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UNITED STATES
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, 1999 COMMISSION FILE NUMBER: 0-22737
ADVANCED COMMUNICATION SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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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)
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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
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(Title of class)
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 to be non-affiliates of the registrant on December
10, 1999, computed with reference to the closing price of the Common Stock on
the Nasdaq National Market as reported for December 10, 1999, was $116,077,545.
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As of the close of business December 10, 1999, the registrant had
outstanding 8,770,364 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, 2000.
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PART I
ITEM 1. BUSINESS.
GENERAL
Advanced Communication Systems, Inc. ("ACS" or the "Company") provides
communications, information systems and aerospace services and solutions,
predominantly to U.S. government agencies and to a lesser extent commercial
customers. The Company operates primarily in three interrelated areas:
communication services, information systems and aerospace services. The Company
believes that, from its inception in 1987, it has been a leading provider of
U.S. Navy satellite communications services. Recently, using its information
management capabilities, the Company has begun to expand its network and
database design and support services to the U.S. military and to develop
business with other federal agencies, state and local governments and commercial
customers. The Company's revenues have increased each year since fiscal 1987 and
grew at a compound annual rate of 62.8% during the last five fiscal years,
reaching $218.3 million for fiscal 1999. The Company's total funded and unfunded
backlog was $704.6 million as of September 30, 1999.
On December 9, 1999, ACS entered into an Agreement and Plan of Merger
(the "Merger Agreement") by and among ACS, The Titan Corporation ("Titan") and A
T Acquisition Corp., a wholly owned subsidiary of Titan ("Sub") pursuant to
which Sub will merge with and into ACS (the "Merger"). ACS will survive the
Merger and become a wholly owned subsidiary of Titan. Under the terms of the
Merger Agreement, upon the consummation of the Merger all outstanding shares of
ACS will be exchanged for shares of Titan common stock and all outstanding
options to acquire common stock of ACS will be assumed and converted into
options to acquire shares of Titan common stock at a ratio between 0.6154 and
0.7843 shares of Titan common stock to one share of ACS common stock (the
"Exchange Ratio"). The Exchange Ratio can vary within this range depending on
the ten day average trading price of Titan common stock ending on or about the
date that is two days prior to the closing date of the Merger. Under the terms
of the Merger Agreement, if the average stock price of Titan common stock is
less than $22.95 per share at the time of closing, ACS has the right to
terminate the Merger Agreement subject to a Titan option to fix the Exchange
Ratio which assures a minimum price of $18.00 per share of ACS common stock. If
the average stock price of Titan common stock is greater than $35.75 per share
at the time of closing, Titan has the right to terminate the Merger Agreement
subject to an ACS option to fix the Exchange Ratio and agree to receive a
maximum price of $22.00 per share of ACS common stock.
The Merger is subject to certain conditions, including stockholder approval
by the holders of a majority of ACS common stock outstanding on the record date
for a meeting of stockholders of ACS at which the stockholders will consider
approval of the Merger Agreement, the expiration or early termination of the
waiting period under the Hart-Scott-Rodino Antitrust Improvements Act, the
receipt of certain approvals and consents and other customary conditions. The
Merger will be accounted for as a pooling of interests and is intended to
qualify as a tax-free reorganization.
The Company's primary objective is to provide superior communication
services, information systems and aerospace services to its clients. Consistent
with this objective, the Company acquired Program Support Associates, Inc.
("PSA") in September 1999, SEMCOR, Inc. ("SEMCOR") in June 1998, Advanced
Management Incorporated ("AMI") in February 1998, Integrated Systems Control,
Inc. ("ISC") in November 1997, and RF Microsystems, Inc. ("RFM") in August 1997.
The Company believes that such acquisitions: (i) allow the Company to
participate in increasingly large and complex procurement programs; (ii)
increase its opportunities to cross-sell products and services to existing
customers; (iii) bring new strength to the Company's technical capabilities
through the cross-utilization of technology and engineering skills; and (iv)
increase the overall depth and experience of the Company's management.
PROGRAM SUPPORT ASSOCIATES, INC. Founded in 1991, PSA develops, installs
and supports online, real time financial management information systems
primarily to the Department of Defense ("DOD"). PSA is headquartered in
Charlottesville, Virginia, and has operations in Charlottesville, San Diego and
the Washington, D.C. area. Its clients include Space and Naval Warfare Command
and Centers, Naval Sea Systems Command, and the U.S. Army.
SEMCOR, INC. Founded in 1967, SEMCOR provides a wide range of technical and
engineering services, primarily to the DOD, in the areas of communication,
aviation, applied technology and information systems. SEMCOR's clients include
the U.S. Navy, U.S. Army, U.S. Air Force, Federal Aviation Administration and a
broad range of commercial clients. SEMCOR maintains its headquarters in Mt.
Laurel, New Jersey, and has 42 offices in 24 states.
ADVANCED MANAGEMENT INCORPORATED. Founded in 1981, AMI provides a wide
range of information technology services, including complex computer solutions
and management services, to a variety of government and commercial entities.
AMI's clients include the Federal Deposit Insurance Corporation (the "FDIC"),
U.S. Secret Service, U.S. General Accounting Office, U.S. Customs Service, U.S.
Department of Health and Human Services, U.S. Department of Labor, U.S.
Department of Agriculture and U.S. Army. AMI is headquartered in Fairfax,
Virginia, and has operations in Maryland, Virginia and Washington, D.C.
INTEGRATED SYSTEMS CONTROL, INC. Founded in 1983, ISC provides technical
and engineering services to the DOD, primarily the U.S. Navy, in the areas of
communications and information technology. Among others, its clients include the
Space and Naval Warfare Systems Center, Defense Information Systems Agency Joint
Interoperability Engineering Office, Naval Air Systems Command, U.S. Coast Guard
and the North Atlantic Treaty Organization ("NATO"). Headquartered in Virginia
Beach, Virginia, ISC has operations in Virginia Beach, San Diego, Charleston and
the Washington, D.C. area and provides support services from a number of sites
worldwide, including Japan, Bahrain, Honolulu, Italy and Guam.
RF MICROSYSTEMS, INC. Founded in 1985, RFM provides technical and
engineering services to the DOD in the areas of communications, navigation,
electronic warfare and digital signal systems. RFM's clients include the Space
and Naval Warfare Systems Center, Naval Air Warfare Center -- Aircraft Division,
Space and Missile Center, Air Force Space Command, Defense
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Information Systems Agency and Department of Transportation. Headquartered in
San Diego, RFM has operations in San Diego, the Los Angeles area, Colorado
Springs and the Washington, D.C. area.
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 $14.3 million
after deducting underwriting discounts and offering expenses payable by the
Company.
In May 1998, the Company consummated a public offering of 2,000,000 shares
of its common stock for $12.375 per share. The offering resulted in net proceeds
to the Company of approximately $22.6 million after deducting underwriting
discounts and offering expenses payable by the Company.
INDUSTRY OVERVIEW
Growth in the Company's business is being driven by increasing demand for
satellite-based communications systems and the increasing trend in government
and commercial organizations to focus on their core competencies by outsourcing
non-core functions such as communications and information technology. In
addition, management believes that 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 more effective use of personnel and assets and result in
increased performance.
Improvements in space and communications technologies have resulted in
modern communications satellites with power, capacity, switching capabilities
and longevity significantly greater than those of their predecessors. These
improvements in performance, together with satellites' extensive geographic
coverage and technical advantages, have made satellite-based communications
increasingly competitive with other communications technologies, broadening the
market for satellite services such as telephony support for cable and network
television, broadband data transmission, paging, earth-sensing and position
location.
Government and business organizations also are increasingly demanding that
information technology systems be designed for interoperability with commercial
off-the-shelf ("COTS") 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 COTS 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 SATELLITE COMMUNICATIONS INDUSTRY. Since
its inception, the Company has focused on being a leader in the military
satellite communications industry. The Company now seeks to expand its services
in this market by continuing its early identification of program needs and its
support of government program offices in formulating requirements. The Company
also believes it can leverage its expertise with U.S. Navy satellite
communications to expand its presence as a military satellite communications
provider both within the U.S. 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 Contracts.
EXPAND THROUGH STRATEGIC ACQUISITIONS AND THE USE OF TEAMING RELATIONSHIPS.
Strategic acquisitions are an integral component of the Company's growth
strategy. The Company has completed five significant acquisitions and continues
to evaluate potential acquisitions of businesses, technologies and products
which are complementary to its core communications business. 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 its increased capabilities, successfully pursue larger
communication, information systems and applied technology opportunities.
Identifying and pursuing future acquisition opportunities will require a
significant amount of
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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.
DEVELOP ADDITIONAL COMMERCIAL BUSINESS. While servicing its government
customers, the Company has developed many advanced technical capabilities in
areas such as satellite communications, networking, groupware applications,
local area network ("LAN") and wide area network ("WAN") services and database
design and support. In addition, the Company has a working relationship with
Microsoft that allows access to certain of Microsoft's suite of proprietary
development tools for groupware applications. The Company's strategy is to
market these skills and capabilities in selected commercial businesses,
especially medium-sized businesses that are outsourcing their increasingly
complex information technology needs.
COMPANY OPERATIONS
The Company operates primarily in three interrelated areas: communication
services, information systems and aerospace services.
COMMUNICATION SERVICES
The Company believes it is recognized as a leader in the satellite
communications industry. The Company designs, develops, integrates and installs
complete communication solutions across the full spectrum of media ranging from
land lines to wireless technologies, with particular strengths in satellite
communications. The Company also provides technical, programmatic and financial
management support to the Company's government customers for large-scale
command, control and communication system procurements. Other related
capabilities include innovative business process re-engineering and the
implementation of streamlined commercial business practices that significantly
enhance productivity. The Company believes this combination of skills and
capabilities is one of the key factors that distinguishes it from its
competitors in the communication services market. The Company's communications
services business represented 51.6% of revenues for fiscal 1999.
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 U.S. 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 U.S. 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
that 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 the required 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 U.S. 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. The Company 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,
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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. The
Company 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.
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 following is a significant communication services contract and program,
emphasizing the nature of the Company's interrelated business areas:
- The Company is the prime contractor under a five-year time and
materials/FFP contract awarded by the U.S. Navy in August 1997 to
provide engineering and technical assistance in the conduct of
requirements definition; system engineering and design; ship
construction and modernization; system/subsystems design; integration,
test and evaluation; installation planning and management; program
planning and management; developmental, operational and acceptance
test planning and execution; and life cycle support planning for the
Navy Defense Message System, Base Level Information Infrastructure,
and Joint Maritime Communications Systems. The subcontractors working
under this contract consist of Scientific Research Corporation, Anteon
Corporation, ESN, Inc, Vredenburg & Company, J.G. Van Dyke &
Associates, Inc., Network Engineering and Technical Services Inc.,
American Systems Corporation and Validity Corporation. The contract
had a backlog of approximately $78.8 million at September 30, 1999.
- The Company is the prime contractor under two five-year cost plus
fixed fee contracts awarded by the U.S. Navy during 1996 and expiring
in fiscal 2001 to provide technical engineering, program management
and various other information management and support services to the
U. S. Navy. During 1999, the U.S. Navy established an Omnibus (the
"PMTO") contract that was awarded to a competitor in September 1999.
This contract encompassed a number of the tasks that previously
were performed under the Company's two existing contracts. Management
believes that it will be able to utilize other contract vehicles to
perform a substantial number of tasks previously performed under
these contracts, however there is no assurance that the Company will
be able to do so. These contracts had a backlog of approximately
$52.5 million at September 30, 1999.
- The Company is the prime contractor under a five-year cost plus
fixed fee contract awarded in November 1998, by the U.S. Navy to
provide software and systems engineering services aimed at validating,
accrediting and certifying some of the Navy's most important
information systems for the Navy Information Systems and Security
("INFOSEC"). This effort includes engineering support, testing,
implementation, training, and transition to the use of information
systems, products and initiatives. The contract had a backlog of
approximately $31.9 million at September 30, 1999.
INFORMATION SYSTEMS
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The Company provides information technology services and systems
integration to a wide spectrum of clients. The Company's information systems
business represented approximately 26.8% of revenues for fiscal 1999.
INFORMATION TECHNOLOGY SERVICES. Through its information technology
services business, the Company offers a broad array of professional information
technology services and information systems to commercial and government
markets. The information systems 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 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 Certified Solution Provider, a Lotus Business Partner, Banyan Vines
Systems Integrator 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 is also a value-added reseller for
a wide range of other cutting-edge information technology hardware and software
products.
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. In addition, the
Company has a special relationship with Microsoft that allows access to certain
of Microsoft's suite of proprietary development tools for groupware
applications. The Company believes that there is a substantial demand for these
kinds of services and is actively marketing them to commercial clients.
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 over 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 a 250 station LAN with five servers. The
Company has applied that same technology to several commercial customers.
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. In fiscal 1997, the Company completed a
major database task for the U.S. Army to provide access to U.S. Army databases
using a data warehousing approach.
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.
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.
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
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government customers are through the Company's GSA Schedule Contracts. Sales to
commercial customers are 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 its GSA
Schedule Contracts. The resale business often provides the opportunity for
additional systems integration business.
The Company believes that a market opportunity has developed as government
and commercial customers have begun to migrate to systems composed of COTS
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 GSA Schedule Contracts for government customers and direct
purchase for commercial customers. An 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 systems integrator because
it has targeted certain technologies and systems to offer through the GSA
Schedule Contracts. Expecting that many government agencies were planning to use
Versa-Module 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.
AEROSPACE SERVICES
The Company applies a wide range of advanced technology to assist customers
across the military services in meeting their critical mission requirements. The
Company's highly qualified professional staff provides state-of-the-art
scientific, engineering, technical, logistics, program and financial management
support. The Company also has a well-qualified support staff with backgrounds in
the various systems and technologies being supported. The Company believes that
its qualifications and experience distinguish it from competitors in the
aviation systems area and make it a pre-eminent support contractor for aviation
systems engineering and program management. The Company's aerospace services
business represented 21.6% of revenues for fiscal 1999.
SYSTEMS ENGINEERING. The Company provides systems engineering and
integration support for a diverse range of surveillance, reconnaissance and
radar systems. The Company develops and validates software; provides
system-level survivability analysis and solutions; applies advanced corrosion
inspection and control methodologies; supports the development of advanced
materials, including composites; and provides flight test planning and related
range management support. Most of the Company's contracts are not
project-specific and provide for support to a variety of platforms and systems.
The Company provides systems engineering, systems integration and system test
support to U.S. Army, U.S. Navy and U.S. Air Force aviation platforms and
systems, and many of the afloat ships of the U.S. Navy. Services provided
include development or review of specifications, requirements analysis, system
and/or subsystem design, hardware and software engineering, human factors
engineering, test planning and test support.
The Company's expertise in systems engineering permits it to develop
innovative solutions to engineering problems. The Company has participated in
the design, development, fabrication, installation and test of several U.S. Navy
airborne reconnaissance systems including the F-14 tactical airborne
reconnaissance pod system (currently in use by the fleet, and still supported by
the Company's personnel), and long focal length electro-optical systems
currently in use for drug interdiction and surveillance. The Company's unique
knowledge of survivability was recently applied to develop an approach for
flight-line testing of specific aircraft characteristics which previously
required specialized laboratory test equipment.
The Company's expertise in materials engineering is currently being applied
to inspection, detection and correction of corrosion problems on U.S. Army
helicopter systems. Sophisticated digital imaging systems are being employed to
locate corrosion in areas that were previously inaccessible without major
disassembly of the airframe. The U.S. Army has requested that the Company's
personnel visit remote overseas bases regularly to assist and train U.S. Army
personnel in corrosion control procedures.
The Company is currently working on construction of a man-in-the-loop
simulation for the Navy F/A-18E/F program. A simulator will be used to
demonstrate the performance benefits of a new active electronically scanned
array radar system. The simulator will
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also be used to develop operator controls and to develop the human/machine
interface for the new "split cockpit" aircraft. The Company has also recently
added a modeling and simulation capability to support U.S. Army rotary-wing test
programs.
LIFE-CYCLE SUPPORT. The Company provides a broad range of logistics
analysis and life-cycle support services to U.S. Army, U.S. Navy, U.S. Air Force
and Federal Aviation Administration activities. The Company's professional staff
is well versed in the various elements of logistics that apply across the life-
cycle of a military system from concept development through operational use and
into retirement. Many of the Company's personnel have previous military
operations and maintenance experience directly applicable to the systems being
supported for the Company's customers. The Company's professionals have
developed specialized software tools for system configuration control and
tracking. The Company-developed Resource Allocation Management Plan is used by
the U.S. Navy F-14 Program Office to track the status of the entire F-14 fleet.
Under contract to the U.S. Army, the Company's engineers and scientists are
reviewing technical manuals for aircraft, tracked vehicles, and watercraft to
find all uses of ozone depleting chemicals and certain hazardous materials and
to identify appropriate replacements.
PROGRAM MANAGEMENT. The Company provides a broad range of program
management support services to a variety of U.S. Army, U.S. Navy, and U.S. Air
Force programs. The Company has implemented an Earned Value Management ("EVM")
Program for the F-14 Program at both the Naval Air Warfare Center Weapons
Division in Point Mugu, California and the Naval Aviation Depot in Jacksonville,
Florida. With EVM, the program office can track progress and cost of major
system upgrades against schedule and budget and to take appropriate corrective
actions promptly. Significant cost savings (in excess of $1 million) were
achieved during the first year of EVM implementation. The Company also provides
budget and financial management and cost estimating support to the Cruise
Missile Program Office, to the B-2 program, and to the Naval Air Warfare Center
Aircraft Division. The Company has recently expanded its financial management
support into the commercial sector with a contract from Navistar in Sidney,
Ohio.
The Company has provided in-depth management and engineering support for
the U.S. Navy EA-6B Improved Capability Modifications Program. The Company's
personnel supported these acquisitions from specification development through
procurement. Currently, the Company is supporting integration and test planning,
reviewing proposed changes to technical manuals, updating program environmental
documentation, researching weight and balance issues and preparing for
preliminary design review.
The Company has a team of over 100 professional, technical, and
administrative personnel providing technical and management support at Eglin Air
Force Base. The Company has received outstanding evaluations for every
evaluation period of this four-year contract. The Company's personnel provide a
range of management and engineering services related to Air Force weapons
testing. Some recent examples include: supporting preparation of a joint strike
fighter weapons roadmap including associated development and production
schedules; updating a master schedule for sub-scale aerial targets; time-phased
production; and providing mission preparation, post-mission reporting, and test
management services for airborne testing of F-15 avionics.
The following are significant aerospace services contracts and programs:
- The Company is the prime contractor under a five-year cost plus fixed
fee contract awarded by the U.S. Navy in May 1998 to provide systems
engineering and technical services which include analysis, development,
and integration of warfare systems into Naval aircraft. The
subcontractors working under this contract consist of Arinc, DCS, Eagan
McCallister, Information Spectrum, Inc., Mantech Systems, Jorge
Scientific, and Averstar, Inc. The contract had a backlog of
approximately $42.3 million at September 30, 1999.
- The Company is the prime contractor under a five-year time and
materials contract awarded by the Naval Air Systems Command (NAVAIR) in
April 1999, to develop, verify, execute and enhance methods and
processes for tracking aircraft structural fatigue life. The contract
team includes, as subcontractors, Boeing Company, University of Dayton
Research Institute, NAVMAR Applied Sciences, SABRE Systems, Technical
Data Analysis, and American Engineering Services. The contract had a
backlog of approximately $45.5 million at September 30, 1999.
PRODUCTS
In September 1999, in order to focus more on its core business
services, the Company made a strategic decision to discontinue development of
its SALTS related software products, and accordingly, the results of operations
for the year ended September 30, 1999, includes a one-time charge of about $3.9
million related to SALTS software development. Related costs, which are included
in indirect, general and administrative expenses, totaled approximately
$548,000.
8
<PAGE> 9
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. The Company's 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. These activities are
augmented by professional market research and proposal development capabilities
within the Company. 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. With
the DOD's move to joint operations, the Company's depth of experience has
allowed it to gain new customers in all of the military services. The Company
emphasizes customer satisfaction, as evidenced by its ability to retain
customers such as the U.S. Navy since the Company's inception in 1987. In fiscal
1996, the Company 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 made the award 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
financial 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 and time and
materials 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 U.S. 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 U.S. 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 Contracts, government agencies may
purchase, at prices approved by the GSA, hardware and software integration,
various engineering services, 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 Contracts
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 with provisions for
economic price adjustments. The contracts are both fixed price and labor hour
contracts and do not have any pre-set delivery schedules or obligation to
purchase any significant amount of goods or services. The GSA Schedule Contracts
are renewable every five years and each of the current contracts expire from
2002 through 2004. The Company believes that the GSA Schedule Contracts will be
renewed beyond these dates, although there can be no assurance to this effect.
For fiscal 1999, approximately 25.4% of the Company's revenues were derived from
GSA Schedule Contracts.
The Company currently has a total of nine blanket purchase agreements
("BPAs") with federal agencies. A BPA is a simplified but non-mandatory, fixed
price or labor hour, contract for the government to purchase products, usually
by establishing charge accounts with qualified sources. Agencies typically enter
into BPAs for similar products with several companies. BPAs generally include a
list
9
<PAGE> 10
of products or services at established prices, individual purchase limits for
authorized purchasers, and other pre-negotiated terms and conditions. Purchases
under BPAs may be paid for with a government-issued credit card.
In 1996, the GSA authorized agencies to enter into BPAs with GSA Schedule
holders. The GSA-authorized BPAs incorporate many terms and conditions of the
GSA Schedule Contracts, and incorporate many products offered on the GSA
Schedule Contracts, often at lower prices than available on the GSA Schedules.
The Company normally enters into separate agreements with vendors in order to
offer reduced BPA prices to the government. The BPA sales vehicle allows the
Company to focus specific vendor relationships on specific sets of customers.
The majority of 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.
Approximately 5.1% of the Company's revenues in fiscal 1999 were generated
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 Defense Contract Audit
Agency ("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 1996 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 under the termination for convenience clause 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.
10
<PAGE> 11
"Backlog" is the total of funded and unfunded backlog. The following table
summarizes the Company's funded and unfunded backlog at the dates indicated:
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------------------------
1997 1998 1999
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
BACKLOG COMPONENT
Funded..................... $ 5,323 $ 57,454 $ 64,797
Unfunded................... 141,314 456,592 639,809
---------- ---------- ----------
Total............ $ 146,637 $ 514,046 $ 704,606
========== ========== ==========
</TABLE>
The Company believes that approximately 29.6% of its backlog as of
September 30, 1999 will result in revenues in fiscal 2000. 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.
Included in the total contract backlog at September 30, 1999, is
approximately $52.5 million attributable to the Company's two significant cost
plus fixed fee contracts with the U.S. Navy. During 1999, the U.S. Navy
established an Omnibus contract, that was awarded to a competitor in September
1999. This contract encompassed a number of the tasks that previously were
performed under these two contracts. Management believes that it will be able to
utilize other contract vehicles to perform a substantial number of tasks
previously performed under these contracts, however there is no assurance that
the Company will be able to do so.
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 services 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
information systems businesses. In satellite communication systems and services,
the Company competes against technical services companies in the defense
industry, including Computer Sciences Corporation, Science Applications
International Corporation and Booz-Allen and Hamilton, Inc. In its other
business areas, the Company competes against a vast array of technical services
companies, computer manufacturers, systems integrators and product resellers and
distributors.
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 September 30, 1999, the Company had 1,974 employees. The Company
believes that its relations with its employees are good. None of the Company's
employees is 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.
11
<PAGE> 12
ITEM 2. DESCRIPTION OF PROPERTY.
The Company, headquartered in Fairfax, Virginia, occupies approximately
363,000 square feet of office space located throughout the United States.
Substantially all of this space is leased and is comprised primarily of office
space. 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.
In August 1999, the Company filed an action against the McGraw-Hill
Companies, Inc. ("McGraw-Hill") in the United States District Court for the
District of New Jersey (the "New Jersey Action"), seeking recovery of
approximately $186,000 in fees for services performed pursuant to certain
contracts. McGraw-Hill has threatened to file a counterclaim against the Company
seeking recovery of $500,000, on allegations that the Company negligently
designed certain software for McGraw-Hill, which negligence caused significant
problems to McGraw-Hill customers. The Company files its answer to the
counterclaim in December 1999, and it believes that it has a meritorious defense
to the counterclaims and intends to conduct a vigorous defense. An initial
Scheduling Conference in the action is scheduled for January 2000.
On September 13, 1999, the Company protested the award of the PMTO contract
to a competitor of the Company. This protest was denied by the Comptroller
General of the United States on December 16, 1999.
The Company is from time to time involved in litigation incidental to the
conduct of its business. The Company currently is not a party to any legal
proceedings, other than the actions referred to above, which, in the opinion of
management, could have a material adverse effect on the Company's business,
financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted during the fourth quarter of fiscal 1999 to
a vote of security holders.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The following table sets forth the high and low sales prices of the Company's
common stock as reported by the Nasdaq National Market, where the common stock
trades under the symbol "ACSC."
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
FISCAL YEAR ENDED SEPTEMBER 30, 1998
First Quarter................................... $12.750 $ 8.000
Second Quarter.................................. 12.000 8.000
Third Quarter................................... 14.938 10.500
Fourth Quarter.................................. 12.875 7.750
FISCAL YEAR ENDED SEPTEMBER 30, 1999
First Quarter................................... $12.563 $ 7.125
Second Quarter.................................. 16.125 9.813
Third Quarter................................... 13.938 11.125
Fourth Quarter.................................. 15.000 10.000
</TABLE>
On December 10, 1999, the closing price of the Company's common stock
was $17.625 per share. As of December 10, 1999, there were approximately 86
holders of record of common stock. The Company believes that there are over
5,200 beneficial owners of common stock.
Dividend Policy
The Company does not anticipate declaring or paying cash dividends in the
foreseeable future. In addition, the Company's existing credit facilities
contain provisions which could have the effect of limiting its ability to pay
cash dividends. See "Note 10 of the Consolidated Financial Statements."
12
<PAGE> 13
Recent Sales of Unregistered Securities
None.
ITEM 6. SELECTED FINANCIAL INFORMATION.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------------------
1995 1996 1997(3) 1998 1999 (4)
-------- -------- ------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.............................................. $ 23,724 $ 31,665 $52,194 $107,752 $218,252
Direct costs.......................................... 14,815 19,307 37,687 69,847 147,667
Indirect, general and administrative expenses......... 8,202 10,253 11,128 28,834 53,863
Provision for doubtful accounts....................... -- -- -- -- 2,514
Write-off of capitalized software development costs... -- -- -- -- 3,893
-------- -------- ------- ------- --------
Income from operations................................ 707 2,105 3,379 9,071 10,315
Interest expense...................................... (185) (257) (136) (1,918) (4,492)
Other income, net..................................... 52 57 153 82 160
-------- -------- ------- ------- --------
Income before taxes................................... 574 1,905 3,396 7,235 5,983
Provision (benefit) for income taxes.................. -- -- (250) 2,861 2,402
-------- -------- ------- ------- --------
Net income............................................ $ 574 $ 1,905 $ 3,646 $ 4,374 $ 3,581
======== ======== ======= ======= ========
Net income per share -- basic......................... $ 0.51 $ 0.85 $ 0.61 $ 0.41
======== ======= ======= ========
Net income per share -- diluted....................... $ 0.50 $ 0.84 $ 0.60 $ 0.41
======== ======= ======= ========
Weighted average shares outstanding -- basic.......... 3,733 4,306 7,221 8,680
======== ======= ======= ========
Weighted average shares outstanding -- diluted........ 3,806 4,352 7,326 8,803
======== ======= ======= ========
PRO FORMA STATEMENT OF OPERATIONS DATA FOR FISCAL YEARS 1995 THROUGH 1997:
Income before taxes................................... $ 574 $ 1,905 $ 3,396
Pro forma income taxes(1)............................. 229 743 1,305
-------- -------- -------
Pro forma net income.................................. $ 345 $ 1,162 $ 2,091
======== ======== =======
Pro forma net income per share -- basic............... $ 0.28 $ 0.45
======== =======
Pro forma net income per share -- diluted............. $ 0.27 $ 0.44
======== =======
Pro forma weighted average shares
outstanding -- basic(2)............................. 4,212 4,682
======== =======
Pro forma weighted average shares
outstanding -- diluted(2)........................... 4,286 4,729
======== =======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------------------------------------
1995 1996 1997 1998 1999
-------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............. $2,716 $ 5,387 $ 9,526 $ 21,436 $ 29,195
Total assets................ 6,987 13,117 26,212 119,735 143,202
Total debt.................. 1,821 2,688 -- 38,274 48,964
Stockholders' equity........ 2,497 4,375 13,828 44,883 49,894
</TABLE>
- ----------
(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 for diluted pro forma net income
per share; and (ii) 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 preceding 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 or $0.25 per share on an after tax basis.
(4) Includes a one-time charge of $3.9 million related to SALTS software
development and $1.8 million for an uncollected receivable from the
Australian Navy related to the development and installation of RANSALTS, a
SALTS-type product. In addition, related costs, that are included in the
indirect and general and administrative expenses, totaled $548,000.
Additionally, included in indirect general and administrative expenses, are
significant bid and proposal costs of $444,000 that were expended for one
major contract proposal effort. Adjusted per share earnings on a fully
diluted basis, excluding the charges referred to above, would have been
$0.86 for the year ended September 30, 1999.
13
<PAGE> 14
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.
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, information systems and aerospace
services and solutions, predominantly to U.S. government agencies and to a
lesser extent commercial customers. The Company operates primarily in three
interrelated areas: communication services, information systems and aerospace
services. The Company has been profitable since its inception in 1987, and has
achieved a compound annual growth rate in revenues of 62.8% over the past five
fiscal years, with its substantial growth in fiscal years 1998 and 1999
attributable to acquisitions.
The Company's backlog, including both funded and unfunded backlog, was
$704.6 million at September 30, 1999. The Company's numerous large contract wins
were primarily responsible for the increase in backlog from fiscal 1998 to
fiscal 1999. 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. 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. Congress normally appropriates funds for
a given program on a fiscal year basis, even though actual contract performance
may take many years. As a result, contracts ordinarily are only partially funded
at the time of award, and additional monies are normally committed to the
contract by the procuring agency as appropriations are made by Congress in
subsequent fiscal years. There can be no assurance that Congress will
appropriate funds or that procuring agencies will commit funds to the Company's
contracts for their anticipated terms. In addition, most of the Company's
government contracts have a base term of one year and a number of option years.
There can be no assurance that the government will extend a contract through its
option years. Many of the Company's large contracts require that the Company
supply services upon request, and the Company receives no payments under these
contracts until such services are requested and performed. There can be no
assurance that cancellations or scope adjustments of these contracts might not
occur or that the Company's services under these contracts will be requested at
the anticipated levels in the future. See "Business -- Government Contracts" and
"Business -- Backlog."
Revenues, by dollar and percentage, from the Company's three interrelated
areas and three major types of customer are given below:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------------------------------------------------
1997 1998 1999
--------------------- --------------------- -----------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
SERVICES PROVIDED
Communication Services.................. $30,854 59% $ 59,424 55% $112,605 52%
Information Systems..................... 21,340 41 33,980 32 58,516 27
Aerospace Services...................... -- -- 14,348 13 47,131 21
------- --- -------- --- -------- ---
Total......................... $52,194 100% $107,752 100% $218,252 100%
======= === ======== === ======== ===
CUSTOMER TYPE
U.S. Government......................... $48,284 92% $ 97,463 90% $198,966 91%
Commercial.............................. 1,997 4 9,422 9 19,201 9
International........................... 1,913 4 867 1 85 --
------- --- -------- --- -------- ---
Total......................... $52,194 100% $107,752 100% $218,252 100%
======= === ======== === ======== ===
</TABLE>
The Company's operating margin is affected by, among other things, the mix
of contract types (cost reimbursement, fixed-price or time and materials) as
well as the proportion of revenues from higher margin commercial and
international sales. A significant portion of the Company's contracts are cost
reimbursement contracts, under which the Company is reimbursed for all actual
costs, plus a fee or profit. The financial risks under these contracts generally
are lower than those associated with other types of contracts, and margins also
are typically lower. The Company has also been awarded fixed-price contracts by
the government. 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:
14
<PAGE> 15
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
------------------------------
1997 1998 1999
-------- -------- ------
<S> <C> <C> <C>
Cost reimbursement............. 59% 41% 45%
Fixed price.................... 35 22 23
Time and materials............. 6 37 32
--- --- ---
Total................ 100% 100% 100%
=== === ===
</TABLE>
Revenues on cost plus fixed fee contracts are recognized to the extent of
costs incurred plus a proportionate amount of fees earned. Revenues on time and
materials contracts are recognized at the contractual rates as labor hours and
direct expenses are incurred. Revenues on fixed-price contracts are recognized
on the percentage-of-completion method based on costs incurred in relation to
total estimated costs.
The Company's two significant U.S. Navy communication services contracts
and programs with SPAWAR accounted for approximately 12.3% of revenues for
fiscal 1999. During 1999, the U.S. Navy established an Omnibus contract, that
was awarded to a competitor in September 1999. This contract encompassed a
number of the tasks that previously were performed under these two communication
services contracts. Management believes that it will be able to utilize other
contract vehicles to perform a substantial number of tasks previously performed
under these contracts, however there is no assurance that the Company will be
able to do so. Although the Company intends to expand its U.S. Government and
commercial sales, a relatively small number of contracts are likely to continue
to account for a significant portion of the Company's future revenues.
Government contracts, including the Company's GSA Schedule Contracts, 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 for the convenience of the government 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 DCAA and other government
auditors. The award of government contracts also is subject to protest by
competitors which can result in the re-opening of the bidding process,
unanticipated legal costs or the award of a contract to a competitor.
Government contracts generally are awarded to the Company through a formal
competitive bidding process in which the Company has many competitors. Upon
expiration, government contracts may be subject to a competitive rebidding
process. There can be no assurance that the Company will be successful in
winning contract awards or renewals in the future. The Company's failure to
renew or replace such contracts when they expire could have a material adverse
effect on its business, financial condition and results of operations.
Approximately 5.1% of the Company's revenues in fiscal 1999 were generated
through small business set-aside programs. The Company no longer is eligible to
participate in some of these programs and, as its revenues and size expand, it
will lose its eligibility to participate in more of these programs. There can be
no assurance that the Company will be able to replace revenues from these
contracts.
The Company also derives significant revenues from sales under the GSA
Schedule Contracts. For fiscal 1999, approximately 25.4% of the Company's
revenues were derived from the GSA Schedule Contracts. The government has no
obligation to purchase any significant amount of goods or services under the
contracts and there can be no assurance as to the actual level of sales that
will be derived from the contracts. The GSA Schedule Contracts are fixed price
contracts, which impose greater financial risk on the Company than cost
reimbursement or time and materials contracts. Failure to anticipate technical
problems, estimate costs accurately or control costs during performance of a
fixed price contract may reduce the Company's profit or cause a loss. In
addition, the GSA
15
<PAGE> 16
Schedule Contracts are renewable every five years by the government. The
Company's current GSA Schedule Contracts expire beginning in 2002 through 2004.
There can be no assurance that the GSA Schedule Contracts will be renewed, and
the Company's inability to renew or replace the GSA Schedule Contracts could
have a material adverse effect on its business, financial condition and results
of operations.
The Company generally uses commercially available products in its systems
integration business, which are generally available from several sources. The
Company has generally been able to obtain adequate supplies from its current
suppliers in a timely manner. The Company believes that, in most cases,
alternate vendors can be found if its current suppliers are unable to fulfill
its needs.
A part of the Company's business strategy calls for growth through
acquisitions. The Company has successfully completed five acquisitions: PSA in
September 1999, SEMCOR in June 1998, AMI in February 1998, ISC in November 1997
and RFM in August 1997. Since the respective dates of the acquisitions, the
Company has been integrating 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. There can be no assurance that the
anticipated benefits from such acquisitions will be realized, that the Company
will operate the acquired businesses profitably in the future or that the
Company will be able to integrate the operations, products or personnel gained
through any such acquisitions without a material adverse effect on the business,
financial condition and results of operations of the Company. 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 62.8%. 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:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------
1997 1998 1999 (2)
--------- ---------- ----------
<S> <C> <C> <C>
Revenues.................................................... 100.0% 100.0% 100.0%
Direct costs................................................ 72.2 64.8 67.7
Indirect, general and administrative expenses............... 21.3 26.8 24.7
Provision for doubtful accounts............................. -- -- 1.1
Write-off of capitalized software development costs -- -- 1.8
Acquired in-process R&D costs............................... 3.7 -- --
----- ----- -----
Income from operations...................................... 2.8 8.4 4.7
Other income (expense), net................................. -- (1.7) (2.0)
----- ----- -----
Net income.................................................. 2.8 6.7 2.7
Income taxes(1)............................................. 1.0 2.7 1.1
----- ----- -----
Net income(1)............................................... 1.8% 4.0% 1.6%
===== ===== =====
</TABLE>
- ----------
(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.
For the year ended September 30,1997, the results of operations reflect
pro forma federal and state income taxes based on applicable rates as if
the Company had not elected S Corporation status for year ended September
30,1997. Amounts for the years ended September 30, 1998 and 1999, are
based on actual results.
(2) Includes a one-time charge of $3.9 million related to SALTS software
development and $1.8 million for an uncollected receivable from the
Australian Navy related to the development and installation of RANSALTS, a
SALTS-type product. In addition, related costs, that are included in the
indirect and general and administrative expenses, totaled $548,000.
Additionally, included in indirect general and administrative expenses, are
significant bid and proposal costs of $444,000 that were expended for one
major contract proposal effort.
16
<PAGE> 17
FISCAL 1999 COMPARED TO FISCAL 1998
Revenues increased 102.5%, or $110.5 million, to $218.3 million for fiscal
1999, from $107.8 million for fiscal 1998. The increase was principally due to
an increase in revenues resulting from the Company's acquisition of SEMCOR, and
an increase in systems integration and communication services revenues.
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 $147.7 million for fiscal 1999, from $69.8
million for fiscal 1998 due primarily to increased revenues from the Company's
acquisition of SEMCOR and from the increase in systems integration revenues.
Direct costs, expressed as a percentage of revenues, increased to 67.7% for
fiscal 1999, from 64.8% for the same period in 1998, primarily due to an
increase in the proportion of revenues derived from systems integration
services. These services have higher direct costs than other services the
Company provides 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 $53.9 million for fiscal 1999 from $28.8 million for fiscal 1998.
The increase was due primarily to the higher level of revenues discussed above.
Indirect expenses, expressed as a percentage of revenues, decreased to 24.7% for
fiscal 1999, from 26.8% for the comparable period last year, due to the higher
proportion of systems integration revenues that typically have lower associated
indirect expenses and the lower indirect costs experienced by SEMCOR, partially
offset by an increase in the amortization of intangible assets, principally
goodwill, resulting from the acquisition of SEMCOR and an increase in the
Company's bid and proposal costs.
In September 1999, in order to focus more on its core business services,
the Company made a strategic decision to discontinue development of its SALTS
related products, and accordingly, recorded a one-time charge of
approximately $3.9 million related to the SALTS software development. This
one-time charge was approximately 1.8% of fiscal 1999 revenues.
In September 1999, the company provided for an uncollected receivable
from the Australian Navy of approximately $1.8 million. This receivable was
related to the development and installation of RANSALTS, a SALTS-type product.
Additionally, during 1999, the Company charged approximately $700,000 to the
provision for doubtful accounts as a reserve for unbilled contract receivables.
Income from operations increased 13.7%, to $10.3 million for fiscal 1999,
from $9.1 million for fiscal 1998, primarily due to increased operating results
from communication systems and aerospace services revenues from the acquisition
of SEMCOR and from the increase in systems integration operating results, offset
by the write-off of capitalized software development costs of $3.9 million and
the provision for doubtful accounts consisting primarily of the Australian Navy
provision referred to above. In addition to the aforementioned write-offs, the
Company incurred approximately $548,000 in costs associated the capitalized
software development and significant bid and proposal costs of approximately
$444,000 that were expended for one major contract proposal effort and were
included in indirect, general and administrative expense in fiscal 1999. As a
percentage of revenues, income from operations decreased to 4.7% for fiscal
1999, from 8.4% for fiscal 1998, principally attributable to the write-offs and
associated costs referred to above and to the traditionally lower operating
margins experienced by SEMCOR, the lower margins from federal agency information
technology customers and from the amortization of intangible assets resulting
from the SEMCOR acquisition.
Other income (expense), net, consists of interest expense resulting
primarily from the debt incurred to fund the Company's acquisitions, offset in
part by interest income from short-term deposits of cash and other sources of
non-operating income. Interest expense was $4.5 million and $1.9 million for
fiscal years ended September 30, 1999 and 1998, respectively. Interest and other
sources of non-operating income were $160,000 and $82,000 for the fiscal years
ended September 30, 1999 and 1998, respectively.
The Company's effective tax rate was 40.1% and 39.5% for the fiscal years
ended September 30, 1999 and 1998, respectively. This increase was primarily due
to higher effective state income tax rates resulting from the acquisition of
SEMCOR.
FISCAL 1998 COMPARED TO FISCAL 1997
Revenues increased 106.5% or $55.6 million, to $107.8 million for fiscal
1998 from $52.2 million for fiscal 1997. The increase was principally due to the
acquisition of SEMCOR, AMI and ISC in 1998 and RFM in late 1997. The increase in
revenue, in part, was offset by decreases in system integration and subcontract
revenues.
Direct costs increased to $69.8 million for fiscal 1998 from $37.7 million
for fiscal 1997 primarily due to increased revenues from the Company's
acquisitions. Direct costs, expressed as a percentage of revenues, decreased to
64.8% for fiscal 1998, from 72.2% for fiscal 1997, primarily due to a decrease
in the proportion of revenues coming from systems integration services. These
services have higher direct costs than other services the Company provides
because the contracts generally require the Company to purchase hardware
components as part of the services.
Indirect, general and administrative expenses increased to $28.8 million
for fiscal 1998 from $11.1 million for fiscal 1997. The increase was primarily
due to the higher level of revenues discussed above. Indirect expenses,
expressed as a percentage of revenues, increased to 26.8% for fiscal 1998, from
21.3% for fiscal 1997, due to the amortization of intangible assets, primarily
goodwill, resulting from the Company's acquisitions and lower proportion of
system integration revenues. Goodwill increased to $45.7 million for fiscal 1998
from $1.7 million for fiscal 1997 due to acquisitions.
17
<PAGE> 18
Income from operations increased six fold, to $9.0 million for fiscal 1998,
from $1.5 million for fiscal 1997, primarily due to increased operating results
from the acquisitions and the write-off of acquired in-process research and
development costs of $1.9 million in 1997. As a percentage of revenues, income
from operations increased to 8.4% for fiscal 1998, from 2.8% for fiscal 1997,
principally due to increased revenues from fixed-price and time-and-materials
contracts which typically carry higher margins. The lower operating margin in
1997 resulted from the write-off of acquired in-process research and development
costs.
Other income (expense) net, consists of interest expense, offset in part by
interest income from short-term deposits of cash. Interest expense was $1.9
million and $136,000 for fiscal 1998 and 1997, respectively. The increase in
interest expense resulted primarily from the amounts borrowed to fund the AMI
and SEMCOR acquisitions. The $19.5 million borrowed to finance the purchase of
AMI was repaid in May 1998 with the proceeds of the Company's public offering of
its common stock. Interest income was $82,000 and $153,000 for fiscal 1998 and
1997, respectively.
The Company's effective tax rate was 39.5% for fiscal 1998. The Company's
pro forma effective tax rate was 38.4% for fiscal 1997. This increase is
primarily due to the increase in the average effective state income tax rates.
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
(IN THOUSANDS)
-----------------------------------------------------------------------------------------------
FISCAL 1998 FISCAL 1999
-----------------------------------------------------------------------------------------------
DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1997 1998 1998 1998 1998 1999 1999 1999
--------- -------- -------- --------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues........................... $14,170 $18,380 $25,848 $49,354 $47,524 $51,312 $57,568 $61,848
Direct costs....................... 9,131 11,859 16,374 32,483 32,195 34,057 39,932 41,483
Indirect, general and
administrative
expenses......................... 3,933 4,888 7,309 12,704 12,373 13,451 13,441 14,598
Provision for doubtful
accounts........................... -- -- -- -- -- -- -- 2,514
Write-off capitalized software
development costs.................. -- -- -- -- -- -- -- 3,893
------- ------- ------- ------- ------- ------- ------- -------
Income from
Operations....................... $ 1,106 $ 1,633 $ 2,165 $ 4,167 $ 2,956 $ 3,804 $ 4,195 $ (640)
======= ======= ======= ======= ======= ======= ======= =======
(AS A PERCENTAGE OF REVENUES)
Revenues........................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Direct costs....................... 64.4 64.5 63.3 65.8 67.7 66.4 69.4 67.1
Indirect, general and
administrative
expenses......................... 27.8 26.6 28.3 25.8 26.0 26.2 23.3 23.6
Provision for doubtful accounts.... -- -- -- -- -- -- -- 4.1
Write-off of capitalized software
development costs.................. -- -- -- -- -- -- -- 6.3
------- ------- ------- ------- ------- ------- ------- -------
Income from
operations....................... 7.8% 8.9% 8.4% 8.4% 6.3% 7.4% 7.3% (1.1)%
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
The Company's revenues and earnings may fluctuate from quarter to quarter
based on such factors as the number, size and scope of projects, expenditures
required by the Company, delays, employee utilization rates, adequacy of
provisions for losses, accuracy of estimates of resources required to complete
ongoing projects and general economic conditions. Demand for the Company's
products and services in each of the markets it serves can vary significantly
from quarter to quarter due to revisions in customer budgets or schedules and
other factors beyond the Company's control. In addition, the Company's sales
tend to be seasonal, with the Company's fourth quarter generally accounting for
the greatest proportion of revenues each year, based to a large extent on the
uneven
18
<PAGE> 19
government purchasing patterns. Due to all of the foregoing factors, it is
possible that in some future period the Company's results of operations will
fall below the expectations of securities analysts and investors.
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 facilities with a commercial
bank and the proceeds from the Company's initial public offering in July 1997
and its public offering in May 1998.
The Company used cash from operating activities of $3.0 million for fiscal
1999, resulting primarily from increases in contract receivables and decreases
in accounts payable, partially offset by net income, non-cash depreciation and
amortization, the non-cash write-offs of capitalized software development costs
and an increase in accrued expenses and other current liabilities. The increase
in contract receivables was due to an increase in revenues recognized for the
period and such increase in receivables was partially offset by the write-off of
approximately $1.8 million due from the Australian Navy.
For fiscal 1998, the Company generated cash from operating activities of
$1.6 million resulting primarily from net income, non-cash depreciation and
amortization and an increase in accrued expenses, partially offset by increases
in contract receivables.
The principal use of cash for investing activities was for the purchases
of computers and equipment, the acquisition of PSA, investment in software
development costs and for the first contingent earnout payment of $5.0 million
to the former shareholders of SEMCOR based on SEMCOR's achievement of certain
financial goals for the six-month period ended December 31, 1998. The purchases
of computers and equipment totaled $1.9 million and $2.5 million for fiscal 1999
and 1998, respectively. Further the Company invested $707,000 and $2.3 million
in software development costs in fiscal 1999 and 1998, respectively. During
fiscal 1998, the Company used cash from investing activities for the
acquisitions of AMI for $19.5 million and SEMCOR for $38.1 million.
Cash provided by financing activities amounted to $11.7 million in fiscal
1999, resulting primarily from net borrowings under the Company's credit
facilities and from sales of treasury stock, partially offset by the repayment
of capital lease obligations. During fiscal 1998, cash provided by financing
activities was $57.1 million primarily from the follow-on offering of the
Company's common stock and net borrowings under the Company's credit facilities.
In February 1998, the Company entered into a line of credit
arrangement, consisting of two credit facilities aggregating $35.0 million, with
a commercial bank, refinancing the Company's then-existing line of credit and
the outstanding commercial bank debt of ISC. The Company's subsidiary, ISC, had
three notes payable totaling approximately $1.7 million at the date of
acquisition, secured by accounts receivable, equipment and other assets, which
were repaid using the above mentioned facility in February 1998. The credit
facility was also used to finance the acquisition of AMI and to provide for the
working capital needs of the Company. The first facility, in an amount up to
$15.0 million, may be used to finance acquisitions, working capital, and other
corporate purposes, and bears interest at either the bank's prime rate or at a
London interbank offered rate ("LIBOR") for one, two or three month periods,
plus a percentage, not more than 2.2%, which depends on the Company's historical
performance. The second facility, in an amount up to $20.0 million, may be used
to finance acquisitions, and bears interest at either the bank's prime rate or
at a LIBOR rate plus a percentage, not more than 2.45%, which depends on the
Company's historical financial performance. The credit agreement contains
various covenants requiring the Company and its subsidiaries, on a consolidated
basis, to maintain certain financial ratios, including funded debt to earnings
before interest, depreciation, income taxes and amortization ("EBITDA"), EBITDA
coverage ratio and minimum net worth and prohibits the payment of dividends.
In June 1998, the line of credit arrangement was increased to $45.0
million, from $35.0 million, to finance the acquisition of SEMCOR and to provide
for the working capital needs of the Company. This credit arrangement was
subject to similar terms and conditions as the original arrangement that was
entered into in February 1998. At September 30, 1999, $58.4 million was
available on these credit facilities and the outstanding balance was $46.0
million with an additional $3.8 million in standby letters of credit.
In February 1999, the line of credit arrangement was increased to
$60.0 million to finance the additional contingent payment to the selling
shareholders of SEMCOR and to provide for the working capital needs of the
Company. This credit arrangement was subject to similar terms and conditions as
the original arrangement that was entered into in February 1998.
Subsequent to year-end, the Company and the commercial bank executed
an amendment to the line of credit arrangement that restated the definition of
EBITDA to exclude $4,800,000 in calculating the funded debt to EBITDA financial
covenant with respect to any fiscal period from September 30, 1999, through and
including June 30, 2000.
19
<PAGE> 20
The Company is currently in negotiations with a commercial bank to
increase these credit facilities in order to satisfy its working capital needs
and to provide for a potential contingent payment to the selling shareholders of
SEMCOR. This payment, up to a maximum of $10.0 million is contingent on SEMCOR
successfully achieving certain financial goals for the twelve-month period
ending December 31, 1999.
In September 1999, the Company acquired PSA and as a result assumed
its liabilities that, in part, consisted of $50,000 outstanding under a line of
credit. This credit arrangement with a commercial bank, in the amount of
$400,000, bears interest at the bank's prime rate plus one percent and is due on
demand. The Company is in the process of terminating this credit facility.
The Company currently anticipates that its current cash balances, amounts
available under its credit facilities 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.
YEAR 2000 DISCLOSURE
OVERVIEW
As is true for most companies, the Year 2000 computer problem creates a
risk for the Company. If systems do not correctly recognize the date information
when the year changes to 2000, there could be an adverse impact on the Company's
operations. The risk exists primarily in four areas; the Company's internal
systems, third parties with which the Company has a material relationship,
Company products and Company Year 2000 services.
In response to the Year 2000 problem and the associated risks, the Company
has developed a comprehensive compliance program to evaluate, address and remedy
the date related problems with respect to the Company's internal systems, third
party relationships, Company products and services. The compliance program is
managed by the Company's Chief Operating Officer, and is tailored after the
guidance promulgated by the General Accounting Office (GAO) in their
publication, Year 2000 Computing Crisis: An Assessment Guide and by the
Department of the Navy Year 2000 Action Plan.
The Company has adopted the following five-phase approach that was endorsed
by the GAO and recognized by the U.S. Congress:
AWARENESS PHASE. The Company's management is familiarized with the scope of
the Year 2000 impact, the problem is defined, compliance standards are
established and an overall strategy is developed. A Year 2000 program team is
formed to organize and implement the Company's Year 2000 compliance program.
ASSESSMENT PHASE. The Year 2000 team determines the impact on the Company's
systems, tools, products and contracts. The team creates an inventory and
evaluation of systems that support the core business sectors. Third party
service providers are contacted concerning their compliance with the Year 2000
problem with regard to the products and services they provide. The team then
prioritizes the conversion or replacement of existing systems that are confirmed
to be Year 2000 non-compliant.
RENOVATION PHASE. The Year 2000 program team rectifies the problems
discovered in the assessment phase by modifying or replacing systems that are
Year 2000 non-compliant.
VALIDATION PHASE. The renovated or replaced systems, applications and
databases are tested and certified as Year 2000 compliant.
IMPLEMENTATION PHASE. The renovated or replaced systems are fully
implemented and extensive testing is performed to insure coordination with other
systems and databases. Backup and recovery plans are put in place.
The Company's internal mission critical systems are Year 2000 compliant.
Internal mission critical systems include local and wide area networks,
financial systems and embedded microcontrollers within facility, security,
telephone and other systems. The Company has also confirmed that Company vendors
and suppliers of essential hardware, software and services are Year 2000
compliant. The Company has verified that its current products are Year 2000
compliant. The Company believes that there are no compliance issues that could
have a material effect on its operations.
COST FOR YEAR 2000 COMPLIANCE
The Company has budgeted $550,000 for Year 2000 compliance and to date has
spent approximately $396,000.
20
<PAGE> 21
YEAR 2000 RISKS
The Company believes that its Year 2000 compliance plan is a comprehensive
one. The Company, however, may not have been able to identify or remedy all Year
2000 compliance issues with respect to its internal systems, suppliers,
customers, products and services. Company customers may choose to fund Year 2000
compliance efforts in lieu of contracting services to the Company. As a result,
the Year 2000 problem could have a materially adverse effect on the Company's
financial condition or results of operations.
CONTINGENCY PLANS
The Company has developed contingency plans to address possible failure of
any of its critical systems. The Company will continue to monitor and, if
necessary, modify contingency plans as required to mitigate the effects of
delays, if any, in internal systems compliance, third party business
interruption, non-compliant Company products and risks associated with providing
Year 2000 related services.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income."
This Statement establishes standards for the reporting and display of
comprehensive income and its components. SFAS 130 will be effective for the
Company's fiscal year 1999 and requires restatement of all previously reported
information for comparative purposes. This Statement does have a material impact
on the Company's financial position, results of operations or cash flows.
In June 1997, the FASB issued SFAS 131, "Disclosures About Segments of an
Enterprise and Related Information." This Statement requires that financial
information be reported on the basis used internally for evaluating segment
performance and deciding how to allocate resources to segments. SFAS 131 is
effective for the Company's fiscal year 1999 and requires restatement of all
previously reported information for comparative purposes. The accompanying
financial statements provide the disclosure required by SFAS 131 (See Note 14).
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
value. Gains or losses resulting from changes in the values of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. SFAS 133 will be effective for the Company's
fiscal year ending September 30, 2001. Management believes that this Statement
will not have a significant impact on the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
21
<PAGE> 22
ITEM 8. INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
ADVANCED COMMUNICATION SYSTEMS, INC.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FINANCIAL STATEMENTS:
Report of Independent Public Accountants................................................... 23
Consolidated Balance Sheets as of September 30, 1999 and 1998.............................. 24
Consolidated Statements of Operations for the Years Ended September 30, 1999, 1998 and
1997....................................................................................... 25
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended September
30, 1999, 1998 and 1997.................................................................... 26
Consolidated Statements of Cash Flows for the Years Ended September 30, 1999, 1998 and
1997....................................................................................... 27
Notes to Consolidated Financial Statements................................................. 28
SCHEDULE:
Schedule II -- Valuation and Qualifying Accounts........................................... 40
Schedules not listed above have been omitted because they are not applicable or the
information required to be set forth therein is included in the financial statements
or notes thereto.
</TABLE>
22
<PAGE> 23
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, 1999 and 1998, and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for each of the three
years in the period ended September 30, 1999. 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, 1999 and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended September 30, 1999, in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audits of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Vienna, Virginia
November 12, 1999
23
<PAGE> 24
ADVANCED COMMUNICATION SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30
---------------------------
1999 1998
-------- ---------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................. $ 1,615 $2,457
Contract receivables, net ................................................ 67,834 54,059
Other receivables......................................................... 1,617 374
Prepaid expenses.......................................................... 1,279 958
Inventories............................................................... 932 583
-------- --------
Total current assets................................................... 73,277 58,431
-------- --------
Property and equipment, net............................................... 7,908 8,044
Other assets:
Software development costs, net........................................... - 3,186
Intangibles, net.......................................................... 61,603 49,726
Other non-current assets.................................................. 414 348
-------- --------
Total other assets..................................................... 62,017 53,260
-------- --------
Total assets........................................................ $143,202 $119,735
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................................... $87 $87
Obligations under capital leases.......................................... 877 1,100
Accounts payable.......................................................... 5,773 9,577
Accrued expenses and other current liabilities............................ 27,789 22,772
Billings in excess of revenue............................................. 1,182 1,208
Deferred profit........................................................... 5,319 -
Income taxes payable...................................................... 738 1,104
Deferred income tax liability............................................. 2,317 1,059
-------- --------
Total current liabilities.............................................. 44,082 36,907
Obligations under capital leases - long-term.............................. 420 523
Deferred income tax liability - long-term................................. 1,226 858
Long-term debt............................................................ 47,580 36,564
-------- --------
Total liabilities...................................................... 93,308 74,852
-------- --------
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,
11,450,000 shares issued at September 30, 1999 and 1998................. 115 115
Paid-in capital........................................................... 42,511 41,105
Retained earnings ........................................................ 7,578 3,991
Less - Treasury stock, 2,701,513 shares at September 30, 1999
and 2,854,887 shares at September 30, 1998.............................. (310) (328)
-------- --------
Total stockholders' equity............................................ 49,894 44,883
-------- --------
Total liabilities and stockholders' equity.......................... $143,202 $119,735
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
24
<PAGE> 25
ADVANCED COMMUNICATION SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30
--------------------------------------------
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
Revenues.................................................................. $218,252 $107,752 $52,194
Direct costs.............................................................. 147,667 69,847 37,687
Indirect, general and administrative expenses............................. 53,863 28,834 11,128
Provision for doubtful accounts .......................................... 2,514 - -
Write-off of capitalized software development costs (Note 7).............. 3,893 - -
Write-off of acquired in-process R & D costs (Note 4)..................... - - 1,910
-------- -------- -------
Income from operations.................................................... 10,315 9,071 1,469
Interest expense.......................................................... (4,492) (1,918) (136)
Other income, net......................................................... 160 82 153
-------- -------- -------
Income before taxes....................................................... 5,983 7,235 1,486
Provision (benefit) for income taxes...................................... 2,402 2,861 (250)
-------- -------- -------
Net income................................................................ $3,581 $4,374 $1,736
======== ======== =======
Net income per share-basic................................................ $0.41 $0.61 $0.40
======== ======== =======
Net income per share-diluted.............................................. $0.41 $0.60 $0.40
======== ======== =======
Weighted average shares outstanding-basic................................. 8,680 7,221 4,306
======== ======== =======
Weighted average shares outstanding-diluted............................... 8,803 7,326 4,352
======== ======== =======
Pro forma statements of operations data:
(unaudited - Note 2)
Income before taxes as reported........................................... $1,486
Pro forma income tax provision............................................ 571
------
Pro forma net income...................................................... $915
======
Pro forma net income per share-basic...................................... $0.20
======
Pro forma net income per share-diluted.................................... $0.19
======
Pro forma weighted average shares outstanding-basic....................... 4,682
======
Pro forma weighted average shares outstanding-diluted..................... 4,729
======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
25
<PAGE> 26
ADVANCED COMMUNICATION SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
------------------------------ PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1996................. 6,750,000 67 16,506 4,520
Net income.................................... -- -- -- 1,736
Sale of common stock.......................... 2,225,000 23 14,341 --
Sale of treasury stock........................ -- -- -- --
Purchase of treasury stock.................... -- -- -- --
Stockholder distributions..................... -- -- -- (6,625)
Translation adjustment........................ -- -- -- (13)
Cancellation of stock repurchase agreements... -- -- (16,438) --
--------- ------ ------- ------
BALANCE AT SEPTEMBER 30, 1997................. 8,975,000 90 14,409 (382)
Net income.................................... -- -- -- 4,374
Sale of common stock.......................... 2,000,000 20 22,627 --
Common stock issued for acquisition.......... 475,000 5 3,295 --
Exercise of stock options and purchases
under the Employee Stock Purchase
Plan.......................................... -- -- 589 --
Tax benefit attributable to the exercise
of non-qualified stock options.............. -- -- 185 --
Translation adjustment........................ -- -- -- (1)
---------- ------ -------- -------
BALANCE AT SEPTEMBER 30, 1998................. 11,450,000 115 41,105 3,991
Net income.................................... -- -- -- 3,581
Exercise of stock options and purchases
under the Employee Stock Purchase
Plan.......................................... -- -- 1,262 --
Tax benefit attributable to the exercise
of non-qualified stock options.............. -- -- 144 --
Translation adjustment........................ -- -- -- 6
----------- ------ -------- -------
BALANCE AT SEPTEMBER 30, 1999................. 11,450,000 $ 115 $ 42,511 $ 7,578
=========== ====== ======== =======
</TABLE>
<TABLE>
<CAPTION>
ADJUSTMENT
FOR
REDEMPTION
VALUE GREATER
THAN AMOUNTS
PAID IN BY TREASURY
STOCKHOLDERS STOCK TOTAL
--------------- ------------- ---------
<S> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1996................. (16,438) (280) 4,375
Net income.................................... -- -- 1,736
Sale of common stock.......................... -- -- 14,364
Sale of treasury stock........................ -- 57 57
Purchase of treasury stock.................... -- (66) (66)
Stockholder distributions..................... -- -- (6,625)
Translation adjustment........................ -- -- (13)
Cancellation of stock repurchase agreements... 16,438 -- --
--------- ------ -------
BALANCE AT SEPTEMBER 30, 1997................. -- (289) 13,828
Net income.................................... -- -- 4,374
Sale of common stock.......................... -- -- 22,647
Common stock issued for acquisition........... -- -- 3,300
Exercise of stock options and purchases
under the Employee Stock Purchase
Plan.......................................... -- (39) 550
Tax benefit attributable to the exercise
of non-qualified stock options.............. -- -- 185
Translation adjustment........................ -- -- (1)
-------- ------- --------
BALANCE AT SEPTEMBER 30, 1998................. -- (328) 44,883
Net income.................................... -- -- 3,581
Exercise of stock options and purchases
under the Employee Stock Purchase
Plan.......................................... -- 18 1,280
Tax benefit attributable to the exercise
of non-qualified stock options.............. -- -- 144
Translation adjustment........................ -- -- 6
-------- ------- --------
BALANCE AT SEPTEMBER 30, 1999................. $ -- $ (310) $ 49,894
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
26
<PAGE> 27
ADVANCED COMMUNICATION SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
-----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.............................................................. $ 3,581 $ 4,374 $ 1,736
Adjustments to reconcile net income to net cash
(used in) provided by operating activities-
Depreciation and amortization....................................... 3,804 2,264 471
Provision for doubtful accounts..................................... 2,514 - -
Write-off of capitalized software development costs................. 3,893 - -
Deferred tax liability.............................................. 1,626 1,078 (238)
Reduction of deferred profit........................................ (1,024) - -
Write-off of acquired in-process R & D costs........................ - - 1,910
Changes in assets and liabilities:
Contract receivables............................................ (15,062) (9,579) (9,414)
Other receivables............................................... (1,624) (157) (303)
Income taxes receivable......................................... - 529 (636)
Prepaid expenses................................................ (321) 532 (84)
Inventories..................................................... (349) (39) (182)
Other assets.................................................... (60) 40 (80)
Accounts payable................................................ (3,793) (1,459) 715
Accrued expenses and other current liabilities.................. 4,251 2,242 4,983
Billings in excess of revenue................................... (26) 606 (502)
Income taxes payable............................................ (372) 1,165 -
--------- --------- --------
Net cash (used in) provided by operating activities........ (2,962) 1,596 (1,624)
--------- --------- --------
Cash flows from investing activities:
Acquisitions, net of cash acquired...................................... (1,974) (54,175) (4,438)
Purchases of property and equipment..................................... (1,906) (2,492) (678)
Capitalized software development costs.................................. (707) (2,339) (626)
Contingent purchase price payment....................................... (5,000) - -
Collection of notes receivable - stockholders........................... - - 443
--------- --------- --------
Net cash used in investing activities....................... (9,587) (59,006) (5,299)
--------- --------- --------
Cash flows from financing activities:
Net proceeds from the sale of common stock.............................. - 22,647 14,364
Net borrowings (repayments)............................................. 16 (884) -
Net borrowings (repayments) under line of credit........................ 10,971 35,000 (2,701)
Deferred financing costs................................................ (234) (45) -
Net repayments of obligations under capital leases...................... (326) (145) -
Exercise of stock options and purchases under the ESPP.................. 1,280 550 57
Stockholder distributions............................................... - - (3,164)
Purchase of treasury stock.............................................. - - (66)
--------- --------- --------
Net cash provided by financing activities................... 11,707 57,123 8,490
--------- --------- --------
Net (decrease) increase in cash......................................... (842) (287) 1,567
Cash and cash equivalents, beginning of period.......................... 2,457 2,744 1,177
--------- --------- --------
Cash and cash equivalents, end of period................................ $ 1,615 $ 2,457 $ 2,744
========= ========= ========
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
27
<PAGE> 28
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, information systems
and applied technology, predominantly to U.S. government agencies and to a
lesser extent commercial and international customers. In August 1997, the
Company acquired RF Microsystems, Inc. ("RFM"), a provider of technical and
engineering services to the Department of Defense in the areas of
communications, navigation, electronic warfare and digital signal systems. In
fiscal 1998, the Company acquired Integrated Systems Control, Inc. ("ISC"), a
satellite communication engineering company, Advanced Management Incorporated
("AMI"), a provider of a wide range of information technology services and
SEMCOR, Inc. ("SEMCOR"), a provider of technical and engineering services in the
areas of communication services, information and applied technology. In fiscal
1999, the Company acquired Program Support Associates, Inc. ("PSA"). PSA
develops, installs and supports online, real time financial management
information systems primarily to the Department of Defense.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Advanced
Communication Systems, Inc. and its wholly owned subsidiaries. All material
intercompany accounts and transactions have been eliminated.
NET INCOME PER COMMON SHARE
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share." This statement
replaces the previously reported primary and fully diluted net income per share
with basic and diluted net income per share. Unlike primary net income per
share, basic net income per share excludes any dilutive effects of stock
options. Diluted net income per share is similar to the previously reported
fully diluted net income per share. All net income per share amounts have been
restated to conform to SFAS No. 128. No reconciling items existed between the
net income used for basic and diluted net income per share. The only reconciling
item between the shares used for basic and diluted net income per share related
to outstanding stock options.
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
period 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 the 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 for diluted pro forma net income per share and (ii) 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.
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.
28
<PAGE> 29
SUPPLEMENTAL STATEMENTS OF CASH FLOWS DATA
The Company paid income taxes in the amount of approximately $1,193,000,
$198,000 and $608,000 and interest expense of approximately $4,318,000,
$1,925,000 and $136,000 during the fiscal years ended September 30, 1999, 1998
and 1997, respectively. The Company acquired all of the outstanding shares of
ISC in exchange for 475,000 shares of the Company's Common Stock in fiscal 1998.
(See Note 4).
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 contract
receivables is mitigated because the majority of the Company's contract
receivables are due from agencies of the U.S. government, and non-government
receivables are comprised of relatively small amounts due from a diverse
customer base.
For the years ended September 30, 1999, 1998 and 1997, approximately
$198,966,000, $97,463,000, and $48,284,000, 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 consisting of computer and communications hardware, that are used in
the completion of contractual obligations, 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, primarily using the straight-line
method. One of the Company's subsidiaries uses an accelerated method and will
adopt the straight-line method in fiscal 2000. Leasehold improvements are
amortized on a straight-line basis over the shorter of the useful life of the
asset or the lease terms. Buildings are depreciated over forty years on a
straight-line basis.
SOFTWARE DEVELOPMENT COSTS
In compliance with 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. (See Note 7)
29
<PAGE> 30
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 (See Note 4).
INTANGIBLE ASSETS
Intangible assets, net of accumulated amortization, consists of the following:
<TABLE>
<CAPTION>
September 30,
---------------------- Amortization
1999 1998 Period
---- ---- ------------
<S> <C> <C> <C>
Goodwill..................... $ 57,586 $ 45,687 5 -- 40 years
Customer lists............... 3,673 3,929 16 years
Debt financing costs......... 344 110 2 years
-------- --------
$ 61,603 $ 49,726
======== ========
</TABLE>
Debt financing costs represents fees and other costs incurred in connection with
the issuance of long term debt. These costs are amortized to interest expense
over the term of the related debt using the effective interest rate method.
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, 1999 and 1998, there has been no
impairment in the carrying value of long-lived assets, with the exception of the
write-off related to software development costs of approximately $3,893,000
discussed in Note 7.
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. The carrying amount
of long-term debt approximates fair value based on borrowing rates currently
available to the Company for bank loans with similar terms and maturities.
INCOME TAXES
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 initial public offering, 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.
RECLASSIFICATION
Certain prior period amounts have been reclassified to conform with the current
year's presentation.
3. OFFERINGS OF COMMON STOCK AND DISTRIBUTIONS TO STOCKHOLDERS:
In July 1997, the Company consummated the initial public offering of its common
stock (the "Initial Public 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 Initial Public 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 Initial Public Offering,
the Company terminated its S
30
<PAGE> 31
corporation election and made distributions to the pre-Initial Public Offering
stockholders of its undistributed S corporation earnings of approximately
$6,600,000.
In May 1998, the Company consummated a public offering of 2,000,000 shares of
its common stock for $12.375 per share. The offering resulted in net proceeds to
the Company of approximately $22,600,000 after deducting underwriting discounts
and offering expenses payable by the Company. The majority of the proceeds was
used to pay the outstanding debt incurred in the acquisition of AMI (See Note
4).
4. ACQUISITIONS:
RF MICROSYSTEMS, INC.
In August 1997, the Company acquired all of the outstanding common stock of 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 excess of the purchase price over the net assets acquired is being
carried as goodwill, in the amount of $1,698,000, which is being amortized over
its estimated useful life of 15 years. The consolidated statement of operations
includes a $1,910,000 charge, based on a third-party appraisal, taken at the
time of the acquisition for acquired in-process research and development costs
related to acquired technology that has not reached technological feasibility
and that has no alternative future use.
INTEGRATED SYSTEMS CONTROL, INC.
In November 1997, the Company acquired all of the outstanding shares of ISC in
exchange for 475,000 shares of the Company's common stock. The acquisition has
been accounted for as a purchase and accordingly the total purchase price has
been allocated to acquired assets and liabilities assumed at their estimated
fair values. The excess of the purchase price over the net assets acquired is
being carried as goodwill, in the amount of approximately $1,428,000, which is
being amortized over its estimated useful life of 30 years.
ADVANCED MANAGEMENT INCORPORATED
In February 1998, the Company acquired all of the outstanding shares of AMI for
$19,500,000 in cash and additional contingent payments for each of two
consecutive twelve month periods following the closing date of the acquisition
up to a maximum of $5,250,000 for each period. AMI did not achieve the financial
goals required for the first twelve-month period and management believes it is
unlikely that AMI will achieve the financial goals for the second twelve-month
period ending January 31, 2000. The acquisition has been accounted for as a
purchase, and accordingly, the purchase price has been allocated to the acquired
assets and liabilities assumed at their estimated fair values. The excess of the
purchase price over the net assets acquired is being carried as intangible
assets, including goodwill and customer lists, in the amounts of approximately
$12,648,000 and $4,100,000, respectively, which is being amortized over their
estimated useful lives of 40 and 16 years, respectively.
SEMCOR, INC.
In June 1998, the Company acquired all of the outstanding shares of SEMCOR for a
preliminary purchase price of $38,100,000 in cash and additional contingent
payments based on the achievement of certain financial goals for the six-month
period ending December 31, 1998, up to a maximum of $5,000,000 and for the
twelve-month period ending December 31, 1999, up to a maximum of $10,000,000.
SEMCOR successfully achieved the financial goals for the six-month period ended
December 31, 1998, as outlined in the stock purchase agreement, and accordingly
the selling shareholders were paid the maximum of $5,000,000 in February 1999.
The Company believes that a substantial portion of the second contingent payment
that is due in February 2000, will be payable to the selling shareholders. The
acquisition has been accounted for as a purchase, and accordingly the
preliminary purchase price has been allocated to the acquired assets and
liabilities assumed at their estimated fair values, based on a third-party
appraisal. In connection with the final determination of the fair value of
assets acquired and pursuant to the provisions of Accounting Principles Board
Opinion No. 16, the Company has valued acquired contracts in process at contract
price, minus the estimated costs to complete and an allowance for the normal
industry profit on its effort to complete such contracts, which amounted to
$6,343,000. Effective April 1, 1999, this adjustment has been reflected in the
accompanying balance sheet as an increase to goodwill and a corresponding
increase to deferred profit. The Company recognized approximately $1,024,000 as
a reduction of costs in fiscal 1999, with the remaining $5,319,000 to be
recorded as a reduction of costs in future periods as work on certain contracts
is performed. The excess of the preliminary purchase price and the first
contingent payment over the net assets acquired is being carried as goodwill, in
the amount of
31
<PAGE> 32
$41,784,000, and is being amortized over its estimated useful life of 40 years.
The amount to be paid for the second contingent payment will be recorded on the
measurement date of December 31, 1999, as additional goodwill.
PROGRAM SUPPORT ASSOCIATES, INC.
In September 1999, the Company acquired all of the outstanding shares of PSA for
$2,300,000 in cash, of which $662,000 is included in accrued expenses at
September 30, 1999, and additional contingent payments, up to $1,000,000, upon
the achievement of certain financial goals during the period commencing January
1, 2000, and ending December 31, 2000. The acquisition has been accounted for as
a purchase, and accordingly, the total purchase price has been allocated to the
acquired assets and liabilities assumed at their estimated fair values. The
excess of the purchase price over the net assets acquired is being carried as
goodwill, in the amount of approximately $1,942,000, which will be amortized
over 20 years.
The following unaudited pro forma summary presents information as if each
acquisition had occurred at the beginning of the fiscal year preceding the
period in which the acquisition was consummated. The pro forma information does
not necessarily reflect the results that would have occurred nor is it
necessarily indicative of future results of operations of the combined
companies.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
---------------------------------------------------------
1999 1998 1997
---- ---- ----
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenues............................. $ 223,065 $ 190,596 $ 181,446
Net income........................... $ 3,783 $ 4,614 $ 3,005
Net income per share - basic......... $ 0.44 $ 0.64 $ 0.58
Net income per share - diluted....... $ 0.43 $ 0.63 $ 0.57
</TABLE>
5. CONTRACT RECEIVABLES:
Contract receivables consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
1999 1998
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
U.S. government:
Amounts billed........................................... $25,625 $22,088
Recoverable costs and accrued profit on progress
completed; not billed.................................. 38,422 27,777
------- -------
Subtotal............................................ 64,047 49,865
------- -------
Commercial customers:
Amounts billed........................................... 3,513 4,469
Recoverable costs and accrued profit on progress
completed; not billed.................................. 1,235 864
------- -------
Subtotal............................................ 4,748 5,333
------- -------
Less allowance for doubtful accounts.......................... 961 1,139
------- -------
Total............................................... $67,834 $54,059
======= =======
</TABLE>
In fiscal 1999, the Company incurred a charge for an uncollected receivable from
the Australian Navy in the amount of approximately $1,800,000. The receivable
was related to the development and installation of RANSALTS, a SALTS-type
product.
6. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
32
<PAGE> 33
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
1999 1998
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Land........................................................ $ 1,231 $ 1,231
Buildings................................................... 1,946 1,946
Furniture and equipment..................................... 10,232 9,411
Equipment under capital leases.............................. 3,470 4,366
Leasehold improvements...................................... 294 305
--------- ---------
17,173 17,259
Less accumulated depreciation and amortization.............. 9,265 9,215
--------- ---------
Total property and equipment, net........................... $ 7,908 $ 8,044
========= =========
</TABLE>
7. SOFTWARE DEVELOPMENT COSTS:
Software development costs consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------
1999 1998
--------- -------
(IN THOUSANDS)
<S> <C> <C>
Cost....................................................... $ 4,357 $3,650
Less accumulated amortization.............................. (464) (464)
Less write-off............................................. (3,893) -
-------- ------
Total software development costs, net...................... $ - $3,186
======== ======
</TABLE>
Software development costs capitalized were $707,000, $2,339,000 and $626,000 in
the years ended September 30, 1999, 1998 and 1997, respectively. Amortization
expense for the years ended September 30, 1999, 1998 and 1997 was approximately
$-0-, $103,000 and $137,000 respectively.
In 1999, the Company discontinued development of its SALTS related software
products, and accordingly, the results of operations for the year ended
September 30, 1999, includes a one-time charge of approximately $3,893,000 in
capitalized SALTS software development costs.
8. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:
Accrued expenses and other current liabilities consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------
1999 1998
---------- ---------
(IN THOUSANDS)
<S> <C> <C>
Accrued salaries, benefits and related taxes................ $ 5,695 $ 7,098
Accrued vacation............................................ 3,663 3,243
Accrued bonuses............................................. 1,320 763
Accrued subcontractor and other direct costs................ 14,465 8,841
Accrued acquisition costs................................... 763 744
Provision for loss contracts................................ 683 1,391
Other accrued expenses and current liabilities.............. 1,200 692
------- -------
$27,789 $22,772
======= =======
</TABLE>
9. RELATED-PARTY TRANSACTIONS:
In 1993, the Company entered into a ten-year lease with a real estate management
company ("10089 Management") to lease its headquarters facility. The owners of
10089 Management include the principal stockholders of the Company. The lease
was scheduled to expire on August 31, 2003 and required rental payments of
approximately $29,000 per month, increased annually based on the Consumer Price
Index. In July 1999, the facility was sold to a non-affiliated third party from
whom the Company currently leases the facility.
33
<PAGE> 34
The Company also provided management services for 10089 Management at no cost.
Included in other receivables at September 30, 1998, was $88,000 due from 10089
Management for reimbursable operating expenses paid for by the Company.
10. LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------
1999 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Line of credit:
$60,000,000 line of credit with a commercial bank expiring
February 28, 2002................................................ $46,000 $35,000
$400,000 line of credit with a commercial bank, interest at
Prime plus 1%, due on demand.................................... 50 -
Notes payable:
Note payable to bank, interest at 9.9%, due
February 2005, secured by a First Deed of Trust
on an office building............................................ 951 964
Note payable to Urban Business Development Corporation,
interest at 8.575%, due January 2015, guaranteed by the
Small Business Administration and secured by a Second
Deed of Trust on an office building.............................. 666 687
------- -------
47,667 36,651
Less current maturities............................................. 87 87
------- -------
$47,580 $36,564
======= =======
</TABLE>
The aggregate maturities of long-term debt in each of the next five fiscal years
is as follows (in thousands): $87 in 2000; $41 in 2001; $46,045 in 2002; $48 in
2003; $55 in 2004 and $1,390 thereafter.
LINES OF CREDIT
In February 1998, the Company entered into a line of credit arrangement,
consisting of two credit facilities aggregating $35,000,000, with a commercial
bank, refinancing the Company's then-existing line of credit and the outstanding
commercial bank debt of ISC. The Company's subsidiary, ISC, had three notes
payable totaling approximately $1,671,000 at the date of acquisition, secured by
accounts receivable, equipment and other assets, which were repaid using the
above mentioned facility in February 1998. The credit facility was also used to
finance the acquisition of AMI and to provide for the working capital needs of
the Company. The first facility, in an amount up to $15,000,000, may be used to
finance acquisitions, working capital, and other corporate purposes, and bears
interest at either the bank's prime rate or at a London interbank offered rate
("LIBOR") for one, two or three month periods, plus a percentage, not more than
2.2%, which depends on the Company's historical performance. The second
facility, in an amount up to $20,000,000, may be used to finance acquisitions,
and bears interest at either the bank's prime rate or at a LIBOR rate plus a
percentage, not more than 2.45%, which depends on the Company's historical
financial performance. The credit agreement contains various covenants requiring
the Company and its subsidiaries, on a consolidated basis, to maintain certain
financial ratios, including, funded debt to earnings before interest,
depreciation, income taxes and amortization ("EBITDA"), EBITDA coverage ratio
and minimum net worth and prohibits the payment of dividends.
In June 1998, the line of credit arrangement was increased to $45,000,000, from
$35,000,000, to finance the acquisition of SEMCOR and to provide for the working
capital needs of the Company. This credit arrangement was subject to similar
terms and conditions as the original arrangement that was entered into in
February 1998.
In February 1999, the line of credit arrangement was increased to $60,000,000 to
finance the additional contingent payment to the selling shareholders of SEMCOR
and to provide for the working capital needs of the Company. This credit
arrangement was subject to similar terms and conditions as the original
arrangement that was entered into in February 1998.
Subsequent to year-end, the Company and the commercial bank executed an
amendment to the line of credit arrangement that restated the definition of
EBITDA to exclude $4,800,000 in calculating the funded debt to EBITDA financial
covenant with respect to any fiscal period from September 30, 1999, through and
including June 30, 2000. As of September 30, 1999, $58,400,000 was available on
this credit arrangement and the outstanding balance was $46,000,000 with an
additional $3,800,000 in standby letters of credit.
34
<PAGE> 35
In September 1999, the Company acquired PSA, and as a result, assumed its
liabilities that, in part, consisted of $50,000 outstanding under a line of
credit. This credit arrangement with a commercial bank, in the amount of
$400,000, bears interest at the bank's prime rate plus one percent and is due on
demand.
At September 30, 1999, and 1998, the Company had $46,050,000 and $35,000,000,
respectively, outstanding under these arrangements. For the years ended
September 30, 1999, 1998 and 1997, interest expense under these credit
facilities was approximately $3,803,000, $1,410,000 and $136,000, respectively,
at weighted average interest rates of 8.16%, 8.10% and 8.75%, respectively.
11. INCOME TAXES:
Following the completion of the Offering, the Company became subject to federal
and state income taxes. The following audited information for the years ended
September 30, 1999 and 1998, and the unaudited pro forma information for the
year ended September 30, 1997, has been determined based on the provisions of
SFAS No. 109. The September 30, 1997, information reflects income tax expense
(benefit) that the Company would have incurred had it been subject to federal
and state income taxes. The income tax provision for the years ended September
30, 1999 and 1998, are based on actual amounts as the Company was subject to
federal and state income taxes for both years.
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30
------------------------
1999 1998 1997 (PRO FORMA)
---- ---- ----------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Income tax provision (benefit)
Current
Federal............................ $ 391 $1,359 $521
State.............................. 803 440 75
Deferred............................. 1,208 1,062 (25)
------ ------ ----
$2,402 $2,861 $571
====== ====== ====
</TABLE>
The provision for income taxes results in effective rates that differ from the
federal statutory rate as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30
-------------
1999 1998 1997 (PRO FORMA)
---- ---- ----------------
(UNAUDITED)
<S> <C> <C> <C>
Statutory federal income tax rate........................ 34.0% 34.0% 34.0%
State income taxes, net of federal tax benefit........... 6.4 5.8 4.9
Other.................................................... (0.3) (0.3) (0.5)
---- ---- ----
40.1% 39.5% 38.4%
==== ==== ====
</TABLE>
The Company had net operating loss carryforwards of approximately $1,007,000, as
of September 30, 1997, that were fully utilized in 1998.
The components of the net deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------
1999 1998
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets
Acquired in-process R & D write-off............. $ 659 $ 711
Cash to accrual adjustment...................... 423 846
Accrued vacation................................ 1,258 828
Reserves........................................ 318 208
Accrued bonus................................... 339 161
</TABLE>
35
<PAGE> 36
<TABLE>
<S> <C> <C>
Other........................................... 216 87
--------- ---------
3,213 2,841
--------- ---------
Deferred tax liabilities
Unbilled receivables............................ (4,309) (2,332)
Cash to accrual adjustment...................... (456) (879)
Capitalized software development costs.. - (1,217)
Amortization.................................... (1,303) (250)
Acquired contracts in process................... (379) -
Other........................................... (309) (80)
--------- ---------
(6,756) (4,758)
--------- ---------
Total deferred tax liability...................... $ (3,543) $ (1,917)
========= ==========
</TABLE>
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 as of September 30, 1996. 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,
plus additional annual amounts to participants in the Plan as prescribed in the
Amendment to the 1997 Stock Incentive Plan. In 1999, the Company's stockholders
approved an amendment to the 1997 Plan, that provided for automatic increases in
the number of shares reserved for issuance thereunder effective on the first
trading day of each of January 1999 and 2000. This amendment provides that the
Plan shall increase by a number of shares equal to the lesser of (i) two percent
(2%) of the total number of shares of the Company's common stock issued and
outstanding on the last trading day of the preceding December or (ii) 400,000
shares. (Such number shall be subject to adjustment by the Company's Board of
Directors under the terms of the Plan to take into account the effect of
extraordinary corporate transactions such as reorganization, merger,
consolidation, recapitalization, restructuring or other distribution, stock
split, spin-off or sale of substantially all of the Company's assets). The
additional amount reserved for issuance effective January 1, 1999, was 172,524
shares. 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, 1999 and
1998, 111,266 shares and 41,900 shares, respectively, were 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
36
<PAGE> 37
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. At September 30, 1999 and 1998, 49,775 shares and 24,250 shares,
respectively, were available for grant under the 1996 Plan.
The Company's Employee Stock Purchase Plan (the "ESPP") was adopted by the Board
of Directors in March 1998. A total of 325,000 shares of common stock have been
reserved for issuance under the ESPP. Eligible employees may purchase a limited
number of shares of the Company's stock at 90% of the market value at certain
plan-defined dates. The ESPP automatically terminates on the earlier of March
31, 2008 or the issuance of the maximum number of shares available under the
ESPP. At September 30, 1999 and 1998, 98,076 shares and 6,280 shares,
respectively, were issued under the ESPP. Pursuant to the terms of the Merger
Agreement with The Titan Corporation (See Note 15), the ESPP will be suspended
after December 31, 1999.
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, 1999, 1998 and 1997, none of
these options was exercisable. All sales of treasury stock were a result of the
exercise of options and stock issued under the Employee Stock Purchase Plan.
The following table summarizes the activity of all the Company's stock options:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER EXERCISE PRICE EXERCISE PRICE
OF SHARES PER SHARE PER SHARE
--------- --------- ---------
<S> <C> <C> <C>
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 granted............................... 391,800 8.875 - 14.375 11.06
Options exercised............................. (83,833) 4.44 - 7.50 5.79
Options forfeited............................. (30,250) 4.44 - 12.125 4.69
------------- ----------------- -------------
Shares under option, September 30, 1998........... 636,517 4.44 - 14.375 9.30
Options granted .............................. 165,975 8.50 - 11.75 11.41
Options exercised............................. (61,578) 4.44 - 11.375 7.01
Options forfeited............................. (87,342) 4.44 - 11.375 10.85
------------- ----------------- -------------
Shares under option, September 30, 1999........... 653,572 $ 4.44 - 14.375 $ 9.85
============= ================= =============
</TABLE>
Options outstanding at September 30, 1999 had a weighted average remaining
contractual life of 6.7 years. The fair value per share of all options issued in
1999, estimated on the date of grant using the Black-Scholes option pricing
model, is $6.19.
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 net income and net income per share would have
been reduced to the amounts indicated below:
37
<PAGE> 38
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
-----------------------
1999 1998 1997 (PRO FORMA)
---------- ---------- ----------------
(UNAUDITED)
<S> <C> <C> <C>
Net income (in thousands) --
As reported................................ $3,581 $4,374 $ 915
SFAS No. 123 pro forma..................... $3,000 $3,891 $ 826
Net income per share --
As reported -- basic....................... $ 0.41 $ 0.61 $ 0.20
SFAS No. 123 pro forma -- basic............ $ 0.35 $ 0.54 $ 0.18
As reported -- diluted..................... $ 0.41 $ 0.60 $ 0.19
SFAS No. 123 pro forma -- diluted.......... $ 0.34 $ 0.53 $ 0.17
</TABLE>
The fair value of each option is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions:
<TABLE>
<CAPTION>
SEPTEMBER 30
------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Expected Dividend Yield......... 0.0% 0.0% 0.0%
Risk-Free Interest Rate......... 5.3% 4.5% 6.4%
Expected Volatility............. 44.0% 58.7% 57.6%
Expected Life (in years)........ 7.0 8.0 7.5
</TABLE>
13. COMMITMENTS:
LEASE COMMITMENTS
The Company has entered into a master leasing agreement in which the Company
sells computer equipment at the original purchase price to a leasing company and
then leases the equipment back. There have been no gains or losses associated
with these sales/leasebacks. All leases related to this master leasing agreement
have been accounted for as capital leases. As of September 30, 1999 and 1998 the
Company recorded approximately $1,297,000 and $1,623,000, respectively, for
obligations under capital leases.
The Company leases office space and equipment under various operating and
capital lease agreements expiring through June 2004. 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, 1999, were as follows:
<TABLE>
<CAPTION>
YEAR ENDED OPERATING CAPITAL
SEPTEMBER 30, LEASES LEASES
------------ --------- -------
(IN THOUSANDS)
<S> <C> <C>
2000................... $ 4,560 $ 973
2001................... 4,045 450
2002................... 2,608 --
2003................... 1,291 --
2004................... 295 --
Less interest.......... -- (126)
-------- -------
Total........ $ 12,799 $ 1,297
======== =======
</TABLE>
During 1993, the Company entered into a lease agreement for office space with a
related party which includes the principal stockholders of the Company (See Note
9). For the years ended September 30, 1999, 1998 and 1997, rent expense related
to this lease totaled $280,000, $336,000 and $257,000, respectively. Amounts
representing aggregate rent expense on all operating leases, excluding the
related party lease, totaled $3,257,000, $2,426,000 and $1,066,000 for the years
ended September 30, 1999, 1998 and 1997, respectively.
38
<PAGE> 39
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, 1999, 1998 and 1997, were
$1,843,000, $860,000 and $236,000, respectively.
LITIGATION
In August 1999, the Company filed an action against the McGraw-Hill Companies,
Inc. ("McGraw-Hill") in the United States District Court for the District of New
Jersey (the "New Jersey Action"), seeking recovery of approximately $186,000 in
fees for services performed pursuant to certain contracts. McGraw-Hill has
threatened to file a counterclaim against the Company seeking recovery of
$500,000, on allegations that the Company negligently designed certain software
for McGraw-Hill, which negligence caused significant problems to McGraw-Hill
customers. The Company files its answer to the counterclaim in December 1999,
and it believes that it has a meritorious defense to the counterclaims and
intends to conduct a vigorous defense.
The Company is from time to time involved in litigation incidental to the
conduct of its business. The Company currently is not a party to any legal
proceedings, other than the action referred to above, and, in the opinion of
management the amount of ultimate liability or recovery with respect to such
actions will not materially affect the financial position or results of
operations of the Company.
14. SEGMENT REPORTING
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 131, Disclosure about Segments of an Enterprise and Related
Information. SFAS No. 131 requires publicly-held companies to report financial
and other information about key revenue-producing segments of the entity for
which such information is available and is utilized by the chief operating
decision-maker in deciding how to allocate resources and in assessing
performance. SFAS No. 131 permits operating segments to be aggregated if they
have similar products and services, customers, methods of distribution, and
belong to the same regulatory environment.
The Company's revenues are derived predominately from the U.S. Government
through long-term cost reimbursement, fixed-price or time and materials
contracts. The Company's operating margin is affected by the mix of contract
types. These contracts are administered and executed under the Federal
Acquisition Regulations. The Company makes vertical market disclosures such as,
communication services, information systems and aerospace services. The chief
operating decision-maker does not allocate resources and does not assess the
performance by the above classifications. The Company manages on a contract by
contract basis. Accordingly, the Company's government contracts are considered
to be one reportable operating segment.
15. SUBSEQUENT EVENTS
AGREEMENT AND PLAN OF MERGER
On December 9, 1999, the Company entered into a definitive agreement to merge
with The Titan Corporation ("Titan", NYSE: TTN) in a tax-free exchange of Titan
common stock for the Company's common stock at an approximate value ranging from
$18 to $22 per the Company's common share. The transaction has been approved by
the board of directors of both companies and is subject to the Company's
shareholder and regulatory approval.
EXECUTIVE RETIREMENT PLAN
On October 25, 1999, the Board of Directors approved an executive retirement
plan which is intended to be an unfunded plan for purposes of providing deferred
compensation to a select group of management or highly compensated employees. An
employee shall become a participant under this plan upon approval of the
Compensation Committee following recommendation by the Chief Executive Officer
of the Company. The Chief Executive Officer is currently the only participant in
the plan and is eligible to receive, upon his retirement, approximately one year
of salary of $350,000.
39
<PAGE> 40
ADVANCED COMMUNICATION SYSTEMS, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OTHER END OF
DESCRIPTION OF PERIOD CHARGES ACCOUNTS(1) DEDUCTIONS PERIOD
- ----------------------------------- ---------- --------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
Year ended September 30, 1999:
Allowance for doubtful accounts....... $1,139 $2,514 $ -- ($2,692) $ 961
Year ended September 30, 1998:
Allowance for doubtful accounts....... $ -- $ -- $ 1,917 ($778) $1,139
Year ended September 30, 1997:
Allowance for doubtful accounts........ $ -- $ -- $ -- $ -- $ --
</TABLE>
(1) Represents amounts that were charged to the allowance for doubtful accounts
as a result of purchase accounting and the allocation of the purchase price
to the acquired assets and liabilities at their fair values.
40
<PAGE> 41
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
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, 2000, 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, 2000, 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, 2000, 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, 2000, or shall be filed by amendment to this Form 10-K on or prior to that
date.
41
<PAGE> 42
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements:
Report of Independent Public Accountants
Consolidated Balance Sheets as of September 30, 1999 and 1998
Consolidated Statements of Operations for the Years Ended September 30,
1999, 1998 and 1997
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended September 30, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the Years Ended September 30,
1999, 1998 and 1997
Notes to Consolidated Financial Statements
(a) 2. Financial Statement Schedules:
Schedules not listed above have been omitted because they are not applicable or
the information required to be set forth therein is included in the Consolidated
Financial Statements or the notes thereto under Item 8.
(a) 3. Exhibits:
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------
3.1 Amended and Restated Certificate of Incorporation of the Company
(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 Commission on May 6, 1997).
3.2 Amended and Restated Bylaws of the Company (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
Commission on May 6, 1997).
10.1 Employment Agreement, dated as of January 2, 1997, between the
Company and Dev Ganesan (Incorporated by reference to the
Registration Statement on Form S-1 (File No. 333-23959) filed by
the Company with the Commission on March 26, 1997).
10.2 1996 Stock Incentive Plan (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 Commission on May 6,
1997).
10.3 1997 Stock Incentive Plan (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 Commission on May 30,
1997).
10.4 Employee Stock Purchase Plan. (Incorporated by reference to
Form 10-K filed by the Company with the Commission on December
29, 1998)
10.5 Form of Indemnity Agreement between the Company and each of its
directors and executive officers (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 Commission on May
30, 1997).
10.6 Credit Agreement, dated as of February 17, 1998, between the
Company and NationsBank, N.A. (Incorporated by reference to Form
8-K filed by the Company with the Commission on March 13, 1998).
10.7 Security Agreement, dated as of February 17, 1998, between the
Company and NationsBank, N.A. (Incorporated by reference to Form
8-K filed by the Company with the Commission on March 13, 1998).
10.8 Waiver and First Amendment to Credit Agreement, dated as of June
19, 1998, by and among the Company, Integrated Systems Control,
Inc. RF Microsystems, Inc. and Advanced Management Incorporated
and NationsBank, N.A. (Incorporated by reference to Form 8-K
filed by the Company with the Commission on July 2, 1998).
10.9 Consent Agreement, dated as of June 19, 1998, by and among the
Company, Integrated Systems Control, Inc. RF Microsystems, Inc.
and Advanced Management Incorporated and NationsBank, N.A.
(Incorporated by reference to Form 8-K filed
42
<PAGE> 43
by the Company with the Commission on July 2, 1998).
10.10 Joinder Agreement, dated as of June 19, 1998, by and among the
Company, Integrated Systems Control, Inc. RF Microsystems, Inc.,
Advanced Management Incorporated and SEMCOR, Inc. and
NationsBank, N.A. (Incorporated by reference to Form 8-K filed by
the Company with the Commission on July 2, 1998).
10.11 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 (Incorporated by reference to
the Registration Statement on Form S-1 (File No. 333-23959) filed
by the Company with the Commission on March 26, 1997).
10.12 Contract No. N00039-96-C-0066, effective March 14, 1996, by and
between the Company and Space and Naval Warfare Systems Command
(Incorporated by reference to the Registration Statement on Form
S-1 (File No. 333-23959) filed by the Company with the Commission
on March 26, 1997).+
10.13 Contract No. N00039-96-C-0097, effective August 29, 1996, by and
between the Company and Space and Naval Warfare Systems Command
(Incorporated by reference to the Registration Statement on Form
S-1 (File No. 333-23959) filed by the Company with the Commission
on March 26, 1997).+
10.14 Form of Tax Indemnification Agreement to be entered into by the
Company and each of its existing Stockholders (Incorporated by
reference to Amendment No. 3 to the Registration Statement on
Form S-1 (File No. 333-23959) filed by the Company with the
Commission on June 25, 1997).
10.15 Stockholders Agreement (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 Commission on May 6,
1997).
10.16 Stock Purchase Agreement by and between Advanced Communication
Systems, Inc. and REMEC Inc., dated as of August 26, 1997
(Incorporated by reference to Current Report on Form 8-K filed by
the Company with the Commission on September 26, 1997).
10.17 Stock Purchase Agreement by and among Advanced Communication
Systems, Inc. and the Shareholders of Integrated Systems Control,
Inc., dated as of October 31, 1997 (Incorporated by reference to
Current Report on Form 8-K filed by the Company with the
Commission on December 5, 1997).
10.18 Stock Purchase Agreement by and between Advanced Communication
Systems, Inc. and the sole Shareholder of Advanced Management
Incorporated, dated as of January 31, 1998 (Incorporated by
reference to Current Report on Form 8-K filed by the Company with
the Commission on March 13, 1998).
10.19 Stock Purchase Agreement by and among Advanced Communication
Systems, Inc. and the Shareholders of SEMCOR, INC., dated as of
June 10, 1998 (Incorporated by reference to Current Report on
Form 8-K filed by the Company with the Commission on July 2,
1998).
10.20 Agreement and Plan of Merger dated as of December 9, 1999, by and
among Advanced Communication Systems, Inc., The Titan Corporation
and A T Acquisition Corp. (Incorporated by reference to Current
Report on Form 8-K filed by the Company with the Commission on
December 20, 1999).
10.21 Company Stockholders Agreement dated as of December 9, 1999, by
and among Advanced Communication Systems, Inc., The Titan
Corporation and A T Acquisition Corp. (Incorporated by reference
to Current Report on Form 8-K filed by the Company with the
Commission on December 20, 1999).
10.22 Advanced Communication Systems, Inc. Executive Retirement Plan.
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, 1999. (For
SEC purposes only).
- ----------
+ Portions of this document were granted confidential treatment.
(b) Reports on Form 8-K
On December 20, 1999, the Company filed a current report on Form 8-K, Item 5
thereof, reporting that on December 9, 1999, the Company entered into an
Agreement and Plan of Merger with The Titan Corporation.
43
<PAGE> 44
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, 1999.
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------------------------------- ----------------------------- -----------------
<S> <C> <C>
/s/ GEORGE A. ROBINSON Chairman, President December 29, 1999
--------------------------------- and Chief Executive Officer
GEORGE A. ROBINSON (Principal Executive Officer)
/s/ TERRENCE E. HILEMAN Vice President, December 29, 1999
--------------------------------- Chief Financial Officer and
TERRENCE E. HILEMAN Treasurer
(Principal Financial and
Accounting Officer)
/s/ CHARLES R. COLLINS Director December 29, 1999
---------------------------------
CHARLES R. COLLINS
/s/ THOMAS A. COSTELLO Director December 29, 1999
---------------------------------
THOMAS A. COSTELLO
/s/ CHARLES G. MARTINACHE Director December 29, 1999
---------------------------------
CHARLES G. MARTINACHE
/s/ WAYNE SHELTON Director December 29, 1999
---------------------------------
WAYNE SHELTON
/s/ VINCENT VIDAS Director December 29, 1999
---------------------------------
VINCENT VIDAS
</TABLE>
44
<PAGE> 45
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
- ----------- -----------------------------------------------------------------
3.1 Amended and Restated Certificate of Incorporation of the Company
(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 Commission on May 6, 1997).
3.2 Amended and Restated Bylaws of the Company (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
Commission on May 6, 1997).
10.1 Employment Agreement, dated as of January 2, 1997, between the
Company and Dev Ganesan (Incorporated by reference to the
Registration Statement on Form S-1 (File No. 333-23959) filed by
the Company with the Commission on March 26, 1997).
10.2 1996 Stock Incentive Plan (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 Commission on May 6,
1997).
10.3 1997 Stock Incentive Plan (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 Commission on May 30,
1997).
10.4 Employee Stock Purchase Plan.(Incorporated by reference to
Form 10-K filed by the Company with the Commission on December
29, 1998)
10.5 Form of Indemnity Agreement between the Company and each of its
directors and executive officers (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 Commission on May
30, 1997).
10.6 Credit Agreement, dated as of February 17, 1998, between the
Company and NationsBank, N.A. (Incorporated by reference to Form
8-K filed by the Company with the Commission on March 13, 1998).
10.7 Security Agreement, dated as of February 17, 1998, between the
Company and NationsBank, N.A. (Incorporated by reference to Form
8-K filed by the Company with the Commission on March 13, 1998).
10.8 Waiver and First Amendment to Credit Agreement, dated as of June
19, 1998, by and among the Company, Integrated Systems Control,
Inc. RF Microsystems, Inc. and Advanced Management Incorporated
and NationsBank, N.A. (Incorporated by reference to Form 8-K
filed by the Company with the Commission on July 2, 1998).
10.9 Consent Agreement, dated as of June 19, 1998, by and among the
Company, Integrated Systems Control, Inc. RF Microsystems, Inc.
and Advanced Management Incorporated and NationsBank, N.A.
(Incorporated by reference to Form 8-K filed by the Company with
the Commission on July 2, 1998).
10.10 Joinder Agreement, dated as of June 19, 1998, by and among the
Company, Integrated Systems Control, Inc. RF Microsystems, Inc.,
Advanced Management Incorporated and SEMCOR, Inc. and
NationsBank, N.A. (Incorporated by reference to Form 8-K filed by
the Company with the Commission on July 2, 1998).
10.11 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 (Incorporated by reference to
the Registration Statement on Form S-1 (File No. 333-23959) filed
by the Company with the Commission on March 26, 1997).
10.12 Contract No. N00039-96-C-0066, effective March 14, 1996, by and
between the Company and Space and Naval Warfare Systems Command
(Incorporated by reference to the Registration Statement on Form
S-1 (File No. 333-23959) filed by the Company with the Commission
on March 26, 1997).+
10.13 Contract No. N00039-96-C-0097, effective August 29, 1996, by and
between the Company and Space and Naval Warfare Systems Command
(Incorporated by reference to the Registration Statement on Form
S-1 (File No. 333-23959) filed by the Company with the Commission
on March 26, 1997).+
10.14 Form of Tax Indemnification Agreement to be entered into by the
Company and each of its existing Stockholders (Incorporated by
reference to Amendment No. 3 to the Registration Statement on
Form S-1 (File No. 333-23959) filed by the Company with the
Commission on June 25, 1997).
10.15 Stockholders Agreement (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 Commission on May 6,
1997).
10.16 Stock Purchase Agreement by and between Advanced Communication
Systems, Inc. and REMEC Inc., dated as of August 26, 1997
(Incorporated by reference to Current Report on Form 8-K filed by
the Company with the Commission on September 26, 1997).
10.17 Stock Purchase Agreement by and among Advanced Communication
Systems, Inc. and the Shareholders of Integrated Systems Control,
Inc., dated as of October 31, 1997 (Incorporated by reference to
Current Report on Form 8-K filed by the Company with the
Commission on December 5, 1997).
10.18 Stock Purchase Agreement by and between Advanced Communication
Systems, Inc. and the sole Shareholder of Advanced Management
Incorporated, dated as of January 31, 1998 (Incorporated by
reference to Current Report on Form 8-K filed by the Company with
the Commission on March 13, 1998).
10.19 Stock Purchase Agreement by and among Advanced Communication
Systems, Inc. and the Shareholders of SEMCOR, INC., dated as of
June 10, 1998 (Incorporated by reference to Current Report on
Form 8-K filed by the Company with the Commission on July 2,
45
<PAGE> 46
1998).
10.20 Agreement and Plan of Merger dated as of December 9, 1999, by and
among Advanced Communication Systems, Inc., The Titan Corporation
and A T Acquisition Corp. (Incorporated by reference to Current
Report on Form 8-K filed by the Company with the Commission on
December 20, 1999).
10.21 Company Stockholders Agreement dated as of December 9, 1999, by
and among Advanced Communication Systems, Inc., The Titan
Corporation and A T Acquisition Corp. (Incorporated by reference
to Current Report on Form 8-K filed by the Company with the
Commission on December 20, 1999).
10.22 Advanced Communication Systems, Inc. Executive Retirement Plan.
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, 1999. (For
SEC purposes only).
- ----------
+ Portions of this document were granted confidential treatment.
46
<PAGE> 1
EXHIBIT - 10.22
ADVANCED COMMUNICATION SYSTEMS, INC.
EXECUTIVE RETIREMENT PLAN
EFFECTIVE OCTOBER 1, 1999
The Advanced Communication Systems, Inc. Executive Retirement Plan (the
"Plan") is intended to be an unfunded plan or arrangement for purposes of
providing deferred compensation to a select group of management or highly
compensated employees for purposes of Title I of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA").
I. DEFINITIONS. As used in this Plan, the following words shall have the
meanings set opposite such terms.
1.1 "BOARD OF DIRECTORS" shall mean the Board of Directors of
Advanced Communication Systems, Inc.
1.2 "COMPANY" shall mean Advanced Communication Systems, Inc., a
Delaware corporation, ("ACS") and its direct and indirect (through another
subsidiary) wholly-owned subsidiaries from and after the date upon which such
subsidiary became wholly-owned by ACS.
1.3 "COMPENSATION COMMITTEE" shall mean the compensation committee of
the Board of Directors.
1.4 "EXECUTIVE EMPLOYEE" shall mean the Chief Executive Officer of
ACS and such other management or highly compensated employees of the Company as
are recommended by such Chief Executive Officer and approved for participation
in this Plan by subsequent resolution of the Compensation Committee.
1.5 "EARLY RETIREMENT DATE" shall mean the end of the calendar month
during which an Executive Employee has both reached the age of fifty-eight (58)
years and completed ten (10) Years of Service
1.6 "PAYOUT PERIOD" shall mean the period described in Article V over
which the Retirement Award is paid.
1.7 "REGULAR RETIREMENT DATE" shall mean the end of the calendar
month during which an Executive Employee has both reached the age of sixty-five
(65) years and completed ten (10) Years of Service.
1.8 "RETIREMENT AWARD" shall mean the product of an Executive
Employee's Years of Service multiplied by the greater of:
<PAGE> 2
(i) the average monthly base pay received by the Executive Employee
for his or her employment with the Company during the last twelve months
preceding the Retirement Date, or
(ii) the average monthly base pay received by the Executive Employee
for his or her employment with the Company during the last three fiscal
years of the Company preceding the Retirement Date.
The Retirement Award shall accrue ratably over the number of Years of
Service between the initial date of an Executive Employee's approval for
participation hereunder and the Executive Employee's Early Retirement Date.
1.9 "RETIREMENT DATE" shall mean the date upon which an Executive
Employee's full time employment with the Company is terminated in accordance
with the provisions of Article III that entitle the Executive Employee to
payment of the Retirement Award.
1.10 "YEARS OF SERVICE" shall mean the whole number of consecutive 12
month periods of service with the Company completed by an Executive Employee.
The first such Year of Service shall begin as of the hire date of the Executive
Employee with the Company and each successive Year of Service shall begin on
successive anniversaries of the hire date. Unless authorized by specific
recommendation of the ACS Chief Executive Officer and approved by resolution of
the Compensation Committee, such period shall not include any period of service
to an entity prior to the time such entity became wholly-owned by ACS or any
subsidiary of ACS. Continuous employment shall not be ended by any period of
absence approved by the Board of Directors. Fractional Years of Service shall
not be taken into account under the Plan.
II. ELIGIBILITY. An Executive Employee shall become a participant under
this Plan upon approval of the Compensation Committee following recommendation
by the Chief Executive Officer of ACS. Participation in the Plan by the Chief
Executive Officer of ACS shall be deemed to have been so recommended and
approved.
III. RETIREMENT BENEFIT. Except as otherwise described below, an Executive
Employee approved for participation hereunder shall be entitled to receive
retirement benefits which in sum total equal the amount of the Retirement Award
if:
(i) his or her full time employment with the Company is terminated
following such employee's Regular Retirement Date, for reasons other than
for Cause; or
-2-
<PAGE> 3
(ii) his or her full time employment with the Company is terminated
following such Employee's Early Retirement Date under one of the following
circumstances:
(A) with the consent of the Board, which consent shall not be
unreasonably withheld;
(B) by reason of death or Total Disability. Total Disability
shall mean the inability by reason of medically determinable physical
or mental impairments to perform any substantial gainful activity for
a continuous period of twelve (12) months or longer; or
(C) for reasons other than for Cause following a Change in
Control of ACS. Change in Control shall mean any of the following:
I. without the approval of the Board of Directors, any
person or group of persons acting in concert becomes a beneficial
owner, directly or indirectly, of securities of the Company
representing forty percent (40%) or more of the total number of
votes that is required for the election of the members of the
Board of Directors of the Corporation;
II. the stockholders of the Company shall approve (A) any
consolidation or merger of the Company other than one in which
the Company's Common Stock outstanding immediately prior thereto
continues to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity)
more than 50% of the combined voting power of the voting
securities of the Company or such other surviving entity
outstanding immediately after such merger or consolidation, or
(B) any sale, lease, exchange, or other transfer (in one
transaction or a series of related transactions) of all or
substantially all the assets of the Company other than to an
entity or entities which are owned directly or indirectly by the
holders of the Company's' Common Stock in substantially the same
proportional amounts; or
III. there shall have been a change in the composition of
the Company's Board of Directors during a one (1) year period
such that the nomination or election of a majority of the
directors in office at the end of such period was not supported
by a majority of the directors in office at the beginning of such
period.
IV. FORFEITURE. An Executive Employee's Retirement Award shall not be
payable and shall be forfeited by such employee upon termination of full time
-3-
<PAGE> 4
employment with the Company under circumstances other than those provided in
Article III.
V. PAYMENT. Unless otherwise provided herein, the Retirement Award shall
be paid in sixteen equal consecutive quarterly installments (each in the amount
of one-sixteenth of the Retirement Award, without interest) commencing on the
first day of the calendar quarter next following a participating Executive
Employee's Retirement Date. Notwithstanding the foregoing, in the case of a
Chief Executive Officer of ACS whose Retirement Date is in or after the year
during which he or she reached the age of 61, the Retirement Award shall be paid
in four equal consecutive quarterly installments (each in the amount of
one-fourth of the Retirement Award, without interest) commencing on the first
day of the calendar quarter next following his or her retirement. In the event
that an Executive Employee shall die or become legally incompetent at the
commencement of or during the Payout Period, then payments thereafter shall be
made to the Executive Employee's legal or personal representative, heirs or such
other persons legally entitled thereto, and the Company shall be entitled to
make any payment into a separate account for the benefit of the Executive
Employee until the Company has become satisfied, in its sole discretion, as to
the proper persons or persons entitled to such payment.
VI. TERMINATION FOR CAUSE. In the event that the full-time employment of
an Executive Employee is terminated for Cause by the Company, then such employee
shall be deemed to have waived any entitlement to any Retirement Award. Cause
shall mean any of the following:
(i) willful malfeasance or nonfeasance by the Executive Employee in
connection with the performance of his or her duties for the Company that
could, in the good faith judgment of the Company, (A) subject the Company
to criminal penalties, or (B) result in the incarceration of any officer,
director or employee of the Company;
(ii) the Executive Employee being convicted of, or pleading guilty or
nolo contendre to, or being indicted for, a felony or other crime involving
theft, fraud or moral turpitude;
(iii) the misappropriation by the Executive Employee of Company funds
for personal use; or
(iv) the continued failure or refusal by, or manifest inability of,
the Executive Employee to perform his or her duties after reasonable prior
notice from the Company to the Executive Employee.
-4-
<PAGE> 5
VII. EMPLOYMENT BY COMPETITOR. Should a retired Executive Employee become
prior to the end of the Payout Period a director, officer, managerial employee,
or consultant to a "Competitor," as defined in this paragraph, the Company may
notify the retired Executive Employee of the Company's request that the
relationship with the Competitor be terminated as a condition to receiving any
additional payments due under a Retirement Award. If the Company provides
written notice to the retired Executive Employee of such a request, and if the
retired Executive Employee does not terminate the relationship with the
Competitor within thirty calendar days, the Company may at any time thereafter
direct the termination of all future retirement payments under this Plan. For
the purposes of this paragraph, a "Competitor" shall be any business, person, or
entity engaged in substantially the same business as was the Company at the time
of the retired Executive Employee's retirement, and was so engaged in one or
more geographic regions in which the Company did business at that time.
VIII. OBLIGATIONS TO BE UNSECURED. The retirement benefits under the Plan
shall not be secured in any manner. The Company shall not be required to reserve
or otherwise set aside, physically or legally, any funds for the payment of its
obligations hereunder. Neither the Executive Employees, nor any other person,
shall be deemed to have any property interest, legal or equitable, in any
specific asset of the Company as a result of this Plan and, to the extent that
any person acquires any rights to receive payment under the provisions of this
Plan, such rights shall be no greater than, nor shall they have any preference
or priority over, the rights of any unsecured creditor of the Company.
IX. OTHER PLANS. Nothing in this Plan shall be construed to affect the
rights of an Executive Employee, his or her surviving spouse, other
beneficiaries, or his or her estate to receive any retirement or death benefits
under any pension, insurance, other deferred compensation, or other retirement
plans of the Company.
X. NON-ALIENATION PROVISION. Neither an Executive Employee nor any other
person or persons who may become entitled to payment of any amount under this
Plan shall have any right to anticipate, commute, pledge, encumber, alienate,
sell, transfer, assign or otherwise dispose of the right to receive payments
hereunder, all of which payments and the rights thereto are expressly hereby
declared to be non-assignable and not subject to the debts, contracts,
liabilities, engagements or torts of the Executive Employee or such other
persons.
XI. WITHHOLDING OF TAXES. The Company shall have the right to withhold
from all amounts payable pursuant to this Plan any federal, state, local or
other taxes of any kind required by law to be withheld.
-5-
<PAGE> 6
XII. RIGHT OF SET-OFF. Each Executive Employee is deemed to consent to a
deduction, from any amounts owed the Executive Employee pursuant to this Plan,
of any and all amounts owed by the Executive Employee to the Company at the time
that payment of the Retirement Award from the Company to the Executive Employee
is due.
XIII. NON-GUARANTEE OF EMPLOYMENT.
Nothing in the Plan shall confer any right on an employee to continue in
the employ of the Company or shall interfere in any way with the right of the
Company to terminate an employee at any time.
XIV. NAMED FIDUCIARY. The Compensation Committee shall serve as the named
fiduciary and administrator (the "Fiduciary") of this Plan. The Fiduciary shall
have full power and discretion to administer and interpret this Plan, and the
Fiduciary's actions with respect hereto shall be binding and conclusive upon all
persons for all purposes, subject to the claims procedure set forth in this
Plan. The Fiduciary shall not be liable to any person for any action taken or
omitted in connection with its responsibilities, rights, and duties under this
Plan unless attributable to willful misconduct or lack of good faith.
XV. CLAIMS PROCEDURE. A person who believes that he or she is being
denied benefit to which he or she is entitled under this Plan (hereinafter
referred to as a "Claimant") may file a written request for such benefit with
the Fiduciary, setting forth his or her claim.
Upon receipt of a claim, the Fiduciary shall advise the Claimant that
a reply will be forthcoming within ninety (90) days and shall, in fact, deliver
such reply within such period. The Fiduciary may, however, extend the reply
period for an additional ninety (90) days for a reasonable cause. If the claim
is denied in whole or in part, the Fiduciary shall adopt a written opinion,
using language calculated to be understood by the Claimant, setting forth:
(i) the specific reason or reasons for such denial;
(ii) the specific reference to pertinent provisions of this Plan on
which such denial is based;
(iii) a description of any additional material or information
necessary for the Claimant to perfect his or her claim and an explanation
why such material or such information is necessary;
-6-
<PAGE> 7
(iv) appropriate information as to the steps to be taken if the
Claimant wishes to submit the claim for review; and
(v) the time limits for requesting a review.
Within sixty (60) days after the receipt by the Claimant of the
written opinion described above, the Claimant may request in writing that the
executive committee of the Board of Directors (the "Executive Committee"),
review the determination. The Claimant or his or her duly authorized
representative may, but need not, review the pertinent documents and submit
issues and comments in writing for consideration by the Executive Committee. If
the Claimant does not request a review of the Fiduciary's determination within
such sixty (60) -day period, he or she shall be barred and estopped from
challenging the Fiduciary's determination.
Within sixty (60) days after receipt of a request for review, the
Executive Committee will review the Fiduciary's determination. After considering
all materials presented by the Claimant, the Executive Committee will render a
written opinion, written in a manner calculated to be understood by the
Claimant, setting forth the specific reasons for the decision and containing
specific references to the pertinent provisions of this Plan on which the
decision is based. If special circumstances require that the sixty (60) -day
time period be extended, the Executive Committee will so notify the Claimant and
will render the decision as soon as possible, but not later than one hundred
twenty (120) days after receipt of the request for review.
XVI. AMENDMENTS. This Plan may be amended, modified or terminated at any
time and for any reason by the Board of Directors of the Company; provided,
however, no such action shall adversely affect the rights of any Executive
Employee who previously was approved for participation and accrued a benefit
hereunder without the express written consent of such Executive Employee.
Notwithstanding the foregoing, upon termination of the Plan, the Company may
fulfill its obligation hereunder in full to any such affected participating
Executive Employee by providing a cash payment to such Executive Employee equal
to the then present value of such employee's accrued benefit hereunder computed
using such actuarial assumptions that the Fiduciary within its sole discretion
determines are reasonable.
XVII MASCULINE, FEMININE, SINGULAR AND PLURAL. The masculine shall be read
in the feminine, the singular in the plural, and vice versa, whenever the
context shall so require.
XVIII TITLES. The titles to Articles and Sections in this Plan are placed
herein for convenience of reference only, and the Plan is not to be construed
by reference thereto.
-7-
<PAGE> 8
XIX. CONTROLLING LAW. This Plan shall be construed according to the laws of
the Commonwealth of Virginia, other than the conflict of laws principles
thereof.
WITNESSETH, the signature below this 2nd day of December, 1999.
WITNESS: ADVANCED COMMUNICATION
SYSTEMS, INC.
/s/TERRENCE E. HILEMAN BY: /s/ GEORGE A. ROBINSON
- ------------------------------ ----------------------------------
NAME: George A. Robinson
--------------------------------
TITLE: Chairman, President and
Chief Executive Officer
--------------------------------
-8-
<PAGE> 1
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 Kingdon
3) Integrated Systems Control, Inc. Virginia
4) Advanced Management Incorporated Virginia
5) SEMCOR, Inc. New Jersey
6) Program Support Associates, Inc. Virginia
<PAGE> 1
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 12, 1999, included in this Form 10-K, into the
Company's previously filed Registration Statement on Form S-8, File No.
333-49051.
/s/ ARTHUR ANDERSEN LLP
Vienna, VA
December 28, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ADVANCED
COMMUNICATIONS SYSTEMS, INC.'S FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<CASH> 1,615
<SECURITIES> 0
<RECEIVABLES> 68,795
<ALLOWANCES> 961
<INVENTORY> 932
<CURRENT-ASSETS> 73,277
<PP&E> 17,173
<DEPRECIATION> 9,265
<TOTAL-ASSETS> 143,202
<CURRENT-LIABILITIES> 44,082
<BONDS> 0
0
0
<COMMON> 115
<OTHER-SE> 49,779
<TOTAL-LIABILITY-AND-EQUITY> 143,202
<SALES> 0
<TOTAL-REVENUES> 218,252
<CGS> 0
<TOTAL-COSTS> 201,530
<OTHER-EXPENSES> 3,893
<LOSS-PROVISION> 2,514
<INTEREST-EXPENSE> 4,492
<INCOME-PRETAX> 5,983
<INCOME-TAX> 2,402
<INCOME-CONTINUING> 3,581
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,581
<EPS-BASIC> .41
<EPS-DILUTED> .41
</TABLE>
