<PAGE>
File Pursuant to Rule 424(b)(1)
Registration Number 333-33961
PROSPECTUS
6,720,000 SHARES
[LOGO]
COMMON STOCK
(AND RIGHTS TO ACQUIRE UP TO 6,400,000 OF SUCH SHARES)
OAO Technology Solutions, Inc. is granting at no cost to the holders of
common shares of Safeguard Scientifics, Inc. transferable rights to purchase
shares of our Common Stock. Safeguard shareholders will receive one right for
every five Safeguard common shares that they own as of October 20, 1997. Each
right will entitle the holder to purchase one share of our Common Stock at an
exercise price of $5.00 per share. Up to 6,400,000 shares of our Common Stock
will be offered in the rights offering. Of these shares, we will be selling
5,915,000 shares and three of our existing stockholders will be selling 485,000
shares. If any shares remain unsubscribed after the rights offering, the
underwriters will purchase all such shares pursuant to a standby underwriting
agreement.
We will also be selling an additional 320,000 shares of our Common Stock to
certain persons selected by us. These persons may have a relationship with us,
Safeguard or one of Safeguard's other partnership companies.
The exercise period for the rights will expire at 5:00 p.m., New York City
time, on November 25, 1997. You may only exercise your rights if you purchase at
least 20 shares of our Common Stock through such exercise.
(CONTINUED)
YOU SHOULD CAREFULLY CONSIDER THE INFORMATION REGARDING THE RISKS ASSOCIATED
WITH AN INVESTMENT IN OUR COMMON STOCK THAT ARE DISCUSSED UNDER THE CAPTION
"RISK FACTORS" BEGINNING ON PAGE 10.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING UNDERWRITING
DISCOUNT DISCOUNT PAID PROCEEDS PROCEEDS TO
ASSUMED EXERCISE PAID BY THE BY SELLING TO THE THE SELLING
AND OFFER PRICE COMPANY STOCKHOLDERS COMPANY STOCKHOLDERS
<S> <C> <C> <C> <C> <C>
Per Share................................. $5.00 Min. $0.15 Min. $0.15 Max. $4.85 Max. $4.85
Max. $0.35 Max. $0.35 Min. $4.65 Min. $4.65
Total..................................... $33,600,000 Min. $935,250 Min. $72,750 Max. $30,239,750 Max. $2,352,250
Max. $2,118,250 Max. $169,750 Min. $29,056,750 Min. $2,255,250
Total with Over-Allotment................. $36,800,000 Min. $935,250 Min. $296,750 Max. $30,239,750 Max. $5,328,250
Max. $2,118,250 Max. $393,750 Min. $29,056,750 Min. $5,231,250
</TABLE>
The minimum underwriting discount assumes that all rights granted in the
rights offering are exercised and reflects the payment of a financial advisory
fee to the underwriters equal to 3% of the exercise price on the 6,720,000
shares sold in this offering. In such a case, the minimum underwriting discount
would yield the maximum proceeds to us and to the selling stockholders. The
maximum underwriting discount assumes that none of the rights granted in the
rights offering are exercised and reflects the payment of an underwriting
discount of 4% of the exercise price on the 6,400,000 shares which would then be
purchased by the underwriters plus an additional 3% financial advisory fee on
all of the 6,720,000 shares offered hereby. In such a case, the maximum
underwriting discount would yield the minimum proceeds to us and to the selling
stockholders.
The last row of the table assumes that the underwriters have exercised their
option granted by the selling stockholders to purchase an additional 640,000
shares of our Common Stock. The exercise of the over-allotment option would
yield additional proceeds to the selling stockholders and would require the
payment by the selling stockholders of both a 4% underwriting discount and a 3%
financial advisory fee on such shares.
<PAGE>
WHEAT FIRST BUTCHER SINGER JANNEY MONTGOMERY SCOTT INC.
THE DATE OF THIS PROSPECTUS IS OCTOBER 21, 1997.
<PAGE>
(CONTINUED FROM COVER PAGE)
Once you exercise a right and we accept the exercise, you may not withdraw
the exercise. The shares of our Common Stock that are sold in the rights
offering will come first from the shares being issued by us, and then from the
shares being sold by the selling stockholders. If shares remain unsubscribed
after the end of the rights exercise period, the first 300,000 of such shares
will be offered by us to certain other persons. These persons may have a
relationship with us, Safeguard or one of Safeguard's other partnership
companies. All shares not purchased by such persons after this offer and all
unsubscribed shares in excess of 300,000 will be purchased by the underwriters
pursuant to a standby underwriting agreement.
There is no minimum number of shares that must be subscribed for in the
rights offering for it to be completed. The number of rights that will be
granted to the holders of Safeguard common shares is based upon the number of
Safeguard common shares that are outstanding on October 20, 1997. If there are
fewer than 32,000,000 Safeguard common shares outstanding on October 20, 1997,
we will grant fewer than 6,400,000 rights in the rights offering. If fewer than
6,400,000 rights are granted, we will offer the shares subject to the rights
which were not granted to Safeguard shareholders to certain persons selected by
us at a purchase price of $5.00 per share. In any event, all of the 6,400,000
shares of our Common Stock offered in the rights offering will be sold. However,
this offering may be canceled by the underwriters if certain conditions are not
satisfied. In that event, if you have made any payments to the rights agent,
ChaseMellon Shareholder Services, L.L.C., the full amount of your payments,
without interest, will be promptly returned to you.
We will not receive any proceeds from the sale of shares by the selling
stockholders. After the completion of this offering, the selling stockholders
together will own approximately 21.6% of our Common Stock.
We have filed a Registration Statement with the SEC covering the rights and
the shares of Common Stock. Before this offering, our Common Stock has not been
listed on any stock exchange or The Nasdaq Stock Market. The rights and our
Common Stock have been approved for quotation on the Nasdaq National Market.
The underwriters may engage in transactions involving the Common Stock
during and after the rights exercise period. As a result, the underwriters may
realize profit in addition to the underwriting compensation received for their
participation in this offering. We expect that we will deliver any remaining
shares on or about December 4, 1997 at the offices of Wheat, First Securities,
Inc. in Richmond, Virginia.
After this offering, we intend to send to all of our stockholders annual
reports containing financial statements that have been examined and reported
upon, with an opinion expressed by, the Company's independent auditors.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF THE COMMON
STOCK OF THE COMPANY, INCLUDING INITIATING BIDS OR EFFECTING PURCHASES ON THE
NASDAQ NATIONAL MARKET FOR THE PURPOSE OF PREVENTING OR RETARDING A DECLINE IN
THE MARKET PRICE OF THE COMMON STOCK. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
<PAGE>
[PHOTO]
Three photographs of employees surrounding the following text: "OAO
Technology Solutions, Inc. Providing Worldwide, [PHOTO] Full-Service Information
Technology Solutions through Industry-Specific Global Partnerships".
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND THE CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY AND THE
NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED,
THE INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS'
OVER-ALLOTMENT OPTION AND ASSUMES AN EXERCISE PRICE OF $5.00 PER SHARE. UNLESS
THE CONTEXT OTHERWISE INDICATES, OAO TECHNOLOGY SOLUTIONS, INC. AND ITS
SUBSIDIARIES ARE REFERRED TO COLLECTIVELY HEREIN AS THE "COMPANY."
THE COMPANY
OAO Technology Solutions, Inc. (the "Company") provides a wide range of
outsourced information technology ("IT") solutions and professional services,
including the operation of large-scale data center complexes and networks
("Megacenter Operations"), distributed systems management, staffing services and
other IT services. The Company provides these solutions and services, generally
on a long-term, fixed-price contractual basis, to strategic clients ("Strategic
Clients") which are global providers of IT outsourcing services. The Company
works with these Strategic Clients as part of the IT outsourcing team in
providing services to a wide range of corporate clients ("Engagement Clients"),
accepting delivery responsibility for specific functional roles within the
outsourcing engagements. The Company's primary Strategic Clients have been IBM's
Global Services ("IBM", formerly IBM's Integrated Systems Solutions Corp.) and
Digital Equipment Corporation ("Digital"). The Company is also working towards
establishing a Strategic Client relationship with Perot Systems Corp. ("Perot
Systems"). Representative Engagement Clients currently include Ameritech,
Campbell Soup, McDonnell Douglas, PECO Energy and Ryder Systems Corp. The
Company's revenues have expanded at a compound annual growth rate of 60.5% to
$57.9 million in 1996 from $22.5 million in 1994. Revenues in the first six
months of 1997 increased by 61.7% to $39.3 million compared to $24.3 million in
the first six months of 1996. For the years ended December 31, 1995 and 1996 and
for the six months ended June 30, 1997, approximately 92%, 74% and 62% of the
Company's revenues, respectively, were derived from fixed-price contracts. As of
June 30, 1997, the Company had over 1,300 employees in 14 Company offices and 82
engagement locations in the United States, Canada, Mexico, Brazil and the United
Kingdom.
The use of outsourcing has grown rapidly as corporations have increasingly
determined that it is advantageous to focus on their core competencies and
outsource those functions that are not central to their primary mission.
According to the Yankee Group, an industry research firm, the IT outsourcing
market in 1995 was approximately $59 billion in the United States and
approximately $107 billion worldwide. One of the key trends occurring in the IT
outsourcing industry is an increasing use of business partnerships and alliances
among outsourcing vendors to deliver more cost-effectively to the engagement
client a broader range of technical skills. Factors driving this trend include
the complexity and convergence of technology required in outsourcing
engagements, competition for technical resources, shortened delivery times, and
investment costs of internally building technical capabilities. As a result,
outsourcing providers recognize that it is not practical to internally develop
and manage all of the technical skills and critical resources necessary to
perform increasingly complex outsourcing engagements.
The Company believes that it is differentiated from other IT service
providers through its focus on relationships with Strategic Clients, its ability
to perform successfully and profitably under multi-year, fixed-price contracts
and its ability to provide services on a national and international basis. The
Company's strategy is to build long-term relationships with selected Strategic
Clients by understanding their business needs and by providing specific services
within large-scale outsourcing engagements more cost-effectively than its
Strategic Clients. The Company's services range from basic data center
management operations to help desk services, business process reengineering and
software engineering support. The Company delivers its services through customer
teams, each of which has full responsibility for the delivery of services to a
specific Strategic Client. The Company's close relationships with its Strategic
Clients, its ability to rapidly transition and integrate its management
personnel into new engagements, and its ability to effectively manage personnel
in the client environment, allow the Company to profitably price
3
<PAGE>
its services under fixed-price contracts. By offering fixed-price contracts, the
Company reduces the execution and pricing risk for its Strategic Clients in
their large-scale outsourcing engagements. The Company has developed and is
continuing to expand its international service delivery capabilities in order to
leverage its Strategic Clients' increasingly global IT outsourcing efforts.
Large-scale outsourcing engagements typically involve the acquisition of IT
assets by the outsourcing provider from the engagement client. These assets can
range from fixed assets, such as entire data centers and computer networks, to
personnel, such as data center, help desk and programming staff. The Company's
role in outsourcing engagements usually involves the retention of IT personnel
from the Engagement Client. By retaining employees as part of its new
outsourcing engagements, the Company's growth has not been impeded by the
availability of qualified technical personnel. As a result, the Company has
avoided the significant staffing costs and expenses normally associated with new
engagements within the IT services industry. In each new outsourcing engagement,
the Company utilizes its expertise in IT staffing and operations to evaluate and
retain outsourced staff and to reengineer the operations of the outsourced
function. Through this process, the Company historically has been able to
improve the performance of, and manage on a more cost-effective basis, the
outsourced function for its clients.
The Company's goal is to become one of the premier providers of outsourced
IT solutions and professional services by pursuing the following principal
strategies:
LEVERAGE EXISTING RELATIONSHIPS. By establishing and nurturing close
relationships with a limited number of Strategic Clients, the Company intends to
continue building a reputation for performance that supports the Company's
selection by its clients as a value-added partner of choice. In support of this
strategy, the employees that deliver services to Strategic Clients are organized
in customer teams, with each customer team responsible for a particular
Strategic Client. In addition to designated customer teams, the Company also
maintains engagement managers who are responsible for each Strategic Client
relationship and who seek to identify additional business opportunities within
the Strategic Client organization. As a result of these relationships, the
Company has been granted several engagements by Strategic Clients without the
requirement that the Company submit to a competitive selection process.
SELECTIVELY EXPAND BASE OF STRATEGIC CLIENTS. The Company intends to
selectively expand the number of Strategic Clients with which it maintains
relationships by carefully evaluating market opportunities with IT services and
product providers who value the Company's outsourcing approach. The Company
recently began its third engagement with the energy systems group of Perot
Systems and is working towards establishing a Strategic Client relationship with
Perot Systems. The Company is also working to establish business opportunities
with NCR also with the objective of achieving a Strategic Client relationship.
In expanding its base of Strategic Clients, the Company intends to refrain from
pursuing engagement or partnership opportunities with organizations competing
directly with its existing Strategic Clients.
INCREASE INTERNATIONAL PRESENCE. The Company plans to continue to expand
its international presence to capitalize on global outsourcing opportunities
with its Strategic Clients. The Company currently maintains offices in Canada,
Mexico, Brazil and the United Kingdom, and anticipates opening additional
offices within the next 18 months in Continental Europe and the Asia-Pacific
Rim. The Company also uses joint venture relationships with local IT services
providers in order to broaden its international service capabilities. The
Company has established a joint venture relationship with Capita Managed
Services Limited, a local IT service provider in the United Kingdom, and has
executed letters of understanding regarding the establishment of joint venture
relationships with Stefanini Consultoria e Assessoria em informatica in Brazil
and with Comtex Group Limited in New Zealand.
DEVELOP INDUSTRY-SPECIFIC EXPERTISE. The Company intends to selectively
develop expertise in industries that may offer higher-margin opportunities for
the Company's IT solutions and professional services. The Company has invested
in developing expertise in the healthcare industry, and has recently begun an
engagement with IBM which leverages the Company's industry expertise to provide
a state-of-the-art
4
<PAGE>
health data network to healthcare service providers. The Company will target
other vertical markets that are undergoing regulatory, technological or
competitive changes which provide opportunities for increased outsourcing of IT
functions. The Company will likely make investments in new technical and service
capabilities to enhance its vertical market strategy.
PURSUE ACQUISITIONS AND ALLIANCES. The Company intends to pursue expansion
opportunities with other IT service providers by means of acquisitions or
alliances. The Company believes that new technical skills, additional industry
expertise, a broader client base and an expanded geographic presence may result
from these activities.
In the years ended December 31, 1995 and 1996 and in the six months ended
June 30, 1997, the Company's largest Strategic Client, IBM, accounted for
approximately 88.7%, 82.2% and 76.2% of the Company's revenues, respectively.
Dataquest, an industry research firm, estimates that in 1995, IBM was the
leading provider of management/operations and business process management
services in the United States with a 28.9% market share and was one of the top
two outsourcing providers worldwide with a 19.7% market share. The Company's
relationship with Digital has grown by 252.4% from $2.1 million in the six
months ended June 30, 1996 to approximately $7.4 million in the six months ended
June 30, 1997. In early 1997, the Company also began its third engagement with
Perot Systems through its energy systems group.
The Company began operations in January 1993 as a division of OAO
Corporation, was incorporated in the State of Delaware in March 1996 and was
spun off from OAO Corporation in April 1996. The Company's principal executive
offices are located at 7500 Greenway Center Drive, Greenbelt, Maryland 20770 and
its telephone number is (301) 486-0400.
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Description of the Rights
Offering................... If you hold Safeguard common shares on October 20, 1997,
you will receive one right to purchase our Common Stock
for every five Safeguard common shares you own.
Fractional rights will be rounded up to the next whole
number in determining the number of rights to be issued
to Safeguard shareholders. Each right entitles you to
purchase one share of our Common Stock at a purchase
price of $5.00. You must own at least 20 rights to be
eligible to exercise your rights. In other words, if you
own fewer than 96 Safeguard common shares, you will
receive fewer than 20 rights and you will not be
eligible to exercise your rights unless you purchase
additional rights in the market. Together with the
selling stockholders, we are offering up to 6,400,000
shares of our Common Stock for purchase through the
exercise of rights.
The Exercise Price of the
Rights..................... If you wish to exercise your rights to purchase our
Common Stock, the purchase price will be $5.00 per share
of Common Stock.
When You Can Exercise Your
Rights..................... The rights will only be exercisable from the period
beginning on October 21, 1997 and ending on November 25,
1997 at 5:00 p.m., New York City time.
How Your Rights Will be
Evidenced.................. You will receive certificates that represent your
transferable rights.
Offer of Unsubscribed Shares
to Other Purchasers........ In the event that not all of the rights are exercised,
we will offer the first 300,000 unsubscribed shares and
any shares of Common Stock subject to rights that were
not distributed, to certain persons selected by us.
These persons may have a relationship with us, Safeguard
or one of Safeguard's other partnership companies.
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
Obligations of the
Underwriters............... The underwriters will purchase any shares offered in the
rights offering that have not been purchased through the
exercise of rights and have not otherwise been sold by
us by November 25, 1997 at the exercise price, less a 4%
underwriters' discount and a 3% financial advisory fee.
The underwriters will then offer these shares to the
public.
Number of Shares of Common
Stock Offered in the Rights
Offering................... Of the 6,400,000 shares offered in the rights offering,
we will be selling 5,915,000 shares and the selling
stockholders will be selling 485,000 shares.
Offer of Direct Shares to
Direct Purchasers.......... We are also offering up to 320,000 shares of our Common
Stock to certain persons selected by us. These persons
may have a relationship with us, Safeguard or one of
Safeguard's other partnership companies.
Common Stock to be
Outstanding After the
Offering................... After this offering, 16,235,583 shares of Common Stock
will be outstanding, not including 1,375,875 shares
issuable upon the exercise of outstanding stock options
(at a weighted average exercise price of $2.70 per
share) as of June 30, 1997.
How We Intend to Use the
Proceeds................... We will use the money received from the sale of our
shares to repay our outstanding debt, to invest in
additional management information systems, and for
continued international expansion, working capital,
general corporate purposes and other capital
expenditures. We may also use a portion of the net
proceeds for future acquisitions, although we currently
have no commitments regarding any acquisition. We will
not receive any proceeds from the sale of our shares by
the selling stockholders.
Nasdaq National Market
Symbols.................... During the period in which you can exercise your rights,
the rights will trade on the Nasdaq National Market
under the symbol OAOTR and the Common Stock will trade
under the symbol OAOTV on a when-issued basis. After the
expiration of the rights period, the Common Stock will
trade under the symbol OAOT.
</TABLE>
7
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The summary consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements of the
Company and the Notes thereto included elsewhere in this Prospectus. The
statement of operations data for the years ended December 31, 1994, 1995 and
1996, and the balance sheet data as of December 31, 1994, 1995 and 1996 have
been derived from consolidated financial statements of the Company which have
been audited by Deloitte & Touche LLP, independent auditors. The statement of
operations data for the year ended December 31, 1993 and the six months ended
June 30, 1996 and 1997 and the balance sheet data as of December 31, 1993 and
June 30, 1997 have been derived from the Company's unaudited consolidated
financial statements which, in the opinion of management, include all
significant, normal and recurring adjustments necessary for a fair presentation
of the financial position and results of operations for such unaudited period.
The Company began its operations in 1993 as a division of OAO Corporation, was
incorporated in March 1996 and was spun off from OAO Corporation in April 1996.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------ --------------------
<S> <C> <C> <C> <C> <C> <C>
1993(1) 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- ---------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operating Data:
Revenues................................................. $ 12,142 $ 22,472 $ 38,229 $ 57,891 $ 24,321 $ 39,338
Direct costs............................................. 8,944 16,503 28,548 43,896 18,170 30,773
Gross profit............................................. 3,198 5,969 9,681 13,995 6,151 8,565
Income from operations................................... 586 1,226 2,343 3,171 1,277 2,250
Net income............................................... $ 322 $ 699 $ 1,089 $ 1,810 $ 725 $ 1,232
Pro forma net income per common share (2)................ $ 0.17 $ 0.07 $ 0.12
Pro forma weighted average number of common shares
outstanding (2)........................................ 10,422 10,422 10,414
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
------------------------------------------
<S> <C> <C> <C>
PRO FORMA
AS ADJUSTED
ACTUAL PRO FORMA(3) (4)
--------- --------------- --------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Balance Sheet Data:
Working capital....................................................... $ 4,505 $ 32,498 $ 32,498
Total assets.......................................................... 20,205 48,198 44,198
Total debt............................................................ 4,651 4,651 651
Total stockholders' equity............................................ 7,072 35,065 35,065
</TABLE>
- ------------------------
(1) The Company's initial year of operations began in 1993 as a division of OAO
Corporation. The Company was incorporated in March 1996 and was spun off
from OAO Corporation in April 1996. As these were entities under common
control, the merger was accounted for similar to that of a pooling-
of-interests and as a result, the financial statements of the Company have
been presented at historical cost since its inception in 1993.
(2) See Note 2 to Notes to the Consolidated Financial Statements for information
concerning calculation of pro forma net income per common share.
(3) The "Pro Forma" balances reflect the sale by the Company of 6,235,000 shares
of Common Stock and the receipt and application of approximately $28.0
million in net proceeds from this offering after
8
<PAGE>
deducting the maximum total underwriting discount with respect to such
shares of approximately $2.2 million and estimated offering expenses of $1.0
million (including $200,000 representing the maximum applicable
non-accountable expense allowance to the underwriters).
(4) The "Pro Forma As Adjusted" balances reflect the repayment of the
outstanding principal balance under the Company's line of credit from the
proceeds of this offering (which was $4.0 million as of July 31, 1997). See
"Use of Proceeds" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
RECENT DEVELOPMENTS
The Company's revenues for the third quarter ended September 30, 1997
increased by 28.8% to $20.6 million from $16.0 million for the same prior year
period. The Company's net income for the third quarter ended September 30, 1997
increased by 65% to $726,000 from $440,000 for the same prior year period. The
Company's net income per common share for the third quarter ended September 30,
1997 increased by 75% to $.07 from $.04 for the same prior year period. The
weighted average number of common and common share equivalents used in computing
net income per common share for the third quarter ended September 30, 1997 and
1996 were 10,414,410 and 10,421,880, respectively.
9
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE RIGHTS AND THE SHARES OF COMMON STOCK OFFERED HEREBY
INVOLVES A HIGH DEGREE OF RISK. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER
THE FOLLOWING RISK FACTORS, AS WELL AS ALL OTHER INFORMATION IN THIS PROSPECTUS,
BEFORE INVESTING IN THE SHARES OF THE COMMON STOCK OFFERED HEREBY. THIS
PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. FUTURE EVENTS AND THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THE RESULTS REFLECTED IN THESE FORWARD-LOOKING STATEMENTS.
FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO,
THOSE DISCUSSED IN THE FOLLOWING RISK FACTORS.
DEPENDENCE ON KEY STRATEGIC CLIENTS
Historically, substantially all of the Company's revenue has been derived
from its relationships with its largest Strategic Clients, IBM and Digital. For
the years ended December 31, 1995 and 1996 and for the six months ended June 30,
1997, IBM accounted for approximately 88.7%, 82.2% and 76.2% of the Company's
revenues, respectively. For the years ended December 31, 1995 and 1996 and for
the six months ended June 30, 1997, Digital accounted for approximately 5.4%,
11.4% and 18.8% of the Company's total revenues, respectively. The Company
expects to continue to derive a significant portion of its revenue from IBM and
Digital for the foreseeable future. The Company's future revenues are dependent
to a large extent on the success of the outsourcing businesses of IBM and
Digital and their continued engagement of the Company. The termination or
nonrenewal of a Strategic Client's contract by an Engagement Client could have a
material adverse effect on the Company's business, operating results and
financial condition. The loss of IBM or Digital as a Strategic Client or a
decrease in the revenue derived from the Company's relationships with either IBM
or Digital would have a material adverse effect on the Company's business,
operating results and financial condition. There can be no assurance that either
Strategic Client will continue to engage the Company's services at historical
levels, if at all.
LIMITED ABILITY TO ESTABLISH NEW STRATEGIC CLIENT RELATIONSHIPS
Because the Company intends to maintain relationships with a limited number
of Strategic Clients, the Company's opportunity to obtain engagements from other
entities including major competitors of these Strategic Clients will be
significantly limited. There can be no assurance that the Company will be able
to establish new Strategic Client relationships. As a result, the Company's
revenue will likely continue to be derived from a limited number of clients and
the Company's future growth opportunities will likely be tied to the
opportunities presented to its Strategic Clients. There can be no assurance that
the Company's Strategic Clients will enjoy continued growth opportunities in
their outsourcing businesses, that they will retain the Company to participate
in any such opportunities, or that new contracts with existing Strategic Clients
will generate profits commensurate with the Company's historical level of
profits.
RISKS ASSOCIATED WITH FIXED-PRICE CONTRACTS
For the years ended December 31, 1995 and 1996 and for the six months ended
June 30, 1997, approximately 92%, 74% and 62% of the Company's revenues,
respectively, were derived from fixed-price contracts. The successful use of
fixed-price contracts by the Company is dependent on the Company's ability to
maintain a pre-established level of service while achieving certain operating or
managerial efficiencies during the course of its fixed-price engagements. There
can be no assurance that the Company will successfully achieve these
efficiencies, the failure of which would likely have a material adverse effect
on the Company's business, operating results and financial condition.
ABILITY TO SUSTAIN AND MANAGE GROWTH
The Company's future growth is dependent upon a number of factors, including
successful execution of the Company's international expansion plans,
implementation of new management information systems, entrance into new vertical
markets, retention of employees, development of complementary capabilities,
10
<PAGE>
execution of its acquisition strategy, and entrance into alliances and business
partnerships. The Company currently has limited management and administrative
resources. The Company's growth and expansion has placed and will likely
continue to place a significant strain on the Company's resources, and the
failure to manage growth effectively would have a material adverse effect on the
Company's business, operating results and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business--Growth Strategy" and "Management."
VARIABILITY OF QUARTERLY OPERATING RESULTS
The Company has experienced and may in the future continue to experience
fluctuations in its quarterly operating results. Factors that may cause the
Company's quarterly operating results to vary include the number of active
engagements, the loss of major Strategic Clients or Engagement Clients, the
timing of personnel cost increases and the portion of revenues derived from new
client engagements. In addition, certain of the Company's engagements are
terminable by its Strategic Clients without penalty and any such termination
could have an adverse effect on the Company's business, operating results and
financial condition. Due to these and other factors, there can be no assurance
that the Company's operating results will meet the expectations of investors for
any given fiscal period. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
DEPENDENCE ON KEY PERSONNEL
The Company believes that its continued success depends to a significant
extent upon the efforts and abilities of its executive officers and other key
employees. In particular, the loss of the services of William R. Hill, the
Company's President and Chief Executive Officer, or Edgar M. Fields, the
Company's Chief Operating Officer, or any of the Company's other executive
officers or key employees could have a material adverse effect on the Company's
business, operating results and financial condition. With the exception of Mr.
Hill, none of the Company's executive officers have entered into employment
contracts with the Company. Furthermore, the Company's anticipated growth and
expansion into activities requiring additional expertise will require the hiring
of highly skilled technical, management, financial, sales and marketing
personnel. Competition for such personnel is intense, and the failure of the
Company to effectively hire and retain such personnel could have a material
adverse effect on the Company's business, operating results and financial
condition. See "Management."
COMPETITION
The IT services market is highly competitive and is served by numerous
firms, including systems consulting and integration firms, professional services
companies, application software firms, temporary employment agencies, the
professional service groups of computer equipment companies, facilities
management and management information systems outsourcing companies, certain
"Big Six" accounting firms, and general management consulting firms. Many
participants in the commercial IT services market have significantly greater
financial, technical and marketing resources and generate greater revenues than
the Company. The Company believes that the principal competitive factors in the
commercial IT services industry include responsiveness to client needs, the
ability to cause the transition of the outsourced services to occur on a prompt
and seamless basis, quality of service, employee relations, price, management
capability and technical expertise. The Company believes that its ability to
compete also depends on a number of competitive factors outside its control,
including the ability of its competitors to hire, retain and motivate skilled
technical and management personnel, the price at which others offer comparable
services and the extent of its competitors' responsiveness to client needs.
As the worldwide IT solutions and services market continues to grow, the
Company believes that it will attract new competitors. There can be no assurance
that the Company will be able to compete successfully which could result in the
failure to obtain new engagements or could compel the Company to make
significant price reductions. The inability of the Company to successfully
compete could result in a
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material adverse effect on the Company's business, operating results and
financial condition. See "Business--Competition."
RISKS ASSOCIATED WITH INTERNATIONAL SALES
The Company expects to expand its presence in international markets and may
in the future derive a significant portion of its revenues from these markets.
The Company's current and future international business activities are subject
to a variety of potential risks, including political, regulatory and trade and
economic policy risks. The Company will also be subject to the risks attendant
to transacting in foreign currencies. In addition, many foreign governments have
laws which provide employees with significantly more favorable severance and
other social welfare benefits than are generally provided in the U.S.
Accordingly, the Company may be subject to unanticipated and significant
severance costs upon the cancellation or expiration of any of its international
engagements. The realization by the Company of any of these risks could have a
material adverse effect on the Company's business, operating results and
financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 12 to Notes to the Consolidated
Financial Statements.
DEPENDENCE ON AVAILABILITY OF QUALIFIED TECHNICAL PERSONNEL
The Company is dependent upon its ability to attract, hire and retain
personnel who possess the technical skills and experience necessary to meet the
service requirements of its clients. The Company competes for these individuals
with other providers of technical services, systems integrators, providers of
outsourcing services, computer systems consultants, and temporary personnel
agencies. There can be no assurance that a sufficient number of qualified
technical personnel will be available to the Company or that the Company will
successfully retain its existing personnel. The realization of any of such
events could have a material adverse effect on the Company's business, financial
condition and results of operations.
LIABILITIES FOR CLIENT AND EMPLOYEE ACTIONS
The Company often places its employees in the workplace of Strategic Clients
and Engagement Clients. The Company is therefore exposed to potential liability
with respect to actions taken by its employees, such as damages caused by
employee errors, misuse of client-proprietary information or theft of client
property. Due to the nature of the Company's potential liability with respect to
any such actions, there can be no assurance that any insurance maintained by the
Company will be adequate to cover any such liability. To the extent that such
insurance is not sufficient in amount or scope to cover a loss, the Company's
business, financial condition and results of operations could be materially
adversely affected. Another attendant risk involves possible claims of
discrimination, harassment and other similar claims. A failure to avoid these
risks may result in negative publicity for the Company and the payment by the
Company of money damages or fines or loss of a Strategic Client or Engagement
Client relationship. There can be no assurance that the Company will not
experience such problems in the future.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The Company relies upon a combination of trade secret, nondisclosure and
other contractual arrangements to protect the proprietary rights of the Company
and the Company's Strategic Clients and Engagement Clients. The Company
generally enters into agreements with its clients which contain covenants
regarding confidentiality and limits access to, and distribution of, its
clients' proprietary information. There can be no assurance that the steps taken
by the Company in this regard will be adequate to deter misappropriation of the
Company's or its clients' proprietary information or that the Company will be
able to detect unauthorized use or take appropriate steps to enforce its
clients' intellectual property rights. The Company has recently adopted a policy
which requires each new employee to execute restrictive covenants that require
the employee to keep confidential all proprietary information pertaining to the
assets or business of the Company and its clients.
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CONTROL BY PRINCIPAL STOCKHOLDERS
After the completion of this offering, Safeguard, Cecile D. Barker and
William R. Hill, the three largest stockholders of the Company (collectively,
the "Principal Stockholders") will beneficially own in the aggregate
approximately 57.5% of the outstanding Common Stock. As a result, the Principal
Stockholders will collectively have the voting power to elect the Company's
entire Board of Directors and to approve all matters requiring stockholder
approval. See "Management--Executive Officers and Directors" and "Principal and
Selling Stockholders."
BROAD DISCRETION IN APPLICATION OF PROCEEDS; ACQUISITION RISKS
The Company intends to use the net proceeds from this offering to repay the
outstanding principal balance under its line of credit (which was $4.0 million
as of July 31, 1997), for an investment in additional management information
systems (estimated at approximately $4.0 million) and for continued
international expansion, working capital, general corporate purposes and other
capital expenditures. In addition, a portion of the net proceeds may be used to
make acquisitions. Accordingly, the specific uses for a substantial portion of
the net proceeds will be at the complete discretion of the Board of Directors of
the Company and may be allocated from time to time based upon a variety of
circumstances. No assurance can be given that the Company will deploy such funds
in a manner that will enhance the financial condition of the Company. In
addition, no assurance can be given that acquisitions will be available on terms
and conditions acceptable to the Company. Acquisitions present numerous risks,
including inaccurate assessment of the benefits to be provided by an acquired
business, the assumption of unexpected liabilities, significant costs and
expenses, costs and expenses involved in the integration of the operations and
services of an acquired business, diversion of management's attention from other
business concerns and potential loss of key employees of the acquired business.
Acquisitions of foreign businesses may involve additional risks, including those
associated with assimilating differences in foreign business practices,
overcoming language barriers, transacting in foreign currencies and assuming
severance and other social welfare obligations. Furthermore, the Company has not
previously made any acquisitions and therefore has no history of avoiding any of
these risks. The realization of any of these risks could be expected to have a
material adverse effect on the Company's business, results of operations and
financial condition. See "Use of Proceeds."
NO PRIOR MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Common Stock
or the rights, and there can be no assurance that an active public market will
develop or be sustained. The exercise price of the rights has been determined
solely by negotiations among the Company, the selling stockholders and the
underwriters and does not necessarily reflect the price at which shares of
Common Stock may be sold in the public market during or after this offering. See
"The Offering--Why We are Selling Shares Through a Rights Offering" for a
discussion of the factors considered in determining the exercise price. The
public markets, in general, have from time to time experienced extreme price and
volume fluctuations, which have in some cases been unrelated to the operating
performance of particular companies, and the market for the securities of IT
services companies, may be subject to greater price volatility than the stock
market in general. In addition, factors such as announcements of new engagements
by the Company's competitors or third parties; announcements of fluctuations in
the operating results of the Company or its Strategic Clients, Engagement
Clients or its competitors; strategic alliances involving the Company's
competitors; or general market conditions in the IT industry may have a
significant impact on the market price of the Common Stock.
DILUTION
The average price per share paid upon the original issuance by the Company
of Common Stock prior to this offering was $0.50. Purchasers of the Common Stock
in this offering will suffer an immediate
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dilution of $2.84 in the net tangible book value per share of the Common Stock
from the exercise price of the rights. See "Dilution."
SHARES ELIGIBLE FOR FUTURE SALE
A substantial number of outstanding shares of Common Stock and shares of
Common Stock issuable upon exercise of outstanding stock options will become
eligible for future sale in the public market at various times. In addition to
the factors affecting the stock market in general and the market for the Common
Stock discussed above, sales of substantial amounts of Common Stock in the
public market, or the perception that such sales could occur, could adversely
affect the market price of the Common Stock. Upon completion of this offering,
the Company will have 16,235,583 shares of Common Stock outstanding, excluding
1,375,875 shares of Common Stock subject to stock options outstanding as of June
30, 1997, and any stock options granted by the Company after June 30, 1997. Of
these shares, the Common Stock sold by the Company in this offering, except for
certain shares described below, will be freely tradable without restriction or
further registration under the Securities Act of 1933, as amended (the "Act").
The remaining 9,515,583 shares of Common Stock (the "Restricted Shares") were
sold by the Company in reliance on exemptions from the registration requirements
of the Act and are "restricted securities" as defined in Rule 144 under the Act
("Rule 144") and may not be sold in the absence of registration under the Act
unless an exemption is available, including an exemption afforded by Rule 144 or
Rule 701 ("Rule 701") under the Act.
Without considering the contractual restrictions described below, (i)
9,515,168 Restricted Shares will be eligible for sale ninety days after the date
of this Prospectus, subject to volume and other resale conditions imposed by
Rule 144, and (ii) 415 Restricted Shares will be eligible for future sale
subject to the holding period and other conditions imposed by Rule 144. Certain
restrictions on shares of Common Stock are applicable to (i) any shares of
Common Stock purchased in this offering by affiliates of the Company, which may
generally only be sold in compliance with the limitations of Rule 144, except
for the holding period requirements thereunder, and (ii) the shares of Common
Stock beneficially owned by the Principal Stockholders all of which, together
with the shares of Common Stock beneficially owned by the other executive
officers, directors and nominees for director of the Company and 280,000 shares
of Common Stock beneficially owned by Warren V. Musser (and/or his assignees),
are subject to lock-up agreements (the "Lock-Up Agreements") and pursuant to
such agreements will not be eligible for sale or other disposition until 180
days after the expiration date of the rights (the "Lock-Up Expiry Date") without
the prior written consent of Wheat, First Securities, Inc. In addition, the
Company has granted certain registration rights to certain of its shareholders
whereby they may cause the Company to register shares of Common Stock. See
"Shares Eligible For Future Sale."
It is anticipated that a registration statement (the "Form S-8 Registration
Statement") covering the Common Stock that may be issued pursuant to the
exercise of options awarded by the Company will be filed and become effective
prior to the Lock-Up Expiry Date, and that shares of Common Stock that are so
acquired or offered thereafter pursuant to the Form S-8 Registration Statement
generally may be resold in the public market without restriction or limitation.
Subject to the provisions of any Lock-Up Agreement, shares of Common Stock may
be resold in the public market beginning 90 days after the date of this
Prospectus pursuant to Rule 701 (i) by persons who are not affiliates of the
Company, without compliance with the public information, holding period, volume
limitation or notice provisions of Rule 144 and (ii) by affiliates of the
Company, without compliance with the holding period requirements of Rule 144.
See "Management--Equity Compensation Plan," "Shares Eligible For Future
Sale--Stock Options" and "Underwriting."
POSSIBLE ISSUANCE OF PREFERRED STOCK
Shares of preferred stock may be issued by the Company in the future without
stockholder approval and upon such terms as the Board of Directors may
determine. The rights of the holders of the Common
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Stock will be subject to, and may be adversely affected by, the rights of the
holders of any preferred stock that may be issued in the future. The issuance of
preferred stock, while providing flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire, or of discouraging a third party
from acquiring, a majority of the outstanding stock of the Company and
potentially prevent the payment of a premium to stockholders in an acquisition
transaction. There are no shares of preferred stock outstanding and the Company
has no present plans to issue any shares of preferred stock. See "Description of
Capital Stock--Preferred Stock."
REQUIREMENTS FOR LISTING SECURITIES ON THE NASDAQ NATIONAL MARKET; APPLICATION
OF THE PENNY STOCK RULES
The Common Stock and rights (the "Listed Securities") have been approved for
listing (upon completion of this offering with respect to the Common Stock and
from the date of this Prospectus through the expiration date with respect to the
rights). If the Company is unable to maintain the standards for continued
listing, the Listed Securities could be subject to delisting from the Nasdaq
National Market. Trading, if any, in the Listed Securities would thereafter be
conducted on the Nasdaq Small Cap Market. If, however, the Company did not meet
the requirements of the Nasdaq Small Cap Market, trading of the Listed
Securities would be conducted on an electronic bulletin board established for
securities that do not meet the Nasdaq listing requirements or in what is
commonly referred to as the "pink sheets." As a result, an investor may find it
more difficult to dispose of, or to obtain accurate quotations as to the price
of, the Company's securities.
In addition, if the Company's securities were delisted, they would be
subject to the so-called penny stock rules that impose additional sales practice
requirements on broker-dealers who sell such securities to persons other than
established customers and accredited investors (generally defined as an investor
with a net worth in excess of $1.0 million or annual income exceeding $200,000,
or $300,000 together with a spouse). For transactions covered by this rule, the
broker-dealer must make a special suitability determination for the purchaser
and must have received the purchaser's written consent to the transaction prior
to sale. Consequently, delisting, if it occurred, may affect the ability of
broker-dealers to sell the Company's securities and the ability of purchasers in
this offering to sell their securities in the secondary market.
The SEC has adopted regulations that define a "penny stock" to be any equity
security that has a market price (as defined in the regulations) of less than
$5.00 per share or an exercise price of less than $5.00 per share, subject to
certain exceptions. For any transaction involving a penny stock, unless exempt,
the rules require the delivery, prior to the transaction, of a disclosure
schedule relating to the penny stock market. The broker-dealer also must
disclose the commissions payable to both the broker-dealer and the registered
representative, current quotations for the securities and, if the broker-dealer
is the sole market-maker, the broker-dealer must disclose this fact and the
broker-dealer's presumed control over the market. Finally, monthly statements
must be sent disclosing recent price information for the penny stock held in the
account and information on the limited market in penny stocks. As a result, if
the Common Stock is determined to be "penny stock," an investor may find it more
difficult to dispose of the Company's Common Stock.
NO DIVIDENDS
To date, the Company has not paid any cash dividends on its Common Stock,
and does not expect to declare or pay any cash or other dividends in the
foreseeable future. In addition, the Company's credit agreement contains a
financial covenant that prohibits the payment of cash dividends. See "Dividend
Policy."
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CANCELLATION OF RIGHTS OFFERING
If the conditions precedent to the sale to the underwriters set forth in the
standby underwriting agreement are not satisfied, the underwriters may elect, on
or before the sixth business day after the expiration date of the rights (the
"Closing Date"), to cancel the rights offering and the Company and the selling
stockholders will not have any obligations with respect to the rights. Under
such circumstances, the exercise price, without interest, will be promptly
returned. See "Underwriting." The Company has been advised by the NASD that it
is likely that trades in the rights and the when-issued shares of Common Stock
in the market would be canceled, and brokerage transaction and other fees
returned, if the rights offering is not consummated.
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THE OFFERING
WHY WE ARE SELLING SHARES THROUGH A RIGHTS OFFERING
We have agreed with Safeguard and the selling stockholders to make a rights
offering to holders of Safeguard common shares. This rights offering represents
the Company's initial public offering of its securities, although it is
different than a traditional public offering in that securities are directed
first to Safeguard shareholders and then to the general public. We believe that
this rights offering will provide several advantages over a traditional initial
public offering. This type of offering gives us the opportunity to offer our
Common Stock to investors who, as Safeguard shareholders, already have some
knowledge of our business. Our securities will also be distributed to a broader,
more stable shareholder base and underwriting discounts and commissions will be
less than if we pursued a traditional initial public offering. In addition,
Safeguard supports this type of rights offering because it affords its
shareholders the opportunity to purchase shares before the shares are offered to
the general public.
We determined the exercise price through negotiations with the selling
stockholders and the underwriters. In making this determination, we considered
such factors as our future prospects and historical financial data, our industry
in general and our position in the industry; market valuations of the securities
of companies engaged in activities similar to ours; the quality of our
management team; and, the advice of our underwriters.
YOU CAN EXERCISE OR SELL YOUR RIGHTS
Until November 25, 1997, you may purchase one share of our Common Stock for
each right you receive, or you may sell your rights in the market. However, you
may not exercise rights for fewer than 20 shares of Common Stock in a single
account, unless you have previously exercised rights for at least 20 shares in
the same account and you provide a letter to ChaseMellon stating that you have
already exercised at least 20 rights. If you hold Safeguard common shares in
multiple accounts, you must meet the minimum purchase requirement for each
account. You may, however, consolidate your rights into one account. If you
receive fewer than 20 rights, you should consider purchasing enough additional
rights to be eligible to exercise your rights or selling your rights in the
market. You should consult with your regular investment advisor and carefully
consider your alternatives.
IF THE NUMBER OF SAFEGUARD COMMON SHARES YOU OWN IS NOT DIVISIBLE BY FIVE
If the number of Safeguard common shares you own is not evenly divisible by
five, we will round up to the next highest whole number in calculating the
number of rights that you are entitled to receive. For example, if you hold 96
Safeguard common shares, you will receive 20 rights. If you are a nominee for
beneficial holders of Safeguard common shares, we will round the number of
rights that you will receive based upon the amount held by each beneficial
holder individually.
WHEN YOU CAN EXERCISE YOUR RIGHTS
You can exercise your rights at any time during the period beginning on
October 21, 1997 and ending at 5:00 p.m., New York City time, on November 25,
1997. After that date, you will not be able to exercise or transfer your rights
and they will be worthless. We do not intend to honor any rights received for
exercise by ChaseMellon after November 25, 1997, regardless of when you sent
your rights to ChaseMellon for exercise.
HOW YOU CAN TRANSFER YOUR RIGHTS
You may transfer all or a portion of your rights by endorsing and delivering
to ChaseMellon (at the addresses set forth below) your rights certificate. You
must properly endorse the certificate for transfer,
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your signature must be guaranteed by a bank or securities broker and your
certificate must be accompanied by instructions to reissue the rights you want
to transfer in the name of the person purchasing the rights. ChaseMellon will
reissue certificates for the transferred rights to the purchaser, and will
reissue a certificate for the balance, if any, to you if it is able to do so
before November 25, 1997. You will be responsible for the payment of any
commissions, fees and other expenses (including brokerage commissions and any
transfer taxes) incurred in connection with the purchase or sale of your rights.
We believe that a market for the rights may develop during the period in which
the rights may be exercised. To facilitate the market, we have received approval
from the Nasdaq National Market to have the rights listed for the period October
21, 1997 through November 25, 1997. We have reserved "OAOTR" as the Nasdaq
symbol under which the rights will trade. If you have any questions regarding
the transfer of rights, you should contact ChaseMellon at P.O. Box 3301, South
Hackensack, New Jersey 07606, Attention: Reorganization Department, telephone
number (800) 223-6554.
HOW YOU CAN EXERCISE YOUR RIGHTS
You may exercise your rights by completing and signing the election to
purchase form that appears on the back of each rights certificate. You must send
the completed and signed form, along with payment in full of the exercise price
for all shares that you wish to purchase to ChaseMellon. ChaseMellon must
receive these documents and the payment by 5:00 p.m., New York City time, on
November 25, 1997. We do not intend to honor any exercise of rights received by
ChaseMellon after that date.
We will, however, accept your exercise if ChaseMellon has received full
payment of the exercise price for shares to be purchased through the exercise of
rights, and has received a letter or telegraphic notice from a bank, trust
company or member firm of the New York Stock Exchange or the American Stock
Exchange setting forth your name, address and taxpayer identification number,
the number of shares you wish to purchase, and guaranteeing that a properly
completed and signed election to purchase form will be delivered to ChaseMellon
by 5:00 p.m., New York City time, on December 1, 1997. If the properly executed
documents are not received by 5:00 p.m. on December 1, 1997, we do not intend to
accept your subscription.
We suggest, for your protection, that you deliver your rights to ChaseMellon
by overnight or express mail courier. If you mail your rights, we suggest that
you use registered mail. If you wish to exercise your rights, you should mail or
deliver your rights and payment for the exercise price to ChaseMellon as
follows:
<TABLE>
<CAPTION>
BY OVERNIGHT/EXPRESS MAIL
BY MAIL: BY HAND: COURIER:
- ------------------------------------ ------------------------------------ ------------------------------------
<S> <C> <C>
ChaseMellon Shareholder Services ChaseMellon Shareholder Services ChaseMellon Shareholder Services
Reorganization Department Reorganization Department Reorganization Department
P.O. Box 3301 120 Broadway,13 Floor 85 Challenger Road,
South Hackensack, NJ 07606 New York, New York 10271 Mail Drop-Reorg
Ridgefield Park, NJ 07660
</TABLE>
You must pay the exercise price in U.S. dollars by cash, check or money
order payable to the "Safeguard Escrow Account." Until this offering is closed,
your payment will be held in escrow by ChaseMellon, who will serve as the escrow
agent of the Safeguard Escrow Account.
ChaseMellon will issue certificates to you representing the Common Stock
purchased through the exercise of rights by December 4, 1997. Until that date,
ChaseMellon will hold all funds received in payment of the exercise price in
escrow and will not deliver any funds to us or to the selling stockholders until
the shares of Common Stock have been issued.
If you are a broker or depository who holds Safeguard common shares for the
account of others and you receive rights certificates for the account of more
than one beneficial owner, you should provide copies
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of this Prospectus to the beneficial owners. You should also carry out their
intentions as to the exercise or transfer of their rights.
Safeguard will decide all questions as to the validity, form and eligibility
(including times of receipt, beneficial ownership and compliance with minimum
exercise provisions). The acceptance of subscription forms and the exercise
price also will be determined by Safeguard. Alternative, conditional or
contingent subscriptions will not be accepted. Safeguard reserves the absolute
right to reject any subscriptions not properly submitted. In addition, Safeguard
may reject any subscription if the acceptance of the subscription would be
unlawful. Safeguard also may waive any irregularities (or conditions) in the
subscription of shares of Common Stock, and its interpretation of the terms (and
conditions) of the rights offering shall be final and binding.
If you are given notice of a defect in your subscription, you will have five
business days after the giving of notice to correct it. You will not, however,
be allowed to cure any defect later than December 1, 1997. We are not obligated
to give you notification of defects in your subscription. We will not consider
an exercise to be made until all defects have been cured or waived. If your
exercise is rejected, your payment of the exercise price will be promptly
returned by ChaseMellon.
HOW YOU CAN OBTAIN ADDITIONAL INFORMATION
If you wish to receive additional copies of this Prospectus or additional
information concerning this offering, you should contact Thomas D. Roberts III,
at Wheat, First Securities, Inc., telephone number 804-344-6404, or Dan N.
Pickens at Janney Montgomery Scott Inc., telephone number 215-665-4513.
EXPECTED EXERCISE OF RIGHTS BY SAFEGUARD CEO
Warren V. Musser, the Chairman and Chief Executive Officer of Safeguard (or
his assignees) is expected to exercise all rights distributed to him. As a
result, he (or his assignees) is expected to acquire approximately 560,000
shares of our Common Stock through the rights offering.
WHAT HAPPENS TO THE UNSUBSCRIBED SHARES
The first 300,000 shares of Common Stock that are not subscribed for at the
end of the rights exercise period will be offered at a price of $5.00 per share
to persons selected by us. These persons may have a relationship with us,
Safeguard or one of Safeguard's other partnership companies. We expect to enter
into agreements with these persons to purchase the unsubscribed shares before
the end of the rights exercise period. If there are less than 300,000
unsubscribed shares at the end of the rights exercise period, the number of
unsubscribed shares offered to each of these persons will be adjusted
accordingly.
To the extent that any unsubscribed shares remain unsold after the offer to
these persons, the underwriters will purchase these shares pursuant to the
standby underwriting agreement. The underwriters must purchase these shares no
later than December 4, 1997.
In connection with this offering, the underwriters will receive a financial
advisory fee of 3% of the exercise price for each share of Common Stock being
offered in this offering, regardless of whether they purchase any shares in this
offering. In addition, if the underwriters purchase any shares in this offering
or through the exercise of certain rights that are purchased in the open market
under certain circumstances, they may purchase the shares at the exercise price
less an underwriting discount of 4% of the exercise price, subject to certain
limitations. The underwriters will offer shares of Common Stock purchased by
them to the public at prices which may vary from the exercise price. The selling
stockholders have granted to the underwriters an option to purchase an
additional 640,000 shares of Common Stock to cover over-allotments, if any,
during the 20-day period beginning on November 25, 1997. The underwriters will
be entitled to purchase these over-allotment shares at the exercise price less
the 3% financial advisory fee and
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the 4% underwriting discount. See "Underwriting." We will not receive any
proceeds from the sale of any shares of Common Stock by the selling
stockholders.
We intend to supplement this Prospectus after the rights exercise period is
over to set forth the results of the rights offering, the transactions by the
underwriters during the exercise period, the number of unsubscribed shares
purchased, if any, and any resale transactions.
WHAT HAPPENS IF THE RIGHTS OFFERING IS CANCELED
The underwriters have the right to cancel the rights offering if certain
conditions are not satisfied or if certain circumstances exist prior to the
closing date of this offering. If you exercise rights and the rights offering is
canceled, ChaseMellon will promptly return to you, without interest, any payment
received in respect of the exercise price and you will not receive any shares of
our Common Stock. Along with the selling stockholders, we have established an
escrow account with ChaseMellon to hold funds received prior to the closing date
of this offering. The NASD has advised us that trades in the rights and the
when-issued shares of Common Stock in the market would be canceled, and
brokerage transaction and other fees returned, if this offering is not
consummated.
FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material federal income tax consequences
affecting holders of Safeguard common shares receiving rights in this offering.
In the opinion of Morgan, Lewis & Bockius LLP, the distribution of the rights by
the Company to holders of Safeguard common shares more likely than not will
constitute a taxable transaction under the Internal Revenue Code of 1986, as
amended (the "Code"), and may also be subject to state or local income taxes.
Because of the complexity of the provisions of the Code referred to below and
because tax consequences may vary depending upon the particular facts relating
to each holder of Safeguard common shares, such holders should consult their own
tax advisors concerning their individual tax situations and the tax consequences
of this offering under the Code and under any applicable state, local or foreign
tax laws.
Safeguard has been advised by Morgan, Lewis & Bockius LLP that, under
current interpretations of case law, the Code, and applicable regulations
thereunder, the federal income tax consequences applicable to holders of
Safeguard common shares receiving rights in this offering generally are as
follows:
DISTRIBUTION OF RIGHTS TO HOLDERS OF SAFEGUARD SHARES
The rights, representing the right to acquire shares of Common Stock from
the Company, can be considered as constituting "property" within the meaning of
Section 317(a) of the Code. The federal income tax consequences of a
distribution of the rights by the Company to holders of Safeguard common shares,
as determined under the Code and the regulations thereunder, are as follows: (i)
each noncorporate holder of Safeguard common shares will be deemed to have
received a distribution from Safeguard, generally taxable as ordinary dividend
income, in an amount equal to the fair market value (if any) of the rights, as
of the date of distribution, (ii) each corporate holder of Safeguard common
shares (other than foreign corporations and S corporations) will be deemed to
have received a distribution from Safeguard (generally taxable as a dividend
subject to the dividends received deduction for corporations (generally 70%, but
80% under certain circumstances)) in an amount equal to the fair market value
(if any) of the rights, as of the date of distribution; and (iii) the tax basis
of the rights in the hands of each holder (whether corporate or noncorporate) of
Safeguard common shares will be equal to the fair market value (if any) of the
rights as of the date of distribution. Because of the predominantly factual
nature of determining the fair market value, if any, of the rights, Morgan,
Lewis & Bockius LLP has expressed no opinion with respect to the fair market
value of the rights.
Since the fair market value of the rights will determine the amount of
taxable income deemed received by the holders of Safeguard common shares, the
determination of the fair market value of each
20
<PAGE>
right as of the date of distribution is critical. The exercise price was
determined through arms-length negotiations among the Company, the selling
stockholders and the underwriters. Based on these negotiations, Safeguard's
Board of Directors believes that the per share value of Common Stock represented
by the rights at the date of the commencement of this offering approximates the
exercise price, and that the rights should have no value for federal income tax
purposes. However, the Internal Revenue Service is not bound by this
determination. See "The Offering-Why We Are Selling Shares Through a Rights
Offering."
EXERCISE OF RIGHTS
Holders of rights, whether corporate or noncorporate, will recognize neither
gain nor loss upon the exercise of the rights. A holder of rights who receives
shares of Common Stock upon the exercise of the rights will acquire a tax basis
in such shares equal to the sum of the exercise price paid under this offering
and the tax basis (if any) of the holder of rights in the rights.
TRANSFER OF RIGHTS
The transferable nature of the rights will permit a holder of rights to sell
rights prior to exercise. Pursuant to Section 1234 of the Code, a rights holder
who sells rights prior to exercise will be entitled to treat the difference
between the amount received for the rights and the adjusted tax basis (if any)
of the holder of rights in the rights as a short-term capital gain or capital
loss, provided that Common Stock subject to the rights would have been a capital
asset in the hands of the holder had it been acquired by him. The gain or loss
so recognized will be short-term since the rights will have been held for less
than twelve months.
NON-EXERCISE OF RIGHTS
The income tax treatment applicable to holders of rights who fail to
exercise or transfer their rights prior to the expiration date also is set forth
in Section 1234 of the Code. Holders of rights who allow their rights to lapse
are deemed under the Code to have sold their rights on the date on which the
rights expire. Since upon such lapse no consideration will be received by a
holder of rights, and since the rights will have been held for less than twelve
months, a short-term capital loss equal to the tax basis (if any) in the rights
will be sustained by the holder on such lapse, provided that Common Stock
subject to the rights would have been a capital asset in the hands of the holder
had it been acquired by him.
21
<PAGE>
USE OF PROCEEDS
The minimum net proceeds to the Company from the sale of the 6,235,000
shares of Common Stock offered by the Company are estimated to be approximately
$28.0 million after deducting estimated offering expenses allocable to and
payable by the Company and assuming that none of the rights granted in the
rights offering are exercised and the sale of 5,915,000 shares of Common Stock
to the underwriters pursuant to the standby underwriting agreement. Estimated
offering expenses include the maximum applicable non-accountable expense
allowance to the underwriters, a financial advisory fee of 3% of the exercise
price and an underwriting discount of 4% of the exercise price. In the event
more of the shares of Common Stock offered hereby are sold pursuant to the
exercise of rights, the Company will not be obligated to pay the underwriting
discount with respect to such shares and will, therefore, realize an amount of
net proceeds greater than approximately $28.0 million. See "The Offering--What
Happens to the Unsubscribed Shares" and "Underwriting."
The Company intends to use approximately $4.0 million of the net proceeds
from this offering to pay amounts due to CoreStates Bank, N.A. under its line of
credit. The amount outstanding under this line of credit bears interest,
generally at the Company's option, at the bank's prime rate or other short term
rates, and is payable on May 31, 1999. The Company also intends to use
approximately $4.0 million of the net proceeds of this offering to invest in
additional management information systems. The remainder of the net proceeds
will be used for continued international expansion, working capital, general
corporate purposes and other capital expenditures. The Company may also seek to
use a portion of the net proceeds from this offering to expand its business
through acquisitions, although the Company does not have any acquisition
commitments. Other than to repay the outstanding balance under its credit line
and to purchase additional management information systems, the Company has not
made any determination regarding the amounts or timing of the use of any
proceeds from this offering. See "Risk Factors--Broad Discretion in Application
of Proceeds; Acquisition Risks." The amounts and the timing of any such use may
vary significantly depending upon a number of factors, including the Company's
revenue growth, asset growth, cash flow and acquisition activities. Pending such
uses, the net proceeds of this offering will be invested in short-term,
investment-grade, interest-bearing securities. The Company currently anticipates
that the net proceeds received by the Company from this offering, together with
amounts available under its existing line of credit, cash generated from
operations and existing cash balances will be sufficient to satisfy its
operating cash needs through December 31, 1998. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
DIVIDEND POLICY
To date, the Company has not paid any cash dividends on its Common Stock.
The Company currently intends to retain future earnings for use in its business
and, therefore, does not anticipate paying any cash dividends in the foreseeable
future. The payment of future dividends, if any, will depend among other things,
on the Company's results of operations, cash flows and financial condition and
on such other factors as the Company's Board of Directors may, in its
discretion, consider relevant. In addition, the Company's credit agreement with
CoreStates Bank, N.A. contains a financial covenant that prohibits the payment
of any dividends.
22
<PAGE>
CAPITALIZATION
The following table sets forth the total capitalization of the Company as of
June 30, 1997, and as adjusted to reflect the sale of 6,235,000 shares of Common
Stock by the Company in this offering and the application of the estimated
minimum net proceeds of approximately $28.0 million therefrom. This table should
be read in conjunction with the Consolidated Financial Statements of the Company
and the Notes thereto and other financial information included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
-------------------------
<S> <C> <C>
ACTUAL AS ADJUSTED(1)
--------- --------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Short term debt and current portion of long term debt (2)................................ $ 4,501 $ 501
--------- -------
--------- -------
Long term debt........................................................................... 150 150
Stockholders' equity:
Preferred Stock, par value $.01 per share; 5,000,000 shares authorized and no shares
issued and outstanding actual and as adjusted........................................ -- --
Common Stock, par value $.01 per share; 25,000,000 shares authorized, and 10,000,583
shares issued and outstanding actual and 16,235,583 shares issued and outstanding as
adjusted (3)......................................................................... 100 162
Additional paid-in capital (3)......................................................... 4,950 32,881
Retained earnings...................................................................... 2,022 2,022
--------- -------
Total stockholders' equity........................................................... 7,072 35,065
--------- -------
Total capitalization............................................................... $ 7,222 $ 35,215
--------- -------
--------- -------
</TABLE>
- ------------------------
(1) Adjusted to give effect to the sale by the Company of 6,235,000 shares of
Common Stock and the receipt and application of approximately $28.0 million
in net proceeds from this offering after deducting the maximum total
underwriting discount with respect to such shares of approximately $2.2
million and estimated offering expenses of $1.0 million.
(2) Represents the outstanding amount under the Company's line of credit and
current portion of balances due under capital leases. The "as adjusted"
total indebtedness reflects the repayment of $4.0 million outstanding under
the Company's line of credit from a portion of the net proceeds from this
offering. See "Use of Proceeds" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
(3) Excludes as of June 30, 1997, 1,375,875 shares of Common Stock issuable upon
the exercise of options at a weighted average exercise price of $2.70 per
share (of which options to purchase 352,417 shares were exercisable as of
June 30, 1997). See "Management--Equity Compensation Plan."
23
<PAGE>
DILUTION
As of June 30, 1997, the Company had a net tangible book value of
approximately $7.1 million or $0.71 per share of Common Stock. Net tangible book
value per share of Common Stock represents the amount of the Company's tangible
assets less its total liabilities, divided by the total number of shares of
Common Stock outstanding. Without taking into account any changes in net
tangible book value after June 30, 1997, other than to give effect to the items
described in Note 1 appearing immediately below the following table, the pro
forma net tangible book value of the Company as of June 30, 1997, would have
been approximately $36.1 million or $2.16 per share. This represents an
immediate increase in such pro forma net tangible book value of $1.45 per share
to existing stockholders and an immediate dilution of $2.84 per share to
investors purchasing Common Stock at the exercise price in this offering. New
stockholders that acquire Common Stock from the underwriters at a price greater
than the exercise price will experience greater dilution. The following table
illustrates this per share dilution in net tangible book value:
<TABLE>
<S> <C>
Exercise Price....................................................... $ 5.00
Net tangible book value per share as of June 30, 1997................ 0.71
Increase per share attributable to new stockholders (1).............. 1.45
---------
Pro forma net tangible book value per share as of June 30, 1997...... 2.16
---------
Dilution per share to new stockholders............................... $ 2.84
---------
---------
</TABLE>
- ------------------------
(1) Reflects the sale by the Company of 6,235,000 shares of Common Stock and the
receipt of approximately $28.0 million in net proceeds from this offering.
The following table sets forth, on an adjusted basis as of June 30, 1997,
the number of shares of Common Stock issued by the Company, the total
consideration paid and the average price per share paid upon original issuance
to stockholders prior to this offering and by new investors before deducting the
underwriters' discount, financial advisory fees and estimated offering expenses:
<TABLE>
<CAPTION>
TOTAL
SHARES PURCHASED CONSIDERATION(1)
------------------------- -------------------------- AVERAGE PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE(1)
------------ ----------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Existing stockholders........................ 10,000,583 61.6% $ 5,000,000 13.8% $ 0.50
New stockholders............................. 6,235,000 38.4 31,175,000 86.2 5.00
------------ ----- ------------- -----
Total........................................ 16,235,583 100.0% $ 36,175,000 100.0%
------------ ----- ------------- -----
------------ ----- ------------- -----
</TABLE>
- ------------------------
(1) Reflects gross consideration from the issuance of stock, and therefore does
not reflect deductions for stock issuance costs, underwriting discounts,
financial advisory fees and offering expenses.
The foregoing tables assume no exercise of outstanding options. As of June
30, 1997 there were outstanding options to purchase an aggregate of 1,375,875
shares of Common Stock at a weighted average exercise price of $2.70 per share
(of which options to purchase 352,417 shares were exercisable at June 30, 1997),
and the Company had an additional 1,824,125 shares of Common Stock available for
future grants and other issuances under the Company's Amended and Restated 1996
Equity Compensation Plan. See "Management" and Note 8 to the Notes to the
Consolidated Financial Statements.
24
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements of the
Company and the Notes thereto included elsewhere in this Prospectus. The
statement of operations data for the years ended December 31, 1994, 1995 and
1996, and the balance sheet data as of December 31, 1994, 1995 and 1996 have
been derived from consolidated financial statements of the Company which have
been audited by Deloitte & Touche LLP, independent auditors. The statement of
operations data for the year ended December 31, 1993 and the six months ended
June 30, 1996 and 1997 and the balance sheet data as of December 31, 1993 and
June 30, 1997 have been derived from the Company's unaudited consolidated
financial statements which, in the opinion of management, include all
significant, normal and recurring adjustments necessary for a fair presentation
of the financial position and results of operations for such unaudited period.
The Company began its operations in 1993 as a division of OAO Corporation, was
incorporated in March 1996 and was spun off from OAO Corporation in April 1996.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------------ --------------------
<S> <C> <C> <C> <C> <C> <C>
1993(1) 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- ---------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues................................................. $ 12,142 $ 22,472 $ 38,229 $ 57,891 $ 24,321 $ 39,338
Direct costs............................................. 8,944 16,503 28,548 43,896 18,170 30,773
--------- --------- --------- --------- --------- ---------
Gross profit............................................. 3,198 5,969 9,681 13,995 6,151 8,565
Selling, general and administrative...................... 2,612 4,743 7,338 10,824 4,874 6,315
--------- --------- --------- --------- --------- ---------
Income from operations................................... 586 1,226 2,343 3,171 1,277 2,250
Interest expense......................................... 49 61 115 46 30 87
--------- --------- --------- --------- --------- ---------
Income before income taxes............................... 537 1,165 2,228 3,125 1,247 2,163
Provision for income taxes............................... 215 466 1,139 1,315 522 931
--------- --------- --------- --------- --------- ---------
Net income............................................... $ 322 $ 699 $ 1,089 $ 1,810 $ 725 $ 1,232
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Pro forma net income per common share (2)................ $ 0.17 $ 0.07 $ 0.12
Weighted average number of common shares outstanding
(2).................................................... 10,422 10,422 10,414
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30, 1997
------------------------------------------ -------------------------
<S> <C> <C> <C> <C> <C> <C>
1993 1994 1995 1996 ACTUAL AS ADJUSTED(3)
--------- --------- --------- --------- --------- --------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital............................................ $ (762) $ (964) $ (1,446) $ 4,718 $ 4,505 $ 32,498
Total assets............................................... 1,139 3,198 5,801 12,828 20,205 44,198
Total debt, including current portion...................... -- -- 251 476 4,651 651
Total stockholders' equity................................. 257 565 1,654 5,840 7,072 35,065
</TABLE>
- ------------------------
(1) The Company's initial year of operations began in 1993 as a division of OAO
Corporation. The Company was incorporated in March 1996 and was spun off
from OAO Corporation in April 1996. As these were entities under common
control, the merger was accounted for similar to that of a pooling-
of-interests and as a result, the financial statements of the Company have
been presented at historical cost since its inception in 1993. See Notes 1
and 2 to the Consolidated Financial Statements.
25
<PAGE>
(2) See Note 2 to Notes to the Consolidated Financial Statements for information
concerning calculation of pro forma net income per common share.
(3) Adjusted to give effect to the sale by the Company of 6,235,000 shares of
Common Stock and the receipt and application of approximately $28.0 million
in net proceeds from this offering after deducting the maximum total
underwriting discount with respect to such shares of approximately $2.2
million and estimated offering expenses of approximately $1.0 million. In
addition, the "as adjusted" balances reflect the repayment of the $4.0
million outstanding under the Company's line of credit from a portion of the
proceeds of this offering. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL
STATEMENTS OF THE COMPANY AND NOTES THERETO INCLUDED ELSEWHERE IN THIS
PROSPECTUS. THE COMPANY'S FISCAL YEAR ENDS ON DECEMBER 31. THIS PROSPECTUS
CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. FUTURE EVENTS AND THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THE RESULTS REFLECTED IN THESE FORWARD-LOOKING STATEMENTS.
FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO,
THOSE DISCUSSED IN "RISK FACTORS."
OVERVIEW
The Company provides a wide range of outsourced IT solutions and
professional services, including the operation of large-scale data center
complexes and networks ("Megacenter Operations"), distributed systems management
("DSM"), staffing services and other IT services. The Company's business began
in January 1993 as a separate business division of OAO Corporation, an
organization that provides IT services to governmental entities. OAO Corporation
formed the Company as a separate business division in order to provide IT
solutions and services to corporate clients. The Company became a wholly-owned
subsidiary of OAO Corporation when it was incorporated in September 1995 and the
Company was re-incorporated in the State of Delaware in March 1996. In April
1996, the Company was spun off from OAO Corporation. See "Certain Transactions"
and Note 1 to the Consolidated Financial Statements of the Company. The
Consolidated Financial Statements of the Company and the Notes thereto included
in this Prospectus reflect the Company's operations as if it had been a separate
legal entity since its January 1993 inception.
The Company has experienced substantial growth since its inception, with
revenues increasing to $57.9 million in 1996 from $12.1 million in 1993. This
growth has continued into 1997 with revenues for the six months ended June 30,
1997 increasing to $39.3 million compared to $24.3 million for the same prior
year period. The Company's operating results, particularly its quarterly
results, can be affected by potentially lower margins on certain incremental
revenue contracts prior to the achievement of expected operating efficiencies.
Engagements which involve new services or services to new clients may result in
lower margins during the early term of the engagement. The Company has
historically experienced margin improvements over the course of its engagements.
In addition, operating results can be affected by the level of the Company's
investments in international and other business development for which the
Company incurred costs of $1.1 million and $3.1 million for the six months ended
June 30, 1997 and the year ended December 31, 1996, respectively.
The Company's relationship with its first Strategic Client, IBM, has
continued to expand in terms of revenues, the range of services provided, the
number of engagements and the number of IBM business units which have engaged
the Company's services. While the Company expects IBM to continue to represent
the majority of the Company's revenues for the foreseeable future, revenues from
IBM have been declining on a percentage basis, accounting for 88.7%, 82.2% and
76.2% of the Company's total revenues for the years ended December 31, 1995 and
1996 and the six months ended June 30, 1997, respectively. This revenue trend is
primarily attributable to the Company's expanding relationship with Digital,
which became a Strategic Client in 1995. The Company is currently a major
delivery partner of Digital for outsourcing engagements across Canada and its
relationship with Digital has expanded into other geographic areas. Revenues
from Digital accounted for 5.4%, 11.4% and 18.8% of the Company's total revenues
for the years ended December 31, 1995 and 1996 and for the six months ended June
30, 1997, respectively. The Company has also recently expanded its business
development activities to include establishing relationships with Perot Systems
and NCR.
For the years ended December 31, 1995 and 1996 and for the six months ended
June 30, 1997, approximately 92%, 74% and 62% of the Company's revenues,
respectively, were derived from fixed-price
27
<PAGE>
contracts. Substantially all of the Company's Megacenter Operations engagements,
which accounted for approximately 60.2% and 46.2% of revenues for the year ended
December 31, 1996 and for the six months ended June 30, 1997, respectively, are
performed under multi-year, fixed-price contracts. These contracts range from
three to ten years in length and are accounted for under the percentage of
completion method. A portion of the Company's DSM engagements are also performed
under multi-year, fixed-price contracts. For the year ended December 31, 1996
and the six months ended June 30, 1997, revenues from fixed-price DSM contracts
accounted for 4.1% and 4.9% of the Company's total revenues, respectively. The
Company's fixed-price contracts generally require the Company to meet certain
pre-established service level benchmarks. Profitability is generally lower
during the early term of these engagements as the Company invests in assuring a
smooth start-up and in attaining certain performance levels prior to the
implementation of productivity improvements. Upon completion of the initial
performance phase, the Company initiates activities to increase profitability
through improved management practices and the establishment of new technical and
operational methodologies.
In 1995, the Company began an initiative to diversify its business by
increasing the scope of its service offerings and through geographic expansion.
In 1995, the Company entered into its first engagement to provide DSM services,
an area in which the Company had previously performed only limited services
within other engagements. The Company believes that its DSM services represent a
significant source of future potential growth. The Company's geographic
expansion into international markets began in 1995 and has accelerated during
1996 and 1997. See Note 12 to notes to the Consolidated Financial Statements. In
particular, primarily as a result of its relationship with Digital, the
Company's revenues derived from the Canadian market grew from $2.1 million for
the year ended December 31, 1995 to $6.9 million for the year ended December 31,
1996. The Company's revenues from the Canadian market were $7.4 million for the
six months ended June 30, 1997. The Company also has been engaged to provide
services in Mexico, South America and the United Kingdom and plans to expand its
business to other international markets. In seeking to expand its international
presence, the Company intends to enter into joint ventures, partnerships or
other types of strategic alliances with organizations located in these markets.
While the IT services industry has generally experienced labor shortages and
wage inflation in excess of most other industries, the Company's engagements
have not been affected, primarily due to the Company's practice of retaining the
majority of the outsourced personnel. The Company prices its services under
these engagements on the basis of the historical cost of the outsourced
function, managerial experience and its assessment of evolving technical
factors. The Company also enters into staffing services engagements requiring
high-demand IT specialists for terms ranging up to 18 months, usually on a time
and materials basis. The Company is subject to the same general labor pressures
inherent in the IT services industry when performing these engagements, which
are primarily related to the Company's DSM and systems integration services. In
pricing its services under shorter term engagements, the Company evaluates the
existing labor market for IT specialists and the expected duration of the
engagement.
RECENT DEVELOPMENTS
The Company's revenues for the third quarter ended September 30, 1997
increased by 28.8% to $20.6 million from $16.0 million for the same prior year
period. The Company's net income for the third quarter ended September 30, 1997
increased by 65% to $726,000 from $440,000 for the same prior year period. The
Company's net income per common share for the third quarter ended September 30,
1997 increased by 75% to $.07 from $.04 for the same prior year period. The
weighted average number of common and common share equivalents used in computing
net income per common share for the third quarter ended September 30, 1997 and
1996 were 10,414,410 and 10,421,880, respectively.
28
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected
statements of operations data as a percentage of net revenues:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
Revenues......................................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Direct costs..................................................... 73.4 74.7 75.8 74.7 78.2
--------- --------- --------- --------- ---------
Gross profit................................................... 26.6 25.3 24.2 25.3 21.8
Selling, general and administrative expense...................... 21.1 19.2 18.7 20.1 16.1
--------- --------- --------- --------- ---------
Income from operations........................................... 5.5 6.1 5.5 5.2 5.7
Interest expense................................................. 0.3 0.3 0.1 0.1 0.2
--------- --------- --------- --------- ---------
Income before taxes............................................ 5.2 5.8 5.4 5.1 5.5
Provision for income taxes....................................... 2.1 3.0 2.3 2.1 2.4
--------- --------- --------- --------- ---------
Net income..................................................... 3.1% 2.8% 3.1% 3.0% 3.1%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1997 TO SIX MONTHS ENDED JUNE 30, 1996
REVENUES. The Company's revenues increased 61.7% to $39.3 million for the
six months ended June 30, 1997 compared to $24.3 million for the same prior year
period. This increase was generally attributable to volume increases within
existing contracts resulting from growth in the Company's ongoing business, an
expansion of the scope of services requested from the Company, increases in
international revenues and increases in revenues from newer lines of business.
International revenue, primarily from the Company's relationship with Digital in
Canada, increased to $7.4 million for the six months ended June 30, 1997
compared to $2.5 million for the same prior year period. Revenues from the
Company's Megacenter Operations increased by 16.0% to $18.1 million for the six
months ended June 30, 1997 compared to $15.6 million for the same prior year
period. Revenues from the Company's DSM services increased by 209.4% to $9.9
million for the six months ended June 30, 1997 compared to $3.2 million for the
same prior year period.
DIRECT COSTS. The Company's direct costs increased 69.2% to $30.8 million
for the six months ended June 30, 1997 compared to $18.2 million for the same
prior year period. Direct costs consist primarily of direct labor costs and
related fringe benefit costs. As a percentage of revenue, direct costs increased
to 78.2% for the six months ended June 30, 1997 compared to 74.7% for the
comparable period in 1996. This percentage increase is primarily due to the
higher proportion of revenues from new engagements and new services for the six
months ended June 30, 1997 compared to the same period in 1996. In entering new
engagements, the Company may accept short term contracts that do not include the
economies of scale, leverage or short-term opportunities for productivity
improvements that are available in more mature or longer term engagements. The
Company believes that these initial contracts are important in penetrating new
markets and in establishing the degree of customer confidence required to secure
additional business.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 28.6% to $6.3 million in the six months ended
June 30, 1997 compared to $4.9 million for the same prior year period. As a
percentage of revenues, these expenses decreased to 16.1% from 20.1% which the
Company generally attributes to increased economies of scale from higher
revenues. The aggregate increase was primarily the result of the continued
development of additional service capabilities and other expenditures necessary
to support the Company's growth. The Company intends to continue building its
marketing, financial and administrative infrastructure to enable it to support
its growth opportunities.
29
<PAGE>
INTEREST EXPENSE AND PROVISION FOR INCOME TAXES. Interest expense increased
to $87,000 in the six months ended June 30, 1997 compared to $30,000 in the same
prior year period. The Company's effective tax rate was 43.1% for the six months
ended June 30, 1997 compared to 41.8% for the six months ended June 30, 1996.
This increase in tax rate was primarily due to changes in the distribution of
income among tax jurisdictions.
COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31, 1995
REVENUES. The Company's revenues increased 51.6% to $57.9 million for the
year ended December 31, 1996, from $38.2 million for the year ended December 31,
1995. This increase was primarily due to volume increases within existing
contracts resulting from growth in the Company's ongoing business, an expansion
of the scope of services provided by the Company, increases in international
revenue and increases in revenues from newer lines of business. International
revenues, primarily from the Company's relationship with Digital in Canada,
increased 214% to $6.9 million for the year ended December 31, 1996 from $2.1
million for the year ended December 31, 1995. Revenues from the Company's
Megacenter Operations increased 14.4% to $34.9 million for the year ended
December 31, 1996 from $30.5 million for the year ended December 31, 1995.
Revenues from the Company's DSM services increased 325.0% to $10.2 million for
the year ended December 31, 1996 from $2.4 million for the year ended December
31, 1995.
DIRECT COSTS. The Company's direct costs increased by 54.0% to $43.9
million for the year ended December 31, 1996 from $28.5 million for the year
ended December 31, 1995. As a percentage of revenues, direct costs increased to
75.8% for the year ended December 31, 1996 from 74.7% for the year ended
December 31, 1995. The Company attributes this increase to increased revenues
from DSM engagements and the attendant costs associated with its establishment
and development of this service offering.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 47.9% to $10.8 million for the year ended
December 31, 1996 from $7.3 million for the year ended December 31, 1995. As a
percentage of revenues, these expenses decreased to 18.7% for the year ended
December 31, 1996 from 19.2% for the year ended December 31, 1995 as a result of
increased economies of scale from higher revenues. The Company primarily
attributes the aggregate increase to the costs associated with the expansion of
its international infrastructure and to the costs associated with developing
contacts and marketing in its targeted international markets. Costs associated
with these initiatives were $3.1 million in 1996 compared to an insignificant
amount in 1995. In addition, selling, general and administrative expenses
increased as the result of hiring of additional management and administrative
personnel necessary to support the Company's growth.
INTEREST EXPENSE AND PROVISION FOR INCOME TAXES. Interest expense was not
material in either year as the Company satisfied its working capital needs
through cash generated from operations and in 1996 from a $5.0 million
investment by Safeguard. The effective tax rate decreased to 42.1% in 1996 from
51.1% in 1995 as a result of losses incurred in international tax jurisdictions
during 1995 for which no tax benefit was recorded.
COMPARISON OF YEAR ENDED DECEMBER 31, 1995 TO YEAR ENDED DECEMBER 31, 1994
REVENUES. The Company's revenues increased 69.8% to $38.2 million for the
year ended December 31, 1995 from $22.5 million for the year ended December 31,
1994. This increase was primarily the result of diversification into new
business areas and volume increases within existing contracts. During 1995, the
Company realized revenues of $2.2 million in Canada, representing the Company's
initial international revenues. In addition, during 1995 the Company began
offering DSM services and recognized revenue of $2.4 million from these
engagements.
DIRECT COSTS. The Company's direct costs increased by 72.7% to $28.5
million for the year ended December 31, 1995 from $16.5 million for the year
ended December 31, 1994. As a percentage of revenues,
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direct costs increased to 74.7% for the year ended December 31, 1995 from 73.4%
for the year ended December 31, 1994. This increase is attributable primarily to
the early financial performance of a new Megacenter Operations engagement. In
these types of engagements, the Company's business model is to improve margins
as productivity enhancements are identified and implemented. In addition,
margins decreased as a result of the commencement of international revenues in
1995 at lower margins than the Company's other business.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general, and
administrative expenses increased 55.3% to $7.3 million for the year ended
December 31, 1995 from $4.7 million for the year ended December 31, 1994. As a
percentage of revenues, these expenses decreased to 19.2% for the year ended
December 31, 1995 from 21.1% for the year ended December 31, 1994 as a result of
increased economies of scale from higher revenues. In addition, a portion of the
increase in selling, general and administrative expenses was attributable to
increased hiring of additional management and administrative personnel necessary
to support the Company's growth.
INTEREST EXPENSE AND PROVISION FOR INCOME TAXES. Interest expense was not
material in either year as the Company satisfied its working capital needs
through cash generated from operations. The effective tax rate increased to
51.1% in 1995 from 40.0% in 1994 as a result of losses incurred in international
tax jurisdictions during 1995 for which no tax benefit was realized.
UNAUDITED QUARTERLY RESULTS
Set forth below are selected unaudited financial statements of operations
data for the last ten fiscal quarters of the Company. In Management's opinion,
the results below have been prepared on the same basis as the audited financial
statements contained herein and include all material adjustments, consisting of
only normal recurring adjustments, necessary for a fair presentation of the
information for the periods when read in conjunction with the Consolidated
Financial Statements of the Company and Notes thereto contained elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
MAR 31 JUN 30 SEP 30 DEC 31 MAR 31 JUN 30 SEP 30 DEC 31
1995 1995 1995 1995 1996 1996 1996 1996
----------- ----------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues................................ $ 7,619 $ 9,284 $ 11,041 $ 10,285 $ 11,498 $ 12,823 $ 15,996 $ 17,574
Gross profit............................ 1,758 2,512 2,805 2,606 2,925 3,227 3,636 4,207
Income from operations.................. 398 535 614 796 624 653 767 1,127
Income before income taxes.............. 374 517 579 758 601 647 760 1,117
Net income.............................. $ 183 $ 253 $ 283 $ 370 $ 351 $ 375 $ 440 $ 644
Pro forma net income per share.......... $ .03 $ .04 $ .04 $ .06
<CAPTION>
MAR 31 JUN 30
1997 1997
--------- ---------
<S> <C> <C>
Revenues................................ $ 19,161 $ 20,177
Gross profit............................ 4,341 4,224
Income from operations.................. 1,022 1,228
Income before income taxes.............. 1,017 1,146
Net income.............................. $ 584 $ 648
Pro forma net income per share.......... $ .06 $ .06
</TABLE>
The Company believes that its business is not seasonal. In addition, the
Company's quarterly operating results can be affected by the level of the
Company's investments in international and other business development and other
costs. Quarterly revenues and gross margins can be affected by the commencement
of new contracts and engagements.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $390,000 at June 30, 1997. Cash flow
generated by (used in) operations was $37,000 in 1994, $351,000 in 1995, ($3.4
million) in 1996 and ($3.2 million) in the six months ended June 30, 1997. The
Company primarily funded its uses of cash in 1996 and 1997 from proceeds
received from a $5.0 million investment by Safeguard in April 1996 and from
borrowings under the Company's credit facility. See "Certain Transactions." The
use of cash in operations in 1996 and in the six months ended June 30, 1997 was
primarily the result of increases in both billed and unbilled accounts
receivable, partially offset by income from operations and increases in accounts
payable and accrued expenses. The Company's accounts receivable were outstanding
an average of 14.0, 37.5 and 60.4 days as of December 31, 1995, December 31,
1996 and June 30, 1997, respectively. The overall increase in billed
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accounts receivable was primarily the result of increased revenues and an
increase in the average time period in which accounts receivable have been
collected. The average time period in which billed accounts receivable have been
collected has increased over time, primarily because the impact of several
contracts with rapid contractual payment terms has been less significant over
time due to the growth of other revenues of the Company. Unbilled accounts
receivable increased from $157,000 at December 31, 1995 to $4.8 million at
December 31, 1996 and $6.3 million at June 30, 1997. The increases in unbilled
accounts receivable were primarily the result of revenue growth and growth in
quick response services provided by the Company. Since the Company receives
requests for quick response services on an as-required basis and reacts
immediately to meet its clients' response needs, these services are often
delivered prior to the receipt of written purchase orders. The Company has begun
to take steps to improve its collection of accounts receivable, including
increased sensitivity to payment terms in the contracting process (including
procedures for quick response orders), initiation of accounts receivable
collection incentive compensation, and increased ongoing monitoring efforts.
During 1997, as described below, the Company obtained a $7.5 million accounts
receivable based credit facility to fund the increase in receivables.
The Company's business is not capital intensive and capital expenditures in
any given year are ordinarily not significant. Capital expenditures amounted to
$51,000 in 1994, $580,000 in 1995, $970,000 in 1996, and $1.4 million for the
six months ended June 30, 1997. Capital expenditures in the first six months of
1997 included expenditures associated with the Company's new leased corporate
headquarters facility and costs associated with the development of new
operational, administrative and financial information system software. During
the remainder of 1997, the Company expects to incur additional capitalized costs
associated with the development of and implementation of new management
information systems.
The Company currently has a $7.5 million line of credit with CoreStates
Bank, N.A., of which $4.0 million was outstanding at July 31, 1997. Advances
under the line of credit are limited to 80.0% of certain eligible accounts
receivable of the Company. As of June 30, 1997, based on the amount of such
accounts receivable, the Company was eligible to borrow $3.2 million of the
remaining $3.5 million which was unused as of such date. The Company is required
to maintain certain financial and other covenants under that facility. The
Company intends to repay the outstanding amount under this facility with a
portion of the proceeds of this offering. See "Use of Proceeds."
The Company may expand its capabilities through the acquisition of other
businesses that are complementary to the Company's existing business. A portion
of the net proceeds from this offering may be used in the future for such
acquisitions. See "Risk Factors--Broad Discretion in Application of Proceeds;
Acquisition Risks" and "Use of Proceeds."
The Company currently anticipates that the net proceeds received by the
Company from this offering, together with amounts available under its existing
line of credit, cash generated from operations and existing cash balances will
be sufficient to satisfy its operating cash needs through December 31, 1998. The
Company believes that additional bank credit would be available to fund such
operating and capital requirements if the Company's cash needs expand more
rapidly than expected. In addition, the Company could consider seeking
additional public or private debt or equity financing to fund future growth
opportunities. No assurance can be given, however, that such bank credit or debt
or equity financing will be available to the Company on terms and conditions
acceptable to the Company, if at all.
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share." This statement establishes standards for computing and presenting
earnings per share and applies to entities with publicly held common stock or
potential common stock (as defined). This statement is effective for financial
statements issued for periods
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<PAGE>
ending after December 15, 1997. Had the statement been effective for the year
ended December 31, 1996 and the six months ended June 30, 1997, income per share
would have been presented as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1996 JUNE 30, 1997
------------------- -------------------
<S> <C> <C>
Income per common share..................................................... $ 0.23 $ 0.15
Income per common share--assuming dilution.................................. $ 0.17 $ 0.12
</TABLE>
In February 1997, FASB issued SFAS No. 129, "Disclosure of Information about
Capital Structure." The Company is required to adopt the provisions of this
statement for the year ending December 31, 1998. This statement continues the
previous requirements to disclose certain information about an entity's capital
structure found in APB Opinions No. 10, "Omnibus Opinion-1996," No. 15,
"Earnings per Share," and FASB Statement No. 47, "Disclosure of Long-Term
Obligations," for entities that were subject to the requirements of those
standards. As the Company has been subject to the requirements of each of those
standards, adoption of SFAS No. 129 will have no impact on the Company's
financial statements.
In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components in the financial statements. The Company
is required to adopt the provisions of the statement for the year ending
December 31, 1998. Earlier application is permitted; however, upon adoption the
Company will be required to reclassify previously reported annual and interim
financial statements. The Company is presently evaluating the impact of this new
standard on its financial statements.
In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 requires the Company to
present certain information about operating segments and related information,
including geographic and major customer data, in its annual financial statements
and in condensed financial statements for the interim periods. The Company is
required to adopt the provisions of the statement for the year ending December
31, 1998. Earlier application is permitted; however, upon adoption the Company
will be required to restate previously reported annual segment and related
information in accordance with the provisions of SFAS No. 131. The Company is
presently evaluating the impact of this new standard on its financial
statements.
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BUSINESS
OVERVIEW
The Company provides a wide range of outsourced IT solutions and
professional services, including the operation of large-scale data center
complexes and networks ("Megacenter Operations"), distributed systems management
("DSM"), staffing services and other IT services. The Company provides these
solutions and services, generally on a long-term, fixed-price contractual basis,
to its Strategic Clients which are global providers of IT outsourcing services.
The Company works with these Strategic Clients as part of the IT outsourcing
team in providing services to a wide range of corporate Engagement Clients,
accepting delivery responsibility for specific functional roles within the
outsourcing engagements. The Company's primary Strategic Clients have been IBM
and Digital. The Company is also working towards establishing a Strategic Client
relationship, with Perot Systems. Representative Engagement Clients currently
include Ameritech, Campbell Soup, McDonnell Douglas, PECO Energy and Ryder
Systems Corp. The Company's revenues have expanded at a compound annual growth
rate of 60.5% to $57.9 million in 1996 from $22.5 million in 1994. Revenues in
the first six months of 1997 increased by 61.7% to $39.3 million compared to
$24.3 million in the first six months of 1996. For the years ended December 31,
1995 and 1996 and for the six months ended June 30, 1997, approximately 92%, 74%
and 62% of the Company's revenues, respectively, were derived from fixed-price
contracts. As of June 30, 1997, the Company had over 1,300 employees in 14
Company offices and 82 engagement locations in the United States, Canada,
Mexico, Brazil and the United Kingdom.
The Company believes that it is differentiated from other IT service
providers through its focus on relationships with Strategic Clients, its ability
to perform successfully and profitably under multi-year, fixed-price contracts
and its ability to provide services on a national and international basis. The
Company's strategy is to build long-term relationships with selected Strategic
Clients by understanding their business needs and by providing specific services
within large-scale outsourcing engagements more cost-effectively than its
Strategic Clients. The Company's services range from basic data center
management operations to help desk services, business process reengineering and
software engineering support. The Company delivers its services through customer
teams, each of which has full responsibility for the delivery of services to a
specific Strategic Client. The Company's close relationships with its Strategic
Clients, its ability to rapidly transition and integrate its management
personnel into new engagements, and its ability to effectively manage personnel
in the client environment, allow the Company to profitably price its services
under fixed-price contracts. By offering fixed-price contracts, the Company
reduces the execution and pricing risk for its Strategic Clients in their
large-scale outsourcing engagements. The Company has developed and is continuing
to expand its international service delivery capabilities in order to leverage
its Strategic Clients' increasingly global IT outsourcing efforts.
Large-scale outsourcing engagements typically involve the acquisition of IT
assets by the outsourcing provider from the engagement client. These assets can
range from fixed assets, such as entire data centers and computer networks, to
personnel, such as data center, help desk and programming staff. The Company's
role in outsourcing engagements usually involves the retention of IT personnel
from the Engagement Client. By retaining employees as part of its new
outsourcing engagements, to date the Company's growth has not been impeded by
the availability of qualified technical personnel and the Company has avoided
the significant staffing costs and expenses normally associated with new
engagements within the IT services industry. In each new outsourcing engagement,
the Company utilizes its expertise in IT staffing and operations to evaluate and
retain outsourced staff and to reengineer the operations of the outsourced
function. Through this process, the Company historically has been able to
improve the performance of, and manage on a more cost-effective basis, the
outsourced function for its clients.
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INDUSTRY
The use of outsourcing has grown rapidly as corporations have increasingly
determined that it is advantageous to focus on their core competencies and
outsource those functions that are not central to their primary mission.
According to the Yankee Group an industry research firm, the IT outsourcing
market in 1995 was approximately $59 billion in the United States and
approximately $107 billion worldwide. In 1995, Dataquest estimates that IBM was
the leading provider of management/operations and business process management
services in the United States with a 28.9% market share and was one of the top
two providers of such services worldwide with a 19.7% market share.
The Company believes that a number of factors have resulted in a significant
shift in the awareness and acceptance by organizations of the benefits of IT
outsourcing. Historically, most IT outsourcing arrangements were premised on the
primary goal of cost reduction and were often limited to discrete functions such
as the management of data centers. Over the past several years, however, a
number of fundamental developments have occurred which have caused organizations
to reconsider the benefits of outsourcing their IT functions. These developments
include global competition, businesses' focus on "core competencies,"
accelerating technological change and the need for enterprise-wide system
integration arising from the rapid growth in the number of software applications
and end-users throughout organizations. The principal technology-driven change
is the continuing movement by large corporations to open, distributed computer
networks using client/server architecture. The move to open standards based
computing environments continues to accelerate today as a result of improvements
in price/performance ratios for computer systems and advances in open computing
standards and enabling technologies. These technological changes are making it
increasingly difficult and expensive for businesses to maintain in-house the
necessary technical and management capabilities to handle both their current IT
needs and to effectively exploit rapidly evolving technologies.
One of the key trends occurring in the IT outsourcing industry is an
increasing use of business partnerships and alliances among outsourcing vendors
to deliver a broader range of technical skills more cost-effectively to the
Engagement Client. Factors driving this trend include the complexity and
convergence of technology required in outsourcing engagements, lack of available
technical resources, shortened delivery times, and investment costs of
internally building technical capabilities. As a result, outsourcing providers
recognize that it is not practical to internally develop and manage all of the
technical skills and critical resources necessary to perform increasingly
complex outsourcing engagements. Outsourcing engagements are typically
characterized as being long-term in nature and often involve the transfer by the
client of certain of its facilities, technologies and employees to the
outsourcer. The outsourcer's responsibilities under IT engagements may vary
widely from engagement to engagement, ranging from the provision of certain
specific IT functions to the management of a client's entire IT operation.
Within these engagements, the relationships involve the provision of employees
or consultants by the subcontracting vendor to the outsourcing vendor. The
subcontractor is normally paid on a time and materials basis and the outsourcing
vendor retains the managerial responsibility for the IT services provided by
such persons.
THE OAO ADVANTAGE
The Company's approach is to be a value-added partner of choice to a limited
number of Strategic Clients in the provision of outsourced IT solutions and
professional services. This client focus establishes a "customer intimate"
relationship in which the Company's Strategic Clients are willing to assign
performance management responsibility to the Company for its role in the
outsourcing engagements, usually on a fixed-price basis. The Company's close
relationships with its Strategic Clients, its ability to rapidly transition and
integrate its management personnel into new engagements, and its ability to
effectively manage personnel in the client environment, allow the Company to
profitably price its services under fixed-price contracts. By generally
operating under fixed-price contracts, the Company reduces the execution and
pricing risk for its Strategic Clients in their large-scale outsourcing
engagements. The
35
<PAGE>
Company believes that this advantage significantly increases its ability to
compete in the provision of IT solutions and professional services.
LIMITED NUMBER OF STRATEGIC CLIENTS. The Company intends to continue
focusing on maintaining close relationships with a limited number of Strategic
Clients on a global basis. By limiting the number of these relationships, the
Company believes that it enhances its standing as a value-added partner of
choice, and limits competitive threats to its Strategic Clients. Therefore, the
Company is better positioned to obtain additional engagements which result from
the continued growth in the demand for the global IT outsourcing solutions and
services provided by the Company's Strategic Clients.
CUSTOMER-INTIMATE RELATIONSHIPS. The Company supports its Strategic Client
relationships through a dedicated customer team for each Strategic Client which
seeks to understand the business objectives of that Strategic Client and to
identify common business opportunities. The Company also supports its Strategic
Client relationships by co-locating its offices with those of its Strategic
Clients and Engagement Clients and by supporting each engagement with employees
possessing extensive background in the services required by the Strategic
Client. By delegating performance management responsibility to the Company, the
Strategic Client is afforded the opportunity to place greater focus on other
portions of the overall engagement.
FIXED-PRICE, MULTI-YEAR CONTRACTS. The Company believes that it provides
added value by offering fixed-price, multi-year contracts to its Strategic
Clients. Within the industry, IT servicing vendors normally provide employees to
perform or support a specific IT function on a time and materials basis. In
contrast, the Company seeks to assume full performance management responsibility
for its specific IT functions within the total engagement. As a result, the
Company is able to offer its Strategic Clients greater cost certainty during the
course of the engagement and the Company is afforded the opportunity to realize
significant benefits by achieving efficiencies through improved management
practices and the establishment of new technical and operational methodologies.
COMPREHENSIVE IT OUTSOURCING SOLUTIONS AND PROFESSIONAL SERVICES. The
Company provides its Strategic Clients with a comprehensive offering of IT
outsourcing solutions and professional services, including: Megacenter
Operations; restructuring of server and PC networks for efficient centralized
operations and management; transition of customer IT environments to new
client/server structures; help desk implementation and operations; development
and sustaining support to applications systems; and system engineering services.
The Company has developed, and is expanding, the capability to provide such
services internationally in response to its Strategic Clients' increasingly
global needs. The Company currently maintains offices in the United States,
Canada, Mexico, Brazil and the United Kingdom.
RETENTION OF ENGAGEMENT CLIENT PERSONNEL. The Company intends to continue
its practice of selectively retaining the majority of the outsourced personnel.
The Company approaches its new employees on the basis that they, and the
capabilities that they represent, are the most critical assets of the Company.
With the Company, employees have the opportunity to participate in the rewards
of the Company's growth, manage their own areas of responsibility, and advance
in their profession. These practices have provided the Company with a large
number of dedicated and talented employees and have allowed the Company to
minimize recruiting and hiring expenses when entering into new engagements. As
the Company achieves efficiencies at many of its engagements it has generally
been able to reduce personnel requirements. This has enabled the Company to
leverage existing employees to expand its role in existing engagements and to
obtain and support new engagements, while providing these individuals with more
diverse career opportunities.
SEAMLESS TRANSITION. The Company has consistently provided its Strategic
Clients with the capability to transition select functions from its Engagement
Clients to the outsourcing engagement without interruption of those functions.
The customer team organizes its employees, augmented by Enablement Team
personnel, into "Transition Teams," assigning them the task of selectively
retaining a high percentage
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<PAGE>
of the incumbent workforce, establishing a contingent redundancy in the
workforce, and providing augmentation of key positions with Company personnel
during the transition period.
GROWTH STRATEGY
The Company's goal is to become one of the premier providers of outsourced
IT solutions and services by pursuing the following principal strategies:
LEVERAGE EXISTING RELATIONSHIPS. By establishing and nurturing close
relationships with a limited number of Strategic Clients, the Company intends to
continue building a reputation for performance that supports the Company's
selection by its clients as a value-added partner of choice. In support of this
strategy, the employees that deliver services to Strategic Clients are organized
in customer teams, with each customer team responsible for a particular
Strategic Client. In addition to designated customer teams, the Company also
maintains engagement managers who are responsible for each Strategic Client
relationship and who seek to identify additional business opportunities within
the Strategic Client organization. As a result of these relationships, the
Company has been granted several engagements by Strategic Clients without the
requirement that the Company submit to a competitive selection process.
SELECTIVELY EXPAND BASE OF STRATEGIC CLIENTS. The Company intends to
selectively expand the number of Strategic Clients with which it maintains
relationships by carefully evaluating market opportunities with IT services and
product providers who value the Company's outsourcing approach. The Company
recently began its third engagement with the energy systems group of Perot
Systems and is working towards establishing a Strategic Client relationship with
Perot Systems. The Company is also working to establish business opportunities
with NCR also with the objective of achieving a Strategic Client relationship.
In expanding its base of Strategic Clients, the Company intends to refrain from
pursuing engagement or partnership opportunities with organizations competing
directly with its existing Strategic Clients.
INCREASE INTERNATIONAL PRESENCE. The Company plans to continue to expand
its international presence to capitalize on global outsourcing opportunities
with its Strategic Clients. The Company currently maintains offices in Canada,
Mexico, Brazil and the United Kingdom, and anticipates opening additional
offices within the next 18 months in Continental Europe and the Asia-Pacific
Rim. The Company also uses joint venture relationships with local IT services
providers in order to broaden its international service capabilities. The
Company has established a joint venture relationship with Capita Managed
Services Limited, a local IT service provider in the United Kingdom, and has
executed letters of understanding regarding the establishment of joint venture
relationships with Stefanini Consultoria e Assessoria em informatica in Brazil
and with Comtex Group Limited in New Zealand.
DEVELOP INDUSTRY-SPECIFIC EXPERTISE. The Company intends to selectively
develop expertise in industries that may offer higher-margin opportunities for
the Company's IT solutions and professional services. The Company has invested
in developing expertise in the healthcare industry, and has recently begun an
engagement with IBM which leverages the Company's industry expertise to provide
a state-of-the-art health data network to healthcare service providers. The
Company will target other vertical markets that are undergoing regulatory,
technological or competitive changes which provide opportunities for increased
outsourcing of IT functions. The Company will likely make investments in new
technical and service capabilities to enhance its vertical market strategy.
PURSUE ACQUISITIONS AND ALLIANCES. The Company intends to pursue expansion
opportunities with other IT service providers by means of acquisitions or
alliances. The Company believes that new technical skills, additional industry
expertise, a broader client base and an expanded geographic presence may result
from these activities.
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OAO'S SERVICES
MEGACENTER OPERATIONS MANAGEMENT. The Company's Megacenter Operations
management services cover the entire spectrum of the management and operation of
large scale computing equipment and all of its ancillary equipment, systems,
services and associated networks. This generally includes the performance of any
task associated with the operation or management of a traditional mainframe data
center. IBM currently engages the Company to provide management and operations
services at three of its four Megacenters in the United States. Each Megacenter
represents the networking of IBM's data centers across a geographic region.
The Company provides services which support all aspects of data center
management such as policy formulation, planning, process and procedure creation,
service level development, staffing and directing the work force, budgeting and
controlling, relocation and consolidation, and upgrading of equipment, services
and systems. In performing these services, the Company is normally responsible
for the attainment of service level requirements and has the flexibility of
directing the personnel as it deems appropriate.
The Company also provides services which involve all elements of the
technical operations of a data center, including management and operation of
distributed networks of systems, computer room equipment scheduling and
operations, network center operation and management, tape library management,
off-site data storage, disaster planning and recovery, tape and print equipment
operations, print distribution, help desk and call center operations,
move/add/change operations for user equipment, computer and network systems
programming, computer and network systems performance measurement and tuning,
production job scheduling and control for applications systems, maintenance and
development of software applications systems, and quality assurance for
technical operations.
A typical Megacenter engagement involves supporting a Strategic Client by
selectively accepting functions within the total outsourcing engagement. The
Company's role is to assume full responsibility for managing, staffing and
delivering service level requirements for those functions. For example, in the
Company's seven-year contractual engagement to support a very large IBM
Megacenter dispersed across the Northeast region of the United States, the
Company performs the functions of console operations, network operations, output
processing operations, data storage operations, and user services functions such
as move/add/change operations. This Megacenter utilizes a network of more than
100 large mainframe computer configurations that support both the Strategic
Client's internal requirements as well as those of its Engagement Clients.
Within this engagement, the Company performs defined functions on a fixed-price
basis and also supports a wide range of additional functions pursuant to
certain staffing service provisions under the contract. These additional
functions may be performed by the Company on a short-or-long-term basis
depending on the requirements of the Strategic Client. The Company performs
these functions in the facilities of both its Strategic Clients and its
Engagement Clients, including regional, national and international locations of
its Engagement Clients.
DISTRIBUTED SYSTEMS MANAGEMENT. The Company's primary focus in DSM services
is on the evolving market for outsourced support of the desktop-network
requirements of its Engagement Clients. The Company has also been engaged to
support mid-range system applications and operations. The Company believes that
the trend toward outsourcing the operation and management of desktop-network
requirements presents a major opportunity for growth. The services being
delivered by the Company vary by engagement and include: network operating
system architecture and implementation; evaluation and redesign of server
architecture; communications network evaluation and restructuring for improved
connectivity and efficiency; design and implementation of E-mail solutions;
rollout of the new desktop system into the user environment; transition services
to support a smooth migration to a new centrally managed desktop environment;
help desk services; deskside training services; asset management support and
control; design and implementation of automated centralized asset control; and
operation support, including activities associated with changes in technology,
the client's organizational structure or physical
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plant changes. The Company currently has engagements in three major Strategic
Client programs, two with IBM and one with Digital.
As an example of the Company's DSM services, the Company has teamed with IBM
to provide support for a major electric utility. This engagement involves the
outsourcing of the Engagement Client's entire desktop-server-network
configuration. The objective of the engagement was initially to rationalize the
environment to enable centralized management and operations permitting the
Strategic Client to improve effectiveness and control costs. The initial scope
of this engagement was for development and implementation of the network
operating system into the existing server environment. The scope of this
engagement has evolved to include designing a new server structure, support to
reengineering the communications environment, implementation of a new standard
desktop configuration, and user support services to include deskside support.
This Engagement Client's environment includes over 6,000 workstations and
approximately 100 servers.
OTHER IT OUTSOURCING AND STAFFING SERVICES. The Company's relationships
with its Strategic Clients, and its posture as a value-added partner of choice
working within client engagements and facilities, provide opportunities to be
highly responsive to evolving client needs. As a result, the Company is
well-positioned to gain insight into market trends and make investments required
to pursue opportunities that result from these trends. As a result, the Company
may more selectively broaden its service offerings.
System engineering services are a natural adjunct to the Company's other
services and represent a large and growing need of its Strategic Clients. The
Company has completed a number of short to medium term engagements in this area
and recently began an engagement in support of a systems integration project
with Perot Systems. Within this complex project, involving the development and
implementation of a system to support the operation of the deregulated electric
utility market, the Company is supporting the system test function and providing
networking expertise across the project. The Company believes that there is a
growing market for outsourced IT services in support of deregulation.
Staffing services are a part of the Company's service offerings to its
Strategic Clients. These services, provided on a time and materials basis, are
regularly utilized within engagements to meet short or indefinite term
requirements, to deliver personnel who augment the client's staffing or to
respond to requirements that cannot be sufficiently defined to permit fixed
prices. There are also instances where an engagement has started on a time and
materials basis and evolved to a fixed-price basis as the requirement became
sufficiently defined.
Industry specific services represent a small, but growing and important
component of the Company's business. The Company has found that it can provide
significant added value to industry-specific markets by melding its proven
capabilities in IT with in-depth expertise in the targeted market. The Company
initially targeted the healthcare industry based upon the dynamics of the
industry. An evaluation of the information aspects of the industry clearly
indicated the value of shared information across the dispersed providers of
healthcare and related businesses such as employers and insurers. For example,
since 1995 the Company has collaborated with a Strategic Client to determine the
market's needs, define a delivery approach and represent the service offering to
potential engagement clients. In 1997, this Strategic Client awarded the Company
a five-year contract to operate the "hub" of the network solution, provide
industry-specific help desk expertise and provide continuing marketing
assistance and customer support services. This contract has significant growth
opportunity if this service is broadly accepted by the healthcare industry.
RELATIONSHIPS WITH STRATEGIC CLIENTS
IBM. The Company's relationship with its first Strategic Client, IBM, has
continued to expand in terms of revenues, the range of services provided, the
number of engagements and the number of IBM business units which have engaged
the Company's services. The Company won its first engagement with IBM in January
1993, successfully competing against several existing IBM contractors, when it
was chosen
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to perform a number of specific functions in a large outsourcing contract which
IBM has been awarded by McDonnell-Douglas. The initial three year term of this
engagement has subsequently been extended to a seven year term and the scope of
the engagement now encompasses the performance of functions in support of IBM's
Central Megacenter. In August 1993, the Company won a similar engagement to
perform a number of specific functions in support of IBM's internal computer
complex in the mid-Hudson Valley in New York. The Company employed approximately
100 former IBM employees at the beginning of this engagement. The initial two
year term of this engagement has subsequently been extended to a seven year term
and the scope of the engagement now encompasses the performance by more than 500
employees of various functions in support of IBM's Northeast Megacenter. In
early 1995, the Company won a three year engagement to perform specific IT
functions in support of IBM's South Megacenter. As a result of these
engagements, IBM currently engages the Company's services at three of its four
U.S. Megacenters.
IBM has also engaged the Company to perform IT services in support of other
large outsourcing contracts which it has been awarded, including engagements
with Ameritech, Amtrak, Blue Cross /Blue Shield of New Jersey and PECO Energy.
In 1995, the Company initiated a relationship with an internal IBM team that was
pursuing a new role for IBM in the rapidly evolving healthcare industry. The
objective of this activity was to apply IBM's "network-centric computing"
approach to the revolution in information needs in the healthcare industry. As a
result of these activities, the Company was awarded a five year contract to
provide industry-specific help desk support, customer support for marketing and
start-up activities, and technical operations for the Atlanta hub of IBM's new
Health Data Network service offering. The Company was chosen to support
Ameritech, IBM's Health Data Network and PECO Energy engagements without having
to submit competitive bids. In addition, IBM has selected the Company, without
competitive bid, as a partner in at least six major outsourcing engagements for
which IBM is currently in the bidding process.
DIGITAL. Digital became a Strategic Client in January 1995 when the Company
was awarded a contract to provide services in support of an Engagement Client in
Vancouver, British Columbia. Later in 1995, the Company was awarded additional
engagements with Digital in Central and Eastern Canada. During 1996, the Company
became a delivery partner of Digital across all of Digital's Canadian
outsourcing engagements and played an important role in assisting Digital to
obtain a long-term extension of a large outsourcing contract in Canada. In 1996,
Digital was awarded an engagement to provide services in support of one of the
industry's largest desktop outsourcing engagements. This particular Engagement
Client is one of the world's largest financial institutions and presents other
global opportunities for Digital. As a result of these engagements, the
Company's relationship with Digital has begun to expand into other geographic
areas, including the U.S. and the United Kingdom.
OTHER EVOLVING RELATIONSHIPS. The foundation of the Company's business
strategy is to identify and build lasting relationships with certain major
participants in the IT outsourcing market. In 1995, the Company identified Perot
Systems as a high growth provider of IT outsourcing that was not a direct
competitor of its existing Strategic Clients. During 1995, the Company was
awarded a small engagement by Perot System's energy systems group. In 1996 and
1997, the Company was awarded two larger engagements with this organization. The
Company believes that the reputation being built and the client understanding
gained in these engagements provides a platform for the pursuit of a long-term
Strategic Client relationship.
In 1995, the Company began to acquire insight and understanding of the
organization and business plans of NCR (then a part of AT&T). This commitment
has recently begun to yield results as the Company has been awarded a number of
small engagements with NCR in 1997. The Company believes that there is an
opportunity to develop a Strategic Client relationship with NCR.
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OPERATIONS
The Company's organizational structure is composed of three parts: customer
teams, an enablement team and corporate management and staff.
Customer teams are responsible for the actual delivery of the Company's
services and provide individual, specific customer focus. Each customer team has
full accountability for the success of the Company's relationship and business
execution with a particular Strategic Client and is directly responsible for the
marketing, closing, and delivery of services to that client. Within customer
teams empowered entrepreneurial business units are responsible for a single or
group of contracts or for a geographical area with its Strategic Client.
The Company's enablement team is responsible for assisting customer teams in
handling the significant upfront activities which occur during the beginning and
transition phases of engagements. The enablement team precedes customer teams
when entering new geographical locations and establishes the required
infrastructure to service clients at that location. When entering new
international locations, this often means identifying legal, accounting,
bookkeeping, and human resource support; organizing a new business entity; and
acquiring physical facilities. The enablement team also supports transition
efforts (new engagement start-ups) by providing experienced specialists to
provide facility, administrative and other support to the customer team.
The Company's corporate management and staff, which includes the Strategic
Programs Group, is responsible for establishing the strategic direction of the
Company, strategic marketing, investor relations, corporate finance and
accounting, human resource policy guidance, and other administrative support
services.
In structuring each outsourcing engagement, the Company works with its
Strategic Clients to identify elements within the engagement where the Company
can assume full responsibility for contract performance. The breadth of the
Company's service offerings provides meaningful flexibility to the Strategic
Client in providing a total solution to the Engagement Client's outsourcing
requirements. The Company's roles include providing services both at Strategic
Clients' and Engagement Clients' locations locally, nationally and
internationally.
In a typical engagement, the Company will retain the personnel working
within the function that is being outsourced. The Enablement Team will support
this transition, by establishing the required infrastructure to support the new
work site. In addition, this team will support the process of transitioning the
incumbent personnel, evaluating their capabilities and selectively hiring
productive outsourced personnel as Company employees. The Company strives to
cultivate strong morale and develop its culture with new employees, emphasizing
the degree to which it values these employees, who often find the opportunity to
work with the Company appealing compared to their previous positions working in
a non-core function. The customer team also focuses on "seamless transitions" by
minimizing any disruption within the outsourced function, often overstaffing new
engagements to ensure client satisfaction. Since the Company normally selects
the majority of the staff on an engagement from incumbent personnel, the
recruiting function for each new engagement is normally minimal. Therefore, the
Company's growth to date has not been impeded by the availability of qualified
technical personnel, and the Company has avoided the significant staffing costs
and expenses normally associated with new engagements within the IT services
industry. As the Company implements efficiencies at an engagement, it is able to
selectively utilize existing employees for other engagements and business
opportunities.
As each outsourcing engagement is transitioned over to the Company,
operational management is inserted into the engagement to oversee the Company's
role on an ongoing basis. Within customer teams, the operational managers and
engagement staff are formed into empowered, entrepreneurial business units,
responsible and accountable for the outcome of this engagement. During the early
stages of each engagement, the outsourced function is evaluated and reengineered
for quality of performance and
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efficiency, as the Company seeks to drive down operational costs while exceeding
service delivery expectations of the client. Each customer team has full
accountability for the success of the Company's relationships and business
execution with its client, and is directly responsible for delivering contracted
solutions and services, and identifying, marketing and closing additional new
business opportunities within existing engagements.
SALES AND MARKETING
To date, the Company has focused its marketing efforts on maintaining and
expanding its relationships with a limited number of Strategic Clients. The
Company's customer-intimate business model is the driving force of the sales and
marketing functions. Since the Company has co-located its offices with those of
its Strategic Clients, its customer teams are designed to focus on and serve the
Strategic Client in targeted market segments. Each customer team includes two or
more account executives who have the responsibility to expand the Company's
business with that Strategic Client. Since the customer teams are closely
aligned with and co-located with the Strategic Client, the Company is in a
better position to anticipate and respond to the Strategic Client's unique
needs, thereby creating a competitive advantage by ensuring account control and
growth with its Strategic Clients. After establishing its customer team in a
manner which the Company believes will exceed its Strategic Client's
expectations, the Company seeks to expand its marketing activities from that
location.
Once the customer teams can anticipate the Strategic Client's future needs,
the Company's Strategic Programs Group is responsible for positioning the
Company to meet these needs through new service offerings. Under the leadership
of the Strategic Programs Group, the Company has made and will continue to make
significant investments to position itself in key industries, technologies and
global markets.
COMPETITION
The IT services market is highly competitive and is served by numerous
firms, including systems consulting and integration firms, professional services
companies, application software firms, temporary employment agencies, the
professional service groups of computer equipment companies, facilities
management and management information systems outsourcing companies, certain
"Big Six" accounting firms, and general management consulting firms. Many
participants in the commercial IT services market have significantly greater
financial, technical and marketing resources and generate greater revenues than
the Company. The Company believes that the principal competitive factors in the
commercial IT services industry include responsiveness to client needs, the
ability to cause the transition of the outsourced services to occur on a prompt
and seamless basis, quality of service, employee relations, price, management
capability and technical expertise. The Company believes that its ability to
compete also depends on a number of competitive factors outside its control,
including the ability of its competitors to hire, retain and motivate skilled
technical and management personnel, the price at which others offer comparable
services and the extent of its competitors' responsiveness to client needs.
FACILITIES
The Company's headquarters and principal administrative, sales and marketing
functions are located in approximately 11,500 square feet of leased space in
Greenbelt, Maryland. This lease expires in December 2003. The Company leases
office space in seven U.S. cities, as well as in Vancouver, British Columbia;
Toronto, Ontario; Calgary, Alberta; Hortalandia, Brazil; and Mexico City,
Mexico. Additionally, the Company shares an office with a joint venture partner
in London, England.
The Company anticipates that additional space will be required as business
expands and believes that it will be able to obtain suitable space as needed. In
addition, the Company intends to open offices during the next 18 months in
Continental Europe and the Asia-Pacific Rim to complement its current
international offices.
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EMPLOYEES
As of June 30, 1997, the Company employed over 1,300 full time persons.
Approximately 120 of these employees have managerial responsibilities, and over
1,150 have technical responsibilities. The Company typically utilizes the
services of independent contractors only in certain international engagements.
The Company believes that its relationships with its employees are good.
Six of the Company's employees are represented by the Southern California
Professional Engineering Association under a collective bargaining agreement
which expires on January 10, 1999. Fourteen of the Company's employees are
represented by the International Association of Machinists and Aerospace Workers
under a collective bargaining agreement which expires on January 15, 1999.
Twenty-four of the Company's employees are represented by the Office and
Professional Employees International Union (the "OPEIU") under a collective
bargaining agreement that expired on February 28, 1997 but which remains in
effect and is currently being negotiated. The Company believes that its
relationships with each union is good and it has no reason to believe that it
will not reach a satisfactory new agreement with the OPEIU.
LEGAL PROCEEDINGS
The Company believes that there are no claims or actions against the Company
the ultimate disposition of which will have a material adverse effect on the
Company's results of operations or consolidated financial position.
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MANAGEMENT
OFFICERS AND DIRECTORS
The names, ages and positions held by the officers and directors of the
Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Directors and Executive Officers
William R. Hill...................................... 51 Chief Executive Officer, President and Director
Edgar M. Fields...................................... 58 Chief Operating Officer
Samuel D. Horgan..................................... 48 Chief Financial Officer and Treasurer
Richard M. Clyne..................................... 49 Senior Vice President
Richard Eubanks...................................... 55 Senior Vice President
Harvard V. Hopkins, Jr............................... 59 Senior Vice President
Gerry Lalonde........................................ 45 Senior Vice President
Donald G. Miller..................................... 60 Senior Vice President
Evelyn A. Scott...................................... 43 Senior Vice President
Howard G. Ulep....................................... 54 Senior Vice President
Jerry L. Johnson..................................... 49 Chairman of the Board of Directors
Cecile D. Barker..................................... 53 Vice Chairman of the Board of Directors
Thomas C. Lynch...................................... 55 Director
Frank B. Foster, III (1)(2).......................... 63 Director
Yvonne Brathwaite Burke (1)(2)....................... 65 Person Named to Become a Director
John Lehman (1)(2)................................... 55 Person Named to Become a Director
Other Company Officers
Christine M. Hazell.................................. 38 Vice President
Anderson O. Inniss................................... 48 Vice President
Patrick H. O'Neill................................... 52 Vice President
Shiraz Patel......................................... 37 Vice President
Stu Schmidt.......................................... 40 Vice President
John T. Weisman...................................... 52 Vice President
</TABLE>
- ------------------------
(1) Member or Person Named to become a member of the Compensation Committee of
the Company's Board of Directors
(2) Member or Person Named to become a member of the Audit Committee of the
Company's Board of Directors
WILLIAM R. HILL has been President and Chief Executive Officer and a
Director of the Company since March 1996. From 1992 to March 1996, Mr. Hill was
the Senior Vice President of the Commercial Systems Group of OAO Corporation
(the "Commercial Systems Group"). From 1990 to 1992, Mr. Hill was Vice President
for Planning Research Corporation ("PRC"), a systems integration company. From
1985 to 1990, Mr. Hill was Vice President of Business Development for OAO
Corporation. He previously was Director of the Legislative and Committee Systems
Division for the United States House of Representatives and a systems engineer
and national account manager for NCR. Mr. Hill has over 20 years of experience
in the information systems and services industry.
EDGAR M. FIELDS has been Chief Operating Officer of the Company since March
1996. From March 1994 to March 1996, Mr. Fields was Group Vice President of
Operations for the Commercial Systems Group and from November 1992 to March
1994, he participated in the formation of the Commercial Systems Group. From
1987 to 1991, Mr. Fields was President of the Systems Services Group
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of PRC. From 1966 to 1987, Mr. Fields held various senior management positions
with PRC. Mr. Fields has over 35 years of experience in the delivery of IT
services.
SAMUEL D. HORGAN joined the Company in July 1997 as Chief Financial Officer
and Treasurer. From January 1996 until July 1997, Mr. Horgan was the Chief
Financial Officer for Worldspan, Ltd., a global computer reservation system and
systems integrator in the airline industry. Before joining Worldspan, Ltd., Mr.
Horgan was Chief Financial Officer and Treasurer of Computer Task Group, Inc., a
large publicly traded IT services provider, from 1986 to December 1995. Mr.
Horgan began his career at Computer Task Group in 1981 as a financial analyst.
Mr. Horgan has over 26 years of experience in business acquisition, management,
finance and operational reorganization.
RICHARD M. CLYNE has been Senior Vice President of the Company since January
1997 and has responsibility for the Company's relationship with IBM and
international opportunities with this Strategic Client. From 1994 to January
1997, Mr. Clyne was the Director of Delivery Services in IBM's Asia Pacific
Group. From 1993 to 1994, Mr. Clyne was Site Executive of IBM's largest
outsourcing account in Long Beach, California. From 1990 to 1992, Mr. Clyne
established and managed IBM's Partner and Vendor Relations unit. Mr. Clyne has
over 26 years of experience in the IT industry.
RICHARD EUBANKS has been a Senior Vice President of the Company since
January 1997 and has responsibility for the Company's relationship with IBM and
for the IBM customer team. From 1967 to 1997, Mr. Eubanks held various technical
and executive positions at IBM. In his career at IBM, Mr. Eubanks developed the
first gas panel display using scan technology which significantly lowered the
display manufacturing cost. Mr. Eubanks also managed IBM's second largest
outsourcing operation in Chicago, Illinois. Mr. Eubanks has 30 years of
experience in the IT industry.
HARVARD V. HOPKINS, JR. has been a Senior Vice President of the Company
since March 1996 and has responsibility for the support of new engagement
startups and transitioning and oversight of the Company's programs on commitment
to quality. From October 1994 to March 1996, Mr. Hopkins was a Vice President in
the Commercial Systems Group. From September 1990 to October 1994, Mr. Hopkins
served as Executive Vice President of Operations for KENROB and Associates, an
IT consulting firm. From 1988 to 1990, Mr. Hopkins was Director of Eastern
Operations for OAO Corporation's Information Systems Group and Vice President of
its Space Systems Division (the "Space Systems Division"). Mr. Hopkins was a
Group Manager for OAO Corporation in 1987. In 1987, Mr. Hopkins retired from his
position as a Colonel in the United States Marine Corps, where he had held
various management, technical and training positions since 1960. Mr. Hopkins has
over 22 years of experience in the IT field.
GERRY LALONDE has been a Senior Vice President of the Company since March
1996 and has responsibility for the Company's relationship with Digital and for
international opportunities with this Strategic Client. From July 1995 to March
1996, Mr. Lalonde was Chief Operating Officer of the Company's Canadian
subsidiary. From 1985 to July 1996, Mr. Lalonde held various positions at
Digital, including Managing Director and General Manager of Digital's
outsourcing management services for Canada; Business Development Manager for
Western Canada; Chief Financial Officer for Digital's New Zealand and Fijian
subsidiaries; and Manager of Management Information Systems for Digital's
Canadian subsidiary. Mr. Lalonde has over 20 years experience in finance, IT,
business development and management.
DONALD G. MILLER has been a Senior Vice President of Operations for the
Company since October 1996 and is responsible for the technical execution of the
Company's engagements, development of new service offerings and international
business development. From 1990 to October 1996, Mr. Miller held various
positions at OAO Corporation, including Vice President of the Network Services
Division, Vice President of Systems Management of the Commercial Systems Group
and Vice President of the Space Systems Division. In 1990, Mr. Miller retired
from his position as a Colonel in the United States Marine Corps, where he held
various management positions in the IT field, including Head of Information
Resources Management. Mr. Miller has over 30 years of management experience in
the IT field.
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EVELYN A. SCOTT has been a Senior Vice President of the Company since March
1996 and is responsible for new business development in Latin America with the
IBM customer team. From 1983 to March 1996, Ms. Scott held various positions
with OAO Corporation, including President of OAO Systems, Inc., a subsidiary
that focused on local government and regional business development, Vice
President of OAO Services, Inc., a subsidiary that offered leading edge
technology to state and local governments, and Manager of the Strategic Programs
Group. Ms. Scott has over 15 years experience in the IT field.
HOWARD G. ULEP has been a Senior Vice President of the Company since
February 1997 and is responsible for the evaluation of acquisition opportunities
and new technologies, services and markets. From July 1995 to December 1996, Mr.
Ulep served as senior management for Northern Communications Systems. In October
1988, Mr. Ulep founded Wye Technologies, a telecommunications applications
provider, and served as Chief Executive Officer until July 1995 when it was sold
to Northern Communications Systems. In 1981, Mr. Ulep founded Capital Systems,
Inc., a systems integration provider, where he served as Chief Executive Officer
until the company was purchased in 1986 by SHL Systemhouse. Mr. Ulep served as
Vice President of Strategic Systems for SHL Systemhouse until 1988. Mr. Ulep has
previously held senior management positions with the United States House of
Representatives Computer Center, Computer Sciences Corporation and Informatics,
Inc. Mr. Ulep has over 20 years experience in the IT field.
JERRY L. JOHNSON has been the Chairman of the Board of Directors of the
Company since April 1996. Mr. Johnson has been the Senior Vice President of
Operations of Safeguard since September 1995. From 1985 to 1995, Mr. Johnson
held various senior executive positions with US West, including Group Director,
Vice President of Network and Technology Services and Vice President of
Residence Planning. From 1983 to 1985, he was President and Chief Executive
Officer of Northwestern Bell Information Technologies, a subsidiary of
Northwestern Bell Telephone Company. Mr. Johnson is a director of USDATA
Corporation, a Safeguard partnership company that is a global supplier of
real-time application development tools, distribution management software,
automatic identification equipment and related consulting and integration
services. Mr. Johnson also is a member of the International Society of Sloan
Fellows.
CECILE D. BARKER has been the Vice Chairman of the Board of Directors of the
Company since April 1996. Mr. Barker is the Chairman of the Board, Chief
Executive Officer and majority owner of OAO Corporation, a company which he
founded in 1973. Mr. Barker regularly serves as an advisor to other
corporations, and he is a member of the Advisory Committee for Scientific Policy
for the National Science Foundation and the Science and Technology Advisory
Committee for the Executive Office of the President of the United States. Mr.
Barker has over 28 years of experience in the management of major scientific,
technological and commercial programs.
THOMAS C. LYNCH became a Director of the Company in April 1996. Mr. Lynch
has been a Senior Vice President of Operations of Safeguard since November 1995.
Prior to that time, Mr. Lynch retired from the U.S. Navy as an Admiral after 33
years of service, including service as Superintendent of the U.S. Naval Academy
from 1991 through 1994 and Director, Navy Roles and Missions from 1994 through
1995. Admiral Lynch currently is a director of Sanchez Computer Associates,
Inc., a Safeguard partnership company that designs, develops and markets banking
software. Mr. Lynch is also a director of The Eastern Technology Council and is
a member of the Cradle Liberty Council, Boy Scouts of America and the U.S. Naval
Academy Foundation.
FRANK B. FOSTER, III became a Director of the Company in April 1996. Mr.
Foster will serve as Chairman of the Audit Committee upon the consummation of
this offering. Mr. Foster retired as President and Chief Executive Officer of
Diamond Bathurst (formerly Diamond Glass) in 1986 after almost 30 years of
service. Since 1986, Mr. Foster has served on the boards of numerous companies
and is currently a director of 1838 Investment Advisors, Airgas, Inc., Contour
Packaging Corporation and U.S. Precision Glass Company.
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YVONNE BRATHWAITE BURKE will become a Director of the Company upon the
consummation of this offering. Ms. Burke will also become a member of the
Compensation Committee and Audit Committee. Ms. Burke has served as Los Angeles
County Supervisor since 1992. Ms. Burke also serves on the Board of L.A. Care
and NAACP Legal Defense and Education Fund. Ms. Burke is a member of the Board
of Trustees of the Amateur Athletic Foundation and the National Academy of
Public Trusteeship. Ms. Burke is a former U.S. Congresswoman, who served on the
Appropriations Committee, Departments of State, Justice and Commerce, and on the
select committee on Assassinations.
JOHN LEHMAN will become a Director of the Company upon the consummation of
this offering. Mr. Lehman will also become a member of the Compensation
Committee and Audit Committee. Mr. Lehman also serves as Chairman of the Board
of Directors of J.F. Lehman & Co., a private equity firm, Ball Corporation and
Sedgwick Group plc. Mr. Lehman was also an investment banker at Paine Webber
Inc. and served as Secretary of the Navy for six years. He served as staff
member to Dr. Henry Kissinger on the National Security Council.
CHRISTINE M. HAZELL has been a Vice President of the Company since October
1996 and is responsible for the Company's human resources and provides
administrative support for the Company's offices. From 1993 to October 1996, Ms.
Hazell was Vice President of Human Resources and Administration for OAO
Corporation and from 1989 to 1993, Ms. Hazell was director of Human Resources
for OAO Corporation. From 1978 to 1989, Ms. Hazell coordinated and administered
corporate benefits programs for OAO Corporation. Ms. Hazell has over 15 years of
management and leadership experience in the Human Resources and Administration
fields.
ANDERSON O. INNISS has been a Vice President of the Company since July 1997.
From April 1996 to July 1997, Mr. Inniss was the Director of the Company's
healthcare services business. From October 1994 to April 1996, Mr. Inniss was a
Director of the Commercial Systems Group. From 1990 to September 1994, Mr.
Inniss was General Manager of Diagnostic Health Imaging Systems. From 1973 to
1988, Mr. Inniss was with the Greater Southeast Community Hospital in
Washington, D.C. where he held positions including Executive Director and
President of a subsidiary. Mr. Inniss has more than 24 years experience in the
organization and management of healthcare enterprises.
PATRICK H. O'NEILL has been a Vice President of the Company since March 1996
and is responsible for managing client engagements and quality assurance at
these engagements. From January 1993 to March 1996, Mr. O'Neill was manager of
the Company's first Megacenter Operations engagement with IBM. Mr. O'Neill has
over 30 years experience in the communications and IT technology fields. From
1987 to 1993, Mr. O'Neill was Director of Consolidated Logistics for OAO
Corporation.
SHIRAZ PATEL has been a Vice President of the Company since March 1996 and
is responsible for the customer team supporting Perot Systems. From 1991 to
March 1996, Mr. Patel held various leadership positions with Digital, including
Director of Outsourcing Services. Mr. Patel led Digital's value migration from a
product based, facilities management business into network centric outsourcing.
Prior to 1991, Mr. Patel also held positions as Vice President at Majesco
Software, Inc., Manager of Networks at Crown Life Insurance, Project Manager, of
Networks at Crown Life Insurance, Project Manager of Networks at Bank of
Montreal and Network Engineer at AT&T Canada.
STU SCHMIDT has been Chief Operating Officer of the Company's Canadian
subsidiary since March 1996. From 1995 to March 1996, Mr. Schmidt was a member
of the Company's international leadership team. From 1993 to 1995, Mr. Schmidt
assisted several corporations in developing new business in the government,
financial and private industry sectors. From 1977 to 1993, Mr. Schmidt held
various leadership positions at Digital, including Customer Services Sales
Manager of the National Capital District, National Account Manager for the IT
industry and the federal government and Field Service Unit Manager. From 1976 to
1977, Mr. Schmidt was a Field Service Engineer with NCR in Canada. Mr. Schmidt
has over 22 years experience in the IT field.
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JOHN T. WEISMAN has been a Vice President for the Company since 1996 and is
responsible for the Company's Northeastern U.S. Megacenter Operations. From 1993
to 1996, Mr. Weisman was Program Manager for the Commercial Systems Group of OAO
Corporation's Northeast Operations. From 1967 to 1993, Mr. Weisman held various
technical and management positions with IBM. Mr. Weisman has over 31 years of
experience in IT and project management.
DIRECTOR COMPENSATION
Directors who are not currently receiving compensation as officers,
employees or consultants of the Company or Safeguard are entitled to receive an
annual retainer fee of $6,000 ($7,000 with respect to the Chairman of the Audit
Committee), plus a fee of $1,000 and reimbursement of expenses for each meeting
of the Board of Directors and each Committee meeting that they attend in person.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to this offering, recommendations concerning the aggregate
compensation of the Company's employees were made to the Compensation Committee
by the Chief Executive Officer. The members of the Compensation Committee prior
to this offering were Thomas Lynch and Cecile Barker. There are currently no
compensation committee interlocks with other entities or insider participation
on the Compensation Committee.
EMPLOYMENT AGREEMENTS
The Company entered into an employment agreement with William R. Hill as of
April 1, 1996, which provides for the payment of an annual base salary of
$150,000, and incentive bonuses upon the achievement of certain objectives. For
1997, Mr. Hill is entitled to receive a maximum bonus of $210,000. This
agreement automatically continues for successive one year terms unless written
notice is provided at least 90 days prior to the applicable expiration date.
This agreement generally restricts Mr. Hill from competing with the Company
during the term of the employment agreement and for a period ending one year
after the termination of his employment. The Company may terminate Mr. Hill's
employment without cause provided that it must continue to pay Mr. Hill his base
salary for the remaining term of the agreement and for such additional period
that he remains bound by his non-competition covenants.
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning compensation
paid or accrued in fiscal 1996 with respect to the Company's Chief Executive
Officer and its three other most highly compensated executive officers for the
year ended December 31, 1996 who earned total salary and bonus in excess of
$100,000 (collectively, the "Named Officers"):
48
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION -------------
(1) SECURITIES
NAME AND ---------------------- UNDERLYING OTHER ANNUAL
PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION
- ------------------------------------------------- --------- ---------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C>
William R. Hill.................................. 1996 $ 152,042 $ 150,000 28,333 $ 1,440
Chief Executive Officer
and President
Edgar M. Fields.................................. 1996 154,027 50,000 100,000 0
Chief Operating Officer
Harvard V. Hopkins............................... 1996 121,120 30,000 66,667 1,600
Senior Vice President
Gerry Lalonde.................................... 1996 135,000 27,500 28,333 0
Senior Vice President
</TABLE>
- ------------------------
(1) The annual compensation described in this table reflects actual salary and
bonus paid to such executive officers in fiscal 1996. It does not include
medical, group life insurance or other benefits received by the Named
Officers which are available generally to all salaried employees of the
Company and certain prerequisites and other personal benefits, securities or
property received by the Named Officers which do not exceed the lesser of
$50,000 or 10% of the aggregate of any such Named Officer's salary and
bonus.
The following table provides information on stock options granted by the
Company in 1996 to the Named Officers. All Company option grants depicted below
were made pursuant to the Company's Amended and Restated 1996 Equity
Compensation Plan (the "Equity Compensation Plan").
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
REALIZABLE POTENTIAL
VALUE AT
ASSUMED ANNUAL RATE
PERCENT OF OF
NUMBER OF TOTAL STOCK PRICE
SHARES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXCERCISE OPTION TERM(1)
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION --------------------
NAME GRANTED FISCAL YEAR SHARE DATE 5% 10%
- --------------------------------------------------- ----------- ----------------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
William R. Hill.................................... 23,333 2.6% $ 2.00 4/1/2002 $ 19,272 $ 43,721
Edgar M. Fields.................................... 100,000 9.1 2.00 4/1/2002 68,019 154,312
Harvard V. Hopkins................................. 66,667 6.1 2.00 4/1/2002 45,246 102,875
Gerry Lalonde...................................... 28,333 2.6 2.00 4/1/2002 19,272 43,721
</TABLE>
- ------------------------
(1) The amounts shown are calculated assuming that the market value of the
Common Stock was equal to the exercise price per share as of the date of
grant of the options. This value is the approximate price per share at which
shares of the Common Stock would have been sold in private transactions on
or about the date on which the options were granted. The dollar amounts
under these columns assume a compounded annual market price increase for the
underlying shares of the Common Stock from the date of grant to the end of
the option term of 5% and 10%. This format is prescribed by the SEC and is
not intended to forecast future appreciation of shares of the Common Stock.
The actual value, if any, a Named Officer may realize, will depend on the
excess of the market price for shares of the
49
<PAGE>
Common Stock on the date the option is exercised over the exercise price.
Accordingly, there is no assurance that the value realized by a Named
Officer will be at or near the value estimated above. The following table
sets forth information concerning options exercised during 1996 and the
number and the hypothetical value of certain unexercised options of the
Company held by the Named Officers as of December 31, 1996. This table is
presented solely for purposes of complying with SEC rules and does not
necessarily reflect the amounts the optionee will actually receive upon any
sale of the shares acquired upon exercise of the options. Aggregated Option
Exercises and Last Fiscal Year-End Option Values.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
DECEMBER 31, 1996 DECEMBER 31, 1996(1)
SHARES ACQUIRED VALUE -------------------------- --------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------------------------- --------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
William R. Hill............................. -- -- -- 28,333 -- $ 84,999
Edgar M. Fields............................. -- -- 20,000 80,000 $ 60,000 240,000
Harvard V. Hopkins.......................... 167 $ 333 13,166 53,333 34,498 159,999
Gerry Lalonde............................... -- -- -- 28,333 -- 84,999
</TABLE>
- ------------------------
(1) Assumes, for presentation purposes only, a per share fair market value of
$5.00.
EQUITY COMPENSATION PLAN
The Company has adopted the Equity Compensation Plan pursuant to which it
has awarded and may in the future award stock options and equity compensation
awards to its employees, officers, non-employee directors and certain
independent contractors.
The Equity Compensation Plan provides for the issuance to employees,
non-employee directors and eligible independent contractors of up to 3,200,000
shares of Common Stock pursuant to the grant of incentive stock options
("ISOs"), non-qualified stock options ("NQSOs"), Stock Appreciation Rights
("SARs"), restricted stock and performance units. The Equity Compensation Plan
is administered by a Committee of directors appointed by the Board of Directors
(the "Committee"). Upon the completion of this offering, the Committee will
consist of two or more "outside directors" as defined under section 162(m) of
the Code and two or more "non-employee directors" as defined under Rule 16(b)(3)
of the Exchange Act. Subject to the provisions of the Equity Compensation Plan,
the Committee has the authority to determine to whom stock options and other
equity compensation awards will be granted and the terms of any such award,
including the number of shares subject to, and the vesting provisions of, the
award. Subject to the terms of the Equity Compensation Plan, the Committee may
also amend the terms of any outstanding award.
As of June 30, 1997, options to purchase a total of 1,375,875 shares of
Common Stock at a weighted average exercise price per share of $2.70 were
outstanding. Of these options, options to purchase 352,417 shares of Common
Stock were fully vested and exercisable as of June 30, 1997. As of June 30,
1997, the Company had an additional 1,824,125 shares of Common Stock available
for future grants under the Equity Compensation Plan.
The option price per share of Common Stock under the Equity Compensation
Plan is determined by the Committee at the time of each grant, provided,
however, that the option price per share for any ISO shall not be less than 100%
of the fair market value of the Common Stock at the time of the grant. If a
person who owns ten percent or more of the Company's Common Stock (a "10%
Stockholder") is granted an ISO, the exercise price shall not be less than 110%
of the fair market value on the date of grant. The term of each stock option may
not exceed ten years and in the case of a 10% stockholder, the term may not
exceed five years. Stock options shall be exercisable at such time or times as
shall be determined by the
50
<PAGE>
Committee. Payment for the exercise of an option shall be made by cash, check or
other instrument as the Committee may accept, including, in the discretion of
the Committee, unrestricted Common Stock of the Company. The Committee may also
allow an option holder to elect to cash out the excess of the fair market value
over the option price of all or a portion of a stock option. The Committee may
also grant, in its sole discretion, a "cashless exercise" feature for the
exercise of stock options.
The Board of Directors may amend the terms of the Equity Compensation Plan
are subject to the requirement to obtain shareholder approval of certain
amendments. Unless sooner terminated, the Equity Compensation Plan will
terminate in 2006.
Under Section 162(m) of the Code, the Company may be precluded from claiming
a federal income tax deduction for total remuneration in excess of $1.0 million
paid to the Chief Executive Officer or to any of the other four most highly
compensated officers in any one year. Total remuneration would include amounts
received upon the exercise of stock options granted under the Equity
Compensation Plan. An exception does exist, however, for "performance-based
compensation," including amounts received upon the exercise of stock options
pursuant to a plan approved by stockholders that meets certain requirements. The
Equity Compensation Plan is intended to meet the requirements of Treasury
Regulation section 1.162-27(f), and the options and other awards granted under
the Equity Compensation Plan are intended to meet the requirements of
"performance-based compensation."
EMPLOYEE STOCK PURCHASE PLAN
The Company intends to consider the adoption of an employee stock purchase
plan during the first six months of 1998 and may submit such a plan for
stockholder approval at its annual meeting of the stockholders held in such
year.
51
<PAGE>
CERTAIN TRANSACTIONS
Pursuant to the terms of a stock purchase agreement dated April 8, 1996 (the
"1996 Purchase") among the Company, OAO Corporation, OAO Services, Inc. ("OAO
Services") and Safeguard, Safeguard purchased from the Company 5,000,000 shares
of the Company's Common Stock for an investment in the Company of $5.0 million
plus a payment of an additional $5.0 million to OAO Services, a subsidiary of
OAO Corporation, in return for a grant by OAO Services to the Company of an
option (the "OAO Services Option") to purchase all of the shares of common stock
of OAO Services at an exercise price based on revenues and earnings levels of
OAO Services for the 12 months prior to the date of exercise. In addition,
Safeguard granted to Cecile D. Barker, the majority owner of OAO Corporation and
a director and significant stockholder of the Company, an option exercisable for
1,000,000 shares of Common Stock held by Safeguard for an aggregate exercise
price of $2,000 (the "Barker Option"). The Barker Option was granted at the time
of Safeguard's investment by Safeguard to Barker, as a
shareholder-to-shareholder transaction. This option was to become exercisable
upon the achievement of certain milestones and was intended to serve as an
earnout feature between these two shareholders. Pursuant to the terms of the
1996 Purchase, Safeguard, William R. Hill and Cecile D. Barker were granted
certain registration rights with respect to their shares of Common Stock in the
Company. See "Shares Eligible for Future Sale-- Registration Rights."
Pursuant to the terms of a Stock Purchase Agreement dated as of July 11,
1997 between Safeguard and Cecile D. Barker, Safeguard purchased 1,000,000
shares of Common Stock from Mr. Barker for $4.2 million. Contemporaneous with
the consummation of this transaction, Mr. Barker exercised the Barker Option. In
addition, pursuant to the terms of an Option Cancellation Agreement by and among
the Company, Safeguard, Cecile D. Barker, OAO Corporation and OAO Services, the
OAO Services Option was canceled in consideration of the right to receive
certain future payments in the event of any sale of OAO Corporation or any
public offering by OAO Corporation which occurs prior to April 8, 2000. In
particular, the Company and Safeguard are each to receive from OAO Corporation
one-half of (i) the greater of $1.0 million or an amount equal to the lesser of
$3.0 million or three percent of the total sales price from the sale of both OAO
Corporation and OAO Services which occurs prior to April 8, 2000, (ii) the
greater of $1.0 million or an amount equal to the lesser of $2.0 million or
three percent of the total sales price from any sale of OAO Corporation which
occurs prior to April 8, 2000 and at such time that OAO Services is not an
affiliate of OAO Corporation, (iii) the greater of $1.0 million or an amount
equal to the lesser of $3.0 million or three percent of the market
capitalization of OAO Corporation if OAO Corporation consummates an initial
public offering of its equity securities prior to April 8, 2000 (an "OAO
Corporation IPO"), or (iv) the greater of $1.0 million or an amount equal to the
lesser of $2.0 million or two percent of the market capitalization of OAO
Corporation if OAO Services is no longer affiliated with OAO Corporation at the
time of the OAO Corporation IPO. The market capitalization of OAO Corporation
would be based on the offering price of the equity securities in the OAO
Corporation IPO.
Pursuant to the terms of an Administrative Services Agreement between the
Company and Safeguard, the Company paid Safeguard $250,000 in 1996 in
consideration of administrative support services, including management
consultation, investor relations, legal services and tax planning. The Company
expects to pay Safeguard approximately $500,000 in 1997 for such services.
Pursuant to the terms of a Transition Services and Operations Services
Agreement dated as of April 8, 1996, the Company paid OAO Corporation $300,000
in 1996 in consideration of certain transition and operations services provided
to the Company. Cecile D. Barker is the majority owner of OAO Corporation.
52
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Common Stock as of the date of this Prospectus and as adjusted
to reflect the sale of the shares offered hereby (i) by each selling
stockholder, (ii) by each person who is known by the Company to own beneficially
more than 5% of the outstanding shares of Common Stock, (iii) by each director
of the Company, (iv) by each Named Officer and (v) by all directors and
executive officers of the Company as a group. Unless otherwise indicated below,
to the knowledge of the Company, all persons listed below have sole voting and
investment power with respect to their shares of Common Stock, except to the
extent authority is shared by spouses under applicable law.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP NUMBER OF BENEFICIAL OWNERSHIP
PRIOR TO THE OFFERING SHARES TO AFTER THE OFFERING (1)
------------------------- BE -------------------------
NUMBER SOLD IN THE NUMBER OF
NAME AND ADDRESS OF SHARES PERCENTAGE OFFERING(11) SHARES PERCENTAGE
- -------------------------------------------------- ---------- ------------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Safeguard Scientifics, Inc.(1).................... 5,000,000 50.0 -- 5,000,000 30.8
800 The Safeguard Building
435 Devon Park Drive
Wayne, PA 19087
Cecile D. Barker(2)............................... 3,997,500 40.0 359,260 3,638,240 22.4
10816 Barnwood Lane
Potomac, MD 20854
William R. Hill(3)................................ 757,083 7.6 62,870 694,212 4.3
Hubert Reid(4).................................... 316,667 3.1 62,870 253,797 1.6
Edgar M. Fields(5)................................ 59,625 * -- 59,625 *
Harvard V. Hopkins, Jr.(6)........................ 34,542 * -- 34,542 *
Frank B. Foster, III(7)........................... 4,167 * -- 4,167 *
Jerry L. Johnson(8)............................... -- -- -- -- --
Thomas C. Lynch(9)................................ -- -- -- -- --
Yvonne Brathwaite Burke........................... -- -- -- -- --
John Lehman....................................... -- -- -- -- --
All executive officers and directors as a group 5,020,333 48.9 485,000 4,597,428 27.9
(16 persons)(10)................................
</TABLE>
- ------------------------
* Less than 1% of the outstanding Common Stock
(1) The shares are held of record by Safeguard Scientifics (Delaware), Inc., a
wholly-owned subsidiary of Safeguard. Includes 274,000 shares of Common
Stock granted by Safeguard to certain of its employees pursuant to a long
term incentive plan (the "LTIP"). Safeguard will continue to exercise voting
control of these shares until the occurrence of certain vesting
requirements. The largest shareholder of Safeguard is Warren V. Musser, the
chairman and chief executive officer of Safeguard, who is the record holder
of approximately 9.5% of the total Safeguard common shares outstanding.
Excludes 2,250,000 shares of Common Stock pledged to Safeguard to secure a
$4.5 million loan made by Safeguard to Mr. Barker. Includes 2,250,000 shares
of Common Stock pledged to Safeguard to secure a $4.5 million loan made by
Safeguard to Mr. Barker.
(2) Includes 2,250,000 shares of Common Stock pledged to Safeguard to secure a
$4.5 million loan made by Safeguard to Mr. Barker.
(3) Includes 7,083 shares of Common Stock issuable pursuant to presently
exercisable options. Mr. Hill's address is 7500 Greenway Center Drive,
Greenbelt, Maryland 20770.
(4) Includes 66,667 shares of Common Stock issuable pursuant to presently
exercisable options and options exercisable upon the completion of this
offering.
53
<PAGE>
(5) Consists of 59,625 shares of Common Stock issuable pursuant to presently
exercisable options.
(6) Includes 34,375 shares of Common Stock issuable pursuant to presently
exercisable options and options exercisable upon the completion of this
offering.
(7) Consists of 4,167 shares of Common Stock issuable pursuant to presently
exercisable options.
(8) Excludes shares of Common Stock owned by Safeguard, of which Mr. Johnson is
a Senior Vice President. Mr. Johnson disclaims beneficial ownership of such
shares. Excludes 30,000 shares of Common Stock allocated to Mr. Johnson
under the LTIP, of which Mr. Johnson has neither dispositive nor voting
power.
(9) Excludes shares of Common Stock owned by Safeguard, of which Mr. Lynch is a
Senior Vice President. Mr. Lynch disclaims beneficial ownership of such
shares. Excludes 30,000 shares of Common Stock allocated to Mr. Lynch under
the LTIP, of which Mr. Lynch has neither dispositive nor voting power.
(10) Includes, in the aggregate, 278,038 shares of Common Stock issuable
pursuant to presently exercisable options.
(11) These numbers do not include 478,240, 124,630 and 37,130 shares
transferable by Mr. Barker, Mr. Hill and Mr. Reid, respectively, pursuant to
the underwriters' over-allotment option.
54
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 25,000,000 shares of
Common Stock, par value $.01 per share, and 5,000,000 shares of preferred stock,
par value $.01 per share.
COMMON STOCK
As of June 30, 1997, there were 10,000,583 shares of Common Stock
outstanding. After giving effect to the issuance of the 6,235,000 shares of
Common Stock offered by the Company hereby, there will be 16,235,583 shares of
Common Stock outstanding.
Holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders and do not have
cumulative voting rights. The election of directors is determined by a plurality
of the votes cast. Accordingly, holders of a majority of the shares of Common
Stock entitled to vote in any election of directors may elect all of the
directors standing for election. See "Risk Factors--Control by Principal
Stockholders." Except as required by law, all other matters are determined by
the vote of the holders of the majority of the stock having voting power present
in person or represented by proxy at the meeting. Holders of Common Stock are
entitled to receive ratably such dividends, if any, as may be declared by the
Board of Directors out of funds legally available therefor, subject to any
preferential dividend rights of outstanding preferred stock. Upon the
liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to receive ratably the net assets of the Company available
after the payment of all debts and other liabilities. Holders of the Common
Stock have no preemptive, subscription, redemption or conversion rights. The
outstanding shares of Common Stock are, and the shares offered by the Company in
this offering will be, when issued and paid for, fully paid and nonassessable.
The rights, preferences and privileges of holders of Common Stock are subject
to, and may be adversely affected by, the rights of the holders of shares of any
series of preferred stock which the Company may designate and issue in the
future.
PREFERRED STOCK
The Company, by resolution of the Board of Directors and without any further
vote or action by the stockholders, has the authority, subject to certain
limitations prescribed by law, to issue from time to time up to an aggregate of
5,000,000 shares of preferred stock in one or more classes or series and to
determine the designation and the number of shares of any class or series as
well as the voting rights, preferences, limitations and special rights, if any,
of the shares of any such class or series, including the dividend rights,
dividend rates, conversion rights and terms, voting rights, redemption rights
and terms, and liquidation preferences. The issuance of preferred stock may have
the effect of delaying, deferring or preventing a change of control of the
Company. As of the date of this Prospectus, there are no shares of preferred
stock outstanding, and the Company has no plans to issue any shares of preferred
stock.
RIGHTS
The Company is granting on the date hereof the rights to the holders of
Safeguard common shares. The rights, subject to minimum exercise requirements,
are each exercisable for one share of Common Stock at an exercise price of $5.00
per share. Persons may not exercise rights for fewer than 20 shares of Common
Stock. For purposes of this offering, a person that holds Safeguard common
shares in multiple accounts must meet the 20 share minimum purchase requirement
in each account. Accordingly, persons holding fewer than 20 rights in an account
should consider the advisability of consolidating their rights in one account,
selling rights, or purchasing additional rights to comply with the minimum
exercise requirements of this offering. Rights may be transferred, in whole or
in part, by endorsing and delivering to ChaseMellon a rights certificate that
has been properly endorsed for transfer, with instructions to reissue the
rights, in whole or in part, in the name of the transferee. ChaseMellon will
reissue certificates for the transferred rights to the transferee, and will
reissue a certificate for the balance, if any, to the holder of the
55
<PAGE>
rights, in each case to the extent it is able to do so prior to the expiration
date of the rights. This offering will terminate and the rights will expire at
5:00 p.m., New York City time, on the expiration date, which is November 25,
1997. After the expiration date of the rights, unexercised rights will be null
and void. For more information about the rights and the offering process,
reference should be made to "The Offering" and to "Risk Factors--Cancellation of
Rights Offering."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services, L.L.C., 85 Challenger Road, Overpeck Centre, Ridgefield
Park, New Jersey 07660.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 16,235,583 shares of
Common Stock outstanding, excluding 1,375,875 shares of Common Stock subject to
stock options outstanding as of June 30, 1997 and any stock options granted by
the Company after June 30, 1997. Of these shares, the Common Stock sold in this
offering, except for certain shares described below, will be freely tradeable
without restriction or further registration under the Act. The remaining
9,515,583 shares of Common Stock (the "Restricted Shares") were sold by the
Company in reliance on exemptions from the registration requirements of the Act
and are "restricted securities" as defined in Rule 144 and may not be sold in
the absence of registration under the Act unless an exemption is available,
including an exemption afforded by Rule 144 or Rule 701. See "Risk
Factors--Shares Eligible for Future Sale."
In general, under Rule 144 as currently in effect, if two years have elapsed
since the date of acquisition of restricted securities from the Company or any
affiliate and the acquiror or subsequent holder is not deemed to have been an
affiliate of the Company for at least 90 days prior to a proposed transaction,
such person would be entitled to sell such shares under Rule 144(k) without
regard to the limitations described below. If one year has elapsed since the
date of acquisition of restricted securities from the Company or any affiliate,
the acquiror or subsequent holder thereof (including persons who may be deemed
affiliates of the Company) is entitled to sell within any three-month period a
number of shares that does not exceed the greater of 1% of the then-outstanding
shares of Common Stock or the average weekly trading volume in the Common Stock
on the Nasdaq National Market during the four calendar weeks preceding such
sale. Sales under Rule 144 are also subject to certain provisions regarding the
manner of sale, notice requirements and the availability of current public
information about the Company. Without considering the contractual restrictions
described below, approximately (i) 9,515,168 Restricted Shares will be eligible
for sale ninety days after the date of this Prospectus, subject to manner of
sale and other resale conditions imposed by Rule 144, and (ii) 415 Restricted
Shares will be eligible for future sale subject to the holding period and other
conditions imposed by Rule 144. Certain restrictions apply to any shares of
Common Stock purchased in this offering by affiliates of the Company, which may
generally only be sold in compliance with the limitations of Rule 144, except
for the holding period requirements thereunder. See "Risk Factors--Shares
Eligible for Future Sale."
Rule 144A under the Act provides a nonexclusive safe harbor exemption from
the registration requirements of the Act of specified resales of restricted
securities to certain institutional investors. In general, Rule 144A allows
unregistered resales of restricted securities to a "qualified institutional
buyer," which generally includes an entity, acting for its own account or for
the account of other qualified institutional buyers, that in the aggregate owns
or invests on a discretionary basis at least $100 million in securities of
issuers that are not affiliated with the entity, as long as these securities
when issued were not of the same class as securities listed on a national
securities exchange or quoted on Nasdaq. The shares of Common Stock outstanding
as of the date of this Prospectus would be eligible for resale under Rule 144A
because such shares, when issued, were not of the same class as any listed or
quoted securities.
56
<PAGE>
STOCK OPTIONS
As of June 30, 1997 there were outstanding options to purchase an aggregate
of 1,375,875 shares of Common Stock (of which 352,417 were exercisable at June
30, 1997) at a weighted average exercise price of $2.70 per share. As of June
30, 1997, the Company had an additional 1,824,125 shares of Common Stock
available for future grant under the Equity Compensation Plan. The holders of
options which are presently exercisable to purchase a total of 278,205 shares
are subject to Lock-Up Agreements, which restrict, until after the Lock-Up
Expiry Date (without the prior written consent of Wheat, First Securities,
Inc.), the holders' ability to sell or otherwise dispose of Common Stock
acquired upon the exercise of such options. See "Management--Equity Compensation
Plan."
The Company issued options and underlying shares of Common Stock to
employees of the Company who were not executive officers and directors of the
Company pursuant to Rule 701. Under Rule 701, employees of the Company who prior
to this offering purchased shares upon the exercise of options grant under the
Equity Compensation Plan are entitled to sell such shares without having to
comply with the public information, holding period, volume limitation or notice
provisions of Rule 144 and they may begin making such sales on the 90th day
after the date of this Prospectus. Rule 701 also permits the shares subject to
unexercised options granted under the Equity Compensation Plan to be sold upon
exercise without having to comply with the foregoing provisions of Rule 144. As
of June 30, 1997, approximately 1,458,958 shares of Common Stock and shares of
Common Stock subject to unexercised options will be eligible for sale under Rule
701 by Company employees (subject to applicable vesting provisions).
It is anticipated that a Registration Statement on Form S-8 covering the
Common Stock that may be issued pursuant to the options granted under the Equity
Compensation Plan will be filed prior to the Lock-Up Expiry Date and that shares
of Common Stock that are so acquired and offered thereafter pursuant to this
Registration Statement generally may be resold in the public market without
restriction or limitation, except in the case of affiliates of the Company, whom
generally may only resell such shares in accordance with each provision of Rule
144, other than the holding period requirement.
LOCK-UP AGREEMENTS
The Principal Stockholders, who will beneficially own 9,330,087 shares of
Common Stock after the completion of this offering, and each other executive
officer, director and nominee for director of the Company have agreed with the
underwriters that they will not sell or otherwise dispose of any shares of
Common Stock until after the Lock-Up Expiry Date without the prior written
consent of Wheat, First Securities, Inc. In addition, Warren V. Musser has
agreed that he and/or his assignees will not sell or otherwise dispose of
280,000 shares of Common Stock until after the Lock-Up Expiry Date without the
prior written consent of Wheat, First Securities, Inc.
REGISTRATION RIGHTS
The Company has granted certain registration rights to Safeguard, Cecile D.
Barker and William R. Hill. In particular, under certain circumstances and
subject to certain limitations, Safeguard can require the Company to register
under the Act (i) such number of shares of Common Stock held by Safeguard, Mr.
Barker or Mr. Hill having a market value of at least $5.0 million, provided that
the Company is not required to effect more than one such registration, and (ii)
on Form S-3 such number of shares of Common Stock having a market value of at
least $1.0 million, provided that the Company is not required to effect more
than one such registration during any twelve-month period. Safeguard, Mr. Barker
and Mr. Hill were also granted certain "piggy-back" registration rights whereby
under certain circumstances and subject to certain conditions, they may include
shares of Common Stock in any registration of shares of Common Stock under the
Act.
57
<PAGE>
UNDERWRITING
The Company, the selling stockholders and the underwriters have entered into
the standby underwriting agreement on the date hereof, pursuant to which the
underwriters are required, subject to certain terms and conditions (all of which
are set forth below), to purchase the shares of Common Stock offered in the
rights offering and not purchased (the "Excess Unsubscribed Shares") in
accordance with the percentages set forth below. If all of the rights are
exercised there will be no Excess Unsubscribed Shares and the underwriters will
not be required to purchase any shares of Common Stock.
<TABLE>
<CAPTION>
% OF UNDERWRITER
UNDERWRITERS SHARES
- ---------------------------------------------------------------------------- ---------------------
<S> <C>
Wheat, First Securities, Inc................................................ 55%
Janney Montgomery Scott Inc................................................. 45%
</TABLE>
The underwriters have agreed, severally and not jointly, subject to the
condition that the Company and the selling stockholders comply with their
obligations under the standby underwriting agreement and subject to the
underwriters' right to terminate their obligations under the standby
underwriting agreement (as specified below), to purchase all of the Excess
Unsubscribed Shares. The Company will pay the underwriters the financial
advisory fee equal to 3% of the exercise price for each share of Common Stock
included in this offering. The financial advisory fee is for services and advice
rendered in connection with the structuring of this offering, valuation of the
business of the Company, and financial advice to the Company before and during
this offering. An additional fee of 4% of the exercise price will be paid to the
underwriters (i) for each share of Common Stock purchased by the underwriters
pursuant to the standby underwriting agreement and (ii) for each share of Common
Stock purchased upon the underwriters' exercise of rights if such rights were
purchased by the underwriters at a time when the Common Stock was trading (on a
"when issued" basis) at a per share price of less than 120% of the exercise
price or if the underwriters purchase such rights with Safeguard's prior
acknowledgment that it would be entitled to receive the underwriting discount
for Common Stock purchased pursuant to the exercise of such rights. In addition,
the Company has agreed to pay the underwriters a non-accountable expense
allowance in the aggregate amount of $200,000, provided, however, such
non-accountable expense allowance shall be reduced to $100,000 or zero if, on
the expiration date of the rights, the closing price for the Common Stock traded
on a "when issued" basis is at least $7.25 per share or greater than $8.25 per
share, respectively. The selling stockholders have granted to the underwriters a
20-day option commencing on the expiration date to purchase a maximum of 640,000
additional shares of Common Stock at a per share price equal to the exercise
price less a financial advisory fee of 3% of the exercise price and an
underwriting discount of 4% of the exercise price. The underwriters may exercise
such option in whole or in part only to cover over-allotments made in connection
with the sale of shares of Common Stock by the underwriters.
Prior to the expiration date of the rights, the underwriters may offer
shares of Common Stock on a when-issued basis, including shares to be acquired
through the purchase and exercise of rights, at prices set from time to time by
the underwriters. It is not contemplated that this offering price set on any
calendar day will be increased more than once during such day. After the
expiration date of the rights, the underwriters may offer shares of Common
Stock, whether acquired pursuant to the standby underwriting agreement, the
exercise of the rights or the purchase of Common Stock in the market, to the
public at a price or prices to be determined. The underwriters may thus realize
profits or losses independent of the underwriting discount and the financial
advisory fee. Shares of Common Stock subject to the standby underwriting
agreement will be offered by the underwriters when, as and if sold to, and
accepted by, the underwriters and will be subject to their right to reject
orders in whole or in part.
Prior to this offering, there has been no public market for the Common Stock
or the rights. Consequently, the exercise price was determined by negotiations
among the Company, the selling stockholders and the underwriters. In determining
the exercise price, the underwriters, the selling stockholders and the Board of
Directors of the Company considered such factors as the future prospects
58
<PAGE>
and historical growth rate in revenues and earnings of the Company, its industry
in general and the Company's position in its industry; revenues, earnings and
certain other financial and operating information of the Company in recent
periods; market valuations of the securities of companies engaged in activities
similar to those of the Company; the management of the Company; and, with
respect to the Company, the advice of the underwriters.
The underwriters will be prohibited from engaging in any market making
activities with respect to the Company's when-issued Common Stock and Common
Stock until the underwriters have completed their participation in the
distribution of shares offered hereby. As a result, the underwriters may be
unable to provide a market for the Company's when-issued Common Stock and Common
Stock should they desire to do so, during certain periods while the rights are
exercisable.
In connection with this offering, the underwriters and certain selling group
members may engage in stabilizing, syndicate covering transactions or other
transactions that stabilize, maintain or otherwise affect the market price of
the Common Stock. A "syndicate covering transaction" is the placing of any bid
or the effecting of any purchase on behalf of the underwriters to reduce a short
position created in connection with this offering. After the opening of
quotations for the Common Stock on the Nasdaq National Market, stabilizing bids
for the purpose of preventing or retarding a decline in the market price may be
initiated by the underwriters or selling group members in any market at a price
no higher than the last independent transaction price for the Common Stock and
then maintained, reduced or raised to follow the independent market. Such
transactions may stabilize the market price of the Common Stock at a level above
that which might otherwise prevail and, if commenced, may be discontinued at any
time.
The Company and the selling stockholders have agreed to indemnify the
underwriters against certain liabilities arising out of or based upon
misstatements or omissions in this Prospectus or the Registration Statement of
which this Prospectus is a part and certain other liabilities, including
liabilities under the Act, and to contribute to certain payments that the
underwriters may be required to make.
The underwriters may terminate their obligations under the standby
underwriting agreement (i) if any calamitous domestic or international event or
act or occurrence has disrupted the general securities market in the United
States; (ii) if trading in the Common Stock (on a when-issued basis) shall have
been suspended by the SEC or Nasdaq; (iii) if trading on the New York Stock
Exchange, the American Stock Exchange or the Nasdaq National Market or in the
over-the-counter market shall have been suspended, or minimum or maximum prices
for trading shall have been fixed, or maximum ranges for prices for securities
shall have been required on the over-the-counter market by the NASD or by order
of the SEC or any other government authority having jurisdiction; (iv) if the
United States shall have become involved in a war or major hostilities which, in
the underwriters' opinion, will affect the general securities market in the
United States; (v) if a banking moratorium has been declared by any Maryland,
New York, Pennsylvania, Virginia or Federal authority; (vi) if a moratorium in
foreign exchange trading (with respect to a foreign exchange on which the
Company's securities are traded) has been declared; (vii) if the Company shall
have sustained a loss material to the Company by fire, flood, accident,
hurricane, earthquake, theft, sabotage or other calamity or malicious act,
whether or not such loss shall have been insured, or from any labor dispute or
any legal or governmental proceeding; (viii) if there shall be such material
adverse market conditions (whether occurring suddenly or gradually between the
date of this Prospectus and the closing of this offering) affecting markets
generally as in the underwriters' reasonable judgment would make it inadvisable
to proceed with this offering, sale or delivery of the shares of Common Stock
offered hereby; or (ix) if there shall have been such material adverse change,
or any development involving a prospective material adverse change, in the
financial condition, net worth or results of operations of the Company since
December 31, 1996 or in the business prospects or condition of the Company since
the date of this Prospectus, or that materially and adversely impacts the
standby underwriting agreement.
The Company has agreed that, without the prior written consent of Wheat,
First Securities, Inc., it will not offer, sell, grant any option for the sale
of, or otherwise dispose of any shares of Common Stock (or
59
<PAGE>
securities convertible into shares of Common Stock) (collectively, the
"Securities") acquired in this offering or held by it as of the date hereof
until after the Lock-Up Expiry Date, other than (i) Common Stock to be sold in
this offering, (ii) Company option issuances and sales of Common Stock pursuant
to the Equity Compensation Plan and (iii) Securities issued as consideration for
an acquisition if the party being issued the Securities agrees not to transfer,
sell, offer for sale, contract or otherwise dispose of such Securities until
after the Lock-Up Expiry Date. The Principal Stockholders and each other
executive officer and director of the Company, who beneficially will in the
aggregate own approximately 9,642,867 shares of Common Stock after the
completion of this offering, have agreed with the underwriters that they will
not sell or otherwise dispose of any shares of Common Stock until after the
Lock-Up Expiry Date without the prior written consent of Wheat, First
Securities, Inc. In addition, Warren V. Musser has agreed that he (and/or his
assignees) will not sell or otherwise dispose of 280,000 shares of Common Stock
until after the Lock-Up Expiry Date without the prior written consent of Wheat,
First Securities, Inc. See "Management--Equity Compensation Plan" and "Shares
Eligible for Future Sale."
LEGAL MATTERS
The validity of the rights and shares of Common Stock offered hereby will be
passed upon for the Company by Morgan, Lewis & Bockius LLP, Philadelphia,
Pennsylvania. Certain legal matters in connection with this offering are being
passed upon for the underwriters by Drinker Biddle & Reath LLP, Philadelphia,
Pennsylvania.
EXPERTS
The consolidated financial statements and financial statement schedule of
the Company as of December 31, 1995 and 1996 and for the years ended December
31, 1994, 1995 and 1996 included in this Prospectus and elsewhere in the
Registration Statement have been audited by Deloitte & Touche LLP, independent
auditors as stated in their reports appearing herein or elsewhere in the
Registration Statement, and have been so included in reliance upon the report of
such firm, given upon their authority of experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (including all amendments thereto, the "Registration Statement") under the
Act with respect to the Common Stock and rights offered hereby. As permitted by
the rules and regulations of the Commission, this Prospectus omits certain
information contained in the Registration Statement. For further information
with respect to the Company and the Common Stock and rights offered hereby,
reference is hereby made to the Registration Statement and to the exhibits and
schedules filed therewith. Statements contained in this Prospectus regarding the
contents of any agreement or other document filed as an exhibit to the
Registration Statement are not necessarily complete, and in each instance
reference is made to the copy of such agreement filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference. The Registration Statement, including the exhibits and schedules
thereto, may be inspected at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, DC 20549, and copies of all or
any part thereof may be obtained from such office upon payment of the prescribed
fees. In addition, the Commission maintains a Web site at http://www.sec.gov
that contains reports, proxy statements, information statements and other
information regarding the Company.
60
<PAGE>
OAO TECHNOLOGY SOLUTIONS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Financial Statements:
Independent Auditors' Report............................................................................. F-2
Consolidated Balance Sheets at December 31, 1995 and 1996 and June 30, 1997 (unaudited).................. F-3
Consolidated Statements of Income for the years ended December 31, 1994, 1995 and 1996 and the Six Months
Ended June 30, 1996 and 1997 (unaudited)............................................................... F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1994, 1995 and 1996 and
the six months ended June 30, 1997 (unaudited)......................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996 and the six
months ended June 30, 1996 and 1997 (unaudited)........................................................ F-6
Notes to Consolidated Financial Statements............................................................... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
OAO Technology Solutions, Inc.:
We have audited the accompanying consolidated balance sheets of OAO
Technology Solutions, Inc. and subsidiaries, as of December 31, 1995 and 1996,
and the related consolidated statements of income, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of OAO Technology Solutions,
Inc. and subsidiaries, as of December 31, 1995 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Washington, D.C.
May 5, 1997, except for Notes 16 and 17, as to which the
dates are July 11, 1997 and September 26, 1997, respectively
F-2
<PAGE>
OAO TECHNOLOGY SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31
-------------------- JUNE 30,
1995 1996 1997
--------- --------- -------------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash.......................................................... $ 9 $ 876 $ 390
Accounts receivable:
Contracts:
Billed........................................................ 1,874 5,031 9,892
Unbilled...................................................... 157 4,831 6,267
--------- --------- -------------
2,031 9,862 16,159
--------- --------- -------------
Deferred income taxes......................................... 441 352 250
Other current assets.......................................... 37 330 689
--------- --------- -------------
Total current assets.......................................... 2,518 11,420 17,488
Property and Equipment--Net................................... 659 1,384 2,586
Due from OAO Corporation...................................... 2,624 -- --
Deposits and Other Assets..................................... -- 24 131
--------- --------- -------------
$ 5,801 $ 12,828 $ 20,205
--------- --------- -------------
--------- --------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank line of credit........................................... $ -- $ -- $ 4,000
Accounts payable.............................................. 533 1,759 2,081
Income taxes payable.......................................... -- 141 541
Accrued expenses.............................................. 2,606 3,681 4,941
Unearned revenue.............................................. 757 931 919
Current maturities of long-term debt.......................... 68 190 501
--------- --------- -------------
Total current liabilities..................................... 3,964 6,702 12,983
Long-term Debt................................................ 183 286 150
Commitments and Contingencies
Stockholders' Equity: Common stock, par value $.01 per share,
authorized, 10,000,000 shares in 1996 (20,000,000 at June
30, 1997--unaudited); issued and outstanding, 10,000,000
shares in 1996 (10,000,583 at June 30, 1997--unaudited)..... 50 100 100
Additional paid-in capital.................................... -- 4,950 4,950
Retained earnings............................................. 1,604 790 2,022
--------- --------- -------------
Total stockholders' equity.................................... 1,654 5,840 7,072
--------- --------- -------------
$ 5,801 $ 12,828 $ 20,205
--------- --------- -------------
--------- --------- -------------
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
OAO TECHNOLOGY SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1996 1997
------------ ------------ ------------- ------------- -------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues............................... $ 22,472 $ 38,229 $ 57,891 $ 24,321 $ 39,338
Direct Costs........................... 16,503 28,548 43,896 18,170 30,773
------------ ------------ ------------- ------------- -------------
Gross Profit........................... 5,969 9,681 13,995 6,151 8,565
Selling, General and Administrative.... 4,743 7,338 10,824 4,874 6,315
------------ ------------ ------------- ------------- -------------
Income from Operations................. 1,226 2,343 3,171 1,277 2,250
Interest Expense....................... 61 115 46 30 87
------------ ------------ ------------- ------------- -------------
Income Before Income Taxes............. 1,165 2,228 3,125 1,247 2,163
Provision for Income Taxes............. 466 1,139 1,315 522 931
------------ ------------ ------------- ------------- -------------
Net Income............................. $ 699 $ 1,089 $ 1,810 $ 725 $ 1,232
------------ ------------ ------------- ------------- -------------
------------ ------------ ------------- ------------- -------------
Pro Forma Net Income Per Common and
Common Share Equivalents (Note 2).... $ 0.17 $ 0.07 $ 0.12
------------- ------------- -------------
Pro Forma Weighted Average Number of
Common and Common Share Equivalents
Outstanding (Note 2)................. 10,421,880 10,421,880 10,414,410
------------- ------------- -------------
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
OAO TECHNOLOGY SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996 AND
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
(DOLLARS AND SHARES IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
----------------------
<S> <C> <C> <C> <C> <C>
ADDITIONAL TOTAL
PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
--------- ----------- ----------- ----------- -------------
BALANCE, JANUARY 1, 1994................................. 5,000 $ 50 $ -- $ 207 $ 207
Distribution to OAO Corporation.......................... -- -- -- (391) (391)
Net income............................................... -- -- -- 699 699
--------- ----- ----------- ----------- ------
BALANCE, DECEMBER 31, 1994............................... 5,000 50 -- 515 515
Net income............................................... -- -- -- 1,089 1,089
--------- ----- ----------- ----------- ------
BALANCE, DECEMBER 31, 1995............................... 5,000 50 -- 1,604 1,604
Net income............................................... -- -- -- 1,810 1,810
Sale of common stock..................................... 5,000 50 4,950 -- --
Distribution to OAO Corporation.......................... -- -- -- (2,624) (2,624)
--------- ----- ----------- ----------- ------
BALANCE, DECEMBER 31, 1996............................... 10,000 100 4,950 790 5,840
Exercise of stock options (unaudited).................... 1 -- -- -- --
Net income (unaudited)................................... -- -- -- 1,232 1,232
--------- ----- ----------- ----------- ------
BALANCE, JUNE 30, 1997 (UNAUDITED)....................... 10,001 $ 100 $ 4,950 $ 2,022 $ 7,072
--------- ----- ----------- ----------- ------
--------- ----- ----------- ----------- ------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
OAO TECHNOLOGY SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:............................. $ 699 $ 1,089 $ 1,810 $ 725 $ 1,232
Net income
Adjustments to reconcile net income to cash flows (used in)
provided by operating activities:
Depreciation and amortization..................................... 19 21 245 50 210
Deferred income taxes............................................. -- 14 89 441 102
Changes in assets and liabilities:
Accounts receivable............................................... (1,257) (1,198) (7,831) (4,793) (6,297)
Other current assets.............................................. (27) (37) (293) (5) (359)
Due from OAO Corporation.......................................... (738) (1,982) -- -- --
Deposits and other assets......................................... (138) -- (24) -- (107)
Accounts payable.................................................. 138 393 331 (246) 322
Accrued expenses.................................................. 1,128 1,349 1,970 (97) 1,260
Unearned revenue.................................................. 213 702 174 (30) (12)
Income taxes payable.............................................. -- -- 141 -- 400
--------- --------- --------- --------- ---------
Net cash (used in) provided by operating activities............... 37 351 (3,388) (3,955) (3,249)
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property and equipment and software.............. (51) (580) (970) (298) (1,412)
--------- --------- --------- --------- ---------
Net cash used in investing activities............................. (51) (580) (970) (298) (1,412)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of stock....................................... -- -- 5,000 5,000 --
Payments on long-term debt........................................ -- (13) (57) (46) --
Borrowings on long-term debt...................................... 13 250 282 192 175
Borrowing on line of credit....................................... -- -- -- -- 4,000
--------- --------- --------- --------- ---------
Net cash provided by financing activities......................... 13 237 5,225 5,146 4,175
--------- --------- --------- --------- ---------
Net increase (decrease) in cash................................... (1) 8 867 893 (486)
Cash, beginning of period......................................... 2 1 9 9 876
--------- --------- --------- --------- ---------
Cash, end of period............................................... $ 1 $ 9 $ 876 $ 902 $ 390
--------- --------- --------- --------- ---------
SUPPLEMENTAL INFORMATION:
Cash payments for interest........................................ $ -- $ 116 $ 45 $ 30 $ 87
--------- --------- --------- --------- ---------
Cash payments for income taxes.................................... $ -- $ -- $ 1,085 $ -- $ 535
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
OAO TECHNOLOGY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996 AND
SIX MONTHS ENDED JUNE 30, 1996 AND 1997 (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. DESCRIPTION OF COMPANY AND CORPORATE ORGANIZATION
OAO Technology Solutions, Inc. (the Company) through its wholly owned
subsidiaries provides a wide range of outsourced information technology
solutions and professional services, including the operation of large-scale data
center complexes and networks, distributed systems management, staffing services
and other information technology services.
The Company's business began in January 1993 as a separate business division
of OAO Corporation ("OAO"), an organization that provides IT services to
governmental entities. OAO formed the Company as a separate business division in
order to provide IT solutions and services to corporate clients. The Company
became a wholly-owned subsidiary of OAO when it was incorporated in September
1995 and the Company was re-incorporated in the State of Delaware in March 1996.
In April 1996, the Company was spun off from OAO.
Subsequently, on April 8, 1996, Safeguard Scientifics, Inc., invested $5,000
in the Company in exchange for 5,000,000 shares of common stock, which
represented 50% of the common stock outstanding as of that date.
The accompanying financial statements reflect the Company's operations since
its formation as a division of OAO. Prior to the spin-off and recapitalization
as a new company in April 1996, the Company's financial statements include
allocations of indirect costs of OAO, primarily rent and administrative costs,
of approximately $2,173 and $484 for the years ended December 31, 1995 and 1996,
respectively. These allocations have been based on the relative sales and labor
costs of the Company as compared to the total sales and labor costs of OAO and
its subsidiaries. Such allocations were consistent with that required by the
Defense Contract Audit Agency in connection with the administration of OAO's
U.S. government contracts and are considered reasonable by management. In
connection with the spin-off and subsequent investment by Safeguard, certain
obligations to the Company from OAO as of the date of the spin-off, in the
amount of $2,600 were forgiven by the Company and treated as a distribution to
OAO. This transaction has been reflected in the accompanying financial
statements as a reduction of stockholders equity at the date of the spin-off.
Subsequent to the spin-off in 1996, the Company was charged administrative
fees by OAO of approximately $600 through September 30, 1996 for administration
of the accounting and human resource functions. Such charges were negotiated
with OAO based on the charges for such services under the allocation methodology
prior to the spin-off and are considered reasonable by management.
The Company has entered into an administrative services agreement with
Safeguard, which provides for payment of a maximum fee of 1% of gross revenues
per year, not to exceed $125 for the six months ended September 30, 1996, and
$500 per year thereafter. The Company charged $250 to operations for the year
ended December 31, 1996, and $250 (unaudited) for the six months ended June 30,
1997 in connection with this agreement.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation--The accompanying consolidated financial
statements include the accounts of OAO Technology Solutions, Inc. and its wholly
owned subsidiaries (the Company): OAO Systems, Inc., OAO Canada, Ltd., Canadian
Network Resources, Ltd., Canadian Resources Management,
F-7
<PAGE>
OAO TECHNOLOGY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996 AND
SIX MONTHS ENDED JUNE 30, 1996 AND 1997 (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Ltd, OAO France, and OAO Mexico. All accounts of the non-U.S. subsidiaries have
been translated into U.S. dollars and included in the consolidated financial
statements.
The Company's initial year of operations began in 1993 as a division of OAO
Corporation. In March 1996, the Company was incorporated and was spun off from
OAO Corporation in April 1996. As these were entities under common control, the
merger was accounted for similar to that of a pooling-of-interests and as a
result, the financial statements of the Company have been presented at
historical cost since its inception in 1993.
All intercompany accounts and transactions have been eliminated.
Revenue Recognition--The Company provides services under contracts,
primarily to large commercial customers. Revenues under fixed-price contracts
are recognized on the basis of the estimated percentage of completion of
services rendered. Revenues under time-and-materials contracts are recorded at
the contracted rates as the labor hours and other direct costs are incurred.
Anticipated losses on all contracts are recognized as soon as they become known.
Unbilled receivables include certain costs and a portion of the fee and expected
profit, which is billable upon completion of the contracts or the completion of
certain tasks under terms of the contracts. Since the Company receives many
requests to perform services on an as-needed basis, and must immediately respond
to these requests, the administrative processing to create the applicable
purchase orders often occurs after services have actually been provided.
Approximately $157, $1,900 and $3,500 (unaudited) of the unbilled receivable
amounts at December 31, 1995 and 1996 and June 30, 1997, respectively, represent
the recognized value of services performed but not billed or billable for the
reason stated above. Approximately $429 and $1,400 (unaudited) of the unbilled
balance at December 31, 1996 and June 30, 1997, respectively, relate to payment
schedules which provide for the billing of the amount over a specified number of
months. At December 31, 1996, unbilled receivables are net of a reserve for
uncollectible accounts of $400.
Cash and Cash Equivalents--The Company considers all highly liquid temporary
investments including those with an original maturity of three months or less to
be cash equivalents. Cash and cash equivalents consist primarily of interest
bearing accounts.
Depreciation and Amortization--Property and equipment is recorded at cost.
The cost of furniture and computer and office equipment is depreciated from the
date of installation using the straight-line method over the estimated useful
lives of the various classes of property, which range from three to seven years.
The cost of software is amortized using the straight-line method over three
years.
Software Development Costs--Software development costs incurred for products
to be used internally are capitalized and are amortized on a straight line basis
over three years. Capitalized software costs are included in property and
equipment in the accompanying consolidated balance sheet. Amortization of these
costs will commence upon completion of the software.
Income Taxes--The provision for income taxes includes Federal and state
income taxes currently payable plus the net change during the year in the
deferred tax liability or asset. The current or deferred tax consequences of all
events that have been recognized in the financial statements are measured based
on provisions of enacted tax law to determine the amount of taxes payable or
refundable in future periods.
F-8
<PAGE>
OAO TECHNOLOGY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996 AND
SIX MONTHS ENDED JUNE 30, 1996 AND 1997 (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Net Income Per Share--Net income per common and common share equivalents at
the effective date of the Registration Statement will be computed based upon the
weighted average number of common and common share equivalents outstanding
during the period. Common share equivalents consist of stock options calculated
using the treasury stock method. Pursuant to Securities and Exchange Commission
Staff Accounting Bulletin No. 83, common stock and options to purchase common
stock issued subsequent to August 1, 1996, at prices below the assumed initial
public offering price will be included as outstanding for all periods presented,
using the treasury stock method at the assumed initial public offering price of
$5 per share.
Calculation of pro forma net income per share and weighted average number of
common and common share equivalents outstanding for the year ended December 31,
1996, and the six months ended June 30, 1996, is on a pro forma basis based upon
operations for the period, assuming the incorporation and spin-out and the
issuance of the common stock all took place on January 1, 1996.
Currency Translation--The assets and liabilities of the Company's foreign
subsidiaries whose functional currency is other than the U.S. Dollar are
translated at the exchange rates in effect on the reporting date, and income and
expenses are translated at the weighted average exchange rate during the period.
The net effect of such translation gains and losses are not included in
determining net income but are accumulated if significant, as a separate
component of stockholders' equity. Foreign currency transaction gains and losses
are included in determining net income.
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.
Concentration of Risk--The Company's largest customer accounted for
approximately 95%, 89%, and 82% of total revenues for the years ended December
31, 1994, 1995, and 1996, respectively. In addition, one other customer
accounted for approximately 11% of total revenues for the year ended December
31, 1996.
Financial instruments that potentially subject the Company to concentration
of credit risk principally consist of accounts receivable. The Company's largest
customer accounted for approximately 65% and 76% of accounts receivable as of
December 31, 1995 and 1996, respectively. In addition, other customers with
balances in excess of 10% accounted for approximately 33% and 19% of accounts
receivable as of December 31, 1995 and 1996, respectively. The Company performs
ongoing credit evaluations of its customers, but generally does not require
collateral to support customer receivables. Losses on uncollectible accounts
have consistently been within management's expectations and have historically
been minimal.
Interim Financial Information--The interim financial statements and related
notes as of June 30, 1997, and for the six-month periods ended June 30, 1996 and
1997, is unaudited. The information reflects all adjustments, consisting only of
normal recurring adjustments that, in the opinion of management, are necessary
to present fairly the financial position and results of operations of the
Company for the periods
F-9
<PAGE>
OAO TECHNOLOGY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996 AND
SIX MONTHS ENDED JUNE 30, 1996 AND 1997 (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
indicated. Results of operations for the interim periods are not necessarily
indicative of the results of operations for the full year.
Stock-Based Compensation--In 1996, the Company adopted Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123). However, the Company has not adopted the
recognition and measurement provisions of SFAS No. 123 and therefore provides
only the applicable disclosures.
3. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1995 and 1996, consisted of:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Furniture and equipment.......................................................................... $ 304 $ 820
Leasehold improvements........................................................................... 9 47
Leased equipment................................................................................. 365 578
Capitalized software............................................................................. 207 430
--------- ---------
885 1,875
Less accumulated depreciation and amortization................................................... (226) (491)
--------- ---------
$ 659 $ 1,384
--------- ---------
--------- ---------
</TABLE>
The Company leases furniture, equipment and automobiles under capital
leases. The capitalized costs and related accumulated amortization, included in
the amounts above, at December 31, 1995 and 1996, are:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Furniture, equipment, and automobiles............................................................. $ 365 $ 578
Less accumulated amortization..................................................................... (90) (172)
--------- ---------
$ 275 $ 406
--------- ---------
</TABLE>
4. ACCRUED EXPENSES
Accrued expenses at December 31, 1995 and 1996, consisted of:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Accrued salaries, bonuses, and other employee benefits......................................... $ 1,731 $ 2,222
Payroll taxes and amounts withheld from employees.............................................. 562 746
Other.......................................................................................... 313 713
--------- ---------
$ 2,606 $ 3,681
--------- ---------
</TABLE>
F-10
<PAGE>
OAO TECHNOLOGY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996 AND
SIX MONTHS ENDED JUNE 30, 1996 AND 1997 (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
5. UNEARNED REVENUE
Unearned revenue at December 31, 1995 and 1996, represents prepayment for
purchases of services that had not been rendered as of the respective dates.
6. CREDIT AGREEMENT (UNAUDITED)
In March 1997, the Company entered into a $5,000 revolving credit agreement
with CoreStates Bank that was increased to $7,500 (unaudited) in July 1997. The
agreement, which matures on May 31, 1999, provides for a commitment fee of .375%
on the unused portion and interest at the prime rate and/or, at the Company's
option, at the bank's overnight base rate plus 2% or LIBOR plus 2%. Borrowings
under the agreement are limited to a percentage of eligible billed receivables
not greater than 90 days old. The agreement also requires the maintenance of
certain financial covenants and prohibits the payment of dividends.
7. LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1995 and 1996:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Capitalized lease obligations bearing interest at 7.10% to 9.50%, aggregate monthly payments
averaging $17................................................................................... $ 251 $ 476
Less current portion.............................................................................. 68 190
--------- ---------
Long-term portion................................................................................. $ 183 $ 286
--------- ---------
</TABLE>
Maturities under the financing arrangements and long-term debt are
summarized below:
<TABLE>
<CAPTION>
YEAR ENDING CAPITAL
DECEMBER 31, LEASES
- ------------- -----------
<S> <C>
1997..................................................................................................... $ 202
1998..................................................................................................... 178
1999..................................................................................................... 72
2000..................................................................................................... 39
2001..................................................................................................... 25
-----
516
Less amounts representing interest....................................................................... (40)
-----
Total.................................................................................................... $ 476
-----
</TABLE>
8. STOCKHOLDERS' EQUITY
In 1996, the Company adopted the 1996 Equity Compensation Plan (the Plan)
under which the Company is authorized to grant stock options to employees,
officers, directors, and consultants. The Plan provides for the issuance of up
to 1,500,000 shares of common stock pursuant to the grant of incentive stock
options, nonqualified stock options, stock appreciation rights, and restricted
stock awards. Generally,
F-11
<PAGE>
OAO TECHNOLOGY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996 AND
SIX MONTHS ENDED JUNE 30, 1996 AND 1997 (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
8. STOCKHOLDERS' EQUITY (CONTINUED)
these options vest ratably over a four-year period and expire ten years after
the date of the grant and are granted at the estimated fair market value at the
date of grant.
Option activity under the Company's plan for the year ended December 31,
1996, is summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED-
EXERCISE AVERAGE
PRICE EXERCISE
SHARES PER SHARE PRICE
--------------- -------------- -----------
<S> <C> <C> <C>
Outstanding, January 1, 1996......................................... --
Options granted...................................................... 1,133,333 $ 2.00--$2.40 $ 2.02
Options canceled..................................................... (16,667) $ 2.00 $ 2.00
---------------
Outstanding, December 31, 1996....................................... 1,116,666 $ 2.00--$2.40 $ 2.02
Options granted (unaudited).......................................... 51,667 $ 2.40 $ 2.40
Options granted (unaudited).......................................... 297,500 $ 5.10 $ 5.10
Options canceled (unaudited)......................................... (89,375) $ 2.00 $ 2.00
Options exercised (unaudited)........................................ (583) $ 2.00 $ 2.00
---------------
Outstanding, June 30, 1997 (unaudited)............................... 1,375,875 $ 2.00--$5.10 $ 2.70
---------------
---------------
Options exercisable, December 31, 1996............................... 102,020 $ 2.00 $ 2.00
Shares available for future grant, December 31, 1996................. 383,333
</TABLE>
The following table summarizes the options outstanding and the
weighted-average remaining life, in years, of options outstanding as of December
31, 1996 and June 30, 1997.
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE REMAINING LIFE
OPTIONS OUTSTANDING AS OF (IN YEARS)
------------------------- --------------------------------
DECEMBER 31, JUNE 30, DECEMBER 31,
EXERCISE PRICE 1996 1997 1996 JUNE 30, 1997
- ------------------------------------------------- ------------ ----------- --------------- ---------------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
$2.00............................................ 1,070,000 980,043 9.0 8.5
$2.40............................................ 46,666 98,332 10.0 9.6
$5.10............................................ -- 297,500 -- 10.0
</TABLE>
As permitted under SFAS No. 123, the Company continues to account for its
employee stock-based compensation plans and options granted under APB No. 25. No
compensation expense has been recognized in connection with options, as all
options have been granted with an exercise price equal to the fair value of the
Company's common stock on the date of grant. Accordingly, the Company has
provided below the additional disclosures specified in SFAS No. 123 for 1996.
For SFAS No. 123 purposes, the fair value of each option grant has been
estimated as of the date of grant using the Black-Scholes option pricing model
with the following weighted average assumptions: risk-free interest rate of
5.93% to 6.26%, expected life of 6 years, expected volatility of zero and
dividend rate of zero percent. Using these assumptions, the fair value of the
stock options granted in 1996 on a per-share weighted average value was $1.02,
which would
F-12
<PAGE>
OAO TECHNOLOGY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996 AND
SIX MONTHS ENDED JUNE 30, 1996 AND 1997 (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
8. STOCKHOLDERS' EQUITY (CONTINUED)
be amortized as compensation expense over the vesting period of the options. Had
compensation expense been determined consistent with SFAS No. 123 utilizing the
assumptions detailed above, the Company's net income and income per share for
the year ended December 31, 1996, would have been reduced to the following pro
forma amounts:
<TABLE>
<S> <C>
Net income:
As reported......................................................................... $ 1,810
Pro forma........................................................................... $ 1,647
Net income per share:
As reported......................................................................... $ 0.17
Pro forma........................................................................... $ 0.16
</TABLE>
The resulting pro forma compensation cost may not be representative of that
expected in future years.
9. INCOME TAXES
The Company's provision for income taxes for the years ended December 31,
1994, 1995 and 1996, consisted of the following:
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Current--Federal....................................................................... $ 737 $ 921 $ 1,006
- -State................................................................................. 184 204 220
--------- --------- ---------
921 1,125 1,226
--------- --------- ---------
Deferred--Federal...................................................................... (372) 11 68
- -State................................................................................. (83) 3 21
--------- --------- ---------
(455) 14 89
--------- --------- ---------
$ 466 $ 1,139 $ 1,315
--------- --------- ---------
--------- --------- ---------
</TABLE>
The provision for income taxes differs from the amount computed by applying
the statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Expected statutory amount................................................................... 34.0% 34.0% 34.0%
Nondeductible expenses...................................................................... 1.4 2.0 2.0
Losses of foreign subsidiaries.............................................................. -- 10.5 --
State income taxes, net of federal benefit.................................................. 4.6 4.6 4.6
Other....................................................................................... -- -- 1.5
--- --- ---
Effective Rate.............................................................................. 40.0% 51.1% 42.1%
--- --- ---
</TABLE>
F-13
<PAGE>
OAO TECHNOLOGY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996 AND
SIX MONTHS ENDED JUNE 30, 1996 AND 1997 (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
9. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and amounts used for income tax purposes.
The tax effect of significant temporary differences that comprise the
deferred tax assets and liabilities at December 31, 1995 and 1996, are as
follows:
<TABLE>
<CAPTION>
Deferred tax assets: 1995 1996
--------- ---------
<S> <C> <C>
Accrued employee benefits..................................................... $ 441 $ 102
Losses of foreign subsidiaries................................................ 748 906
--------- ---------
Subtotal...................................................................... 1,189 1,008
Less valuation allowance...................................................... (748) (656)
--------- ---------
Total deferred tax assets..................................................... 441 352
Deferred tax liabilities...................................................... -- --
--------- ---------
Net deferred tax assets....................................................... $ 441 $ 352
--------- ---------
--------- ---------
</TABLE>
A valuation allowance has been provided to reduce the deferred tax assets to
a level that more likely than not, under the requirements of SFAS 109, will be
realized.
At December 31, 1996, the Canadian subsidiaries have net operating loss
carryforwards available to offset future taxable income generated by these
subsidiaries of approximately $1,930. These carryforwards expire in 2003.
10. EMPLOYEE BENEFIT PLANS
In 1996, the Company approved the temporary adoption of the OAO Corporation
Employee Savings Plan (the 401(k) Plan) as the employee savings plan. Effective
September 30, 1996, the Company established a separate 401(k) Plan, the OAO
International Corporation Employee Savings Plan, and completed the rollover of
assets held under the OAO Corporation Employee Savings Plan to the new plan. The
401(k) Plan covers substantially all of the Company's U.S. employees.
Participants may contribute to the Plan an amount between 1% and 15% of their
total annual compensation. The Company makes matching contributions of 20% of
each participant's contributions up to 10%. Company matching contributions
amounted to $201 in 1996.
F-14
<PAGE>
OAO TECHNOLOGY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996 AND
SIX MONTHS ENDED JUNE 30, 1996 AND 1997 (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
11. COMMITMENTS
The Company has entered into long-term lease agreements for office space and
equipment. The minimum fixed rental commitments related to all noncancelable
operating leases are approximately as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, AMOUNT
- --------------------------------------------------------------------------------------------------------- ---------
<S> <C>
1997..................................................................................................... $ 413
1998..................................................................................................... 345
1999..................................................................................................... 290
2000..................................................................................................... 290
2001..................................................................................................... 261
Thereafter............................................................................................... 411
---------
$ 2,010
---------
</TABLE>
A number of these leases have escalation clauses for increases in real
estate taxes, operating costs, and inflation and provide various renewal options
up to five years. Rent expense for the years ended December 31, 1994, 1995, and
1996, approximated $118, $355, and $421, respectively.
12. GEOGRAPHIC AREA INFORMATION
The Company generated substantially all of its revenues in the United States
and Canada during the three years ended December 31, 1996. The following
represents a summary of information by geographic area:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Net revenues:
United States......................................................................... $ 22,472 $ 36,147 $ 51,000
Canada................................................................................ -- 2,082 6,891
Eliminations and other consolidated................................................... -- -- --
--------- --------- ---------
$ 22,472 $ 38,229 $ 57,891
--------- --------- ---------
Income (loss) before taxes:
United States......................................................................... $ 1,165 $ 2,848 $ 5,682
Canada................................................................................ -- (620) 228
Eliminations and other consolidated................................................... -- -- (2,785)
--------- --------- ---------
$ 1,165 $ 2,228 $ 3,125
--------- --------- ---------
Identifiable assets:
United States......................................................................... $ 5,948 $ 12,733
Canada................................................................................ 603 2,473
Eliminations and other consolidated................................................... (750) (2,378)
--------- ---------
$ 5,801 $ 12,828
--------- ---------
</TABLE>
F-15
<PAGE>
OAO TECHNOLOGY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996 AND
SIX MONTHS ENDED JUNE 30, 1996 AND 1997 (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
12. GEOGRAPHIC AREA INFORMATION (CONTINUED)
Sales between geographic areas are not material. Costs related to business
development in international locations other than Canada of approximately $3,100
have been included in "Eliminations and other consolidated." Prior to 1996,
costs incurred in this area were not significant. Identifiable assets are those
assets used in the operations in each geographic area.
13. RELATED PARTY TRANSACTIONS
The Company and OAO Services, Inc. (Services), a subsidiary of OAO, are
related parties as a common group of shareholders hold a substantial ownership
interest in both companies. During 1996, the Company entered into several
contracts with Services to serve as a subcontractor. Total revenues recorded
under these contracts amounted to $1,557 for the year ended December 31, 1996.
At December 31, 1996, the Company has $764 and $297 of billed and unbilled
receivables, respectively, which are due from Services.
At the date of its investment in the Company, April 8, 1996 (Note 1),
Safeguard paid $5,000 to Services, in return for a grant by Services to the
Company of an option to purchase at anytime through April 8, 2000, all of the
shares of common stock of Services at an exercise price based on revenues and
earnings levels of Services for the 12 months prior to the date of exercise.
14. EARNINGS PER SHARE
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" (EPS) which
simplifies the standards for computing EPS previously found in APB Opinion No.
15 and makes them comparable to international EPS standards. The Statement is
effective for financial statements issued for periods ending after December 15,
1997. Had the following statement been effective for the year ended December 31,
1996 and the six months ended June 30, 1997, income per share would have been
presented as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1996 JUNE 30, 1997
------------------- -------------------
<S> <C> <C>
Income per common share..................................................... $ 0.23 $ 0.15
Income per common share--assuming dilution.................................. $ 0.17 $ 0.12
</TABLE>
15. CONTINGENCIES
The Company is involved in various litigation arising in the normal course
of business. In management's opinion, the Company's ultimate liability or loss,
if any, resulting from this litigation will not have a material adverse effect
on the accompanying financial statements.
16. SUBSEQUENT EVENTS--RELATED PARTY TRANSACTIONS
Pursuant to the terms of an agreement dated July 11, 1997, the Services'
option (Note 13) was canceled in consideration of the right by the Company and
Safeguard to receive certain future payments in the event of any sale of OAO and
Services or any public offering by OAO which occurs prior to April 8, 2000. In
each instance, the minimum amount to be received by the Company would be $500
with the potential for a higher amount based on the value of the transaction.
17. SUBSEQUENT EVENTS--RECAPITALIZATION
On July 31, 1997, the Board of Directors approved an increase in the number
of authorized shares of common stock to 20 million shares, a par value of $.01
per share, and a split of all shares of common stock at a ratio of 1.6667 to
one. All share amounts have been restated to give effect to the July 31, 1997
stock split. In addition, the Board authorized the issuance of 10 million shares
of preferred stock; however, no shares have been issued.
Further, on September 26, 1997, the Board of Directors increased the
authorized number of common shares to 25 million and decreased the authorized
number of preferred shares to 5 million.
F-16
<PAGE>
<TABLE>
<S> <C> <C>
[PHOTO]
Three photographs of employees surround the
following text: "Our Success is Measured By the
[PHOTO] Success of Our Customers". The Company's logo [PHOTO]
appears below the photographs.
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITY
OTHER THAN THE SECURITIES COVERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN
OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH AN OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATES AS OF WHICH INFORMATION IS FURNISHED OR THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 10
The Offering................................... 17
Federal Income Tax Consequences................ 20
Use of Proceeds................................ 22
Dividend Policy................................ 22
Capitalization................................. 23
Dilution....................................... 24
Selected Consolidated Financial Data........... 25
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 27
Business....................................... 34
Management..................................... 44
Certain Transactions........................... 52
Principal and Selling Stockholders............. 53
Description of Capital Stock................... 55
Shares Eligible for Future Sale................ 56
Underwriting................................... 58
Legal Matters.................................. 60
Experts........................................ 60
Additional Information......................... 60
Index to Consolidated Financial Statements..... F-1
</TABLE>
------------------------
UNTIL DECEMBER 20, 1997 (25 DAYS AFTER THE EXPIRATION DATE), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING
AS UNDERWRITERS AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
6,720,000 SHARES
(AND RIGHTS TO ACQUIRE
UP TO 6,400,000 OF SUCH SHARES)
[LOGO]
COMMON STOCK
-------------
PROSPECTUS
-------------
WHEAT FIRST BUTCHER SINGER
JANNEY MONTGOMERY SCOTT INC.
OCTOBER 21, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
