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PROSPECTUS
Filed Pursuant to Rule 424(b)(3)
File No. 333-36447
OFFER TO EXCHANGE
10 1/8% SENIOR SUBORDINATED NOTES DUE 2005 (THE "EXCHANGE NOTES")
FOR ALL OUTSTANDING 10 1/8% SENIOR SUBORDINATED NOTES DUE 2005 (THE "PRIVATE
NOTES")
OF
FEDERAL DATA CORPORATION
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME ON JANUARY 22,
1998 UNLESS EXTENDED.
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Federal Data Corporation ("FDC") is offering (the "Exchange Offer"), upon
the terms and subject to the conditions set forth in this Prospectus and the
accompanying Letter of Transmittal (the "Letter of Transmittal"), to exchange
$1,000 principal amount of its 10 1/8% Senior Subordinated Notes Due 2005 (the
"Exchange Notes"), which exchange has been registered under the Securities Act
of 1933, as amended (the "Securities Act"), pursuant to a registration statement
of which this Prospectus is a part (the "Registration Statement"), for each
$1,000 principal amount of its outstanding 10 1/8% Senior Subordinated Notes Due
2005 (the "Private Notes"), of which $105,000,000 in aggregate principal amount
was issued on July 25, 1997 and is outstanding as of the date hereof. The form
and terms of the Exchange Notes are the same as the form and terms of the
Private Notes except that (i) the exchange will have been registered under the
Securities Act, and, therefore, the Exchange Notes will not bear legends
restricting the transfer thereof and (ii) holders of the Exchange Notes will not
be entitled to certain rights of holders of the Private Notes under the
Registration Rights Agreement (as defined), which rights will terminate upon the
consummation of the Exchange Offer. The Exchange Notes will evidence the same
indebtedness as the Private Notes (which they replace) and will be entitled to
the benefits of the Indenture (as defined). The Private Notes and the Exchange
Notes are sometimes referred to herein collectively as the "Notes." See "The
Exchange Offer" and "Description of Notes."
The Exchange Notes will bear interest at the same rate and on the same terms
as the Private Notes. Consequently, the Exchange Notes will bear interest at the
rate of 10 1/8% per annum and the interest thereon will be payable semi-annually
on February 1 and August 1 of each year, commencing February 1, 1998. The
Exchange Notes will bear interest from and including the date of issuance of the
Private Notes (July 25, 1997). Holders whose Private Notes are accepted for
exchange will be deemed to have waived the right to receive any interest accrued
on the Private Notes.
The Exchange Notes will be general unsecured obligations of FDC and will be
subordinated in right of payment to all existing and future Senior Indebtedness
(as defined) of FDC including obligations under the New Senior Credit Facility
(as defined) and rank PARI PASSU with other senior subordinated indebtedness of
FDC. Pursuant to the terms of the Indenture, the Exchange Notes will be fully
and unconditionally guaranteed (the "Subsidiary Guarantees") by each of FDC's
wholly owned subsidiaries (collectively, the "Subsidiary Guarantors"). The
Subsidiary Guarantees will be general unsecured obligations of the Subsidiary
Guarantors and will be subordinated in right of payment to all existing and
future Guarantor Senior Indebtedness (as defined). At September 30, 1997, FDC
had $7.5 million of Senior Indebtedness (representing revolving line of credit
borrowings of $3.5 million and $4.0 million of undrawn letters of credit) and
$113.0 million of senior subordinated indebtedness outstanding and the
Subsidiary Guarantors had $8.2 million of Guarantor Senior Indebtedness
outstanding (excluding guarantees of indebtedness under the New Senior Credit
Facility). The Subsidiary Guarantors also had $11.0 million of secured
nonrecourse notes and nonrecourse obligations under capital leases. As a result
of the Subsidiary Guarantees, the Notes are not subordinated to obligations of
the Guarantors that are not Guarantor Senior Indebtedness. But see "Risk
Factors--Fraudulent Conveyance; Preferential Transfer."
The Exchange Notes are redeemable in whole or in part, at the option of FDC,
on or after August 1, 2001, at the redemption prices set forth herein plus
accrued and unpaid interest, if any, to the date of redemption. In addition, at
any time, or from time to time, on or prior to August 1, 2000, FDC, at its
option, may redeem up to 35% of the aggregate principal amount of the Exchange
Notes originally issued in the Offering, as described herein, with the net cash
proceeds received from one or more Public Equity Offerings (as defined) by FDC
at the redemption prices set forth herein plus accrued and unpaid interest, if
any, to the date of redemption; PROVIDED that at least 65% of the original
aggregate principal amount of the Exchange Notes remains outstanding after any
such redemption. The Exchange Notes will also be redeemable by FDC in the event
of a Change in Control (as defined) at any time prior to August 1, 2001, at a
redemption price equal to 100% of the principal amount thereof plus the
Applicable Premium (as defined) plus accrued and unpaid interest, if any, to the
date of redemption. In the event of a Change of Control, if FDC does not redeem
all of the outstanding Exchange Notes, (i) FDC will have the option, at any time
on or prior to August 1, 2000, to redeem the Exchange Notes in whole but not in
part, at a redemption price equal to 100% of the principal amount thereof, plus
the Applicable Premium (as defined) as of, and accrued and unpaid interest, if
any, to the date of redemption, and (ii) if FDC does not so redeem the Exchange
Notes, each holder of Exchange Notes will have the right to require FDC to
repurchase all or any part of such Holder's Exchange Notes at a price equal to
101% of the principal amount thereof, plus accrued interest to the date of
purchase. Certain of FDC's Senior Indebtedness, including indebtedness under the
New Senior Credit Facility, contain provisions requiring repayment upon a Change
of Control and there can be no assurance that FDC would have sufficient funds to
satisfy its obligations under such other indebtedness or to repurchase all
Exchange Notes tendered upon a Change of Control. In addition, FDC will be
obligated to offer to purchase Exchange Notes at 100% of their principal amount,
plus accrued and unpaid interest, if any, thereon to the date of purchase in the
event of certain asset sales.
SEE "RISK FACTORS" BEGINNING ON PAGE 16 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH THE EXCHANGE OFFER AND AN
INVESTMENT IN THE EXCHANGE NOTES.
FDC will accept for exchange any and all validly tendered private notes not
withdrawn prior to 5:00 p.m., New York City time, on January 22, 1998, unless
the Exchange Offer is extended by FDC in its sole discretion (the "Expiration
Date"). Tenders of private notes may be withdrawn at any time prior to 5:00
p.m., New York City time, on the expiration date. The Exchange Offer is not
conditioned upon any minimum principal amount of private notes being tendered
for exchange. Private notes may be tendered only in integral multiples of
$1,000. The Exchange Offer is subject to certain customary conditions. See "The
Exchange Offer--Conditions."
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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The date of this Prospectus is December 22, 1997
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Based on an interpretation by the staff of the Securities and Exchange
Commission (the "Commission") set forth in no-action letters issued to third
parties, FDC believes that the Exchange Notes issued pursuant to the Exchange
Offer in exchange for Private Notes may be offered for resale, resold and
otherwise transferred by a holder thereof (other than (i) a broker-dealer who
purchases such Exchange Notes directly from FDC to resell pursuant to Rule 144A
or any other available exemption under the Securities Act or (ii) a person that
is an affiliate of FDC within the meaning of Rule 405 under the Securities Act),
without compliance with the registration and prospectus delivery provisions of
the Securities Act; PROVIDED that the holder is acquiring the Exchange Notes in
the ordinary course of its business and is not participating, and had no
arrangement or understanding with any person to participate, in the distribution
of the Exchange Notes. Holders of Private Notes wishing to accept the Exchange
Offer must represent to FDC, as required by the Registration Rights Agreement,
that such conditions have been met. FDC believes that, to its knowledge, none of
the registered holders of the Private Notes is an affiliate (as such term is
defined in Rule 405 under the Securities Act) of FDC.
Prior to the Exchange Offer, there has been no public market for the Private
Notes. FDC does not intend to list the Exchange Notes on any securities exchange
or to seek approval for quotation through any automated quotation system. There
can be no assurance that an active market for the Exchange Notes will develop.
To the extent that a market for the Exchange Notes does develop, the market
value of the Exchange Notes will depend on market conditions (such as yields on
alternative investments), general economic conditions, FDC's financial condition
and certain other factors. Such conditions might cause the Exchange Notes, to
the extent that they are traded, to trade at a significant discount from face
value. See "Risk Factors--Absence of Public Market."
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus meeting
the requirements of the Securities Act in connection with any resale of such
Exchange Notes. Any broker-dealer that resells Exchange Notes that were received
by it for its own account pursuant to the Exchange Offer may be deemed to be an
"underwriter" within the meaning of the Securities Act. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of Exchange Notes received in exchange for Private Notes where such
Private Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. FDC has indicated its intention to make
this Prospectus (as it may be amended or supplemented) available to any
broker-dealer for use in connection with any such resale for the period required
by the Securities Act. See "Plan of Distribution."
FDC will not receive any proceeds from, and has agreed to bear the expenses
of, the Exchange Offer. No underwriter is being used in connection with this
Exchange Offer.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL FDC ACCEPT SURRENDERS FOR
EXCHANGE FROM, HOLDERS OF PRIVATE NOTES IN ANY JURISDICTION IN WHICH THE
EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE
SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
NO PERSON IS AUTHORIZED IN CONNECTION WITH THE EXCHANGE OFFER TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS OR
THE ACCOMPANYING LETTER OF TRANSMITTAL, AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY FDC.
NEITHER THE DELIVERY OF THIS PROSPECTUS OR THE ACCOMPANYING LETTER OF
TRANSMITTAL, NOR ANY EXCHANGE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES
CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY DATE SUBSEQUENT TO THE DATE HEREOF.
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UNTIL MARCH 23, 1998 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS OFFERING TRANSACTIONS IN THE EXCHANGE NOTES, WHETHER OR NOT
PARTICIPATING IN THE EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER A PROSPECTUS IN
CONNECTION THEREWITH. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
THE EXCHANGE NOTES WILL BE AVAILABLE INITIALLY ONLY IN BOOK-ENTRY FORM. FDC
EXPECTS THAT THE EXCHANGE NOTES ISSUED PURSUANT TO THE EXCHANGE OFFER WILL BE
ISSUED IN THE FORM OF ONE OR MORE FULLY REGISTERED GLOBAL NOTES THAT WILL BE
DEPOSITED WITH, OR ON BEHALF OF, THE DEPOSITORY TRUST COMPANY ("DTC" OR THE
"DEPOSITARY") AND REGISTERED IN ITS NAME OF CEDE & CO., AS ITS NOMINEE.
BENEFICIAL INTERESTS IN THE GLOBAL NOTE REPRESENTING THE EXCHANGE NOTES WILL BE
SHOWN ON, AND TRANSFERS THEREOF WILL BE EFFECTED ONLY THROUGH, RECORDS
MAINTAINED BY THE DEPOSITARY AND ITS PARTICIPANTS. AFTER THE INITIAL ISSUANCE OF
SUCH GLOBAL NOTE, EXCHANGE NOTES IN CERTIFICATED FORM WILL BE ISSUED IN EXCHANGE
FOR THE GLOBAL NOTE IN ACCORDANCE WITH THE TERMS AND CONDITIONS SET FORTH IN THE
INDENTURE. SEE "DESCRIPTION OF NOTES--BOOK ENTRY, DELIVERY AND FORM."
NOTICE REGARDING FORWARD-LOOKING INFORMATION
This Prospectus includes "forward looking statements," which are identified
by the use of forward-looking words or phrases including, but not limited to,
"intended," "will," "should," "may," "strategically positioned," "expects,"
"expected," "anticipates," and "anticipated." These forward looking statements
are based on the Company's current expectations. All statements other than
statements of historical facts included in this Prospectus, including those
regarding market trends, the Company's financial position, business strategy,
projected costs, and plans and objectives of management for future operations,
are forward looking statements. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, there
can be no assurance that such expectations will prove to have been correct.
Because forward-looking statements involve risks and uncertainties, the
Company's actual results could differ materially. Important factors that could
cause actual results to differ materially from the Company's expectations
("Cautionary Statements') are disclosed under "Risk Factors," and elsewhere in
this Prospectus including, without limitation, in conjunction with the
forward-looking statements included in this Prospectus. These forward-looking
statements represent the Company's judgment as of the date of this Prospectus.
All subsequent written and oral forward-looking statements attributable to the
Company or persons acting on behalf of the Company are expressly qualified in
their entirety by the Cautionary Statements. The Company disclaims, however, any
intent or obligation to update its forward-looking statements.
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PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL DATA, INCLUDING
THE FINANCIAL STATEMENTS AND NOTES THERETO, APPEARING ELSEWHERE IN THIS
PROSPECTUS. AS USED IN THIS PROSPECTUS, ALL REFERENCES TO THE COMPANY INCLUDE,
UNLESS THE CONTEXT INDICATES OTHERWISE, FEDERAL DATA CORPORATION ("FDC") AND ITS
SUBSIDIARIES AFTER GIVING EFFECT TO THE ACQUISITIONS OF NYMA, INC. ("NYMA") IN
MAY 1997 (THE "NYMA ACQUISITION") AND SYLVEST MANAGEMENT SYSTEMS CORPORATION
("SYLVEST") IN JUNE 1997 (THE "SYLVEST ACQUISITION") (COLLECTIVELY, THE
"ACQUISITIONS"). ALL REFERENCES IN THE PROSPECTUS TO "PRO FORMA" INFORMATION,
UNLESS OTHERWISE INDICATED, ARE PRO FORMA FOR THE ACQUISITIONS, THE APPLICATION
OF THE PROCEEDS OF THE OFFERING OF THE PRIVATE NOTES AND ENTRY INTO A NEW SENIOR
CREDIT FACILITY (THE "NEW SENIOR CREDIT FACILITY") (COLLECTIVELY, THE
"TRANSACTIONS").
THE COMPANY
The Company is a major supplier of information technology to a wide range of
customers within the U.S. Federal Government (the "Government"). The Company has
assembled, through internal growth and strategic acquisitions, comprehensive
information technology product and services capabilities to address the unique
needs of its Government clients. Management believes that the Company is
strategically positioned to benefit from the current trends in the Government
market for information technology and outsourcing of technical and professional
services. The Government is among the world's largest purchasers of information
technology with estimated total expenditures in fiscal 1997 in excess of $26
billion according to estimates prepared by Federal Sources, Inc. For the year
ended December 31, 1996 and the nine months ended September 30, 1997, the
Company's total pro forma revenues were $332.8 million and $308.7 million,
respectively, and total pro forma EBITDA (as defined herein) was $23.3 million
and $10.3 million, respectively.
Founded in 1969, the Company serves a diverse and expanding customer base
representing over 20 Government agencies including the National Aeronautics and
Space Administration ("NASA"), the Federal Aviation Administration (the "FAA"),
the National Institutes of Health (the "NIH"), the Department of Defense (the
"DoD"), the Veterans Benefit Administration (the "VBA") and the Department of
State. In addition, the Company has longstanding relationships with many of its
key clients, with agencies served by the Company for five or more years
accounting for more than half of the Company's pro forma revenues in 1996.
Management believes that the Company's established reputation and long-standing
relationships with Government customers, and the extensive knowledge gained from
those relationships, have been critical to the Company's strong record of growth
and provide a key competitive advantage in pursuing business opportunities with
new and existing customers.
Consistent with its strategy of providing a complete range of information
technology offerings to its Government customers, the Company has pursued
strategic acquisitions to broaden and strengthen key skill areas. In May 1997,
the Company purchased NYMA, a provider of sophisticated engineering and
information technology services. NYMA complemented and significantly expanded
the Company's core capabilities in the technology and engineering services
sector, providing the Company with the ability to bid effectively on new
contracts with a higher component of technical services requirements. In June
1997, the Company acquired Sylvest, a value-added reseller and integrator of
commercial off-the-shelf ("COTS") hardware, software and technical services
supporting open systems architectures within the Government marketplace. Through
the Sylvest Acquisition, the Company has become a leading reseller of COTS
hardware and software to the Government and has substantially expanded the
number of customers to which it can market its systems integration and services
offerings.
The Acquisitions have significantly enhanced the Company's presence in the
Government marketplace. Based on a recent survey, on a pro forma basis, the
Company would have been the 25th largest information technology contractor to
the Government in 1996. Management believes the information technology industry,
particularly the portion serving Government customers, has consolidated and will
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continue to consolidate, resulting in additional opportunities for the Company
to make attractive acquisitions that complement or expand its core capabilities.
A substantial portion of the Company's revenues are derived from integrated
technology solutions, which include both a technical services component and the
resale of COTS hardware and software. Management believes that its ability to
bundle products and services gives it a significant competitive advantage over
competitors who offer only products or services. The Company is organized into
four operating groups:
- THE SYSTEMS INTEGRATION GROUP provides large-scale, integrated information
technology systems customized to meet the unique needs of individual
customers. These systems are typically delivered through multi-year,
technically complex data processing projects that entail the application
and integration of leading-edge technology of multiple vendors. The
Company delivers systems integration services and provides required COTS
hardware and software as both a prime contractor and a subcontractor
across a broad range of Government opportunities.
- THE SERVICES GROUP provides information technology services, including
program management, software development and software maintenance
functions, to various Government agencies and prime contractors. The
Services Group also provides engineering support to NASA, the FAA and
other Government agencies in the areas of aeromechanics, aerospace
technology, space experimentation, structures, materials, instrumentation
and aeronautics. The Company has also recently been awarded contracts to
provide these services to private industry on a selected basis. The
Company substantially enhanced its services capabilities through the NYMA
Acquisition.
- THE SOLUTIONS GROUP provides information technology solutions designed to
address six discrete customer needs: document management, Microsoft
consulting, executive management consulting, point-of-sale systems
implementations, electronic commerce and training. These projects usually
are smaller scale and involve a higher content of pre-packaged systems or
specialized subject matter consulting than those of the Systems
Integration Group. In providing these solutions, the Company combines its
in-house technical expertise with its ability to provide COTS products
from multiple vendors.
- THE PRODUCT SALES GROUP is the Company's principal product resale unit and
focuses on the sale of workstations, servers and enterprise networking
hardware. Product sales are also made through the Systems Integration and
Solutions Groups, which resell hardware and software in connection with
their services engagements. Along with providing a broad range of top
quality products through its supplier and teaming relationships with
leading hardware and software manufacturers, the Company adds value for
its customers through its extensive knowledge of the Government
procurement process and through its integration, technical support and
implementation services. The Company substantially enhanced its product
reselling operations through the Sylvest Acquisition.
Management believes that the Company's expertise in both technical services
and product resales distinguishes it from most of its competitors and provides
it with significant cross-selling opportunities that support the Company's
growth strategy.
BUSINESS STRENGTHS
The Company attributes its growth and performance to several factors,
including the following:
- EXTENSIVE KNOWLEDGE OF CUSTOMERS. Through its experience on numerous
Government contracts since 1969, the Company has acquired an in-depth
knowledge of Government contracting and procurement rules and regulations
and of the unique information technology needs of its Government
customers. The Company's experience in the Government marketplace helps it
to anticipate a Government agency's needs, to fashion solutions
appropriate to the agency's infrastructure and
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personnel and to guide the agency's personnel through the Government
buying process, which has undergone significant change in recent years.
- STRONG POSITION IN AN ATTRACTIVE AND GROWING MARKET. The Government
market for information technology products and services is large and has
experienced significant growth. Federal Sources, Inc. estimates Government
spending in this area to be in excess of $26 billion in 1997 and forecasts
such spending to grow at 6-8% annually over the next five years. In
addition, the General Services Administration (the "GSA") anticipates a
continuation of the trend toward increased Government use of outside
information technology providers and estimates that 65% of all Government
agencies operating in-house data systems may eventually outsource
information technology services to the private sector at an estimated cost
savings of 25% to 30%.
- TECHNOLOGICAL EXPERTISE. Through its experience in offering a complete
package of technology products and services, the Company has developed a
high level of technological expertise. Core information technology
competencies include systems integration, engineering services, software
engineering, high end workstations and servers, networking products,
internet solutions, document management workflow systems and complex
project management. These core competencies allow the Company to bid
successfully on a wide range of contracts. Management believes the
Company's expertise and training programs contribute to employee and
customer loyalty.
- EXTENSIVE TEAMING RELATIONSHIPS WITH SUPPLIERS. The Company maintains
strong relationships with many of its key suppliers. These relationships
allow the Company to work with these suppliers to fashion joint solutions
for its customers. Management believes that the Company provides
significant value to its suppliers by allowing them to take advantage of
the Company's extensive knowledge of the Government and its procurement
regulations. In addition, the Company's sales and marketing capabilities
allow its suppliers to access new end-user markets without expanding their
marketing functions. The Company currently has relationships with most
leading hardware and software suppliers.
- STRONG MANAGEMENT TEAM AND INVESTOR BASE. The Company has a highly
experienced and committed management team that has successfully expanded
the Company's business and led the Company's diversification into
additional service and product markets. The Company's senior management
team averages over 11 years experience with the Company and over 23 years
experience in the industry. The Carlyle Group (including its affiliates,
"Carlyle"), the Company's principal stockholder, has supported the
Company's acquisition strategy and provided a critical source of equity
capital for the implementation of the Company's growth strategy.
BUSINESS AND GROWTH STRATEGY
The Company's goal is to be a leading one-stop information technology
solutions supplier, providing high-quality products and services that meet the
complete needs of its Government client base. The Company's strategies to meet
this objective are the following:
- CREATE COMPREHENSIVE SKILL AND PRODUCT BASE. The Company seeks to
continuously add new information technology capabilities and strategically
expand existing business areas to meet the changing information technology
needs and buying patterns of its clients. By expanding its extensive
technical skill base and ability to supply a broad and diverse set of COTS
hardware and software, the Company can provide its customers with the
widest possible range of cost effective solutions and engender a high
level of customer satisfaction. Management believes that such
capabilities, together with the Company's in-depth knowledge of changing
Government procurement practices, should continue to create new
opportunities for the Company.
- STRONG CUSTOMER KNOWLEDGE AND FOCUS. The Company strives to understand
the full range of each of its customers' information technology needs. The
Company's strategy is to continue to leverage its strong customer
knowledge, advanced technical skills and supplier relationships to tailor
optimal
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solutions to its customers' specific needs and to offer technology
infrastructures that anticipate its customers' rapidly evolving needs.
- PURSUE STRATEGIC ACQUISITIONS. The Company seeks to continue expanding
the breadth and quality of the information technology products and
services it offers. The recently completed acquisitions of NYMA and
Sylvest have added important complementary skills to the Company's
information technology capabilities. Management expects to continue to
pursue strategic acquisitions which it believes can contribute
significantly to the Company's future business growth.
- MAXIMIZE FLEXIBILITY OF GOVERNMENT CUSTOMERS. A key component of the
Company's success has been its ability to quickly adapt to the rapidly
evolving Government procurement process. The Company continually pursues
means of maximizing its customers' flexibility in acquiring a range of
products and services with competitive prices and minimal bureaucratic
delay by selecting the best acquisition methods available in the current,
more streamlined procurement climate.
- CAPITALIZE ON OUTSOURCING OPPORTUNITIES. The Company seeks to pursue new
opportunities created by changes in the Government information technology
industry. In particular, although the Government has frequently hired
service providers to fill specific roles in the past, the Government is
increasingly considering opportunities to outsource entire functions to
private industry. The Company intends to leverage its client
relationships, technical skills and access to COTS hardware and software
to pursue these opportunities.
THE INVESTOR
The Carlyle Group, a Washington D.C.-based private merchant bank founded in
1987, became the Company's controlling stockholder in a 1995 recapitalization of
the Company. Carlyle and its affiliates currently manage a $1.3 billion private
equity fund. Carlyle has made over 30 investments in select industries including
aerospace, defense, information technology and related services. Some of these
investments include BDM International, Inc. (NASDAQ: BDMI), a multinational
information technology company; Magnavox Electronic Systems Company, an
electronics systems supplier to the Government and prime contractors (later sold
to Hughes Electronics); Howmet Corporation, a leading supplier of investment
cast turbine engine components for the jet aircraft and industrial gas power
generation markets; and GDE Systems Inc., a leading supplier of mission planning
and information systems as well as test equipment to the Government and prime
contractors (later sold to Tracor, Inc.); Power Paragon Inc., a leading supplier
of power distribution systems to the U.S. government and prime contractors
(later sold to SPD Inc.); and Vought Aircraft Company, a leading supplier of
major aircraft structures and subassemblies for commercial and military aircraft
(later sold to Northrop Grumman Corporation).
THE RECAPITALIZATION AND THE TRANSACTIONS
Prior to December 1, 1995, a substantial majority of the Company's common
stock was owned by its employees. On December 1, 1995, the Company effected a
recapitalization, through which FDC Holdings, Inc. ("Holdings") merged with and
into the Company with the Company continuing as the surviving corporation (the
"Recapitalization"). Holdings was a company organized by Carlyle to facilitate
the Recapitalization and had no operating activity or history. Upon consummation
of the Recapitalization, Holdings received 85.4% of the Company's common stock
and 14.6% was retained by members of Company management who were shareholders
prior to the Recapitalization. The Recapitalization resulted in a charge to
stockholders' equity of $58.8 million to reflect redemption of certain common
stock.
The Company financed the Recapitalization through proceeds from term loans
of $35.0 million, borrowings of approximately $6.5 million under its prior
senior credit facility (the "Prior Senior Credit Facility"), issuance of $7.0
million in the Company's notes (the "FDC Notes") and an equity investment by
Holdings of $16.1 million. These proceeds were also utilized to pay fees and
expenses related to the Recapitalization and related financing, and to provide
working capital for the Company.
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In May 1997, the Company purchased all of the outstanding capital stock of
NYMA for $29.5 million, consisting of $24.5 million in cash and $5.0 million in
the Company's notes (the "NYMA Notes"). The purchase price may be increased by
up to $7.0 million if certain performance criteria related to earnings and new
business activity are met. The Company funded the cash portion of the purchase
price with borrowings of approximately $9.5 million under the Prior Senior
Credit Facility and approximately $15.0 million in proceeds from an issuance of
additional stock to the Company's stockholders.
In June 1997, the Company purchased all of the outstanding capital stock of
Sylvest for $40.4 million, consisting of $33.4 million in cash and $7.0 million
in the Company's notes (the "Sylvest Notes"). The purchase price may be
increased by up to $1.0 million if certain earnings objectives are met and is
subject to adjustment based on an audit of the closing balance sheet. The
Company funded the cash portion of the purchase price with borrowings of $21.4
million under the Prior Senior Credit Facility and approximately $12.0 million
in proceeds from an issuance of additional stock to the Company's stockholders.
NYMA and Sylvest are referred to from time to time as the "Acquired Companies."
In July 1997, the Company sold $105 million in aggregate principal amount of
Private Notes to the Initial Purchasers in a transaction exempt from the
registration requirements of the Securities Act (the "Private Placement"). The
Company used the proceeds of the Private Placement to (i) prepay $7.7 million of
notes originally issued in connection with the recapitalization of the Company
at the time of Carlyle's initial investment in 1995 (the "FDC Notes" and,
together with the NYMA Notes and the Sylvest Notes, the "Seller Notes") and $4.0
million of the Sylvest Notes, (ii) repay (the "Refinancing") all amounts
(approximately $80.4 million) of long-term debt ("Refinanced Bank Debt") owing
under the Prior Senior Credit Facility, (iii) pay $7.0 million in fees and
expenses associated with the Private Placement and the Refinancing and (iv)
generate $5.9 million in additional cash for working capital purposes. None of
the proceeds of the Private Placement are remaining. In addition, the Company
terminated the Prior Senior Credit Facility and executed a new senior secured
revolving credit facility (the "New Senior Credit Facility"), which provides
revolving borrowing availability up to $75.0 million, subject to a borrowing
base limitation.
THE EXCHANGE OFFER
<TABLE>
<S> <C>
The Exchange Offer................ FDC is hereby offering to exchange $1,000 principal
amount of Exchange Notes for each $1,000 principal
amount of Private Notes that are properly tendered and
accepted. FDC will issue Exchange Notes on or promptly
after the Expiration Date. As of the date hereof, there
is $105,000,000 aggregate principal amount of Private
Notes outstanding. See "The Exchange Offer."
Based on an interpretation by the staff of the
Commission set forth in no-action letters issued to
third parties, the Company believes that the Exchange
Notes issued pursuant to the Exchange Offer in exchange
for Private Notes may be offered for resale, resold and
otherwise transferred by a holder thereof (other than
(i) a broker-dealer who purchases such Exchange Notes
directly from the Company to resell pursuant to Rule
144A or any other available exemption under the
Securities Act or (ii) a person that is an affiliate of
the Company within the meaning of Rule 405 under the
Securities Act), without compliance with the
registration and prospectus delivery provisions of the
Securities Act; PROVIDED that the holder is acquiring
Exchange Notes in the ordinary course of its business
and is not participating, and had no arrangement or
</TABLE>
8
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<TABLE>
<S> <C>
understanding with any person to participate, in the
distribution of the Exchange Notes. Each broker-dealer
that receives Exchange Notes for its own account in
exchange for Private Notes, where such Private Notes
were acquired by such broker-dealer as a result of
market-making activities or other trading activities,
must acknowledge that it will deliver a prospectus
meeting the requirements of the Securities Act in
connection with any resale of such Exchange Notes. Any
broker-dealer that resells Exchange Notes that were
received by it for its own account pursuant to the
Exchange Offer may be deemed to be an "underwriter"
within the meaning of the Securities Act. The Letter of
Transmittal states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. See "The Exchange
Offer--Resale of the Exchange Notes."
Registration Rights Agreement..... The Private Notes were sold by the Company on July 25,
1997 (the "Closing Date") to BT Alex. Brown Incorporated
and Lehman Brothers Inc. (the "Initial Purchasers")
pursuant to a Purchase Agreement, dated July 18, 1997,
by and among the Company and the Initial Purchasers (the
"Purchase Agreement"). The Initial Purchasers
subsequently sold the Private Notes to third parties.
See "The Exchange Offer-- Purpose of the Exchange
Offer." Pursuant to the Purchase Agreement, the Company
and the Initial Purchasers entered into a Registration
Rights Agreement, dated as of July 25, 1997 (the
"Registration Rights Agreement"), which grants the
holders of the Private Notes certain exchange and
registration rights. The Exchange Offer is intended to
satisfy such rights, which will terminate upon the
consummation of the Exchange Offer. The holders of the
Exchange Notes will not be entitled to any exchange or
registration rights with respect to the Exchange Notes.
See "The Exchange Offer--Termination of Certain Rights."
Expiration Date................... The Exchange Offer will expire at 5:00 p.m., New York
City time, on January 22, 1998, unless the Exchange
Offer is extended by the Company in its sole discretion,
in which case the term "Expiration Date" shall mean the
latest date and time to which the Exchange Offer is
extended. See "The Exchange Offer--Expiration Date;
Extensions; Amendments."
Accrued Interest on the Exchange
Notes and the Private Notes..... The Exchange Notes will bear interest from and including
the date of issuance of the Private Notes (July 25,
1997). Holders whose Private Notes are accepted for
exchange will be deemed to have waived the right to
receive any interest accrued on the Private Notes. See
"The Exchange Offer--Interest on the Exchange Notes."
Conditions to the Exchange
Offer........................... The Exchange Offer is subject to the condition that, in
the reasonable judgment of the Company, it does not
violate applicable law, rules or regulations or an
applicable
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
interpretation of the staff of the Commission. The
Exchange Offer is not conditioned upon any minimum
aggregate principal amount of Private Notes being
tendered for exchange. See "The Exchange
Offer--Conditions."
Procedures for Tendering Private
Notes........................... Each holder of Private Notes wishing to accept the
Exchange Offer must complete, sign and date the Letter
of Transmittal, or a facsimile thereof, in accordance
with the instructions contained herein and therein, and
mail or otherwise deliver such Letter of Transmittal, or
such facsimile, together with such Private Notes and any
other required documentation to Norwest Bank Minnesota,
National Association, as exchange agent (the "Exchange
Agent"), at the address set forth herein. By executing
the Letter of Transmittal, the holder will represent to
and agree with the Company that, among other things, (i)
the Exchange Notes to be acquired by such holder of
Private Notes in connection with the Exchange Offer are
being acquired by such holder in the ordinary course of
its business, (ii) such holder has no arrangement or
understanding with any person to participate in a
distribution of the Exchange Notes, (iii) that if such
holder is a broker-dealer registered under the Exchange
Act or is participating in the Exchange Offer for the
purposes of distributing the Exchange Notes, such holder
will comply with the registration and prospectus
delivery requirements of the Securities Act in
connection with a secondary resale transaction of the
Exchange Notes acquired by such person and cannot rely
on the position of the staff of the Commission set forth
in no-action letters (see "The Exchange Offer--Resale of
the Exchange Notes"), (iv) such holder understands that
a secondary resale transaction described in clause (iii)
above and any resales of Exchange Notes obtained by such
holder in exchange for Private Notes acquired by such
holder directly from the Company should be covered by an
effective registration statement containing the selling
securityholder information required by Item 507 or Item
508, as applicable, of Regulation S-K of the Commission
and (v) such holder is not an "affiliate", as defined in
Rule 405 under the Securities Act, of the Company. Any
broker-dealer that resells Exchange Notes that were
received by it for its own account pursuant to the
Exchange Offer may be deemed to be an "underwriter"
within the meaning of the Securities Act. If the holder
is a broker-dealer that will receive Exchange Notes for
its own account in exchange for Private Notes that were
acquired as a result of market-making activities or
other trading activities, such holder will be required
to acknowledge in the Letter of Transmittal that such
holder will deliver a prospectus meeting the
requirements of the Securities Act in connection with
any resale of such Exchange Notes; however, by so
acknowledging and by delivering a prospectus, such
holder will not be deemed to admit
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
that it is an "underwriter" within the meaning of the
Securities Act. See "The Exchange Offer--Procedures for
Tendering. "
Special Procedures for Beneficial
Owners.......................... Any beneficial owner whose Private Notes are registered
in the name of a broker, dealer, commercial bank, trust
company or other nominee and who wishes to tender such
Private Notes in the Exchange Offer should contact such
registered holder promptly and instruct such registered
holder to tender on such beneficial owner's behalf. If
such beneficial owner wishes to tender on such owner's
own behalf, such owner must, prior to completing and
executing the Letter of Transmittal and delivering such
owner's Private Notes, either make appropriate
arrangements to register ownership of the Private Notes
in such owner's name or obtain a properly completed bond
power from the registered holder. The transfer of
registered ownership may take considerable time and may
not be able to be completed prior to the Expiration
Date. See "The Exchange Offer-- Procedures for
Tendering."
Guaranteed Delivery Procedures.... Holders of Private Notes who wish to tender their
Private Notes and whose Private Notes are not
immediately available or who cannot deliver their
Private Notes, the Letter of Transmittal or any other
documentation required by the Letter of Transmittal to
the Exchange Agent prior to the Expiration Date must
tender their Private Notes according to the guaranteed
delivery procedures set forth under "The Exchange
Offer--Guaranteed Delivery Procedures."
Acceptance of the Private Notes
and Delivery of the Exchange
Notes........................... Subject to the satisfaction or waiver of the conditions
to the Exchange Offer, the Company will accept for
exchange any and all Private Notes that are properly
tendered in the Exchange Offer prior to the Expiration
Date. The Exchange Notes issued pursuant to the Exchange
Offer will be delivered within five business days
following the Expiration Date. See "The Exchange
Offer--Terms of the Exchange Offer."
Withdrawal Rights................. Tenders of Private Notes may be withdrawn at any time
prior to the Expiration Date. See "The Exchange
Offer--Withdrawal of Tenders."
Certain Federal Income Tax
Considerations.................. The exchange of Private Notes for Exchange Notes will be
treated as a "non-event" for federal income tax
purposes. As a result, no material federal income tax
consequences will result to holders exchanging Private
Notes for Exchange Notes. See "Certain Federal Income
Tax Considerations."
Exchange Agent.................... Norwest Bank Minnesota, National Association is serving
as the Exchange Agent in connection with the Exchange
Offer.
</TABLE>
11
<PAGE>
THE EXCHANGE NOTES
The Exchange Offer applies to the entire aggregate principal amount of the
Private Notes. The form and terms of the Exchange Notes are the same as the form
and terms of the Private Notes except that (i) the exchange will have been
registered under the Securities Act and, therefore, the Exchange Notes will not
bear legends restricting the transfer thereof and (ii) holders of the Exchange
Notes will not be entitled to certain rights of holders of the Private Notes
under the Registration Rights Agreement, which rights will terminate upon
consummation of the Exchange Offer. The Exchange Notes will evidence the same
indebtedness as the Private Notes (which they replace) and will be issued under,
and be entitled to the benefits of, the Indenture. For further information and
for definitions of certain capitalized terms used below, see "Description of
Notes."
<TABLE>
<S> <C>
Maturity Date..................... August 1, 2005
Interest Payment Dates............ Interest on the Exchange Notes will accrue from the date
of original issuance (the "Issue Date") and will be
payable semi-annually on February 1 and August 1 of each
year commencing on February 1, 1998.
Optional Redemption............... On or after August 1, 2001, the Exchange Notes will be
redeemable at the option of the Company, in whole or in
part, at the redemption prices set forth herein plus
accrued interest to the date of redemption. In addition,
prior to August 1, 2000, the Company may, at its option,
redeem up to 35% of the aggregate principal amount of
the Exchange Notes originally issued with the net cash
proceeds of one or more Public Equity Offerings (as
defined), at the redemption prices set forth herein plus
accrued interest to the date of redemption; PROVIDED
that at least 65% of the original aggregate principal
amount of Exchange Notes shall remain outstanding after
any such redemption.
Change of Control................. Upon a Change of Control (as defined), (i) the Company
will have the option, at any time on or prior to August
1, 2001, to redeem the Exchange Notes in whole but not
in part, at a redemption price equal to 100% of the
principal amount thereof, plus the Applicable Premium
(as defined) as of, and accrued and unpaid interest, if
any, to, the date of redemption, and (ii) if the Company
does not so redeem the Exchange Notes, each holder will
have the right, subject to certain conditions, to
require the Company to repurchase such holder's Exchange
Notes at a price equal to 101% of the principal amount
thereof plus accrued interest to the date of repurchase.
Ranking........................... The Exchange Notes will be general unsecured obligations
of the Company and will be subordinated in right of
payment to all existing and future Senior Indebtedness
(as defined) of the Company. The Exchange Notes will
rank PARI PASSU with any senior subordinated
indebtedness of the Company (including the Seller Notes)
and will rank senior to all other subordinated
indebtedness of the Company. As of September 30, 1997,
the Company had approximately $7.5 million of Senior
Indebtedness (representing revolving line of credit
borrowings of $3.5 million and $4.0 million of undrawn
letters of credit) outstanding.
</TABLE>
12
<PAGE>
<TABLE>
<S> <C>
Guarantees........................ The Exchange Notes will be guaranteed on a senior
subordinated basis (the "Subsidiary Guarantees") by the
Subsidiary Guarantors. The Subsidiary Guarantees will be
general unsecured obligations of the Subsidiary
Guarantors and will be subordinated in right of payment
to all existing and future Guarantor Senior Indebtedness
(as defined). As of September 30, 1997, the Subsidiary
Guarantors collectively had approximately $8.2 million
of Guarantor Senior Indebtedness outstanding (excluding
guarantees of Indebtedness under the New Senior Credit
Facility). Guarantor Senior Indebtedness includes $5.9
million outstanding under the Floor Plan Financing
Facility (as defined), which amount is reflected as
accounts payable in the September 30, 1997 balance
sheet. The Subsidiary Guarantors also had $11.0 million
of secured nonrecourse notes and nonrecourse obligations
under capital leases at September 30, 1997.
Certain Covenants................. The Indenture governing the Notes (the "Indenture") will
contain certain covenants that, among other things,
limit the ability of the Company and certain of its
subsidiaries to pay dividends or make certain other
Restricted Payments (as defined), incur additional
indebtedness, consummate certain asset sales, incur
indebtedness that is subordinated in right of payment to
any Senior Indebtedness and senior in right of payment
to the Notes, incur liens, impose restrictions on the
ability of a subsidiary to pay dividends or make certain
payments to the Company and its subsidiaries, guarantee
certain indebtedness, issue certain preferred stock,
enter into certain transactions with affiliates, sell,
assign, transfer, lease, convey or otherwise dispose of
all or substantially all of the assets of the Company,
or enter into certain mergers and consolidations. In
addition, under certain circumstances, the Company will
be required to offer to purchase Notes at a price equal
to 100% of the principal amount thereof, plus accrued
interest, if any, to the date of purchase, with the
proceeds of certain Asset Sales (as defined). All of
such covenants are subject to significant qualifications
and exceptions.
</TABLE>
For additional information regarding the Exchange Notes, including
definitions of capitalized terms used above, see "Description of Notes."
RISK FACTORS
See "Risk Factors", which begins on page 16, for a discussion of certain
factors that should be considered in evaluating an investment in the Notes.
The Company is organized under the laws of Delaware with principal executive
offices located at 4800 Hampden Lane, Bethesda, Maryland 20814 (telephone
number: (301) 986-0800).
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<PAGE>
SUMMARY UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following table sets forth summary unaudited pro forma consolidated
financial information of the Company. The pro forma consolidated financial
information for the year ended December 31, 1996 and the nine months ended
September 30, 1997, give effect to the Transactions as if they had occurred on
January 1, 1996. The following information should be read in conjunction with
the "Selected Unaudited Pro Forma Consolidated Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements of the Company and the Acquired Companies and the notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA
-------------------------------------
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- ------------------
(IN THOUSANDS)
<S> <C> <C>
INCOME STATEMENT DATA:
Revenues................................................................ $ 332,822 $ 308,723
-------- --------
Cost of sales and services.............................................. 259,679 258,255
Selling, general and administrative..................................... 49,490 40,406
Amortization of goodwill................................................ 3,953 2,965
Interest expense(a)..................................................... 15,771 10,563
-------- --------
Total expenses........................................................ 328,893 312,189
-------- --------
Income (loss) before income taxes....................................... 3,929 (3,466)
Provision (benefit) for income taxes.................................... 2,131 (966)
-------- --------
Net income (loss)..................................................... $ 1,798 $ (2,500)
-------- --------
-------- --------
OTHER DATA:
EBITDA(b)............................................................... $ 23,295 $ 10,254
Net recourse interest expense(c)........................................ 13,557 9,462
Net cash recourse interest expense(d)................................... 12,532 8,693
Depreciation and amortization(e)........................................ 5,809 4,258
Capital expenditures.................................................... 2,124 1,788
</TABLE>
- ------------------------
(a) Interest expense includes interest on both recourse and nonrecourse notes
payable and obligations under capital leases. The Company finances certain
equipment leases to Government customers with borrowings or capital leases
that are recourse only to the related payment stream and property leased. In
most circumstances, the Company's future obligations under these nonrecourse
agreements, in event of default by the end user lessee, would be limited to
ensuring the return of the associated assets to the lender. These
nonrecourse notes payable and obligations under capital leases are
considered debt under generally accepted accounting principles and,
accordingly, are reflected as liabilities in the Company's historical
financial statements.
(b) EBITDA represents the sum of income (loss) before income taxes, net recourse
interest expense and depreciation and amortization. EBITDA is not a measure
of performance or financial condition under generally accepted accounting
principles but is presented to provide additional information related to
debt service capability. EBITDA should not be considered in isolation or as
a substitute for other measures of financial performance or liquidity under
generally accepted accounting principles. While EBITDA is frequently used as
a measure of operations and the ability to meet debt service requirements,
it is not necessarily comparable to other similarly titled captions of other
companies due to the potential inconsistencies in the method of calculation.
14
<PAGE>
(c) Net recourse interest expense is interest expense minus interest expense on
nonrecourse notes payable and nonrecourse obligations under capital leases
of $2,015 and $1,014, and minus interest income on cash balances of $199 and
$87 for the year ended December 31, 1996 and the nine months ended September
30, 1997, respectively.
(d) Net cash recourse interest expense is net recourse interest expense minus
amortization of deferred financing costs of $1,025 and $769 for the year
ended December 31, 1996 and the nine months ended September 30, 1997,
respectively.
(e) Excludes amortization of deferred financing costs on the Private Notes that
are included in interest expense.
15
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION SET FORTH IN THIS PROSPECTUS,
PROSPECTIVE INVESTORS SHOULD CAREFULLY REVIEW THE FOLLOWING RISK FACTORS BEFORE
DECIDING TO MAKE AN INVESTMENT IN THE NOTES.
SUBSTANTIAL LEVERAGE AND DEBT SERVICE
The Company is highly leveraged. At September 30, 1997, the Company's
consolidated total recourse debt and total stockholders' equity was $118.8
million and $1.8 million, respectively. See "Capitalization." The Company's pro
forma ratio of earnings to fixed charges for the year ended December 31, 1996
was 1.2 to 1.0 and the Company would have had a fixed charge coverage deficiency
of $3.5 million for the nine months ended September 30, 1997. The Company's
ability to make scheduled payments of the principal of, or interest on, or to
refinance its indebtedness (including the Notes) depends on its future
performance, which to a certain extent is subject to economic, financial,
competitive and other factors beyond its control. Based upon pro forma 1996
operations, management believes that available cash flow, together with
borrowings available under the New Senior Credit Facility and other sources of
liquidity, should be adequate to meet the Company's anticipated requirements for
working capital, capital expenditures, interest payments and revolving balances
under the New Senior Credit Facility through at least the scheduled date of
expiration of the New Senior Credit Facility on July 25, 2002. There can be no
assurance, however, that the Company's cash flow will be sufficient to satisfy
such requirements. If the Company is unable to generate sufficient cash flow
from operations in the future to service its debt and make necessary capital
expenditures, the Company may be required to refinance all or a portion of its
existing debt, including the Notes, to sell assets or to obtain additional
financing. There can be no assurance that any such refinancing would be possible
or that any such sales of assets or additional financing could be achieved. If
the Company is unable to repay its debt as it becomes due, the purchasers of the
Notes could lose some or all of their investment. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
The Indenture and the New Senior Credit Facility permit the Company to incur
additional Indebtedness, subject to certain limitations, and the Indenture
permits the Company to borrow up to $75.0 million (or greater amounts subject to
a borrowing base limitation) under the New Senior Credit Facility and one or
more Floor Plan Financing Facilities (as defined). The Indenture limits the
ability of FDC to pay dividends to holders of its capital stock, subject to
certain exceptions. See "Description of Notes--Certain Covenants--Limitation on
Restricted Payments."
The Company's high level of debt will have several important effects on its
future operations, including (a) requiring the Company to dedicate a significant
portion of its cash flow to service its debt, reducing funds available for
operations, capital expenditures, research and development, acquisitions and
future business opportunities, and increasing the Company's vulnerability to
adverse general economic and industry conditions; (b) increasing the Company's
cost of capital and debt service requirements under its variable rate credit
facilities if interest rates rise; (c) limiting the Company's flexibility in
reacting to changes in its markets, in technology and in general economic
conditions; and (d) through the financial covenants and other restrictions
contained in the New Senior Credit Facility and in the Indenture, requiring the
Company to meet certain financial tests and restricting its ability to borrow
additional funds (which could adversely affect the Company's liquidity and
ability to finance additional acquisitions), to dispose of assets or to engage
in certain transactions.
SUBORDINATION OF THE NOTES; ASSET ENCUMBRANCE
The Notes will be subordinated to all Senior Indebtedness, including Senior
Indebtedness incurred after the date of the Indenture. As of September 30, 1997,
the Company had $7.5 million of Senior Indebtedness outstanding including debt
under the New Senior Credit Facility (representing revolving line of credit
borrowings of $3.5 million and $4.0 million of undrawn letters of credit). The
Indenture permits
16
<PAGE>
the Company to incur Senior Indebtedness under the New Senior Credit Facility as
well as additional Senior Indebtedness (provided certain financial or other
conditions are met). The Company's Restricted Subsidiaries have guaranteed the
obligations of the Company under the Indenture and the Notes, but such
guarantees will be subordinated to all Guarantor Senior Indebtedness, which will
include the guarantees of the Company's indebtedness under the New Senior Credit
Facility and the Floor Plan Financing Facility. The Notes and the Subsidiary
Guarantees will be subordinated in right of payment to all existing and future
Senior Indebtedness of the Company and the Subsidiary Guarantors, respectively,
including the principal, premium (if any) and interest with respect to the
Senior Indebtedness under the New Senior Credit Facility and guarantees thereof
and the Floor Plan Financing Facility. As a result of the Subsidiary Guarantees,
the Notes are not subordinated to obligations of the Guarantors that are not
Guarantor Senior Indebtedness. But see "Risk Factors--Fraudulent Conveyance;
Preferential Transfer."
The Company may not pay principal of, premium (if any) on, or interest on,
the Notes, make any deposit pursuant to defeasance provisions or repurchase or
redeem or otherwise retire any Notes (i) if any Significant Senior Indebtedness
(as defined) is not paid when due or (ii) if any other default on Designated
Senior Indebtedness (as defined) occurs that permits the holders of such
Designated Senior Indebtedness to accelerate maturity of such Designated Senior
Indebtedness, in accordance with its terms, and the Trustee receives a notice of
such default unless, in either case, the default has been cured or waived, any
such acceleration has been rescinded or such Senior Indebtedness has been paid
in full or, in the case of any default other than a payment default, 179 days
have passed since the default notice is given. See "Description of Notes." Upon
any payment or distribution of the assets of the Company or any Subsidiary
Guarantor in connection with a total or partial liquidation or dissolution or
reorganization of or similar proceeding relating to the Company or such
Subsidiary Guarantor, the holders of Senior Indebtedness will be entitled to
receive payment in full before the holders of the Notes are entitled to receive
any payment. See "Description of the Securities--Subordination." The Notes are
also unsecured and thus, in effect, will rank junior to any secured indebtedness
of the Company or the Guarantors. The indebtedness and guarantees outstanding
under the New Senior Credit Facility will be secured by liens upon all assets,
including all receivables, inventory and general intangibles and equipment, as
well as the stock of the Restricted Subsidiaries, and indebtedness under Floor
Plan Financing Facilities and nonrecourse lease financing transactions will also
be secured.
Because the Company conducts substantially all of its operations through its
Subsidiaries, it is required to rely almost entirely upon payment from its
Subsidiaries for the funds necessary to meet its obligations, including the
payment of interest on and principal of the Notes. The ability of the
Subsidiaries to make such payments will be subject to, among other things,
applicable state laws. Claims of creditors of the Company's Subsidiaries will
generally have priority as to the assets of such Subsidiaries over the claims of
the Company.
Although the Subsidiary Guarantees provide the holders of the Notes with a
direct claim against the assets of the Subsidiary Guarantors, enforcement of the
Subsidiary Guarantees against any Subsidiary Guarantor would be subject to
certain "suretyship" defenses available to guarantors generally, and such
enforcement would also be subject to certain defenses available to the
Subsidiary Guarantors in certain circumstances. See "--Fraudulent Conveyance;
Preferential Transfer." Although the Indenture contains waivers of most
"suretyship" defenses, there can be no assurance that those waivers would be
enforced by a court in a particular case. To the extent that the Subsidiary
Guarantees are not enforceable, the Notes and Subsidiary Guarantees would be
effectively subordinated to all liabilities of the Subsidiary Guarantors,
including trade payables of such Subsidiary Guarantors, whether or not such
liabilities otherwise constitute Guarantor Senior Indebtedness under the
Indenture. In addition, although the New Senior Credit Facility will generally
permit Subsidiaries to pay dividends in amounts sufficient to pay interest on
the Notes, the payment of dividends to the Company by its Subsidiaries is
contingent upon the earnings of those Subsidiaries and approval of those
Subsidiaries.
17
<PAGE>
FRAUDULENT CONVEYANCE; PREFERENTIAL TRANSFER
If the court in a lawsuit brought by an unpaid creditor or representative of
creditors, such as a trustee in bankruptcy or the Company or any Subsidiary
Guarantor as a debtor-in-possession, were to find under relevant federal and
state fraudulent conveyance statutes that the Company or any Subsidiary
Guarantor did not receive fair consideration or reasonably equivalent value for
incurring the indebtedness represented by the Notes or its Subsidiary
Guarantees, and that, at the time of such incurrence, the Company or such
Subsidiary Guarantor (i) was insolvent, (ii) was rendered insolvent by reason of
such incurrence or grant, (iii) was engaged in a business or transaction for
which the assets remaining with the Company or such Subsidiary Guarantor
constituted unreasonably small capital or (iv) intended to incur, or believed
that it would incur, debts beyond its ability to pay such debts as they matured,
such court, subject to applicable statutes of limitation, could avoid the
Company's obligations under the Notes or the Subsidiary Guarantor's obligations
under the Subsidiary Guarantees, subordinate the Notes or the Subsidiary
Guarantees to other indebtedness of the Company or the Subsidiary Guarantors or
take other action detrimental to the holders of the Notes.
The measure of insolvency for these purposes will vary depending upon the
law of the jurisdiction being applied. Generally, however, a company will be
considered insolvent for these purposes if the sum of that company's debts
(including contingent obligations) is greater than all of that company's
property at a fair valuation, or if the present fair saleable value of that
company's assets is less than the amount that will be required to pay its
probable liability on its existing debts (including contingent obligations) as
they become absolute and matured. Moreover, regardless of solvency, a court
could avoid an incurrence of indebtedness, including the Notes or the Subsidiary
Guarantees, to the claims of all existing and future creditors on similar
grounds. Based upon financial and other information currently available to it,
management believes the Company and each Subsidiary Guarantor were solvent at
the time of and immediately after the Private Placement. However, there can be
no assurance as to what standard a court would apply in order to determine
whether the Company or the Subsidiary Guarantors were "insolvent" upon
consummation of the sale of the Notes and the Subsidiary Guarantees.
Additionally, under federal bankruptcy or applicable state insolvency law,
if certain bankruptcy or insolvency proceedings are initiated by or against the
Company or any Subsidiary Guarantor within 90 days after any payment by the
Company or any Subsidiary Guarantor with respect to the Notes or the Subsidiary
Guarantees or if the Company or any Subsidiary Guarantor anticipated becoming
insolvent at the time of such payment, all or a portion of such payment could be
avoided as a preferential transfer and the recipient of such payment could be
required to return such payment.
GOVERNMENT CONTRACTING RISKS
The Company derives substantially all of its revenues from contracts or
subcontracts with the Government and believes that the success and development
of its business will continue to depend on its successful participation in
Government contract programs. Accordingly, changes in Government contracting
policies could directly affect the Company's financial performance. Among the
factors that could materially adversely affect the Company's Government
contracting business are budgetary constraints affecting Government spending
generally or specific departments (such as DoD, NASA or the Veterans
Administration, for example), in particular, changes in fiscal policies or
available funding, changes in Government programs or requirements, curtailment
of the Government's use of technology services firms such as the Company, the
adoption of new laws or regulations, technological developments, Governmental
shutdowns (such as that which occurred during the Government's fiscal 1996, as
discussed under "Management's Discussion and Analysis of Financial Condition and
Results of Operations") and general economic conditions. These or other factors
could cause Governmental agencies to reduce their purchases under contracts, to
exercise their right to terminate contracts or not to exercise options to renew,
which could have a material adverse effect on the Company's financial condition,
results of operations and debt service capability.
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Several Government customers served by the Company represented significant
portions of 1996 pro forma revenues. The U.S. Navy, NASA and the Veterans
Administration represented approximately 15%, 13% and 11% of 1996 pro forma
revenues, respectively, and the loss of any of these customers could have a
material adverse effect on the Company's financial condition, results of
operations and debt service capability. See "Business--Products and Services"
for a discussion of the Company's material contracts.
Consistent with the overall trend toward reduced growth in Government
spending, many of the Company's Government customers are subject to increasingly
stringent budgetary constraints. For example, the budgets of DoD and NASA have
been substantially reduced in recent years. The Company has substantial
contracts in place with a number of these agencies, and the Company's continued
performance under these contracts, or award of additional contracts from these
agencies, could be materially adversely affected by continued or future spending
reductions or budget cutbacks at these agencies. See "Business-- Products and
Services." Although these reductions have not materially impacted the Company to
date, there can be no assurance that further budget reductions will not occur,
and such reductions could have a material adverse effect on the Company's
financial condition, results of operations and debt service capability.
All Government contracts require compliance with various contract provisions
and procurement regulations. The Government frequently reviews and considers
revisions to its procurement practices and has substantially modified numerous
procurement procedures in recent years. Such new or modified procurement
regulations could materially adversely affect the Company, increase competition
or increase the Company's costs of competing for or performing under Government
contracts. Moreover, any violation of procurement regulations could result in
the termination of the contracts, imposition of fines, and/or debarment from
award of additional Government contracts.
Most Government contracts are subject to modification or termination in the
event of changes in funding, and the Company's contractual costs and revenue are
subject to adjustment as a result of Government audits. In addition, Government
contracts, by their terms, generally can be terminated at any time by the
Government, without cause, for its convenience. Further, all Government contract
awards are subject to protest by competitors. The termination or nonrenewal of
any of the Company's significant contracts or the imposition of fines, damages
or suspension from bidding on additional contracts could have a material adverse
effect on the Company's financial condition, results of operations and debt
service capability.
RISKS UNDER SECTION 8(A) CONTRACT VEHICLES. Through the operations of NYMA
and Sylvest, the Company derived approximately 24% of its pro forma 1996 revenue
and approximately 12% of its pro forma 1996 income before income taxes
(excluding interest expense and amortization of goodwill) from contracts that
were awarded under section 8(a) of the Small Business Act ("Section 8(a)"),
which is intended to foster growth of small businesses owned and controlled by
socially and economically disadvantaged individuals. After consummation of the
Acquisitions, Sylvest's and NYMA's continued participation under these Section
8(a) contracts will require waivers from the Administrator of the Small Business
Administration. There can be no assurance that waivers will be obtained with
respect to these Section 8(a) contracts, and the failure to obtain such waivers
could have a material adverse effect on the Company's financial condition,
results of operations or debt service capability. For a description of the
material contract that could be affected, see "Business--Products and Services."
NASA has recently notified NYMA that it does not plan to request a waiver or to
exercise the final option year of a contract when the current option expires on
December 31, 1997. The Government has advised the Company that it plans to
procure the goods and services currently provided by NYMA under a new Section
8(a) set-aside contract on which NYMA would be ineligible to participate as a
prime contractor. NYMA intends to pursue continued participation in the program
in a reduced role as a subcontractor on the new contract in 1998, although such
participation would generate lower revenues and EBITDA than NYMA has
historically earned, and there can be no assurance that such a subcontract will
be obtained. 1996 revenues from this contract were approximately $33 million.
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RISKS UNDER TRADITIONAL CONTRACT VEHICLES. The Company derives a
substantial portion of its revenues from fixed-term Government contracts that
typically span a base year and one or more option years and are awarded through
formal competitive bids. There can be no assurance that the Government will
extend a fixed-term contract through its option years and, even if the
Government were to so extend each of the Company's fixed-term contracts, several
of such contracts expire in the next few years, and substantially all of the
Company's existing fixed-term contracts expire prior to the maturity of the
Exchange Notes. For a description of the Company's material contracts, see
"Business--Products and Services." Upon expiration, to the extent a requirement
continues to exist for the services provided thereunder, such contracts are
frequently subject to a competitive rebidding process, and there can be no
assurance that the Company will win any particular bid, or that the Company will
be able to replace business lost upon expiration or completion of any such
contract. The Company's failure to win or replace a significant dollar volume of
such contracts could materially adversely affect the Company's financial
condition, results of operations and debt service capability.
RISKS UNDER NEW CONTRACT VEHICLES. In contrast to traditional, longer-term
agreements by individual agencies to purchase specific services or products from
a single contractor or team of contractors, budget pressures and reforms in the
procurement process have caused many Government customers to spend an increasing
portion of their procurement budgets over the past few years through GSA
Schedules and other smaller-scale, shorter-term, multiple award, and/or multiple
agency contract ("MAC") vehicles. These vehicles are generally for an
"indefinite delivery, indefinite quantity" ("IDIQ") of goods and services, and
therefore effectively constitute procurement "schedules" or catalogs. These new
contract vehicles are generally awarded to multiple contractors, may be
available to multiple agencies, and require that the contractor make an
effective post-award sales effort to realize meaningful revenue under the
contract. The acquisition of Sylvest increases the relative proportion of the
Company's consolidated business being done on the basis of these contracts,
which was partially responsible for the decline in the Company's relative profit
margins for the nine months ended September 30, 1997 compared to the prior year
period. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Competition for post-award sales under many IDIQ contracts is intense and
there can be no assurance that the Company will continue to increase revenues or
otherwise sell successfully pursuant to GSA Schedules or other IDIQ vehicles,
and failure to do so could materially and adversely affect the Company's
financial condition, results of operation and debt service capability. Moreover,
sales are frequently made pursuant to such contracts at prices lower than those
stated in the contracts or related schedules. The Government's growing use of
GSA Schedules and other IDIQ vehicles and increasing emphasis on commercial
procurement practices, along with pressure for continuous competition through
the lifetime of these contracts, could have a material adverse effect on the
Company's financial condition, results of operations and debt service
capability.
The Company derives significant revenues from sales made pursuant to its GSA
Schedules and other IDIQ vehicles. One such contract, the NIH's Electric
Computer Store II ("ECS II"), presently has 45 awardees. The Company's inability
to renew or replace its GSA Schedules or other IDIQ contracts could have a
material adverse effect on the Company's financial condition, results of
operations and debt service capability.
COMPETITION
The Company serves highly competitive and fragmented markets, in which no
single competitor holds a significant market position. The Company derives
substantially all of its revenues from contracts with the Government and its
prime contractors, and many such contracts are awarded on the basis of
negotiations or competitive bids where price may be a significant factor. The
Company experiences vigorous competition from a large number of private-sector
firms. In addition, under new procurement regulations, Government agencies can
compete with private firms such as the Company in certain cases by offering
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services to other agencies. Some of the Company's competitors are large,
diversified firms with substantially greater financial resources and larger
technical staffs than the Company. In addition, under GSA Schedules and many
IDIQ vehicles, the Company faces a large number of competitors for post-award
sales of COTS products. It is increasingly likely that the Company's customers,
many of which have had multi-year contracts with individual suppliers (including
the Company) in the past, will meet an increasing proportion of their
information technology requirements through multi-vendor, multi-agency
procurement vehicles. There can be no assurance that the Company will be able to
continue to compete successfully in this changing procurement environment.
DEPENDENCE ON KEY TECHNICAL PERSONNEL
The Company's continued success depends in large part on its ability to
recruit and retain the technical personnel necessary to serve its clients
effectively. Competition for skilled personnel in the information technology
services industry is intense and increasing, and technology service companies
often experience high attrition among their skilled employees. Excessive
attrition among its technical personnel could increase the Company's costs of
performing its contractual obligations, reduce the Company's ability to
efficiently satisfy its clients' needs and seriously constrain the Company's
future growth potential. In addition, the Company must often comply with
provisions in Government contracts that require employment of persons with
specified levels of education, work experience and security clearances. The loss
of any significant number of the Company's existing key technical personnel or
the inability to attract and retain key employees in the future could have a
material adverse effect on the Company's financial condition, results of
operations and debt service capability. See "Business--Employees" and
"Management."
ACQUISITION STRATEGY
Principally through the Acquisitions, the Company has increased its work
force by approximately 360% in September 1997 compared to year-end 1996. The
Company's continued success will depend upon its ability to integrate NYMA,
Sylvest and other acquired businesses into its operations. The integration of
such businesses into the Company's operations may require a disproportionate
amount of management's attention and the Company's resources. There can be no
assurance that the acquired entities will operate profitably, that the Company
will realize anticipated synergies, or that the Acquisitions will cause the
Company's operating performance to improve.
Although management intends to continue to identify and complete synergistic
acquisitions and the Company regularly engages in discussions with acquisition
targets, there can be no assurances that suitable acquisition targets will be
available in the future on reasonable terms, that additional acquisitions will
be completed, that acquisition financing will be available on reasonable terms
or at all, that any new businesses will generate revenues or net income
comparable to the Company's existing businesses or that such businesses will be
integrated successfully or operated profitably. In addition, the New Senior
Credit Facility contains certain covenants restricting, among other things,
acquisitions and capital expenditures, and the New Senior Credit Facility and
the Indenture limit the incurrence of additional indebtedness. Such covenants
may limit the ability of the Company to complete certain additional
acquisitions. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
SEASONALITY AND QUARTERLY FLUCTUATIONS
The Company's business is seasonal, with revenues and profitability
generally higher in the third and fourth quarters and lower in the first quarter
(which has frequently shown an operating loss) of each fiscal year, in line with
Government procurement patterns. Any quarter may include significant variations
in revenue and profitability, depending on the timing of particular contract
awards, installation schedules, and contract expiration schedules. Product sales
are generally more seasonal than services sales, and the Sylvest Acquisition
could exacerbate the seasonality of the Company's business. As a result of this
seasonality, operating results and cash flow may vary significantly from quarter
to quarter.
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CONCENTRATION OF OWNERSHIP
Entities controlled by Carlyle have, in the aggregate, more than 80% of the
Company's voting power. Consequently, Carlyle can control the election of the
directors of the Company and the outcome of all matters submitted to a vote of
the Company's stockholders, as well as the Company's management, operations and
policies.
ABSENCE OF PUBLIC MARKET
There is currently no established trading market for the Notes. Although the
Private Notes are eligible for trading in the Private Offerings, Resales and
Trading through Automatic Linkages ("PORTAL") market of the National Association
of Securities Dealers, Inc., the Company does not intend to apply for listing of
the Notes on any securities exchange or on any automated dealer quotation
system. Private Notes that are not exchanged in the Exchange Offer will be
eligible for trading in the PORTAL market. The Company has been advised by the
Initial Purchasers that they presently intend to make a market in the Notes, but
the Initial Purchasers are under no obligation to do so, and any such
market-making may be discontinued at any time without notice, at the sole
discretion of the Initial Purchasers. Accordingly, no assurance can be given as
to the prices or liquidity of, or trading markets for, the Notes. The liquidity
of any market for the Notes will depend upon the number of holders of the Notes,
the interest of securities dealers in making a market in the Notes, prevailing
interest rates, the market for similar securities and other factors, including
general economic conditions and the financial condition and performance of, and
prospectus for, the Company. The absence of an active market for the Notes could
adversely affect the market price and liquidity of the Notes.
FAILURE TO EXCHANGE PRIVATE NOTES
Exchange Notes will be issued in exchange for Private Notes only after
timely receipt by the Exchange Agent of such Private Notes, a properly completed
and duly executed Letter of Transmittal and all other required documentation.
Therefore, holders of Private Notes desiring to tender such Private Notes in
exchange for Exchange Notes should allow sufficient time to ensure timely
delivery. Neither the Exchange Agent nor the Company is under any duty to give
notification of defects or irregularities with respect to tenders of Private
Notes for exchange. Private Notes that are not tendered or are tendered but not
accepted will, following consummation of the Exchange Offer, continue to be
subject to the existing restrictions upon transfer thereof. In addition, any
holder of Private Notes who tenders in the Exchange Offer for the purpose of
participating in a distribution of the Exchange Notes will be required to comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any resale transaction. Each broker-dealer that receives
Exchange Notes for its own account in exchange for Private Notes, where such
Private Notes were acquired by such broker-dealer as a result of market-making
activities or any other trading activities, must acknowledge that it will
deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale of such Exchange Notes. Any broker-dealer that
resells Exchange Notes that were received by it for its own account pursuant to
the Exchange Offer may be deemed to be an "underwriter" within the meaning of
the Securities Act. The Letter of Transmittal states that by so acknowledging
and by delivering a prospectus, a broker-dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the Securities Act. To the extent
that Private Notes are tendered and accepted in the Exchange Offer, the trading
market for untendered and tendered but unaccepted Private Notes could be
adversely affected due to the limited amount, or "float," of the Private Notes
that are expected to remain outstanding following the Exchange Offer. Generally,
a lower "float" of a security could result in less demand to purchase such
security and could, therefore, result in lower prices for such security. For the
same reason, to the extent that a large amount of Private Notes are not tendered
or are tendered and not accepted in the Exchange Offer, the trading market for
the Exchange Notes could be adversely affected. See "Plan of Distribution" and
"The Exchange Offer."
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THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The Private Notes were sold by the Company on the Closing Date to the
Initial Purchasers pursuant to the Purchase Agreement. The Initial Purchasers
subsequently sold the Private Notes, and the Company and the Initial Purchasers
entered into the Registration Rights Agreement on July 25, 1997. Pursuant to the
Registration Rights Agreement, the Company agreed that, unless the Exchange
Offer is not permitted by applicable law or Commission policy, it would file
with the Commission a registration statement under the Securities Act (a
"Registration Statement") with respect to the Exchange Notes within 60 days
after the Closing Date and use its best efforts to cause such Registration
Statement to become effective under the Securities Act within 150 days after the
Closing Date. A copy of the Registration Rights Agreement has been filed as an
exhibit to the Registration Statement. The Registration Statement is intended to
satisfy certain of the Company's obligations under the Registration Rights
Agreement and the Purchase Agreement.
RESALE OF THE EXCHANGE NOTES
With respect to the Exchange Notes, based upon an interpretation by the
staff of the Commission set forth in certain no-action letters issued to third
parties, the Company believes that a holder (other than (i) a broker-dealer who
purchases such Exchange Notes directly from the Company to resell pursuant to
Rule 144A or any other available exemption under the Securities Act or (ii) any
such holder that is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act) who exchanges Private Notes for Exchange Notes in the
ordinary course of business and who is not participating, does not intend to
participate, and has no arrangement with any person to participate, in a
distribution of the Exchange Notes, will be allowed to resell Exchange Notes to
the public without further registration under the Securities Act and without
delivering to the purchasers of the Exchange Notes a prospectus that satisfies
the requirements of Section 10 of the Securities Act. However, if any holder
acquires Exchange Notes in the Exchange Offer for the purpose of distributing or
participating in the distribution of the Exchange Notes or is a broker-dealer,
such holder cannot rely on the position of the staff of the Commission
enumerated in certain no-action letters issued to third parties and must comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any resale transaction, unless an exemption from registration
is otherwise available. Each broker-dealer that receives Exchange Notes for its
own account in exchange for Private Notes, where such Private Notes were
acquired by such broker-dealer as a result of market-making activities or other
trading activities, must acknowledge that it will deliver a prospectus meeting
the requirements of the Securities Act in connection with any resale of such
Exchange Notes. Any broker-dealer that resells Exchange Notes that were received
by it for its own account pursuant to the Exchange Offer may be deemed to be an
"underwriter" within the meaning of the Securities Act. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection of
resales of Exchange Notes received in exchange for Private Notes where such
Private Notes were acquired by such broker-dealer as a result of market-making
or other trading activities. Pursuant to the Registration Rights Agreement the
Company has agreed to make this Prospectus, as it may be amended or supplemented
from time to time, available to broker-dealer for use in connection with any
resale for the period required by the Securities Act. See "Plan of
Distribution."
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and the Letter of Transmittal, the Company will accept any and all Private Notes
validly tendered and not withdrawn prior to the Expiration Date. The Company
will issue $1,000 principal amount of Exchange Notes in exchange for
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each $1,000 principal amount of outstanding Private Notes surrendered pursuant
to the Exchange Offer. Private Notes may be tendered only in integral multiples
of $1,000.
The form and terms of the Exchange Notes are the same as the form and terms
of the Private Notes except that (i) the exchange will be registered under the
Securities Act and, therefore, the Exchange Notes will not bear legends
restricting the transfer thereof and (ii) holders of the Exchange Notes will not
be entitled to any of the rights of holders of Private Notes under the
Registration Rights Agreement, which rights will terminate upon the consummation
of the Exchange Offer. The Exchange Notes will evidence the same indebtedness as
the Private Notes (which they replace) and will be issued under, and be entitled
to the benefits of, the Indenture, which also authorized the issuance of the
Private Notes, such that both series of Notes will be treated as a single class
of debt securities under the Indenture.
As of the date of this Prospectus, $105,000,000 in aggregate principal
amount of the Private Notes are outstanding and registered in the name of Cede &
Co., as nominee for DTC. Only a registered holder of the Private Notes (or such
holder's legal representative or attorney-in-fact) as reflected on the records
of the Trustee under the Indenture may participate in the Exchange Offer. There
will be no fixed record date for determining registered holders of the Private
Notes entitled to participate in the Exchange Offer.
Holders of the Private Notes do not have any appraisal or dissenters' rights
under the Indenture in connection with the Exchange Offer. The Company intends
to conduct the Exchange Offer in accordance with the provisions of the
Registration Rights Agreement and the applicable requirements of the Securities
Act, the Securities Exchange Act of 1934 as amended (the "Exchange Act"), and
the rules and regulations of the Commission thereunder.
The Company shall be deemed to have accepted validly tendered Private Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
of Private Notes for the purposes of receiving the Exchange Notes from the
Company.
Holders who tender Private Notes in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Private
Notes pursuant to the Exchange Offer. The Company will pay all charges and
expenses, other than certain applicable taxes described below, in connection
with the Exchange Offer. See "--Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time on
January 22, 1998, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will (i) notify the
Exchange Agent of any extension by oral or written notice, (ii) mail to the
registered holders an announcement thereof and (iii) issue a press release or
other public announcement which shall include disclosure of the approximate
number of Private Notes deposited to date, each prior to 9:00 a.m., New York
City time, on the next business day after the previously scheduled Expiration
Date. Without limiting the manner in which the Company may choose to make a
public announcement of any delay, extension, amendment or termination of the
Exchange Offer, the Company shall have no obligation to publish, advertise, or
otherwise communicate any such public announcement, other than by making a
timely release to an appropriate news agency.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Private Notes, (ii) to extend the Exchange Offer or (iii) if any
conditions set forth below under "--Conditions" shall not have been satisfied,
to terminate the Exchange Offer by giving oral or written notice of such delay,
extension or termination to the Exchange Agent. Any such delay in acceptance,
extension, termination or amendment will be followed as promptly as practicable
by oral or written notice thereof to the registered holders. If the
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Exchange Offer is amended in a manner determined by the Company to constitute a
material change, the Company will promptly disclose such amendment by means of a
prospectus supplement that will be distributed to the registered holders, and
the Company will extend the Exchange Offer for a period of five to ten business
days, depending upon the significance of the amendment and the manner of
disclosure to the registered holders, if the Exchange Offer would otherwise
expire during such five to ten business day period.
INTEREST ON THE EXCHANGE NOTES
The Exchange Notes will bear interest at a rate equal to 10 1/8% per annum.
Interest on the Exchange Notes will be payable semi-annually on February 1 and
August 1 of each year, commencing February 1, 1998. Holders of Exchange Notes
will receive interest from the date of initial issuance of the Private Notes.
Holders of Private Notes that are accepted for exchange will be deemed to have
waived the right to receive any interest accrued on the Private Notes.
PROCEDURES FOR TENDERING
Only a registered holder of Private Notes may tender such Private Notes in
the Exchange Offer. To tender in the Exchange Offer, a holder of Private Notes
must complete, sign and date the Letter of Transmittal, or a facsimile thereof,
have the signatures thereon guaranteed if required by the Letter of Transmittal,
and mail or otherwise deliver such Letter of Transmittal or such facsimile to
the Exchange Agent at the address set forth below under "--Exchange Agent" for
receipt prior to the Expiration Date. In addition, either (i) certificates for
such Private Notes must be received by the Exchange Agent along with the Letter
of Transmittal, (ii) a timely confirmation of a book-entry transfer (a
"Book-Entry Confirmation") of such Private Notes, if such procedure is
available, into the Exchange Agent's account at the Depositary pursuant to the
procedure for book-entry transfer described below, must be received by the
Exchange Agent prior to the Expiration Date or (iii) the holder must comply with
the guaranteed delivery procedures described below.
The tender by a holder that is not withdrawn prior to the Expiration Date
will constitute an agreement between such holder and the Company in accordance
with the terms and subject to the conditions set forth herein and in the Letter
of Transmittal.
THE METHOD OF DELIVERY OF PRIVATE NOTES AND THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK
OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE
AN OVERNIGHT OR HAND DELIVERY SERVICE, PROPERLY INSURED. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT
BEFORE THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR PRIVATE NOTES SHOULD BE
SENT TO THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS,
COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS
FOR SUCH HOLDERS.
Any beneficial owner(s) of the Private Notes whose Private Notes are
registered in the name of a broker, dealer, commercial bank, trust company or
other nominee and who wishes to tender should contact the registered holder
promptly and instruct such registered holder to tender on such beneficial
owner's behalf. If such beneficial owner wishes to tender on such owner's own
behalf, such owner must, prior to completing and executing the Letter of
Transmittal and delivering such owner's Private Notes, either make appropriate
arrangements to register ownership of the Private Notes in such owner's name or
obtain a properly completed bond power from the registered holder. The transfer
of registered ownership may take considerable time.
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Signatures on a Letter of Transmittal or a notice of withdrawal described
below (see "--Withdrawal of Tenders"), as the case may be, must be guaranteed by
an Eligible Institution (as defined below) unless the Private Notes tendered
pursuant thereto are tendered (i) by a registered holder who has not completed
the box entitled "Special Issuance Instructions" or the box entitled "Special
Delivery Instructions" on the Letter of Transmittal or (ii) for the account of
an Eligible Institution. In the event that signatures on a Letter of Transmittal
or a notice of withdrawal, as the case may be, are required to be guaranteed,
such guarantee must be made by a member firm of a registered national securities
exchange or of the National Association of Securities Dealers, Inc., a
commercial bank or trust company having an office or correspondent in the United
States or an "eligible guarantor institution" within the meaning of Rule 17Ad-15
under the Exchange Act which is a member of one of the recognized signature
guarantee programs identified in the Letter of Transmittal (an "Eligible
Institution").
If the Letter of Transmittal is signed by a person other than the registered
holder of any Private Notes listed therein, such Private Notes must be endorsed
or accompanied by a properly completed bond power, signed by such registered
holder as such registered holder's name appears on such Private Notes.
If the Letter of Transmittal or any Private Notes or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
The Exchange Agent and the Depositary have confirmed that any financial
institution that is a participant in the Depositary's system may utilize the
Depositary's Automated Tender Offer Program to tender Private Notes. All
questions as to the validity, form, eligibility (including time of receipt),
compliance with conditions, acceptance and withdrawal of tendered Private Notes
will be determined by the Company in its sole discretion, which determination
will be final and binding. The Company reserves the absolute right to reject any
and all Private Notes not properly tendered or any Private Notes the Company's
acceptance of which would, in the opinion of counsel for the Company, be
unlawful. The Company also reserves the right to waive any defects,
irregularities or conditions of tender as to particular Private Notes. The
Company's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Private Notes must be cured within such time as the
Company shall determine. Although the Company intends to notify holders of
defects or irregularities with respect to tenders of Private Notes, neither the
Company, the Exchange Agent nor any other person shall incur any liability for
failure to give such notification. Tenders of Private Notes will not be deemed
to have been made until such defects or irregularities have been cured or
waived.
While the Company has no present plan to acquire any Private Notes that are
not tendered in the Exchange Offer or to file a registration statement to permit
resales of any Private Notes that are not tendered pursuant to the Exchange
Offer, the Company reserves the right in its sole discretion to purchase or make
offers for any Private Notes that remain outstanding subsequent to the
Expiration Date or, as set forth below under "--Conditions," to terminate the
Exchange Offer and to the extent permitted by applicable law, purchase Private
Notes in the open market, in privately negotiated transactions or otherwise. The
terms of any such purchases or offers could differ from the terms of the
Exchange Offer.
By tendering, each holder of Private Notes will represent to the Company
that, among other things, (i) Exchange Notes to be acquired by such holder of
Private Notes in connection with the Exchange Offer are being acquired by such
holder in the ordinary course of business of such holder, (ii) such holder has
no arrangement or understanding with any person to participate in the
distribution of the Exchange Notes, (iii) such holder acknowledges and agrees
that any person who is a broker-dealer registered under the Exchange Act or is
participating in the Exchange Offer for the purposes of distributing the
Exchange Notes must comply with the registration and prospectus delivery
requirements of the Securities Act in
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connection with a secondary resale transaction of the Exchange Notes acquired by
such person and cannot rely on the position of the staff of the Commission set
forth in certain no-action letters, (iv) such holder understands that a
secondary resale transaction described in clause (iii) above and any resales of
Exchange Notes obtained by such holder in exchange for Private Notes acquired by
such holder directly from the Company should be covered by an effective
registration statement containing the selling securityholder information
required by Item 507 or Item 508, as applicable, of Regulation S-K of the
Commission and (v) such holder is not an "affiliate," as defined in Rule 405
under the Securities Act, of the Company. If the holder is a broker-dealer that
will receive Exchange Notes for such holder's own account in exchange for
Private Notes that were acquired as a result of market-making activities or
other trading activities, such holder will be required to acknowledge in the
Letter of Transmittal that such holder will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of such
Exchange Notes; however, by so acknowledging and by delivering a prospectus,
such holder will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. Any broker-dealer that resells Exchange Notes
that were received by it for its own account pursuant to the Exchange Offer may
be deemed to be an "underwriter" within the meaning of the Securities Act.
RETURN OF PRIVATE NOTES
If any tendered Private Notes are not accepted for any reason set forth in
the terms and conditions of the Exchange Offer or if Private Notes are withdrawn
or are submitted for a greater principal amount than the holders desire to
exchange, such unaccepted, withdrawn or non-exchanged Private Notes will be
returned without expense to the tendering holder thereof (or, in the case of
Private Notes tendered by book-entry transfer into the Exchange Agent's account
at the Depositary pursuant to the book-entry transfer procedures described
below, such Private Notes will be credited to an account maintained with the
Depositary) as promptly as practicable.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Private Notes at the Depositary for purposes of the Exchange Offer within
two business days after the date of this Prospectus, and any financial
institution that is a participant in the Depositary's systems may make book-
entry delivery of Private Notes by causing the Depositary to transfer such
Private Notes into the Exchange Agent's account at the Depositary in accordance
with the Depositary's procedures for transfer. However, although delivery of
Private Notes may be effected through book-entry transfer at the Depositary, the
Letter of Transmittal or facsimile thereof, with any required signature
guarantees and any other required documents, must, in any case, be transmitted
to and received by the Exchange Agent at the address set forth below under
"--Exchange Agent" on or prior to the Expiration Date or pursuant to the
guaranteed delivery procedures described below.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Private Notes and (i) whose Private Notes
are not immediately available or (ii) who cannot deliver their Private Notes,
the Letter of Transmittal or any other required documents to the Exchange Agent
prior to the Expiration Date, may effect a tender if:
(a) The tender is made through an Eligible Institution;
(b) Prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery substantially in the form provided by the Company
setting forth the name and address of the holder, the certificate
number(s) of such Private Notes and the principal amount of Private Notes
tendered, stating that the tender is being made thereby and guaranteeing
that, within five New York Stock Exchange trading days after the
Expiration Date, the Letter of Transmittal (or a facsimile thereof),
together
27
<PAGE>
with the certificate(s) representing the Private Notes in proper form for
transfer or a Book-Entry Confirmation, as the case may be, and any other
documents required by the Letter of Transmittal, will be deposited by the
Eligible Institution with the Exchange Agent; and
(c) Such properly executed Letter of Transmittal (or facsimile thereof), as
well as the certificate(s) representing all tendered Private Notes in
proper form for transfer and all other documents required by the Letter
of Transmittal are received by the Exchange Agent within five New York
Stock Exchange trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Private Notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Private Notes may be
withdrawn at any time prior to the Expiration Date.
To withdraw a tender of Private Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to the Expiration Date. Any such
notice of withdrawal must (i) specify the name of the person having deposited
the Private Notes to be withdrawn (the "Depositor"), (ii) identify the Private
Notes to be withdrawn (including the certificate number or numbers and principal
amount of such Private Notes) and (iii) be signed by the holder in the same
manner as the original signature on the Letter of Transmittal by which such
Private Notes were tendered (including any required signature guarantees). All
questions as to the validity, form and eligibility (including time of receipt)
of such notices will be determined by the Company in its sole discretion, whose
determination shall be final and binding on all parties. Any Private Notes so
withdrawn will be deemed not to have been validly tendered for purposes of the
Exchange Offer and no Exchange Notes will be issued with respect thereto unless
the Private Notes so withdrawn are validly retendered. Properly withdrawn
Private Notes may be retendered by following one of the procedures described
above under "The Exchange Offer--Procedures for Tendering" at any time prior to
the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or exchange the Exchange Notes for, any
Private Notes, and may terminate the Exchange Offer as provided herein before
the acceptance of such Private Notes, if the Exchange Offer violates applicable
law, rules or regulations or an applicable interpretation of the Staff of the
Commission.
If the Company reasonably determines that such condition (that the Exchange
Offer not violate applicable law, rules, regulations or interpretation of the
Staff) is not satisfied, the Company may (i) refuse to accept any Private Notes
and return all tendered Private Notes to the tendering holders or (ii) extend
the Exchange Offer and retain all Private Notes tendered prior to the expiration
of the Exchange Offer, subject, however, to the rights of holders to withdraw
such Private Notes (see "--Withdrawal of Tenders").
LIQUIDATED DAMAGES
The Company, the Subsidiary Guarantors and the Initial Purchaser entered
into a registration rights agreement (the "Registration Rights Agreement") dated
as of July 25, 1997, pursuant to which each of the Company and the Subsidiary
Guarantors agreed that they will, at their cost, for the benefit of the Holders,
(i) to the extent not prohibited by any applicable law or applicable
interpretation of the staff of the Commission (A) prepare and, on or prior to 60
days (the "Filing Date") after the date of original issuance of the Private
Notes (the "Issue Date"), file with the Commission a Registration Statement
under the Securities Act with respect to an offer by the Company to the holders
of the Private Notes (the "Exchange
28
<PAGE>
Offer") to issue and deliver to such holders, in exchange for the Private Notes,
a like principal amount of notes (the "Exchange Notes") guaranteed on a senior
subordinated basis by each of the Subsidiary Guarantors, and identical to the
Private Notes in all material respects, except that the such notes will not have
provisions regarding restrictions on transfer, (B) use their best efforts to
cause the Registration Statement relating to the Exchange Offer to be declared
effective by the Commission under the Securities Act on or prior to 150 days
after the Issue Date, and (C) commence the Exchange Offer and use their best
efforts to issue, on or prior to the date (the "Consummation Date") that is 30
days immediately following the date that the Exchange Registration Statement
shall have been declared effective, the Exchange Notes. The offer and sale of
the Exchange Notes pursuant to the Exchange Offer shall be registered pursuant
to the Securities Act on an appropriate form (the "Exchange Registration
Statement") and duly registered or qualified under all applicable state
securities or Blue Sky laws and will comply with all applicable tender offer
rules and regulations under the Exchange Act and state securities or Blue Sky
laws. The Exchange Offer shall not be subject to any condition, other than that
the Exchange Offer does not violate any applicable law or interpretation of the
staff of the Commission.
If, prior to consummation of the Exchange Offer, any of the Initial
Purchasers hold any Private Notes acquired by it and having, or which are
reasonably likely to be determined to have, the status of an unsold allotment in
the initial distribution, or any other holder of Private Notes is not entitled
to participate in the Exchange Offer, the Company and the Subsidiary Guarantors,
upon the request of such Initial Purchaser or any such holder, shall,
simultaneously with the delivery of the Exchange Notes in the Exchange Offer,
issue and deliver to such Initial Purchaser and any such holder, in exchange
(the "Private Exchange") for such Private Notes held by such Initial Purchaser
and any such holder, a like principal amount of debt securities of the Company,
guaranteed by each of the Subsidiary Guarantors on a senior subordinated basis,
that are identical in all material respects to the Exchange Notes (the "Private
Exchange Notes").
If (i) the Company and the Subsidiary Guarantors are not permitted to file
the Exchange Offer Registration Statement or to consummate the Exchange Offer
because the Exchange Offer is not permitted by any applicable law or applicable
interpretation of the Staff of the Commission or (ii) any holder of a Private
Note notifies the Company on or prior to the 30th day following the Issue Date
that (A) due to a change in law or policy it is not entitled to participate in
the Exchange Offer, (B) due to a change in law or policy it may not resell
Exchange Notes acquired by it in the Exchange Offer to the public without
delivering a prospectus and the Prospectus contained in the Exchange
Registration Statement is not appropriate or available for such resales by such
holder or (C) it owns Private Notes (including any Initial Purchaser that holds
Private Notes as part of an unsold allotment from the original offering of the
Private Notes) acquired directly from the Company or a Subsidiary Guarantor or
an Affiliate of the Company or a Subsidiary Guarantor or (iii) any holder of
Private Exchange Notes so requests after the consummation of the Private
Exchange or (iv) the Company and the Subsidiary Guarantors have not consummated
the Exchange Offer within 180 days after the Issue Date (each such event
referred to in clauses (i) through (iv), a "Shelf Filing Event"), the Company
and the Subsidiary Guarantors shall (a) promptly deliver to the holders and the
Trustee notice thereof and (b) at their own expense cause to be filed with the
Commission pursuant to Rule 415 a shelf registration statement (the "Shelf
Registration Statement") as promptly as practicable and in any event prior to 60
days after such filing obligation arises relating to all Transfer Restricted
Notes (as defined) (the "Shelf Registration") the holders of which have provided
certain information requested by the Company (provided that if the Shelf Filing
Event arises pursuant to clause (iv) above, the Company and the Subsidiary
Guarantors shall file the Shelf Registration Statement on or prior to the 181st
day after the Issue Date), and shall use their best efforts to have the Shelf
Registration Statement declared effective by the Commission on or prior to 90
days after the filing thereof. In such circumstances, the Company and the
Subsidiary Guarantors shall use their best efforts to keep the Shelf
Registration Statement continuously effective under the Securities Act, until
(A) two years (or such shorter period as may be established by any amendment to
the two year period set forth in Rule 144(k) under the Securities Act) following
the Issue Date or (B) if sooner, the date immediately following the date that
all Transfer Restricted Notes covered by the Shelf Registration Statement have
29
<PAGE>
been sold pursuant thereto or otherwise cease to be Transfer Restricted Notes
(the "Effectiveness Period").
During any consecutive 365-day period, the Company will have the ability to
suspend the availability of the Shelf Registration Statement for up to two
periods of up to 45 consecutive days, but no more than an aggregate of 60 days
during any 365-day period.
For purposes of the foregoing, a "Transfer Restricted Note" means each
Private Note, each Exchange Note as to which clause (ii) of the second preceding
paragraph is applicable, and each Private Exchange Note, in each case upon
original issuance thereof and at all time subsequent thereto until the earliest
to occur of (A) the date on which any such Private Note has been exchanged by a
person other than a Participating Broker-Dealer for an Exchange Note (other than
with respect to an Exchange Note as to which clause (ii) of the preceding
paragraph applies) pursuant to the Exchange Offer, (B) with respect to Exchange
Notes received by Participating Broker-Dealers in the Exchange Offer, the
earlier of (x) the date on which such Exchange Note has been sold by such
Participating Broker-Dealer by means of the Prospectus contained in the Exchange
Registration Statement and (y) the date on which the Exchange Registration
Statement has been effective under the Securities Act for a period of six months
after the Consummation Date, (C) a Shelf Registration Statement covering such
Note, Exchange Note or Private Exchange Note has been declared effective by the
Commission and such Note, Exchange Note or Private Exchange Note, as the case
may be, has been disposed of in accordance with such effective Shelf
Registration Statement, (D) the date on which such Note, Exchange Note or
Private Exchange Note, as the case may be, is eligible for distribution to the
public without volume or manner of sale restrictions pursuant to Rule 144(k) or
(E) the date on which such Private Note, Exchange Note or Private Exchange Note,
as the case may be, ceases to be outstanding for purposes of the Indenture or
any other indenture under which such Exchange Note or Private Exchange Note was
issued.
If the Company and the Subsidiary Guarantors fail to comply with the above
provisions or if the Exchange Offer Registration Statement or the Shelf
Registration statement fails to become effective, then, as liquidated damages
(the "Liquidated Damages") shall become payable in respect of the Private Notes
as follows:
(i) if (A) neither the Exchange Offer Registration Statement nor Shelf
Registration Statement is filed with the Commission on or prior to the
Filing Date or (B) notwithstanding that the Company and the Subsidiary
Guarantors have consummated or will consummate an Exchange Offer, the
Company and the Subsidiary Guarantors are required to file a Shelf
Registration Statement and such Shelf Registration Statement is not filed on
or prior to the date required by the Registration Rights Agreement, then
commencing on the day after either such required filing date, Liquidated
Damages shall accrue on the principal amount of the Private Notes at a rate
of 0.5% per annum for the first 90 days immediately following each such
filing date, such Liquidated Damages rate increasing by an additional 0.5%
per annum at the beginning of each subsequent 90-day period; or
(ii) if (A) neither the Exchange Offer Registration Statement nor a
Shelf Registration Statement is declared effective by the Commission on or
prior to 90 days after the applicable filing date or (B) notwithstanding
that the Company and the Subsidiary Guarantors have consummated or will
consummate an Exchange Offer, the Company and the Subsidiary Guarantors are
required to file a Shelf Registration Statement and such Shelf Registration
Statement is not declared effective by the Commission on or prior to the
90th day following the date such Shelf Registration Statement was filed,
then commencing on the day after the 90th day following the applicable
filing date, Liquidated Damages shall accrue on the principal amount of the
Private Notes at a rate of 0.5% per annum for the first 90 days immediately
following such date, such Liquidated Damages rate increasing by an
additional 0.5% per annum at the beginning of each subsequent 90-day period;
or
30
<PAGE>
(iii) if (A) the Company and the Subsidiary Guarantors have not
exchanged Exchange Notes for all Private Notes validly tendered in
accordance with the terms of the Exchange Offer on or prior to the 30th day
after the date on which the Exchange Offer Registration Statement was
declared effective or (B) if applicable, the Shelf Registration Statement
has been declared effective and such Shelf Registration Statement ceases to
be effective at any time prior to the second anniversary of its effective
date (other than after such time as all Private Notes have been disposed of
thereunder), then Liquidated Damages shall accrue on the principal amount of
the Private Notes at a rate of 0.5% per annum for the first 90 days
commencing on (x) the 31st day after such effective date, in the case of (A)
above, or (y) the day such Shelf Registration Statement ceases to be
effective in the case of (B) above, such Liquidated Damages rate increasing
by an additional 0.5% per annum at the beginning of each subsequent 90-day
period;
PROVIDED, HOWEVER, that the Liquidated Damages rate on the Private Notes may not
exceed in the aggregate 1.50% per annum; PROVIDED, FURTHER, HOWEVER, that (1)
upon the filing of the Exchange Offer Registration Statement or a Shelf
Registration Statement (in the case of clause (i) above), (2) upon the
effectiveness of the Exchange Offer Registration Statement or a Shelf
Registration Statement (in the case of clause (ii) above), or (3) upon the
exchange of Exchange Notes for all Private Notes tendered (in the case of clause
(iii) (A) above), or upon the effectiveness of the Shelf Registration Statement
which had ceased to remain effective (in the case of clause (iii) (B) above),
Liquidated Damages on the Private Notes as a result of such clause (or the
relevant subclause thereof), as the case may be, shall cease to accrue.
Any Liquidated Damages will be payable in cash to record holders in the same
manner as interest will be payable on the Private Notes.
No holder of Transfer Restricted Notes shall be entitled to Liquidated
Damages payable in connection with any Shelf Registration Statement unless and
until such holder shall have provided certain information reasonably requested
by the Company for use in connection with such Shelf Registration Statement.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by, all the provisions of the Registration Rights Agreement, a copy
of which will be available upon request to the Company.
TERMINATION OF CERTAIN RIGHTS
All rights under the Registration Rights Agreement (including registration
rights) of holders of the Private Notes eligible to participate in the Exchange
Offer will terminate upon consummation of the Exchange Offer except with respect
to the Company's continuing obligations (i) to indemnify such holders (including
any broker-dealers) and certain parties related to such holders against certain
liabilities (including liabilities under the Securities Act), (ii) to provide,
upon the request of any holder of a transfer-restricted Private Note, the
information required by Rule 144A(d)(4) under the Securities Act in order to
permit resales of such Private Notes pursuant to Rule 144A and (iii) to provide
copies of the latest version of the Prospectus to broker-dealers upon their
request for the period required by the Securities Act.
31
<PAGE>
EXCHANGE AGENT
Norwest Bank Minnesota, National Association has been appointed as Exchange
Agent of the Exchange Offer. Questions and requests for assistance, requests for
additional copies of this Prospectus or of the Letter of Transmittal and
requests for Notice of Guaranteed Delivery should be directed to the Exchange
Agent addressed as follows:
<TABLE>
<S> <C>
BY REGISTERED OR CERTIFIED MAIL: IN PERSON:
Norwest Bank Minnesota, Northstar East Bldg.
National Association 608 2nd Ave. S.
Corporate Trust Operations 12th Floor
P.O. Box 1517 Corporate Trust Ser.
Minneapolis, MN 55480-1517 Minneapolis, MN
BY HAND OR OVERNIGHT COURIER: BY FACSIMILE FOR ELIGIBLE INSTITUTIONS
ONLY):
Norwest Bank Minnesota, (612) 667-4927
National Association CONFIRM RECEIPT OF NOTICE OF
Corporate Trust Operations GUARANTEED DELIVERY BY TELEPHONE:
Norwest Center (612) 667-9764
Sixth and Marquette
Minneapolis, MN 55479-0113
</TABLE>
DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION VIA A
FACSIMILE NUMBER OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID
DELIVERY.
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telephone or in person by officers and regular
employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company and are estimated in the aggregate to be approximately
$250,000. Such expenses include registration fees, fees and expenses of the
Exchange Agent and the Trustee, accounting and legal fees and printing costs,
among others.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Private Notes pursuant to the Exchange Offer. If, however, a transfer tax is
imposed for any reason other than the exchange of the Private Notes pursuant to
the Exchange Offer, then the amount of any such transfer taxes (whether imposed
on the registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption therefrom
is not submitted with the Letter of Transmittal, the amount of such transfer
taxes will be billed directly to such tendering holder.
CONSEQUENCE OF FAILURES TO EXCHANGE
Participation in the Exchange Offer is voluntary. Holders of the Private
Notes are urged to consult their financial and tax advisors in making their own
decisions on what action to take, and the Company takes no position with respect
to the advisability of the Exchange Offer.
32
<PAGE>
The Private Notes that are not exchanged for the Exchange Notes pursuant to
the Exchange Offer will remain restricted securities. Accordingly, such Private
Notes may be resold only (i) to a person whom the seller reasonably believes is
a QIB in a transaction meeting the requirements of Rule 144A, (ii) in a
transaction meeting the requirements of Rule 144 under the Securities Act, (iii)
outside the United States to a foreign person in a transaction meeting the
requirements of Rule 904 under the Securities Act, (iv) in accordance with
another exemption from the registration requirements of the Securities Act (and
based upon an opinion of counsel if the Company so requests), (v) to the Company
or (vi) pursuant to an effective registration statement and, in each case, in
accordance with any applicable securities laws of any state of the United States
or any other applicable jurisdiction.
ACCOUNTING TREATMENT
For accounting purposes, the Company will recognize no gain or loss as a
result of the Exchange Offer. The expenses of the Exchange Offer will be
amortized over the term of the Exchange Notes.
33
<PAGE>
THE RECAPITALIZATION AND THE TRANSACTIONS
Prior to December 1, 1995, a substantial majority of the Company's common
stock was owned by its employees. On December 1, 1995, the Company effected the
Recapitalization, wherein Holdings merged with and into the Company with the
Company continuing as the surviving corporation. Holdings was a company
organized by Carlyle to facilitate the Recapitalization and had no operating
activity or history. Upon consummation of the Recapitalization, Holdings
received 85.4% of the Company's common stock and 14.6% was retained by members
of Company management who were shareholders prior to the Recapitalization. The
Recapitalization resulted in a charge to stockholders' equity of $58.8 million
to reflect redemption of certain common stock.
The Company financed the Recapitalization through proceeds from term loans
of $35.0 million, borrowings of approximately $6.5 million under the Prior
Senior Credit Facility, issuance of $7.0 million in FDC Notes and an equity
investment by Holdings of $16.1 million. These proceeds were also utilized to
pay fees and expenses related to the Recapitalization and related financing, and
to provide working capital for the Company.
In May 1997, the Company purchased all of the outstanding capital stock of
NYMA for $29.5 million, consisting of $24.5 million in cash and $5.0 million in
NYMA Notes. The purchase price may be increased by up to $7.0 million if certain
performance criteria related to earnings and new business activities are met.
Such payments, if any, will be accounted for as adjustments to the purchase
price. No additional payments have been made as of September 30, 1997.
Additional payments, if any, will be funded with additional borrowings. The
Company funded the cash portion of the purchase price with additional borrowings
of approximately $9.5 million and the sale of 555,556 shares of the Company's
common stock for approximately $15.0 million. In connection with the NYMA
Acquisition, the Company also borrowed approximately $18.5 million under the
Prior Senior Credit Facility to retire existing Company and NYMA working capital
debt and to pay related fees and expenses.
In June 1997, the Company purchased all of the outstanding capital stock of
Sylvest for $40.4 million, consisting of $33.4 million in cash and $7.0 million
in Sylvest Notes. The purchase price may be increased by up to $1.0 million if
certain earnings objectives are met and is subject to adjustment based on an
audit of the closing balance sheet. Such payments, if any, will be accounted for
as adjustments to the purchase price. No additional payments have been made as
of September 30, 1997. Additional payments, if any, will be funded with
additional borrowings. The Company funded the cash portion of the purchase price
with additional borrowings of $21.4 million and the sale of 444,444 shares of
the Company's common stock for approximately $12.0 million. In connection with
the Sylvest Acquisition, the Company also borrowed approximately $6.0 million
under the Prior Senior Credit Facility to retire existing Sylvest working
capital debt and to pay related fees and expenses.
The Company does not presently expect additional payments in connection with
either acquisition to be material.
34
<PAGE>
USE OF PROCEEDS
In July 1997, the Company sold $105 million in aggregate principal amount of
Private Notes to the Initial Purchasers in a transaction exempt from the
registration requirements of the Securities Act (the "Private Placement"). The
Company used the proceeds of the Private Placement to (i) prepay $7.7 million of
notes originally issued in connection with the recapitalization of the Company
at the time of Carlyle's initial investment in 1995 (the "FDC Notes" and,
together with the NYMA Notes and the Sylvest Notes, the "Seller Notes") and $4.0
million of the Sylvest Notes, (ii) repay (the "Refinancing") all amounts
(approximately $80.4 million) of long-term debt ("Refinanced Bank Debt") owing
under the Prior Senior Credit Facility, (iii) pay $7.0 million in fees and
expenses associated with the Private Placement and the Refinancing and (iv)
generate $5.9 million in additional cash for working capital purposes. None of
the proceeds of the Private Placement are remaining. In addition, the Company
terminated the Prior Senior Credit Facility and executed a new senior secured
revolving credit facility (the "New Senior Credit Facility"), which provides
revolving borrowing availability up to $75.0 million, subject to a borrowing
base limitation.
The Company will not receive any proceeds from the Exchange Offer. In
consideration for issuing the Exchange Notes as contemplated in this Prospectus,
the Company will receive in exchange Private Notes in like principal amount, the
terms of which are identical to the Exchange Notes except that (i) the exchange
will have been registered under the Securities Act, and, therefore, the Exchange
Notes will not bear legends restricting the transfer thereof and (ii) holders of
the Exchange Notes will not be entitled to certain rights of holders of the
Private Notes under the Registration Rights Agreement, which rights will
terminate upon the consummation of the Exchange Offer. The Private Notes
surrendered in exchange for Exchange Notes will be retained by the Company and
the Exchange Offer will not result in any increase in the indebtedness of the
Company.
35
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at
September 30, 1997. The debt balances and total capitalization presented below
represent the recourse obligations of the Company and exclude $11.0 million of
nonrecourse notes payable and nonrecourse obligations under capital leases. The
information presented below is unaudited and should be read in conjunction with
the financial statements of the Company and the notes thereto included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
(DOLLARS IN
MILLIONS)
<S> <C>
Cash and cash equivalents.................................................................... $ 8.0
------
------
Recourse debt:(a)
Revolving line of credit(b)................................................................ $ 3.5
Recourse obligations under capital leases.................................................. 2.3
Senior subordinated notes due 2005......................................................... 105.0
Seller notes............................................................................... 8.0
------
Total recourse debt...................................................................... 118.8
Stockholders' equity(c)...................................................................... 1.8
------
Total capitalization(a)................................................................ $ 120.6
------
------
</TABLE>
- ------------------------
(a) The Company has excluded $11.0 million of nonrecourse notes payable and
nonrecourse obligations under capital leases from the debt balances and
total capitalization presented above. The Company's future obligation under
these nonrecourse agreements, in the event of default by the end user
lessee, would be limited in most circumstances, outside a bankruptcy
proceeding, to ensuring the return of the associated assets to the lender.
These nonrecourse notes payable and nonrecourse obligations under capital
leases are considered debt under generally accepted accounting principles
and accordingly, are reflected as liabilities in the Company's historical
financial statements. Total recourse debt is total debt of $129.8 million
minus the $11.0 million of nonrecourse notes payable and nonrecourse
obligations under capital leases noted above.
(b) At September 30, 1997, the Company's New Senior Credit Facility had a
revolving credit borrowing availability of $75 million subject to a
borrowing base limitation. Availability was reduced by borrowings of $3.5
million and $4.0 million through the issuance of a letter of credit in
connection with the contingent consideration available to the former
shareholders of NYMA.
(c) Stockholders' equity includes the effect of the Recapitalization which
included a charge to stockholders' equity of $58.8 million. In connection
with the Recapitalization and the Acquisitions, Carlyle and management have
contributed approximately $43.1 million of cash to the Company. See Notes 2
and 14 to FDC's consolidated financial statements.
36
<PAGE>
SELECTED UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following selected unaudited pro forma consolidated financial data give
effect to the Transactions. The unaudited pro forma consolidated statements of
operations have been prepared assuming the sale of the Private Notes and the
application of the net proceeds therefrom occurred as of January 1, 1996. The
unaudited pro forma consolidated statements of operations reflect the historical
results of the Company, NYMA and Sylvest for the year ended December 31, 1996
and for the nine months ended September 30, 1997. The acquisition of NYMA was
completed on May 2, 1997. The acquisition of Sylvest was completed on June 30,
1997. Pursuant to the stock purchase agreement with Sylvest, the Solutions
Division of Sylvest, which was retained by the previous owners, was excluded
from the transaction. Where significant, pro forma adjustments have been made to
reflect the impact of excluding the related revenue and expense amounts. The
unaudited pro forma consolidated financial data give effect to certain pro forma
adjustments that are described in the notes to these statements.
The unaudited pro forma consolidated financial data are presented for
informational purposes only and are not necessarily indicative of the results of
operations that would have been achieved had the Transactions been completed as
of the respective date or period presented, nor are they necessarily indicative
of the Company's future results of operations. The unaudited pro forma
consolidated financial data should be read in conjunction with the historical
financial statements of the Company, NYMA and Sylvest, including the notes
thereto, included elsewhere in this Prospectus.
The Company believes that the assumptions used in preparing the unaudited
pro forma consolidated financial data provide a reasonable basis for presenting
all of the significant effects of the Transactions and that the pro forma
adjustments give effect to those assumptions in the unaudited pro forma
consolidated financial data. The Company, NYMA and Sylvest each have fiscal
years ending December 31.
37
<PAGE>
FEDERAL DATA CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
PRO FORMA RELATED TO THE
ADJUSTMENTS OFFERING OF
THE RELATED TO THE THE PRIVATE PRO FORMA
COMPANY NYMA SYLVEST ACQUISITIONS SUBTOTAL NOTES CONSOLIDATED
---------- --------- ---------- -------------- ---------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues............................ $ 151,108 $ 82,046 $ 106,542 $ (6,874)(a) $ 332,822 $ 332,822
---------- --------- ---------- ------- ---------- ------------
Cost of sales and services.......... 114,248 57,824 92,736 (5,129)(a) 259,679 259,679
Selling, general and administrative
expenses.......................... 21,366 22,481 11,376 (3,380)(a) 49,490 49,490
(2,353)(b)
Amortization of goodwill............ 3,953(c) 3,953 3,953
Interest expense.................... 7,564 394 340 (734)(d) 13,997 $ (338)(g) 15,771
6,433(e) 2,112(h)
---------- --------- ---------- ------- ---------- ------- ------------
Total expenses.................. 143,178 80,699 104,452 (1,210) 327,119 1,774 328,893
---------- --------- ---------- ------- ---------- ------- ------------
Income before income taxes.......... 7,930 1,347 2,090 (5,664) 5,703 (1,774) 3,929
Provision for income taxes.......... 3,202 547 47 (955)(f) 2,841 (710)(f) 2,131
---------- --------- ---------- ------- ---------- ------- ------------
Net income.......................... $ 4,728 $ 800 $ 2,043 $ (4,709) $ 2,862 $ (1,064) $ 1,798
---------- --------- ---------- ------- ---------- ------- ------------
---------- --------- ---------- ------- ---------- ------- ------------
</TABLE>
<TABLE>
<S> <C>
OTHER PRO FORMA DATA
EBITDA(1)................................................................................. $ 23,295
Net recourse interest expense(2).......................................................... 13,557
Net cash recourse interest expense(3)..................................................... 12,532
Depreciation and amortization(4).......................................................... 5,809
Capital expenditures...................................................................... 2,124
</TABLE>
- ------------------------
(1) EBITDA represents the sum of income (loss) before income taxes, net recourse
interest expense and depreciation and amortization. EBITDA is not a measure
of performance or financial condition under generally accepted accounting
principles, but is presented to provide additional information related to
debt service capability. EBITDA should not be considered in isolation or as
a substitute for other measures of financial performance or liquidity under
generally accepted accounting principles. While EBITDA is frequently used as
a measure of operations and the ability to meet debt service requirements,
it is not necessarily comparable to other similarly titled captions of other
companies due to the potential inconsistencies in the method of calculation.
(2) Net recourse interest expense is interest expense minus interest expense on
nonrecourse notes payable and nonrecourse obligations under capital leases
of $2,015 and minus interest income on cash balances of $199.
(3) Net cash recourse interest expense is net recourse interest expense minus
amortization of deferred financing costs of $1,025.
(4) Excludes amortization of deferred financing costs on the Notes that are
included in interest expense.
38
<PAGE>
FEDERAL DATA CORPORATION
NOTE TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
1. PRO FORMA ADJUSTMENTS TO THE UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
Pro forma adjustments to the unaudited consolidated statement of
operations for the year ended December 31, 1996 are made to reflect the
following:
(a) To remove revenues and direct costs of the Solutions division of
Sylvest pursuant to the stock purchase agreement.
(b) To record the reduction in compensation expense in connection with
new employment agreements entered into with NYMA and Sylvest senior
management concurrent with the effective date of their respective stock
purchase agreements.
(c) To record amortization of goodwill related to the Acquisitions over
an estimated useful life of 15 years.
(d) To remove historical interest expense incurred by NYMA and Sylvest
due to the repayment of the related debt balances.
(e) To reflect interest expense, including amortization of additional
deferred financing costs on additional borrowings under the Prior Senior
Credit Facility and the Seller Notes.
(f) To record the estimated aggregate income tax provision. This amount
includes the tax effect of all pro forma adjustments and the tax effect of
accounting for Sylvest as if it were a C corporation. Sylvest was a S
corporation prior to the Sylvest Acquisition.
(g) To reflect the net change in amortization of deferred financing
costs resulting from the issuance of the Notes:
<TABLE>
<S> <C>
Amortization of deferred financing costs related to
the Prior Senior Credit Facility................. $ (1,363)
Pro forma deferred financing costs related to the
Notes and the New Senior Credit Facility......... 1,025
---------
Net decrease....................................... $ (338)
---------
---------
</TABLE>
At December 31, 1996, there were deferred financing costs related to the
Prior Senior Credit Facility. No adjustments for the write-off of these amounts
has been included in the unaudited pro forma consolidated statement of
operations for the year ended December 31, 1996.
(h) To record the net change in interest expense resulting from the
issuance of the Notes and the establishment of the New Senior Credit
Facility:
<TABLE>
<S> <C>
Notes at 10.125%................................... $ 10,631
Actual interest expense on Prior Senior Credit
Facility......................................... (2,361)
Pro forma interest expense on additional borrowings
under the Prior Senior Credit Facility and Seller
Notes............................................ (6,408)
Pro forma increased fees related to the New Senior
Credit Facility.................................. 250
---------
Net increase....................................... $ 2,112
---------
---------
</TABLE>
39
<PAGE>
FEDERAL DATA CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ADJUSTMENTS ADJUSTMENTS
THE RELATED TO THE RELATED TO THE PRO FORMA
COMPANY NYMA(1) SYLVEST(1) ACQUISITIONS SUBTOTAL OFFERING CONSOLIDATED
---------- ----------- ----------- -------------- ---------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues........................ $ 212,069 $ 23,624 $ 78,863 $ (5,833)(a) $ 308,723 $ 308,723
---------- ----------- ----------- ------- ---------- ------------
Cost of sales and services...... 178,132 13,838 70,312 (4,027)(a) 258,255 258,255
Selling, general, and
administrative expenses........ 23,624 11,670 10,213 (1,963)(a) 40,406 40,406
(3,138)(b)
Amortization of goodwill........ 1,195 -- -- 1,770(c) 2,965 2,965
Interest expense................ 7,124 144 297 (441)(d) 9,244 $ (166)(g) 10,563
2,120(e) 1,485(h)
---------- ----------- ----------- ------- ---------- ------- ------------
Total expenses.............. 210,075 25,652 80,822 (5,679) 310,870 1,319 312,189
---------- ----------- ----------- ------- ---------- ------- ------------
Income (loss) before income
taxes.......................... 1,994 (2,028) (1,959) (154) (2,147) (1,319) (3,466)
Provision (benefit) for income
taxes.......................... 1,031 (785) -- (685)(f) (439) (527)(f) (966)
---------- ----------- ----------- ------- ---------- ------- ------------
Net income (loss)............... $ 963 $ (1,243) $ (1,959) $ 531 $ (1,708) $ (792) $ (2,500)
---------- ----------- ----------- ------- ---------- ------- ------------
---------- ----------- ----------- ------- ---------- ------- ------------
OTHER PRO FORMA DATA
EBITDA(2)......................................................................................................... $ 10,254
Net recourse interest expense(3).................................................................................. 9,462
Net cash recourse interest expense(4)............................................................................. 8,693
Depreciation and amortization(5).................................................................................. 4,258
Capital expenditures.............................................................................................. 1,788
</TABLE>
- ------------------------
(1) Includes activity of NYMA and Sylvest prior to their acquisition by the
Company.
(2) EBITDA represents the sum of income (loss) before income taxes, net recourse
interest expense and depreciation and amortization. EBITDA is not a measure
of performance or financial condition under generally accepted accounting
principles, but is presented to provide additional information related to
debt service capability. EBITDA should not be considered in isolation or as
a substitute for other measures of financial performance or liquidity under
generally accepted accounting principles. While EBITDA is frequently used as
a measure of operations and the ability to meet debt service requirements,
it is not necessarily comparable to other similarly titled captions of other
companies due to the potential inconsistencies in the method of calculation.
(3) Net recourse interest expense is interest expense minus interest expense on
nonrecourse notes payable and nonrecourse obligations under capital leases
of $1,014 and minus interest income on cash balances of $87.
(4) Net cash recourse interest expense is net recourse interest expense minus
amortization of deferred financing costs of $769.
(5) Excludes amortization of deferred financing costs on the Notes that are
included in interest expense.
40
<PAGE>
FEDERAL DATA CORPORATION
NOTE TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS)
1. PRO FORMA ADJUSTMENTS TO THE UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
Pro forma adjustments to the unaudited consolidated statement of operations
for the nine months ended September 30, 1997 are made to reflect the following:
(a) To remove revenues and direct costs of the Solutions division of
Sylvest pursuant to the stock purchase agreement.
(b) To record the reduction in compensation expense in connection with
new employment agreements entered into with NYMA and Sylvest senior
management concurrent with the effective date of their respective stock
purchase agreements.
(c) To record amortization of goodwill related to the Acquisitions over
an estimated useful life of 15 years.
(d) To remove historical interest expense incurred by NYMA and Sylvest
due to the repayment of the related debt balances.
(e) To reflect interest expense, including amortization of additional
deferred financing costs on additional borrowings under the Prior Senior
Credit Facility and the Seller Notes.
(f) To record the estimated aggregate income tax provision. This amount
includes the tax effect of all pro forma adjustments and the tax effect of
accounting for Sylvest as if it were a C corporation. Sylvest was a S
corporation prior to the Sylvest Acquisition.
(g) To reflect the net change in amortization of deferred financing
costs resulting from the issuance of the Notes:
<TABLE>
<S> <C>
Amortization of deferred financing costs related to
the Prior Senior Credit Facility................. $ (935)
Pro forma deferred financing costs related to the
Notes and the New Senior Credit Facility......... 769
---------
Net decrease....................................... $ (166)
---------
---------
</TABLE>
Deferred financing costs related to the Prior Senior Credit Facility
were written off in the third quarter. No adjustments for the write-off of
these amounts has been included in the unaudited pro forma consolidated
statement of operations for the nine months ended September 30, 1997.
(h) To record the net change in interest expense resulting from the
issuance of the Notes and the establishment of the New Senior Credit
Facility:
<TABLE>
<S> <C>
Notes at 10.125%................................... $ 7,973
Actual interest expense on Prior Senior Credit
Facility......................................... (1,870)
Pro forma interest expense on additional borrowings
under the Prior Senior Credit Facility and Seller
Notes............................................ (4,806)
Pro forma increased fees related to the New Senior
Credit Facility.................................. 188
---------
Net increase....................................... $ 1,485
---------
---------
</TABLE>
41
<PAGE>
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA OF
FEDERAL DATA CORPORATION
The following table sets forth selected consolidated historical financial
data of FDC as of and for the years ended December 31, 1992, 1993, 1994, 1995
and 1996. The selected consolidated historical financial data has been derived
from FDC's consolidated financial statements, which have been audited by Price
Waterhouse LLP, independent accountants. Consolidated balance sheets at December
31, 1995 and 1996 and the related consolidated statements of operations, of
stockholders' (deficit) equity and of cash flows for the three years ended
December 31, 1996 and notes thereto appear elsewhere in this Prospectus. The
selected consolidated historical financial data as of September 30, 1997 and for
the nine months ended September 30, 1996 and 1997 have been derived from FDC's
unaudited consolidated financial statements which, in the opinion of management,
reflect all material adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of the data for the unaudited
periods. The operating results for the nine months ended September 30, 1997 are
not necessarily indicative of the results that may be expected for the full year
ending December 31, 1997. The selected consolidated historical financial data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the audited consolidated
financial statements of FDC, together with the related notes thereto, included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------ ------------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS EXCEPT RATIO DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues.............................. $ 96,933 $112,441 $143,527 $129,819 $151,108 $ 91,767 $212,069
-------- -------- -------- -------- -------- -------- --------
Expenses:
Cost of sales and services.......... 73,710 86,623 114,038 107,366 114,248 69,506 178,132
Selling, general and
administrative.................... 13,297 14,395 20,546 20,943 21,366 13,823 24,819
Interest(a)......................... 4,377 5,389 3,580 3,663 7,564 6,080 7,124
-------- -------- -------- -------- -------- -------- --------
Total expenses.................... 91,384 106,407 138,164 131,972 143,178 89,409 210,075
-------- -------- -------- -------- -------- -------- --------
Income (loss) from continuing
operations before extraordinary item
and income taxes.................... 5,549 6,034 5,363 (2,153) 7,930 2,358 1,994
Income tax provision (benefit)........ 2,220 369 1,171 (3,950) 3,202 943 1,031
-------- -------- -------- -------- -------- -------- --------
Income from continuing operations
before extraordinary item........... 3,329 5,665 4,192 1,797 4,728 1,415 963
Loss from discontinued operations, net
of income tax benefit(b)............ (6,330) -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Income (loss) before extraordinary
item................................ (3,001) 5,665 4,192 1,797 4,728 1,415 963
Extraordinary loss from early
retirement of debt, net of income
tax benefit(c)...................... -- -- -- -- -- -- (2,655)
-------- -------- -------- -------- -------- -------- --------
Net (loss) income..................... $ (3,001) $ 5,665 $ 4,192 $ 1,797 $ 4,728 $ 1,415 $ (1,692)
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
EARNINGS PER SHARE(D):
Income before extraordinary item...... $ 2.43 $ 0.73 $ 0.39
Extraordinary loss from early
retirement of debt, net of income
tax................................. -- -- (1.07)
-------- -------- --------
Net income (loss)..................... $ 2.43 $ 0.73 $ (0.68)
-------- -------- --------
-------- -------- --------
Weighted average common shares and
common share equivalents(e)........... 1,946,194 1,934,984 2,478,425
-------- -------- --------
-------- -------- --------
OPERATING AND OTHER DATA(F):
EBITDA(g)............................. $ 8,149 $ 7,509 $ 6,734 $ (847) $ 14,082 $ 7,337 $ 10,068
Net recourse interest expense(h)...... 431 109 44 40 5,370 4,342 6,023
Net cash recourse interest
expense(f).......................... 431 109 44 40 3,926 3,462 5,512
Depreciation and amortization......... 2,169 1,366 1,327 1,266 782 637 2,051
Capital expenditures.................. 362 593 2,590 686 903 546 1,582
Ratio of earnings to fixed
charges(j).......................... 2.0x 2.0x 2.2x (k) 2.0x -- 1.3x
Pro forma ratio of earnings to fixed
charges(j).......................... -- -- -- -- 1.2x -- (k)
BALANCE SHEET DATA AT END OF PERIOD:
Working capital....................... $ 4,073 $ 14,422 $ 17,195 $ 11,025 $ 16,249 $ 53,282
Total assets.......................... 103,046 115,094 120,947 150,102 83,286 212,428
Long-term debt(l)..................... 46,984 35,753 20,077 43,412 50,170 120,676
Stockholders' equity (deficit)(m)..... 9,823 15,310 19,399 (25,962) (22,826) 1,781
</TABLE>
42
<PAGE>
- ------------------------------
(a) Interest expense includes interest on both recourse and nonrecourse notes
payable and obligations under capital leases.
(b) During 1990, the Company sold the business and substantially all the assets
of a subsidiary and accounted for the disposition as a discontinued
operation. The loss recorded during 1992 related to estimated costs arising
from a subcontractor's breach of contract to perform services under a
Government prime contract related to the discontinued operation.
(c) During the nine months ended September 30, 1997, the Company wrote off the
deferred financing fees related to the FDC, NYMA and Sylvest acquisition
debt that was refinanced in July 1997.
(d) Net income (loss) per share has been omitted for 1992-1995 because of the
material change in outstanding common shares resulting from the
recapitalization described at (m) below.
(e) See Note 3 of Notes to Consolidated Financial Statements for an explanation
of the determination of shares used in computing the net income (loss) per
share.
(f) Net cash flows from (for) operating activities was $5,443, $12,258, $19,242,
$(2,767), $1,452, $(9,309) and $14,927 for the years ended December 31,
1992, 1993, 1994, 1995 and 1996, and for the nine months ended September 30,
1996 and 1997, respectively. Net cash flows (for) from investing activities
was $(24,977), $(8,093), $(7,558), $(52,841), $49,703, $50,006 and $(59,707)
for the years ended December 31, 1992, 1993, 1994, 1995 and 1996, and for
the nine months ended September 30, 1996 and 1997, respectively. Net cash
flows from (for) financing activities was $26,358, $(4,155), $(3,529),
$50,327, $(60,275), $(50,790) and $51,612 for the years ended December 31,
1992, 1993, 1994, 1995 and 1996, and for the nine months ended September 30,
1996 and 1997, respectively.
(g) EBITDA represents the sum of income (loss) from continuing operations before
extraordinary item and income taxes, net recourse interest expense and
depreciation and amortization. EBITDA is not a measure of performance or
financial condition under generally accepted accounting principles, but is
presented to provide additional information related to debt service
capability. EBITDA should not be considered in isolation or as a substitute
for other measures of financial performance or liquidity under generally
accepted accounting principles. While EBITDA is frequently used as a measure
of operations and the ability to meet debt service requirements, it is not
necessarily comparable to other similarly titled captions of other companies
due to the potential inconsistencies in the method of calculation.
(h) Net recourse interest expense is interest expense minus interest expense on
nonrecourse notes payable and nonrecourse obligations under capital leases
of $3,734, $4,910, $3,188, $2,669, $2,015, $1,651 and $1,014 and minus
interest income on cash balances of $212, $370, $348, $954, $179, $87 and
$87 for the years ended December 31, 1992, 1993, 1994, 1995 and 1996 and for
the nine months ended September 30, 1996 and 1997, respectively.
(i) Net cash recourse interest expense is net recourse interest expense minus
amortization of deferred financing costs of $817, $544 and $511 for the year
ended December 31, 1996 and for the nine months ended September 30, 1996 and
1997, respectively, and minus interest expense of $627 and $336 for the year
ended December 31, 1996 and the nine months ended September 30, 1996,
respectively, on Seller Notes that was paid through the issuance of payment
in kind notes.
(j) For the purpose of calculating the ratios of earnings to fixed charges,
"earnings" represents income from continuing operations before income taxes
plus fixed charges. "Fixed charges" consist of interest expense, excluding
interest income and including amortization of debt issuance costs, and the
portion of operating lease rental expense (33%) which management believes is
representative of the interest component of lease expense.
(k) As a result of the loss from continuing operations before income taxes
incurred for the year ended December 31, 1995, the Company was unable to
fully cover the indicated fixed charges by $2,153. On a pro forma basis,
after giving effect to the Transactions, earnings did not cover fixed
charges for the nine months ended September 30, 1997 by $3,466.
(l) Long-term debt includes both recourse and nonrecourse notes payable and
obligations under capital leases.
(m) Stockholders' equity (deficit) includes the effect of the Recapitalization
which included a charge to stockholders' equity of $58.8 million. In
connection with the Recapitalization and the Acquisitions, Carlyle and
management have contributed approximately $43.1 million of cash to the
Company. See Notes 2 and 14 to FDC's consolidated financial statements.
43
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS OF FDC'S CONSOLIDATED FINANCIAL
CONDITION AND CONSOLIDATED RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION
WITH FDC'S CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO APPEARING
ELSEWHERE IN THIS PROSPECTUS. EXCEPT AS EXPRESSLY INDICATED, THE FOLLOWING
DISCUSSION DOES NOT GIVE EFFECT TO THE OFFERING OF THE PRIVATE NOTES OR THE
ACQUISITIONS OR INCLUDE PRO FORMA FINANCIAL INFORMATION.
GENERAL
FDC is a major supplier of information technology to a wide range of
customers within the Government. FDC has assembled, through internal growth and
strategic acquisitions, comprehensive information technology product and
services capabilities to address the unique needs of its Government clients.
Management believes the continuing consolidation within the information
technology industry, particularly among companies serving Government customers,
should result in additional opportunities for the Company to make attractive
acquisitions. As a result, the Company is continually involved in the
investigation and evaluation of potential acquisition candidates. Any such
transactions are typically subject to numerous conditions, including due
diligence investigations, contract reviews and negotiation of a definitive
purchase agreement in addition to arranging acceptable financing. In evaluating
acquisition targets, the Company considers, among other things, their
competitive market position, management teams, growth position, technical skills
and contract base. At any time the Company may have one or more offers
outstanding and may have executed one or more letters of intent or binding
acquisition agreements. There can be no assurance, however, that any such
understandings, letters of intent or discussions will result in any particular
transaction being consummated, or that acceptable financing will be available.
Prior to December 1, 1995, the majority of FDC's common stock was owned by
its employees. On December 1, 1995, FDC effected the Recapitalization wherein
Holdings merged with and into FDC with FDC continuing as the surviving
corporation. Holdings was a company organized by Carlyle to facilitate the
Recapitalization and had no operating activity or history. Upon consummation of
the Recapitalization, Holdings received 85.4% of FDC's outstanding common stock
and 14.6% was retained by members of FDC's management who were shareholders
prior to the Recapitalization. The merger was accounted for as a
recapitalization which resulted in a charge to stockholders' equity of $58.8
million to reflect the redemption of common stock.
The Government accounted for approximately 95%, 95% and 97% of total
revenues during 1994, 1995 and 1996, respectively. Revenue from sales and
sales-type leases (capital leases on which the lessor derives profit on the
underlying product as well as on the financing feature of the lease) is
generally recognized upon installation at the customer's site. FDC pioneered the
lease-to-ownership-plan ("LTOP"), a capital lease transaction, which allows
customers the flexibility to use operating lease funds to acquire equipment and
software and convert the transaction to an installment purchase if the contract
equipment meets its longer-term technological requirements. Under an LTOP, the
title of the equipment or software passes to the Government after the Government
makes the final lease payment. FDC typically discounts payments to be received
from the Government on a nonrecourse basis with independent financial
institutions. Accordingly, FDC's net investment in sales-type leases are pledged
as collateral for these nonrecourse obligations, which are reflected as
nonrecourse indebtedness on FDC's consolidated balance sheet. FDC considers
LTOPs to be sales-type leases in those instances where FDC believes that the
risk of cancellation of the Government lease is remote.
The Company's business is highly seasonal due to the Government's funding
and buying patterns which generally produce greater revenue, earnings and cash
flow to the Company in the third and fourth quarters with weaker performance
(frequently including operating losses) in the first quarter. Results for
44
<PAGE>
the nine months ended September 30, 1997 are not necessarily indicative of
results to be expected for the year ending December 31, 1997.
The Company's operating performance is affected by the number of Government
contracts held, the types of contracts, the timing of installation or delivery
and the relative margins of the services performed or products sold, as the case
may be. For a discussion of the Company's material contracts, including the
receipt of a recent termination notice stating that NASA will not exercise its
option at year-end 1997 on a NYMA "Section 8(a)" contract and related
considerations, see "Business--Products and Services-- Services
Group--Engineering Services--Scientific, Engineering, Technical and
Administrative Related Services." In general, the Company earns its highest
margins on its most specialized systems integration work and lower margins on
cost-plus services contracts and on sales of COTS products by its Product Sales
Group, which tend to have a lower services component associated with such sales
and a more competitive after-award sales environment. However, profitability
regularly varies from contract to contract and product to product over the
contract term.
The following discussion includes the results of operations of NYMA from May
2, 1997 and Sylvest from June 30, 1997 (the dates of acquisition) through
September 30, 1997. The Acquisitions substantially expanded the size of the
Company. Pro forma revenues for 1996 were more than double FDC's revenues (see
"Selected Unaudited Pro Forma Consolidated Financial Data"), and the Company's
work force expanded from 250 at the end of 1996 to over 1,000 after the
Acquisitions. As a result of these Acquisitions, the Company's results of
operations and financial condition will differ materially from those reported in
prior periods, as the Company's revenues, expenses and level of indebtedness and
capitalization will all increase materially. Cash flows may also be affected
materially depending on the operating performance of the Acquired Companies.
Because of the indebtedness incurred to finance the Recapitalization, operating
results for periods after the Recapitalization are not comparable with the
results for periods prior to the Recapitalization. For financial information
regarding the Acquired Companies, see "Selected Unaudited Pro Forma Consolidated
Financial Data" and the financial statements and the notes thereto of the
Acquired Companies included elsewhere in this Prospectus.
The Company is currently negotiating for the sale of substantially all of
the assets of DoxSys, Inc., which, if completed, is not expected to be material
to the Company's financial condition or results of operations.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1996
REVENUES
Revenues for the nine months ended September 30, 1997 were $212.1 million,
up $120.3 million or 131% over the comparable period of 1996. The NYMA and
Sylvest acquisitions accounted for $82.4 million of the increase in revenue over
the comparable period of 1996. Revenue from equipment and software sales was
$115.9 million, up $67.2 million or 138% from the comparable period of 1996. The
NYMA and Sylvest acquisitions accounted for $43.5 million of the increase in
equipment and software sales revenue over the comparable period of 1996. The
remaining increase in revenue from equipment and software sales is principally
due to increased emphasis on FDC's COTS products business and the negative
impact of the Government budget delay and shutdown on FDC's 1996 first half
revenue. Revenue from maintenance and support services was $93.8 million, up
$53.8 million or 135% from the comparable period of 1996. The NYMA and Sylvest
acquisitions accounted for $38.9 million of the increase in revenue over the
comparable period of 1996. The remaining increase in revenue from maintenance
and support services is principally due to increased professional services
performed under existing contracts and additional contracts under maintenance
plans.
45
<PAGE>
COST OF SALES AND SERVICES
Cost of sales and services for the nine months ended September 30, 1997 was
$178.1 million, up $108.6 million or 156% over the comparable period of 1996.
The NYMA and Sylvest acquisitions accounted for $73.6 million of the increase in
cost of sales and services over the comparable period of 1996. Cost of sales and
services for the nine months ended September 30, 1997 was 85% of sales and
services revenues compared with 78% of sales and services revenues for the
comparable period in 1996. The decrease in the gross margin percentage primarily
relates to increased influence of the COTS products sold through the Product
Sales Group including Sylvest, which generally have lower gross margin
percentages than product sales by FDC's Systems Integration Group and Solutions
Group, and the lower margins on NYMA's cost plus award fee business, offset by
the improved margins from the professional services business, a greater
percentage of which is now being performed by FDC employees instead of being
subcontracted to others.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expense for the nine months ended
September 30, 1997 was $24.8 million, up $11.0 million or 80% over the
comparable period of 1996. The NYMA and Sylvest acquisitions accounted for $4.8
million of the increase in selling, general and administrative expenses over the
comparable period of 1996. The amortization of goodwill related to the NYMA and
Sylvest acquisitions accounted for $1.2 million of the increase in selling,
general and administrative expense over the comparable period of 1996. The
remaining increase in selling, general and administrative expense was due
primarily to an increase in the number of personnel. Excluding the effect of the
NYMA and Sylvest acquisitions and the amortization of goodwill, selling, general
and administrative expense for the nine months ended September 30, 1997 was down
to 14% of revenues compared with 15% of revenues for the comparable period of
1996. This decrease in selling, general and administrative expense as a
percentage of revenue was due primarily to economies of scale resulting from the
increase in revenues.
INTEREST EXPENSE
Interest expense for the nine months ended September 30, 1997 was $7.1
million, up $1.0 million, or 17% over the comparable period of 1996. Recourse
interest expense increased $1.6 million for the nine months ended September 30,
1997 over the comparable period of 1996 primarily due to increased recourse debt
balances including term debt used to partially finance the Acquisitions.
Interest expense on nonrecourse debt declined $0.6 million for the nine months
ended September 30, 1997 from the comparable period of 1996 due to a reduced
level of capital leases. Interest expense is expected to be higher in 1998 than
in 1997, reflecting the higher level of Indebtedness to be outstanding for the
full year, as a result of the Acquisitions.
INCOME TAXES
The provision for income taxes for the the nine months ended September 30,
1997 is based on an estimated annual effective rate, excluding expenses not
deductible for income tax purposes. Before giving effect to the Acquisitions,
the effective tax provision rate for the year ending December 31, 1997 is
estimated to be 40%, approximately the same rate as that experienced for 1996.
The Company believes that the nondeductibility of goodwill associated with the
NYMA acquisition will cause future tax rates to be higher.
EXTRAORDINARY LOSS
During the nine months ended September 30, 1997, the Company wrote off $4.4
million of deferred financing fees related to the FDC, NYMA and Sylvest
acquisition debt that was refinanced in July 1997. This write-off was reduced by
an income tax benefit of $1.7 million which produced an extraordinary loss of
$2.7 million.
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NET INCOME/LOSS
Net loss for the nine months ended September 30, 1997 was $1.7 million, a
$3.1 million decrease from the net income of $1.4 million recorded in the
comparable period of 1996.
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995
REVENUES
Revenues for the year ended December 31, 1996 were $151.1 million, up $21.3
million or 16% over 1995. Revenue from equipment and software sales was $87.5
million, up $6.5 million or 8% from 1995. The increase in revenue from equipment
and software sales was principally due to increased emphasis on FDC's COTS
products business. Revenue from maintenance and support services was $59.9
million, up $16.1 million or 37% from 1995. The increase in revenue from
maintenance and support services was principally due to increased professional
services performed under existing contracts and additional contracts under
maintenance plans.
COST OF SALES AND SERVICES
Cost of sales and services for the year ended December 31, 1996 was $114.2
million, up $6.9 million or 6% compared with 1995. Cost of sales and services
for 1996 was 78% of sales and services revenues compared with 86% of sales and
services revenues in 1995. The increase in gross margin percentage primarily
relates to efficiencies recognized on the higher revenue base in the maintenance
and support services businesses and to a $6.3 million loss recorded in 1995 on a
single fixed-price government contract. The loss resulted when expected cost
reductions associated with the introduction of new technology were not realized.
Excluding the effect of the $6.3 million loss, cost of sales and services for
1995 was 81% of sales and services revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expense for the year ended December 31,
1996 was $21.4 million, up $0.4 million or 2% over 1995. Selling, general and
administrative expense for the year ended December 31, 1996 was down to 14% of
revenues compared with 16% of revenues for 1995. This decrease as a percent of
revenues was due primarily to $5.4 million of expenses incurred during 1995 in
connection with the Recapitalization. These expenses included the forgiveness of
$3.1 million of indebtedness from certain of FDC's officers, special
discretionary bonuses of $1.4 million and $0.9 million of other one-time
charges. Excluding the effect of expenses incurred in connection with the
Recapitalization, selling, general and administrative expenses as a percent of
revenues would have been 11% in 1995. The increase in recurring selling, general
and administrative expenses during 1996 primarily relates to increased personnel
as FDC expanded its sales force in the products and professional services areas.
INTEREST EXPENSE
Interest expense for the year ended December 31, 1996 was $7.6 million, up
$3.9 million or 106% over 1995. The increase in interest expense primarily
relates to the interest on the indebtedness which was issued in connection with
the Recapitalization. The increase in interest expense on such indebtedness more
than offset the decrease in interest expense resulting from reduced capital
leases.
INCOME TAXES
The effective tax provision rate for the year ended December 31, 1996 was
40% as compared with the effective tax benefit rate of 184% for 1995. The 1995
tax benefit resulted from the Company's elimination of its deferred tax asset
valuation allowance of $3.3 million based on management's belief that there was
sufficient assurance that the Company's deferred tax assets would be realized,
offset by $0.6 million of
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nondeductible expenses. Excluding the effect of the elimination of the deferred
tax asset valuation allowance and the nondeductible expenses, the Company would
have had an effective tax benefit rate for the year ended December 31, 1995 of
36%.
NET INCOME
Net income for the year ended December 31, 1996 was $4.7 million, up $2.9
million or 163% over 1995 based on the reasons discussed above.
YEAR ENDED DECEMBER 31, 1995 COMPARED WITH YEAR ENDED DECEMBER 31, 1994
REVENUES
Revenues for the year ended December 31, 1995 were $129.8 million, down
$13.7 million or 10% from 1994. Revenues from equipment and software sales were
$81.0 million, down $26.9 million or 25% from 1994. The decrease in revenues
from equipment and software sales is principally due to a reduction in business
volume on contracts that were awarded and had high initial order levels during
1994. In addition, the first of two Government budget delays and shutdowns had a
negative impact on the Company's business in the fourth quarter of 1995.
Revenues from maintenance and support services were $43.8 million, up $12.3
million or 39% from 1994. The increase in revenues from maintenance and support
services is principally due to increased professional services performed under
existing contracts and additional contracts under maintenance plans.
COST OF SALES AND SERVICES
Cost of sales and services for the year ended December 31, 1995 was $107.4
million, down $6.7 million or 6% from 1994 primarily due to the decrease in
product and software sales. Cost of sales and services for the year ended
December 31, 1995 was 86% of sales and services revenues compared with 82% of
sales and services revenues for 1994. During 1995, the Company recorded a $6.3
million loss on a single fixed-price government contract. The loss resulted when
expected cost reductions associated with the introduction of new technology were
not realized. Excluding the effect of the $6.3 million loss, cost of sales and
services for 1995 was 81% of sales and services revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expense for the year ended December 31,
1995 was $20.9 million, up $0.4 million or 2% over 1994. Selling, general and
administrative expense for the year ended December 31, 1995 was 16% of revenues
compared with 14% of revenues for 1994. This increase in selling, general and
administrative expense as a percent of revenues was due primarily to $5.4
million of expenses incurred during 1995 in connection with the
Recapitalization. These expenses included the forgiveness of $3.1 million of
indebtedness from certain of FDC's officers, special discretionary bonuses of
$1.4 million and $0.9 million of other one-time charges. Excluding the effect of
the expenses incurred in connection with the Recapitalization, selling, general
and administrative expenses as a percent of revenues would have been 11% in
1995. Selling, general and administrative expenses during 1994 included $2.1
million of one-time compensation expenses incurred in contemplation of a
potential change in ownership of FDC and a $0.5 million reserve established for
a possible loss on a limited partnership, which owned FDC's office space.
Excluding the effect of these expenses, selling, general and administrative
expenses as a percent of revenues would have been 12% in 1994.
INTEREST EXPENSE
Interest expense for the year ended December 31, 1995 was $3.7 million, up
$0.1 million or 2% over the comparable period of 1994.
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INCOME TAXES
The Company recorded an effective tax benefit rate of 184% for the year
ended December 31, 1995, compared with an effective tax provision rate of 22%
for 1994. This tax benefit was primarily the result of the Company's elimination
of its deferred tax asset valuation allowance of $3.3 million based on
management's belief that there was sufficient assurance that the Company's
deferred tax assets would be realized, offset in part by $0.6 million of
nondeductible expenses. Excluding the effect of the elimination of the deferred
tax asset valuation allowance and the nondeductible expenses, the Company would
have had an effective tax benefit rate for the year ended December 31, 1995 of
36%. During 1994, the Company recorded the benefit of investment tax credits of
$1.1 million and released $0.9 million of the deferred tax asset valuation
allowance. Excluding the effects of the investment tax credits and the release
of the deferred tax asset valuation allowance, the effective tax provision rate
for the year ended December 31, 1994 would have been 36%.
NET INCOME
Net income for the year ended December 31, 1995 was $1.8 million, down $2.4
million or 57% from 1994 based on the reasons discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity is cash provided by operations.
The Company's liquidity requirements generally vary seasonally with revenues,
which are generally higher in the third and fourth quarters of each fiscal year.
Historically, cash flow from the collection of accounts receivable from the
Government has generally been predictable and dependable. Cash and cash
equivalents were $1.2 million at December 31, 1996, down $9.1 million from
December 31, 1995 primarily as a result of net cash flow from operating
activities of $1.5 million and net cash flows from investing activities of $49.7
million being offset by net cash flow used in financing activities of $60.3
million. Net cash flow from operating activities was primarily a result of net
income plus depreciation and amortization, which totaled $5.5 million, offset in
part by other changes in assets and liabilities of $4.0 million. Net cash flow
from investing activities was $49.7 million for 1996 primarily as a result of
selling the short-term investments resulting from the equity payments received
in the Recapitalization of $51.8 million, offset in part by purchases of
equipment for sales-type leases and property and equipment totaling $2.1
million. Net cash flows used in financing activities amounted to $60.3 million
for 1996, primarily as a result of the redemption payments made to selling
shareholders in the Recapitalization of $51.8 million, repayments of borrowings
of $15.8 million and repayments of capital lease obligations of $5.4 million,
offset in part by additional net borrowings under the Company's line of credit
of $10.8 million.
As of September 30, 1997, FDC had outstanding recourse debt of $118.8
million. See "Capitalization." These amounts exclude $11.0 million of
nonrecourse notes payable and obligations under capital leases, which the
Company records in connection with the financing of certain equipment sales and
leases. See "--General."
The Company's New Senior Credit Facility includes certain restrictions as to
the Company's ability, among other things, to acquire or dispose of assets, to
pay dividends and to incur additional indebtedness. In addition, the Company is
required to maintain a minimum net worth and certain operating ratios,
including, among others, interest coverage and fixed charges. Such requirements
could limit the Company's ability to incur debt and could thereby limit the
Company's liquidity and ability to make certain acquisitions. All of the
Company's assets not otherwise pledged are utilized as collateral under the
Company's credit agreements. The New Senior Credit Facility also provides for a
maximum availability based upon a borrowing base comprised of 85% of Eligible
Receivables and 60% of Eligible Inventory (as defined in the New Senior Credit
Facility), up to a maximum availability of $75.0 million. At September 30, 1997
there were $4.0 million of undrawn letters of credit and $3.5 million of
revolving line of credit
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borrowings. The New Senior Credit Facility bears interest at the Company's
option at the base rate in effect from time to time plus 1.25% or the eurodollar
rate plus 2.25% plus an additional 2.0% on overdue amounts. See "Description of
Certain Indebtedness."
The Company, through Sylvest, also maintains an inventory and receivables
financing facility with an asset-based lender to facilitate the purchase of
inventory by Sylvest from approved vendors for prompt resale to customers. The
Company pays no interest on accounts drawn under such Floor Plan Financing
Facility (as defined) for negotiated periods and such drawn amounts are
reflected in accounts payable during such periods. See "Description of Certain
Indebtedness."
Upon the closing of the Acquisition, all outstanding balances of NYMA and
Sylvest under their respective lines of credit were repaid in full by the
Company and the lines of credit were cancelled.
Stockholders' equity amounted to $1.8 million at September 30, 1997, an
increase in stockholders' equity of $24.6 million from December 31, 1996. This
increase is principally due to proceeds from the sale of common stock of $27.0
million, net of issuance costs of $0.8 million. The stockholders' deficit
amounted to $22.8 million at December 31, 1996, a reduction of $3.1 million from
December 31, 1995. This reduction is principally due to the net income of $4.7
million for 1996, net of a charge to retained earnings of $1.6 million, to fund
future additional distributions for the benefit of the selling shareholders in
the Recapitalization. The stockholders' deficit amounted to $26.0 million at
December 31, 1995, a change of $45.4 million from stockholders' equity at
December 31, 1994. The reduction is principally due to the redemption of common
stock in the Recapitalization of $58.8 million and other redemptions of common
stock of $1.8 million, offset in part by net income of $1.8 million and net
proceeds from the sale of common stock of $13.9 million.
As of September 30, 1997, the Company had no significant capital expenditure
commitments.
Based on the Company's current level of operations, management believes that
available cash, together with the net proceeds of the offering of the Private
Notes and available borrowings under the New Senior Credit Facility and the
Floor Plan Financing Facility, should be adequate to meet the Company's
anticipated future requirements for working capital, capital expenditures and
scheduled payments of interest on its debts (including the Notes) through at
least the scheduled date of expiration of the New Senior Credit Facility on July
25, 2002.
INFLATION AND GENERAL ECONOMIC CONDITIONS
Although the Company cannot accurately anticipate the effect of inflation on
its operations, it does not believe that inflation has had, or is likely in the
foreseeable future to have, a material impact on its results of operations.
Unlike other service providers, the Company does not have a significant number
of fixed price service contracts where the Company bears the risk of cost
increases. The Company's operating results would be adversely affected by
increases in interest rates which would result in higher interest payments by
the Company under its variable rate credit facilities. As of September 30, 1997,
the Company had $3.5 million (excluding $4.0 million of undrawn letters of
credit) outstanding under its variable rate credit facilities. If interest rates
rise, the Company's cost of capital and debt service requirements would
increase. The Company has not historically entered into hedging transactions
with respect to its variable rate debt, but may do so in the future.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
(SFAS 128) is effective for the Company for the year ending December 31, 1997.
Under SFAS 128, the Company will not be required to present earnings per share
for as long as its common stock is not publicly held.
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BUSINESS
GENERAL
The Company is a major supplier of information technology to a wide range of
customers within the Government. The Company has assembled, through internal
growth and strategic acquisitions, comprehensive information technology product
and services capabilities to address the unique needs of its Government clients.
Management believes that the Company is strategically positioned to benefit from
the current trends in the Government market for information technology and
outsourcing of technical and professional services. The Government is among the
world's largest purchasers of information technology with estimated total
expenditures in fiscal 1997 in excess of $26 billion. For the year ended
December 31, 1996 and the six months ended September 30, 1997, the Company's
total pro forma revenues were $332.8 million, $308.7 million, respectively, and
total pro forma EBITDA (as defined herein) were $23.3 million and $10.3 million,
respectively.
Founded in 1969, the Company serves a diverse and expanding customer base
representing over 20 Government agencies including NASA, the FAA, the NIH, the
DoD, the VBA and the Department of State. In addition, the Company has
longstanding relationships with many of its key clients, with agencies served by
the Company for five or more years accounting for more than half of the
Company's pro forma revenues in 1996. Management believes that the Company's
established reputation and long-standing relationships with Government
customers, and the extensive knowledge gained from those relationships, have
been critical to the Company's strong record of growth and provide a key
competitive advantage in pursuing business opportunities with new and existing
customers.
Consistent with its strategy of providing a complete range of information
technology offerings to its Government customers, the Company has pursued
strategic acquisitions to broaden and strengthen key skill areas. In May 1997,
the Company purchased NYMA, a provider of sophisticated engineering and
information technology services. NYMA complemented and significantly expanded
the Company's core capabilities in the technology and engineering services
sector, providing the Company with the ability to bid effectively on new
contracts with a higher component of technical services requirements. In June
1997, the Company acquired Sylvest, a value-added reseller and integrator of
COTS hardware, software and technical services supporting open systems
architectures within the Government marketplace. Through the Sylvest
Acquisition, the Company has become a leading reseller of COTS hardware and
software to the Government and has substantially expanded the number of
customers to which it can market its systems integration offerings. FDCT Corp.
is the parent holding company of FDC Technologies, Inc., NYMA, Inc. and Sylvest
Management Systems Corporation and has no independent operations. DoxSys, Inc.
is a wholly-owned subsidiary of FDC Technologies, Inc. and provides complete
image-based document management solutions tailored to customers. VAD
International, Inc. is a wholly-owned subsidiary of NYMA, Inc. and is a value
added distributor of document workflow management software and assorted hardware
products.
The Acquisitions have significantly enhanced the Company's presence in the
Government marketplace. Based on a recent survey, on a pro forma basis, the
Company would have been the 25th largest information technology contractor to
the Government in 1996. Management believes the information technology industry,
particularly the portion serving Government customers, has and will continue to
consolidate, resulting in additional opportunities for the Company to make
attractive acquisitions that complement or expand its core capabilities.
The Company is currently negotiating for the sale of substantially all of
the assets of DoxSys, Inc., which, if completed, is not expected to be material
to the Company's financial condition or results of operations.
INDUSTRY OVERVIEW
According to Federal Sources, Inc., an independent market research firm
specializing in the Government market, the Government is the world's largest
single buyer of information technology services and
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products. Federal Sources, Inc. estimates that Government spending specifically
designated for information technology will be $26.5 billion during the
Government's fiscal 1997. The Government also spends significant additional
funds on information technology through other general budget appropriations.
According to the Electronic Industries Association, Government agencies that are
not required to report their information technology expenditures, including
agencies in the intelligence community, will spend an additional $20 billion on
such technology in the Government's fiscal 1997.
Despite growing budget pressures, Government outlays for third-party
technology services and outsourcing have increased steadily as the Government
has sought to control its spending and gain the efficiencies and flexibility
experienced by commercial purchasers of these services. The GSA anticipates a
continuation of the trend toward increased Government use of outside information
technology providers and estimates that 65% of all Government agencies operating
in-house data systems may eventually outsource information technology services
to the private sector at an estimated cost savings of 25% to 30%. The current
legislative and regulatory environment generally supports initiatives in the
Government information technology sector to change procurement practices and
become more like the private sector. Several statutory and regulatory changes
have brought about a significant transition in Government procurement practices,
dramatically increasing the number of procurement "vehicles" available to
Government customers and generally reducing the lead time required to buy
information technology products and services. See "--Government Contracts."
In addition to its growing use of third-party providers, the Government,
like many corporate organizations, has sought to address an increasing portion
of its information technology needs through relatively inexpensive, open
architecture systems based on COTS hardware and software, which are rapidly
displacing the single purpose, custom systems historically favored by the
Government.
These concurrent changes in the types of information technology solutions
purchased by Government agencies and the rules governing the procurement of such
solutions have dramatically changed the marketplace in the last few years and
are likely to continue doing so. Where Government agencies traditionally
procured customized information technology solutions through agency-specific
contracts awarded to a single contractor or contractor team, Government agencies
are now more likely to purchase flexible, COTS-based information technology
systems through IDIQ contracts awarded to multiple contractors or teams of
contractors or through established GSA Schedules or multi-agency contracts
("MACs"). See "--Government Contracts."
BUSINESS AND GROWTH STRATEGY
The Company's goal is to be a leading one-stop information technology
solutions supplier, providing high-quality products and services that meet the
complete needs of its Government client base. The Company's strategies to meet
this objective are the following:
- CREATE COMPREHENSIVE SKILL AND PRODUCT BASE. The Company seeks to
continuously add new information technology capabilities and strategically
expand existing business areas to meet the changing information technology
needs and buying patterns of its clients. By expanding its extensive
technical skill base and ability to supply a broad and diverse set of COTS
hardware and software, the Company can provide its customers with the
widest possible range of cost effective solutions and engender a high
level of customer satisfaction. Management believes that such
capabilities, together with the Company's in-depth knowledge of changing
Government procurement practices, should continue to create new
opportunities for the Company.
- STRONG CUSTOMER KNOWLEDGE AND FOCUS. The Company strives to understand
the full range of each of its customers' information technology needs. The
Company's strategy is to continue to leverage its strong customer
knowledge, advanced technical skills and supplier relationships to tailor
optimal solutions to its customers' specific needs and to offer technology
infrastructures that anticipate its customers' rapidly evolving needs.
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- PURSUE STRATEGIC ACQUISITIONS. The Company seeks to continue expanding
the breadth and quality of the information technology products and
services it offers. The recently completed acquisitions of NYMA and
Sylvest have added important complementary skills to the Company's
information technology capabilities. Management expects to continue to
pursue strategic acquisitions which it believes can contribute
significantly to the Company's future business growth.
- MAXIMIZE FLEXIBILITY OF GOVERNMENT CUSTOMERS. A key component of the
Company's success has been its ability to quickly adapt to the rapidly
evolving Government procurement process. The Company continually pursues
means of maximizing its customers' flexibility in acquiring a range of
products and services with competitive prices and minimal bureaucratic
delay by selecting the best methods available in the current, more
streamlined procurement climate.
- CAPITALIZE ON OUTSOURCING OPPORTUNITIES. The Company seeks to pursue new
opportunities created by changes in the Government information technology
industry. In particular, although the Government has frequently hired
service providers to fill specific roles in the past, the Government is
increasingly considering opportunities to outsource entire functions to
private industry. As part of this strategy, the Company intends to
leverage its client relationships, technical skills and access to COTS
hardware and software in pursuing emerging opportunities in the
outsourcing of certain Government information technology functions.
PRODUCTS AND SERVICES
The Company focuses on providing a comprehensive array of high technology
professional services in combination with hardware and software products from a
variety of selected manufacturers. The Services Group focuses primarily on
providing sophisticated technical and engineering personnel to enhance
information technology performance and productivity and to provide project
engineering and outsourcing services. The Systems Integration Group integrates
diverse hardware and software components into a single turnkey system, usually
selling COTS hardware and software products as an element of the integrated
solution. The Product Sales Group provides a one-stop shop for government
customers to procure COTS hardware and software. The Solutions Group provides
high-end, solutions-oriented consulting services.
SYSTEMS INTEGRATION GROUP
Systems integration refers to the integration of diverse information
technology products, frequently including the combination of existing custom
systems with COTS hardware and software into a single turnkey system. The
Company's Systems Integration Group provides large-scale, tailored integrated
solutions to its customers, generally including design, construction, and
implementation, as well as the sale of any COTS hardware and software required
for completion. The Company is a prominent computer systems integrator, having
been a pioneer in systems integration for the Government in 1969. The Company
has over 25 years of experience supplying custom turnkey systems to various
departments and agencies of the Government. The contracts completed during this
period have ranged from national defense programs to administrative, payroll and
inventory control functions of various Government departments and agencies.
The Company's systems integration projects are characterized by complex
features such as multi-year systems life, multiple vendors, technical
complexity, the application and integration of leading-edge technology and the
selection and management of subcontractors and teaming partners with expertise
specific to the system solution required by the customer. The Company acts as
both a prime contractor and as a subcontractor on a broad range of systems
integration projects for the Government. In performing these duties, the Company
generally procures equipment, software, networking components and services from
several manufacturers or suppliers to produce a single, program-specific turnkey
system. When no "off-the-shelf" solution or product exists, the Company on
occasion develops software to provide a total
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compliant solution. The Company also generally provides installation,
maintenance, training and technical support services throughout the life of the
contract. Most systems integration contracts specify initial system requirements
to be covered by the contract amount; as technology and customer needs change
over the life of the contracts, they function as IDIQ contracts that permit the
Company to supply equipment upgrades and customer support in response to
changing customer requirements and improvements in technology. Management
believes that such long-term contracts have permitted the Company to develop
strong partnerships with its customers and have contributed to the Company's
success with long-term programs in an environment of rapidly changing
procurement requirements and technological growth.
The Systems Integration Group consists of over 100 dedicated technical and
management personnel trained to provide COTS integration, mainframe, midrange
and microcomputer integration, communications and networking, software
development, and help desk and support organizations.
Listed below are summary descriptions of major contracts and programs for
the Systems Integration Group. The term of each contract specified is the
maximum term under the contract including all options. The Government has
typically exercised all options under the Systems Integration Group's contracts.
Although the future status of any contract is uncertain after contract
expiration, management believes that certain support and service functions being
provided under many of these contracts may be subject to recompetition and rebid
upon expiration, either alone or in combination with other products and/or
services. For a description of Government contracts, see "--Government
Contracts."
U.S. NAVY SUPPLY SYSTEMS COMMAND. This fifteen-year contract was
awarded in 1983 and provides for the installation of computer systems at 62
NAVSUP sites worldwide. The systems are used for integrated wide-area and
local area communications control, terminal emulation, data conversion and
database management. The contract expires in 1998. 1996 revenues were
approximately $32 million.
VETERANS BENEFIT ADMINISTRATION MODERNIZATION. This eight-year contract
was awarded in December 1992 and provides for the modernization of the
information technology environment in regional offices of the VBA. Products
and services provided include hardware, software, maintenance, support desk,
training, installation and technical support services. The Company is
providing LAN servers and workstations which connect to Honeywell
mainframes. The contract expires in 2000. 1996 revenues were approximately
$28 million.
INVENTORY CONTROL POINTS II. Awarded in 1992, this five-year contract
calls for the Company to provide hardware, software and services to
modernize portions of the Navy's logistics support services. The contract
expires in 1997. 1996 revenues were approximately $18 million.
DEPARTMENT OF STATE. This seven-year contract was awarded in 1994 and
calls for the Company to augment and replace existing IBM mainframe systems
and their components at five Department of State processing hubs. The
contract expires in 2001. 1996 revenues were approximately $11 million.
DEPARTMENT OF VETERANS AFFAIRS. Awarded in 1991, this ten-year contract
calls for the Company to provide IBM systems in support of Veterans
Administration on-line processing systems. The contract expires in 2001.
1996 revenues were approximately $10 million.
NIH CERTAN CORPORATE COMPUTING SYSTEMS. This eight-year contract was
awarded in December 1996 and involves the provision and support of both new
and existing IBM mainframes and open systems, and the provision of related
software. In addition, the Company will install and provide post-
installation support of DEC AlphaServers and install Oracle software. The
contract expires in 2004. No revenues were realized under this contract in
1996.
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SERVICES GROUP
The Company's technology services offerings are focused predominantly on
providing sophisticated professional and outsourcing services to various
Government agencies. These activities are concentrated in two key areas:
information technology services and engineering services.
INFORMATION TECHNOLOGY SERVICES. The Company operates under approximately
35 separate contracts for information technology services, through which it
provides program management, software development and software maintenance
functions for various Government agencies and prime contractors to the
Government. Specific activities include providing software engineering services
to support the maintenance and modification of the FAA's Air Traffic Control
Operational Computer Program at seven FAA Enroute Centers and at the FAA
Technical Center; supporting the design, development and implementation and
maintenance of systems and programs for spacecraft mission operations at the
California Institute of Technology Jet Propulsion Laboratory ("JPL"); performing
acceptance testing and supporting integration and test activities and quality
assurance for the Earth Observing System Data and Information System, a network
to support a constellation of earth observing spacecraft for NASA; and
monitoring contractor activities under the HUD Integrated Information Service,
including contracts administration, negotiations, budget analysis, quality
control and other services.
ENGINEERING SERVICES. The Company provides engineering services primarily
through NYMA, which provides support to NASA, the FAA, other Government agencies
and private industry. Operating under two large NASA cost-plus contracts to
provide comprehensive engineering support for NASA's Lewis Research Center in
Cleveland, Ohio and Langley Research Center in Hampton, Virginia, the Company
provides engineering services in the areas of aeromechanics, aerospace
technology, space experimentation, structures, materials, instrumentation and
aeronautics.
The Company's 300 employees at Lewis Research Center, over 25% of whom have
PhDs, perform research into rocket propulsion, space power, space propulsion,
wind tunnels and other test facilities support, structural analysis for
spacecraft materials and materials research. Specific projects include the
conceptual design and performance modeling for the national aerospace plane, the
advanced subsonic transport and high speed research engines; aerodynamic and
mission analysis for single- and two-stage-to-orbit vehicles and high speed
supersonic civilian transports; icing research studies; and the design of
propulsion system aeroacoustics and turbomachinery technologies, such as an
energy efficient engine. The group at Lewis is also responsible for building
space flight hardware for NASA space experiments including hardware for
microgravity experiments on the Space Shuttle, the Mir space station, sounding
rockets and the planned International Space Station. To date, NYMA has been
involved in the development of over 55 payloads flown on 16 Space Shuttle
missions.
Langley research relating mainly to aeronautics involves approximately 120
employees, and is focused in the areas of aeronautical systems analysis,
spacecraft mission analysis and engineering and flight operations support. The
Langley unit provides a full range of systems analysis and integration studies
including systems analysis for advanced military and civil aircraft designs,
conceptual design studies of critical and high-payoff technologies,
multi-discipline studies of unique military aircraft configurations, airframe
and engine design studies on hypersonic vehicles, scramjet integrated design
studies and spacecraft mission and system performance analysis. The Company
provides engineering and operations support in such areas as the design,
engineering and development of flight projects; the development of ground test
systems and test techniques (such as the development of innovative wind
tunnels); and the maintenance and operations of aircraft and aircraft systems
including research vehicles and experimental avionics systems.
As a result of its work at the two NASA centers, the Services Group
generated approximately $1 million in additional 1996 revenues by providing
similar engineering services to approximately ten private aerospace companies.
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Listed below are summary descriptions of major contracts and programs of the
Services Group. The term of each contract specified is the maximum term under
the contract including all options. The Government has typically exercised all
options under the Services Group's contracts. Although the future status of any
contract is uncertain after contract expiration, the Company expects the
customer under each of these contracts to continue to require the services being
performed after the contract expires and expects such services to be the subject
of a new bidding competition for a new contract, either alone or in combination
with other services. For a description of different types of Government
contracts, see "--Government Contracts."
SCIENTIFIC, ENGINEERING, TECHNICAL AND ADMINISTRATIVE RELATED
SERVICES. This five-year cost-plus-award-fee contract was awarded under
Section 8(a) to NYMA in 1994 by NASA's Lewis Research Center, as described
above. After the acquisition of NYMA by the Company, NYMA's continued
participation as a prime contractor under Section 8(a) contracts required a
waiver from the Administrator of the Small Business Administration, as
discussed under "Risk Factors--Government Contracting Risks." NASA has
recently notified NYMA that it does not plan to request a waiver or to
exercise the final option year of the contract when the current option
expires on December 31, 1997. The Government has advised the Company that it
plans to procure the goods and services currently provided by NYMA under a
new Section 8(a) set-aside contract on which NYMA would be ineligible to
participate as a prime contractor. NYMA intends to pursue continued
participation in the program in a reduced role as a subcontractor on the new
contract in 1998, although such participation would generate lower revenues
and EBITDA than NYMA has historically earned, and there can be no assurance
that such a subcontract will be obtained. 1996 revenues were approximately
$33 million.
HOST SOFTWARE SUPPORT. This twelve-year fixed-price labor hour contract
was awarded to NYMA in 1986. The Company is a subcontractor to Lockheed
Martin and provides software support to 7 FAA Enroute Air Traffic Control
Centers east of the Mississippi River. The Enroute system monitors and
directs aircraft between airports. Approximately 65 employees perform
project activities including software engineering and maintenance, systems
enhancements, systems programming and data reduction and analysis. The
contract expires in 1998. 1996 revenues were approximately $8 million.
MISSION OPERATIONS SUPPORT SERVICES. This five-year cost-plus-fixed-fee
contract was awarded in 1994 by the JPL and provides NASA flight project
mission operations support systems at the JPL. Company personnel support
Galileo, Voyager, Topex, Cassini, New Millennium, Mars Global Surveyor and
the Multi-Mission Ground System Office. The contract expires in 1999. 1996
revenues were approximately $7 million.
SYSTEMS ANALYSIS AND ENGINEERING RESEARCH SUPPORT. This five and
one-half year cost-plus-award-fee contract was awarded in 1997 by NASA's
Langley Research Center, as described above. The contract expires in 2002.
PRODUCT SALES GROUP
The Company is a leading value-added reseller of hardware, software and
related services to the Government. Consistent with the Company's strategy of
offering solutions based on open computing architectures, the Company has
focused its reselling activities on workstations, servers, enterprise networking
hardware and related peripherals and software. Along with providing a broad
range of top quality products through supplier and teaming relationships with
hardware and software original equipment manufactures ("OEMs"), the Company
makes its technical personnel available to provide its customers with customized
"value-added" technical support services. Information technology product sales
have been a core business for the Company and have provided it with the
marketing platform to become a major open systems solutions provider in the
Government marketplace. The Company substantially expanded its capabilities in
this area through the Sylvest Acquisition.
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The Product Sales Group employs approximately 60 sales, marketing, business
development and contract representatives and 40 technical personnel, each of
whom has been recruited based on his or her extensive knowledge of a particular
customer group, particular products sold by the Company, or both. The sales
force's extensive training in various Government procurement rules allows them
to guide customers to the most efficient acquisition vehicle for the Company's
products, whether that vehicle is an agency-specific IDIQ contract, a MAC
contract or a GSA Schedule. See "--Government Contracts." These representatives
maintain regular contact and working relationships with a set of vendors and
existing or potential customers.
The Company's product reselling activities add value for both information
technology manufacturers and Government customers. Manufacturers gain access to
the Company's sales force and its experience in the Government procurement and
sales process, including capabilities and experience in electronic commerce,
order entry and invoicing. Customers benefit from the Company's technical
knowledge of available products and vendors, and also from the Company's
procurement expertise, which helps them select the optimal procurement vehicle
to meet their needs. The Company's procurement personnel also make it easier for
Government customers to place orders and configure and set-up new systems.
Management believes that the new contract vehicles resulting from Government
procurement reform (see "--Government Contracts") could enhance the Company's
opportunities to provide value-added services to both suppliers and customers by
allowing the Company to demonstrate how these vehicles can be used by suppliers
to sell more products and by customers to buy more products and services.
Management believes the Company is on the leading edge of electronic
commerce for sales of information technology to the Government. The Company has
developed Internet facilities including a World Wide Web Site to support
"paperless" contracting with the GSA Schedules and under the NIH Electronic
Computer Store II ("ECS II"). ECS II is a MAC contract vehicle providing an
electronic catalog from which agencies may place individual orders ranging in
value from a few thousand dollars to several million dollars. The Company is one
of 45 vendors providing products under the ECS II vehicle and is able to quickly
add new products as they become available and requested by its customers.
Customers typically select from among the participating vendors based on prior
or existing service relationships, breadth of product offerings, reputation and
price. Management believes the Company is well positioned to benefit from its
electronic commerce capabilities as more and more government procurement
vehicles are requiring these competencies as a condition of award.
The Company also provides expertise in the Government procurement process as
a subcontractor to OEMs, providing services including initial bid and proposal
preparation, contract management, customer support services, technical
management services and electronic commerce services. By providing these
services, the Company allows the OEMs to sell to the Government as if they were
direct marketers of hardware and software. Under a NASA Scientific and
Engineering Workstation Program II ("SEWP II") subcontract, the Company will
provide several of these subcontracting services to a leading microcomputer and
workstation manufacturer for a specified percentage of revenues.
SOLUTIONS GROUP
The Solutions Group provides information technology solutions designed to
address six discrete customer needs: document management, Microsoft consulting,
executive management consulting, point of sale systems implementations,
electronic commerce and training. In providing these solutions, the Company
combines its in-house expertise with appropriate products of different vendors.
Management believes the Company's expertise in these key substantive areas
provides an effective marketing tool in sales of other products and services.
Through its DoxSys subsidiary, the Company provides complete image-based
document management solutions tailored to customers. These systems are primarily
based on a line of products manufactured by Mosaix, Inc. The Company is
currently negotiating for the sale of substantially all of the assets of DoxSys,
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Inc., which, if completed, is not expected to be material to the Company's
financial condition or results of operations.
The executive management consulting group seeks to help Government agencies
respond to recent legislation including the Chief Financial Officer Act, the
Government Performance and Results Act and the Information Technology Management
Reform Act. Subject matter topics include integrated financial management
solutions, financial management improvement, financial management operations,
internal management controls, fraud detection and prevention, strategic
information management, software process improvement, performance-based
budgeting and strategic and performance plans. These projects are often similar
to the Company's systems integration activities but are usually smaller and
involve a higher content of pre-packaged systems or specialized subject matter.
The Company is a Microsoft Solutions provider. Microsoft Solutions is an
intensive program developed by Microsoft to train information technology
professionals in five key functional areas: messaging, Internet, intranet,
extranet and large data center replacement applications. The group provides
infrastructure analysis and migration to Windows NT, enterprise-wide messaging
design and implementation, Internet and intranet design and deployment and
mainframe replacement, migration and connectivity.
The Company operates an authorized and certified training and education
center for Microsoft and maintains four fully-equipped classrooms devoted to
Microsoft training. In on-site and off-site services, the Company trained over
14,000 people in 1996, including Government and private sector clients as well
as Company personnel. Management believes that these training services can play
a large role in retaining customers and key Company personnel.
The point of sale business of the Solutions Group provides customized
software and hardware systems to movie theaters and quick service restaurants.
The systems allow for advanced day theater ticket sales, customer order entry,
multi-point inventory, "real time" agents and up-to-the-minute operations
reports. The theater system also provides a module to schedule movies so as to
maximize concessions revenues. Current customers include United Artist Theaters,
Arby's franchisees and Dairy Queen franchisees in selected cities.
COMPETITION
In providing a broad range of services and products that address the
complete information technology needs of its clients, the Company participates,
to varying degrees, in multiple segments of the information technology market,
including markets for systems engineering, development and integration;
networking; document imaging services; and product and component sales. Each
market segment in which the Company operates experiences vigorous competition.
Within each segment, the Company competes against different firms of varying
sizes, with different specializations and skills. The number and size of
competitors vary among operating groups and within the individual divisions of
each group. Frequently, the number and identity of competitors vary even from
program to program within a given business area. While the recent trend toward
increased use of GSA and IDIQ contracts has changed some aspects of how
companies sell to the Government, the Company has experienced no material change
in the overall competitiveness of the federal market. Many of the Company's
competitors are significantly larger and have greater financial resources than
the Company. Some of these competitors are divisions or subsidiaries of large,
diversified companies that have access to the financial resources of their
parent companies. In the Product Sales Group, the Company competes with certain
computer manufacturers (including the Company's suppliers), who occasionally
sell directly to the U.S. Government market, as well as a substantial number of
systems integrators, resellers and distributors. To a lesser extent, the Company
competes with Government agencies themselves which are permitted to sell
services to other Government agencies as a result of procurement reform.
The Company believes that the principal competitive factors in the
Government services market are technical knowledge, management capability, past
contract performance, personnel qualifications and
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price. During its recent history, the Company has been successful in winning new
and repeat contract awards in each of its businesses and in getting customers to
exercise contract option years in its services business, both of which the
Company believes are attributable to the strength of its past contract
performance, its technical knowledge, and its competitive prices. Further, the
Company's senior management team has extensive, industry-specific technical and
managerial experience. As a result, the Company believes that it has generally
been able to compete successfully on each of the principal competitive factors
within each of its business lines.
BACKLOG
The Company's total contract backlog is only a portion of the total contract
capacity (i.e., the maximum amount that the Government can purchase under its
contracts with the Company) and represents management's estimate of the
aggregate revenues that are likely to be earned by the Company over the life of
all of its contracts, including option periods. Because many of the Company's
contracts are multi-year contracts and contracts with option years, total
contract backlog represents revenues expected to be realized over a number of
years into the future. The Company's estimated total contract backlog as of
September 30, 1997 was $1.1 billion. The Company's estimates of revenue from
such contracts are based on the Company's history with such contracts and
similar contracts, and management believes such estimates to be reasonable.
However, because total contract backlog is based on management's estimate as to
the future potential of existing contracts, there can be no assurances that all
of such backlog will be recognized as revenue. In addition, the Government's
ability to select multiple winners under IDIQ contracts, as well as its right to
limit orders to any particular awardee, mean that there is no assurance that
unfunded contract backlog will result in actual orders.
Because the Government operates under annual appropriations, agencies of the
Government typically fund contracts on an incremental basis. Accordingly, only a
portion of the Company's total contract backlog is "funded." Funded backlog
consists of the aggregate dollar portion of contracts currently appropriated by
Government customers and allocated to contracts by the purchasing Government
agencies or otherwise allocated for payment by customers upon completion of
specified work. The Company estimates that as of September 30, 1997 its funded
contract backlog was $90 million. Funded backlog generally varies depending on
procurement and funding cycles and other factors beyond the Company's control.
Accordingly, period-to-period comparisons are difficult and not necessarily
indicative of any future trends in revenues.
The preceding information regarding contract backlog and future revenues to
be derived therefrom, is forward-looking and is subject to certain risks and
uncertainties including, but not limited to, a dependence on the continued
funding of Government programs and contract procurements and the risk of
contract termination described elsewhere in the Prospectus.
GOVERNMENT CONTRACTS
The Company derives substantially all of its revenues from business
performed under Government contracts. These include services, systems
integration and other contracts obtained through a negotiated procurement
process, as well as product sales contracts made under GSA Schedules, MACs and
similar IDIQ vehicles.
Traditional negotiated procurement contracts typically authorize a single
contractor or team of contractors to provide a defined set of services and
products to a single government agency. These contracts include
cost-reimbursement contracts (both cost-plus-fixed-fee and cost-plus-award-fee),
time and materials contracts, fixed-price contracts and IDIQ contracts.
Cost-plus-fixed-fee contracts generally provide for the reimbursement of
incurred costs during contract performance, to the extent that such costs are
allowable and allocable, and the payment of a fee, the size of which is fixed in
the contract. Cost-plus-award-fee contracts typically provide for the
reimbursement
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of costs with a base fee and an additional fee that is based upon a periodic
evaluation of the contractor's performance against specified criteria. Under
time and materials contracts, the contractor agrees to provide certain
categories of labor and materials at negotiated rates. To the extent a
contractor's costs differ from the negotiated rates, the contractor realizes all
of the benefit or detriment resulting from the difference between the contract
price and the contractor's cost for a unit of labor or product. Risks associated
with these fluctuations have been mitigated for information technology providers
by the consistent decline in product costs over time, although these reductions
must frequently be anticipated in the proposal process. Under fixed-price
contracts, the contractor agrees to perform specified work for a fixed price
and, accordingly, realizes all the benefit or detriment resulting from decreases
or increases in the cost of performing the work.
The IDIQ contracts historically negotiated by the Company typically specify
the prices at which certain services and/or products are to be provided. These
contracts have been and continue to be used for large-scale Government purchases
of integrated systems that include a significant service or maintenance
component, along with the provision of computer hardware and software. These
IDIQ contracts are typically awarded to a single bidder or team of bidders
chosen through a formal competitive bid process. The periods of performance for
IDIQ contracts typically span a base year and a number of option years. IDIQ
contracts do not obligate the Government to purchase goods or services at the
levels set out in the request for proposal, and allow the Government to
terminate the contract if it is dissatisfied with the contractor's pricing or
performance, or simply for convenience. Alternatively, IDIQ vehicles offer both
the Government and the contractor flexibility to introduce new products and
services as technology changes over the life of the contract.
Over the past few years, reforms of the Government procurement process have
introduced a dramatic increase in the flexibility and alternatives available to
the federal information technology buyer. Onerous regulations that effectively
encouraged large scale, long term, single award procurements have given way to a
more "commercial" buying approach. Government customers, particularly those
buying computer hardware and software without a custom service element, are
spending an increasing share of their procurement budgets through smaller scale,
shorter term, multiple award, multiple agency contract vehicles. While each of
these flexible contractual vehicles has its own unique characteristics, they
have several major elements in common. Because these vehicles do not require the
Government to make specific purchases, they are generally characterized as IDIQ
contracts, and function as procurement "schedules" or catalogs. Although
contractors must compete for the right to participate in these multi-agency,
multi-vendor vehicles, winning the right to participate does not guarantee
revenues, which require an effective post-award sales effort.
In addition to purchasing from multiple IDIQ contracts, Government agencies
may also purchase from GSA Schedules or MACs. Historically, the GSA would
produce schedules for each agency, after extensive bidding and review processes,
that would dictate the products, prices and vendors for all purchases by that
agency. As a result of recent changes to the rules governing use of GSA
Schedules for Government agency purchases of hardware, software and services,
GSA Schedules now frequently act as broadly defined IDIQ contracts under which
multiple Government agencies may procure hardware, software or related services
from contractors authorized to sell under such GSA Schedules without minimum or
maximum order limitations. Contractors participating in the GSA Schedule program
are eligible to market their products to a broad range of Government customers.
The GSA Schedules together with related basic purchasing agreements for larger
volume purchases at reduced prices ("BPAs") offer Government agencies the
advantage of an established contracting infrastructure including staff who are
expert in the technologies offered by various vendors, volume driven pricing,
access to the latest technology and streamlined purchasing mechanisms.
At the time of initial award, prices to the end-users under the Company's
GSA Schedules are set, either at a specified level for the duration of the
contract or at specified levels varying over time. In addition, under certain
circumstances, the Company is required under the terms of its GSA Schedules to
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pass on any savings, resulting from supplier discounts or other price
reductions, to the Government in the form of corresponding price reductions. GSA
Schedules do not have pre-set delivery schedules or minimum purchase levels. The
uncertainties related to future contract performance costs, quantities to be
shipped and dates of delivery make it difficult to predict the future revenues
and profitability performance that may be associated with any particular GSA
Schedule.
Similar to GSA Schedules, MACs offer multiple agencies the opportunity to
procure products from a broad range of vendors. For example, 45 contractors,
including FDC and Sylvest, now hold MACs through the NIH's ECS II, which is a
series of electronic hardware and software catalogs from which any Government
agency that elects to participate may order. MACs specify products and prices
and are issued by a specific government agency to multiple contractors. The
agency which selects the vendors and maintains the products list and takes a
small percentage of each order for administering the contract, and multiple
agencies are permitted to place orders under the MAC.
The evolution of procurement methods has had the effect of making the
procurement of information technology in the Government more similar to that in
the commercial sector. The new procurement methods allow for more timely
purchases of information technology products and for multiple vendors selling
the same products and services, resulting in increasing competition for contract
orders. Thus, whereas historically a contract award typically assured the
winning bidder of a predictable amount of revenue, in the current environment
the contractor's post-award sales, marketing, and customer service effectiveness
frequently dictate the amount and timing of all revenue to be realized under the
contract or schedule. In effect, the new vehicles necessitate two selling
cycles: one to win participation as a vendor under the umbrella contract and a
second to actually win specific orders after contract award.
SALES AND MARKETING
Sales and marketing efforts are split into contract pre-award and post-award
activities. Employees in the Corporate Marketing Group focus on pre-award sales
and marketing, including identifying new contracts, qualifying the Company to
bid on such contracts and then bidding on such contracts. Once a contract is
awarded, the business unit responsible for the new contract leads the technical
performance and/or post-award sales and marketing effort intended to maximize
sales. Under IDIQ contracts, the Company's post-award activities are the most
significant factor in determining the amount of revenue realized.
Within the Corporate Marketing Group, senior management and the Company's
own professional staff of engineers, analysts and other personnel conduct the
Company's sales and marketing activities. The Corporate Marketing Group employs
approximately 50 people, the majority of which are engaged in the preparation
and negotiation of major proposals.
MAJOR CUSTOMERS
The Company has derived and expects to continue to derive substantially all
of its total revenues from Government contracts. Contracts with the U.S. Navy,
NASA and the Veterans Administration represented approximately 15%, 13% and 11%
of pro forma 1996 revenues, respectively. The various Government customers
exercise independent purchasing decisions, and sales to the Government are
generally not regarded as constituting sales to one customer. Instead, each
contracting entity is considered to be a separate customer.
EMPLOYEES
On September 30, 1997, the Company employed 1,052 persons, 673 of these
employees were technical, 130 were marketing/sales personnel and 249 were other
administrative staff. Of the total, 259 employees held advanced degrees. The
Company believes that it is competitive in hiring and retaining
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qualified personnel. Less than 2% of the Company's employees are covered by
collective bargaining agreements with labor unions. The Company considers its
relations with its employees to be good and has not experienced any significant
labor problems.
FACILITIES
The Company leases all of the offices and facilities used in connection with
its operations. The following table sets forth information relating to the
significant facilities leased by the Company. In addition, the Company leases
several other customer support offices near customer facilities in various
states.
<TABLE>
<CAPTION>
EXPIRATION
OF
LOCATION PURPOSE SQUARE FOOTAGE LEASES(S)
- ----------------- -------------------------------------------------------- --------------- -----------
<S> <C> <C> <C>
Bethesda, MD Corporate Headquarters 67,602 12/31/04
Cleveland, OH NASA Lewis Support Facility 90,000 12/31/98
Greenbelt, MD Services Group Headquarters 66,746 12/31/04
Landover, MD Product Sales Group Headquarters 23,777 2/28/98
</TABLE>
LEGAL MATTERS
The Company is not involved in any material legal proceedings. From time to
time, the Company or its competitors file protests, as permitted under
procurement regulations, in connection with specific contract awards.
Historically, these proceedings have not had any material effect on the
Company's financial condition, results of operations, or cash flow. There can be
no assurance that the Company will not become involved in material legal
proceedings or contract bid protest proceedings in the future.
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MANAGEMENT
The following table sets forth certain information with respect to the
members of the Board of Directors and the executive officers of the Company.
Executive officers of the Company are chosen by the Board of Directors and serve
at its discretion. Directors of the Company serve until the election and
qualification of their successors.
<TABLE>
<CAPTION>
NAME TITLE AGE
- ----------------------------- ------------------------------------------------------------------------- ---
<S> <C> <C>
William E. Conway, Jr........ Chairman 48
Allan M. Holt................ Director 45
C. Robert Hanley............. Director and Chairman Emeritus 64
Daniel R. Young.............. Director, President and CEO 63
Peter J. Clare............... Director 32
Harry T. Marren.............. Director, President--FDC Technologies, Inc. 63
Paul A. Taltavull............ Senior Vice President, Solutions Group--FDC Technologies, Inc. 43
John W. Wayne................ Vice President--FDC Technologies, Inc. 41
James M. Dean................ Vice President, Chief Financial Officer and Treasurer of the Company; 50
Treasurer--FDC Technologies, Inc.
Michael D. Brant............. President--DoxSys, Inc. 50
Sterling E. Phillips, Jr..... Vice President, Corporate Marketing--FDC Technologies, Inc. 51
Charles M. Mathews, Jr....... Vice President, Product Sales Group--FDC Technologies, Inc. 38
Peter C. Belford, Sr......... Vice President, Services Group--FDC Technologies, Inc. and President and 51
Chief Operating Officer--NYMA, Inc.
</TABLE>
William E. Conway, Jr. was elected as a Director of the Company in 1996. He
has been a Managing Director of The Carlyle Group, a Washington, D.C.-based
private merchant bank, since 1987. Mr. Conway was Senior Vice President and
Chief Financial Officer of MCI Communications Corporation from 1984 until 1987,
and was a Vice President and Treasurer of MCI from 1981 to 1984. Mr. Conway
presently serves on the Board of Directors of BDM International, Inc., GTS
Duratek, Inc., Nextel Communications, Inc., Tracor Inc., Howmet International
Inc. and several privately held companies.
Allan M. Holt was elected as a Director of the Company in 1996. He is a
Managing Director of The Carlyle Group, a Washington, D.C.-based private
merchant bank which he joined in 1991. He was previously with Avenir Group, a
private investment and advisory group, and from 1984 to 1987 was Director of
Planning and Budgets at MCI Communications Corporation, which he joined in 1982.
Mr. Holt currently serves on the boards of several privately held companies.
C. Robert Hanley has been a Director of the Company since its founding in
1969. Mr. Hanley was President and Chief Executive Officer of the Company from
1969 until 1985, when he became its Chairman and Chief Executive Officer. He
retired in January 1996 and now serves as a consultant to the Company.
Daniel R. Young has been a Director of the Company since 1977 and its
President and Chief Executive Officer since 1996. Mr. Young joined the Company
in 1976 as its Executive Vice President and became its President and Chief
Operating Officer in 1985. Prior to joining the Company, Mr. Young was employed
by Data Transmission Company as Executive Vice President and held various
management positions at Texas Instruments Incorporated.
Peter J. Clare was elected as a Director of the Company in 1996. He is
currently a Principal with The Carlyle Group, a Washington, D.C.-based private
merchant bank which he joined in 1992. Mr. Clare was previously with First City
Capital, a private investment group. From 1987 to 1989, he worked in the
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mergers and acquisitions and merchant banking groups at Prudential-Bache. Mr.
Clare currently serves on the boards of several privately held companies.
Harry T. Marren was elected as a Director of the Company in 1997. He has
been President of FDC Technologies, Inc. and its predecessor organization,
Federal Data Systems Corporation, since 1989. Mr. Marren joined the Company in
1977 as General Manager of Operations and was promoted to Vice President in 1980
and Senior Vice President in 1988.
Paul A. Taltavull has been Senior Vice President of the Solutions Group
within FDC Technologies, Inc. since April 1997. Mr. Taltavull joined the Company
in 1982 as a Federal Marketing Representative and has held a series of marketing
management positions with the Company, including Senior Vice President of
Marketing from 1992 to 1997. Before joining the Company, Mr. Taltavull was a
sales representative for Hewlett-Packard Company and a practicing engineer for
the U.S. Government.
John W. Wayne has been Vice President of the Systems Integration Group of
FDC Technologies, Inc. since 1990. He previously directed the Company's systems
design and engineering group. He joined Federal Data Corporation in 1981 as an
Operations Project Manager and was subsequently promoted to Director of
Technical Services. Prior to joining the Company, Mr. Wayne was employed as a
Systems Engineer with Inforex Incorporated and by TRW Data Systems as a Customer
Engineer.
James M. Dean has been Vice President and Chief Financial Officer of the
Company since 1986 and its Treasurer since 1987. Mr. Dean joined Federal Data
Corporation in 1983 as its Controller. He was previously employed by Price
Waterhouse as a Senior Audit Manager.
Michael D. Brant has been President of DoxSys, Inc. since April 1997. He
joined FDC Technologies, Inc. in 1993 as Vice President and General Manager of
DoxSys. From 1972 to 1992, Mr. Brant held various marketing positions with Xerox
Corporation, including Vice President of Custom Systems Integration.
Sterling E. Phillips, Jr. has been Vice President of corporate marketing of
FDC Technologies, Inc. since April 1997. He joined FDC Technologies, Inc. in
1996 as Vice President of its Services Group. He was previously employed as
Chief Operating Officer of TRI-COR Industries, Inc. and President of Business
Development of the federal business unit of Computer Sciences Corporation. From
1968 through 1992, Mr. Phillips held various positions in management, sales and
marketing with The IBM Corporation.
Charles M. Mathews, Jr. has been Vice President of the Product Sales Group
of FDC Technologies, Inc. since 1996. From 1990 through 1994, Mr. Mathews was
President of Bohdan Associates, Inc. and President of the Atlantic region of
AmeriData, Inc. from 1994 through 1995.
Peter C. Belford, Sr. has been Vice President of the Services Group of FDC
Technologies, Inc. since 1997 and President and Chief Operating Officer of NYMA,
Inc. since 1994. Mr. Bedford joined NYMA in 1985 as its Executive Vice
President. Mr. Belford was previously employed by Computer Sciences Corporation
("CSC") as Vice President, Product Management and Product Assurance. He joined
CSC in 1977 as a Program Manager and became Assistant to the President of the
System Sciences Division of that company, with executive management
responsibilities.
The Company does not currently pay any fees or remuneration to its directors
for service on the Board and the Board has not established committees of the
Board of Directors.
CONSULTING AGREEMENTS
In January 1996, the Company and C. Robert Hanley entered into a 3-year
consulting agreement. Under the terms of the agreement, Mr. Hanley consults on
certain aspects of the Company's business and receives a consulting fee of
$200,000 per year, maintains an office at the Company's Bethesda headquarters
and participates in the Company's health insurance plan. The consulting
agreement requires Mr. Hanley to be available to provide such consulting
services as the Company may reasonably request. Mr. Hanley regularly provides
consulting services to the Company pursuant to the consulting agreement and
serves as director to the Company without compensation.
64
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth information with respect to the compensation
paid by the Company for services rendered during the year ended December 31,
1996 to the Chief Executive Officers and to each of the four other most highly
compensated executive officers of the Company (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL COMPENSATION --------------------------------------------------
----------------------------------- SECURITIES
OTHER RESTRICTED UNDERLYING
ANNUAL STOCK OPTIONS/ LTIP ALL OTHER
NAME AND SALARY BONUS(1) COMPENSATION(2) AWARD(S) SARS(3) PAYOUTS COMPENSATION(4)
PRINCIPAL POSITION ($) ($) ($) ($) (#) ($) ($)
- ---------------------------------------- ------- -------- --------------- ---------- ---------- ------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Daniel R. Young(5) ..................... 225,012 300,000 -- -- 75,000 -- 430,351
(Chief Executive Officer)
C. Robert Hanley(6) .................... 10,418 -- -- -- -- -- 2,341,260
(Chief Executive Officer)
Harry T. Marren ........................ 150,000 250,000 -- -- 40,000 -- 168,086
(President, FDC Technologies, Inc.)
Paul A. Taltavull ...................... 150,000 150,000 -- -- 25,000 -- --
(Senior Vice President)
John W. Wayne .......................... 102,000 160,000 -- -- 15,000 -- --
(Vice President)
James M. Dean .......................... 110,000 130,000 -- -- 10,000 -- --
(Vice President and Chief Financial
Officer)
</TABLE>
- ------------------------
(1) Bonus awards are reflected in the year to which they are attributable and
not the year in which they are actually paid. Bonuses are awarded at the
discretion of management subject to review by the Board of Directors.
(2) Fringe benefit amounts are omitted to the extent the aggregate value of such
benefits is less than 10% of the salary and bonus, or $50,000.
(3) The options listed were awarded in 1996 pursuant to the Company's Stock
Option Plan for Executives and Other Key Employees (the "Plan"). Under the
Plan, 6% of the options granted become exercisable on December 31 of each
year beginning on December 31, 1996 and ending December 31, 2001. The
remaining 70% of the options granted become exercisable throughout a
five-year period beginning December 31, 1996 based on satisfaction of
certain financial criteria, including earnings and cash flow targets.
(4) Amounts shown include the dollar value of life insurance premiums paid on
behalf of Messrs. Young ($430,351), Hanley ($2,149,593) and Marren
($168,086). Mr. Hanley also received $191,667 in consulting fees.
(5) Mr. Young was appointed Chief Executive Officer in January 1996.
(6) Resigned in January 1996.
65
<PAGE>
The following table sets forth information regarding the Company's Option
Grants during the fiscal year ended December 31, 1996. The Company has granted
no stock appreciation rights.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
INDIVIDUAL GRANTS STOCK
------------------------------ PRICE
NUMBER OF APPRECIATION
SECURITIES PERCENT OF TOTAL FOR OPTION TERM
UNDERLYING OPTIONS GRANTED EXERCISE OR ----------------
OPTIONS TO EMPLOYEES IN BASE PRICE EXPIRATION 5% 10%
NAME GRANTED (#) FISCAL YEAR ($/SH)(1) DATE ($) ($)
- ---------------------------------------- ----------- ---------------- ----------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Daniel R. Young......................... 75,000 30% 10 03/31/01 207,211 457,883
C. Robert Hanley........................ -- -- -- -- -- --
Harry T. Marren......................... 40,000 16% 10 03/31/01 110,513 244,204
Paul A. Taltavull....................... 25,000 10% 10 03/31/01 69,070 152,627
John W. Wayne........................... 15,000 6% 10 03/31/01 41,442 91,577
James M. Dean........................... 10,000 4% 10 03/31/01 27,628 61,051
</TABLE>
- ------------------------
(1) On February 14, 1996, the Board of Directors established an exercise price
of $10 per share, which equaled the per share price paid by Carlyle in
connection with the Recapitalization on December 1, 1995.
The following table sets forth for each of the Named Executive Officers the
number of, and the value of, the exercisable and unexercisable stock options
each of them held at December 31, 1996. None of the Named Executive Officers
exercised a stock option during 1996.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN THE MONEY
OPTIONS OPTIONS AT FISCAL
AT FISCAL YEAR-END (#) YEAR-END ($)(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Daniel R. Young......................... 4,500 70,500 76,500 1,198,500
C. Robert Hanley........................ -- -- -- --
Harry T. Marren......................... 2,400 37,600 40,800 639,200
Paul A. Taltavull (2)................... 1,500 23,500 25,500 399,500
John W. Wayne (3)....................... 900 14,100 15,300 239,700
James M. Dean (2)....................... 600 9,400 10,200 159,800
</TABLE>
- ------------------------
(1) As privately held Company not then engaged in any transaction requiring a
current valuation of its shares, the Company did not determine the value of
its common stock at year-end. Accordingly, the Company has assumed for
purposes of this table a value of $27.00 per share, the price paid for the
common stock by all investors at the time of the NYMA Acquisition in May
1997. Management believes the values attributed to unexercised options in
this table to be higher than the actual value of such options at year-end.
(2) Excludes options to purchase 30,000 shares granted prior to the
Recapitalization pursuant to FDC's 1987 Stock Incentive Plan, which options
will be replaced with immediately exercisable options to purchase shares of
FDC in a quantity and at a price that will preserve the economic value of
the options prior to the Recapitalization.
(3) Excludes options to purchase 5,000 shares granted prior to the
Recapitalization pursuant to FDC's 1987 Stock Incentive Plan, which options
will be replaced with immediately exercisable options to purchase shares of
FDC in a quantity and at a price that will preserve the economic value of
the options prior to the Recapitalization.
66
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth the ownership of common stock of the Company
by each person known by the Company to be the owner of 5% or more of the
Company's outstanding common stock, by each person who is a director or Named
Executive Officer of the Company and by all directors and executive officers of
the Company as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER ALL OUTSTANDING
BENEFICIAL OWNER(1) OF SHARES COMMON STOCK
- ------------------------------------------------------------------ ---------- ---------------
<S> <C> <C>
TCG Holdings, L.L.C.(2)........................................... 2,447,272 84.1
William E. Conway, Jr.(3)......................................... -- --
Allan M. Holt(3).................................................. -- --
C. Robert Hanley(4)............................................... 73,172 2.5
Daniel R. Young(5)(6)............................................. 155,407 5.3
Peter J. Clare(3)................................................. -- --
Harry T. Marren(6)................................................ 31,000 1.1
Paul A. Taltavull(6).............................................. 14,880 *
James M. Dean(6).................................................. 5,920 *
John W. Wayne(6).................................................. 12,000 *
All directors and executive officers as a group (13 persons)...... 345,288 11.9
</TABLE>
- ------------------------
* less than one percent
(1) Except as otherwise indicated, each beneficial owner has the sole power to
vote, as applicable, and to dispose of all units owned by such beneficial
owner.
(2) TCG Holdings, L.L.C., a Delaware limited liability company, is the sole
managing member of TC Group, L.L.C., a Delaware limited liability company,
which is the sole general partner of Carlyle Partners II, L.P., a Delaware
limited partnership, Carlyle Partners III, L.P., a Delaware limited
partnership, Carlyle International Partners II, L.P., a Cayman Islands
limited partnership, Carlyle International Partners III, L.P., a Cayman
Islands limited partnership, and certain other partnerships formed by
Carlyle. The address of TCG Holdings L.L.C. is c/o The Carlyle Group, 1001
Pennsylvania Avenue, N.W., Washington, D.C. 20004. James A. Baker III, Frank
C. Carlucci, William E. Conway, Jr., Daniel A. D'Aniello, Richard G. Darman,
David W. Dupree, Allan M. Holt, Jerome H. Powell and David M. Rubenstein, as
the managing members of TCG Holdings, L.L.C., may be deemed to share
beneficial ownership of the shares shown as beneficially owned by TCG
Holdings, L.L.C. Such persons disclaim such beneficial ownership.
(3) The address of such person is c/o The Carlyle Group, 1001 Pennsylvania
Avenue, N.W., Washington, D.C. 20004.
(4) The address of C. Robert Hanley is 2808 Tarflower Way, Naples, Florida
34105.
(5) 7,000 of these shares (0.3% of the total outstanding shares of the Company)
are owned by the Daniel R. Young Irrevocable Unitrust U/A dated November 16,
1994, for which Daniel R. Young is the trustee.
(6) The address of such person is 4800 Hampden Lane, Bethesda, Maryland 20814.
67
<PAGE>
CERTAIN TRANSACTIONS
Concurrently with the acquisition of the Company by Carlyle in 1995, the
Company entered into a management agreement (the "Management Agreement") with TC
Group, L.L.C. for certain management and financial advisory services to be
provided to the Company and its subsidiaries. In consideration of the management
and financial advisory services, the Company pays TC Group, L.L.C. an annual
management fee of $300,000. Based on fees being paid by comparably situated
companies, the Company believes that this Management Agreement is on terms no
less favorable to the Company than could have been obtained from an independent
third party.
Carlyle received fees of $1.5 million and $0.5 million for advisory and
other services rendered in connection with the Recapitalization and the NYMA
Acquisition, respectively. Carlyle received a fee of $1.5 million for advisory
and other services rendered in connection with the Sylvest Acquisition, the
offering of the Private Notes and the Refinancing.
In connection with the Recapitalization, the Company sold an airplane, the
Company's financial services division, and a 10% limited partnership interest in
a bankrupt partnership that previously held title to the office building in
which the Company is located to an entity controlled by C. Robert Hanley, a
Director of the Company and its former chief executive officer. Mr. Hanley
purchased the above-described assets and assumed the related liabilities for
approximately $2.4 million, the aggregate estimated value of the airplane and
the financial services division. The Company attributed no value to the
partnership interest. The Company entered into a three-year consulting agreement
with Mr. Hanley and a three-year agreement for use of the airplane from an
affiliate of Mr. Hanley. The consulting agreement provides for annual payments
of $200,000, and the lease of the airplane provides for annual payments of
$300,000 plus a usage charge which amounted to $55,632 during the year ended
December 31, 1996. The consulting agreement requires Mr. Hanley to be available
to provide such consulting services as the Company may reasonably request. Mr.
Hanley regularly provides consulting services to the Company pursuant to the
consulting agreement and serves as director to the Company without compensation.
In connection with the Recapitalization, the stockholders of the Company
executed a Holders Agreement dated as of November 30, 1995 (as amended,
supplemented or replaced, the "Holders Agreement"). The Holders Agreement
restricts transfer of the common stock of the Company (except to affiliates, to
the public in a registered offering or pursuant to Rule 144 under the Securities
Act, transfers in a merger or sale of the Company, or transfer pursuant to
certain rights under the Holders Agreement). The Holders Agreement also provides
for tag-along rights on transfers of more than 15% of the common stock, bring
along rights with respect to more than 50% of the common stock and registration
rights.
68
<PAGE>
DESCRIPTION OF CERTAIN INDEBTEDNESS
NEW SENIOR CREDIT FACILITY
As a part of the refinancing of the Company, FDC entered into a new senior
secured credit agreement (the "New Senior Credit Facility") shortly after the
offering of the Private Notes. The New Senior Credit Facility is among the
Company, its subsidiaries (as Subsidiary Guarantors), Bankers Trust Company (as
agent) and Bank of Boston, The Bank of New York, BTM Capital Corporation,
Creditanstalt Bankverein, Credit Lyonnais New York Branch, First Source
Financial LLP, First Union Commercial Corp. and IBJ Schroder Bank & Trust
Company. The New Senior Credit Facility consists of a $75.0 million revolving
credit facility, including a subfacility for letters of credit (the "Revolving
Loan"). As of September 30, 1997, approximately $3.5 million (excluding $4.0
million of undrawn letters of credit) was outstanding under the New Senior
Credit Facility.
The Revolving Loan is evidenced by notes and matures on or before the fifth
anniversary of the closing of the New Senior Credit Facility. Availability of
Loans and Letters of Credit are subject to a borrowing base comprised of 85% of
Eligible Receivables and 60% of Eligible Inventory (as such terms are defined in
the New Senior Credit Facility).
Mandatory reductions of outstanding principal amounts under the New Senior
Credit Facility are required upon the occurrence of certain events.
All outstanding loans under the New Senior Credit Facility bear interest at
the Company's option at the base rate in effect from time to time plus 1.25% or
the eurodollar rate plus 2.25% plus an additional 2.0% on overdue amounts.
Interest in respect of base rate loans is payable quarterly in arrears on the
last business day of each fiscal quarter. Interest in respect of eurodollar
loans is payable at the end of the applicable interest period or, if earlier,
quarterly.
FDC's obligations under the New Senior Credit Facility are guaranteed by all
direct and indirect domestic subsidiaries of FDC and are secured by a lien on
all assets (present and future, tangible and intangible) of FDC and the
Subsidiary Guarantors, with such exceptions as are satisfactory to the lenders.
The New Senior Credit Facility contains customary covenants restricting the
incurrence of debt (except for the Notes and the existing Floor Plan Financing
Facility (as defined), as amended, modified or replaced), and encumbrances on or
sales of assets, limiting mergers and acquisitions except Permitted Acquisitions
(as defined in the New Senior Credit Facility) and restricting dividends,
investments and changes of control, providing for the maintenance of certain
financial ratios and various other financial and other covenants and
restrictions. A change of control under the Notes would constitute a change of
control under the New Senior Credit Facility that would require the Company to
repay any obligations then outstanding under the New Senior Credit Facility. If
a Change of Control were to occur, the Company may not have sufficient assets to
satisfy its repayment obligations under the New Senior Credit Facility which
will rank senior to the Notes, and its repurchase obligations under the Notes.
FLOOR PLAN FINANCING FACILITY
On September 17, 1996, Sylvest entered into the Agreement for Wholesale
Financing and the STAR Agreement (Short Term Accounts Receivable Program) with
Deutsche Financial Services Corporation ("DFS") (as amended or replaced from
time to time, collectively, the "Floor Plan Financing Facility") to facilitate
the purchase of inventory by Sylvest from approved vendors for prompt resale to
customers. In return, Sylvest granted DFS a first priority security interest in
the assets financed by DFS and certain other rights and assets. The Floor Plan
Financing Facility currently contains certain financial covenants, which if
breached may require FDC to return to Sylvest moneys paid by Sylvest to FDC in
the previous month to the extent such repayments are necessary to cure such
breach. As of September 30, 1997, approximately $5.9 million was outstanding
under the Floor Plan Financing Facility.
69
<PAGE>
On September 5, 1997, FDC entered into a security agreement with
NationsCredit Commercial Corporation of America ("NCC") to facilitate the
purchase of inventory by FDC from approved vendors for prompt resale to
customers. On September 11, 1997, NCC and lenders under the New Senior Credit
Facility entered into an intercreditor agreement which provides for the sharing
of collateral.
SELLER NOTES
On January 4, 1996, in connection with the Recapitalization, the Company
issued an aggregate principal amount of $7.0 million of 9% Increasing Rate
Subordinated Notes (the "FDC Notes") due on the later of (i) six months after
the indefeasible payment of all amounts owed under the Company's senior credit
facility (including any refinancing thereof), to the extent the term of the
senior credit facility is extended in connection with a default or anticipated
default and (ii) July 4, 2003. The FDC Notes accrue interest at 9% from January
4, 1996 through January 3, 1999, 11% from January 4, 1999 through December 31,
2002 and 13% thereafter. Interest on the FDC Notes is payable semi-annually
beginning July 4, 1996; provided, however, that any amount of cash interest
which is not paid on the FDC Notes as a result of payment restrictions under any
"senior debt" (as defined in the FDC Notes) will be paid by the issuance of
payment-in-kind notes. The interest payments of $316,485 due July 4, 1996 and
$330,727 due January 4, 1997 were made through the issuance of payment-in-kind
notes.
On May 2, 1997, in connection with the NYMA Acquisition, the Company issued
an aggregate principal amount of $5.0 million of 9% Increasing Rate Subordinated
Notes (the "NYMA Notes") due on the later of (i) six months after the
indefeasible payment of all amounts owed under the Company's senior credit
facility (including any refinancing thereof), to the extent the term of the
senior credit facility is extended in connection with a default or anticipated
default and (ii) November 2, 2004. The NYMA Notes accrue interest at 9% from May
2, 1997 through May 2, 2000, 11% from May 3, 2000 through May 3, 2003 and 13%
thereafter. Interest on the NYMA Notes will be payable semi-annually beginning
November 2, 1997; provided, however, that any amount of cash interest which is
not paid on the NYMA Notes as a result of payment restrictions under any "senior
debt" (as defined in the NYMA Notes) will be paid by the issuance of
payment-in-kind notes.
On June 30, 1997, in connection with the Sylvest Acquisition, the Company
issued an aggregate principal amount of $7.0 million of 9% Increasing Rate
Subordinated Notes (the "Sylvest Notes") due on the (i) later of six months
after the indefeasible payment of all amounts owed under the Company's senior
credit facility (including any refinancing thereof), to the extent the term of
the senior credit facility is extended in connection with a default or
anticipated default and (ii) December 31, 2004. The Sylvest Notes accrue
interest at 9% from June 30, 1997 through June 30, 1999, 11% from July 1, 1999
through June 30, 2001 and 13% thereafter. Interest on the Sylvest Notes will be
payable semi-annually beginning December 31, 1997; provided, however, that any
amount of cash interest which is not paid on the Sylvest Notes as a result of
payment restrictions under any "senior debt" (as defined in the Sylvest Notes)
will be paid by the issuance of payment-in-kind notes.
Each of the Seller Notes contain financial covenants. All of the outstanding
FDC Notes and a portion of the Sylvest Notes were repaid with the proceeds of
the offering of the Private Notes.
70
<PAGE>
DESCRIPTION OF NOTES
GENERAL
The Notes were issued under an Indenture (the "Indenture") dated as of July
15, 1997, by and among the Company, the Subsidiary Guarantors and Norwest Bank,
Minnesota, National Association, as Trustee (the "Trustee").
The following summaries of certain provisions of the Indenture hereunder do
not purport to be complete and are subject to, and are qualified by reference
to, all the provisions of the Indenture, including the definitions therein of
certain terms included herein. Wherever particular defined terms of the
Indenture are referred to herein, such defined terms shall be incorporated
herein by reference. Unless the context otherwise requires, references to
defined terms refer to defined terms of the Indenture.
The Notes are unsecured senior subordinated obligations of the Company, are
guaranteed on a senior subordinated unsecured basis by the Subsidiary
Guarantors, are limited to $175,000,000 aggregate principal amount, of which
$105,000,000 aggregate principal amount were issued in the offering of the
Private Notes, and mature on August 1, 2005. Additional amounts may be issued in
one or more series from time to time subject to the limitations set forth under
"--Certain Covenants--Limitation on Indebtedness" and the restrictions contained
in the Senior Credit Facility. The Notes are subordinated to Senior Indebtedness
of the Company as described below under "--Subordination."
As of the consummation of the offering of the Private Notes, all of the
Company's Subsidiaries are Restricted Subsidiaries. However, under certain
circumstances, the Company will be able to designate current or future
Subsidiaries as Unrestricted Subsidiaries. Unrestricted Subsidiaries will not be
subject to any of the restrictive covenants set forth in the Indenture.
TERMS OF NOTES
The Notes mature on August 1, 2005, and bear interest at the rate per annum
stated on the cover page hereof from the date of issuance, payable semiannually
in arrears on each February 1 and August 1 commencing on February 1, 1998, to
the persons who are registered holders thereof at the close of business on the
January 15 or July 15 preceding the applicable interest payment date. The Notes
are payable both as to principal and interest at the office of the agent of the
Company maintained for such purpose within the City and State of New York, or,
at the option of the Company, payment of interest may be made by check mailed to
the holders of the Notes at their respective addresses set forth in the Notes
holder register. Unless otherwise designated by the Company, the Company's agent
in New York will be at the office of the Trustee maintained for such purpose.
Interest on the Notes will be computed on the basis of a 360-day year of twelve
30-day months. The Notes are transferable and exchangeable at the offices of the
Registrar. The Notes were issued in fully registered form, without coupons, in
principal amounts of $1,000 and any integral multiple thereof.
OPTIONAL REDEMPTION
Except as provided below, the Notes may not be redeemed prior to August 1,
2001. On or after such date, the Notes may be redeemed at the option of the
Company, at any time as a whole, or from time to time in part, on not less than
30 nor more than 60 days' notice, at the following redemption prices (expressed
as percentages of principal amount), plus accrued and unpaid interest (if any)
to the date of
71
<PAGE>
redemption (subject to the rights of holders of record on the relevant record
date to receive interest due on the relevant interest payment date), if redeemed
during the 12-month periods commencing August 1:
<TABLE>
<CAPTION>
REDEMPTION
PRICE
-----------
<S> <C>
2001............................................................................. 105.063%
2002............................................................................. 103.375%
2003............................................................................. 101.688%
2004 and thereafter.............................................................. 100.000%
</TABLE>
Notwithstanding the foregoing, at any time prior to August 1, 2000, the
Company may redeem, in part and from time to time, with the net proceeds of one
or more Public Equity Offerings, up to 35% aggregate principal amount of the
Notes originally issued in the offering of the Private Notes at a redemption
price equal to 110.125% of the aggregate principal amount thereof plus accrued
and unpaid interest thereon, if any, to the redemption date; PROVIDED that at
least 65% of the aggregate principal amount of the Notes originally issued in
the offering of the Private Notes remain outstanding immediately after the
occurrence of any such redemption and that any such redemption occurs within 90
days following the closing of any such Public Equity Offering.
At any time on or prior to August 1, 2001, the Notes may also be redeemed as
a whole at the option of the Company upon the occurrence of a Change of Control,
upon not less than 30 nor more than 60 days prior notice (but in no event more
than 90 days after the occurrence of such Change of Control), at a redemption
price equal to 100% of the principal amount thereof plus the Applicable Premium
as of, and accrued and unpaid interest, if any, to, the date of redemption (the
"Redemption Date") (subject to the right of holders of record on the relevant
record date to receive interest due on the relevant interest payment date). The
Company may not redeem Notes pursuant to this paragraph if it has made a Change
of Control Offer (as defined) with respect to such Change of Control.
NOTICES AND SELECTIONS
In the event of a redemption of less than all of the Notes, the Notes will
be selected for redemption by the Trustee PRO RATA, by lot or by any other
method that the Trustee considers fair and appropriate and, if the Notes are
listed on any securities exchange, by a method that complies with the
requirements of such exchange; PROVIDED, HOWEVER, that if partial redemption is
made with the proceeds of a Public Equity Offering prior to August 1, 2000,
selection of the Notes or portions thereof for redemption shall be made by the
Trustee only on a PRO RATA basis unless such method is otherwise prohibited.
Notice of redemption will be mailed at least 30 days but not more than 60 days
before the redemption date to each holder of Notes to be redeemed at such
holder's registered address. On and after the redemption date, interest will
cease to accrue on Notes or portions thereof called for redemption (unless the
Company shall default in the payment of the redemption price or accrued
interest). Notes that are redeemed by the Company or that are purchased by the
Company pursuant to a Net Proceeds Offer as described under "--Limitation on
Asset Sales" or pursuant to a Change of Control Offer as described under
"--Change of Control" or that are otherwise acquired by the Company will be
surrendered to the Trustee for cancellation.
SUBORDINATION
The payment of all obligations on the Notes is subordinated in right of
payment to the prior payment in full, in cash or Cash Equivalents, of all
Obligations on the Senior Indebtedness. Upon any payment or distribution of
assets of the Company to the creditors upon any liquidation, dissolution,
winding up, reorganization, assignment for the benefit of creditors or
marshaling of assets of the Company or in a bankruptcy, reorganization,
insolvency, receivership or similar proceeding relating to the Company or its
property, whether voluntary or involuntary, all obligations with respect to all
Senior Indebtedness shall first be paid in full, in cash or Cash Equivalents,
before any payment or distribution is made on account of any
72
<PAGE>
Obligations on the Notes, or for the acquisition of any of the Notes for cash or
property or otherwise; and until all such Obligations with respect to all Senior
Indebtedness are paid in full, in cash or Cash Equivalents, any distribution to
which the holders of the Notes would be entitled but for the subordination
provisions will be made to the holders of Senior Indebtedness as their interests
may appear. If (i) any default occurs and is continuing in the payment when due,
whether at maturity, upon any redemption, by declaration or otherwise, of any
principal of, interest on, or other amounts due and owing on, any Senior
Indebtedness or (ii) any default occurs and is continuing with respect to any
Significant Senior Indebtedness resulting in the acceleration of the maturity of
all or any portion of any Significant Senior Indebtedness, no payment shall be
made by or on behalf of the Company or any of its Subsidiaries or any other
person on its or their behalf with respect to any Obligations on the Notes or to
acquire any of the Notes for cash or property or otherwise, except out of a
trust theretofore established pursuant to the provisions of the Indenture
described under "Satisfaction and Discharge of the Indenture; Covenant
Defeasance" (PROVIDED that payment into such trust was not made during any
period in which payment on the Notes is blocked pursuant to the subordination
provisions of the Indenture) and except by issuance of Junior Securities. In
addition, if any other event of default occurs and is continuing (or if such an
event of default would occur upon any payment with respect to the Notes) with
respect to the Designated Senior Indebtedness, as such event of default is
defined in the instrument creating or evidencing such Designated Senior
Indebtedness permitting the holders of such Designated Senior Indebtedness then
outstanding, or their Representative, to accelerate the maturity thereof and if
the Representative for the Designated Senior Indebtedness gives written notice
of the event of default to the Trustee (a "Default Notice"), then, unless and
until the date, if any, on which all Designated Senior Indebtedness to which
such event of default relates is discharged or the Representative for the
Designated Senior Indebtedness gives notice that all events of default have been
cured or waived or have ceased to exist or the Trustee receives written notice
from the Representative for the Designated Senior Indebtedness terminating the
Blockage Period (as defined below), during the 179 days after the delivery of
such Default Notice (the "Blockage Period"), none of the Company or any of its
Subsidiaries or any other person on its or their behalf shall (x) make any
payment with respect to any Obligations on the Notes or (y) acquire any of the
Notes for cash or property or otherwise. Notwithstanding anything herein to the
contrary, in no event will a Blockage Period extend beyond 179 days from the
date the payment on the Notes was due. Only one such Blockage Period may be
commenced within any 360 consecutive days. No event of default which existed or
was continuing (it being acknowledged that any action of the Company or its
Subsidiaries occurring subsequent to delivery of a Default Notice that would
give rise to any event of default pursuant to any provision under which an event
of default previously existed (or was continuing at the time of delivery of such
Default Notice) shall constitute a new event of default for this purpose) on the
date of the commencement of any Blockage Period with respect to the Designated
Senior Indebtedness shall be, or be made, the basis for the commencement of a
second Blockage Period by the Representative of the Designated Senior
Indebtedness whether or not within a period of 360 consecutive days, unless such
event of default shall have been cured or waived for a period of not less than
90 consecutive days.
By reason of such subordination, in the event of the insolvency of the
Company, creditors of the Company who are not holders of Senior Indebtedness,
including the holders of the Notes, may recover less, ratably, than holders of
Senior Indebtedness.
At September 30, 1997, the Company had $7.5 million of Senior Indebtedness
(representing revolving line of credit borrowings of $3.5 million and $4.0
million of undrawn letters of credit) and $113.0 million of senior subordinated
indebtedness (representing $105.0 million of Private Notes and $8.0 million of
Seller Notes) outstanding and the Subsidiary Guarantors had $8.2 million of
Guarantor Senior Indebtedness outstanding (excluding guarantees of Indebtedness
under the New Senior Credit Facility). The Subsidiary Guarantors also had $11.0
million of secured nonrecourse notes and nonrecourse obligations under capital
leases.
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CHANGE OF CONTROL
Upon a Change of Control, each holder of Notes shall have the right to
require that the Company repurchase all or a portion of such holder's Notes at a
repurchase price in cash equal to 101% of the principal amount thereof plus
accrued and unpaid interest, if any, to any Repurchase Date (subject to the
rights of the holders of record on the relevant record date to receive interest
on the relevant interest payment date), in accordance with the terms set forth
below (the "Change of Control Offer").
Within 30 days following the date upon which the Change of Control occurred,
if the Company has not made a redemption offer pursuant to the third paragraph
under "Optional Redemption", the Company must send, by first class mail, a
notice to each holder, with a copy to the Trustee, which notice shall govern the
terms of the Change of Control Offer. Such notice shall state, among other
things, the purchase date, which must be not earlier than 30 days nor later than
60 days from the date such notice is mailed, other than as may be required by
law (the "Change of Control Payment Date"). Holders electing to have a Note
purchased pursuant to a Change of Control Offer will be required to surrender
the Note, with the form entitled "Option of Holder to Elect Purchase" on the
reverse of the Note completed, to the Paying Agent at the address specified in
the notice prior to the close of business on the Business Day prior to the
Change of Control Payment Date.
The Indenture requires that if the Senior Credit Facility is in effect, or
any amounts are owing thereunder, at the time of the occurrence of a Change of
Control, prior to the mailing of the notice to holders described in the
preceding paragraph, but in any event within 30 days following any Change of
Control, the Company covenants to (i) repay in full all Obligations under the
Senior Credit Facility or offer to repay in full all Obligations under the
Senior Credit Facility and repay the Obligations under the Senior Credit
Facility of each lender who has accepted such offer or (ii) obtain the requisite
consent under the Senior Credit Facility to permit the repurchase of the Notes
as described above. The Company must first comply with the covenant described in
the preceding sentence before it shall be required to purchase Notes in the
event of a Change of Control; PROVIDED that the Company's failure to comply with
the covenant described in the preceding sentence constitutes an Event of Default
described in clause (c) under "Events of Default" below if not cured within 30
days after the notice required by such clause. As a result of the foregoing, a
holder of the Notes may not be able to compel the Company to purchase the Notes
unless the Company is able at the time to refinance all of the Senior Credit
Facility or obtain requisite consents under the Senior Credit Facility. Failure
by the Company to make a Change of Control Offer when required by the Indenture
constitutes a Default under the Indenture and, if not cured within 30 days after
notice, constitutes an Event of Default.
The Company will comply with all applicable securities laws in connection
with any Change of Control Offer, including Rule 14e-1 under the Exchange Act.
CERTAIN COVENANTS
LIMITATION ON INDEBTEDNESS
The Company may not create, incur, issue, assume, guarantee or otherwise
become liable for, contingently or otherwise (collectively, "issue"), directly
or indirectly, any Indebtedness, and may not permit any Restricted Subsidiary to
issue, directly or indirectly, any Indebtedness; PROVIDED that the Company or a
Subsidiary Guarantor may issue Indebtedness if the Operating Coverage Ratio of
the Company is greater than (x) 1.75 to 1.0, if the date of such issuance is on
or prior to August 1, 1999, or (y) 2.00 to 1.0, if the date of such issuance is
after August 1, 1999.
The above limitation will not apply to the issuance of the following
Indebtedness: (a)(1) Indebtedness pursuant to the Senior Credit Facility, in an
aggregate principal amount at any time outstanding not to exceed the greater of
(x) $75.0 million and (y) the sum of 85% of Eligible Receivables and 60% of
Eligible Inventory, in each case, as defined in the Senior Credit Facility (but
including accounts and inventory in
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which the lenders under any Floor Plan Financing Facility have a security
interest), as in effect on the Issue Date (the "Borrowing Base") less, in either
case, the aggregate principal amount of Indebtedness then outstanding pursuant
to clause (a)(2) below, permanently reduced by repayments of term loans or
revolving loans out of the Excess Net Proceeds of Asset Sales actually made
(other than temporary reductions of revolving loan balances pending application
as permitted by the covenant described under "Limitation on Asset Sales"), and
(2) Indebtedness pursuant to any Floor Plan Financing Facility in an aggregate
principal amount not to exceed the greater of (x) $75.0 million and (y) the
Borrowing Base less, in either case, the aggregate principal amount of
Indebtedness then outstanding pursuant to the Senior Credit Facility; (b) the
Notes and the Subsidiary Guarantees; (c) Indebtedness owed to the Company or a
Restricted Subsidiary by the Company or a Restricted Subsidiary; PROVIDED,
HOWEVER, that any transfer of such Indebtedness (excluding a pledge or other
transfer thereof intended to create a security interest therein, but including
any enforcement thereof other than an enforcement that results in the repayment
of an obligation permitted by the terms of this covenant) to a person other than
the Company or a Restricted Subsidiary will be deemed for the purposes of this
covenant to constitute, in each case, the issuance of such Indebtedness by the
issuer thereof; (d) Indebtedness of the Company or any Restricted Subsidiary
(other than Indebtedness described in clause (a), (b) or (c) above) outstanding
as of the Issue Date, which Indebtedness is not contemplated to be repaid with
the proceeds of the offering of the Private Notes; (e) Indebtedness of the
Company or a Restricted Subsidiary issued in exchange for, or the proceeds of
which are used to refinance, extend, renew, substitute, replace or refund or pay
at maturity (including any mandatory sinking fund payment), any Indebtedness
issued pursuant to the covenant described in the first paragraph of this
"Limitation on Indebtedness" covenant or clauses (b) and (d) above and (j) below
(the "Refinancing Indebtedness"); PROVIDED that (l) the principal amount of such
Refinancing Indebtedness (or, if such Indebtedness is issued with original issue
discount, the amount equal to the original issue price of such Indebtedness plus
accretion, if any) shall not exceed the principal amount and accrued interest of
the Indebtedness so refinanced (plus the amount of any premiums required to be
paid under the terms of the instrument governing such Indebtedness and plus the
amount of reasonable expenses incurred by the Company or such Restricted
Subsidiary in connection therewith), (2) the Refinancing Indebtedness shall have
a Weighted Average Life to Maturity equal to or greater than the Weighted
Average Life to Maturity of the Indebtedness being refinanced, (3) if the
Indebtedness being refinanced is subordinate in right of payment to the Notes or
any Guarantee, the Refinancing Indebtedness shall be subordinated in right of
payment to the Notes or any Guarantee, on terms, considered as a whole, at least
as favorable to the holders of Notes as those contained in the documentation
governing the Indebtedness being refinanced, if any; and (4) if the Indebtedness
to be refinanced is Indebtedness of the Company, such Refinancing Indebtedness
will only be permitted by this clause (e) if it is Indebtedness of the Company;
(f) Indebtedness incurred by the Company or any Restricted Subsidiary under
Hedging Obligations; PROVIDED that (x) in the case of an Interest Rate
Agreement, the notional principal amount thereof does not exceed the principal
amount of the Indebtedness to which such Interest Rate Agreement relates and (y)
in the case of a Currency Agreement, such Currency Agreement does not increase
the Indebtedness of the Company and its Subsidiaries other than as a result of
fluctuations in foreign currency exchange or by reason of fees, indemnities and
compensation payable thereunder; (g) Indebtedness incurred by the Company or any
Restricted Subsidiary under performance bonds, letter of credit obligations to
provide security for worker's compensation claims, payment obligations in
connection with self-insurance or similar requirements and bank overdrafts
incurred in the ordinary course of business; PROVIDED that any Obligations
arising in connection with such bank overdraft Indebtedness is extinguished
within five business days; (h) Indebtedness incurred by the Company or any
Restricted Subsidiary and arising from agreements providing for indemnification,
adjustment of purchase price or similar obligations, from guarantees or letters
of credit, surety bonds or performance bonds securing any Obligations of the
Company or any Restricted Subsidiary pursuant to such agreements, in any case
incurred in connection with the disposition of any business, assets or
Restricted Subsidiary other than guarantees of Indebtedness incurred by any
person acquiring all or any portion of such business, assets or Restricted
Subsidiary for the purpose of financing such acquisition, in a principal amount
not to exceed the gross proceeds (with proceeds other
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than cash or Cash Equivalents being valued at the fair market value thereof as
determined by the Board of Directors of the Company in good faith) actually
received by the Company or any Restricted Subsidiary in connection with such
dispositions; (i) Indebtedness of the Company in an aggregate principal amount
not to exceed $5.0 million at any time outstanding in connection with the
purchase, redemption, acquisition, cancellation or other retirement for value of
shares of Capital Stock of the Company or any corporation of which the Company
is a Subsidiary, options on any such shares or related stock appreciation rights
or similar securities held by officers or employees or former officers or
employees of the Company or any Subsidiary of the Company (or their estates or
beneficiaries under their estates) and which were issued pursuant to any stock
option or other equity incentive plan, upon death, disability, retirement,
termination of employment or pursuant to the terms of such stock option or other
equity incentive plan or any other agreement under which such shares of capital
stock, options, related rights or similarly securities were issued; PROVIDED
that (1) such Indebtedness, by its terms or by the terms of any agreement or
instrument pursuant to which such Indebtedness is issued, is expressly made
subordinate in right of payment to the Notes at least to the extent that the
Notes are subordinated in right of payment to Senior Indebtedness, and (2) such
Indebtedness, by its terms or by the terms of any agreement or instrument
pursuant to which such Indebtedness is issued, provides that no payments of
principal of such Indebtedness by way of sinking fund, mandatory redemption or
otherwise (including defeasance) may be made at any term prior to one year after
the stated maturity of the Notes; (j) Acquired Indebtedness that is without
recourse to the Company or any of its Restricted Subsidiaries or any of their
respective assets (other than the Subsidiary acquired subject to such Acquired
Indebtedness and its assets), and is not guaranteed by any such person; PROVIDED
that, with respect to the incurrence of more than $5.0 million of such Acquired
Indebtedness at any time outstanding, after giving PRO FORMA effect to the
incurrence thereof, the Company could incur at least $1.00 of Indebtedness under
the first paragraph of this "Limitation on Indebtedness" covenant; (k)
Indebtedness issued as pay-in-kind interest in lieu of cash interest under the
terms of and pursuant to the Seller Notes or any other Indebtedness that is
incurred in accordance with the Indenture which is expressly subordinated in
right of payment to the Notes to at least the same extent as payment on the
Notes is subordinated to payment on Senior Indebtedness; (l) Indebtedness
represented by Capitalized Lease Obligations and Purchase Money Indebtedness of
the Company and Restricted Subsidiaries, in each case incurred for the purpose
of financing all or any part of the purchase price or cost of construction or
improvement of property, plant or equipment used in the business of the Company
or such Restricted Subsidiary, in aggregate principal amount not to exceed $5.0
million at any time outstanding; (m) lease financings and notes payable of the
Company or its Restricted Subsidiaries which are classified as nonrecourse in
accordance with GAAP, in each case entered into in the ordinary course of
business and consistent with past practice and secured solely by the equipment,
proceeds therefrom and associated lease payments in an aggregate principal
amount at any time outstanding not to exceed 20% of the Total Assets at the time
of issuance of such Indebtedness; and (n) additional Indebtedness of the Company
and Restricted Subsidiaries, which may, but need not be incurred under the
Senior Credit Facility, in an aggregate principal amount not to exceed $7.5
million at any time outstanding. Notwithstanding any other provision of this
covenant, a guarantee by a Subsidiary Guarantor or the Company of Indebtedness
incurred in accordance with the terms of the Indenture at the time such
Indebtedness was incurred will not constitute a separate incurrence of
Indebtedness.
For purposes of determining compliance with this covenant, in the event that
an item of Indebtedness meets the criteria of more than one of the categories
described in clauses (a) through (n) in the second paragraph of this covenant or
is entitled to be incurred pursuant to the first paragraph of this covenant, the
Company shall, in its sole discretion, classify such item of Indebtedness in any
manner that complies with this covenant and such item of Indebtedness will be
treated as having been incurred pursuant to only one of such clauses or pursuant
to the first paragraph hereof; PROVIDED that all outstanding Indebtedness under
the Senior Credit Facility or any Floor Plan Financing Facility immediately
following the offering of the Private Notes shall be deemed to have been
incurred pursuant to clause (a) of the second paragraph of this covenant.
Accrual of interest and the accretion of accreted value will not be deemed to be
an incurrence of Indebtedness for purposes of this covenant.
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LIMITATION ON ADDITIONAL SENIOR SUBORDINATED DEBT
Neither the Company nor any Subsidiary Guarantor will incur, create, issue,
assume, guarantee or otherwise become liable for any Indebtedness that is
expressly by its terms subordinate or junior in right of payment to any
Indebtedness of such person and senior in any respect of payment to the Notes or
the Guarantee of such Subsidiary Guarantor, as the case may be.
LIMITATION ON RESTRICTED PAYMENTS
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly (i) declare or pay any dividend or make any distribution
in either case on account of the Company's Capital Stock to the holders of the
Company's Capital Stock (except dividends or distributions payable in the
Company's Capital Stock), (ii) purchase, redeem or otherwise acquire or retire
for value any Capital Stock (including any option or warrant to purchase Capital
Stock) of the Company, (iii) purchase, repurchase, redeem, defease or otherwise
acquire or retire for value, prior to scheduled maturity, scheduled repayment or
scheduled sinking fund payment any Subordinated Obligations or the Seller Notes,
or (iv) make any Investment other than a Permitted Investment (any such
dividend, distribution, payment, purchase, redemption, defeasance, other
acquisition or retirement or Investment being hereinafter referred to as a
"Restricted Payment") if at the time the Company or such Restricted Subsidiary
makes such Restricted Payment: (a) a Default or Event of Default has occurred
and is continuing (or would result therefrom); (b) the Company is not able to
incur $1.00 of additional Indebtedness under the first paragraph of the covenant
described under "Limitation on Indebtedness"; or (c) the aggregate amount of
such Restricted Payment and all other Restricted Payments subsequent to the
Issue Date would exceed the sum of (A) the aggregate Net Cash Proceeds received
by the Company from any offering of the Qualified Capital Stock of the Company,
or of any entity of which the Company is a direct or indirect Subsidiary, to the
extent the proceeds thereof shall have been contributed as common equity to the
Company, and the amount of any other capital contributions received by the
Company in cash subsequent to the Issue Date and on or prior to the date the
Restricted Payment occurs (the "Reference Date"), (B) 50% of the cumulative
Consolidated Net Income of the Company subsequent to the Issue Date and on or
prior to the Reference Date or minus 100% of any cumulative deficit in
Consolidated Net Income during such period, (C) to the extent that any
Investment (other than a Permitted Investment) that was made after the Issue
Date is sold for cash or otherwise liquidated or repaid for cash, or any
Unrestricted Subsidiary which is designated as an Unrestricted Subsidiary
subsequent to the Issue Date is sold or liquidated for cash, the lesser of (1)
the cash return of capital with respect to such Investment (less the cost of
disposition, if any) and (2) the initial amount of such Investment (in each case
to the extent not included in clause (B) above), and (D) $5.0 million.
Notwithstanding the foregoing, the provisions set forth in the immediately
preceding paragraph will not prevent (i) the declaration and payment of any
dividends paid within 60 days after the date of declaration thereof if, at such
date of declaration, such dividend would have complied with this covenant, (ii)
if no Default or Event of Default shall have occurred and be continuing as a
consequence thereof, any purchase or redemption of Capital Stock or any
Subordinated Obligations of the Company made by exchange for, or out of the
proceeds of the substantially concurrent sale of, Qualified Capital Stock of the
Company (other than Capital Stock issued or sold to a Restricted Subsidiary),
(iii) if no Default or Event of Default shall have occurred and be continuing as
a consequence thereof, the repurchase, redemption or other repayment of any
Subordinated Obligations in exchange for or solely out of the proceeds of the
substantially concurrent sale (other than to a Restricted Subsidiary) of
Subordinated Obligations with a Weighted Average Life to Maturity equal to or
greater than the then remaining Weighted Average Life to Maturity of the
Subordinated Obligations repurchased, redeemed or repaid, (iv) any payment by
the Company or any Restricted Subsidiary of the Company (a) in connection with
repurchases of Equity Interests or Subordinated Obligations of the Company
following the death, disability or termination of employment of members of
management, and (b) of amounts (to the extent such payments would
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otherwise constitute Restricted Payments) required to be paid by the Company or
any of its Restricted Subsidiaries to participants in employee benefit plans
upon termination of employment by such participants, as provided in the
documents related thereto, in an aggregate amount (for both clauses (a) and (b))
not to exceed $2.0 million in any fiscal year; PROVIDED that any unused amounts
may be carried over to any subsequent fiscal year subject to a maximum amount of
$5.0 million in any fiscal year; PROVIDED, FURTHER, that such amount in any
fiscal year may be increased by an amount not to exceed (i) the cash proceeds
from the sale of Equity Interests of the Company to members of management,
directors or consultants of the Company and its Subsidiaries that occurs after
the Issue Date (to the extent the cash proceeds from the sale of such Equity
Interests have not otherwise been applied to the payment of Restricted Payments
by virtue of subclause (c) of the preceding paragraph) plus (ii) the cash
proceeds of key man life insurance policies received by the Company and its
Restricted Subsidiaries after the Issue Date less (iii) the amount of any
Restricted Payments previously made pursuant to clauses (i) and (ii); and
PROVIDED, FURTHER, that the cancellation of Indebtedness owing to the Company
from members of management of the Company or any of its Restricted Subsidiaries
in connection with a repurchase of Equity Interests of the Company will not be
deemed to constitute a Restricted Payment for purposes of this covenant or any
other provision of the Indenture, (v) Investments in securities not constituting
cash or Cash Equivalents and received in connection with an Asset Sale made
pursuant to the provisions of the covenant described under "--Certain
Covenants--Limitation on Asset Sales" below or any other disposition of assets
not constituting an Asset Sale by reason of the $500,000 threshold contained in
the definition thereof, (vi) repurchases of Equity Interests deemed to occur
upon exercise of stock options if such Equity Interests represent a portion of
the exercise of such options, (vii) Investments in Unrestricted Subsidiaries
that are made with Excluded Contributions, (viii) if no Default or Event of
Default shall have occurred and be continuing as a consequence thereof, the
declaration and payment of dividends to holders of any class or series of
Designated Preferred Stock issued after the Issue Date; PROVIDED, HOWEVER, that
for the most recently ended four full fiscal quarters for which internal
financial statements are available immediately preceding the date of issuance of
such Designated Preferred Stock, after giving effect to such issuance on a pro
forma basis, the Company and its Restricted Subsidiaries would have had an
Operating Coverage Ratio greater than (x) 1.75 to 1.0, if the date of such
incurrence is on or prior to August 1, 1999, or (y) 2.00 to 1.0, if the date of
incurrence is after August 1, 1999, (ix) Investments in Unrestricted
Subsidiaries having an aggregate fair market value, taken together with all
other Investments made pursuant to this clause (ix) that are at that time
outstanding, not to exceed $5.0 million at the time of such Investment (with the
fair market value of each Investment being measured at the time made and without
giving effect to subsequent changes in value) and (x) prepayments of Seller
Notes in an amount not to exceed $11.7 million in connection with the
Transactions and, after the Issue Date, additional prepayments of Seller Notes
in an amount not to exceed $2.0 million in any fiscal year; PROVIDED that any
unused amounts may be carried over to any subsequent fiscal year; PROVIDED that,
for purposes of determining whether Restricted Payments can be made pursuant to
the previous paragraph, all payments made pursuant to clauses (i), (iv), (viii)
and (ix) shall be included and payments made pursuant to all other clauses
specified above shall not be so included.
LIMITATION ON PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, create or otherwise cause or suffer to exist or become
effective any consensual encumbrance or restriction on the ability of any
Restricted Subsidiary to: (i) pay dividends or make any other distributions on
its Capital Stock or pay any Indebtedness or other obligation owed to the
Company or a Restricted Subsidiary, (ii) make any loans or advances to the
Company or a Restricted Subsidiary or (iii) transfer any of its property or
assets to the Company, except any such encumbrance or restriction under or by
reason of (a) applicable law or any applicable rule, regulation or order, (b)
the Indenture and the Notes, (c) the Senior Credit Facility or any Floor Plan
Financing Facility, (d) secured Indebtedness otherwise permitted to be incurred
pursuant to the provisions of the covenants described under "--Limitation on
Liens" that
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limit the right of the debtor to dispose of the assets securing such
Indebtedness, (e) customary net worth provisions contained in leases and other
agreements entered into in the ordinary course of business, (f) customary
restrictions with respect to a Restricted Subsidiary pursuant to an agreement
that has been entered into for the sale or disposition of all or substantially
all of the Capital Stock or assets of such Restricted Subsidiary, (g) provisions
with respect to the disposition or distribution of assets or property in joint
venture agreements and other similar agreements, (h) any other instrument
governing Indebtedness incurred on or after the Closing Date or any refinancing
thereof that is incurred in accordance with the Indenture, PROVIDED that the
encumbrance or restriction contained in any such Indebtedness or any such
refinancing thereof is no more restrictive and no more unfavorable to the
holders of the Notes than that contained in the Senior Credit Facility or any
Floor Plan Financing Facility as in effect on the Closing Date, (i) customary
provisions restricting subletting or assignment of any lease governing a
leasehold interest of a Restricted Subsidiary, (j) Acquired Indebtedness;
PROVIDED that (x) such restriction is not applicable to any person, or the
properties or assets of any person, other than the person acquired, and (y) such
Indebtedness is otherwise permitted to be incurred pursuant to the "Limitation
on Indebtedness" covenant and (k) restrictions on cash or other deposits or net
worth imposed by customers under contracts entered into in the ordinary course
of business.
LIMITATION ON ASSET SALES
The Company may not, and may not permit any Restricted Subsidiary to,
consummate any Asset Sale unless (i) the Company (or the Restricted Subsidiary,
as the case may be) receives consideration at the time of each such Asset Sale
at least equal to the fair market value (as specified in an Officers'
Certificate with respect to any Asset Sale of less than $2.0 million and as
determined by the Board of Directors of the Company in good faith with respect
to Asset Sales in excess of $2.0 million) of the assets sold; (ii) not less than
75% (100% in the case of lease payments) of the consideration received by the
Company (or such Restricted Subsidiary, as the case may be) is in the form of
cash; PROVIDED that any note or other obligation received by the Company (or
such Restricted Subsidiary, as the case may be) that is converted into cash
within 30 days after receipt and any liabilities (as shown on the Company's or
such Restricted Subsidiary's most recent balance sheet) of the Company or any
Restricted Subsidiary (other than Contingent Liabilities and liabilities that
are by their terms subordinated to the Notes or any guarantee thereof) that are
assumed by the transferee of any such assets shall be deemed to be cash for
purposes of this clause (ii); and (iii) the Company within 365 days of such
Asset Sale (x) reinvests or causes a Restricted Subsidiary to reinvest
(including by way of acquisitions) the Net Cash Proceeds of any Asset Sale into
one or more of the then existing businesses of the Company and its Subsidiaries
or any Similar Business; or (y) applies or causes to be applied such Net Cash
Proceeds to the permanent reduction of outstanding Senior Indebtedness or
Guarantor Senior Indebtedness, as the case may be; or (z) after such time as the
accumulated Excess Net Proceeds equal or exceed $10.0 million, applies or causes
to be applied such Excess Net Proceeds to the purchase of Notes tendered to the
Company for purchase at a price equal to 100% of the principal amount thereof
plus accrued interest thereon to the date of purchase pursuant to an offer to
purchase by the Company (a "Net Proceeds Offer") as set forth below; PROVIDED,
HOWEVER, that the Company shall have the right to exclude Asset Sales the net
proceeds of which in the aggregate do not exceed $2.0 million annually from the
calculation of accumulated Net Cash Proceeds; PROVIDED, FURTHER, to the extent
Net Cash Proceeds have not been applied pursuant to clause (x), (y) or (z) above
within 325 days of an Asset Sale, such Net Cash Proceeds shall be held in a
segregated account pending such application. Pending the final application of
any such Net Cash Proceeds, the Company or Restricted Subsidiary, as the case
may be, may temporarily reduce Senior Indebtedness or Guarantor Senior
Indebtedness, as the case may be, or otherwise invest such Net Cash Proceeds in
any manner not prohibited by the Indenture.
The Company will be required under the Senior Credit Facility to apply
certain net proceeds of asset sales to the repayment of Obligations thereunder.
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Each Net Proceeds Offer will be mailed to record Holders of Notes as shown
on the register of Holders not less than 365 nor more than 395 days after the
relevant Asset Sale, with a copy to the Trustee, shall specify the purchase date
(which shall be no earlier than 30 days nor later than 60 days from the date
such notice is mailed) and shall otherwise comply with the procedures set forth
in the Indenture. Upon receiving notice of the Net Proceeds Offer, Holders may
elect to tender their Notes in whole or in part in integral multiples of $1,000
in exchange for cash. To the extent Holders properly tender Notes in an amount
exceeding the Net Proceeds Offer, Notes of tendering Holders will be repurchased
on a pro rata basis (based on amounts tendered). If the aggregate purchase price
of Notes tendered pursuant to the Net Proceeds Offer is less than the Net Cash
Proceeds allotted to the purchase of the Notes, the Company may apply the
remaining Net Cash Proceeds for general corporate purposes.
The Company will comply with all applicable securities laws in connection
with any Net Proceeds Offer, including Rule 14e-1 under the Exchange Act.
LIMITATION ON LIENS
The Company will not, and will not permit any of its Restricted Subsidiaries
to, create, incur or otherwise cause or suffer to exist or become effective any
Liens of any kind (other than Permitted Liens) upon any property or asset of the
Company or any Restricted Subsidiary or any shares of stock or debt of any
Restricted Subsidiary which owns property or assets, now owned or hereafter
acquired, unless (i) if such Lien secures Indebtedness which is PARI PASSU with
the Notes or a Guarantee, then the Notes or such Guarantee, as the case may be,
are secured on an equal and ratable basis with the obligations so secured until
such time as such obligation is no longer secured by a Lien or (ii) if such Lien
secures Indebtedness which is subordinated to the Notes or a Guarantee, any such
Lien shall be subordinated to the Lien granted to the holders of the Notes or
such Guarantee, as the case may be, to the same extent as such Subordinated
Obligations are subordinated to the Notes.
LIMITATION ON CAPITAL STOCK OF RESTRICTED SUBSIDIARIES
The Company will not, if such action would cause a Subsidiary not to be a
Controlled Subsidiary, (i) sell, pledge, hypothecate or otherwise convey or
dispose of any Capital Stock of a Restricted Subsidiary (other than Liens on
such Capital Stock securing Obligations under Senior Indebtedness or Guarantor
Senior Indebtedness) or (ii) permit any of its Restricted Subsidiaries to issue
any Capital Stock, other, in any such case, than to the Company or a Controlled
Subsidiary. The foregoing restrictions shall not apply to an Asset Sale made in
compliance with "--Limitation on Asset Sales" or the issuance of Preferred Stock
in compliance with the covenant described under "--Limitation on Indebtedness."
GUARANTEES OF CERTAIN INDEBTEDNESS
The Company will not permit any of its Subsidiaries, directly or indirectly,
to incur, guarantee or secure through the granting of Liens the payment of any
Indebtedness under the Senior Credit Facility or any refunding or refinancing
thereof in each case unless such Subsidiary, the Company and the Trustee execute
and deliver a supplemental indenture evidencing such Subsidiary's Guarantee,
such Guarantee to be a senior subordinated unsecured obligation of such
Subsidiary. Neither the Company nor any Subsidiary Guarantor shall be required
to make a notation on the Notes or the Guarantees to reflect any such subsequent
Guarantee. Nothing in this covenant shall be construed to permit any Subsidiary
of the Company to incur Indebtedness otherwise prohibited by the "Limitation on
Indebtedness" covenant.
LIMITATION ON TRANSACTIONS WITH AFFILIATES
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, following the Issue Date, enter into or permit to exist
any transaction with any Affiliate of the Company or any Significant Stockholder
of the Company (an "Affiliate Transaction") unless such transaction is on
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terms that are fair and reasonable to the Company or such Subsidiary and no less
favorable to the Company or such Subsidiary than those that could be obtained in
a comparable arm's length transaction with an entity that is not an Affiliate of
the Company or a Significant Stockholder of the Company; PROVIDED that in the
event such transaction or series of related transactions involves aggregate
consideration in excess of $2.0 million, the foregoing determination as to
fairness shall be made by a majority of the Disinterested Directors of the Board
of Directors of the Company as evidenced by a Board Resolution; PROVIDED,
FURTHER, that in the event such transaction or series of related transactions
involves aggregate consideration in excess of $10.0 million, the Company shall,
in addition to obtaining the approval of the Disinterested Directors of its
Board of Directors, obtain a written opinion of an Independent Financial Advisor
stating that the terms of such transaction are fair and reasonable to the
Company or such Subsidiary from a financial point of view; PROVIDED, HOWEVER,
that (i) reasonable and customary directors' fees, indemnification and similar
arrangements and payments thereunder, (ii) transactions between or among or for
the benefit of the Company and its Subsidiaries, which are not otherwise
prohibited by the Indenture, (iii) any employment agreement entered into by the
Company or any of its Subsidiaries in the ordinary course of business, (iv)
Restricted Payments permitted by the provisions of the Indenture described above
under "--Limitation on Restricted Payments," (v) provision of administrative or
management services by the Company or its Subsidiaries or any of their officers
to any of their respective Subsidiaries in the ordinary course of business, (vi)
arm's length transactions entered into in the ordinary course of business
between the Company or any Restricted Subsidiary and any Affiliate of the
Company or any Significant Stockholder of the Company engaged in a Similar
Business and (vii) transactions contemplated by any agreement as in effect as of
the Closing Date or any amendment thereto so long as any such amendment is not
disadvantageous to the Holders of the Notes in any material respect and so long
as the amounts paid by the Company and the Restricted Subsidiaries under any
such amended agreement do not exceed the amounts payable by the Company and the
Restricted Subsidiaries on the Closing Date, in each case, shall not be deemed
Affiliate Transactions.
LIMITATION ON MERGERS AND CERTAIN OTHER TRANSACTIONS
The Company, in a single transaction or through a series of related
transactions, shall not consolidate with or merge with or into any other person,
or transfer (by lease, assignment, sale or otherwise) all or substantially all
of its properties and assets unless (i) either the Company shall be the
continuing person, or the person (if other than the Company) formed by such
consolidation or into which the Company is merged or to which all or
substantially all of the properties and assets of the Company are transferred
(the Company or such other person hereinafter referred to as the "Surviving
person") shall be a corporation organized and validly existing under the laws of
the United States, any state thereof or the District of Columbia, and if other
than the Company shall expressly assume, by an indenture supplement, all of the
obligations of the Company under the Notes and the Indenture; (ii) immediately
after and giving effect to such transaction and the assumption contemplated by
clause (i) above and the incurrence or anticipated incurrence of any
Indebtedness to be incurred in connection therewith, the Surviving person could
incur at least $1.00 of Indebtedness pursuant to the first paragraph under the
"Limitation on Indebtedness" covenant and (iii) immediately before and
immediately after and giving effect to such transaction and the assumption of
the obligations as set forth in clause (i) above and the incurrence or
anticipated incurrence of any Indebtedness to be incurred in connection
therewith, no Default or Event of Default shall have occurred and be continuing;
and (iv) the Surviving person shall have delivered to the Trustee an officers'
certificate stating that such consolidation, merger, sale, assignment, transfer,
lease, conveyance or other disposition and, if a supplemental indenture is
required in connection with such transaction, such supplemental indenture comply
with the applicable provisions of the Indenture and that all conditions
precedent in the Indenture relating to such transaction have been satisfied.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties and assets of one or more Subsidiaries of
the Company the Capital Stock of which constitutes all or substantially all of
the properties
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and assets of the Company shall be deemed to be the transfer of all or
substantially all of the properties and assets of the Company. Notwithstanding
the foregoing clauses (ii) and (iii), (a) any Restricted Subsidiary of the
Company may consolidate with, merge into or transfer all or part of its
properties and assets to the Company or a Subsidiary Guarantor and (b) the
Company may merge with an Affiliate incorporated solely for the purpose of
reincorporating the Company in another jurisdiction.
The Indenture provides that upon any consolidation, combination or merger or
any transfer of all or substantially all of the assets of the Company in
accordance with the foregoing, the surviving entity shall succeed to, and be
substituted for, and may exercise every right and power of, the Company under
the Indenture and the Notes with the same effect as if such surviving entity had
been named as such.
GUARANTEES
Each Subsidiary Guarantor unconditionally guarantees, jointly and severally,
to each holder and the Trustee, subject to subordination provisions
substantially the same as those described above, the full and complete payment
of principal of and interest on the Notes. Upon the sale or disposition of a
Subsidiary Guarantor (or all or substantially all of its assets) to an entity
which is not a subsidiary of the Company, which is otherwise in compliance with
the Indenture, such Subsidiary Guarantor shall be deemed released from all its
obligations under the Indenture and its Guarantee; PROVIDED, HOWEVER, that any
such termination shall occur only to the extent that all obligations of such
Subsidiary Guarantor under the Senior Credit Facility and all of its guarantees
of, and under all of its pledges of assets or other security interests which
secure, Indebtedness of the Company shall also terminate upon such release, sale
or transfer.
The Indebtedness evidenced by each Guarantee (including the payment of
principal of, premium, if any, and interest on the Notes) will be subordinated
on the same basis to Guarantor Senior Indebtedness (defined with respect to the
Indebtedness of a Guarantor in the same manner as Senior Indebtedness is defined
with respect to the Company) as the Notes are subordinated to Senior
Indebtedness. See "--Subordination" above.
The obligations of each Subsidiary Guarantor are limited to the maximum
amount as will, after giving effect to all other contingent and fixed
liabilities of such Subsidiary Guarantor (including, without limitation, any
guarantees under the Senior Credit Facility) and after giving effect to any
collections from or payments made by or on behalf of any other Subsidiary
Guarantor in respect of the obligations of such other Subsidiary Guarantor under
the Guarantee, not constitute a fraudulent conveyance or fraudulent transfer
under federal or state law. Each Subsidiary Guarantor that makes a payment or
distribution under a Guarantee shall be entitled to a contribution from each
other Subsidiary Guarantor in a PRO RATA amount based on the Adjusted Net Assets
of each Subsidiary Guarantor.
Each Subsidiary Guarantor may consolidate with or merge into or sell its
assets to the Company or another Subsidiary Guarantor without limitation. Each
Subsidiary Guarantor may consolidate with or merge into or sell all or
substantially all its assets to a corporation other than the Company or another
Subsidiary Guarantor (whether or not affiliated with the Subsidiary Guarantor):
PROVIDED that either (x) the transaction is an Asset Sale consummated in
accordance with the "Limitation on Asset Sales" covenant or (y)(a) if the
surviving corporation is not the Subsidiary Guarantor, the surviving corporation
agrees to assume such Subsidiary Guarantor's Guarantee and all its obligations
pursuant to the Indenture and (b) such transaction does not (i) violate any
covenants set forth in the Indenture or (ii) result in a Default or Event of
Default immediately thereafter that is continuing.
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Separate financial statements of the Subsidiary Guarantors are not included
herein because such Subsidiary Guarantors are jointly and severally liable with
respect to the Company's obligations pursuant to the Notes, and the aggregate
net assets, earnings and equity of the Subsidiary Guarantors are substantially
equivalent to the net assets, earnings and equity of the Company on a
consolidated basis.
EVENTS OF DEFAULT
An "Event of Default" is defined in the Indenture to mean (a) default in the
payment of any installment of interest upon any of the Notes as and when the
same shall become due and payable, and continuance of such default for a period
of 30 days (whether or not prohibited by the subordination provisions of the
Indenture); (b) default in the payment of all or any part of the principal on
any of the Notes when the same shall become due and payable, either at maturity,
upon any redemption, by declaration or otherwise (whether or not prohibited by
the subordination provisions of the Indenture); (c) failure on the part of the
Company or any Subsidiary Guarantor duly to observe or perform any other of the
covenants or agreements on the part of the Company or any Subsidiary Guarantor
in the Notes or in the Indenture for a period of 30 days after receipt of
written notice specifying such failure, stating that such notice is a "Notice of
Default" under the Indenture and demanding that the Company or such Subsidiary
Guarantor, as the case may be, remedy the same, shall have been given by
registered or certified mail, return receipt requested, to the Company by the
Trustee, or to the Company and the Trustee by the holders of at least 25% in
aggregate principal amount of the Notes at the time outstanding; (d) a default
under any Indebtedness of the Company or any of its Restricted Subsidiaries,
whether such Indebtedness now exists or shall hereinafter be created, if both
(A) such default either (i) results from the failure to pay principal on
Indebtedness at the final maturity of the respective issue of Indebtedness and
such failure continues for a period of 10 days or more, or (ii) results in the
holder or holders of such Indebtedness causing such Indebtedness to become due
prior to its stated maturity and such acceleration has not been rescinded,
canceled or otherwise cured within 10 days after receipt of notice of
acceleration by the Company and (B) the principal amount of such Indebtedness,
together with the principal amount of any other such Indebtedness in default for
failure to pay principal at final maturity or the maturity of which has been so
accelerated, in each case with respect to which the 10-day period described
above has passed, aggregates in excess of $10.0 million at any one time; (e) any
final judgment or order for the payment of money shall be rendered against the
Company or any Significant Subsidiary of the Company by a court of competent
jurisdiction in excess of $10.0 million individually or in the aggregate for all
such judgments or orders against all such persons that are not stayed, bonded or
discharged and there is a period of 60 consecutive days, after written notice
has been given by the Trustee or the holders of at least 25% in aggregate
principal amount of the Notes then outstanding, during which a stay of
enforcement of such judgment or order, by reason of pending appeal or otherwise,
shall not be in effect; (f) certain events of bankruptcy with respect to the
Company and its Significant Subsidiaries; or (g) any Subsidiary Guarantee shall
for any reason cease to be in full force and effect or be declared null and void
or any responsible officer of the Company or any Guarantor denies that it has
any further liability under any Subsidiary Guarantee or gives notice to such
effect (other than by reason of the termination of the Indenture or the release
of any such Subsidiary Guarantee in accordance with the Indenture).
If an Event of Default (other than an Event of Default specified in clause
(f) above with respect to the Company) occurs and is continuing, either the
Trustee or the holders of at least 25% in aggregate principal amount of the
Notes then outstanding, by notice in writing to the Company and the Trustee
specifying the respective Event of Default and that it is a "notice of
acceleration" (the "Acceleration Notice"), may declare the entire principal
amount of and accrued interest on the Notes to be due and payable immediately,
and the same (i) shall become immediately due and payable or (ii) if there are
any amounts outstanding under the Senior Credit Facility, shall become due and
payable upon the first to occur of an acceleration under the Senior Credit
Facility, or 5 business days after receipt by the Company and the Representative
under the Senior Credit Facility of such Acceleration Notice, unless all Events
of Default specified in such Acceleration Notice (other than any Event of
Default in respect of non-payment of
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principal) shall have been cured or waived. In the event of a declaration
because an Event of Default set forth in clause (d) of the preceding paragraph
has occurred and is continuing, such declaration of acceleration shall be
automatically annulled if the missed payments in respect of such Indebtedness
have been paid or if the holders of the Indebtedness that is subject to
acceleration have rescinded their declaration of acceleration and the Trustee
has received written notice of such Indebtedness having been repaid in full, in
each case within 60 days thereof and if (i) the annulment of such acceleration
would not conflict with any judgment or decree of a court of competent
jurisdiction, (ii) all existing Events of Default, except non-payment of
principal or interest which have become due solely because of the acceleration,
have been cured or waived and (iii) the Company has delivered an Officer's
Certificate to the Trustee to the effect of clauses (i) and (ii) above. If an
Event of Default specified in clause (f) above occurs with respect to the
Company, the principal amount of and accrued interest on the Notes shall become
and be immediately due and payable without any declaration or other act on the
part of the Trustee or any holder.
The declaration of acceleration is subject to the condition that if, at any
time after the principal of the Notes shall have been so declared due and
payable, and before any judgment or decree for the payment of the moneys shall
have been obtained or entered as hereinafter provided, the Company shall pay or
shall deposit with the Trustee a sum sufficient to pay all matured installments
of interest upon all the Notes and the principal of any and all Notes which
shall have become due otherwise than by acceleration (with interest upon such
principal and, to the extent that payment of such interest is unenforceable
under applicable law, on overdue installments of interest, at the same rate as
the rate of interest specified in the Notes, to the date of such payment or
deposit) and such amount as shall be sufficient to cover reasonable compensation
to the Trustee and each predecessor Trustee, their respective agents, attorneys
and counsel, and all other expenses and liabilities incurred, and all advances
made, by the Trustee and each predecessor Trustee except as a result of
negligence or bad faith, and if any and all Events of Default under the
Indenture, other than the non-payment of the principal of Notes which shall have
become due by acceleration, shall have been cured, waived or otherwise remedied
as provided in the Indenture, then and in every such case the holders of a
majority in aggregate principal amount of the Notes then outstanding, by written
notice to the Company and to the Trustee, may waive all defaults and rescind and
annul such declaration and its consequences, but no such waiver or rescission
and annulment shall extend to or shall affect any subsequent default or shall
impair any right consequent thereon.
The holders of a majority in outstanding aggregate principal amount of the
Notes by notice to the Trustee may on behalf of the holders of the Notes waive
any existing Default or Event of Default under the Indenture and its
consequences, except a continuing Default or Event of Default in the payment of
interest on, or the principal of, the Notes.
No holder of any of the Notes has any right to institute any proceeding with
respect to the Indenture or any remedy thereunder, unless the holders of at
least 25% in principal amount of the outstanding Notes have made written
request, and offered indemnity, to the Trustee to institute such proceeding as
Trustee, the Trustee has failed to institute such proceeding within 30 days
after receipt of such notice and the Trustee has not within such 30-day period
received directions inconsistent with such written request by holders of a
majority in principal amount of the outstanding Notes. Such limitations do not
apply, however, to a suit instituted by a holder of a Note for the enforcement
of the payment of the principal of, premium, if any, or accrued interest on,
such Note on or after the respective due dates expressed in such Note.
The Indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each holder of the Notes notice
of the Default within 90 days after it occurs. Except in the case of a Default
in the payment of principal, premium (if any) or interest on any Note, the
Trustee may withhold notice if and so long as a committee of its trust officers
determines that withholding notice is in the interest of the holders of the
Notes. In addition, the Company is required to deliver to the Trustee, within
120 days after the end of each fiscal year, a certificate indicating whether the
signers thereof know of any Default that occurred under the Indenture during the
previous year. The Company is also required to deliver to the Trustee, within 30
days after the occurrence thereof, written notice of events which would
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constitute certain Defaults under the Indenture, their status and what action
the Company is taking or proposes to take in respect thereof.
TRANSFER
The Notes were issued in registered form and are transferable only upon the
surrender of the Notes being transferred for registration of transfer. The
Company may require payment of a sum sufficient to pay all taxes, assessments or
other governmental charges. The Notes were issued in a transaction exempt from
registration under the Act and are subject to transfer restrictions. The
registered holder of a Note may be treated as the owner of it for all purposes.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee or stockholder, as such, of the Company or
any Subsidiary shall have any liability for any obligations of the Company or
any Subsidiary under the Notes, any Subsidiary Guarantee or the Indenture. Each
holder of the Notes by accepting a Note waives and releases all such liability.
The waiver and release are part of the consideration for issuance of the Notes.
This provision does not affect any possible claims under the federal securities
laws.
SATISFACTION AND DISCHARGE OF THE INDENTURE; COVENANT DEFEASANCE
The Indenture will cease to be of further effect as to all outstanding Notes
(except as to (a) rights of registration of transfer, substitution, exchange and
the Company's right of optional redemption and prepayment, (b) rights of holders
to receive payments of principal of and interest on the Notes and any other
rights of the holders thereof with respect to the amounts deposited with the
Trustee under the provisions referred to in this paragraph, (c) the rights,
obligations and immunities of the Trustee under the Indenture and (d) certain
other specified provisions in the Indenture) when (x) all outstanding Notes
(except lost, stolen or destroyed Notes which have been replaced or paid) have
been delivered to the Trustee for cancellation or (y) the Company shall have
paid or caused to be paid the principal of and interest on the Notes as and when
the same shall have become due and payable or (z)(i) the Notes not previously
delivered to the Trustee for cancellation shall have become due and payable, or
are by their terms to become due and payable within one year or are to be called
for redemption upon delivery of notice and (ii) the Company shall have deposited
with the Trustee, as trust funds, the entire amount in cash sufficient to pay
the principal of and interest on the outstanding Notes to maturity or
redemption, as the case may be.
The Indenture will also cease to be in effect (except as aforesaid) on the
91st day after the deposit by the Company with the Trustee, in trust for the
benefit of the holders of Notes, of (a) money in an amount or (b) U.S.
government obligations which through the payment of interest and principal in
accordance with their terms will provide, not later than one business day before
the due date of payments in respect of the Notes, money in an amount, or (c) a
combination thereof, sufficient in the opinion of a nationally recognized
independent public accounting firm to pay and discharge without consideration of
reinvestment of such interest each installment of principal and interest on the
Notes then outstanding at the maturity date of such principal or installment of
principal and interest. Such a trust may only be established if the Company has
delivered to the Trustee an opinion of counsel acceptable to the Trustee (who
may be counsel to the Company) to the effect that (i) the defeasance and
discharge will not be deemed, or result in, a taxable event, with respect to
holders of the Notes, (ii) the creation of the trust will not violate the
Investment Company Act of 1940 and (iii) after the passage of 90 days following
the deposit of the trust funds, such funds will not be subject to any
bankruptcy, insolvency, reorganization or other similar law affecting creditors'
rights generally. The Indenture will not be discharged if, among other things,
an Event of Default, or an event which with notice or lapse of time would have
become an Event of Default, shall have occurred and be continuing on the date of
such deposit or during the period ending on the 91st day
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after such date. In the event of any such defeasance and discharge, Note holders
will thereafter be able to look only to such trust fund for payment of principal
and interest on the Notes.
The Indenture provides that the Company may cease to comply with certain
covenants imposing restrictions on the incurrence of Indebtedness by the Company
and its Subsidiaries, and limitations on certain Restricted Payments,
disposition of assets of the Company and its Subsidiaries, limitations on
payment of dividends and other distributions or payments by Subsidiaries,
transactions with Affiliates, mergers and consolidations, limitations on Capital
Stock of Restricted Subsidiaries, limitations on Guarantees of certain
Indebtedness, limitations on Liens and Change in Control transactions if the
Company deposits with the Trustee money and/or U.S. government obligations,
which, through the payment of interest and principal thereof in accordance with
their terms, will provide, not later than one business day before the date
payments in respect of the Notes are payable, money in an amount sufficient in
the opinion of a nationally recognized independent public accounting firm to pay
principal of and interest on the outstanding Notes (without consideration of the
reinvestment of such interest) or installments of principal or interest. The
obligations of the Company under the Indenture other than with respect to the
covenants referred to above shall remain in full force and effect. Such a trust
may only be established if the Company has delivered to the Trustee an opinion
of counsel acceptable to the Trustee (who may be counsel to the Company) to the
effect that (i) the deposit and related covenant defeasance will not be deemed,
or result in, a taxable event with respect to holders of Notes; and (ii) the
creation of the trust will not violate the Investment Company Act of 1940.
MODIFICATION OF THE INDENTURE
The Indenture and the Notes may be amended or supplemented (and compliance
with any provision thereof may be waived) by the Company, the Trustee and the
holders of not less than a majority in aggregate principal amount of the Notes
then outstanding, except that without the consent of each holder affected, no
such amendment, supplement or waiver may (1) change the principal amount of
Notes whose holders must consent to an amendment, supplement or waiver of any
provision of the Indenture or the Notes; (2) reduce the rate or extend the time
for payment of interest on any Note; (3) reduce the principal amount of any
Note; (4) change the Maturity Date of any Note or alter the redemption
provisions in a manner adverse to any holder (except that provisions affecting
the requirement to repurchase Notes following a Change of Control or certain
asset sales may be amended by the Company, the Trustee and the holders of not
less than a majority in aggregate principal amount of the Notes then
outstanding); (5) make any changes in the provisions concerning waivers of
Defaults or Events of Default by holders or the rights of holders to recover the
principal of, premium (if any) or interest on or redemption payment with respect
to any Note; (6) make the principal of, or interest on, any Note payable with
anything other than as provided for in the Indenture and the Notes; and (7) make
any change to the subordination provisions of the Indenture and the Notes in a
manner that adversely affects the holders.
In addition, the Company and the Trustee may amend the Indenture and the
Notes for certain specified purposes, including, among other things, (a) to cure
any ambiguity, defect or inconsistency therein; PROVIDED that such amendment or
supplement does not adversely affect the rights of any holder, (b) to comply
with requirements of the Commission in order to effect or maintain the
qualification of the Indenture under the Trust Indenture Act of 1939 or (c) to
make any other change that does not adversely affect the rights of any holder.
Notwithstanding the foregoing, no amendment shall modify any provision of the
Indenture so as to adversely affect the rights of any holder of Senior
Indebtedness without the consent of such holder.
THE TRUSTEE
The holders of a majority in principal amount of the outstanding Notes may
remove the Trustee and appoint a successor trustee with the Company's consent,
by so notifying the trustee to be so removed and the Company. In addition, the
holders of a majority in principal amount of the outstanding Notes have the
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right, subject to certain limitations, to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or of
exercising any trust or power conferred on such Trustee.
The Indenture provides that, in case a Default or an Event of Default has
occurred and is continuing, the Trustee thereunder shall exercise such of the
rights and powers vested in it by the Indenture, and use the same degree of care
and skill in the exercise thereof, as a prudent person would exercise or use
under the circumstances in the conduct of his own affairs. Subject to the latter
provision, the Trustee is under no obligation to exercise any of its rights or
powers under the Indenture at the request, order or direction of any of the
holders, unless they shall have offered to the Trustee reasonable security or
indemnity against the costs, expenses and liabilities which may be incurred
thereby.
The Indenture contains limitations on the rights of the Trustee, should it
become a creditor of the Company, to obtain payment of claims in certain cases
or to be realized on certain property received by it in respect of any such
claims, securities or otherwise. The Trustee is permitted to engage in other
transactions: however, if the Trustee acquires any "conflicting interest," it
must eliminate such conflict or resign.
REPORTS
So long as the Notes are outstanding, the Company will furnish to the
Trustee and holders of the Notes all quarterly and annual financial reports that
the Company is required to file with the Commission under the Exchange Act (or
similar reports in the event that the Company is not at the time required to
file such reports with the Commission). The Indenture provides that even if the
Company is entitled under the Exchange Act not to furnish such information to
the Commission or the holders of the Notes, it will nonetheless continue to
furnish such information to the Commission (to the extent the Commission is
accepting such reports) and holders of the Notes.
CERTAIN DEFINITIONS
"ACQUIRED INDEBTEDNESS" means (i) with respect to any person that becomes a
Restricted Subsidiary, Indebtedness of such person at the time such person
becomes a Restricted Subsidiary and not incurred in connection with, or in
contemplation of, such person becoming a Restricted Subsidiary, treating for
purposes of this definition as Indebtedness the unused portion of any revolving
loan commitments provided in agreements to which such person is a party as
borrower or guarantor and (ii) with respect to the Company or any of its
Restricted Subsidiaries, any Indebtedness assumed by the Company or any of its
Restricted Subsidiaries in connection with the acquisition of any assets from
another person (other than the Company or any of its Restricted Subsidiaries),
and which was not incurred by such other person in connection with or, in
contemplation of, such acquisition.
"ACT" means the Securities Act of 1933, as amended.
"ADJUSTED NET ASSETS" of a Subsidiary Guarantor at any date shall mean the
lesser of the amount by which (i) the fair value of the property of such
Subsidiary Guarantor exceeds the total amount of liabilities, including, without
limitation, contingent liabilities (after giving effect to all other fixed and
contingent liabilities incurred or assumed on such date), but excluding
liabilities under the Subsidiary Guarantee, of such Subsidiary Guarantor at such
date and (ii) the present fair salable value of the assets of such Subsidiary
Guarantor at such date exceeds the amount that will be required to pay the
probable liability of such Subsidiary Guarantor on its debts (after giving
effect to all other fixed and contingent liabilities incurred or assumed on such
date and after giving effect to any collection from any Subsidiary of such
Subsidiary Guarantor in respect of the obligations of such Subsidiary under the
Subsidiary Guarantee), excluding debt in respect of the Subsidiary Guarantee, as
they become absolute and matured.
"AFFILIATE" of any specified person means any other person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified person. For the purposes of
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this definition, "control" when used with respect to any person means the power
to direct the management and policies of such person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "affiliated," "controlling" and "controlled" have meanings
correlative to the foregoing.
"APPLICABLE PREMIUM" means, with respect to a Note at any Redemption Date,
the greater of (i) 1.0% of the principal amount of such Note and (ii) the excess
of (A) the present value at such time of (1) the redemption price of such Note
at August 1, 2001 (such redemption price being described under "--Optional
Redemption") plus (2) all required interest payments due on such Note through
August 1, 2001, computed using a discount rate equal to the Treasury Rate plus
50 basis points, over (B) the principal amount of such Note.
"ASSET SALE" means any direct or indirect sale, issuance, conveyance,
transfer, lease, assignment or other transfer for value (including any sale and
leaseback transaction) by the Company or any of its Restricted Subsidiaries to
any person other than the Company or any wholly owned Restricted Subsidiary of
(i) any Capital Stock of any Restricted Subsidiary; or (ii) any other property
or assets of the Company or any Restricted Subsidiary other than in the ordinary
course of business, in each case, resulting in Net Cash Proceeds to the Company
and its Restricted Subsidiaries of $500,000 or more, provided that the sale,
conveyance, transfer, assignment or other transfer of substantially all of the
assets of the Company and its Restricted Subsidiaries taken as a whole will be
governed by the terms of the Indenture described above under the caption
"Limitation on Mergers and Certain Other Transactions"; provided, however, an
Asset Sale shall not mean (a) a disposition of Cash Equivalents or Investment
Grade Securities or obsolete equipment in the ordinary course of business; (b)
the disposition of all or substantially all of the assets in a manner permitted
pursuant to the provisions described under "Limitation on Mergers and Certain
Other Transactions" or any disposition that constitutes a Change of Control
pursuant to the Indenture; (c) any Restricted Payment that is permitted to be
made, and is made, under the first paragraph of the covenant described above
under "Limitation on Restricted Payments"; and (d) any disposition by a
Restricted Subsidiary to the Company or by the Company or a Restricted
Subsidiary to a Wholly Owned Restricted Subsidiary.
"CAPITAL STOCK" means, with respect to any person, any and all shares,
interests, participations or other equivalents (however designated) of corporate
stock, including each class of common stock and preferred stock of such person,
including, without limitation, if such person is a partnership, partnership
interests (whether general or limited) and any other interest or participation
that confers on a person the right to receive a share of the profits and losses
of, or distributions of assets of, such partnership.
"CAPITALIZED LEASE OBLIGATION" means obligations under a lease that is
required to be capitalized for financial reporting purposes in accordance with
GAAP, and the amount of Indebtedness represented by such obligations shall be
the capitalized amount of such obligations determined in accordance with GAAP.
"CASH EQUIVALENTS" means (i) obligations issued or unconditionally
guaranteed by the United States of America or any agency thereof, or obligations
issued by any agency or instrumentality thereof and backed by the full faith and
credit of the United States of America, (ii) commercial paper rated the highest
grade by Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's
Corporation ("S&P") and maturing not more than one year from the date of
creation thereof, (iii) demand and time deposits with, and certificates of
deposit and banker's acceptances issued by, any bank having capital surplus and
undivided profits aggregating at least $250 million and maturing not more than
one year from the date of creation thereof, (iv) repurchase agreements that are
secured by a perfected security interest in an obligation described in clause
(i) and are with any bank described in clause (iii), (v) readily marketable
direct obligations issued by any state of the United States of America or any
political subdivision thereof having one of the two highest rating categories
obtainable from either Moody's or S&P and (vi) investments in money market funds
which invest substantially all of their assets in securities of the types
described in clauses (i) through (v) above.
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"CHANGE OF CONTROL" means the occurrence of one or more of the following
events: (i) any sale, lease, exchange or other transfer (in one transaction or a
series of related transactions) of all or substantially all of the assets of the
Company to any person or group of related persons for purposes of Section 13(d)
of the Exchange Act (a "Group") together with any Affiliates thereof (whether or
not otherwise in compliance with the provisions of the Indenture); (ii) the
approval by the holders of Capital Stock of the Company of any plan or proposal
for the liquidation or dissolution of the Company (whether or not otherwise in
compliance with the provisions of the Indenture); or (iii) the acquisition in
one or more transactions, of beneficial ownership (within the meaning of Rule
13d-3 under the Exchange Act) by (x) any person or Group (other than a Group the
majority in economic interests and voting or similar rights is owned by
Permitted Holders) that either (A) beneficially owns (within the meaning of Rule
13d-3 under the Exchange Act), directly or indirectly, (I) at least 30% (or, in
the case of a transaction or transactions approved before the consummation of
same by a majority of the directors of the Company, 35%) of the Company's then
outstanding voting securities entitled to vote on a regular basis for the Board
of Directors of the Company and (II) a greater beneficial interest than the
Permitted Holders, or (B) otherwise has the ability to elect, directly or
indirectly, a majority of the members of the Company's Board of Directors,
including without limitation by the acquisition of revocable proxies for the
election of directors. Clause (i) of the definition of "Change of Control"
includes a sale, lease, exchange or other transfer of "all or substantially all"
of the assets of the Company to a Group. There is little case law interpreting
the phrase "all or substantially all" in the context of an indenture. Because
there is no precise established definition of this phrase, the ability of a
holder of Notes to require the Company to repurchase such Notes as a result of a
sale, lease, exchange or other transfer of all or substantially all of the
Company's assets to person or a Group may be uncertain.
"COMPANY" means Federal Data Corporation, a Delaware corporation and its
successors that become a party to the Indenture in accordance with its terms.
"CONSOLIDATED EBITDA" of the Company means, for any period, the sum (without
duplication) of (i) Consolidated Net Income, (ii) to the extent Consolidated Net
Income has been reduced thereby, all income taxes of the Company and its
Restricted Subsidiaries paid or accrued in accordance with GAAP for such period,
Consolidated Interest Expense, amortization expense (including write-off of
intangible assets and deferred financing costs), depreciation expense, and any
restructuring reserve or charge recorded during such period in accordance with
GAAP, (iii) LIFO charge (credit) of the Company and its Restricted Subsidiaries
for such period, (iv) other non-cash items reducing Consolidated Net Income
(excluding any such charge which requires an accrual of or a cash reserve for
cash charges for any future period) and (v) cash received with respect to any
non-cash item previously deducted from Consolidated Net Income pursuant to
clause (x) below less (x) other non-cash items increasing Consolidated Net
Income (excluding any reversal of any non-cash item to the extent such reversed
non-cash item previously reduced an addition to Consolidated EBITDA pursuant to
the parenthetical to clause (iv) above) and (y) the amount of all cash payments
made by such person or its subsidiaries during such period to the extent that
such cash payment has been provided for in a reserve or charge referred to (and
previously added back to such Consolidated Net Income) in clause (ii) or (iv)
above (and were not otherwise deducted in the computation of Consolidated Net
Income of such person for such period), all as determined on a consolidated
basis for the Company and its Restricted Subsidiaries in conformity with GAAP.
"CONSOLIDATED INTEREST EXPENSE" of the Company means the aggregate of (i)
all cash and non-cash interest expense (minus amortization or write-off of
deferred financing costs included in cash or non-cash interest expense and minus
interest income (other than the interest income, if any, attributable to the
assets of the type financed pursuant to clause (m) of the second paragraph of
the covenant described under "--Limitation on Indebtedness") and capitalized
interest) with respect to all outstanding Indebtedness of the Company and its
Restricted Subsidiaries for such period (other than Indebtedness of the type
permitted to be incurred pursuant to clause (m) of the second paragraph of the
covenant described under "--Limitation on Indebtedness") plus (ii) the product
of (x) the amount of all cash dividend payments on any series of Preferred Stock
of the Company and its Restricted Subsidiaries (other than to or for the
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benefit of the Company or a Restricted Subsidiary); provided that with respect
to any series of Designated Preferred Stock that is Disqualified Capital Stock
(including, without limitation Designated Preferred Stock) that has not paid
cash dividends during such period but accrues dividends according to its terms
during any period prior to the maturity date of the Notes, cash dividends shall
be deemed to have been paid with respect to such series of Designated Preferred
Stock during such period for purposes of clause (i) of this definition; times
(y) a fraction, the numerator of which is one and the denominator of which is
one minus the then current effective consolidated federal, state and local tax
rate of the Company expressed as a decimal.
"CONSOLIDATED NET INCOME" of the Company means, for any period, the
aggregate net income (or loss) of the Company and its Restricted Subsidiaries
for such period on a consolidated basis, determined in accordance with GAAP;
provided that there shall be excluded therefrom (i) gains and losses from Asset
Sales or abandonments or reserves relating thereto and the related tax effects,
(ii) items classified as extraordinary, nonrecurring or unusual gains and
losses, and the related tax effects, each determined in accordance with GAAP,
(iii) the net income of any person acquired in a pooling of interests
transaction accrued prior to the date it becomes a Restricted Subsidiary of the
Company or is merged or consolidated with the Company or any Restricted
Subsidiary, (iv) the net income (or loss) of any Restricted Subsidiary to the
extent that the declaration of dividends or similar distributions by that
Restricted Subsidiary of that income was actually prevented by contract,
operation of law or otherwise and (v) the net income (or loss) of any person,
other than a Restricted Subsidiary, except to the extent of the lesser of (x)
cash dividends or distributions paid to the Company or a Restricted Subsidiary
of the Company by such person and (y) the net income of such person (but in no
event less than zero) and (vi) the cumulative effects of any change in
accounting principles.
"CONTINGENT OBLIGATIONS" means, with respect to any person, any obligation
of such person guaranteeing any leases, dividends or other obligations that do
not constitute Indebtedness ("primary obligations") of any other person (the
"primary obligor") in any manner, whether directly or indirectly, including,
without limitation, any obligation of such person, whether or not contingent,
(i) to purchase any such primary obligation or any property constituting direct
or indirect security therefor, (ii) to advance or supply funds (A) for the
purchase or payment of any such primary obligation or (B) to maintain working
capital or equity capital of the primary obligor or otherwise to maintain the
net worth or solvency of the primary obligor, or (iii) to purchase property,
securities or services primarily for the purpose of assuring the owner of any
such primary obligation of the ability of the primary obligor to make payment of
such primary obligation against loss in respect thereof.
"CONTROLLED SUBSIDIARY" of the Company means a Restricted Subsidiary (i) 90%
or more of the total Equity Interest or other ownership interests of which
(other than directors' qualifying shares) shall at the time be owned by the
Company (directly or through one or more Controlled Subsidiaries of the
Company), and (ii) of which the Company possesses, directly or indirectly, the
power to direct or cause the direction of the management or policies, whether
through the ownership of voting securities, by agreement or otherwise.
"CURRENCY AGREEMENT" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Company or any Restricted Subsidiary against fluctuations in currency values.
"DEFAULT" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"DESIGNATED PREFERRED STOCK" means Preferred Stock of the Company that is
issued for cash (other than to a Restricted Subsidiary) and is so designated as
Designated Preferred Stock, pursuant to an Officers' Certificate executed by the
principal executive officer and the principal financial officer of the Company,
on the issuance date thereof, the cash proceeds of which are excluded from the
calculation set forth in clause (A) of the first paragraph of the "Limitation on
Restricted Payments" covenant.
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"DESIGNATED SENIOR INDEBTEDNESS" means any Indebtedness under or in respect
of the Senior Credit Facility or any other Senior Indebtedness designated as
such in an Officers' Certificate delivered to the Trustee, in aggregate
principal amount outstanding of $25.0 million or more.
"DISINTERESTED DIRECTOR" means, with respect to any transaction or series of
transactions in respect of which the Board of Directors is required to deliver a
resolution of the Board of Directors under the Indenture, a member of the Board
of Directors who does not have any material direct or indirect financial
interest in or with respect to such transaction or series of transactions
(except arising exclusively as a consequence of such member's relationship to
the Company).
"DISQUALIFIED CAPITAL STOCK" means, with respect to any person, any Capital
Stock which, by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable), or upon the happening of any event
(other than an event which would constitute a Change of Control), matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is exchangeable for Indebtedness, or is redeemable at the option of the holder
thereof (except, in each case, upon the occurrence of a Change in Control), in
whole or in part, on or prior to the maturity date of the Notes.
"EQUITY INTEREST" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"EXCESS NET PROCEEDS" shall mean Net Cash Proceeds of any Asset Sale not
applied in accordance with clause (iii)(x) or (y) of the "Limitation on Asset
Sales" covenant.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"EXCLUDED CONTRIBUTIONS" means net cash proceeds received by the Company
after the Issue Date from (a) capital contributions and (b) the private sale of
common stock of the Company to Carlyle or its Affiliates, in each case
designated as Excluded Contributions pursuant to an Officers' Certificate
executed by the principal executive officer and the principal financial officer
of the Company on the date such capital contributions are made or the date such
Equity Interests are sold, as the case may be, the cash proceeds of which are
excluded from the calculation set forth in clause (c) of the first paragraph of
the "Limitation on Restricted Payments" covenant.
"FLOOR PLAN FINANCING FACILITY" means any facility (including without
limitation the Agreement for Wholesale Financing and the STAR Agreement (Short
Term Accounts Receivable Program) dated as of September 17, 1996 by and between
Deutsche Financial Services Corporation and Sylvest Management Systems
Corporation, as amended, extended, renewed, restated, supplemented, replaced or
otherwise modified (in whole or in part, and without limitation as to amount,
terms, conditions, covenants and other provisions) from time to time) entered or
to be entered into by the Company or any Restricted Subsidiary pursuant to which
the Company or such Restricted Subsidiary may (i) borrow funds to purchase
inventory from certain vendors for prompt resale to customers and to finance
related accounts receivable and (ii) grant a security interest in such entity's
assets (including the accounts receivable generated by such resales) to secure
such borrowings.
"GAAP" or "generally accepted accounting principles" means generally
accepted accounting principles in the United States as in effect from time to
time, including, without limitation, those set forth in the opinions and
pronouncements of the Accounting Principles Board of the American Institute of
Certified Public Accountants and statements and pronouncements of the Financial
Accounting Standards Board or in such other statements by such other entity as
approved by a significant segment of the accounting profession.
"GUARANTEE" means a guarantee, direct or indirect, in any manner of all or
any part of any Indebtedness.
"GUARANTOR SENIOR INDEBTEDNESS" means (i) indebtedness of a Subsidiary
Guarantor for money borrowed and all obligations, whether direct or indirect,
under guarantees, letters of credit, foreign
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currency or interest rate swaps, foreign exchange contracts, caps, collars,
options, hedges or other agreements or arrangements designed to protect against
fluctuations in currency values or interest rates, other extensions of credit,
expenses, fees, reimbursements, indemnities and all other amounts (including
interest at the contract rate accruing on or after the filing of any petition in
bankruptcy or reorganization relating to such Subsidiary Guarantor whether or
not a claim for post-filing interest is allowed in such proceeding) owed by such
Subsidiary Guarantor under, or with respect to, the Senior Credit Facility, (ii)
the principal of and premium, if any, and accrued and unpaid interest (including
interest at the contract rate accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to a Subsidiary Guarantor whether or
not a claim for post-filing interest is allowed in such proceeding), whether
existing on the date hereof or hereafter incurred, in respect of (A)
indebtedness of such Subsidiary Guarantor for money borrowed, (B) express
written guarantees by such Subsidiary Guarantor of indebtedness for money
borrowed by any other person, (C) indebtedness evidenced by notes, debentures,
bonds, or other instruments of indebtedness for the payment of which such
Subsidiary Guarantor is responsible or liable, by guarantees or otherwise, (D)
obligations of such Subsidiary Guarantor for the reimbursement of any obligor on
any letter of credit, banker's acceptance or similar credit transaction, (E)
obligations of such Subsidiary Guarantor under any agreement to lease, or any
lease of, any real or personal property which, in accordance with GAAP, is
classified upon Subsidiary Guarantor's consolidated balance sheet as a
liability, and (F) obligations of such Subsidiary Guarantor under or
guaranteeing interest rate swaps, caps, collars, options and similar
arrangements and foreign currency hedges and (iii) modifications, renewals,
extensions, replacements, refinancings, and refundings of any such indebtedness,
obligations or guarantees, unless, in the instrument creating or evidencing the
same or pursuant to which the same is outstanding, it is expressly provided that
such indebtedness, obligations or guarantees, or such modifications, renewals,
extensions, replacements, refinancings, or refundings thereof, are not superior
in right of payment to the Guarantee of such Subsidiary Guarantor; provided,
that Guarantor Senior Indebtedness will not be deemed to include (a) any
liability for Federal, state, local or other taxes owed or owing by a Subsidiary
Guarantor, (b) any accounts payable or other liability to trade creditors
arising in the ordinary course of business, (c) any Indebtedness, guarantee or
obligation of a Subsidiary Guarantor which is expressly subordinate or junior by
its terms in any respect to any other Indebtedness, guarantee or obligations of
such Subsidiary Guarantor, (d) Indebtedness incurred in violation of the
"Limitation on Indebtedness" covenant or (e) Indebtedness of a Subsidiary
Guarantor which is classified as nonrecourse in accordance with GAAP or any
unsecured claim arising in respect thereof by reason of the application of
section 1111(b)(1) of the Bankruptcy Code.
"HEDGING OBLIGATIONS" means, with respect to the Company or a Restricted
Subsidiary, (i) the obligations of such person under Interest Rate Agreements,
(ii) the obligations of such person under Currency Agreements and (iii)
obligations under agreements or arrangements designed to protect such person
against fluctuations in the value of commodities entered into in such person's
business.
"INDEBTEDNESS" of any person means, at any time, without duplication: (i)
the principal of and, if any is due and payable at such time, premium in respect
of (A) indebtedness of such person for money borrowed and (B) indebtedness
evidenced by notes, debentures, bonds, or other similar instruments for the
payment of which such person is responsible or liable; (ii) all Capitalized
Lease Obligations of such person; (iii) all obligations of such person issued or
assumed as the deferred purchase price of property, all conditional sale
obligations of such person and all obligations of such person under any title
retention agreement (but excluding trade accounts payable arising in the
ordinary course of business); (iv) all obligations of such person for the
reimbursement of any obligor on any letter of credit, banker's acceptance or
similar credit transaction (other than obligations with respect to letters of
credit securing obligations (other than obligations described in (i) through
(iii) above) entered into in the ordinary course of business of such person;
PROVIDED that, for the purpose of determining Events of Default referred to in
clause (d) under the caption "--Events of Default", obligations with respect to
letters of credit securing obligations entered into in the ordinary course of
business shall be excluded only to the extent such letters of credit are not
drawn upon or, if and to the extent drawn upon, such drawing is reimbursed no
later than the third
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Business Day following receipt by such person of a demand for reimbursement
following payment on the letter of credit); (v) the principal amount of all
obligations of such person with respect to the redemption, repayment or other
purchase of any Disqualified Capital Stock; (vi) in the case of the Company, any
Preferred Stock of a Restricted Subsidiary, valued at the aggregate liquidation
preference thereof plus accrued and unpaid dividends thereon; (vii) all
obligations of the type referred to in clauses (i) through (vi) above of other
persons and all dividends of other persons the payment of which, in either case,
such person is responsible or liable for as obligor, guarantor or otherwise; and
(viii) all obligations of the type referred to in clauses (i) through (vii) of
other persons secured by a lien, mortgage, pledge or encumbrance of any kind on
any property or asset of such person (whether or not such obligation is assumed
by such person), the amount of such obligation being deemed to be the lesser of
the value of such property or assets or the amount of the obligation so secured;
provided, however, that Indebtedness shall not include any interest, commitment
or other fees.
"INDEPENDENT FINANCIAL ADVISOR" means a reputable accounting, appraisal or
investment banking firm that is, in the reasonable judgment of the Board of
Directors of the Company, qualified to perform the task for which such firm has
been engaged hereunder and disinterested and independent with respect to the
Company and its Affiliates.
"INITIAL PURCHASERS" means BT Alex. Brown Incorporated and Lehman Brothers
Inc.
"INTEREST RATE AGREEMENTS" means, with respect to the Company and the
Restricted Subsidiaries, any arrangements with any other person, whereby,
directly or indirectly, such person is entitled to receive from time to time
periodic payments calculated by applying either a floating or a fixed rate of
interest on a stated notional amount in exchange for periodic payments made by
such other person calculated by applying a fixed or a floating rate of interest
on the same notional amount and shall include, without limitation, interest rate
swaps, caps, floors, collars and similar agreements.
"INVESTMENT" means, with respect to any person, all investments by such
person in other persons (including Affiliates of such person) in the form of
loans, guarantees, advances of assets or capital contributions (excluding
commission, travel and similar advances to, and compensation and benefits of,
officers and employees of such person made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Capital Stock
or other securities and all other items that are or would be classified as
investments on a balance sheet prepared in accordance with GAAP. In addition,
the fair market value (as determined by the Board of Directors of the Company in
good faith) of the assets of any Subsidiary of the Company at the time that such
Subsidiary is designated as an Unrestricted Subsidiary shall be deemed to be an
Investment made by the Company in such Unrestricted Subsidiary at such time.
"Investment" shall exclude (i) extensions of trade credit by the Company and the
Restricted Subsidiaries on commercially reasonable terms in the ordinary course
of business and (ii) sales, assignments, transfers, contributions, licenses or
other dispositions of patents, copyrights, applications with respect thereto,
and other trademarks, intellectual property and other technological "know-how"
(collectively, "Intellectual Property") to joint ventures in which the Company
or a wholly-owned Restricted Subsidiary owns at least 50% of the equity
interests (PROVIDED, that if the equity interest of the Company or such
Restricted Subsidiary, as the case may be, in such joint venture is reduced
below 50%, the Company shall have been deemed to make an Investment in such
joint venture in an amount equal to the fair market value (as determined by the
Board of Directors of the Company in good faith) of such Intellectual Property).
"INVESTMENT GRADE SECURITIES" means (i) securities issued or directly and
fully guaranteed or insured by the United States government or any agency or
instrumentality thereof (other than Cash Equivalents), (ii) debt securities or
debt instruments with a rating of BBB- or higher by S&P or Baa3 or higher by
Moody's or the equivalent of such rating by such rating organization, or, if no
rating of S&P or Moody's then exists, the equivalent of such rating by any other
nationally recognized securities rating agency, but excluding any debt
securities or instruments constituting loans or advances among the Company and
its Subsidiaries, and (iii) investments in any fund that invests exclusively in
investments of the type described in clauses (i) and (ii) which fund may also
hold immaterial amounts of cash pending investment and/or distribution.
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"ISSUE DATE" means the date of first issuance of the Notes under the
Indenture.
"JUNIOR SECURITIES" means Equity Interests of the Company or debt securities
that are subordinated to all Senior Indebtedness (and any debt securities issued
in exchange for Senior Indebtedness) to substantially the same extent as, or
greater extent than, the Notes are subordinated to Senior Indebtedness pursuant
to the Indenture.
"LIEN" means with respect to any property or assets of any person, any
mortgage or deed of trust, pledge, hypothecation, assignment, deposit
arrangement, security interest, lien, charge, easement, encumbrance, preference,
priority, or other security agreement or preferential arrangement of any kind or
nature whatsoever on or with respect to such property or assets (including,
without limitation, any Capitalized Lease Obligation, conditional sales, or
other title retention agreement having substantially the same economic effect as
any of the foregoing).
"NET CASH PROCEEDS" means cash payments received (including any cash
payments received by way of deferred payment of principal pursuant to a note or
installment receivable or otherwise, but only as and when received) from any
sale, lease, transfer or other disposition of Capital Stock of the Company or a
Restricted Subsidiary or property or other assets of the Company or a Restricted
Subsidiary, in each case net of (i) any reserve for adjustment in respect of the
sale price of such asset or assets as required by GAAP (provided, that upon the
payment of such adjustment amount the excess, if any, of the amount so reserved
over the amount so paid shall be deemed "Net Cash Proceeds"), (ii) repayment of
any Purchase Money Indebtedness secured by a Lien on the sold asset or assets
and (iii) all legal, title and recording tax expenses, commissions and other
fees and expenses incurred, and any taxes payable and reasonably estimated
income taxes, as a consequence of such sale, lease, transfer or other
disposition.
"NET WORTH" of any person means the total of the amounts shown on the
balance sheet of such person, as of the end of the most recent fiscal quarter of
such person ending at least 45 days prior to the taking of any action for the
purpose of which the determination is being made, as the sum of (i) par or
stated value for all outstanding Capital Stock of such person plus (ii) paid-in
capital or capital surplus relating to such Capital Stock plus (iii) any
retained earnings or earned surplus less (x) any accumulated deficit and (y) any
amounts attributable to Disqualified Capital Stock.
"OBLIGATIONS" means all obligations for principal, premium, interest,
penalties, fees, indemnifications, reimbursements, damages and other liabilities
payable under, or with respect to, the documentation governing any Indebtedness.
"OPERATING COVERAGE RATIO" means the ratio of Consolidated EBITDA of the
Company and the Restricted Subsidiaries during the four most recent full fiscal
quarters for which financial information is available (the "Four Quarter
Period") ending not more than 135 days prior to the date of the transaction
giving rise to the need to calculate the Operating Coverage Ratio (the
"Transaction Date") of the Company and the Restricted Subsidiaries for the Four
Quarter Period to Consolidated Interest Expense of the Company and the
Restricted Subsidiaries for the Four Quarter Period. In addition to and without
limitation of the foregoing, for purposes of this definition, "Consolidated
EBITDA" and "Consolidated Interest Expense" shall be calculated after giving
effect on a PRO FORMA basis for the Four Quarter Period to (i) the incurrence or
repayment of any Indebtedness (excluding the incurrence of Indebtedness under
any revolving credit facility and including repayments of Indebtedness under any
revolving credit facility only to the extent that such repayment effects, or is
accompanied by, a permanent reduction in the availability thereunder) or the
issuance of any Designated Preferred Stock (and the application of the proceeds
of such Indebtedness or Designated Preferred Stock) of the Company and the
Restricted Subsidiaries at any time subsequent to the last day of the Four
Quarter Period and on or prior to the Transaction Date, as if such incurrence or
repayment or issuance, as the case may be (and the application of the proceeds
thereof), occurred on the first day of the Four Quarter Period and (ii) any
Asset Sales (and the application of proceeds thereof) or asset acquisitions
(including Capital Stock) outside the ordinary course of business in excess of
$100,000 occurring during the Four Quarter Period or at any time subsequent to
the last day of
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the Four Quarter Period and on or prior to the Transaction Date, as if such
Asset Sale (and the application of proceeds thereof) or asset acquisition
occurred on the first day of the Four Quarter Period, without giving effect to
the limitations set forth in clause (iii) of the definition of Consolidated Net
Income. If the Company or any of its Restricted Subsidiaries directly or
indirectly guarantees Indebtedness of a third person (other than the Company or
any of its Restricted Subsidiaries), the preceding sentence shall give effect to
the incurrence of such guaranteed Indebtedness as if such person or any
subsidiary (other than an Unrestricted Subsidiary) of such person had directly
incurred or otherwise assumed such guaranteed Indebtedness. Furthermore, in
calculating "Consolidated Interest Expense," (A) interest on Indebtedness or
dividends on Designated Preferred Stock determined on a fluctuating basis as of
the Transaction Date and which will continue to be so determined thereafter
shall be deemed to have accrued at a fixed rate per annum equal to the rate of
interest on such Indebtedness in effect on the Transaction Date, (B) if interest
on any Indebtedness actually incurred on the Transaction Date may optionally be
determined at an interest rate based upon a factor of a prime or similar rate, a
eurocurrency interbank offered rate, or other rates, then the interest rate or
dividend rate in effect on the Transaction Date will be deemed to have been in
effect during the Four Quarter Period and (C) notwithstanding clause (A) above,
interest on Indebtedness determined on a fluctuating basis, to the extent such
interest is covered by Interest Rate Agreements, shall be deemed to accrue at
the rate per annum resulting after giving effect to the operation of such
Interest Rate Agreements. Any such PRO FORMA calculation may include (a) any
adjustments, that would, in the reasonable determination of the Company set
forth in an Officers' Certificate, satisfy the requirements of Rule 11-02(a) of
Regulation S-X as if included in a registration statement filed with the
Commission, and (b) any other operating expense reductions reasonably expected
to result from any acquisition of assets (including any Permitted Investment
provided for in clause (iv) of the definition of such term), if such expected
reductions are (i) set forth in reasonable detail in a plan approved by or
resolutions of the Board of Directors, and (ii) limited to operating expenses
specified in such plan (and, if any such reductions are set forth as a range,
the lowest amount of such range) that would otherwise have resulted in the
payment of cash within twelve months after the date of consummation of such
transaction, net of any operating expenses (other than extraordinary items,
non-recurring or temporary charges and other similar one-time expenses)
reasonably expected to be incurred to implement such plan or to obtain goods or
services (including without limitation personnel, occupancy and transportation
expenses) in replacement of goods and services that are being curtailed or
eliminated to result in such expected reductions, and that are to be paid in
cash during such twelve-month period, and such Officers' Certificate so states.
"PERMITTED HOLDERS" or "Carlyle" means TC Group, L.L.C., a Delaware limited
liability company, and its Affiliates, and any successors thereof that are
Permitted Holders.
"PERMITTED INVESTMENT" means (i) cash and Cash Equivalents; (ii) any
Investment in the Company or in a Controlled Subsidiary of the Company; (iii)
any Investment by the Company or any Subsidiary existing on the Closing Date;
(iv) any Investment by the Company or any Subsidiary of the Company in a person,
if as a result of such Investment (A) such person becomes a Controlled
Subsidiary of the Company or (B) such person is merged, consolidated or
amalgamated with or into, or transfers or conveys substantially all of its
assets to, or is liquidated into, the Company or a Controlled Subsidiary of the
Company; (v) advances to employees in an aggregate principal amount not to
exceed $500,000 at any time outstanding; (vi) any Investment acquired by the
Company or any of its Restricted Subsidiaries (a) in exchange for any other
Investment or accounts receivable held by the Company or any such Restricted
Subsidiary in connection with or as a result of a bankruptcy, workout,
reorganization or recapitalization of the issuer of such other Investment or
accounts receivable or (b) as a result of a foreclosure by the Company or any of
its Restricted Subsidiaries with respect to any secured Investment or other
transfer of title with respect to any secured Investment in default; (vii)
Hedging Obligations; (viii) loans and advances to officers, directors and
employees for business-related travel expenses, moving expenses and other
similar expenses, in each case incurred in the ordinary course of business; (ix)
Investments the payment for which consists of Equity Interests of the Company
(exclusive of Disqualified Capital Stock); PROVIDED, HOWEVER, that such Equity
Interests will not increase the amount available for Restricted Payments under
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clause (c) of the first paragraph of the "Limitation on Restricted Payments"
covenant; and (x) additional Investments having an aggregate fair market value,
taken together with all other Investments made pursuant to this clause (x) that
are at that time outstanding, not to exceed $5.0 million at the time of such
Investment (with the fair market value of each Investment being measured at the
time made and without giving effect to subsequent changes in value) (subject in
each case to the restrictions described under "--Limitation on Indebtedness" and
"--Limitation on Mergers and Certain Other Transactions").
"PERMITTED LIENS" means (i) Liens on property or assets of, or any shares of
stock of or secured debt of, any corporation existing at the time such
corporation becomes a Restricted Subsidiary of the Company or at the time such
corporation is merged into the Company or any of its Restricted Subsidiaries,
provided that such Liens are not incurred in connection with, or in
contemplation of, such corporation becoming a Restricted Subsidiary of the
Company or merging into the Company or any of its Restricted Subsidiaries, (ii)
Liens securing Refinancing Indebtedness; PROVIDED that any such Lien does not
extend to or cover any Property, shares or debt other than the Property, shares
or debt securing the Indebtedness so refunded, refinanced or extended, (iii)
Liens in favor of the Company or any of its Restricted Subsidiaries, (iv) Liens
securing industrial revenue bonds, (v) Liens to secure Purchase Money
Indebtedness that is otherwise permitted under the Indenture; PROVIDED that (A)
any such Lien is created solely for the purpose of securing Indebtedness
representing, or incurred to finance, refinance or refund, the cost (including
sales) and excise taxes, installation and delivery charges and other direct
costs of, and other direct expenses paid or charged in connection with, such
purchase or construction) of such Property, (B) the principal amount of the
Indebtedness secured by such Lien does not exceed 100% of such costs, and (C)
such Lien does not extend to or cover any Property other than such item of
Property and any improvements on such item, (vi) statutory Liens or landlords',
carriers', warehousemen's, mechanics', suppliers', materialmen's, repairmen's or
other like Liens arising in the ordinary course of business which do not secure
any Indebtedness and with respect to amounts not yet delinquent or being
contested in good faith by appropriate proceedings, if a reserve or other
appropriate provisions, if any, as shall be required in conformity with GAAP
shall have been made therefor, (vii) Liens in favor of the Trustee under the
Indenture and any substantially equivalent Lien granted to any trustee or
similar institution under any indenture for Indebtedness permitted by the terms
of the Indenture, (viii) Liens incurred or pledges or deposits made in the
ordinary course of business to secure obligations under workers' compensation,
unemployment insurance or other types of social security or similar legislation,
(ix) Liens incurred or deposits made to secure the performance of tenders, bids,
leases, statutory obligations, surety and appeal bonds, government contracts,
performance and return of money bonds and other obligations of a like nature
incurred in the ordinary course of business (exclusive of obligations for the
payment of borrowed money), (x) Liens upon specific items of inventory or other
goods and proceeds of any person securing such person's obligations in respect
of bankers' acceptances issued or created for the account of such person to
facilitate the purchase, shipment or storage of such inventory or other goods in
the ordinary course of business, (xi) Liens securing reimbursement obligations
with respect to letters of credit which encumber documents and other property
relating to such letters of credit and the products and proceeds thereof, (xii)
Liens in favor of customs and revenue authorities arising as a matter of law to
secure payment of nondelinquent customs duties in connection with the
importation of goods, (xiii) judgment and attachment Liens not giving rise to a
Default or Event of Default, (xiv) leases or subleases granted to others not
interfering in any material respect with the business of the Company or any
Subsidiary, (xv) Liens encumbering customary initial deposits and margin
deposits, and other Liens incurred in the ordinary course of business that are
within the general parameters customary in the industry, in each case securing
Indebtedness under Hedging Obligations, (xvi) Liens encumbering deposits made in
the ordinary course of business to secure nondelinquent obligations arising from
statutory, regulatory, contractual or warranty requirements of the Company or
its Subsidiaries for which a reserve or other appropriate provision, if any, as
shall be required by GAAP shall have been made, (xvii) Liens arising out of
consignment or similar arrangements for the sale of goods entered into by the
Company or any Subsidiary in the ordinary course of business in accordance with
past practices, (xviii) any interest or title of a lessor in the property
subject to any lease, whether characterized
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as capitalized or operating other than any such interest or title resulting from
or arising out of a default by the Company or any Subsidiary of its obligations
under such lease, (xix) Liens arising from filing UCC financing statements for
precautionary purposes in connection with true leases of personal property that
are otherwise permitted under the applicable indenture and under which the
Company or any Subsidiary is lessee, (xx) other Liens securing obligations
incurred in the ordinary course of business which obligations or judgments do
not exceed $10.0 million in the aggregate at any one time outstanding, (xxi)
Liens securing Capitalized Lease Obligations permitted to be incurred; PROVIDED
that such Lien does not extend to any property other than that subject to the
underlying lease, (xxii) Liens on assets or capital stock of Unrestricted
Subsidiaries, (xxiii) Liens securing Indebtedness under the Senior Credit
Facility or any Floor Plan Financing Facility (xxiv) Liens existing on the
Closing Date, (xxv) Liens on assets of the Company securing Senior Indebtedness
and Liens on assets of a Subsidiary Guarantor securing Guarantor Senior
Indebtedness, (xxvi) any extensions, substitutions, replacements or renewals of
the foregoing, (xxvii) Liens for taxes, assessments or governmental charges that
are not delinquent or are being contested in good faith by appropriate
proceedings and (xxviii) easements or minor defects or irregularities in title
and other similar charges or encumbrances on property not interfering in any
material respect with the Company's use of such property.
"PERSON" means any individual, corporation, partnership, joint venture,
association, joint- stock company, trust, unincorporated organization or
government or other agency or political subdivision thereof.
"PREFERRED STOCK" means any Capital Stock of a person, however designated,
which entitles the holder thereof to a preference with respect to dividends,
distributions or liquidation proceeds of such person over the holders of other
Capital Stock issued by such person.
"PROPERTY" of any person means all types of real, personal, tangible,
intangible or mixed property owned by such person whether or not included in the
most recent consolidated balance sheet of such person and its Subsidiaries under
GAAP.
"PUBLIC EQUITY OFFERING" means an underwritten equity offering of the
Qualified Capital Stock of the Company, or of any entity of which the Company is
a direct or indirect subsidiary, to the extent the proceeds thereof shall have
been contributed to the Company, pursuant to an effective registration statement
under the Act.
"PURCHASE MONEY INDEBTEDNESS" means any Indebtedness incurred in the
ordinary course of business by a person to finance the cost (including the cost
of construction) of an item of property, the principal amount of which
Indebtedness does not exceed the sum of (i) 100% of such cost and (ii)
reasonable fees and expenses of such person incurred in connection therewith.
"QUALIFIED CAPITAL STOCK" means, with respect to any person, any Capital
Stock of such person that is not Disqualified Capital Stock.
"REPRESENTATIVE" means the agent or representative in respect of any
Designated Senior Indebtedness; provided that if, and for so long as, any
Designated Senior Indebtedness lacks such a representative, then the
Representative for such Designated Senior Indebtedness shall at all times
constitute the holders of a majority in outstanding principal amount of such
Designated Senior Indebtedness in respect of any Designated Senior Indebtedness.
"RESTRICTED SUBSIDIARY" means any Subsidiary that is not an Unrestricted
Subsidiary.
"SELLER NOTES" means the 9% Increasing Rate Subordinated Notes outstanding
on the Issue Date that were issued by the Company to certain present and former
shareholders of the Company and former shareholders of NYMA, Inc. and Sylvest
Management Systems Corporation, as in effect on the Issue Date.
"SENIOR CREDIT FACILITY" means the Credit Agreement to be entered into by
and among the Company, certain of its Subsidiaries, the lenders referred to
therein, Bankers Trust Company, as Agent, together with
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the related documents thereto (including, without limitation, any guarantees and
security documents), as amended, extended, renewed, restated, supplemented or
otherwise modified (in whole or in part, and without limitation as to amount,
terms, conditions, covenants and other provisions) from time to time, and any
agreement (and related documents) governing Indebtedness incurred to refund or
refinance the entirety of the borrowings and commitments then outstanding or
permitted to be outstanding under such Credit Agreement or a successor Senior
Credit Facility, whether by the same or any other lender or group of lenders.
The Company shall promptly notify the Trustee of any other lender or group of
lenders. The Company shall promptly notify the Trustee of any such refunding or
refinancing of the Senior Credit Facility.
"SENIOR INDEBTEDNESS" means (i) indebtedness of the Company for money
borrowed and all obligations, whether direct or indirect, under guarantees,
letters of credit, foreign currency or interest rate swaps, foreign exchange
contracts, caps, collars, options, hedges or other agreements or arrangements
designed to protect against fluctuations in currency values or interest rates,
other extensions of credit, expenses, fees, reimbursements, indemnities and all
other amounts (including interest at the contract rate accruing on or after the
filing of any petition in bankruptcy or reorganization relating to the Company
whether or not a claim for post-filing interest is allowed in such proceeding)
owed by the Company under, or with respect to, the Senior Credit Facility, or
any Floor Plan Financing Facility, (ii) the principal of and premium, if any,
and accrued and unpaid interest, whether existing on the date hereof or
hereafter incurred, in respect of (A) indebtedness of the Company for money
borrowed, (B) express written guarantees by the Company of indebtedness for
money borrowed by any other person, (C) indebtedness evidenced by notes,
debentures, bonds, or other instruments of indebtedness for the payment of which
the Company is responsible or liable, by guarantees or otherwise, (D)
obligations of the Company for the reimbursement of any obligor on any letter of
credit, banker's acceptance or similar credit transaction, (E) obligations of
the Company under any agreement to lease, or any lease of, any real or personal
property which, in accordance with GAAP, is classified on the Company's
consolidated balance sheet as a liability, and (F) obligations of the Company
under interest rate swaps, caps, collars, options and similar arrangements and
foreign currency hedges and (iii) modifications, renewals, extensions,
replacements, refinancings and refundings of any such indebtedness, obligations
or guarantees, unless, in the instrument creating or evidencing the same or
pursuant to which the same is outstanding, it is expressly provided that such
indebtedness, obligations or guarantees, or such modifications, renewals,
extensions, replacements, refinancings or refundings thereof, are not superior
in right of payment to the Notes; PROVIDED that Senior Indebtedness will not be
deemed to include (a) any obligation of the Company to any Subsidiary (other
than obligations pledged pursuant to the Senior Credit Facility, as security for
the obligations of the Company thereunder), (b) any liability for federal,
state, local or other taxes owed or owing by the Company, (c) any accounts
payable or other liability to trade creditors arising in the ordinary course of
business, (d) any Indebtedness, guarantee or obligation of the Company which is
expressly subordinate or junior by its terms in any respect to any other
Indebtedness, guarantee or obligation of the Company, (e) Indebtedness with
respect to the Seller Notes, (f) that portion of any Indebtedness incurred in
violation of the "Limitation on Indebtedness" covenant or (g) Indebtedness of
the Company which is classified as nonrecourse in accordance with GAAP or any
unsecured claim arising in respect thereof by reason of the application of
section 1111(b)(1) of the Bankruptcy Code. Notwithstanding clause (f) of the
foregoing proviso, any Indebtedness incurred pursuant to the Senior Credit
Facility in reliance of an Officers' Certificate with respect to the amount of
Indebtedness outstanding pursuant to the Floor Plan Financing Facility shall be
deemed Senior Indebtedness.
"SIGNIFICANT SENIOR INDEBTEDNESS" means any Indebtedness under or in respect
of the Senior Credit Facility or Senior Indebtedness with principal amount due
(or accreted value with respect to Senior Indebtedness issued at a discount) in
excess of $5.0 million upon initial issuance thereof.
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"SIGNIFICANT STOCKHOLDER" means, with respect to any person, any other
person who is the beneficial owner (within the meaning of Rule 13d-3 under the
Exchange Act) of more than 5% of any class of equity securities of such person
that are entitled to vote on a regular basis for the election of directors of
such person.
"SIGNIFICANT SUBSIDIARY" means each Restricted Subsidiary of the Company
that is a "significant subsidiary" as defined in Rule 1-02(v) of Regulation S-X
under the Securities Act and the Exchange Act (as such regulation is in effect
on the date hereof).
"SIMILAR BUSINESS" means an information technology business the majority of
whose revenues are derived from government contracting or value added reselling
of goods or services or any business or activity that is reasonably similar
thereto or a reasonable extension, development or expansion thereof or ancillary
thereto.
"SUBORDINATED OBLIGATIONS" means any Indebtedness of the Company which is
expressly subordinated or junior in right of payment to the Notes.
"SUBSIDIARY" of any person means (i) a corporation a majority of whose
Capital Stock with voting power, under ordinary circumstances, to elect
directors is, at the date of determination, directly or indirectly, owned by
such person, by one or more subsidiaries of such person or by such person and
one or more subsidiaries of such person, or (ii) a partnership in which such
person or a subsidiary of such person is, at the date of determination, a
general partner of such partnership, but only if such person or its subsidiary
is entitled to receive more than fifty percent of the assets of such partnership
upon its dissolution, or (ii) any other person (other than a corporation or a
partnership) in which such person, a subsidiary of such person or such person
and one or more subsidiaries of such person, directly or indirectly, at the date
of determination, has (x) at least a majority ownership interest or (y) the
power to elect or direct the election of a majority of the directors or other
governing body of such person.
"SUBSIDIARY" means any subsidiary of the Company.
"SUBSIDIARY GUARANTEE" means the Guarantees executed and delivered by any
Subsidiary Guarantor with respect to the Company's obligations under the
Indenture and the Notes.
"SUBSIDIARY GUARANTOR" means (i) each of (a) FDCT Corp., (b) NYMA, Inc., (c)
Sylvest Management Systems Corporation, (d) FDC Technologies, Inc. (e) DoxSys,
Inc. and (f) VAD International, Inc., (ii) each of the Company's Subsidiaries
which becomes a guarantor of the Notes pursuant to the "Guarantees of Certain
Indebtedness" covenant, and (iii) each of the Company's Subsidiaries executing a
supplemental indenture in which such Subsidiary agrees to be bound by the terms
of the Indenture; provided that any person constituting a Subsidiary Guarantor
as described above shall cease to constitute a Subsidiary Guarantor when its
respective Subsidiary Guarantee is released in accordance with the terms
thereof.
"TOTAL ASSETS" means the total consolidated assets of the Company and its
Restricted Subsidiaries, as shown on the most recent balance sheet of the
Company.
"TRANSACTIONS" means the acquisition by the Company of NYMA, Inc. in May
1997 and of Sylvest Management Systems Corporation in June 1997, prepayment of
certain of the Seller Notes, entry into the Senior Credit Facility, the offering
of the Private Notes and the application of the proceeds of the offering of the
Private Notes.
"TREASURY RATE" means the yield to maturity at the time of computation of
United States Treasury securities with a constant maturity (as compiled and
published in the most recent Federal Reserve Statistical Release H.15 (519)
which has become publicly available at least two business days prior to the
Redemption Date (or, if such Statistical Release is no longer published, any
publicly available source or similar market date)) most nearly equal to the
period from the Redemption Date to August 1, 2001; provided, however, that if
the period from the Redemption Date to August 1, 2001 is not equal to the
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constant maturity of a United States Treasury security for which a weekly
average yield is given, the Treasury Rate shall be obtained by linear
interpolation (calculated to the nearest one-twelfth of a year) from the weekly
average yields of United States Treasury securities for which such yields are
given, except that if the period from the Redemption Date to August 1, 2001 is
less than one year, the weekly average yield on actually traded United States
Treasury securities adjusted to a constant maturity of one year shall be used.
"UNRESTRICTED SUBSIDIARY" of any person means (i) any Subsidiary of such
person that at the time of determination shall be or continue to be designated
an Unrestricted Subsidiary by the Board of Directors of such Person in the
manner provided below and (ii) any Subsidiary of an Unrestricted Subsidiary. The
Board of Directors may designate any Subsidiary (including any newly acquired or
newly formed Subsidiary) to be an Unrestricted Subsidiary unless such Subsidiary
owns any Capital Stock of, or owns or holds any Lien on any property of, the
Company or any other Subsidiary of the Company that is not a Subsidiary of the
Subsidiary to be so designated; provided that (x) the Company certifies to the
Trustee that such designation complies with the "Limitation on Restricted
Payments" covenant and (y) each Subsidiary to be so designated and each of its
Subsidiaries have not at the time of designation, and do not thereafter, create,
incur, issue, assume, guarantee or otherwise become directly or indirectly
liable with respect to any Indebtedness pursuant to which the lender has
recourse to any of the assets of the Company or any of its Restricted
Subsidiaries. The Board of Directors may designate any Unrestricted Subsidiary
to be a Restricted Subsidiary only if (x) immediately after giving effect to
such designation, the Company is able to incur at least $1.00 of additional
Indebtedness under the first paragraph of the covenant described under
"Limitation on Indebtedness" above and (y) immediately before and immediately
after giving effect to such designation, no Default or Event of Default shall
have occurred and be continuing. Any such designation by the Board of Directors
shall be evidenced to the Trustee by promptly filing with the Trustee a copy of
the resolution giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing provisions.
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the then outstanding
aggregate principal amount of such Indebtedness into (b) the sum of the total of
the products obtained by, multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required payment of
principal, including payment at final maturity, in respect thereof by (ii) the
number of years (calculated to the nearest one-twelfth) which will elapse
between such date and the making of such payment.
BOOK ENTRY; DELIVERY AND FORM
Except as described in the next paragraph, the Notes (and the related
guarantees) initially will be represented by a single, permanent global
certificate in definitive, fully registered form (the "Global Note"). The Global
Note will be deposited on the Issue Date with, or on behalf of, The Depository
Trust Company, New York, New York ("DTC") and registered in the name of a
nominee of DTC. The Global Note will be subject to certain restrictions on
transfer set forth therein and will bear the legend regarding such restrictions
set forth under the heading "Transfer Restrictions" herein.
Notes (i) originally purchased by or transferred to "foreign purchasers" (as
defined in "Transfer Restrictions") or (ii) held by qualified institutional
buyers or Accredited Investors who are not QIBs who elect to take physical
delivery of their certificates instead of holding their interests through the
Global Note (collectively referred to herein as the "Non-Global Purchasers")
will be issued in registered form (the "Certificated Security"). The
Certificated Security will initially be registered in the name of DTC or the
nominee of DTC and will be deposited with the trustee or custodian on behalf of
DTC. Upon the transfer to a QIB of any Certificated Security initially issued to
a Non-Global Purchaser, such Certificated Security will, unless the transferee
requests otherwise or the Global Note has previously been exchanged in whole for
Certificated Securities, be exchanged for an interest in the Global Note.
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THE GLOBAL NOTE. The Company expects that pursuant to procedures
established by DTC (i) upon the issuance of the Global Note, DTC or its
custodian will credit, on its internal system, the principal amount of Notes of
the individual beneficial interests represented by such Global Note to the
respective accounts of persons who have accounts with such depositary and (ii)
ownership of beneficial interests in the Global Note will be shown on, and the
transfer of such ownership will be effected only through, records maintained by
DTC or its nominee (with respect to interests of participants) and the records
of participants (with respect to interests of persons other than participants).
Such accounts initially will be designated by or on behalf of the Initial
Purchasers and ownership of beneficial interests in the Global Note will be
limited to persons who have accounts with DTC ("participants") or person who
hold interests through participants. QIBs may hold their interests in the Global
Note directly through DTC if they are participants in such system, or indirectly
through organizations which are participants in such system.
So long as DTC, or its nominee, is the registered owner or holder of the
Notes, DTC or such nominee, as the case may be, will be considered the sole
owner or holder of the Notes represented by such Global Note for all purposes
under the Indenture. No beneficial owner of an interest in the Global Note will
be able to transfer that interest except in accordance with DTC's procedures, in
addition to those provided for under the Indenture with respect to the Notes.
Payments of the principal of, premium (if any) and interest (including
Liquidated Damages) on, the Global Note will be made to DTC or its nominee, as
the case may be, as the registered owner thereof. None of the Company, the
Trustee or any Paying Agent will have any responsibility or liability for any
aspect of the records relating to or payments made on account of beneficial
ownership interests in the Global Note or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interest.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal, premium, if any, or interest (including Liquidated Damages) in
respect of the Global Note, will credit participants' accounts with payments in
amounts proportionate to their respective beneficial interests in the principal
amount of the Global Note as shown on the records of DTC or its nominee. The
Company also expects that payments by participants to owners of beneficial
interests in the Global Note held through such participants will be governed by
standing instructions and customary practice, as is now the case with securities
held for the accounts of customers registered in the names of nominees for such
customers. Such payments will be the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
through DTC's same-day funds system in accordance with DTC rules and will be
settled in federal funds. If a holder requires physical delivery of a
Certificated Security for any reason, including to sell Notes to persons in
states which require physical delivery of the Notes, or to pledge such
securities, such holder must transfer its interest in the Global Note, in
accordance with the normal procedures of DTC and with the procedures set forth
in the Indenture.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Notes (including the presentation of Notes for exchange as
described below) only at the direction of one or more participants to whose
account the DTC interests in the Global Note are credited and only in respect of
such portion of the aggregate principal amount of Notes as to which such
participant or participants has or have given such direction. However, if there
is an Event of Default under the Indenture, DTC will exchange the Global Note
for Certificated Securities, which it will distribute to its participants and
which will be legended as set forth under the heading "Transfer Restrictions."
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provisions of Section 17A of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). DTC was created to hold securities for its participants
and facilitate the clearance and settlement of securities
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transactions between participants through electronic book-entry changes in
accounts of its participants, thereby eliminating the need for physical movement
of certificates. Participants include securities brokers and dealers, banks,
trust companies and clearing corporations and certain other organizations.
Indirect access to the DTC system is available to others such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a participant, either directly or indirectly ("indirect
participants").
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Note among participants of DTC, it is under
no obligation to perform such procedures, and such procedures may be
discontinued at any time. Neither the Company nor the Trustee will have any
responsibility for the performance by DTC or its participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
CERTIFICATED SECURITIES. If DTC is at any time unwilling or unable to
continue as a depositary for the Global Note and a successor depositary is not
appointed by the Company within 90 days, Certificated Securities will be issued
in exchange for the Global Note.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
In the opinion of Latham & Watkins, counsel to the Company, the following
discussion describes the material federal income tax consequences expected to
result to holders whose Private Notes are exchanged for Exchange Notes in the
Exchange Offer. Such opinion is based upon current provisions of the Internal
Revenue Code of 1986, as amended, applicable Treasury regulations, judicial
authority and administrative rulings and practice. There can be no assurance
that the Internal Revenue Service ("the Service") will not take a contrary view,
and no ruling from the Service has been or will be sought with respect to the
Exchange Offer. Legislative, judicial or administrative changes or
interpretations may be forthcoming that could alter or modify the statements and
conclusions set forth herein. Any such changes or interpretations may or may not
be retroactive and could affect the tax consequences to holders. Certain holders
(including insurance companies, tax-exempt organizations, financial
institutions, broker-dealers, foreign corporations, and persons who are not
citizens or residents of the United States) may be subject to special rules not
discussed below. EACH HOLDER OF PRIVATE NOTES SHOULD CONSULT ITS OWN TAX ADVISOR
AS TO THE PARTICULAR TAX CONSEQUENCES OF EXCHANGING PRIVATE NOTES FOR EXCHANGE
NOTES, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN
LAWS.
The exchange of Private Notes for Exchange Notes will be treated as a
"non-event" for federal income tax purposes. As a result, no material federal
income tax consequences will result to holders exchanging Private Notes for
Exchange Notes.
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus meeting
the requirements of the Securities Act in connection with any resale of such
Exchange Notes. Any broker-dealer that resells Exchange Notes that were received
by it for its own account pursuant to the Exchange Offer may be deemed to be an
"underwriter" within the meaning of the Securities Act. This Prospectus, as it
may be amended or supplemented from time to time, may be used by a broker-dealer
in connection with the resales of Exchange Notes received in exchange for
Private Notes where such Private Notes were acquired as a result of
market-making activities or other trading activities. The Company has agreed
that for the period required by the Securities Act, it will make this
Prospectus, as amended or supplemented, available to any broker-dealer that
requests such document in the Letter of Transmittal for use in connection with
any such resale.
102
<PAGE>
The Company will not receive any proceeds from any sale of Exchange Notes by
broker-dealers or any other persons. Exchange Notes received by broker-dealers
for their own account pursuant to the Exchange Offer may be sold from time to
time in one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the Exchange Notes or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealers and/or the purchasers of any such
Exchange Notes. Any broker-dealer that resells Exchange Notes that were received
by it for its own account pursuant to the Exchange Offer and any broker or
dealer that participates in a distribution of such Exchange Notes may be deemed
to be an "underwriter" within the meaning of the Securities Act and any profit
on any such resale of Exchange Notes and any commissions or concessions received
by any such persons may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal states that by acknowledging that it
will deliver and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
The Company has agreed to pay all expenses incident to the Company's
performance of, or compliance with, the Registration Rights Agreement and will
indemnify the holders of Private Notes (including any broker-dealers), and
certain parties related to such holders, against certain liabilities, including
liabilities under the Securities Act.
LEGAL MATTERS
The validity of the Exchange Notes offered hereby will be passed upon for
the Company by Latham & Watkins, Chicago, Illinois.
EXPERTS
The consolidated financial statements of Federal Data Corporation as of
December 31, 1995 and 1996, and for each of the three years in the period ended
December 31, 1996, included in this Prospectus have been so included in reliance
on the report of Price Waterhouse LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
The consolidated financial statements of NYMA, Inc., as of December 31, 1995
and 1996 and for each of the three years in the period ended December 31, 1996,
included in this Prospectus, have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein, and have been
so included in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
The balance sheets as of December 31, 1995 and 1996 and the statements of
operations, changes in shareholders' equity, and cash flows of Sylvest
Management Systems Corporation, for each of the three years in the period ended
December 31, 1996, included in this Prospectus, have been included herein in
reliance on the report of Coopers & Lybrand L.L.P., independent accountants,
given on the authority of that firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Rights Agreement on
Form S-4 under the Securities Act with respect to the Exchange Notes offered
hereby. As permitted by the rules and regulations of the Commission, this
Prospectus omits certain information, exhibits and undertakings contained in the
Registration Statement. For further information with respect to the Company and
the Exchange Notes offered hereby, reference is made to the Registration
Statement, including the exhibits thereto and the financial statements, notes
and schedules filed as a part thereof. As a result of the Exchange Offer, the
Company will become subject to the informational requirements of the Exchange
Act.
103
<PAGE>
The Registration Statement (and the exhibits and schedules thereto), as well as
the periodic reports and other information filed by the Company with the
Commission, may be inspected and copied at the Public Reference Section of the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the regional offices of the Commission located at 7 World
Trade Center, New York, New York 10048 and Suite 1400, Northwestern Atrium
Center, 500 West Madison Street, Chicago, Illinois 60661-2511. Copies of such
materials may be obtained from the Public Reference Section of the Commission,
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and
its public reference facilities in New York, New York and Chicago, Illinois at
the prescribed rates. The Commission also maintains a web site (located at
http://www.sec.gov) that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission. Statements contained in this Prospectus as to the contents of any
contract or other document are not necessarily complete, and in each instance
reference is made to the copy of such contract or document filed as an exhibit
to the Registration Statement, each such statement being qualified in all
respects by such reference.
Pursuant to the Indenture, the Company has agreed to furnish to the Trustee
and to registered holders of the Exchange Notes, without cost to the Trustee or
such registered holders, copies of all reports and other information that would
be required to be filed by the Company with the Commission under the Exchange
Act, whether or not the Company is then required to file reports with the
Commission. As a result of this Exchange Offer, the Company will become subject
to the periodic reporting and other informational requirements of the Exchange
Act. In the event that the Company ceases to be subject to the information
requirements of the Exchange Act, the Company has agreed that, so long as any
Exchange Notes remain outstanding, it will file with the Commission (but only if
the Commission at such time is accepting such voluntary filings) and distribute
to holders of the Notes copies of the financial information that would have been
contained in such annual reports and quarterly reports, including a
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," that would have been required to be filed with the Commission
pursuant to the Exchange Act. The Company will also furnish such other reports
as it may determine or as may be required by law.
The principal address of the Company is 4800 Hampden Lane, Bethesda,
Maryland 20814 and the Company's telephone number is (301) 986-0800.
104
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Federal Data Corporation
Report of Independent Accountants.................................................. F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996 and September 30, 1997
(unaudited)...................................................................... F-3
Consolidated Statements of Operations for the Years Ended December 31, 1994, 1995
and 1996 and for the Nine Months Ended September 30, 1996 and 1997 (unaudited)... F-4
Consolidated Statements of Stockholders' (Deficit) Equity for the Years Ended
December 31, 1994, 1995 and 1996 and for the Nine Months Ended September 30, 1997
(unaudited)...................................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1994, 1995
and 1996 and for the Nine Months Ended September 30, 1996 and 1997 (unaudited)... F-6
Notes to Consolidated Financial Statements......................................... F-7
NYMA, Inc.
Independent Auditors' Report....................................................... F-20
Consolidated Balance Sheets as of December 31, 1995 and 1996 and March 31, 1997
(unaudited)...................................................................... F-21
Consolidated Statements of Operations for the Years Ended December 31, 1994, 1995
and 1996 and for the Quarters Ended March 31, 1996 and 1997 (unaudited).......... F-22
Consolidated Statements of Stockholders' Equity for the Years Ended December 31,
1994, 1995 and 1996 and for the Quarter Ended March 31, 1997 (unaudited)......... F-23
Consolidated Statements of Cash Flows for the Years Ended December 31, 1994, 1995
and 1996 and for the Quarters Ended March 31, 1996 and 1997 (unaudited).......... F-24
Notes to Consolidated Financial Statements......................................... F-25
Sylvest Management Systems Corporation
Report of Independent Accountants.................................................. F-32
Balance Sheets as of December 31, 1995 and 1996 and June 30, 1997 (unaudited)...... F-33
Statements of Operations for the Years Ended December 31, 1994, 1995 and 1996 and
for the Six Months Ended June 30, 1996 (unaudited) and 1997 (unaudited).......... F-34
Statements of Changes in Shareholders' Equity for the Years Ended December 31,
1994, 1995 and 1996 and for the Six Months Ended June 30, 1997 (unaudited)....... F-35
Statements of Cash Flows for the Years Ended December 31, 1994, 1995 and 1996 and
for the Six Months Ended June 30, 1996 (unaudited) and 1997 (unaudited).......... F-36
Notes to Financial Statements...................................................... F-37
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Federal Data Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' (deficit) equity and of
cash flows present fairly, in all material respects, the financial position of
Federal Data Corporation and its subsidiaries at 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. 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 of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Washington, D.C.
March 28, 1997
F-2
<PAGE>
FEDERAL DATA CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1996
---------- ---------- SEPTEMBER 30,
1997
-------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents................................................. $ 10,311 $ 1,191 $ 8,023
Merger consideration investments.......................................... 51,762 -- --
Accounts receivable....................................................... 48,812 54,379 109,649
Net investment in sales-type leases....................................... 13,360 9,251 6,886
Deferred income taxes..................................................... 1,811 2,105 1,003
Other assets.............................................................. 2,836 2,524 15,348
---------- ---------- -------------
Total current assets.................................................. 128,892 69,450 140,909
Net investment in sales-type leases....................................... 13,743 8,609 5,543
Leased and other property and equipment................................... 1,341 1,462 4,066
Goodwill.................................................................. -- -- 56,549
Deferred income taxes..................................................... 2,800 1,092 1,089
Other assets.............................................................. 3,326 2,673 4,272
---------- ---------- -------------
Total assets.......................................................... $ 150,102 $ 83,286 $ 212,428
---------- ---------- -------------
---------- ---------- -------------
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Notes payable-recourse.................................................... $ 15,799 $ 4,235 $ 27
Notes payable-nonrecourse................................................. 9,045 5,177 3,598
Obligations under capital leases-recourse................................. 1,683 1,614 1,355
Obligations under capital leases-nonrecourse.............................. 4,267 4,255 3,999
Merger consideration payable.............................................. 51,762 -- --
Accounts payable and other liabilities.................................... 35,311 37,920 78,648
---------- ---------- -------------
Total current liabilities............................................. 117,867 53,201 87,627
Notes payable-recourse.................................................... 26,333 40,250 116,449
Notes payable-nonrecourse................................................. 7,618 5,032 1,259
Obligations under capital leases-recourse................................. 4,131 2,586 903
Obligations under capital leases-nonrecourse.............................. 5,330 2,302 2,065
Merger consideration payable.............................................. 7,033 -- --
Other liabilities......................................................... 7,752 2,741 2,344
---------- ---------- -------------
Total liabilities..................................................... 176,064 106,112 210,647
---------- ---------- -------------
Stockholders' (deficit) equity
Common stock, $.01 par value: 8,000,000 shares authorized; shares issued
and outstanding, 1,910,896 in 1995 and 1996 and 2,910,896 in 1997..... 19 19 29
Capital in excess of par value.......................................... 13,932 13,950 40,239
Accumulated deficit..................................................... (39,913) (36,795) (38,487)
---------- ---------- -------------
Total stockholders' (deficit) equity.................................. (25,962) (22,826) 1,781
---------- ---------- -------------
Commitments
Total liabilities and stockholders' (deficit) equity.................... $ 150,102 $ 83,286 $ 212,428
---------- ---------- -------------
---------- ---------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
FEDERAL DATA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------ --------------------------
1994 1995 1996 1996 1997
---------- ---------- ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues
Equipment and software sales................. $ 107,958 $ 81,038 $ 87,543 $ 48,645 $ 115,866
Maintenance and support services............. 31,424 43,750 59,871 39,962 93,800
Interest and other........................... 4,145 5,031 3,694 3,160 2,403
---------- ---------- ------------ ------------ ------------
Total revenues............................. 143,527 129,819 151,108 91,767 212,069
---------- ---------- ------------ ------------ ------------
Expenses
Cost of sales and services................... 114,038 107,366 114,248 69,506 178,132
Selling, general and administrative.......... 20,546 20,943 21,366 13,823 24,819
Interest..................................... 3,580 3,663 7,564 6,080 7,124
---------- ---------- ------------ ------------ ------------
Total expenses............................. 138,164 131,972 143,178 89,409 210,075
---------- ---------- ------------ ------------ ------------
Income (loss) before extraordinary item and
income taxes................................. 5,363 (2,153) 7,930 2,358 1,994
Income tax provision (benefit)................. 1,171 (3,950) 3,202 943 1,031
---------- ---------- ------------ ------------ ------------
Income before extraordinary item............... 4,192 1,797 4,728 1,415 963
Extraordinary loss from early retirement of
debt net of income tax benefit of $1,770..... -- -- -- -- (2,655)
---------- ---------- ------------ ------------ ------------
Net income (loss).............................. $ 4,192 $ 1,797 $ 4,728 $ 1,415 $ (1,692)
---------- ---------- ------------ ------------ ------------
---------- ---------- ------------ ------------ ------------
Earnings per share:
Income before extraordinary item............. $ 2.43 $ 0.73 $ 0.39
Extraordinary loss from early retirement of
debt, net of income tax.................... -- -- (1.07)
------------ ------------ ------------
Net income (loss).............................. $ 2.43 $ 0.73 $ (0.68)
------------ ------------ ------------
------------ ------------ ------------
Weighted average common shares and common share
equivalents.................................. 1,946,194 1,934,984 2,478,425
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
FEDERAL DATA CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK CAPITAL IN EARNINGS
------------------------ EXCESS OF (ACCUMULATED
SHARES PAR VALUE PAR VALUE DEFICIT) TOTAL
----------- ----------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993......................... 5,777,344 $ 58 $ 5,948 $ 9,305 $ 15,311
Net income......................................... -- -- -- 4,192 4,192
Redemption of common stock......................... (39,032) (1) (174) -- (175)
Deferred compensation.............................. -- -- 71 -- 71
----------- --- ----------- ------------ ----------
Balance, December 31, 1994......................... 5,738,312 57 5,845 13,497 19,399
Net income......................................... -- -- -- 1,797 1,797
Redemptions of common stock from Merger............ (5,313,814) (53) (4,094) (54,648) (58,795)
Other redemption of common stock................... (164,831) (1) (1,816) -- (1,817)
Shares exchanged, net.............................. 16,229 -- -- -- --
Proceeds from sale of common stock, net of expenses
of $2,158........................................ 1,635,000 16 13,926 -- 13,942
Distribution to liquidating trust.................. -- -- -- (559) (559)
Deferred compensation.............................. -- 71 -- 71
----------- --- ----------- ------------ ----------
Balance, December 31, 1995......................... 1,910,896 19 13,932 (39,913) (25,962)
Net income......................................... -- -- -- 4,728 4,728
Additional Merger expenses......................... -- -- (53) -- (53)
Distribution to be made to former stockholders..... -- -- -- (1,610) (1,610)
Deferred compensation.............................. -- -- 71 -- 71
----------- --- ----------- ------------ ----------
Balance, December 31, 1996......................... 1,910,896 19 13,950 (36,795) (22,826)
Net income (Unaudited)............................. -- -- -- (1,692) (1,692)
Proceeds from sale of common stock, net of expenses
of $817 (Unaudited).............................. 1,000,000 10 26,173 -- 26,183
Deferred compensation (Unaudited).................. -- -- 116 -- 116
----------- --- ----------- ------------ ----------
Balance, September 30, 1997 (Unaudited)............ 2,910,896 $ 29 $ 40,239 $ (38,487) $ 1,781
----------- --- ----------- ------------ ----------
----------- --- ----------- ------------ ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
FEDERAL DATA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------- ----------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................... $ 4,192 $ 1,797 $ 4,728 $ 1,415 $ (1,692)
Adjustments to reconcile net income (loss) to net
cash flows from operating activities:
Extraordinary loss from early retirement of debt,
net of income tax benefit of $1,770............... -- -- -- -- 2,655
Depreciation and amortization....................... 1,327 1,266 782 637 2,051
Loss (income) recorded on sales-type leases......... (3,705) (4,062) (1,738) (2,151) 1,219
Collections from sales-type leases.................. 18,403 12,372 6,075 1,107 3,046
(Increase) decrease in accounts and notes
receivable........................................ (16,584) 6,712 (5,569) 2,325 (1,013)
Increase (decrease) in accounts payable and accrued
expenses.......................................... 22,398 (18,839) 2,180 (8,493) 3,346
Net change in other assets and liabilities.......... (6,789) (2,013) (5,006) (4,149) 5,315
---------- ---------- ---------- ---------- ----------
Net cash flows from operating activities............ 19,242 (2,767) 1,452 (9,309) 14,927
---------- ---------- ---------- ---------- ----------
Cash flows from investing activities:
Sale (purchase) of short-term investments........... 2,000 (51,762) 51,762 51,762 --
Acquisitions of businesses.......................... -- -- -- -- (58,125)
Proceeds from sale of equipment..................... -- 1,503 -- -- --
Proceeds from sale of division...................... -- 890 -- -- --
Purchase of equipment for sales-type leases......... (6,968) (2,786) (1,156) (1,210) --
Purchase of property and equipment.................. (2,590) (686) (903) (546) (1,582)
---------- ---------- ---------- ---------- ----------
Net cash flows from investing activities............ (7,558) (52,841) 49,703 50,006 (59,707)
---------- ---------- ---------- ---------- ----------
Cash flows from financing activities:
Proceeds from borrowings............................ 9,463 61,478 1,916 -- 160,400
Repayments of borrowings............................ (2,620) (13,451) (15,797) (13,308) (98,101)
Net borrowings (repayments) under line of credit.... -- -- 10,800 15,700 (25,855)
Payments to selling stockholders.................... -- -- (51,762) (51,762) --
Proceeds from sale of common stock.................. -- 16,100 -- -- 27,000
Recapitalization, stock issuance and debt
acquisition costs................................. -- (5,294) -- -- (10,202)
Redemption of common stock.......................... (174) (1,817) -- -- --
Repayments of capital lease obligations............. (10,198) (6,689) (5,432) (1,420) (1,630)
---------- ---------- ---------- ---------- ----------
Net cash flows from financing activities............ (3,529) 50,327 (60,275) (50,790) 51,612
---------- ---------- ---------- ---------- ----------
Net change in cash and cash equivalents............... 8,155 (5,281) (9,120) (10,093) 6,832
Cash and cash equivalents, beginning of period........ 7,437 15,592 10,311 10,311 1,191
---------- ---------- ---------- ---------- ----------
Cash and cash equivalents, end of period.............. $ 15,592 $ 10,311 $ 1,191 $ 218 $ 8,023
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
FEDERAL DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS
UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 1--NATURE OF BUSINESS
The accompanying consolidated financial statements include the accounts of
Federal Data Corporation and its wholly-owned subsidiaries (collectively, the
Company). The Company operates in one business segment and principally engages
in the design and marketing of commercially available data processing solutions
and consulting to the United States Government (the Government). The Government
accounted for approximately 95%, 95% and 97% of total revenues during 1994, 1995
and 1996, respectively. The Company pursues this business as a computer systems
integrator, reseller and professional services provider. The traditional
integration business focuses on configuring various types of computer hardware,
software and peripherals obtained from one or more manufacturers or suppliers,
combined with data networking components, to produce a single turnkey system
designed to accommodate the data processing requirements of the customer. This
business is generally oriented toward mission critical business applications
rather than research and development or tactical military systems. The Company
also focuses on image-based document management and automation technologies. The
Company generally provides ongoing maintenance and other consulting and support
services related to the solutions installed by the Company. The Company also
establishes relationships with providers of hardware and software components and
offers these products under a variety of contract offerings such as GSA
schedules and competitive contract vehicles.
The data processing solutions are sold or leased to the Government under
various types of agreements providing for, in certain cases, purchase options or
other lease to ownership arrangements. Most contracts with Government agencies
expire on September 30 of each year (the Government's fiscal year end) and are
renewable for additional fiscal years subject to the appropriation of funding.
While the Company's Government contracts provide for fiscal funding termination,
the Company has not experienced any early terminations of significant contracts
since its inception.
NOTE 2--MERGER
On December 1, 1995, FDC Holdings, Inc. (Holdings) merged with and into the
Company with the Company continuing as the surviving corporation (the Merger).
Holdings was a company organized by the Carlyle Group (Carlyle) to facilitate
the Merger and had no operating activity or history. Upon consummation of the
Merger, Holdings received 85.4% of the Company's common stock and 14.6% was
retained by members of Company management who were shareholders prior to the
Merger. Existing shareholders exchanged 259,667 shares of the Company's common
stock for 275,896 shares of common stock of the surviving corporation, 164,831
shares of common stock were purchased and retired and the remaining 5,313,814
shares of common stock were redeemed with the Merger consideration. The Merger
was accounted for as a recapitalization which resulted in a charge to
stockholders' equity of $58,795 to reflect the redemption of common stock.
The Company financed the Merger through proceeds from term loans of $35,000,
borrowings under a revolving line of credit of $6,500 and an equity purchase of
1,635,000 shares of common stock by Holdings for $16,100. These proceeds were
also utilized to pay fees and expenses related to the Merger and acquisition of
the debt, and to provide working capital for the Company. Of the total fees and
expenses, $1,500 was paid to an affiliate of Carlyle. At December 31, 1995, the
Merger consideration was invested in money market funds. On January 4, 1996, the
Company liquidated this investment and paid the selling
F-7
<PAGE>
FEDERAL DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS
UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 2--MERGER (CONTINUED)
shareholders $49,448 of the Merger consideration in cash and issued subordinated
notes amounting to $7,033. The remaining balance of the Merger consideration of
$2,315 was paid in cash on April 4, 1996.
The subordinated notes issued on January 4, 1996 accrue interest at 9% from
January 4, 1996 through January 3, 1999, 11% from January 4, 1999 through
December 31, 2002 and 13% thereafter. Interest on the subordinated notes is
payable semi-annually beginning July 4, 1996; provided however, that any amount
of cash interest which is not paid on the subordinated notes as a result of
payment restrictions under any senior debt will be made by the issuance of
payment in kind subordinated notes. The interest payment of $316 due July 4,
1996 was made through the issuance of payment in kind subordinated notes. The
principal and any accrued and unpaid interest will be payable on the latter of
six months after the payment of all amounts owed under the Company's credit
agreement (see Note 7) or July 4, 2003.
As part of the consideration for the purchase of the common stock of the
selling shareholders outlined in the Merger agreement, the Company prepaid
$1,610 of premiums during 1996 under a Split Dollar life insurance policy to
fund future additional distributions to the selling shareholders. The Company
has recorded a reduction of $1,610 in retained earnings based on the
distribution that will be made to the selling shareholders in 1999 when the
Split Dollar payments are received.
As a condition of the Merger, the Company was required to dispose of certain
nonessential assets and related liabilities. These assets and related
liabilities consisted of an airplane, land and building in South Carolina,
certain artwork, the Company's Financial Services Division and a 10% limited
partnership interest in a bankrupt partnership that previously held title to the
office building in which the Company is located. An entity controlled by the
former majority shareholder purchased the airplane, the Company's Financial
Services Division and the 10% limited partnership interest and assumed the
related liabilities for $2,393, the aggregate estimated value of the airplane
and the Financial Services Division. The Company attributed no value to the
partnership interest. The Company has placed the artwork and the land and
building in South Carolina into a liquidating trust. The liquidating trust is
required to sell these assets and distribute the net proceeds to the selling
shareholders. The disposition of these nonessential assets and liabilities did
not have a significant impact on the Company's consolidated financial
statements.
The Merger agreement generally required the Company to complete the
distribution of the assets held by the Federal Data Corporation Employee Stock
Ownership Plan (the ESOP). These assets consisted principally of shares of the
Company's common stock. The Company had previously terminated the ESOP in May
1994 and received approval from the Internal Revenue Service to distribute the
assets in October 1995. In October and November 1995, the Company distributed
the assets of the ESOP to the participants. The ESOP distribution had no effect
on the Company's consolidated financial statements.
Concurrent with the acquisition of a controlling interest in the Company by
Carlyle in 1995, the Company entered into a management agreement with TC Group,
L.L.C. for certain management and financial advisory services to be provided to
the Company and its subsidiaries. The agreement provides for the payment of
annual management fees in an amount equal to $300. In addition, concurrent with
the acquisition of Carlyle's controlling interest, the Company entered into a
three year consulting agreement with the former majority shareholder and a three
year agreement to lease a corporate aircraft with an affiliate of the former
majority shareholder. The consulting agreement provides for annual payments of
F-8
<PAGE>
FEDERAL DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS
UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 2--MERGER (CONTINUED)
$200 and the lease of the aircraft provides for annual payments of $300 plus a
usage charge which amounted to $56 during the year ended December 31, 1996.
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies of the Company conform to generally accepted
accounting principles. All significant intercompany accounts and transactions
have been eliminated in consolidation. Those policies significantly affecting
the consolidated financial statements are summarized below.
UNAUDITED INFORMATION
Interim financial information for the nine months ended September 30, 1996
and 1997 included herein is unaudited but has been prepared on the same basis as
the audited consolidated statements and, in the opinion of management, contain
all adjustments necessary, consisting only of normal recurring adjustments, for
a fair presentation of the financial position, results of operations, and cash
flows for such periods. The consolidated results of operations for the nine
months ended September 30, 1997 are not necessarily indicative of the results to
be expected for the full year ending December 31, 1997.
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 revenue and expenses during the reporting
period. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenue from sales and sales-type leases is recorded upon installation or
delivery at the customer's site depending upon contractual terms. Maintenance
and support services revenue is recognized as services are provided.
DEPRECIATION AND AMORTIZATION
Leased and other property and equipment are stated at original cost, net of
accumulated depreciation and amortization, and are depreciated and amortized by
the Company using the straight-line method over their estimated useful lives.
The estimated useful lives of principal items of computer, furniture, office and
other equipment range from 3 to 10 years. Leasehold improvements are amortized
over the term of the lease. Debt acquisition fees are being amortized over the
terms of the related notes payable.
GOODWILL
Goodwill represents the excess of the cost of acquiring businesses over the
fair value of net assets acquired and is amortized over fifteen years using the
straight-line method. The Company periodically reviews goodwill to assess
recoverability, and impairments are recognized in the results of operations, as
F-9
<PAGE>
FEDERAL DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS
UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
appropriate. The measurement of possible impairment is based primarily on the
ability to recover the balance of the goodwill from expected future operating
cash flows on an undiscounted basis.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash and cash equivalents consist primarily of short-term, highly liquid
investments with insignificant interest rate risk and original maturities of
three months or less at date of acquisition. Similar investments with original
maturities beyond three months are considered short-term investments and are
carried at cost, which approximates market value.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and cash equivalents, receivables, accounts payable, and accrued
expenses are reflected in the consolidated financial statements at fair value
because of their short-term nature. The carrying value of notes payable
approximates fair value as determined through discounted cash flow analysis
using rates currently available to the Company for debt with similar terms and
maturities.
INCOME TAXES
The Company recognizes deferred income taxes for the expected future tax
consequences of temporary differences by applying enacted statutory tax rates to
differences between the financial statement carrying amounts and the tax basis
of existing assets and liabilities.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations
of credit risk consist of cash and accounts receivable. The Company maintains
its cash principally in one United States bank. Accounts receivable result
primarily from contracts with the Government. Contracts with the Government do
not require collateral or other arrangements. The Company does not believe
significant credit risk exists at December 31, 1996.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share is computed by dividing net income (loss) by the
sum of the weighted average number of common and, where applicable, dilutive
common equivalent shares outstanding. The Company's common equivalent shares,
consisting entirely of options to purchase common stock, are calculated using
the treasury stock method which assumes the exercise of all outstanding stock
options with the hypothetical proceeds being used to repurchase shares for
treasury. Net income per share has been omitted for 1994 and 1995 because of the
material change in outstanding common shares resulting from the recapitalization
described above.
F-10
<PAGE>
FEDERAL DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS
UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 4--NET INVESTMENT IN SALES-TYPE LEASES
Net investment in sales-type leases consists of the following as of December
31:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Minimum lease payments receivable....................................... $ 31,260 $ 20,683
Less unearned income.................................................... (4,157) (2,823)
--------- ---------
Total net investment in sales-type leases............................... 27,103 17,860
Less current portion.................................................... 13,360 9,251
--------- ---------
Long-term net investment in sales-type leases........................... $ 13,743 $ 8,609
--------- ---------
--------- ---------
</TABLE>
Future minimum lease payments receivable as of December 31, 1996 are due as
follows:
<TABLE>
<CAPTION>
<S> <C>
1997............................................................................... $ 11,157
1998............................................................................... 7,668
1999............................................................................... 1,570
2000............................................................................... 288
</TABLE>
NOTE 5--OTHER ASSETS
Other assets consist of the following as of December 31:
<TABLE>
<CAPTION>
1995 1996
------------------------ ------------------------
CURRENT LONG-TERM CURRENT LONG-TERM
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Deferred financing costs.......................... $ -- $ 3,136 $ -- $ 2,319
Prepaid expenses.................................. 2,590 -- 1,895 --
Other............................................. 246 190 629 354
----------- ----------- ----------- -----------
Total other assets................................ $ 2,836 $ 3,326 $ 2,524 $ 2,673
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
Amortization expense for deferred financing costs was $817 during 1996.
NOTE 6--LEASED AND OTHER PROPERTY AND EQUIPMENT
Leased and other property and equipment consist of the following as of
December 31:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Furniture, office and other equipment, net of accumulated depreciation of
$3,262 and $3,798........................................................ $ 1,051 $ 1,364
Leasehold improvements, net of accumulated amortization of $3,443 and
$3,678................................................................... 290 98
--------- ---------
Total leased and other property and equipment.............................. $ 1,341 $ 1,462
--------- ---------
--------- ---------
</TABLE>
Total depreciation and amortization expense during 1994, 1995 and 1996 was
$1,327, $1,266 and $782, respectively.
F-11
<PAGE>
FEDERAL DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS
UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 7--NOTES PAYABLE
Recourse notes payable consist of the following as of December 31:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Term A note payable in quarterly installments through December 2000..... $ 25,000 $ 17,647
Term B note payable in quarterly installments through December 2002..... 10,000 8,319
Revolving line of credit................................................ -- 10,800
Subordinated notes...................................................... -- 7,350
Notes payable in monthly installments through October 1997, with
interest from 7.34% to 10.73%......................................... 7,132 369
--------- ---------
Total recourse notes payable............................................ 42,132 44,485
Less current portion.................................................... 15,799 4,235
--------- ---------
Long-term recourse notes payable........................................ $ 26,333 $ 40,250
--------- ---------
--------- ---------
</TABLE>
The Company's Term A and Term B notes payable accrue interest at LIBOR plus
2.75% (8.3% at December 31, 1996) and LIBOR plus 3.25% (8.8% at December 31,
1996), respectively. In addition to the required quarterly principal and
interest payments on the Company's Term A and B notes, the Company is required
to make mandatory principal payments based on excess cash flow as defined in the
credit agreement. No mandatory principal payments based on excess cash flow were
required for 1996.
At December 31, 1996, the Company had a $25,000 revolving line of credit
facility which expires in December 2002. Interest accrues on borrowings under
the revolving line of credit at prime plus 1.25% (9.50% at December 31, 1996).
In addition, the Company pays a commitment fee of 0.5% of the unused line of
credit facility. The Company has the option to convert the interest rate on the
revolving line of credit to LIBOR plus 2.75%.
The Company's above credit agreement includes certain restrictions as to the
Company's ability, among other things, to acquire or dispose of assets or to pay
dividends. In addition, the Company is required to maintain a minimum net worth
and certain operating ratios, including among others, interest coverage and
fixed charges. All of the Company's assets not otherwise pledged are utilized as
collateral under the Company's credit agreements.
The Company finances certain equipment leases to Government customers with
borrowings or capital leases that are recourse only to the related payment
stream and property leased. In most circumstances, the Company's future
obligations under nonrecourse agreements, in event of default by the end user
lessee, would be limited to ensuring the return of the associated assets to the
lender.
F-12
<PAGE>
FEDERAL DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS
UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 7--NOTES PAYABLE (CONTINUED)
Nonrecourse notes payable consist of the following as of December 31:
<TABLE>
<CAPTION>
1995 1996
--------- -----------
<S> <C> <C>
Notes secured by equipment and minimum lease payments receivable from
customers, repayable through September 2000, with interest from
6.75% to 12.75%..................................................... $ 16,663 $ 10,209
Less current portion................................................. 9,045 5,177
--------- -----------
Long-term nonrecourse notes payable.................................. $ 7,618 $ 5,032
--------- -----------
--------- -----------
</TABLE>
Principal payments on the notes payable as of December 31, 1996 are due as
follows:
<TABLE>
<CAPTION>
RECOURSE NONRECOURSE
--------- -----------
<S> <C> <C>
1997................................................................. $ 4,235 $ 5,177
1998................................................................. 4,286 2,924
1999................................................................. 4,706 1,760
2000................................................................. 5,126 348
2001................................................................. 3,992 --
Thereafter........................................................... 22,140 --
</TABLE>
NOTE 8--OBLIGATIONS UNDER CAPITAL LEASES
Obligations under recourse capital leases consist of the following as of
December 31:
<TABLE>
<CAPTION>
1995 1996
--------- -----------
<S> <C> <C>
Minimum lease payments............................................... $ 7,177 $ 4,919
Less deferred interest............................................... (1,363) (719)
--------- -----------
Total obligations under recourse capital leases...................... 5,814 4,200
Less current portion................................................. 1,683 1,614
--------- -----------
Long-term obligations under recourse capital leases.................. $ 4,131 $ 2,586
--------- -----------
--------- -----------
</TABLE>
Obligations under nonrecourse capital leases consist of the following as of
December 31:
<TABLE>
<CAPTION>
1995 1996
--------- -----------
<S> <C> <C>
Minimum lease payments............................................... $ 10,791 $ 7,239
Less deferred interest............................................... (1,194) (682)
--------- -----------
Total obligations under nonrecourse capital leases................... 9,597 6,557
Less current portion................................................. 4,267 4,255
--------- -----------
Long-term obligations under nonrecourse capital leases............... $ 5,330 $ 2,302
--------- -----------
--------- -----------
</TABLE>
F-13
<PAGE>
FEDERAL DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS
UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 8--OBLIGATIONS UNDER CAPITAL LEASES (CONTINUED)
Future minimum lease payments under capital leases as of December 31, 1996
are due as follows:
<TABLE>
<CAPTION>
RECOURSE NONRECOURSE
----------- -------------
<S> <C> <C>
1997.................................................................. $ 2,064 $ 4,768
1998.................................................................. 1,986 2,409
1999.................................................................. 869 62
</TABLE>
NOTE 9--ACCOUNTS PAYABLE AND OTHER LIABILITIES
Accounts payable and other liabilities consist of the following as of
December 31:
<TABLE>
<CAPTION>
1995 1996
---------------------- ----------------------
CURRENT LONG-TERM CURRENT LONG-TERM
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Accrued contract expenses....................... $ 14,677 $ -- $ 19,289 $ --
Other accrued expenses.......................... 2,896 -- 3,876 --
Accounts payable................................ 13,033 -- 8,042 --
Deferred income................................. 2,932 7,217 3,121 2,272
Income taxes payable............................ 754 -- 1,660 --
Other........................................... 1,019 535 1,932 469
--------- ----------- --------- -----------
Total accounts payable and other liabilities.... $ 35,311 $ 7,752 $ 37,920 $ 2,741
--------- ----------- --------- -----------
--------- ----------- --------- -----------
</TABLE>
NOTE 10--INCOME TAXES
The income tax provision (benefit) consists of the following for the years
ended December 31:
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Current income tax provision:
Federal....................................................... $ 916 $ 153 $ 1,370
State......................................................... 255 508 418
--------- --------- ---------
Total current income tax provision.............................. 1,171 661 1,788
--------- --------- ---------
Deferred income tax provision (benefit):
Federal....................................................... -- (4,365) 1,228
State......................................................... -- (246) 186
--------- --------- ---------
Total deferred income tax provision (benefit)................... -- (4,611) 1,414
--------- --------- ---------
Total income tax provision (benefit)............................ $ 1,171 $ (3,950) $ 3,202
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-14
<PAGE>
FEDERAL DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS
UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 10--INCOME TAXES (CONTINUED)
Deferred income tax assets and liabilities consist of the following as of
December 31:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Deferred income tax assets:
Deferred income.......................................................... $ 3,857 $ 2,049
Compensation and employee benefits....................................... 284 904
Property and equipment................................................... 326 131
Accounts receivable reserves............................................. 20 128
Other.................................................................... 243 77
--------- ---------
Total deferred income tax assets......................................... 4,730 3,289
Deferred income tax liabilities............................................ 119 92
--------- ---------
Net deferred income tax assets............................................. $ 4,611 $ 3,197
--------- ---------
--------- ---------
</TABLE>
Net deferred income taxes as reflected on the consolidated balance sheet
consist of the following as of December 31:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Current deferred income tax assets......................................... $ 1,811 $ 2,105
Long-term deferred income tax assets....................................... 2,919 1,184
Less long-term deferred income tax liabilities............................. (119) (92)
--------- ---------
Net long-term deferred income tax assets................................... 2,800 1,092
--------- ---------
Net deferred income tax assets............................................. $ 4,611 $ 3,197
--------- ---------
--------- ---------
</TABLE>
A reconciliation between the provision (benefit) for income taxes computed
on income (loss) before income (loss) tax at the statutory federal tax rate and
the provision (benefit) for income taxes is as follows for the years ended
December 31:
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Statutory federal income tax rate.................................. 34.0% (34.0)% 34.0%
State income taxes, net of federal benefit......................... 1.0% (4.5)% 2.6%
Nondeductible expenses............................................. 1.0% 6.2% 0.2%
Reduction in valuation allowance................................... (16.1)% (154.0)% --
Other.............................................................. 2.0% 2.8% 3.5%
--------- --------- ---
Effective income tax rate.......................................... 21.9% (183.5)% 40.3%
--------- --------- ---
--------- --------- ---
</TABLE>
During 1994 and 1995, the Company reduced the tax valuation allowance by
$862 and $3,313, respectively, to reflect management's assessment that the
realization of these benefits was more likely than not. At December 31, 1995 and
1996, the Company has not recorded any tax valuation allowance.
F-15
<PAGE>
FEDERAL DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS
UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 11--STOCKHOLDERS' EQUITY AND TRANSACTIONS WITH STOCKHOLDERS
During 1984, the majority shareholder of the Company transferred shares of
the Company's common stock to certain key employees. The Company has accounted
for this transaction as if the Company, and not the majority shareholder, had
transferred the stock. At December 31, 1996, the unamortized compensation
expense related to this transaction was $242.
In June 1987, the Company adopted a Stock Incentive Plan (the Plan) under
which stock options were granted to officers and key employees at an exercise
price established at the discretion of the Plan Committee at the date of award.
Options granted under the Plan were nontransferable and were exercisable
immediately for a period of ten years following the date of grant. Prior to the
Merger, options to purchase 93,500 shares of the Company's common stock at
exercise prices ranging from $7.50 to $9.00 per share were outstanding under the
Plan. Subject to the provisions of the Merger agreement, these options are to be
replaced with new options to acquire shares of common stock of the surviving
corporation. The terms of the new options, including the number of shares and
exercise price will be equitably adjusted to reflect the consummation of the
Merger, provided that the new options will provide substantially the same
economic benefits to the option holders as the benefits provided prior to the
Merger. As of March 28, 1997, the new options have not been exchanged for the
old options.
In February 1996, the Company adopted a new Stock Option Plan for Executives
and Key Employees of Federal Data Corporation. Under the plan, options may be
granted at fair value to purchase up to 257,000 shares of common stock. Options
granted under the plan vest ratably over five years and expire ten years from
the date of grant or in accordance with other terms as specified by the
Company's Board of Directors. Of the options outstanding as of December 31,
1996, under the variable component of the plan 170,100 options for shares will
vest only if certain financial measures are met. As of December 31, 1996, none
of the financial measures had been met and accordingly, no compensation has been
recorded. As of December 31, 1996, options to purchase 14,580 shares at a price
of $10.00 per share were exercisable and options to purchase 14,000 shares were
available for granting. The Company has adopted the disclosure-only provision of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-based
Compensation" (SFAS 123). Accordingly, no compensation cost has been recognized
for the stock option plan. Had compensation cost for the Company's stock option
plan been determined based on the fair value at the grant date for awards in
1995 and 1996, there would not have been a material impact on the Company's
results of operations. To determine fair value under SFAS 123, the Company used
the Present Value Approach and the following weighted-average assumptions for
1995 and 1996: a risk-free interest rate of 6.35%, expected lives of 5 years and
expected dividends of zero.
F-16
<PAGE>
FEDERAL DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS
UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 11--STOCKHOLDERS' EQUITY AND TRANSACTIONS WITH STOCKHOLDERS (CONTINUED)
The following is a summary of stock option activity for outstanding options:
<TABLE>
<CAPTION>
OPTION PRICE NUMBER OF
PER SHARE SHARES
--------------- -----------
<S> <C> <C>
Balance at December 31, 1993.................................... $7.50-$9.00 90,000
Granted......................................................... -- --
Exercised....................................................... -- --
Forfeited....................................................... -- --
Canceled........................................................ -- --
Balance at December 31, 1994.................................... 7.50-9.00 90,000
Granted......................................................... 7.50 8,500
Exercised....................................................... 7.50 (5,000)
Forfeited....................................................... -- --
Canceled........................................................ -- --
Balance at December 31, 1995.................................... 7.50-9.00 93,500
Granted......................................................... 10.00 253,000
Exercised....................................................... -- --
Forfeited....................................................... 10.00 (10,000)
Canceled........................................................ -- --
Balance at December 31, 1996.................................... $7.50-$10.00 336,500
</TABLE>
NOTE 12--SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
During 1994, 1995 and 1996, the Company paid interest costs of $3,700,
$3,124 and $7,546, respectively. During the same years, the Company paid income
taxes of $40, $1,097 and $628, respectively.
During 1994, 1995 and 1996, the Company financed through capital leases the
acquisition of computer equipment, which was sold to customers, of $5,741,
$6,700 and $779, respectively.
NOTE 13--COMMITMENTS
The Company leases its primary office space under a ten year lease, expiring
in 2004. The lease payments are subject to escalations of approximately 2% per
year and also subject to yearly increases based on increases in operating
expenses and property taxes. The Company has two consecutive five year renewal
options.
F-17
<PAGE>
FEDERAL DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS
UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 13--COMMITMENTS (CONTINUED)
Future minimum payments at December 31, 1996, for all noncancellable
operating leases with initial terms of one year or more are as follows:
<TABLE>
<S> <C>
1997.............................................................. $ 1,690
1998.............................................................. 1,630
1999.............................................................. 1,614
2000.............................................................. 763
2001.............................................................. 778
Thereafter........................................................ 2,428
</TABLE>
The Company has the option to terminate the lease on approximately one-half
of its office space as of January 2000. Operating lease expense was $2,675,
$1,532 and $1,782 during 1994, 1995 and 1996, respectively. The Company received
$587, $368 and $146 from sublease rentals during 1994, 1995 and 1996,
respectively.
NOTE 14--SUBSEQUENT EVENTS (UNAUDITED)
ACQUISITIONS
In May 1997, the Company purchased all of the outstanding shares of common
stock of NYMA, Inc. (NYMA) for $29,499. The purchase price consists of $24,499
in cash and $5,000 in subordinated notes. The agreement also provides for
additional cash payments of up to $6,000 and additional subordinated notes of
$1,000 if certain operating objectives related to earnings and new business
activities are met. Such payments, if any, will be accounted for as adjustments
to the purchase price. No additional payments have been made as of September 30,
1997. The Company financed the acquisition of NYMA through additional borrowing
of $28,000 and the sale of 555,556 shares of the Company's common stock for
approximately $15,000. A portion of the new borrowings was used to retire
existing Company and NYMA working capital debt. NYMA is a provider of high
technology engineering and information technology services under contracts with
various U.S. Government agencies and subcontracts with large government
contractors. In June 1997, the Company also purchased all of the outstanding
shares of common stock of Sylvest Management Systems Corporation (Sylvest) for
$40,350. The purchase price consists of $33,350 in cash and subordinated notes
of $7,000. The purchase price is subject to adjustment based on an audit of the
closing balance sheet. The Company does not expect any such adjustment to be
material. The agreement also provides for an additional subordinated note of
$1,000 if certain earnings objectives are met. Such payments, if any, will be
accounted for as adjustments to the purchase price. No additional payments have
been made as of September 30, 1997. The Company financed the acquisition of
Sylvest through additional borrowing of $27,400 and the sale of 444,444 shares
of the Company's common stock for approximately $12,000. A portion of the new
borrowings was used to retire existing Sylvest working capital debt. Sylvest is
a leading reseller and technical services vendor supporting open systems
architecture within the federal marketplace. Of the total fees and expenses
related to these transactions, $1,000 was paid to an affiliate of Carlyle.
Condensed pro forma operating data which gives effect to the acquisitions of
NYMA and Sylvest for the year ended December 31, 1996 and the nine months ended
September 30, 1996 and 1997 is provided
F-18
<PAGE>
FEDERAL DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS
UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 14--SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
below. Such pro forma operating data has been prepared as if the acquisitions
occurred as of the beginning of the reporting period. Goodwill associated with
the acquisitions is being amortized over an estimated useful life of 15 years.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
YEAR ENDED ----------------------
DECEMBER 31, 1996 1996 1997
----------------- ---------- ----------
<S> <C> <C> <C>
Revenues.............................................................. $ 332,822 $ 212,475 $ 308,723
-------- ---------- ----------
-------- ---------- ----------
Income (loss) before extraordinary item and income taxes.............. $ 5,703 $ 833 $ (2,147)
-------- ---------- ----------
-------- ---------- ----------
Net income (loss)..................................................... $ 2,862 $ (483) $ (1,708)
-------- ---------- ----------
-------- ---------- ----------
Net income (loss) per common share.................................... $ 1.47 $ (0.25) $ (0.69)
-------- ---------- ----------
-------- ---------- ----------
</TABLE>
ISSUANCE OF SENIOR SUBORDINATED NOTES
In July 1997, the Company issued $105,000 of Senior Subordinated Notes and
utilized the proceeds to repay its indebtedness under its existing term loans as
well as the additional borrowings incurred to finance the NYMA and Sylvest
acquisitions. All of the Company's direct and indirect wholly-owned subsidiaries
have fully and unconditionally guaranteed, on a joint and several basis, the
Company's obligations under the Senior Subordinated Notes. The Company is a
holding company with no assets or operations other than its investments in its
subsidiaries. The separate financial statements of the subsidiary guarantors are
not presented because the Company's management believes that such financial
statements are not material to investors.
F-19
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
NYMA, Inc.
Greenbelt, Maryland
We have audited the accompanying consolidated balance sheets of NYMA, Inc.
and subsidiary (the Company) as of December 31, 1996 and 1995, and the related
consolidated statements of operations, 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, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 31,
1996 and 1995, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1996.
DELOITTE & TOUCHE LLP
Washington, D.C.
March 21, 1997 (May 2, 1997 as to Note 9)
F-20
<PAGE>
NYMA, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------
1995 1996
--------- --------- AS OF MARCH 31,
1997
------------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Accounts receivable................................................... $ 27,287 $ 24,619 $ 22,289
Inventory............................................................. 1,097 1,632 1,729
Prepaid expenses...................................................... 450 431 451
Refundable income taxes............................................... 1,914 1,383 1,383
Total current assets................................................ 30,748 28,065 25,852
PROPERTY AND EQUIPMENT--NET............................................. 950 947 876
DEPOSITS AND OTHER ASSETS............................................... 465 687 686
--------- --------- -------
TOTAL................................................................... $ 32,163 $ 29,699 $ 27,414
--------- --------- -------
--------- --------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable.......................................................... $ 12,463 $ 8,923 $ 5,189
Accounts payable and other accrued expenses........................... 2,749 2,559 4,205
Salaries and related payroll taxes.................................... 1,459 1,627 1,302
Accrued employee benefits............................................. 2,530 2,942 3,150
Income taxes payable.................................................. 344 50 --
Deferred income taxes................................................. 4,555 5,049 5,049
--------- --------- -------
Total current liabilities........................................... 24,100 21,150 18,895
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.02 par value--authorized, 4,000,000 shares; shares
issued and outstanding, 3,706,700 in 1995, 3,611,000 in 1996, and
3,615,400 in 1997................................................... 74 72 72
Additional paid-in capital............................................ 41 128 135
Retained earnings..................................................... 7,948 8,349 8,312
--------- --------- -------
Total stockholders' equity.......................................... 8,063 8,549 8,519
--------- --------- -------
TOTAL................................................................... $ 32,163 $ 29,699 $ 27,414
--------- --------- -------
--------- --------- -------
</TABLE>
See notes to consolidated financial statements.
F-21
<PAGE>
NYMA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTER ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE:
Contracts................................................ $ 97,916 $ 93,482 $ 82,004 $ 20,071 $ 17,318
Interest................................................. 13 24 20 6 2
Other.................................................... 2 214 22 1 --
--------- --------- --------- --------- ---------
97,931 93,720 82,046 20,078 17,320
--------- --------- --------- --------- ---------
COSTS AND EXPENSES:
Cost of products and services............................ 74,138 72,013 57,824 13,657 12,102
General and administrative............................... 22,091 20,247 22,481 5,612 5,197
Interest................................................. 402 794 394 141 80
--------- --------- --------- --------- ---------
96,631 93,054 80,699 19,410 17,379
--------- --------- --------- --------- ---------
EARNINGS (LOSS) BEFORE INCOME TAXES........................ 1,300 666 1,347 668 (59)
PROVISION FOR INCOME TAXES (BENEFIT)....................... 739 294 547 267 (22)
--------- --------- --------- --------- ---------
NET EARNINGS (LOSS)........................................ $ 561 $ 372 $ 800 $ 401 $ (37)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
See notes to consolidated financial statements.
F-22
<PAGE>
NYMA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996 AND
THE QUARTER ENDED MARCH 31, 1997 (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
----------------------- ADDITIONAL
NUMBER OF PAID-IN
SHARES AMOUNT CAPITAL RETAINED EARNINGS TOTAL
---------- ----------- ------------- ----------------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994.......................... 3,689,150 $ 74 $ 27 $ 7,015 $ 7,116
Net earnings.................................... -- -- -- 561 561
Exercise of options............................. 17,550 -- 15 -- 15
---------- ----- ----- ------ ---------
BALANCE, DECEMBER 31, 1994........................ 3,706,700 74 42 7,576 7,692
Net earnings.................................... -- -- -- 372 372
Exercise of options............................. 250 -- -- -- --
Repurchase of stock............................. (250) -- (1) -- (1)
---------- ----- ----- ------ ---------
BALANCE, DECEMBER 31, 1995........................ 3,706,700 74 41 7,948 8,063
Net earnings.................................... -- -- -- 800 800
Exercise of options, including income tax
benefit....................................... 24,300 -- 88 -- 88
Repurchase of stock............................. (120,000) (2) (1) (399) (402)
---------- ----- ----- ------ ---------
BALANCE, DECEMBER 31, 1996........................ 3,611,000 72 128 8,349 8,549
Net loss (unaudited)............................ -- -- -- (37) (37)
Exercise of options (unaudited)................. 4,400 -- 7 -- 7
---------- ----- ----- ------ ---------
BALANCE, MARCH 31, 1997
(unaudited)..................................... 3,615,400 $ 72 $ 135 $ 8,312 $ 8,519
---------- ----- ----- ------ ---------
---------- ----- ----- ------ ---------
</TABLE>
See notes to consolidated financial statements.
F-23
<PAGE>
NYMA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTER ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss)......................................... $ 561 $ 372 $ 800 $ 401 $ (37)
Adjustments to reconcile net earnings (loss) to net cash
(used in) provided by operating activities:
Depreciation and amortization............................... 266 568 613 113 136
Loss on sale of property and equipment...................... 40 -- -- -- --
Deferred income taxes....................................... 1,971 (512) 494 -- --
Change in assets and liabilities:
(Increase) decrease in accounts receivable................ (9,151) 211 2,668 437 2,330
Decrease (increase) in inventory.......................... 3,682 (137) (535) (261) (97)
Decrease (increase) in prepaid expenses................... 100 (230) 19 20 (20)
(Increase) decrease in refundable income taxes............ (1,326) (588) 531 237 --
(Increase) decrease in deposits and other assets.......... (9) (253) (222) (8) 1
(Decrease) increase in accounts payable and other accrued
expenses................................................ (3,082) 415 (190) 1,539 1,645
Increase (decrease) in salaries and related payroll
taxes................................................... 534 (29) 168 (14) (324)
Increase (decrease) in accrued employee benefits.......... 779 270 412 (143) 208
(Decrease) increase in income taxes payable............... (1,129) 344 (239) 35 (50)
--------- --------- --------- --------- ---------
Net cash (used in) provided by operating activities..... (6,764) 431 4,519 2,356 3,792
--------- --------- --------- --------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchases of property and equipment......................... (840) (378) (610) (79) (65)
Proceeds from sale of property and equipment................ 5 -- -- -- --
Decrease in notes receivable................................ 223 -- -- -- --
--------- --------- --------- --------- ---------
Net cash used in investing activities................... (612) (378) (610) (79) (65)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) on note payable................... 6,980 (52) (3,540) (2,277) (3,734)
Proceeds from sale of stock................................. 15 -- 33 -- 7
Cost of stock repurchase.................................... -- (1) (402) -- --
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing activities..... 6,995 (53) (3,909) (2,277) (3,727)
--------- --------- --------- --------- ---------
CHANGE IN CASH AND CASH EQUIVALENTS........................... (381) -- -- -- --
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD................ 381 -- -- -- --
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD...................... $ -- $ -- $ -- $ -- $ --
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
SUPPLEMENTAL INFORMATION:
Cash payments for interest.................................. $ 392 $ 721 $ 394 $ 198 $ 121
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Cash payments for taxes..................................... $ 1,308 $ 1,394 $ 775 $ -- $ 28
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
NON-CASH FINANCING ACTIVITY:
Income tax benefit from exercise of stock options........... $ -- $ -- $ 55 $ -- $ --
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
See notes to consolidated financial statements.
F-24
<PAGE>
NYMA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND
QUARTERS ENDED MARCH 31, 1996 AND 1997 (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE BUSINESS--NYMA, Inc., headquarters in Greenbelt,
Maryland, was incorporated July 19, 1978, under the laws of the State of
Maryland. The Company provides diversified technical support and assembles
computer products under contracts with various U.S. Government agencies and
subcontracts with large private government contractors.
PRINCIPLES OF CONSOLIDATION--The consolidated financial statements include
the accounts of NYMA, Inc. and its eighty percent owned subsidiary, VAD
International, Inc., formed on July 1, 1996. All significant intercompany
accounts and transactions have been eliminated in consolidation.
CONCENTRATION OF RISK--On January 1, 1994, the Company commenced operations
under a contract with National Aeronautics and Space Administration which
accounted for approximately 33%, 34% and 41% of revenues for the years ended
December 31, 1994, 1995 and 1996, respectively. The contract base term expired
on December 31, 1995, with three separate one-year options, exercisable by the
government, to extend the term through December 31, 1998. The option to extend
the term of the contract through December 31, 1997, has been exercised.
During the years ended December 31, 1994, 1995 and 1996, revenues from a
contract with U.S. Department of Agriculture accounted for approximately 16%,
20% and 9%, respectively, of contract revenues. The contract term was completed
on September 30, 1996.
During the years ended December 31, 1994, 1995 and 1996, revenues from U.S.
Government contracts accounted for approximately 95%, 96% and 97% of revenues,
respectively.
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.
REVENUE RECOGNITION--On cost reimbursable contracts, revenues are recorded
as contract costs are incurred, plus a proportionate amount of the fee expected
to be realized on the contract. On fixed-price contracts, revenues are recorded
using the percentage of completion method. Generally, progress to completion is
measured using a cost output measure as units are delivered. Provision for
estimated losses on contracts are recorded when identifiable.
Contract performance incentives, which provide increased or decreased fees
based on actual performance compared to established targets, are recorded when
reasonably determinable.
CASH AND CASH EQUIVALENTS--The Company has a cash management system that
provides for the investment of excess cash balances in Short-Term securities.
The participating bank transfers the Company's excess cash daily to overnight
investments that are under the bank's control and redeposits the cash the
following day. Cash overdrafts are funded by draws against the revolving credit
facility (see Note 4). For purposes of the statement of cash flows, the Company
considers all highly liquid debt instruments purchased with an original maturity
date of three months or less to be cash equivalents.
F-25
<PAGE>
NYMA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND
QUARTERS ENDED MARCH 31, 1996 AND 1997 (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORY--Inventory of microcomputer equipment and software is carried at
the lower of actual cost or market, using the average cost method.
PROPERTY AND EQUIPMENT--Property and equipment are stated at cost. The cost
of maintenance and repairs is charged to expense as incurred; significant
renewals and betterments are capitalized. Depreciation and amortization are
provided over the expected useful lives of the assets, which range from five to
seven years, generally using accelerated methods. Leasehold improvements are
amortized over the lease term or expected useful life, whichever is shorter.
OTHER ASSETS--Other assets consist of cash surrender value on life insurance
policies for certain officers of the Company (see Note 8). No policy loans exist
at December 31, 1995 and 1996.
INCOME TAXES--The Company records its provision for income taxes in
accordance with Statement of Financial Accounting Standards No. 109 (SFAS 109).
SFAS 109 requires the Company to record a provision for deferred income taxes
for differences between the basis of certain assets and liabilities for income
tax and financial statement reporting purposes, and between reporting methods
for income tax return and financial statement reporting purposes, which will
create taxable income or deductions in future periods.
INTERIM FINANCIAL STATEMENTS (UNAUDITED)--In the opinion of management, the
accompanying unaudited financial statements contain all adjustments (consisting
only of various normal accruals) necessary to present fairly the Company's
financial position, results of operations, and cash flows. The results of
operations for the quarter ended March 31, 1997, are not necessarily indicative
of the results of operations to be expected for the full year.
NEW ACCOUNTING PRONOUNCEMENTS--Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based Compensation, was adopted by the
Company during 1996. However, the Company did not adopt the recognition and
measurement principles of SFAS No. 123 and therefore will provide only the
applicable disclosures.
2. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following at December 31, 1995 and 1996:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Billed........................................................ $ 17,487 $ 13,819
Unbilled...................................................... 9,800 10,800
--------- ---------
$ 27,287 $ 24,619
--------- ---------
--------- ---------
</TABLE>
Unbilled receivables at December 31, 1995 and 1996, include approximately
$5,325 and $5,753, respectively, for amounts billed in January 1996 and 1997,
respectively. The remainder represents differences between actual and
provisional overhead rates for years open to government audit (see Note 8) and
contract retainages. Retainages are generally billable upon acceptance of work
by customers or completion of contract audits by the government.
F-26
<PAGE>
NYMA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND
QUARTERS ENDED MARCH 31, 1996 AND 1997 (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31, 1995 and
1996:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Office furniture and equipment..................................................... $ 1,294 $ 1,353
Computer equipment................................................................. 1,633 2,187
Leasehold improvements............................................................. 19 19
--------- ---------
2,946 3,559
Accumulated depreciation and amortization.......................................... (1,996) (2,612)
--------- ---------
$ 950 $ 947
--------- ---------
--------- ---------
</TABLE>
4. NOTE PAYABLE
Under the terms of a revolving credit facility agreement, the Company can
borrow up to $13,000, limited by certain percentages of billed accounts
receivable. Borrowings under the line-of- credit agreement bear interest at the
one-month LIBOR (5.50% at December 31, 1996) plus 1.75% and are due on June 30,
1997. Borrowings are payable at maturity with interest payable monthly. At
December 31, 1996, $8,923 was outstanding under this agreement.
The borrowings are predominately collateralized by accounts receivable,
certain contract rights, and certain other assets of the Company. The three
primary stockholders of the Company have provided unconditional and unlimited
personal guarantees, until the time when the Company meets certain specific
financial results.
The line-of-credit agreement contains certain covenants (as defined in such
agreement) requiring the Company to maintain, among other things, specified
ratios of total liabilities to tangible net worth and a fixed charge coverage
ratio as well as other financial and nonfinancial covenants.
The fair value of the Company's note payable is considered to be equivalent
to its carrying value based upon consideration of borrowings with similar credit
ratings, collateral, and maturity.
5. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) plan covering substantially all of its employees.
Company contributions are equal to 50% of each employee's contribution, subject
to certain limitations. For the years ended December 31, 1994, 1995 and 1996,
the Company contributed approximately $962, $975 and $938, respectively, to this
plan.
F-27
<PAGE>
NYMA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND
QUARTERS ENDED MARCH 31, 1996 AND 1997 (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
6. INCOME TAXES
INCOME TAX PROVISION--The provision (benefit) for income taxes consists of
the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Current:
Federal..................................................................... $ (920) $ 696 $ 68
State....................................................................... (312) 110 (15)
Deferred.................................................................... 1,971 (512) 494
--------- --------- ---------
$ 739 $ 294 $ 547
--------- --------- ---------
--------- --------- ---------
</TABLE>
DEFERRED INCOME TAXES--The principal components of the deferred portion of
the provision for income taxes for the years ended December 31, 1994, 1995, and
1996 are as follows:
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Accrual to cash conversion................................................... $ 1,828 $ (378) $ 687
Contractually unbilled revenue............................................... 70 (45) --
Other........................................................................ 73 (89) (193)
--------- --------- ---------
$ 1,971 $ (512) $ 494
--------- --------- ---------
--------- --------- ---------
</TABLE>
The approximate tax effect of each type of temporary difference that gave
rise to the Company's deferred tax liability at December 31, 1995 and 1996, is
as follows:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Accrual to cash conversion......................................................... $ (4,510) $ (5,197)
Other.............................................................................. (45) 148
--------- ---------
Current deferred tax liability..................................................... $ (4,555) $ (5,049)
--------- ---------
--------- ---------
</TABLE>
Effective and Statutory Rate Reconciliation. The difference between the
effective rate in the provision for income taxes and the statutory rate for the
federal income taxes is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Statutory federal income tax rate............................................... 35% 35% 35%
Provision computed at federal statutory rate.................................... $ 455 $ 233 $ 469
State income taxes, net of federal benefit...................................... 78 73 67
Increase in deferred taxes due to higher expected rates......................... 150 -- --
Other........................................................................... 56 (12) 11
--------- --------- ---------
$ 739 $ 294 $ 547
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-28
<PAGE>
NYMA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND
QUARTERS ENDED MARCH 31, 1996 AND 1997 (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
7. STOCKHOLDERS' EQUITY
The Company has granted options to key employees to purchase shares of
common stock exercisable at prices ranging from $.50 to $3.35 per share, which
approximates the fair market value of the Company's stock at date of grant, as
determined by the Board of Directors. Under the provisions of APB Opinion No.
25, no compensation expense is recognized.
During the year ended December 31, 1996, option holders exercised options
for 24,300 shares. The difference between the exercise price and the fair market
value of the stock at date of exercise resulted in taxable income to the
optionee. The Company received a deduction for income tax purposes equal to the
optionees' taxable income, which resulted in a reduction in taxes payable and an
increase in additional paid-in capital equal to the tax effect of $55 for the
year ended December 31, 1996.
Options for 144,900 and 163,945 shares were exercisable at December 31, 1995
and 1996, respectively. The remaining options become exercisable over periods
ranging from five to ten years. The schedule of option activity for the years
ended December 31, 1994, 1995, and 1996, is as follows:
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Outstanding, beginning of year......................................... 144,450 167,850 184,800
Granted................................................................ 45,500 26,500 175,700
Canceled............................................................... (4,550) (9,300) (20,700)
Exercised.............................................................. (17,550) (250) (24,300)
--------- --------- ---------
Outstanding, end of year............................................... 167,850 184,800 315,500
--------- --------- ---------
--------- --------- ---------
</TABLE>
In 1996 the Company adopted the disclosure provisions of SFAS No. 123. The
Company accounts for its stock-based compensation plan under APB No. 25. For
SFAS No. 123 purposes, the fair value of each option has been estimated as of
the date of grant using the minimum value method with a risk-free interest rate
of 6.18% and an expected life of five years. Using these assumptions, the fair
value of the stock options is $175, which would be amortized over the expected
life of the options. Had compensation expense been determined consistent with
SFAS No. 123 utilizing the assumptions detailed above, the Company's net
earnings for the year ended December 31, 1996, would have been reduced to the
following pro forma amount:
<TABLE>
<S> <C>
Net earnings:
As reported................................................................ $ 800
Pro forma.................................................................. 765
</TABLE>
The resulting pro forma compensation expense may not be representative of
that expected in future years.
8. COMMITMENTS AND CONTINGENCIES
LEASES--The Company leases office facilities, automobiles, and certain
office equipment under long-term operating lease agreements with terms extending
to 2000. Certain of these leases contain provisions for renewal options and rent
escalations to provide for increases in operating costs. In addition, the
Company has executed a letter of credit in the amount of $45 in lieu of a lease
deposit on its corporate
F-29
<PAGE>
NYMA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND
QUARTERS ENDED MARCH 31, 1996 AND 1997 (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
headquarters building. Certain officers of the Company are limited partners in a
partnership that owns the corporate headquarters.
The approximate aggregate future minimum lease payments as of December 31,
1996, for leases with remaining terms in excess of one year, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- -----------------------------------------------------------------------------------------------
<S> <C>
1997........................................................................................... $ 3,687
1998........................................................................................... 3,562
1999........................................................................................... 162
2000........................................................................................... 37
---------
$ 7,448
---------
---------
</TABLE>
Rental expense for operating leases for the years ended December 31, 1994,
1995 and 1996, was approximately $3,247, $3,065 and $3,362, respectively.
AUDITS--The Company is subject to contract cost audits by government
agencies. Completed and future audits may result in various billed and unbilled
costs being disallowed. At December 31, 1996, audits have been completed through
1993. In the opinion of management, adequate reserves have been provided for the
results of remaining open audit periods.
LITIGATION--The Company is a defendant in various legal actions arising in
the normal course of business. Management believes that the ultimate liability,
if any, resulting from these actions will not have a material effect upon
results of operations or financial position.
STOCK RESTRICTION AND REPURCHASE AGREEMENT--The Company and three of its
stockholders, representing 3,543,825 shares of the 3,611,000 shares issued and
outstanding at December 31, 1996, are parties to an agreement restricting any
transfer of Company stock without prior written consent of all other parties to
this agreement. Upon the death of a stockholder, the Company shall pay to the
estate or surviving spouse an amount, as outlined below, equal to the value of
all the deceased party's shares of stock in the Company. The Company owns life
insurance policies on these stockholders in connection with this agreement (see
Note 1).
The purchase price per share is to be determined as the greater of net book
value per share (total stockholders' equity divided by the total number of
shares issued and outstanding) using the next available audited financial
statements or an independently appraised value per share determined by
appraisers, selected by the Company, based upon the next available audited
financial statements. Further, per the agreement, the purchase price for shares
of one of the stockholders, representing 2,040,000 shares at December 31, 1996,
shall be discounted by 60% of the value of the above determined purchase price
per share. The estate or surviving spouse shall surrender all shares of the
party's stock to the Company within three months of such party's death.
F-30
<PAGE>
NYMA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND
QUARTERS ENDED MARCH 31, 1996 AND 1997 (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Payment by the Company shall be made in five equal installments. The first
installment is to be made within eighteen months of the party's death and the
remaining payments are to be made in consecutive annual disbursements on the
anniversary of the first payment. Interest shall accrue at the imputed interest
rate applicable to similar extensions of credit in accordance with the U.S.
Internal Revenue Code. Prepayment by the Company in whole or in part of the
entire balance is permitted.
9. SUBSEQUENT EVENT-MERGER
On May 2, 1997, the Company's stockholders sold their shares of the
Company's stock, including shares under options outstanding which were exercised
prior to closing, to Federal Data Corporation for cash, a subordinated note, and
other incentives.
* * * * * *
F-31
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Sylvest Management Systems Corporation
We have audited the accompanying balance sheets of Sylvest Management
Systems Corporation ("the Company") as of December 31, 1995 and 1996, and the
related statements of operations, changes in shareholders' 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 Sylvest Management Systems
Corporation as of December 31, 1995 and 1996 and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1996 in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Washington, D.C.
March 21, 1997, except for Notes 5 and 10,
as to which the date is June 30, 1997
F-32
<PAGE>
SYLVEST MANAGEMENT SYSTEMS CORPORATION
BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................................................... $ 3,580 $ 1,603
Accounts receivable, net of allowance for doubtful accounts of $73, $168 and $168 as of
December 31, 1995 and 1996 and June 30, 1997, respectively.............................. 14,708 27,864
Unbilled costs............................................................................ 2,188 1,881
Prepaid expenses and other current assets................................................. 157 495
--------- ---------
Total current assets.................................................................... 20,633 31,843
Property and equipment, net................................................................. 1,154 1,281
Deposits and other assets................................................................... 27 21
--------- ---------
Total assets............................................................................ $ 21,814 $ 33,145
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank line of credit....................................................................... $ 6,915 $ 5,406
Accounts payable.......................................................................... 9,184 19,545
Accrued expenses.......................................................................... 780 2,272
Other current liabilities................................................................. 460 225
Payable to Federal Data Corporation....................................................... -- --
--------- ---------
Total current liabilities............................................................... 17,339 27,448
--------- ---------
Commitments
Shareholders' equity:
Common stock, $1.00 par value; 1,000 shares authorized, issued and outstanding............ 1 1
Additional paid-in capital................................................................ 45 45
Notes receivable from shareholders........................................................ (400) (400)
Retained earnings......................................................................... 4,829 6,051
--------- ---------
Total shareholders' equity.............................................................. 4,475 5,697
--------- ---------
Total liabilities and shareholders' equity.............................................. $ 21,814 $ 33,145
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-33
<PAGE>
SYLVEST MANAGEMENT SYSTEMS CORPORATION
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1994 1995 1996
--------- --------- ---------- SIX MONTHS ENDED JUNE
30,
------------------------
1996 1997
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue.............................................. $ 58,988 $ 84,013 $ 106,544 $ 29,515 $ 78,863
--------- --------- ---------- ----------- -----------
Costs and expenses:
Cost of sales and services......................... 50,909 71,483 92,736 25,054 70,312
Selling, general and administrative expenses....... 6,805 10,672 11,376 4,772 10,213
--------- --------- ---------- ----------- -----------
57,714 82,155 104,112 29,826 80,525
--------- --------- ---------- ----------- -----------
Operating income (loss).............................. 1,274 1,858 2,432 (311) (1,662)
Interest expense, net................................ (130) (349) (340) (161) (297)
Other income (expense), net.......................... 22 42 (2) -- --
--------- --------- ---------- ----------- -----------
Income (loss) before income taxes.................... 1,166 1,551 2,090 (472) (1,959)
Provision (benefit) for income taxes................. 14 19 47 -- --
--------- --------- ---------- ----------- -----------
Net income (loss)................................ $ 1,152 $ 1,532 $ 2,043 $ (472) $ (1,959)
--------- --------- ---------- ----------- -----------
--------- --------- ---------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-34
<PAGE>
SYLVEST MANAGEMENT SYSTEMS CORPORATION
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------------ PAID-IN NOTES RECEIVABLE RETAINED
SHARES AMOUNT CAPITAL FROM SHAREHOLDERS EARNINGS TOTAL
----------- ----------- ------------- ----------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993.................... 1,000 $ 1 $ 45 $ (400) $ 3,283 $ 2,929
Distributions to shareholders................... -- -- -- -- (394) (394)
Net income...................................... -- -- -- -- 1,152 1,152
----- --- --- ----- --------- ---------
Balance at December 31, 1994.................... 1,000 1 45 (400) 4,041 3,687
Distributions to shareholders................... -- -- -- -- (744) (744)
Net income...................................... -- -- -- -- 1,532 1,532
----- --- --- ----- --------- ---------
Balance at December 31, 1995.................... 1,000 1 45 (400) 4,829 4,475
Distributions to shareholders................... -- -- -- -- (821) (821)
Net income...................................... -- -- -- -- 2,043 2,043
----- --- --- ----- --------- ---------
Balance at December 31, 1996.................... 1,000 1 45 (400) 6,051 5,697
Distributions to shareholders................... -- -- -- 400 (2,345) (1,945)
Net income...................................... -- -- -- -- (1,959) (1,959)
----- --- --- ----- --------- ---------
Balance at June 30, 1997 (unaudited)............ 1,000 $ 1 $ 45 $ -- $ 1,747 $ 1,793
----- --- --- ----- --------- ---------
----- --- --- ----- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-35
<PAGE>
SYLVEST MANAGEMENT SYSTEMS CORPORATION
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- --------- SIX MONTHS ENDED JUNE
30,
------------------------
1996 1997
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Reconciliation of net income (loss) to net cash
provided by (used in) operating activities:
Net income (loss)...................................... $ 1,152 $ 1,532 $ 2,043 $ (472) $ (1,959)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization........................ 170 301 461 277 247
Loss on disposal of property and equipment........... -- -- 23 17 --
Deferred income taxes................................ 11 (7) (6) -- --
Changes in operating assets and liabilities:
Accounts receivable................................ (9,557) 5,938 (13,156) 2,889 (2,990)
Unbilled costs..................................... (104) (857) 307 219 (153)
Prepaid expenses and other current assets.......... (563) 1,064 (338) (52) 779
Deposits and other assets.......................... (202) 194 6 (34) (89)
Accounts payable................................... 4,772 (2,600) 10,361 (1,388) 253
Accrued expenses................................... 575 (189) 1,492 75 (133)
Other current liabilities.......................... 377 (719) (229) (438) (159)
--------- --------- --------- ----------- -----------
Net cash provided by (used in) operating activities.... (3,369) 4,657 964 1,093 (4,204)
--------- --------- --------- ----------- -----------
Cash flows from investing activities:
Purchases of property and equipment.................. (258) (832) (611) (301) (104)
--------- --------- --------- ----------- -----------
Net cash used in investing activities.................. (258) (832) (611) (301) (104)
--------- --------- --------- ----------- -----------
Cash flows from financing activities:
Net borrowings (repayments) on bank line of credit... 5,765 (1,330) (1,509) (2,378) (5,378)
Borrowings from Federal Data Corporation............. -- -- -- -- 13,353
Distributions to shareholders........................ (394) (744) (821) (379) (2,007)
--------- --------- --------- ----------- -----------
Net cash provided by (used in) financing activities.... 5,371 (2,074) (2,330) (2,757) 5,968
--------- --------- --------- ----------- -----------
Net increase (decrease) in cash........................ 1,744 1,751 (1,977) (1,965) 1,660
Cash at the beginning of the period.................... 85 1,829 3,580 3,580 1,603
--------- --------- --------- ----------- -----------
Cash at the end of the period.......................... $ 1,829 $ 3,580 $ 1,603 $ 1,615 $ 3,263
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-36
<PAGE>
SYLVEST MANAGEMENT SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED)
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Sylvest Management Systems Corporation ("the Company") was organized in
March 1987 and incorporated in May 1987 to design and implement open systems
solutions. The U.S. Government accounted for approximately 70%, 75% and 70% of
total revenue for the years ended December 31, 1994, 1995 and 1996,
respectively, and is the Company's primary customer. Most contracts with
government agencies expire on September 30 of each year (the Federal
government's fiscal year-end) and are renewable for additional fiscal years
subject to adequate funding. The Company generated 11% and 10% of its revenue
from one customer in 1995 and 1996, respectively. In 1994, the Company generated
approximately 13% of its revenue from one customer and 10% of its revenue from
another customer.
REVENUE RECOGNITION
The Company generally recognizes revenue from hardware and software sales at
the time of shipment. Service and maintenance revenue is recognized ratably over
the contractual period or as the services are performed.
UNBILLED COSTS
Unbilled costs represent amounts incurred for contractual obligations which
have not been invoiced or shipped to the customer pursuant to contractual terms.
PROPERTY AND EQUIPMENT
Property and equipment is carried at cost. Depreciation and amortization are
recorded over the estimated useful lives of the assets ranging from three to
five years, primarily by the straight-line method. When assets are sold or
otherwise disposed of, the cost and related accumulated depreciation or
amortization are removed from the accounts and resulting gains or losses are
included in operations. The cost of additions and betterments are capitalized.
Repair and maintenance costs are expensed as incurred.
Management periodically monitors the carrying value of property and
equipment and other long-lived assets for potential impairment on an on-going
basis. The impairment amount would be determined by comparing the carrying value
of these assets with their related, expected future net cash flows. Should the
sum of the related, expected future net cash flows be less than the carrying
value, management would determine whether an impairment loss should be
recognized. An impairment loss would be measured by the amount by which the
carrying value of these assets exceeds the future discounted cash flows. For the
years ended December 31, 1994, 1995 and 1996 there were no adjustments to the
carrying values of property and equipment.
INCOME TAXES
The Company has elected to be treated as an S Corporation for federal income
tax purposes. Accordingly, elements of income and expense will pass through
directly to shareholders. The Company remains a taxable entity for those states
which do not recognize the S Corporation status. Taxes for these
F-37
<PAGE>
SYLVEST MANAGEMENT SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED)
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
states are accounted for using the liability method whereby deferred tax assets
and liabilities are determined based upon differences between financial
reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse. Valuation allowances are established when necessary to
reduce deferred tax assets to amounts expected to be realized. Income tax
expense represents the tax payable for the period and the change during the
period in deferred tax assets and liabilities.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations
of credit risk consist of cash and accounts receivable. The Company maintains
its cash in one U.S. commercial bank. Accounts receivable result primarily from
shipments and contracts with the U.S. Government. Contracts with the U.S.
Government do not require collateral or other arrangements. The Company does not
believe significant credit risk exists at December 31, 1996.
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 as of the
dates of the financial statements, and the reported amounts of revenue and
expenses during the reported periods. Actual results could differ from
management's estimates.
FINANCIAL INSTRUMENTS
The carrying value of cash, accounts receivable and accounts payable
approximates fair value, because of the relatively short maturities of these
instruments. The carrying value of the bank line of credit approximates fair
value since it carries a fluctuating market interest rate.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1995 financial statement
amounts to conform to the current year presentation.
2. NOTES RECEIVABLE FROM SHAREHOLDERS
In December 1993, the Company made advances in the form of promissory notes
to its two principal shareholders in the amount of $200 each. In 1996 the
maturity dates of the promissory notes were extended from December 16, 1996 to
December 15, 1997. The outstanding principal is due in full on December 15,
1997. Interest is due and payable monthly at the prime rate (8.5%, 8.5% and
8.25% at December 31, 1994, 1995 and 1996 respectively) plus 1%. Total interest
income earned on these notes was approximately $38 during each of the three
years in the period ended December 31, 1996.
F-38
<PAGE>
SYLVEST MANAGEMENT SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED)
(DOLLARS IN THOUSANDS)
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Equipment..................................................................................... $ 966 $ 1,379
Furniture and fixtures........................................................................ 299 365
Automobiles................................................................................... 147 150
Computer software............................................................................. 428 485
Leasehold improvements........................................................................ 92 130
--------- ---------
1,932 2,509
Accumulated depreciation and amortization..................................................... (778) (1,228)
--------- ---------
Property and equipment, net................................................................... $ 1,154 $ 1,281
--------- ---------
--------- ---------
</TABLE>
Depreciation expense for the years ended December 31, 1994, 1995 and 1996
was $170, $301, and $461, respectively.
4. ACCOUNTS PAYABLE
As of December 31, 1996, accounts payable includes approximately $2,400 in
amounts payable to an international asset-based lender under an arrangement
established to facilitate the purchase of inventory under a major U.S.
Government contract. Under this arrangement, the lender directly pays the
vendors for purchases made by the Company. The arrangement provides the Company
with up to $7,000 in credit for inventory purchases. The terms of the
arrangement enable the Company to repay outstanding amounts paid by the lender,
interest free, within a stipulated time period from the initial purchase from
the vendors. After the stipulated time period, interest under this arrangement
accrues at the prime rate as determined by Chase Manhattan Bank (8.25% at
December 31, 1996). The Company generally pays its outstanding amounts within
the stipulated time period and therefore incurs minimal interest expense. This
arrangement requires the Company to maintain a minimum tangible net worth and
establishes a maximum debt to tangible net worth ratio. As of December 31, 1996,
the Company was in compliance with these covenants.
In connection with this arrangement, the Company entered into an
Intercreditor and Subordination Agreement (the "Intercreditor Agreement")
between a local bank that has extended the Company a line of credit (see Note 5)
and the international asset-based lender. Under the Intercreditor Agreement, all
advances made by the international asset-based lender are collateralized by the
Company's unbilled costs and accounts receivable resulting from the sale of
inventory purchased under the above arrangement.
5. BANK LINE OF CREDIT
The Company, pursuant to a revolving credit agreement with a local bank, may
borrow up to $15,000, subject to a borrowing base defined in the agreement,
which expired May 31, 1997. All loans made under the revolving credit agreement
are collateralized by all accounts receivable other than those collateralizing
advances under the Intercreditor Agreement (see Note 4). Upon the closing of the
acquisition of the
F-39
<PAGE>
SYLVEST MANAGEMENT SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED)
(DOLLARS IN THOUSANDS)
5. BANK LINE OF CREDIT (CONTINUED)
Company by Federal Data Corporation (see Note 10), all outstanding balances
under the line of credit were repaid in full by Federal Data Corporation and the
line was canceled.
The revolving credit agreement requires the Company to comply with certain
restrictive covenants. The most restrictive of these covenants requires the
Company to maintain a minimum tangible net worth of $4,000. As of December 31,
1996, the Company was in compliance with this covenant. The repayment of the
credit agreement is personally guaranteed by the President of the Company. The
terms of the agreement require payment of interest at the bank's prime rate
(8.5%, 8.5% and 8.25% at December 31, 1994, 1995 and 1996, respectively) plus
one quarter of one percent. Interest expense incurred in connection with the
revolving credit agreement approximated $130, $430 and $430 for the years ended
December 31, 1994, 1995 and 1996, respectively.
6. INCOME TAXES
The provision for (benefit from) state income taxes consists of the
following:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Current...................................................................................... $ 3 $ 26 $ 53
Deferred..................................................................................... 11 (7) (6)
--- --- ---
$ 14 $ 19 $ 47
--- --- ---
--- --- ---
</TABLE>
Net deferred state income tax liabilities, included in other current
liabilities, were $9 and $15 as of December 31, 1996 and 1995, respectively.
Deferred taxes result principally from accelerated depreciation, timing of
certain liabilities and different revenue recognition methods for tax purposes
on the shipment of products.
7. COMMITMENTS
The Company leases office space under noncancelable operating leases
expiring through 1997. The Company is reviewing its options for its future
office space requirements. In addition, the Company leases certain equipment on
an annual basis. Aggregate rent expense for the years ended December 31, 1994,
1995 and 1996 was approximately $281, $571 and $702, respectively.
Future minimum annual rental commitments for noncancelable leases are as
follows as of December 31, 1996:
<TABLE>
<CAPTION>
OPERATING LEASES
-----------------
<S> <C>
1997......................................................................... $ 379
-----
$ 379
-----
-----
</TABLE>
F-40
<PAGE>
SYLVEST MANAGEMENT SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED)
(DOLLARS IN THOUSANDS)
8. 401(K) PLAN
During 1993, the Company established the Sylvest Management Systems
Corporation 401(k) Profit Sharing Plan and Trust ("the Plan") which covers all
employees who have completed one year of service and are at least 21 years of
age or were employed on April 15, 1993, the effective date of the Plan.
Effective January 1, 1994, the Plan was amended to make all employees who are
least 18 years of age eligible to participate in the Plan on the date of hire.
Eligible employees may contribute up to 15% of their salary, subject to certain
annual limits. The Company at its discretion may make contributions to the Plan
for all employees who have completed 1,000 hours of service. The Company
recognized expense of $100, $50 and $100 for 1994, 1995 and 1996, respectively,
for contributions to the Plan.
9. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Interest paid............................................................................. $ 116 $ 386 $ 435
--------- --------- ---------
--------- --------- ---------
Income taxes paid......................................................................... $ 13 $ 12 $ 35
--------- --------- ---------
--------- --------- ---------
</TABLE>
10. SUBSEQUENT EVENT-MERGER
On June 30, 1997, the Company's shareholders sold their shares of the
Company's stock to Federal Data Corporation for cash, a subordinated note, and
other incentives.
11. INTERIM INFORMATION (UNAUDITED)
The interim financial information for the six months ended June 30, 1996 and
1997 is unaudited. The unaudited interim financial statements reflect, in the
opinion of management, all adjustments (which include only normal recurring
adjustments) necessary to fairly present the results of operations, changes in
cash flows and financial position as of and for the periods presented. The
unaudited interim financial information should be read in conjunction with the
audited financial statements and related notes thereto. The results for the
interim periods presented are not necessarily indicative of results to be
expected for the full year.
The interim balance sheet as of June 30, 1997 has been excluded from the
financial statements based on the fact that, effective June 30, 1997, the
Company was acquired by Federal Data Corporation (see Note 10). In connection
with the acquisition, the Company incurred a note payable to Federal Data
Corporation for approximately $13.3 million in connection with the repayment of
the existing line of credit balance and the payment of certain operating
liabilities outstanding as of June 30, 1997. Further, in connection with the
acquisition, the notes receivable from shareholders existing as of December 31,
1996 was forgiven and reflected as a distribution in the statement of changes in
shareholders' equity.
F-41
<PAGE>
- ------------------------------------------------
------------------------------------------------
- ------------------------------------------------
------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFER
CONTAINED HEREIN OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL,
OR THE SOLICITATION OF AN OFFER TO BY, TO ANY PERSON IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE HEREOF.
--------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary............................. 4
Summary Unaudited Pro Forma Consolidated
Financial Data............................... 14
Risk Factors................................... 16
The Exchange Offer............................. 23
The Recapitalization and the Transactions...... 34
Use of Proceeds................................ 35
Capitalization................................. 36
Selected Unaudited Pro Forma Consolidated
Financial Data............................... 37
Selected Consolidated Historical Financial Data
of Federal Data Corporation.................. 42
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 44
Business....................................... 51
Management..................................... 63
Executive Compensation......................... 65
Principal Stockholders......................... 67
Certain Transactions........................... 68
Description of Certain Indebtedness............ 69
Description of Notes........................... 71
Certain Federal Income Tax Considerations...... 102
Plan of Distribution........................... 102
Legal Matters.................................. 103
Experts........................................ 103
Available Information.......................... 103
Index to Financial Statements.................. F-1
</TABLE>
FEDERAL DATA CORPORATION
OFFER TO EXCHANGE
10 1/8% SENIOR SUBORDINATED
NOTES DUE 2005
FOR ALL OUTSTANDING
10 1/8% SENIOR SUBORDINATED
NOTES DUE 2005
---------------------
PROSPECTUS
---------------------
DECEMBER 22, 1997
- ------------------------------------------------
------------------------------------------------
- ------------------------------------------------
------------------------------------------------
