated subsidiaries.
At this point, the Company has not determined the impact of adopting SFAS
131.
<PAGE>
Item 8. Index to Financial Statements
Advanced Communication Systems, Inc.
Page
Report of Independent Public Accountants............................ 21
Consolidated Balance Sheets as of September 30, 1997 and 1996....... 22
Consolidated Statements of Operations for the Years Ended September
30, 1997, 1996 and 1995............................................. 23
Consolidated Statements of Changes in Stockholders' Equity for the
Years ended September 30, 1997, 1996 and 1995....................... 24
Consolidated Statements of Cash Flows for the Years Ended September
30, 1997, 1996 and 1995............................................. 25
Notes to Consolidated Financial Statements.......................... 26
<PAGE>
Report of Independent Public Accountants
To the Board of Directors of
Advanced Communication Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Advanced
Communication Systems, Inc. (a Delaware corporation) and subsidiaries, as of
September 30, 1997 and 1996, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended September 30, 1997. 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. and subsidiaries as of September 30, 1997 and 1996, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended September 30, 1997, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Washington, D.C.
November 7, 1997
<PAGE>
ADVANCED COMMUNICATION SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
September 30,
-----------------------
1997 1996
------------ ----------
ASSETS
Current assets:
Cash and cash equivalents ................................ $ 2,744 $ 1,177
Contract receivables ..................................... 17,643 9,987
Other receivables ....................................... 154 69
Income taxes receivable .................................. 529 --
Inventories .............................................. 544 --
Prepaid expenses ......................................... 296 208
-------- --------
Total current assets ................................... 21,910 11,441
-------- --------
Property and equipment, net .............................. 1,261 571
Other assets:
Notes receivable, stockholders ........................... -- 443
Other related party receivables .......................... 86 138
Software development costs, net .......................... 950 461
Goodwill, net ............................................ 1,706 --
Long-term deferred tax asset ............................. 147 --
Other assets ............................................. 152 63
-------- --------
Total other non-current assets ......................... 3,041 1,105
-------- --------
Total assets ....................................... $ 26,212 $ 13,117
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ......................................... $ 3,321 $ 2,125
Accrued expenses and other current liabilities ........... 8,838 3,476
Billings in excess of revenue ............................ 225 362
Deferred income tax liability ............................ -- 91
-------- --------
Total current liabilities ............................. 12,384 6,054
Line of credit ........................................... -- 2,688
-------- --------
Total liabilities ..................................... 12,384 8,742
Commitments (Note 13)
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, 8,975,000 shares issued at September 30,
1997 and 6,750,000 shares issued at September 30, 1996 . 90 67
Paid-in-capital and accretion ............................ 14,409 16,506
Retained (deficit) earnings .............................. (382) 4,520
Adjustment for redemption value greater than amounts paid
in by stockholders ...................................... -- (16,438)
Less - Treasury Stock, 2,945,000 shares at September 30,
1997 and 3,017,250 shares at September 30, 1996, at cost . (289) (280)
-------- --------
Total stockholders' equity ............................. 13,828 4,375
-------- --------
Total liabilities and stockholders' equity ......... $ 26,212 $ 13,117
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<TABLE>
ADVANCED COMMUNICATION SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<CAPTION>
Year Ended September 30,
------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues ............................................ $ 52,194 $ 31,665 $ 23,724
Direct costs ........................................ 37,687 19,307 14,815
Indirect, general and administrative expenses ....... 11,128 10,253 8,202
Write-off of acquired in-process R & D costs (Note 4) 1,910 -- --
-------- -------- --------
Income from operations .............................. 1,469 2,105 707
Interest expense .................................... (136) (257) (185)
Other income, net ................................... 153 57 52
-------- -------- --------
Income before taxes ................................. 1,486 1,905 574
Benefit for income taxes ............................ (250) -- --
-------- -------- --------
Net income .......................................... $ 1,736 $ 1,905 $ 574
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Pro forma statements of operations data:
(unaudited): (Note 2)
<S> <C> <C>
Income before taxes as reported .............. $ 1,486 $ 1,905
Pro forma tax provision ...................... 571 743
-------- --------
Pro forma net income ......................... $ 915 $ 1,162
======== ========
Pro forma net income per share ............... $ 0.19 $ 0.27
======== ========
Pro forma weighted average shares outstanding 4,767 4,361
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<TABLE>
ADVANCED COMMUNICATION SYSTEMS, INC
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands, except share data)
<CAPTION>
Adjustment for
Redemption
Value Greater
Common Stock Than Amounts
----------------------- Paid-In Retained Paid In by Treasury
Shares Amount Capital Earnings Stockholders Stock Total
------------ --------- ----------- ----------- ------------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
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 ................................. -- -- -- 1,736 -- -- 1,736
Sale of common stock from initial public
offering ................................. 2,225,000 23 14,341 -- -- -- 14,364
Sale of treasury stock ..................... -- -- -- -- -- 57 57
Purchase of treasury stock ................. -- -- -- -- -- (66) (66)
Stockholder distributions .................. -- -- -- (6,625) -- -- (6,625)
Translation adjustment ..................... -- -- -- (13) -- -- (13)
Cancellation of stock repurchase agreements. -- -- (16,438) -- 16,438 -- --
---------- ---- -------- ------- -------- ----- --------
Balance at September 30, 1997 .............. 8,975,000 $90 $ 14,409 ($ 382) -- ($289) $ 13,828
========== ==== ======== ======= ======== ===== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<TABLE>
ADVANCED COMMUNICATION SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<CAPTION>
Year Ended September 30,
----------------------------------
1997 1996 1995
----------- --------- ----------
<S> <C> <C> <C>
Cash flow from operating activities:
Net income.................................................... $1,736 $1,905 $574
Adjustments to reconcile net income to net cash (used in)
provided by operating activities-
Depreciation and amortization............................. 471 402 330
Write-off of acquired in-process research and development. 1,910 - -
Loss on property and equipment............................ - 2 4
Changes in assets and liabilities, net of effects
from acquisitions:
Contract receivables.................................. (9,414) (5,328) (282)
Other receivables..................................... (85) (18) (3)
Prepaid expenses...................................... (84) (125) -
Income taxes receivable............................... (636) - -
Inventories........................................... (182) - -
Other related party receivables....................... (218) (37) (53)
Long-term deferred tax asset.......................... (147) - -
Other assets.......................................... (80) (21) 17
Accounts payable...................................... 715 1,439 (476)
Accrued expenses...................................... 4,885 1,874 306
Billings in excess of revenue........................ (502) 79 78
Income taxes payable.................................. - (7) 7
Deferred income taxes................................. (91) - (7)
Other current liabilities............................. 98 - -
----------- --------- ----------
Net cash (used in) provided by operating activities. (1,624) 165 545
----------- --------- ----------
Cash flows from investing activities:
Collection (advances) of notes receivable-stockholders........ 443 (50) 7
Purchases of property and equipment........................... (678) (370) (270)
Capitalized software development costs........................ (626) - (240)
Acquisitions, net of cash acquired............................ (4,438) - -
Insurance proceeds from loss of property and equipment........ - - 23
----------- --------- ----------
Net cash used in investing activities............... (5,299) (420) (480)
----------- --------- ----------
Cash flows from financing activities:
Net proceeds from sale of common stock........................ 14,364 - -
Net (repayments) borrowings under line of credit.............. (2,701) 867 (209)
Stockholders' distributions................................... (3,164) (27) -
Purchase of treasury stock.................................... (66) - (88)
Sale of treasury stock........................................ 57 - 5
----------- --------- ----------
Net cash provided by (used in) financing activities. 8,490 840 (292)
----------- --------- ----------
Net increase (decrease) in cash............................... 1,567 585 (227)
Cash and cash equivalents, beginning of year.................. 1,177 592 819
----------- --------- ----------
Cash and cash equivalents, end of period...................... $2,744 $1,177 $592
=========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
ADVANCED COMMUNICATION SYSTEMS, INC.
NOTES TO CONSOLIDATED 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. Effective
August 26, 1997, the Company acquired RF Microsystems, Inc. ("RFM") which became
a wholly owned subsidiary of the Company. RFM provides technical and engineering
services to the Department of Defense in the areas of communications,
navigation, electronic warfare and digital signal systems. RFM has offices in
San Diego, Los Angeles and the Washington, DC area.
2. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of Advanced
Communication Systems, Inc. and its wholly owned subsidiaries. All intercompany
transactions have been eliminated.
Pro Forma Net Income Per Share (Unaudited)
Prior to June 25, 1997, the Company elected to be treated as an S corporation
and was not subject to federal and certain state income taxes. The pro forma
statement of operations data reflects federal and state income taxes at
applicable rates as if the Company had not elected S corporation status for the
periods indicated. Pro forma net income per share has been computed by dividing
pro forma net income by the pro forma weighted average number of common shares
outstanding during each period.
The pro forma weighted average shares outstanding is based on: (i) the weighted
average shares outstanding during the period assuming the dilutive effect of all
options outstanding; (ii) stock options issued during the twelve months
immediately preceding the offering date (using the treasury stock method and the
initial public offering price of $7.50 per share) for all periods presented,
through the date of the offering; 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 in excess of the
preceding twelve months earnings, through the date of the offering. (Note 12)
Pro forma fully diluted net income per share approximates primary net income per
share for all periods presented.
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.
Supplemental Statements of Cash Flows Data
The Company paid income taxes in the amount of $608,000, $14,000 and $1,000 and
interest expense of $136,000, $251,000 and $175,000 during the fiscal years
ended September 30, 1997, 1996 and 1995, respectively.
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 ended September 30, 1997, 1996 and 1995, approximately
$48,284,000, $28,607,000, and $23,483,000, respectively, of the Company's
revenues were derived from contracts or subcontracts funded by the U.S.
government, most of which were funded by the Department of Defense. Government
contracts can be terminated at any time by the government without cause, are
subject to competitive rebidding process upon expiration, require compliance
with various contract procurement regulations and are subject to audit by the
Defense Contract Audit Agency and other government auditors.
Cash and Cash Equivalents
Cash and cash equivalents include short-term investments with original
maturities of three months or less.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined using
the average cost method.
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
except for acquired in-process research and development costs (Note 4).
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, 1997 and 1996, 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. 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, 1997
and 1996 the remaining deferred tax liability is $0 and $91,000 respectively.
From October 1, 1989 through June 25, 1997, the Company elected to be treated as
an S corporation and was not subject to federal and certain state income taxes.
As a result, no provision for federal and state income taxes has been included
in the historical statements of operations prior to June 25, 1997. On June 25,
1997, in connection with the public offering (Note 3), the S corporation status
was terminated, thereby subjecting future income of the Company to federal and
state income taxes. Subsequent to June 25, 1997, the Company has provided for
federal and state income taxes in the statements of operations at the effective
tax rates.
3. Initial Public Offering and Distribution to Stockholders
In July 1997, the Company consummated the initial public offering of its common
stock (the "Offering"), selling 2,225,000 shares of common stock, including the
underwriter's overallotment option of 375,000 shares, for $7.50 per share. The
Offering resulted in net proceeds to the Company of approximately $14,400,000
after deducting underwriters discounts and offering expenses payable by the
Company. In connection with the Offering, the Company terminated its S
corporation election and made distributions to the pre-Offering stockholders of
its undistributed S corporation earnings of approximately $6,700,000.
4. Acquisitions
Effective August 26, 1997, the Company acquired all of the outstanding common
stock of RF Microsystems, Inc. ("RFM") for cash consideration of $5,000,000. The
acquisition has been accounted for as a purchase, and the financial results of
RFM have been included in the results of operations from the date of
acquisition. The total purchase price has been allocated to the acquired assets
and liabilities assumed at their estimated fair values in accordance with the
provisions of Accounting Principles Board Opinion No. 16. The estimated excess
of the purchase price over the net assets acquired is being carried as goodwill,
in the amount of $1,671,000, which will be amortized over its estimated useful
life of fifteen years. The consolidated statement of operations includes a
$1,910,000 charge taken at the time of the acquisition for acquired research and
development costs related to acquired technology that has not reached
technological feasibility and that has no alternative future use.
The following unaudited pro forma summary presents information as if the
acquisition had occurred at the beginning of each fiscal year presented. The
charge of $1,910,000 related to the write-off of acquired in-process research
and development has been included in the pro forma results for the year ended
September 30, 1997. The pro forma information does not necessarily reflect the
actual results that would have occurred nor is it necessarily indicative of
future results of operations of the combined companies.
(unaudited)
September 30,
1997 1996
------- -------
(in thousands, except per share data)
Revenues ............................. $58,195 $37,607
Net income............................ 1,048 1,294
Net income per share.................. $0.22 $0.30
A common group of stockholders held a substantial interest in both Fairfax
Communications Limited ("FCL") and the Company. As of September 30, 1996, the
Company had a receivable of $54,000 due from FCL for payroll services which the
Company performs on its behalf. In April 1997, the Company acquired all the
outstanding stock of FCL for $46,500. Revenues and operating income of FCL are
not material.
On November 26, 1997, the Company acquired all the outstanding shares of
Integrated Systems Control, Inc. ("ISC") pursuant to a Stock Purchase Agreement,
dated as of October 31, 1997, by and between the shareholders of ISC. The
consideration paid was 475,000 shares of the Company's common stock.
The most recent annual financial statements of ISC (at December 31, 1996)
disclose revenues of $11,123,000, net income of $301,000 and total assets of
$5,098,000. The Company is in the process of determining the appropriate
accounting treatment (purchase or pooling-of-interests) for this business
combination. However, management believes that the application of either method
would not produce materially different results in future periods.
5. Contract Receivables:
Contract receivables consist of the following:
September 30,
1997 1996
------- ------
(in thousands)
U.S. government:
Amounts billed ................................. $ 2,927 $4,103
Recoverable costs and accrued profit on
progress completed; not billed ............... 11,860 5,187
------- ------
Subtotal ................................... 14,787 9,290
Commercial customers:
Amounts billed ................................. 904 123
Recoverable costs and accrued profit on
progress completed; not billed ............... 1,952 574
------- ------
Subtotal ................................... 2,856 697
------- ------
Total ...................................... $17,643 $9,987
======= ======
6. Property and Equipment:
Property and equipment consist of the following:
September 30,
1997 1996
------ ------
(in thousands)
Furniture and equipment ....................... $2,575 $1,561
Leasehold improvements ........................ 18 13
------ ------
2,593 1,574
Less -- Accumulated depreciation and
amortization .................................. 1,332 1,003
------ ------
Total property and equipment, net ............. $1,261 $ 571
====== ======
7. Software Development Costs:
Software development costs consist of the following:
September 30,
1997 1996
------ ----
(in thousands)
Cost ............................................ $1,311 $685
Accumulated amortization ........................ 361 224
------ ----
Total software development costs, net ........... $ 950 $461
====== ====
Software development costs capitalized were $626,000 and $0 in the years ended
September 30, 1997 and 1996, respectively. Amortization expense for the years
ended September 30, 1997, 1996 and 1995 was $137,000, $137,000, $88,000
respectively.
8. Accrued Expenses:
Accrued expenses consist of the following:
September 30,
1997 1996
------ ------
(in thousands)
Accrued salaries, benefits and related taxes.... $ 984 $ 833
Accrued vacation................................ 543 411
Accrued bonuses................................. 310 387
Accrued subcontractor costs..................... 6,579 1,726
Other........................................... 422 119
------ ------
Total accrued expenses.......................... $8,838 $3,476
====== ======
9. Related-Party Transactions (See Note 4)
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,
which expires on August 31, 2003, requires current rental payments of
approximately $26,000 per month, increased annually based on the Consumer Price
Index.
10089 Management purchased the headquarters facility, using in part a loan of
$1,125,000 from a third party lender, which was guaranteed by the Company. In
March 1997, the loan agreement was amended to cancel the guarantee upon the
initial public offering resulting in net proceeds to the Company of at least
$10,000,000. The remaining purchase price was financed through promissory notes
from various stockholders due to the Company. Accordingly, this guarantee was
terminated upon the closing of the initial public offering in July 1997. 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, 1997 and 1996, was $818,750 and $894,000 respectively.
Stockholders' notes receivable at September 30, 1997 and 1996 were $0 and
$443,000, respectively. The loans bore interest at rates ranging from 7.0% to
8.75% per annum and had maturity dates ranging from 1998 to 2001. Interest was
due annually on the anniversary date of the loans, with principal due at
maturity. One loan for $50,000 was secured by a lien on real estate. Accrued
interest receivable at September 30, 1997 and 1996 of $0 and $83,000,
respectively, is included in related party receivables in the accompanying
balance sheets. All of the stockholder notes receivable and the related interest
receivables were repaid at the time of the initial public offering.
The Company also provides management services for 10089 Management at no cost.
Included in other related-party receivables are amounts due from 10089
Management for reimbursable operating expenses paid for by the Company.
10. Line of Credit:
The Company has a line of credit arrangement with a commercial bank under which
it may borrow up to a maximum of $5,000,000. The borrowings are limited to 80%
of the eligible receivables, as defined, and 90% of eligible government
receivables, as defined, and are secured by all assets including inventory,
contract receivables and intangibles. The line bears interest, payable monthly,
at the bank's prime rate plus a percentage, not more than 0.25% and currently
zero. 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. The line of
credit arrangement expires on February 28, 1998.
At September 30, 1997, and 1996 , the Company had $0 and $2,688,000 ,
respectively, outstanding under this arrangement. For the years ended September
30, 1997, 1996 and 1995, interest expense under this line of credit was
$136,000, $249,000 and $185,000, respectively, at weighted average interest
rates of 8.75%, 8.87% and 9.20% respectively.
11. Income Taxes
Following the completion of the Offering, the Company became subject to federal
and state income taxes. The following unaudited pro forma information has been
determined based upon the provisions of SFAS No. 109. This information reflects
income tax expense (benefit) that the Company would have incurred had it been
subject to federal and state income taxes.
(unaudited)
Years ended September 30,
-------------------------
1997 1996
--------- ---------
Pro forma income tax provision (benefit) (in thousands)
Current
Federal .............................. $ 521 $ 708
State ................................ 75 87
Deferred ............................... (25) (52)
------- -------
$ 571 $ 743
======= =======
The provision for income taxes results in effective rates which differ from the
federal statutory rate as follows:
September 30,
1997
---------------
Statutory federal income tax rate............... 34.0%
State income taxes, net of federal tax benefit.. 4.9%
Other........................................... (0.5%)
---------------
38.4%
===============
As of September 30, 1997, the Company had net operating loss carryforwards of
approximately $1,007,000, which expire in the year 2012. The benefits of there
carryforwards may be limited in the future in the event of significant changes
in the ownership of the Company. Net operating loss carryforwards may be used to
offset up to 90% of the Company's alternative minimum taxable income. The
provision for the alternative minimum tax will be allowed as a credit carryover
against regular tax in the future in the event regular tax exceeds alternative
minimum tax expense.
Under the provisions of SFAS No. 109, the tax effect of the net operating loss
carryforwards, together with net temporary differences, represents a net
deferred tax asset for which management has reserved 100% of the operating loss
carryforward. These carryforwards will be benefited for financial reporting
purposes when utilized to offset future taxable income. The components of the
net deferred tax assets are as follows:
September 30,
1997
----------------
(in thousands)
Deferred tax assets
Net operating loss carryforwards.............. $386
Acquired in-process R and D write-off......... 729
Cash to accrual adjustment.................... 607
Accrued vacation.............................. 116
Other......................................... 191
----------------
2,029
----------------
Deferred tax liabilities
Unbilled receivables.......................... (1,143)
Capitalized software development costs........ (307)
Other......................................... (46)
----------------
(1,496)
----------------
Net deferred tax asset.......................... 533
Valuation allowance............................. (386)
----------------
Long-term deferred tax asset.................... $147
================
12. Stockholders' Equity:
Recapitalization and Stock Split
On May 5, 1997, the Company amended and restated its Certificate of
Incorporation to increase the number of authorized shares to 40,000,000 shares
of Common Stock, par value $.01 per share, and 1,000,000 shares of Preferred
Stock, par value $.01 per share. In June, 1997, the Board of Directors approved
a stock dividend having the effect of a 6,750-for-1 stock split of the Common
Stock, which was paid to the stockholders effective June 25, 1997. The change in
the Company's Common Stock for the stock dividend has been given retroactive
effect for all periods presented.
Stock Redemption Agreements
All of the outstanding shares of common stock and options, upon exercise, were
subject to Stock Redemption Agreements. Under certain circumstances, the Company
was 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 $4.44 and $1.48 as of September 30, 1996 and
1995, respectively. The Stock Redemption Agreements were terminated in
connection with the initial public offering and the corresponding accretion was
removed. All treasury stock purchases were a result of the provisions of these
Stock Redemption Agreements.
Stock Plans and Agreements
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. 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. At September 30, 1997, 341,200 shares are available for grant
under this plan.
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. The Board of Directors
granted 337,500 options under this plan and has determined not to grant any
additional awards under the 1996 Plan.
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 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.
In 1997, the Board of Directors granted options under the 1997 Plan to purchase
108,800 shares of Common Stock. These options have an average exercise price of
$8.10 per share and become exercisable in three equal increments and expire
after seven years or upon termination of employment.
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.
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, 1997, 1996 and 1995, these
options were exercisable in the amounts of -0-, 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:
Weighted
Average
Exercise Price
Number Price per per
of Shares Share Share
--------- --------- --------
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......................... 115,000 6.50 6.50
Options granted......................... 108,800 7.50-9.875 8.10
Options exercised ...................... (81,000) 0.70 0.70
Options forfeited....................... (13,500) 4.44 4.44
-------- --------- --------
Shares under option, September 30, 1997 .. 358,800 $0.70-$9.875 $6.21
======== ========= ========
Options outstanding at September 30, 1997 had a weighted average remaining
contractual life of 4.9 years. The fair value per share of all options issued in
1997, estimated on the date of grant using the Black-Scholes option pricing
model, is $4.85.
The Company adopted the disclosure requirements of SFAS No. 123, Accounting for
Stock-Based Compensation, effective for the Company's September 30, 1997
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 pro forma net income and pro forma net income
per share would have been reduced to the amounts indicated below:
Year Ended
September 30,
1997
-------------
Pro forma net income (in thousands) --
As reported ............................. $ 915
SFAS No. 123 pro forma .................. $ 826
Pro forma net income per share --
As reported ............................. $0.19
SFAS No. 123 pro forma .................. $0.17
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 57.6%; risk-free
interest rates of approximately 6.4%; and average expected lives of 7.5 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.
13. Commitments:
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,
1997, were as follows:
Year Ended
September 30, (in thousands)
--------------- --------------
1998................................ $ 1,146
1999................................ 1,070
2000................................ 737
2001................................ 465
2002................................ 326
Thereafter ......................... 299
--------------
Total $4,043
==============
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 9).
For the years ended September 30, 1997, 1996 and 1995, rent expense related to
this lease totaled $257,000, $309,000 and $299,000, respectively. Amounts
representing aggregate rent expense on all operating leases, excluding the
related party lease, totaled $1,066,000, $1,183,000 and $1,014,000 for the years
ended September 30, 1997, 1996 and 1995, 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 matching
contributions, each determined annually by the Board of Directors. Contributions
charged to expense for the years ended September 30, 1997, 1996 and 1995, were
$236,000, $368,000, $320,000, respectively.
14. Subsequent Events:
Acquisition
As discussed in Note 4, on November 26, 1997, the Company acquired all the
outstanding shares of ISC.
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this item is hereby incorporated by reference
from the Company's definitive proxy statement to be filed with the Commission
under Section 14A of the Securities Exchange Act of 1934 on or before January
28, 1998, or shall be filed by amendment to this Form 10-K on or prior to such
date.
Item 11. Executive Compensation.
The information required by this item is hereby incorporated by reference
from the Company's definitive proxy statement to be filed with the Commission
under Section 14A of the Securities Exchange Act of 1934 on or before January
28, 1998, or shall be filed by amendment to this Form 10-K on or prior to that
date.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item is hereby incorporated by reference
from the Company's definitive proxy statement to be filed with the Commission
under Section 14A of the Securities Exchange Act of 1934 on or before January
28, 1998, or shall be filed by amendment to this Form 10-K on or prior to that
date.
Item 13. Certain Relationships and Related Transactions.
The information required by this item is hereby incorporated by reference
from the Company's definitive proxy statement to be filed with the Commission
under Section 14A of the Securities Exchange Act of 1934 on or before January
28, 1998, or shall be filed by amendment to this Form 10-K on or prior to that
date.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) 1. Financial Statements:
Report of Independent Accountants
Consolidated Balance Sheets as of September 30, 1997 and 1996
Consolidated Statements of Operations for the Years Ended September
30, 1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity for the Years Ended
September 30, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the Years Ended September
30, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
(a) 2. Financial Statement Schedules:
All schedules are omitted because they are not applicable or the
required information is shown in the Consolidated Financial
Statements or the notes thereto under Item 8.
(a) 3. Exhibits:
Exhibit
No. Description
------- -----------
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.***
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.***
10.12 -- Stock Purchase Agreement by and between Advanced
Communication Systems, Inc. and REMEC Inc., dated as
of August 26, 1997.******
10.13 -- Stock Purchase Agreement by and between Advanced
Communication Systems, Inc. and the Shareholders of
Integrated Control Systems, Inc., dated as of October
31, 1997.*******
11.1 -- Computation of Per Share Earnings.*
21.1 -- List of Subsidiaries of the Registrant.*
23.1 -- Consent of Arthur Andersen LLP.*
27.1 -- Financial Data Schedule for year ended September 30,
1997. (For SEC purposes only).*
----------------------
* Filed herewith.
** Incorporated by reference to the Registration
Statement on Form S-1 (File No. 333-23959) filed
by the Company with the SEC on March 26, 1997.
*** Incorporated by reference to Amendment No. 1 to
the Registration Statement on Form S-1
(File No.333-23959) filed by the Company with
the SEC on May 6, 1997.
**** Incorporated by reference to Amendment No. 2 to
the Registration Statement on Form S-1
(File No.333-23959) filed by the Company with
the SEC on May 30, 1997.
***** Incorporated by reference to Amendment No. 4 to
the Registration Statement on Form S-1
(File No.333-23959) filed by the Company with
the SEC on June 25, 1997.
****** Incorporated by reference to Current Report on
Form 8-K filed by the Company with the SEC on
September 26, 1997.
******* Incorporated by reference to Current Report on
Form 8-K filed by the Company with the SEC on
December 5, 1997.
+ Confidential treatment has been granted for
certain portions of this exhibit.
(b) Reports on Form 8-K
On September 3, 1997, the Company filed a current report on Form 8-K
pursuant to Item 5 thereof, reporting that on August 26, 1997 it signed a
definitive agreement to acquire RF Microsystems, Inc., a wholly owned subsidiary
of REMEC, Inc. for $5.0 million in cash.
On September 26, 1997, the Company filed a current report on Form 8-K
pursuant to Item 2 thereof, reporting that on September 12, 1997, it acquired
all the outstanding shares of RF Microsystems, Inc., from REMEC, Inc., pursuant
to a Stock Purchase Agreement, dated August 26, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in Fairfax, Virginia
on December 29, 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 Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
----------- ----------- --------
/s/ George A. Robinson Chairman, President December 29, 1997
----------------------- and Chief Executive Officer
George A. Robinson (Principal Executive Officer)
/s/ Dev Ganesan Executive Vice President, December 29, 1997
---------------- Chief Financial Officer
Dev Ganesan and Treasurer
(Principal Financial and
Accounting Officer)
/s/ Charles R. Collins Director December 29, 1997
-----------------------
Charles R. Collins
/s/ Thomas A. Costello Director December 29, 1997
-----------------------
Thomas A. Costello
/s/ Charles G. Martinache Director December 29, 1997
--------------------------
Charles G. Martinache
/s/ Wayne Shelton Director December 29, 1997
--------------------------
Wayne Shelton
<PAGE>
INDEX TO EXHIBITS
Exhibit
No. Description
11.1 -- Computation of Per Share Earnings.
21.1 -- List of Subsidiaries of the Registrant.
23.1 -- Consent of Arthur Andersen LLP.
27.1 -- Financial Data Schedule for year ended September
30, 1997. (For SEC purposes only).
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)
Year ended September 30,
-----------------------------
1997 1996
-------------- ------------
Weighted average Common Stock outstanding.......... 4,305,801 3,732,750
Common stock equivalent............................ 46,623 73,440
Stock options issued during the twelve
months immediately preceeding the offering (using
the treasury stock method and the initial public
offering price of $7.50 per share.................. 38,131 75,833
The assumed sale of a sufficient number of shares
of Common Stock necessary to fund the distribution
of all undistributed S corporation earnings in
excess of the preceeding twelve months earnings.... 376,917 479,333
-------------- ------------
Pro forma weighted average shares.................. 4,767,472 4,361,356
============== ============
Pro forma net income............................... $915 $1,162
============== ============
Pro forma net income per share..................... $0.19 $0.27
============== ============
EXHIBIT 21.1 - LIST OF SUBSIDIARIES OF THE REGISTRANT
Name of Subsidiary State of Incorporation
- ------------------ ----------------------
1) RF Microsystems, Inc. California
2) Fairfax Communications, Ltd. United Kingdom
3) Integrated Systems Control, Inc. Virginia
EXHIBIT 23.1 - CONSENT OF ARTHUR ANDERSEN LLP
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the incorporation of our
report dated November 7, 1997, included in this Form 10-K, into the Company's
previously filed Registration Statement on Form S-8, File No. 333-37681.
/s/ ARTHUR ANDERSEN LLP
Washington, D.C.
December 26, 1997
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