<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 23, 1998
REGISTRATION NO. 333-48703
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
PRE-EFFECTIVE
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ATLANTIC DATA SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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MASSACHUSETTS 7379 04-2696393
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
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ATLANTIC DATA SERVICES, INC.
ONE BATTERYMARCH PARK
QUINCY, MASSACHUSETTS 02169
(617) 770-3333
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
ROBERT W. HOWE, CHIEF EXECUTIVE OFFICER AND CHAIRMAN
ATLANTIC DATA SERVICES, INC.
ONE BATTERYMARCH PARK
QUINCY, MASSACHUSETTS 02169
(617) 770-3333
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
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STEPHEN A. HURWITZ, ESQ. PETER B. TARR, ESQ.
MITCHELL S. BLOOM, ESQ. HALE AND DORR LLP
TESTA, HURWITZ & THIBEAULT, LLP 60 STATE STREET
125 HIGH STREET BOSTON, MASSACHUSETTS 02109
BOSTON, MASSACHUSETTS 02110 (617) 526-6000
(617) 248-7000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this registration statement becomes effective.
------------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
- ------------------
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ------------------
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ------------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED APRIL 23, 1998
ATLANTIC DATA SERVICES, INC.
2,500,000 SHARES
COMMON STOCK
[ADS CORPORATE LOGO]
------------------------------
Of the 2,500,000 shares of Common Stock offered hereby, 2,000,000 shares
are being sold by Atlantic Data Services, Inc. ("ADS" or the "Company") and
500,000 shares are being sold by certain stockholders of the Company (the
"Selling Stockholders"). See "Principal and Selling Stockholders." The Company
will not receive any of the proceeds from the sale of shares by the Selling
Stockholders. Prior to this offering, there has been no public market for the
Common Stock of the Company. It is currently estimated that the initial public
offering price of the Common Stock will be between $13.00 and $15.00 per share.
See "Underwriting" for information relating to the method of determining the
initial public offering price. Application has been made to have the Common
Stock approved for listing on the Nasdaq National Market under the symbol
"ADSC."
------------------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 6.
------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE 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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==================================================================================================================
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2)(3) STOCKHOLDERS(3)
- ------------------------------------------------------------------------------------------------------------------
Per Share......................... $ $ $ $
- ------------------------------------------------------------------------------------------------------------------
Total(3).......................... $ $ $ $
</TABLE>
================================================================================
(1) The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters as stated herein (the "Underwriters") against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."
(2) Before deducting offering expenses payable by the Company, estimated at
$750,000.
(3) Certain stockholders of the Company have granted to the Underwriters a
30-day option to purchase an aggregate of up to an additional 375,000 shares
of Common Stock on the same terms as set forth above, solely to cover
over-allotments, if any. If this option is exercised in full, the total
Price to Public, Underwriting Discounts and Commissions and Proceeds to
Selling Stockholders will be $ , $ and $ ,
respectively. See "Underwriting."
------------------------------
The shares of Common Stock are offered by the Underwriters as stated
herein, subject to receipt and acceptance by them and subject to their right to
reject any order in whole or in part. It is expected that delivery of such
shares will be made through the offices of BancAmerica Robertson Stephens, San
Francisco, California, on or about May , 1998.
BANCAMERICA ROBERTSON STEPHENS
BT ALEX. BROWN
ADAMS, HARKNESS & HILL, INC.
THE DATE OF THIS PROSPECTUS IS MAY , 1998
<PAGE> 3
[A diagram depicting the interrelationship among the Company's core
competencies, tools,
methodologies, quality assurance program and practice areas.]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF
THE COMPANY, INCLUDING ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
<PAGE> 4
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING 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, ANY SELLING STOCKHOLDER OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES
OR AN OFFER TO, OR SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN
OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATE HEREOF.
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
------------------------
TABLE OF CONTENTS
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PAGE
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Summary..................................................... 4
Risk Factors................................................ 6
Use of Proceeds............................................. 14
Dividend Policy............................................. 14
Capitalization.............................................. 15
Dilution.................................................... 16
Selected Consolidated Financial Data........................ 17
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 18
Business.................................................... 24
Management.................................................. 33
Certain Transactions........................................ 41
Principal and Selling Stockholders.......................... 42
Description of Capital Stock................................ 44
Shares Eligible for Future Sale............................. 48
Underwriting................................................ 50
Legal Matters............................................... 52
Experts..................................................... 52
Additional Information...................................... 52
Index to Consolidated Financial Statements.................. F-1
</TABLE>
------------------------
The Company was incorporated in Massachusetts in 1980 under the name
Atlantic Data Services, Inc. As used in this Prospectus, references to the
"Company" and "ADS" refer to Atlantic Data Services, Inc. The Company's
principal executive offices are located at One Batterymarch Park, Quincy,
Massachusetts 02169, and its telephone number is (617) 770-3333. The Company
intends to furnish to all of its stockholders an annual report containing
consolidated financial statements audited by its independent accountants for
each fiscal year and quarterly reports containing unaudited financial data for
each of the first three quarters of each fiscal year.
Atlantic Data Services, ADS and the A-D-S logo are service marks of the
Company. Trade names and trademarks of other companies appearing in this
Prospectus are the property of their respective owners.
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<PAGE> 5
SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including information set forth in "Risk Factors" and the
Consolidated Financial Statements and Notes thereto, appearing elsewhere in this
Prospectus. This Prospectus contains forward-looking statements which involve
risks and uncertainties. The Company's actual results may differ materially from
those results discussed in these forward-looking statements and from the results
historically experienced. Factors that might cause such a difference include,
but are not limited to, those discussed in "Risk Factors."
THE COMPANY
Atlantic Data Services, Inc. ("ADS" or the "Company") provides information
technology ("IT") strategy consulting and systems integration services to
customers exclusively in the financial services industry, primarily banks. ADS
offers rapid, cost-effective IT solutions to the business challenges faced by
financial services companies through its in-depth financial services experience,
technological expertise and project management skills. The Company's service
offerings are organized around five practice areas: IT Strategy Consulting,
Consolidations and Conversions, Year 2000 Resolution, Application Outsourcing,
and Electronic Commerce and Home Banking. Since its founding in 1980, ADS has
developed an in-depth knowledge of the banking and financial services industry
and of its changing market and technology dynamics.
The business challenges created by deregulation and consolidation coupled
with the need to maintain existing systems and incorporate new technologies have
forced banks to turn to third party IT providers for assistance in developing IT
solutions to meet their changing needs. Because of the critical importance of
their IT systems, banks seek to engage IT service providers who have in-depth
knowledge of their systems and business processes and who can assume
responsibility for project management and delivery. IT service providers working
with banks must possess extensive experience in the financial services industry
and be fluent in both traditional legacy systems and newer technologies.
However, there is a shortage of professionals who have this combination of
skills. While many banks are concluding that using outside specialists enables
them to develop better IT solutions in less time and to reduce implementation
risks, most IT consulting firms do not have the specialized knowledge of the
financial services industry necessary to assist banks in rapidly and
cost-effectively meeting their business challenges.
ADS enables its customers to leverage their existing IT systems and
personnel to compete more effectively, to rapidly assimilate changing
technologies and to meet their evolving business needs in a timely and
cost-effective manner. The Company works closely with its customers' management
and IT personnel from diagnostic and strategic planning through project
completion. The Company's IT professionals have extensive experience in the
diverse technical environments, legacy hardware platforms, programming
languages, and software used by banks, as well as newer technologies including
client/server applications and the Internet. In addition, the Company has
developed proprietary tools and methodologies designed to reduce the risks
inherent in complex systems implementations. The Company works closely with its
customers to determine the appropriate resources and staffing to assign to their
projects and deploys its staff from throughout the United States to meet a
customer's needs.
The Company seeks to become the leading IT consulting and systems
integration service provider to the financial services industry. Key elements of
this strategy include developing long-term relationships with customers,
particularly large banks that are expanding their operations and service
offerings; leveraging the Company's vertical market expertise into additional
financial services channels; developing new service offerings to meet customers'
evolving needs; entering into relationships with leading software providers to
the financial services industry to increase customer referrals and enhance
industry recognition; and expanding the Company's expertise and market share in
the financial services industry through selective acquisitions.
The Company markets and sells its services directly through its
professional sales staff and senior management. The Company's customers include
ABN-AMRO Information Technology Services, Associated Banc-Corp., BankBoston,
N.A., Canadian Imperial Bank of Commerce, Citizens Savings Bank & Citizens Trust
Company, Fleet Services Corporation, National City Corporation, NationsBank
Corporation (Barnett Bank) and SunTrust Services Corp.
4
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THE OFFERING
Common Stock Offered by the Company........... 2,000,000 shares
Common Stock Offered by the Selling
Stockholders.................................. 500,000 shares
Common Stock to be Outstanding after the
offering(1)................................... 12,768,830 shares
Use of Proceeds............................... For general corporate purposes,
including working capital. See
"Use of Proceeds."
Proposed Nasdaq National Market Symbol........ ADSC
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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FISCAL YEAR ENDED MARCH 31,
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1994 1995 1996 1997 1998
------- ------- ------- ------- -------
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CONSOLIDATED STATEMENTS OF INCOME DATA:
Revenues................................................... $11,872 $14,624 $20,052 $23,843 $42,830
Gross profit............................................... 3,852 5,054 7,675 8,625 18,607
Income from operations..................................... 682 1,536 2,627 3,185 8,303
Discontinued operations, net of tax........................ 1,483 1,245 780 100 --
Net income................................................. 1,398 2,131 2,343 2,041 4,898
Earnings per share of Common Stock and Special Common
Stock(2)................................................. $0.14 $0.21 $0.24 $0.20 $0.49
Pro forma earnings per common share(2)..................... $0.47
=======
Pro forma earnings per common share -- assuming
dilution(2).............................................. $0.46
=======
Dividends declared per share of Common Stock and Special
Common Stock............................................. -- -- $0.40 $0.15 $0.30
======= ======= ======= ======= =======
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<CAPTION>
MARCH 31, 1998
------------------------
ACTUAL AS ADJUSTED(3)
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CONSOLIDATED BALANCE SHEETS DATA:
Cash and cash equivalents................................... $ 3,401 $28,691
Working capital............................................. 7,480 32,770
Total assets................................................ 14,485 39,775
Total stockholders' equity.................................. 8,683 33,973
</TABLE>
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(1) Based on shares outstanding as of March 31, 1998. Excludes 649,510 shares of
Class A Common Stock issuable upon the exercise of options outstanding as of
such date at a weighted average exercise price of $6.41 per share, of which
503,760 stock options were then exercisable at a weighted exercise price of
$4.05 per share. Also does not include 1,628,500 additional shares reserved
for future grants or issuances as of the date of this Prospectus under the
Company's stock option and stock purchase plans. See "Capitalization,"
"Management -- Equity Plans," "-- Director Compensation" and Notes 10-12 of
Notes to Consolidated Financial Statements.
(2) See Note 2 of Notes to Consolidated Financial Statements for information
concerning the calculation of historical and pro forma earnings per common
share.
(3) Adjusted to reflect the sale of 2,000,000 shares of Common Stock offered by
the Company hereby at an assumed initial public offering price of $14.00 per
share and the application of the estimated net proceeds therefrom. See "Use
of Proceeds" and "Capitalization."
Except as otherwise indicated, the information contained in this Prospectus
(i) assumes no exercise of the Underwriters' over-allotment option; (ii) assumes
conversion on a 1-for-1 basis of all of the shares of Special Common Stock and
Class A Common Stock into Common Stock of the Company upon the closing of this
offering; and (iii) reflects a 28-for-1 stock split effected by the Company on
November 6, 1997.
5
<PAGE> 7
RISK FACTORS
This Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements and from the results
historically experienced as a result of certain factors including, without
limitation, those set forth under "Risk Factors" and elsewhere in this
Prospectus. In addition to the other information in this Prospectus, the
following risk factors should be considered carefully in evaluating the Company
and its business before purchasing shares of the Common Stock offered hereby.
VARIABILITY OF QUARTERLY OPERATING RESULTS
Variations in the Company's revenues and operating results have occurred
from quarter to quarter and may continue to occur as a result of a number of
factors. Quarterly revenues and operating results can depend on the number, size
and scope of customer projects commenced and completed during a quarter,
employee utilization rates, billing rates, the number of working days in a
quarter, the timing of introduction of new service offerings, both by the
Company and its competitors, changes in pricing, both by the Company and its
competitors, and general economic conditions. The timing of revenues is
difficult to forecast because the Company's sales cycle is relatively long and
may depend on factors such as the size and scope of projects or other factors
that adversely impact the financial services industry and general economic
conditions.
Because a high percentage of the Company's expenses are relatively fixed, a
variation in the timing of the initiation or the completion of customer
projects, particularly at or near the end of a quarter, can cause significant
variations in operating results from quarter to quarter and could result in
losses. The Company attempts to manage its personnel utilization rates by
closely monitoring project timetables and staffing requirements for new
projects. While professional staff must be adjusted to reflect active projects,
the Company must maintain a sufficient number of senior professionals to oversee
existing customer projects and participate with the Company's sales force in
securing new customer projects. In addition, the Company expects to increase its
operating expenses by increasing its staff. The Company expects to experience a
significant time lag between the date professional staff are hired and the date
such personnel become fully productive. The rate at which new professional staff
become productive could cause material fluctuations in quarterly results of
operations. Furthermore, to the extent such increased operating expenses precede
or are not subsequently followed by increased revenues, the Company's business,
financial condition and results of operations could be materially adversely
affected. In addition, many of the Company's projects are, and may be in the
future, terminable without customer penalty. An unanticipated termination of a
major project or loss of a major customer could require the Company to maintain
or terminate underutilized employees, resulting in a higher than expected number
of unassigned persons or higher than expected severance expenses.
Due to all of the foregoing factors, it is possible that in some future
periods the Company's results of operations will be below the expectations of
public market analysts and investors. In such event, the price of the Company's
Common Stock could be materially adversely affected. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
DEPENDENCE ON THE FINANCIAL SERVICES INDUSTRY
Substantially all of the Company's revenues are derived from customers in
the financial services industry, primarily banks, and the Company expects it
will continue to derive substantially all of its revenues from customers in the
financial services industry for the foreseeable future. Accordingly, unfavorable
economic conditions adversely impacting the financial services industry could
have a material adverse effect on the Company's business, financial condition
and results of operations. For example, the financial services industry has
experienced and may continue to experience cyclical fluctuations in
profitability, which may affect the willingness or ability of participants in
this industry
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to fund projects such as those for which the Company may be engaged. In
addition, because a significant portion of the Company's revenues are derived
from services related to deregulation and consolidation activities in the
financial services industry, changes in the regulatory environment or a
reduction in consolidation activity could have a material adverse effect on the
Company's business, financial condition and results of operations.
CONCENTRATION OF REVENUES; DEPENDENCE ON MAJOR CUSTOMERS
The Company has derived and expects to continue to derive a significant
portion of its revenues from a relatively limited number of customers. For
example, the Company's five largest customers in fiscal 1998 accounted for
approximately 64.5% of revenues. During that same period, Associated Banc-
Corp., First Security Information Technology, Inc., National City Corporation,
NationsBank Corporation (Barnett Bank) and ABN-AMRO Information Technology
Services accounted for approximately 17.4%, 13.7%, 13.3%, 10.1% and 10.0%,
respectively, of revenues. In fiscal 1997, the Company's five largest customers
accounted for approximately 54.0% of revenues, and during the same period First
Security Information Technology, Inc. and Citizens Savings Bank & Citizens Trust
Company accounted for approximately 18.8% and 12.4%, respectively, of revenues.
Revenues and earnings can fluctuate from quarter to quarter based on the number
of major projects engaged in by the Company and the requirements of these
projects. The loss of a major customer or termination of a major project as a
result of an acquisition of a customer by an organization to which the Company
does not currently provide services could have a material adverse effect on the
Company's business, financial condition and results of operations. Although the
Company's largest customers have varied from period to period, the Company
anticipates that its results of operations in any given period will continue to
depend to a significant extent upon revenues from a small number of customers.
There is no assurance that the Company's major customers will continue to
purchase services from the Company at current levels, if at all, or that the
Company will be able to replace revenues from such customers with revenues from
other customers. The loss of, or a significant reduction in revenues from, any
of the Company's major customers could have a material adverse effect on its
business, financial condition and results of operations. See
"Business -- Customers."
MANAGEMENT OF GROWTH
The Company is currently experiencing a period of growth which has placed,
and could continue to place, a strain on the Company's financial and human
resources. From March 31, 1997 through March 31, 1998, the size of the Company's
staff increased from 176 to 295 full-time employees, and further significant
increases are expected to occur in the foreseeable future. The Company's need to
manage its growth effectively will require it to continue to improve its
operational, financial, and other internal systems, and to attract, train,
motivate, manage and retain its employees. If the Company's management is unable
to manage growth effectively or new employees are unable to achieve anticipated
performance levels, the Company's business, financial condition and results of
operations could be materially adversely affected. Potential investors should
consider the risks, expenses and difficulties frequently encountered in
connection with the operation and development of an expanding business.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant extent upon a number of key
management personnel, principally its Chairman and Chief Executive Officer,
Robert W. Howe, and its President and Chief Operating Officer, William H.
Gallagher, the loss of either of whom could have a material adverse effect on
the Company's business, financial condition and results of operations. The
Company has employment agreements with each of these individuals, and with its
Senior Vice President, Finance and Administration and Chief Financial Officer,
Paul K. McGrath, its Executive Vice President and Director of Operations, Peter
A. Cahill, and its Executive Vice President and Director of Business
Development, David E. Olsson. The Company does not have non-competition
agreements with any of
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<PAGE> 9
its executive officers or other employees. The Company has purchased $5.5
million in key man insurance policies on the life of each of Messrs. Howe and
Gallagher. See "Management -- Employment Agreements."
AVAILABILITY OF PROFESSIONAL STAFF
The Company's business involves the delivery of professional services and
is therefore labor-intensive. The Company's success will depend in large part on
its ability to attract, train, motivate and retain highly skilled employees.
Qualified project managers are in especially great demand and are likely to
remain a limited resource for the foreseeable future. There is no assurance that
the Company will continue to attract sufficient numbers of highly skilled
employees and to retain its existing project managers and other senior
personnel. The loss of some or all of the Company's senior staff could have a
material adverse effect on its business, financial condition and results of
operations, including its ability to secure and complete customer projects on a
timely basis.
COMPETITION
The IT and systems integration market, especially in the financial services
industry, includes a large number of competitors and is subject to rapid
technological and market changes. The Company competes for customer projects and
experienced personnel with a number of companies having significantly greater
financial, technical and marketing resources and revenues than the Company. Many
of these competitors also have greater name recognition in the financial
services industry. ADS's competitors operate in a variety of market segments
including systems consulting and integration, application software, professional
services (such as computer equipment companies like International Business
Machines Corporation), multinational accounting firms, and general management
consulting firms (such as Andersen Consulting, Computer Sciences Corporation and
Electronic Data Systems Corporation). In addition, the custom software
development market is highly fragmented with numerous firms, many of which focus
on their respective local markets. The Company also faces competition from
internal IT departments of its customers.
The Company expects to experience increasing competition from companies
offering established integration services and new service offerings and
technologies. In addition, current and potential competitors may make strategic
acquisitions or establish cooperative relationships among themselves or with
others, thereby increasing their ability to expand or increase their service
offerings to address the needs of ADS's existing or prospective customers.
Accordingly, it is possible that new competitors or alliances among current and
new competitors may emerge and rapidly gain significant market share. Increased
competition could result in lower utilization rates, billing rate reductions,
fewer customer engagements, reduced gross margins, and loss of market share for
the Company, any of which could materially adversely affect its business,
financial condition and results of operations.
To be successful in the future, the Company must respond promptly and
effectively to customer demands, technological changes and competitors'
innovations. The Company's competitors may be able to respond more quickly than
the Company to new or emerging technologies and changes in customer requirements
and devote greater resources to the development, promotion and sale of new
service offerings to prospective customers. There is no assurance that the
Company will be able to compete successfully with existing or new competitors or
that competition will not have a material adverse effect on its business,
financial condition and results of operations.
RAPID TECHNOLOGICAL CHANGE
The Company's success will depend in part on its ability to develop IT
solutions that keep pace with rapid changes in computing technology, evolving
industry standards and changing customer needs and preferences. In particular,
the Company's future success will depend upon its ability to develop and
introduce new service offerings, improve existing service offerings and develop
and maintain skills necessary to keep pace with changing technologies. There is
no assurance that the
8
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Company will be successful in developing, introducing and marketing such service
offerings on a timely and cost-effective basis, or that such service offerings,
if developed, will be accepted in the market. In addition, there is no assurance
that products, technologies or service offerings developed by others will not
render the Company's services uncompetitive or obsolete. The Company's failure
to address these challenges could have a material adverse effect on its
business, financial condition and results of operations.
RISK OF FIXED PRICE CONTRACTS
Revenues from fixed price contracts represented approximately 11.6% and
12.1% of the Company's revenues for fiscal 1997 and 1998, respectively. In the
future, the Company's strategy is to increase the percentage of revenues
generated by fixed price contracts. In making proposals for fixed price
contracts, the Company relies on its estimated costs for completing the
projects. These estimates reflect, among other factors, judgments as to the
effectiveness of the Company's technology and services as applied to a
particular project. Any unexpected costs or unanticipated delays in connection
with the performance of fixed price contracts could have a material adverse
effect on the Company's business, financial condition and results of operations.
DEPENDENCE ON THE YEAR 2000 MARKET
A portion of the growth in the Company's revenues in fiscal 1997 and 1998
resulted from increased demand for the Company's services relating to the
diagnosis and resolution of the Year 2000 problem. Although the Company believes
the market for products and services relating to the Year 2000 problem will
continue to grow, there can be no assurance that this market will develop to the
extent anticipated by the Company. In addition, while the Company believes that
demand for Year 2000 services will continue after the turn of the century, this
demand is expected to begin to diminish after the year 2000 as many Year 2000
solutions are implemented and tested. After the overall demand for Year 2000
solutions has been addressed, there is no assurance that the demand for the
Company's other services will not be materially adversely affected. In addition,
there is no assurance that the Company's existing and potential customers will
be willing or able to allocate the resources, financial or otherwise, to address
the Year 2000 problem or that existing or potential customers will understand or
acknowledge the problem. Many organizations may attempt to resolve the problem
internally rather than contract with outside Year 2000 service providers such as
the Company. Due to these factors, the market for Year 2000 products and
services is uncertain and unpredictable. If the market for the Year 2000
products and services fails to grow, or grows more slowly than anticipated, the
Company's business, financial condition and results of operations could be
materially adversely affected.
POTENTIAL FOR CONTRACT LIABILITY; PROJECT RISKS
The Company's services, especially solutions addressing the Year 2000
problem, involve key aspects of customers' businesses and computer systems.
Failures in a customer's system could result in a claim for substantial damages
against the Company, regardless of the Company's actual responsibility for such
failures. The Company attempts to limit contractually its liability for damages
arising from negligent acts, errors, mistakes or omissions in rendering its
services. Despite this precaution, there can be no assurance that the
limitations of liability set forth in its contracts would be enforceable or
would otherwise protect the Company from liability for damages. Additionally,
the Company maintains general liability insurance coverage, including coverage
for errors and omissions in excess of the applicable deductible amount. However,
there is no assurance that such coverage will continue to be available on
acceptable terms, or will be available in sufficient amounts to cover one or
more large claims, or that the insurer will not deny coverage as to any future
claim. The successful assertion of one or more large claims against the Company
that exceed available insurance coverage, or the occurrence of changes in the
Company's insurance policies including premium increases or the imposition of
large deductible or co-insurance requirements, could each have a material
adverse effect on the Company's business, financial condition and results of
operations. Furthermore, litigation, regardless of its
9
<PAGE> 11
outcome, could result in substantial cost to the Company and divert management's
attention from the Company's operations. Any contract liability claim or
litigation against the Company could, therefore, have a material adverse effect
on its business, financial condition and results of operations. Because many of
the Company's projects are mission-critical projects for major financial
institutions, a failure or inability to meet a customer's expectations could
seriously damage the Company's reputation and affect its ability to attract new
business.
CONTROL BY MANAGEMENT
After the offering, the executive officers and directors of the Company
(and their affiliates) will beneficially own approximately 71.3% of the
outstanding Common Stock (approximately 68.7% if the Underwriters'
over-allotment option is exercised in full). As a result, while there is no
agreement among the executive officers and directors of the Company as to the
voting of their Common Stock, if they vote together, they can effectively
control the outcome of matters requiring a stockholder vote, including the
election of directors, adopting or amending provisions of the Company's Articles
of Organization and By-laws, and approving mergers or other similar
transactions, such as sales of substantially all of the Company's assets.
Control by the executive officers and directors could have the effect of
discouraging certain types of transactions involving an actual or potential
change of control of the Company, including transactions in which the holders of
Common Stock might otherwise receive a premium for their shares over then
current market prices. In addition, the possibility of such persons exercising
such control may limit the price that certain investors may be willing to pay in
the future for shares of the Company's Common Stock. Purchasers in this offering
will become minority stockholders of the Company and will be unable to control
the management or business policies of the Company. The Company's Articles of
Organization do not provide for cumulative voting in the election of directors.
See "Management" and "Principal and Selling Stockholders."
POTENTIAL ACQUISITIONS
In the normal course of its business, the Company evaluates potential
acquisitions of businesses and technologies that could complement or expand its
business. Acquisitions may involve difficulties in the retention of personnel,
diversion of management's attention, unexpected liabilities and tax and
accounting issues. If the Company were to complete an acquisition, there is no
assurance that the Company would be able to successfully integrate the acquired
business or technologies into the Company's existing business and operations. In
addition, there is no assurance that an acquisition of any business or
technology will lead to the successful development of new service offerings, or
that any such service offerings, if developed, will achieve market acceptance or
be profitable. If the Company consummates one or more significant acquisitions
in which the consideration consists of stock, or is financed with the net
proceeds of the issuance of stock, stockholders of the Company could suffer a
significant dilution of their equity interests. In addition, if the Company were
to complete an acquisition to expand internationally, the Company's business may
be subject to a variety of risks affecting international operations, including
difficulties in collecting accounts receivable, potentially longer payment
cycles, increased costs associated with maintaining international marketing
efforts, currency fluctuations, exchange rates, changes in regulatory
requirements, and difficulties in enforcement of contractual obligations and
intellectual property rights. There is no assurance that such factors will not
have a materially adverse effect on the Company's business, financial condition
or results of operations.
INTELLECTUAL PROPERTY RIGHTS
The Company's success is dependent upon certain proprietary methodologies
and software tools, including its Engagement Management Methodology, Conversion
Productivity Tool and Year 2000 Methodology, that it uses in providing services
to customers. The Company's business also includes developing custom software
for various customers. Ownership of such software is generally assigned to the
customer, and the Company retains no right, title or interest in it.
10
<PAGE> 12
The Company relies on a combination of trade secret, nondisclosure and
other contractual arrangements, and copyright and trademark laws to protect its
proprietary rights. It currently holds no patents or registered copyrights. The
Company generally enters into confidentiality agreements with its consultants,
customers and potential customers and limits access to and distribution of its
proprietary information. While the Company does not usually enter into
confidentiality agreements with its employees, such employees are generally
required to sign confidentiality agreements in connection with specific client
engagements. There is no assurance that these steps will be adequate to deter
misappropriation of proprietary information of the Company or its customers or
that it will be able to detect unauthorized use of and take appropriate steps to
enforce its intellectual property rights.
In the future, litigation may be necessary to enforce and protect the
Company's trade secrets, copyrights and other intellectual property or
proprietary rights. The Company may also be subject to litigation to defend
against claimed infringement or to determine the scope and validity of the
intellectual property or proprietary rights of others. In the event of
litigation involving the Company's use of technology, the Company could be
required to expend significant resources to develop non-infringing technology or
to obtain licenses to technology involved in litigation. There is no assurance
that the Company would be successful in any such development or that any such
licenses would be available on commercially reasonable terms, if at all.
Although the Company is not aware that its services, trademarks or other
proprietary rights infringe the proprietary rights of others, there is no
assurance that third parties will not assert infringement claims against the
Company and that such claims will not result in a material adverse effect on its
business, financial condition and results of operations. Any litigation
concerning the Company's use of technology could result in substantial cost in
defending such action and divert management's attention from the Company's
operations, either of which could have a material adverse effect on its
business, financial condition and results of operations. Adverse determinations
in such litigation could result in the loss of the Company's proprietary rights,
subject it to significant liabilities, or prevent it from selling its services,
any of which could have a material adverse effect on its business, financial
condition and results of operations. See "Business -- Intellectual Property
Rights."
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the shares of
the Common Stock, and there can be no assurance that an active public market for
the shares of Common Stock will develop or be sustained after the offering. The
initial public offering price will be determined through negotiations among the
Company, the Selling Stockholders and the Underwriters based upon several
factors. See "Underwriting" for a discussion of the factors to be considered in
determining the initial public offering price. The market price of the shares of
Common Stock may be highly volatile and could be subject to wide fluctuations in
response to variations in operating results, announcements of technological
innovations or new services by the Company or its competitors, changes in
financial estimates by securities analysts or other events or factors. In
addition, the financial markets have experienced significant price and volume
fluctuations that have especially affected the market prices of equity
securities of many IT companies and that often have been unrelated to the
operating performance of such companies or have resulted from the failure of the
operating results of such companies to meet market expectations in a particular
quarter. Broad market fluctuations, or any failure of the Company's operating
results to meet market expectations in a particular quarter, may materially
adversely affect the market price of the shares of Common Stock. In the past,
following periods of volatility in the market price of a company's securities,
securities class action litigation has often been instituted against such
company. Such litigation could result in substantial costs and a diversion of
management's attention and resources, which would have a material adverse effect
on the Company's business, financial condition and results of operations.
11
<PAGE> 13
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of the Company's Common Stock in
the public market following this offering, or the perception that such sales
could occur, could materially adversely affect the prevailing market price of
the Common Stock. Immediately after completion of this offering, the Company
will have 12,783,830 shares of Common Stock outstanding, of which the 2,500,000
shares offered hereby will be eligible for sale without regard to volume or
other limitations pursuant to Rule 144 ("Rule 144") under the Securities Act,
unless purchased by "affiliates" of the Company as that term is defined under
Rule 144. The Company, its executive officers, directors and certain
stockholders, who in the aggregate own beneficially 10,283,830 of the remaining
outstanding shares of Common Stock and stock options exercisable for an
additional 420,510 shares of Common Stock have agreed pursuant to lock-up
agreements that they will not sell or otherwise dispose of any shares of Common
Stock beneficially owned by them for a period of 180 days from the date of this
Prospectus. Such agreements provide that BancAmerica Robertson Stephens may, in
its sole discretion and at any time without notice, release all or a portion of
the shares subject to these lock-up agreements. Upon the expiration of these
lock-up agreements, all of such outstanding shares will become immediately
eligible for sale in the public market, subject in some cases to the volume and
other restrictions of Rule 144 or Rule 701 under the Securities Act. Promptly
after the date of this Prospectus, the Company intends to register on one or
more registration statements on Form S-8 all shares of Common Stock issuable
under its stock option and stock purchase plans. Shares covered by such
registration statements will be eligible for sale in the public market after the
effective date of such registration. In addition, the holders of 9,452,040
shares of Common Stock are entitled to certain registration rights with respect
to such shares. If such holders, by exercising their registration rights, cause
a large number of shares to be registered and sold in the public market, such
sales may have a material adverse effect on the market price of the Common
Stock. See "Management -- Executive Compensation," and "-- Equity Plans,"
"Description of Capital Stock" and "Shares Eligible for Future Sale."
POTENTIAL ISSUANCE OF PREFERRED STOCK; ANTI-TAKEOVER EFFECT OF ARTICLES OF
ORGANIZATION AND BY-LAW PROVISIONS AND MASSACHUSETTS LAW
Upon the closing of this offering, the Company's Board of Directors will
have the authority to issue up to 1,000,000 shares of Preferred Stock and to fix
the rights, preferences, privileges and restrictions of such shares without any
further vote or action by the Company's stockholders. Although the Company has
no current plans to issue shares of Preferred Stock, the potential issuance of
Preferred Stock may have the effect of delaying, deferring or preventing a
change in control of the Company, may discourage bids for the Common Stock at a
premium over the market price of the Common Stock and may materially adversely
affect the market price of, and the voting and other rights of the holders of,
Common Stock.
The Company's Board of Directors is divided into three classes, each of
which serves for a staggered three-year term. Such staggered Board may make it
more difficult for a third party to gain control of the Company's Board of
Directors. In addition, certain provisions of the Company's Articles of
Organization and By-laws and of Massachusetts corporate law may be deemed to
have an anti-takeover effect and may discourage takeover attempts not first
approved by the Board of Directors (including takeovers which certain
stockholders may deem to be in their best interests). See "Description of
Capital Stock."
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of Common Stock in this offering will experience an immediate
dilution of $11.34 per share in the pro forma net tangible book value of their
Common Stock from an assumed initial public offering price of $14.00 per share.
Additional dilution is likely to occur upon the exercise of outstanding stock
options. See "Dilution."
12
<PAGE> 14
DISCRETIONARY USE OF PROCEEDS
The Company has no current specific plan for the use of a significant
portion of the estimated net proceeds from this offering. As a consequence, the
Company's management will have the discretion to allocate a large percentage of
the net proceeds to uses that stockholders may not consider desirable, and there
can be no assurance that the net proceeds can or will be invested to yield a
significant return. See "Use of Proceeds."
NO EXPECTATION OF DIVIDENDS
The Company does not expect to pay cash dividends on its Common Stock in
the foreseeable future. See "Dividend Policy."
13
<PAGE> 15
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,000,000 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$25,290,000, assuming an initial public offering price of $14.00 per share and
after deducting underwriting discounts and commissions and estimated offering
expenses payable by the Company. The Company expects to use the net proceeds for
general corporate purposes, including working capital. However, the Company has
not allocated any specific portion of the net proceeds to such purposes, and
management will have the ability to allocate such proceeds at its discretion.
From time to time in the ordinary course of business, the Company evaluates the
potential acquisition of businesses and technologies that complement the
Company's business, for which a portion of the net proceeds may be used.
Currently, the Company does not have any commitments or agreements with respect
to any such acquisitions. Pending use of the net proceeds for the above
purposes, the Company intends to invest such funds in interest-bearing,
investment-grade securities. The Company will not receive any proceeds from the
sale of shares by the Selling Stockholders.
DIVIDEND POLICY
In fiscal 1996, 1997 and 1998, the Company paid aggregate cash dividends of
$4.0 million, $1.5 million and $3.0 million, respectively, in each case to
holders of the Company's Special Common Stock and Common Stock. The Company does
not anticipate that it will pay any cash dividends in the foreseeable future.
The payment of any future dividends will be at the discretion of the Company's
Board of Directors and will depend upon, among other things, future earnings,
operations, capital requirements of the Company, business conditions and
contractual restrictions on payment of dividends, if any.
14
<PAGE> 16
CAPITALIZATION
The following table sets forth as of March 31, 1998 (i) the actual
capitalization of the Company; (ii) the pro forma capitalization of the Company
after giving effect to the conversion into Common Stock of all of the
outstanding shares of Special Common Stock and Class A Common Stock upon the
closing of this offering, and (iii) the as adjusted capitalization of the
Company after giving effect to the sale by the Company of 2,000,000 shares of
Common Stock at an assumed initial public offering price of $14.00 per share and
the application of the estimated net proceeds therefrom. See "Use of Proceeds."
This table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Consolidated
Financial Statements and Notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1998
----------------------------------
ACTUAL PRO FORMA AS ADJUSTED
------ --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Stockholders' equity:
Common Stock, $.01 par value; 11,746,840 shares authorized,
6,847,960 shares issued and outstanding, actual;
60,000,000 shares authorized, 10,768,830 issued and
outstanding, pro forma; 60,000,000 shares authorized,
12,768,830 shares issued and outstanding, as adjusted..... $ 68 $ 108 $ 128
Class A Common Stock, $.01 par value; 1,694,800 shares
authorized, 928,790 shares issued and outstanding, actual;
no shares issued and outstanding, pro forma and as
adjusted(1)............................................... 9 -- --
Special Common Stock, $.01 par value; 3,104,080 shares
authorized, 3,104,080 shares issued and outstanding,
actual; no shares issued and outstanding, pro forma and as
adjusted.................................................. 31 -- --
Preferred Stock, $.01 par value; no shares authorized,
actual; 1,000,000 shares authorized, no shares issued and
outstanding, pro forma and as adjusted.................... -- -- --
Additional paid-in capital.................................. 2,245 2,245 27,515
Retained earnings........................................... 6,355 6,355 6,355
Less treasury Class A Common Stock at cost,
112,000 shares............................................ (25) (25) (25)
------ ------ -------
Total stockholders' equity................................ 8,683 8,683 33,973
------ ------ -------
Total capitalization.............................. $8,683 $8,683 $33,973
====== ====== =======
</TABLE>
- ---------------
(1) Does not include 649,510 shares of Class A Common Stock issuable at a
weighted average exercise price of $6.41 per share upon exercise of stock
options outstanding as of March 31, 1998 under the Company's stock option
and stock purchase plans, of which 503,760 stock options were then
exercisable at a weighted average exercise price of $4.05 per share. As of
the date of this Prospectus, an additional 1,628,500 shares are reserved for
future grants under the Company's stock option and stock purchase plans. See
"Management -- Director Compensation" and "-- Equity Plans" and Notes 10-12
of Notes to Consolidated Financial Statements.
15
<PAGE> 17
DILUTION
The pro forma net tangible book value of the Company as of March 31, 1998,
assuming the conversion into Common Stock of all outstanding shares of Special
Common Stock and Class A Common Stock, was $8,683,000, or $0.81 per share of
Common Stock. Pro forma net tangible book value per share is equal to the
Company's total tangible assets less total liabilities, divided by the number of
shares of Common Stock outstanding on a pro forma basis at that date.
After giving effect to the sale of the 2,000,000 shares of Common Stock
offered by the Company hereby (at an assumed initial public offering price of
$14.00 per share and after deducting underwriting discounts and commissions and
estimated offering expenses), the pro forma net tangible book value of the
Company as of March 31, 1998 would have been approximately $33,973,000, or $2.66
per share. This represents an immediate increase in net tangible book value of
$1.85 per share to existing stockholders and an immediate dilution of $11.34 per
share to new investors in this offering. The following table illustrates this
per share dilution.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $14.00
Pro forma net tangible book value per share as of March
31, 1998.............................................. $ 0.81
Increase per share attributable to new investors....... 1.85
------
Pro forma as adjusted net tangible book value per share
after this offering....................................... 2.66
------
Dilution per share to new investors......................... $11.34
======
</TABLE>
The following table summarizes on a pro forma basis as of March 31, 1998
the differences between the number of shares of Common Stock purchased from the
Company, the total consideration paid to the Company, and the average price paid
per share by existing stockholders and by the new investors.
<TABLE>
<CAPTION>
SHARES PURCHASED(1) TOTAL CONSIDERATION
-------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)... 10,768,830 84.3% $ 1,945,000 6.5% $ 0.18
New investors.............. 2,000,000 15.7 28,000,000 93.5 $14.00
---------- ----- ----------- -----
Total............ 12,768,830 100.0% $29,945,000 100.0%
========== ===== =========== =====
</TABLE>
- ------------
(1) Sales by the Selling Stockholders in this offering will cause the number of
shares held by existing stockholders to be reduced to 10,268,830 shares or
80.4% (9,893,830 shares or 77.5% if the Underwriters' over-allotment option
is exercised in full) of the total number of shares of Common Stock to be
outstanding after this offering, and will increase the number of shares held
by new investors to 2,500,000 shares or 19.6% (2,875,000 shares or 22.5% if
the Underwriters' over-allotment option is exercised in full) of the total
number of shares of Common Stock to be outstanding after this offering. See
"Principal and Selling Stockholders."
The calculation of pro forma net tangible book value and the other
computations above assume no exercise of stock options outstanding as of March
31, 1998. As of March 31, 1998, there were options outstanding to purchase a
total of 649,510 shares of Class A Common Stock at a weighted average exercise
price of $6.41 per share, of which 503,760 stock options were then exercisable
at a weighted average exercise price of $4.05 per share. To the extent that any
of these options are exercised, there will be further dilution to new investors.
See "Capitalization," "Management -- Equity Plans," "Description of Capital
Stock," "Shares Eligible for Future Sale" and Notes 10-12 of Notes to
Consolidated Financial Statements.
16
<PAGE> 18
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data as of March 31, 1997 and March 31,
1998 and for the fiscal years ended March 31, 1996, 1997 and 1998, have been
derived from the Company's Consolidated Financial Statements, which have been
audited by Ernst & Young LLP, independent auditors, and are included elsewhere
in this Prospectus. The selected financial data as of March 31, 1994, 1995 and
1996 and for the fiscal years ended March 31, 1994 and 1995 have been derived
from financial statements which have been audited. This data should be read in
connection with the Consolidated Financial Statements and Notes thereto and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF INCOME DATA:
Revenues............................................... $11,872 $14,624 $20,052 $23,843 $42,830
Cost of revenues....................................... 8,020 9,570 12,377 15,218 24,223
------- ------- ------- ------- -------
Gross profit........................................... 3,852 5,054 7,675 8,625 18,607
Operating expenses:
Sales and marketing.................................. 592 683 1,173 1,493 3,737
General and administrative........................... 2,578 2,835 3,875 3,947 6,567
------- ------- ------- ------- -------
Total operating expenses.......................... 3,170 3,518 5,048 5,440 10,304
------- ------- ------- ------- -------
Income from operations................................. 682 1,536 2,627 3,185 8,303
Interest income........................................ 39 129 199 120 146
Interest expense....................................... (25) (4) (2) (5) (4)
------- ------- ------- ------- -------
Income from continuing operations before provision for
income taxes and minority interest................... 696 1,661 2,824 3,300 8,445
Provision for income taxes............................. 375 691 1,261 1,359 3,547
------- ------- ------- ------- -------
Income from continuing operations...................... 321 970 1,563 1,941 4,898
Discontinued operations, net of tax.................... 1,483 1,245 780 100 --
Minority interest...................................... (406) (84) -- -- --
------- ------- ------- ------- -------
Net income............................................. $ 1,398 $ 2,131 $ 2,343 $ 2,041 $ 4,898
======= ======= ======= ======= =======
Earnings per share of Common Stock and Special Common
Stock(1):
Continuing operations................................ $ 0.03 $ 0.10 $ 0.16 $ 0.20 $ 0.49
=======
Discontinued operations.............................. 0.11 0.11 0.08 -- --
Earnings per share of Common Stock and Special Common
Stock............................................. $ 0.14 $ 0.21 $ 0.24 $ 0.20 $ 0.49
------- ------- ------- ------- -------
Pro forma earnings per common share(1)................. $ 0.47
=======
Pro forma earnings per common share -- assuming
dilution(1).......................................... $ 0.46
=======
Dividends declared per share of Common Stock and
Special Common Stock................................. -- -- $ 0.40 $ 0.15 $ 0.30
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
-----------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEETS DATA:
Cash and cash equivalents.............................. $ 2,718 $ 4,436 $ 2,231 $ 2,653 $ 3,401
Working capital........................................ 4,458 6,595 4,641 5,069 7,480
Total assets........................................... 7,653 9,196 7,470 8,201 14,485
Total stockholders' equity............................. $ 4,801 $ 6,932 $ 5,275 $ 5,816 8,683
</TABLE>
- ---------------
(1) See Note 2 of Notes to Consolidated Financial Statements for information
concerning the calculation of historical and pro forma earnings per common
share.
17
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion contains forward-looking statements which involve
risks and uncertainties. The Company's actual results may differ significantly
from the results discussed in the forward-looking statements. Factors that might
cause such a difference include, but are not limited to, those discussed in
"Risk Factors."
OVERVIEW
ADS provides IT strategy consulting and systems integration services to
customers exclusively in the financial services industry, primarily banks. The
Company's service offerings are organized around five practice areas: IT
Strategy Consulting, Consolidations and Conversions, Year 2000 Resolution,
Application Outsourcing, and Electronic Commerce and Home Banking.
The Company was organized in Massachusetts in 1980 to provide consulting
services to banks and bank service bureaus. In 1990, the Company acquired a
majority of the outstanding common stock of Data Management Systems, Inc.
("DMS"), a bank service bureau. In fiscal 1992, the Company sold the item
processing division of DMS and in fiscal 1995, the Company purchased the
remaining minority interest in DMS. Later in fiscal 1995, the Company approved a
plan to sell DMS's remaining business line, the on-line processing division.
Accordingly, the results of operations of the on-line processing division are
included as discontinued operations in the Company's consolidated financial
statements for fiscal 1996 and 1997. See Note 6 of Notes to Consolidated
Financial Statements.
The Company's revenues are derived primarily from professional fees billed
to customers on a time and materials or, in certain instances, on a fixed price
basis. Included in revenues are reimbursable contract-related travel and
entertainment expenses which are separately billed to clients. Substantially all
of the Company's contracts, other than fixed price contracts, are terminable by
the customer following limited notice and without significant penalty to the
customer. Time and materials revenues are recognized as services are performed.
Fixed price revenues are recognized using the percentage-of-completion method
based on the ratio of costs incurred to total estimated project costs. The
Company's strategy is to increase in future years the percentage of revenues
represented by fixed price contracts. Any unexpected costs or unanticipated
delays in connection with the performance of fixed price contracts could have a
material adverse effect on the Company's business, financial condition and
results of operations. The cumulative impact of any revisions to the estimate of
the percentage-of-completion of any fixed price contract is reflected in the
quarter in which such impact becomes known.
Revenues from the Company's five largest customers in fiscal 1996, 1997 and
1998 were 66.0%, 54.0% and 64.5%, respectively, as a percentage of revenues. In
fiscal 1996, Citizens Savings Bank & Citizens Trust Company and Fleet Services
Corporation accounted for approximately 22.0% and 18.1%, respectively, of
revenues. In fiscal 1997, First Security Information Technology, Inc. and
Citizens Savings Bank & Citizens Trust Company accounted for approximately 18.8%
and 12.4%, respectively, of revenues. In fiscal 1998, Associated Banc-Corp.,
First Security Information Technology, Inc., National City Corporation,
NationsBank Corporation (Barnett Bank) and ABN-AMRO Information Technology
Services accounted for approximately 17.4%, 13.7%, 13.3%, 10.1% and 10.0%,
respectively, of revenues. See "Risk Factors -- Concentration of Revenues;
Dependence on Major Customers." Substantially all of the Company's revenues are
derived from customers located in North America.
Cost of revenues consists primarily of salaries and employee benefits for
personnel dedicated to customer assignments, fees paid to subcontractors for
work performed in connection with customer assignments and reimbursable
contract-related travel and entertainment expenses incurred by the Company in
connection with the delivery of its services. Customer project margins and
personnel utilization percentages are the most significant variables in
determining the Company's income from continuing operations. ADS manages its
personnel utilization rates by monitoring its personnel needs and generally
adjusts personnel levels based on specific project requirements. The number of
staff
18
<PAGE> 20
assigned to particular projects may vary widely depending on the size, duration,
degree of completion and complexity of each engagement. Delays in project
completion and in implementation may result in periods when personnel are not
assigned to active projects and, accordingly, result in lower average
utilization rates during such periods, which could have a materially adverse
effect on the Company's operating results. In addition, the Company must
maintain appropriate numbers of senior professionals both to oversee existing
engagements and for business development activities.
Sales and marketing expenses consist primarily of salaries, employee
benefits, travel expenses and promotional costs. General and administrative
expenses consist primarily of expenses associated with the Company's management,
finance and administrative groups, including recruiting, training, depreciation
and amortization, and occupancy costs.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
financial data as a percentage of revenues:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------------
1994 1995 1996 1997 1998
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues............................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues....................................... 67.6 65.4 61.7 63.8 56.6
----- ----- ----- ----- -----
Gross profit........................................... 32.4 34.6 38.3 36.2 43.4
Operating expenses:
Sales and marketing.................................. 5.0 4.7 5.9 6.3 8.7
General and administrative........................... 21.7 19.4 19.3 16.6 15.3
----- ----- ----- ----- -----
Total operating expenses.......................... 26.7 24.1 25.2 22.9 24.0
----- ----- ----- ----- -----
Income from operations................................. 5.7 10.5 13.1 13.3 19.4
Interest income........................................ 0.3 0.9 1.0 0.5 0.3
Interest expense....................................... (0.2) -- -- -- --
----- ----- ----- ----- -----
Income from continuing operations before provision for
income taxes and minority interest................... 5.8 11.4 14.1 13.8 19.7
Provision for income taxes............................. 3.1 4.8 6.3 5.7 8.3
----- ----- ----- ----- -----
Income from continuing operations...................... 2.7 6.6 7.8 8.1 11.4
Discontinued operations, net of tax.................... 12.5 8.5 3.9 0.5 --
Minority interest...................................... (3.4) (0.6) -- -- --
----- ----- ----- ----- -----
Net income............................................. 11.8% 14.5% 11.7% 8.6% 11.4%
===== ===== ===== ===== =====
</TABLE>
YEARS ENDED MARCH 31, 1998 AND 1997
Revenues
Revenues increased 79.6% for fiscal 1998 over fiscal 1997, from $23.8
million to $42.8 million. This increase was primarily due to an increase in
volume of services delivered to customers and an increase in the average billing
rate.
Cost of Revenues
Cost of revenues increased 59.2% from $15.2 million for fiscal 1997, to
$24.2 million for fiscal 1998, representing 63.8% and 56.6% of revenues,
respectively. The dollar increase in cost of revenues was primarily due to an
increase in billable personnel from 148 at March 31, 1997 to 275 at March 31,
1998. The decrease in cost of revenues as a percentage of revenues is due to
increased utilization rates and billing rate increases.
19
<PAGE> 21
Sales and Marketing
Sales and marketing expenses increased 150.3% from $1.5 million for fiscal
1997 to $3.7 million for fiscal 1998, representing 6.3% and 8.7% of revenues,
respectively. This increase resulted primarily from the Company's decision to
expand its sales and marketing group from eight employees at March 31, 1997 to
17 employees at March 31, 1998, as well as increased investment in marketing
initiatives. The Company expects its sales and marketing expenses to increase in
absolute dollars as the Company continues to add sales and marketing staff.
General and Administrative
General and administrative expenses increased 66.4% from $3.9 million for
fiscal 1997 to $6.6 million for fiscal 1998, representing 16.6% and 15.3% of
revenues, respectively. This increase is primarily due to increases in
recruiting, occupancy and equipment costs to support the Company's expansion.
The Company expects that general and administrative expenses will increase in
absolute dollars as personnel and facilities are added to support the Company's
growth and as the Company incurs costs associated with being a public company.
Income Tax Provision
The income tax provision pertaining to continuing operations increased
161.0% from $1.4 million for fiscal 1997 to $3.5 million for fiscal 1998,
resulting in effective tax rates of 41.2% and 42.0%, respectively. The Company's
effective tax rate may vary from period to period based on its expansion into
areas with varying country, state and local statutory income tax rates. See Note
8 of Notes to Consolidated Financial Statements.
YEARS ENDED MARCH 31, 1997 AND 1996
Revenues
Revenues increased 18.9% for fiscal 1997 over fiscal 1996, from $20.1
million to $23.8 million. This increase was principally due to an increase in
volume of services delivered to customers and an increase in the average billing
rate.
Cost of Revenues
Cost of revenues increased 23.0% from $12.4 million for fiscal 1996 to
$15.2 million for fiscal 1997, representing 61.7% and 63.8% of revenues,
respectively. The dollar increase was primarily due to increased reimbursable
expenses and, to a lesser extent, an increase in the average number of billable
personnel in fiscal 1997 compared to fiscal 1996. Cost of revenues as a
percentage of revenues for fiscal 1997 increased primarily due to a decrease in
utilization rates.
Sales and Marketing
Sales and marketing expenses increased 27.3% from $1.2 million for fiscal
1996 to $1.5 million for fiscal 1997, representing 5.9% and 6.3% of revenues,
respectively. Sales and marketing expenses increased primarily as a result of
the Company's decision to expand its sales and marketing group, which grew from
five employees at the end of fiscal 1996 to eight employees at the end of fiscal
1997.
General and Administrative
General and administrative expenses remained constant at $3.9 million for
fiscal 1996 and 1997, representing 19.3% and 16.6% of revenues, respectively.
The decrease in general and administrative expenses as a percentage of revenues
reflects the increase in revenues for fiscal 1997 compared to fiscal 1996.
20
<PAGE> 22
Income Tax Provision
The income tax provision pertaining to continuing operations increased 7.8%
from $1.3 million in fiscal 1996 to $1.4 million for fiscal 1997, resulting in
effective tax rates of 44.7% and 41.2%, respectively. The decrease in the
effective tax rate is primarily due to differences in applicable state income
tax rates. See Note 8 of Notes to Consolidated Financial Statements.
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth certain unaudited quarterly statements of
income data in absolute terms and as a percentage of revenues for each of the
periods indicated. In the opinion of management, this information has been
prepared on the same basis as the audited financial statements appearing
elsewhere in this Prospectus, and all necessary adjustments, consisting only of
normal recurring adjustments, have been included in the amounts stated below to
present fairly the unaudited quarterly results when read in conjunction with the
audited Consolidated Financial Statements and Notes thereto. The operating
results for any quarter are not necessarily indicative of results of any future
period.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------
JUNE SEPT. DEC. MARCH JUNE SEPT. DEC. MARCH
1996 1996 1996 1997 1997 1997 1997 1998
------ ------ ------ ------ ------ ------ ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................................ $5,588 $5,763 $5,807 $6,685 $8,231 $9,118 $10,870 $14,611
Cost of revenues........................ 3,627 3,748 3,883 3,960 4,751 5,265 6,236 7,971
------ ------ ------ ------ ------ ------ ------- -------
Gross profit............................ 1,961 2,015 1,924 2,725 3,480 3,853 4,634 6,640
Operating expenses:
Sales and marketing................... 291 324 435 443 579 685 883 1,590
General and administrative............ 972 843 925 1,207 1,275 1,384 1,615 2,293
------ ------ ------ ------ ------ ------ ------- -------
Total operating expenses............ 1,263 1,167 1,360 1,650 1,854 2,069 2,498 3,883
------ ------ ------ ------ ------ ------ ------- -------
Income from operations.................. 698 848 564 1,075 1,626 1,784 2,136 2,757
Interest income......................... 18 24 36 42 28 29 52 37
Interest expense........................ (2) (1) (1) (1) (2) (1) (1) --
------ ------ ------ ------ ------ ------ ------- -------
Income from continuing operations before
provision for income taxes............ 714 871 599 1,116 1,652 1,812 2,187 2,794
Provision for income taxes.............. 294 359 247 459 694 761 919 1,173
Discontinued operations, net of tax..... 100 -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------- -------
Net income.............................. $ 520 $ 512 $ 352 $ 657 $ 958 $1,051 $ 1,268 $ 1,621
====== ====== ====== ====== ====== ====== ======= =======
Revenues................................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues........................ 64.9 65.0 66.9 59.2 57.7 57.7 57.4 54.6
------ ------ ------ ------ ------ ------ ------- -------
Gross profit............................ 35.1 35.0 33.1 40.8 42.3 42.3 42.6 45.4
Operating expenses:
Sales and marketing................... 5.2 5.6 7.5 6.6 7.0 7.5 8.1 10.9
General and administrative............ 17.4 14.7 15.9 18.1 15.5 15.2 14.9 15.7
------ ------ ------ ------ ------ ------ ------- -------
Total operating expenses............ 22.6 20.3 23.4 24.7 22.5 22.7 23.0 26.6
------ ------ ------ ------ ------ ------ ------- -------
Income from operations.................. 12.5 14.7 9.7 16.1 19.8 19.6 19.6 18.8
Interest income......................... 0.3 0.4 0.6 0.6 0.3 0.3 0.5 0.3
Interest expense........................ -- -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------- -------
Income from continuing operations before
provision for income taxes............ 12.8 15.1 10.3 16.7 20.1 19.9 20.1 19.1
Provision for income taxes.............. 5.3 6.2 4.2 6.9 8.4 8.4 8.4 8.0
Discontinued operations, net of tax..... 1.8 -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------- -------
Net income.............................. 9.3% 8.9% 6.1% 9.8% 11.7% 11.5% 11.7% 11.1%
====== ====== ====== ====== ====== ====== ======= =======
</TABLE>
21
<PAGE> 23
The Company's revenues increased in each of the eight quarters presented
primarily due to increases in the volume of services delivered to customers and
to increases in the average billing rate. Cost of revenues increased in absolute
terms due to an increased number of project personnel to support an increased
number of projects. Cost of revenues as a percentage of revenues decreased
significantly in the last several quarters, reflecting revenue growth as well as
higher utilization rates and an increase in the average billing rate.
Variability in utilization rates for project personnel has resulted in some
quarterly fluctuations in project personnel costs as a percentage of revenues.
For the quarters ended June 30, September 30, and December 31, 1996, utilization
rates were lower because of a decrease in the number of billable hours caused by
the loss of a major customer, which negatively impacted gross margins. For the
quarters ended March 31, June 30, September 30, December 31, 1997 and March 31,
1998, utilization rates, the average billing rate and the number of billable
hours all increased over the prior three quarters. In the future, utilization
rates and gross margins may vary from quarter to quarter based on a number of
factors, including training schedules, vacation and holiday schedules,
recruiting requirements, customer start-up of new projects and other
administrative requirements of existing project personnel.
Sales and marketing expenses increased in each of the eight quarters
presented as the Company expanded its sales and marketing staff. General and
administrative expenses have fluctuated in absolute terms from quarter to
quarter and at times as a percentage of revenues.
Variations in the Company's revenues and operating results have occurred
from quarter to quarter and may continue to occur as a result of a number of
factors. Quarterly revenues and operating results can depend on the number, size
and scope of customer projects commenced and completed during a quarter,
employee utilization rates, billing rates, the number of working days in a
quarter, the timing of introduction of new service offerings, both by the
Company and its competitors, changes in pricing, both by the Company and its
competitors, and general economic conditions. The timing of revenues is
difficult to forecast because the Company's sales cycle is relatively long and
may depend on factors such as the size and scope of projects or other factors
that adversely impact the financial services industry and general economic
conditions.
Because a high percentage of the Company's expenses are relatively fixed, a
variation in the timing of the initiation or the completion of customer
projects, particularly at or near the end of a quarter, can cause significant
variations in operating results from quarter to quarter and could result in
losses. The Company attempts to manage its personnel utilization rates by
closely monitoring project timetables and staffing requirements for new
projects. While professional staff must be adjusted to reflect active projects,
the Company must maintain a sufficient number of senior professionals to oversee
existing customer projects and participate with the Company's sales force in
securing new customer projects. In addition, the Company expects to increase its
operating expenses by increasing its staff. The Company expects to experience a
significant time lag between the date professional staff are hired and the date
such personnel become fully productive. The rate at which new professional staff
become productive could cause material fluctuations in quarterly results of
operations. Furthermore, to the extent such increased operating expenses precede
or are not subsequently followed by increased revenues, the Company's business,
financial condition and results of operations could be materially adversely
affected. In addition, many of the Company's projects are, and may be in the
future, terminable without customer penalty. An unanticipated termination of a
major project or loss of a major customer could require the Company to maintain
or terminate underutilized employees, resulting in a higher than expected number
of unassigned persons or higher than expected severance expenses.
Due to all of the foregoing factors, it is possible that in some future
periods the Company's results of operations will be below the expectations of
public market analysts and investors. In such event, the price of the Company's
Common Stock could be materially adversely affected. See "Risk Factors --
Variability of Quarterly Operating Results."
22
<PAGE> 24
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations principally
from cash flow from operations and, to a lesser extent, from the private sale of
equity securities. In 1988, General Atlantic Partners II, L.P. purchased
3,104,080 shares from the Company and certain stockholders for an aggregate
purchase price of approximately $2.8 million, of which approximately $1.4
million was paid to the Company.
The Company has no long-term debt and continues to operate primarily
debt-free. Working capital increased to $7.5 million at March 31, 1998 compared
to $5.1 million at March 31, 1997. This increase was due primarily to an
increase in accounts receivable and proceeds from the exercise of stock options
partially offset by cash used for capital expenditures to support new employees
and the growth of the Company. On January 28, 1998, the Company paid an
aggregate $3.0 million in dividends on its Common Stock and Special Common
Stock. Net cash provided by operating activities for fiscal 1997 was
approximately the same as for fiscal 1996. Net cash provided by operating
activities increased by $1.8 million in fiscal 1998 primarily because of a $2.9
million increase in net income.
Capital expenditures of approximately $0.2 million, $0.2 million and $0.6
million for fiscal 1996, 1997 and 1998, respectively, were used principally for
computer equipment to upgrade employee workstations and leasehold improvements
related to the Company's growth. Capital expenditures for fiscal 1999 are
expected to be approximately $1.0 million and will be used principally for
computer and other equipment.
The Company believes that proceeds from the sale of the Common Stock
offered hereby together with cash provided from operations will be sufficient to
meet the Company's working capital and capital expenditure requirements for at
least the next 12 months. To the extent the Company is unable to fund its
operations from cash flows, the Company may need to obtain financing from
external sources in the form of either additional equity or indebtedness. There
can be no assurance that additional financing will be available at all, or that,
if available, such financing will be obtainable on terms favorable to the
Company.
To date, inflation has not had a material impact on the Company's financial
results.
IMPACT OF YEAR 2000
The Company has installed Year 2000 compliant software in many of its major
systems. The Company is in the process of either modifying or replacing software
used in the Company's systems. The cost of these efforts is not expected to be
material. The Company presently believes that the Year 2000 issue will not pose
significant operational problems. However, Year 2000 issues could have a
significant impact on the Company's operations and its financial results if
modifications cannot be completed on a timely basis, unforeseen needs or
problems arise, or the systems operated by its customers, vendors or
subcontractors are not Year 2000 compliant.
23
<PAGE> 25
BUSINESS
OVERVIEW
Atlantic Data Services, Inc. ("ADS" or the "Company") provides information
technology ("IT") strategy consulting and systems integration services to
customers exclusively in the financial services industry, primarily banks. ADS
offers rapid, cost-effective IT solutions to the business challenges faced by
financial services companies through its in-depth financial services experience,
technological expertise and project management skills. The Company's service
offerings are organized around five practice areas: IT Strategy Consulting,
Consolidations and Conversions, Year 2000 Resolution, Application Outsourcing,
and Electronic Commerce and Home Banking. Since its founding in 1980, ADS has
developed an in-depth knowledge of the banking and financial services industry
and of its changing market and technology dynamics.
The Company markets and sells its services directly through its
professional sales staff and senior management. The Company's customers include
ABN-AMRO Information Technology Services, Associated Banc-Corp., BankBoston,
N.A., Canadian Imperial Bank of Commerce, Citizens Savings Bank & Citizens Trust
Company, Fleet Services Corporation, National City Corporation, NationsBank
Corporation (Barnett Bank) and SunTrust Services Corp.
INDUSTRY BACKGROUND
Deregulation and consolidation in the financial services industry are
rapidly reshaping the business environment and causing significant changes in
the ways large banks operate and compete. These industry trends have allowed
banks to dramatically expand their service offerings to include products and
services competing with mutual funds, brokerage services, insurance offerings
and investment banking services. The development, customization and integration
of these new service offerings have challenged and strained banks' internal IT
capabilities and resources. Deregulation in the financial services industry has
also resulted in the entry of new competitors offering products and services
traditionally marketed by banks, resulting in increased competition and margin
pressure. Consolidation, which has been driven in part by deregulation, has
forced banks to focus on the successful integration of acquisitions and
consolidation of redundant operations to meet their strategic objectives and
increase profitability.
At the same time that they are addressing the challenges of deregulation
and consolidation, banks have increasingly focused on the widespread deployment
of technologies to reduce costs and deliver new products and services. Banks
rely primarily on centralized mainframe or minicomputer systems and have large
legacy applications that must be regularly maintained and supported. While
maintaining these large and complex systems, banks are also integrating newer
technologies, including distributed architecture and client/server technologies.
This trend has forced banks to rapidly adopt new technologies from multiple
vendors and implement complex hardware, software and networking solutions
throughout their organizations to remain competitive. In addition, diagnosing
and designing solutions to manage and solve Year 2000 problems and the advent of
the new European Monetary Union have added to the already large number of
complex projects facing banks' overburdened internal IT staffs.
The onset of the electronic marketplace has also forced banks to expand
traditional customer delivery channels to include automated teller machines,
telephone banking, and home banking via personal computers and the Internet to
meet changing customer needs. These changing delivery channels and customer
preferences have also caused banks to significantly change their business
practices in addition to expanding their technology infrastructure.
The business challenges created by deregulation and consolidation coupled
with the need to maintain existing systems, incorporate new technologies and
meet changing customer preferences have forced banks to turn to third party IT
providers for assistance in developing IT solutions to meet their changing
needs. Industry sources estimate that total expenditures for IT services,
consisting of
24
<PAGE> 26
consulting and education, systems integration and development and systems
management services, in the financial services market were approximately $5.5
billion in 1996 and will reach approximately $9.5 billion by the year 2000. This
represents a compound annual growth rate of approximately 14.7% between 1996 and
2000.
Designing, developing, implementing and maintaining IT solutions that
address the challenges faced by banks requires highly skilled professionals
trained in diverse technologies and business practices. Many banks are reluctant
to expand their IT departments through additional staffing, especially at a time
when they are seeking to minimize fixed costs and reduce workforces. Because of
the critical importance of their IT systems, banks seek to engage service
providers who have in-depth knowledge of their IT systems and business processes
and who can assume responsibility for project management and delivery. IT
consultants working with banks must also possess experience in the financial
services industry and be fluent in both traditional legacy systems and newer
technologies. However, there is a shortage of professionals who have this
combination of skills. While many banks are concluding that using outside
specialists enables them to develop better IT solutions in less time and to
reduce implementation risks, most IT consulting firms do not have the
specialized knowledge of the financial services industry necessary to assist
banks in rapidly and cost-effectively meeting their business challenges.
THE ADS SOLUTION
ADS provides rapid, cost-effective IT solutions to the business challenges
faced by financial services companies through its in-depth financial services
experience, technological expertise and project management skills. The Company's
service offerings are organized around five practice areas: IT Strategy
Consulting, Consolidations and Conversions, Year 2000 Resolution, Application
Outsourcing, and Electronic Commerce and Home Banking. ADS enables its customers
to leverage their existing IT systems and personnel to compete more effectively,
to rapidly assimilate changing technologies and to meet their evolving business
needs in a timely and cost-effective manner. The main elements of the ADS
solution include:
In-depth Knowledge of the Financial Services Industry. Since its founding
in 1980, ADS has developed an in-depth knowledge of the financial services
industry and of the changing market and technology dynamics in that industry.
Further, ADS has accumulated expertise in many areas of business operations in
the banking environment as well as a broad knowledge of the multiple products
and services offered by large banks. ADS currently works with banks having from
$10 billion to over $150 billion in assets and understands the full range of
business and technological challenges banks face as they grow in size and
complexity. As a result, the Company can offer its customers scaleable solutions
as they change and expand and can help them evaluate and restructure their
operations, practices, activities and, in some cases, policies to compete more
effectively.
Highly Developed Project Management Skills. The Company works closely with
its customers' management and IT personnel from diagnostic and strategic
planning through project completion. Each project team is staffed with
experienced IT professionals who, in addition to their knowledge of the banking
industry, have comprehensive business, functional and technical expertise. Every
engagement is headed by an experienced project manager who takes ownership and
accountability for the project and manages the project team to meet the
customer's goals on-time, within budget and according to agreed specifications.
In addition, the project manager provides concise and timely updates on the
project's status to the customer's management and IT personnel.
Expertise in Multiple Technologies. Banks' information and operating
systems are complex and fully integrated into all facets of banks' daily
operations. As a result, IT consultants working in financial services must have
enterprise-wide knowledge of a bank's IT systems and operations to design and
integrate new components. The Company's IT professionals have extensive
experience in the diverse technical environments, legacy hardware platforms,
programming languages, and software used by banks, as well as newer technologies
including client/server applications and the Internet. In addition,
25
<PAGE> 27
the Company has accumulated expertise on technologies specific to banks'
products and services including automated teller, electronic funds transfer and
item processing systems. Because of its in-depth technical knowledge, ADS can
help customers select the best business solutions tailored to their specific
technological needs.
Proprietary Methodologies and Tools. The Company applies its proprietary
Engagement Management Methodology to each customer project across all its
practice areas. This methodology allows ADS's professional staff to focus on
project management, project control and reporting, and a phased implementation
that is designed to ensure that customer projects are completed on time, within
budget, and according to agreed specifications. This methodology also allows the
Company to deliver its services in a consistent manner across all levels of its
organization. To further increase productivity and efficiency, the Company has
developed additional proprietary tools and methodologies such as the Conversion
Productivity Tool and the Year 2000 Methodology. The Company's tools and
methodologies are used at customer locations and are designed to reduce the
risks inherent in complex systems implementations.
Geographically Distributed Organization. The Company's professional staff
is located throughout the United States. The Company works closely with its
customers to determine the appropriate resources and staffing to assign to
customers' projects. Once the project parameters are defined and the geographic
locations are identified, ADS is able to rapidly deploy its staff from
throughout the United States to meet a customer's needs. The appropriate project
team is assigned to the customer's site(s) to operate on the project in tandem
with the customer's staff. The Company facilitates this operational model by
investing in software, hardware and infrastructure to support its employees'
remote access to the Company's internal information systems.
STRATEGY
The Company seeks to become the leading IT consulting and systems
integration service provider in the financial services industry. Key elements of
this strategy include:
Establish Long-Term Relationships with Customers. A key component of ADS's
strategy is the development of long-term relationships with customers,
particularly large banks that are expanding their operations and their service
offerings. ADS partners with its customers by working on a consultative basis to
understand their business needs, by working closely with their management and IT
staff to achieve consensus on solution strategies, and by delivering customized
solutions on time, within budget and according to agreed specifications. ADS
believes this strategy will allow it to expand the length and scope of its
customer engagements and to grow with its customers' requirements.
Leverage Customer Base. The Company believes that as banks expand their
product lines into brokerage, insurance, Internet banking and other areas,
additional opportunities will arise for ADS both within its existing customer
base and with new customers. The Company seeks to leverage its vertical market
expertise into these developing financial services channels. The Company also
believes its emphasis on long-term relationships and customer service
facilitates the sale of additional service offerings and will increase the
number of IT projects it performs for existing customers.
Extend Practice Areas. ADS believes opportunities exist to develop
additional service offerings to meet the changing business and technological
needs of its customers. The Company works closely with its customers to identify
emerging industry trends and develops service offerings to meet those needs. For
example, the Company is currently developing a practice methodology and tools to
offer its customers test and reintegration services. This service offering will
enable ADS's customers to determine whether new hardware and software systems
they deploy will meet applicable accounting, audit, legal and other operational
requirements.
Enter into Alliances with Leading Software Vendors. The Company believes
that relationships with leading software providers to the financial services
industry may result in increased direct customer referrals and enhanced industry
recognition. ADS also believes these relationships will
26
<PAGE> 28
enable it to broaden its customer base, increase its competitiveness and
maintain its technological leadership through access to the most current
information and training on leading software and information systems. The
Company intends to continue to pursue these relationships, and may seek to form
alliances with other developers and vendors of IT technologies.
Pursue Strategic Acquisitions. The Company believes the fragmented nature
of the IT services industry provides opportunities to expand its expertise in
the financial services industry through the selective acquisition of IT
consulting firms with a complementary vertical market focus. In addition, where
appropriate, the Company may consider acquisitions that expand its market share,
particularly with an emphasis on international expansion. While the Company from
time to time considers acquisition opportunities, it currently has no
agreements, understandings or commitments to effect any acquisition.
PRACTICE AREAS
ADS offers and delivers its services through five practice areas that
address the major areas of interest and activity of its customers and capitalize
on the business and technology skills of the ADS staff. These five practice
areas are IT Strategy Consulting, Consolidations and Conversions, Year 2000
Resolution, Application Outsourcing, and Electronic Commerce and Home Banking.
The following diagram depicts the interrelationship among the Company's core
competencies, tools, methodologies, quality assurance program, and practice
areas:
[A diagram depicting the interrelationship among the Company's core
competencies, tools, methodologies, quality assurance program and practice
areas]
IT Strategy Consulting. ADS provides business solutions that assist
customers in managing change within their operational and technical
environments. ADS's solutions-oriented consulting begins with an overall
assessment of the customer's current situation and identifies potential IT
risks, opportunities and alternatives. Once the initial evaluation is complete,
ADS creates an itemized list of deliverables and tasks and assumes
responsibility for the delivery of the targeted solution. ADS's project
managers, practice managers, business analysts and technical specialists work in
close cooperation with the customer's IT staff to create, manage and execute the
specific plans designed to meet the project objectives. Throughout the process,
ADS provides ongoing review and reporting on the schedule, deliverables and
budget agreed upon at project commencement. For example, ADS was engaged by a
27
<PAGE> 29
large mid-western bank to upgrade its branch technological systems and to
evaluate and restructure its internal communication systems. This project
involved reviewing and evaluating the customer's existing facilities and
determining capacities and exposure to failure. ADS made specific
recommendations and assisted in the deployment of an IT solution specific to the
customer's needs.
Consolidations and Conversions. ADS has accumulated extensive experience
in systems conversion and related activities based on numerous projects for
financial services customers over the past 18 years. ADS assists customers that
have acquired other institutions to consolidate redundant operations or upgrade
legacy systems to new technology applications. In these projects, ADS focuses on
a business solution to consolidations and systems conversions. ADS has developed
the Conversion Productivity Tool ("CPT"), a proprietary software program that
automates the most important aspects of the data conversion process. CPT assists
the ADS business analysts in mapping the customer's business products and the
data elements of the application. The business analyst uses CPT to input the
conversion rules, to perform analysis of the relationship between the inbound
and target systems, and to test and execute the conversion automatically. ADS
also uses a comprehensive conversion project methodology that allows the project
team to interact with the customer's staff and bring a set of professional
disciplines and methodologies to these complex projects.
In addition to assisting customers with integrating the technological
changes necessitated by conversions and consolidations, the Company also helps
its customers to manage operational issues. Through mergers and acquisitions,
two or more banks combine to create a much larger institution. The resulting
larger institution must evaluate and restructure its operations, practices,
activities and, in some cases, policies to compete more effectively. By
capitalizing on the Company's experience, a bank can reposition its operations
and technologies and achieve the economies of scale and competitive advantages
of a larger, more complex institution.
Year 2000 Resolution. ADS has developed a set of proprietary tools and
methodologies addressing not only a customer's data processing requirements, but
also the risks that the Year 2000 problem presents to the customer's entire
business. The Company's Year 2000 projects are divided into three phases, each
of which has specified activities and deliverables: (i) Risk Assessment and
Project Definition; (ii) Component Remediation; and (iii) Component Testing and
Reintegration. ADS reviews the risks in each functional area of the customer's
operations to determine where and how a Year 2000 failure could occur and its
expected impact on the customer. From these findings, a triage analysis is made
to prioritize the possible failures that could have the greatest customer
impact. Remediation solutions are then defined and ADS's Year 2000 Methodology
determines an appropriate resolution, which may include a customized solution, a
replacement strategy or a third party "factory" solution. In all cases, ADS's
Year 2000 Methodology tracks the issues through resolution. Finally, ADS's Year
2000 Methodology creates a comprehensive user-based testing and reintegration
process for each business area affected. The ADS Year 2000 Methodology tests the
entire user process, including all automated, manual and third party interface
components, rather than merely testing the corrected component. Throughout the
entire Year 2000 engagement, ADS focuses on the impact to the business unit, the
enterprise-wide solution and the mitigation of risk to the institution.
Application Outsourcing. Competitive pressures in the financial services
industry and the need to reinvest in newer applications make application
outsourcing an attractive alternative to internal staffing. In these
engagements, ADS takes responsibility for core system performance, maintenance
and enhancement through a designated project team. ADS assumes all
responsibility for the outsourced application from intervention on production
failures to major reinvestments and enhancements to the application. In these
engagements, the Company's customers occasionally transfer their staff to the
ADS staff, thus shifting the staffing levels of the customer. ADS also provides
management reporting on service levels achieved on all applications covered by
the outsourcing contract. For example, ADS currently provides outsourcing
services on an international trade finance system for a multi-national financial
institution.
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<PAGE> 30
Electronic Commerce and Home Banking. ADS has begun to focus on providing
consulting and application development services to financial services
institutions in the emerging field of electronic commerce and home banking.
Electronic commerce and home banking is intended to provide fully integrated
financial services to the consumer by offering access to financial products and
services from a wide variety of delivery channels. ADS assists customers
undertaking this migration by providing consulting services in four major areas:
(i) identification or experimentation with new electronic delivery channels,
including Internet-based offerings through home computers; (ii) merging of new
service offerings as market trends and customer focused solutions become
apparent and available; (iii) integration of new offerings into the financial
institution's complex environment of core applications, payment systems and
settlement and accounting operations; and (iv) restructuring of a customer's
backroom operations to reflect and support the changing mix of transactions and
delivery channels.
PROJECT MANAGEMENT METHODOLOGY AND QUALITY ASSURANCE
For each customer engagement and across all of its practice areas, ADS
employs its Engagement Management Methodology and Quality Assurance Program to
monitor the adherence to and the successful use of ADS's practice area tools and
methodologies.
Engagement Management Methodology. ADS has developed a comprehensive
methodology consisting of a company wide discipline and best practices that
cover the entire customer engagement cycle. The Engagement Management
Methodology provides ongoing project reporting designed to ensure that standard
project sizing and pricing is used and project risk is assessed and managed.
This methodology also defines how project changes are identified, sized,
proposed, approved and tracked. The Engagement Management Methodology provides
guidelines and procedures throughout the engagement and across all of the
Company's functions. This methodology provides that functions within the Company
in the areas of business development, operations, recruiting and accounting are
integrated and synchronized throughout an engagement.
Quality Assurance Program. The Company employs a Quality Assurance Program
throughout the customer engagement that determines three measurable items: (i)
the effective utilization of the Engagement Management Methodology and other
practice area tools and methodologies; (ii) the quality level, completion time
and budget projections for project deliverables and goals; and (iii) the level
of customer satisfaction and approval rating of ADS in the project. ADS's
Quality Assurance Program is executed by its senior management not directly
involved in the customer engagement, with the direct input and participation of
customer management. The Company's bonus program is based, in part, on the
results of the Quality Assurance Program.
CUSTOMERS
The Company's customers consist primarily of banks and other financial
services companies located in the United States and Canada. The following is a
list of representative customers during fiscal 1997 and 1998.
<TABLE>
<S> <C>
ABN-AMRO Information Technology Services Great Financial Corporation
Alltel Information Services, Inc. Intranet, Inc.
Associated Banc-Corp. Keane, Inc.
BankBoston, N.A. Magna Data Services, Inc.
Canadian Imperial Bank of Commerce National City Corporation
Citizens Savings Bank & Citizens Trust Company NationsBank Corporation (Barnett Bank)
EDS -- Banking and Securities People's Heritage Bank
Electronic Payment Systems, Inc. Signet Bank
First Commercial Corporation SunTrust Services Corp.
First Security Information Technology, Inc. Susquehanna Bancshares, Inc.
Fleet Services Corporation UST Data Services, Inc.
Visa Interactive
</TABLE>
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<PAGE> 31
Substantially all of the Company's revenues are from customers in the
financial services industry, primarily banks, and the Company expects it will
continue to derive substantially all of its revenues from customers in the
financial services industry for the foreseeable future. Accordingly, unfavorable
economic conditions adversely impacting the financial services industry could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Risk Factors -- Dependence on Financial Services
Industry."
The Company has derived and expects to continue to derive a significant
portion of its revenues from a relatively limited number of customers. For
example, the Company's five largest customers in fiscal 1998 accounted for
approximately 64.5% of revenues. During that same period, Associated Banc-
Corp., First Security Information Technology, Inc., National City Corporation,
NationsBank Corporation (Barnett Bank) and ABN-AMRO Information Technology
Services accounted for 17.4%, 13.7%, 13.3%, 10.1% and 10.0%, respectively, of
revenues. In fiscal 1997, the Company's five largest customers accounted for
approximately 54.0% of revenues, and during the same period, First Security
Information Technology, Inc. and Citizens Savings Bank & Citizens Trust Company
accounted for 18.8% and 12.4%, respectively, of revenues. There is no assurance
that the Company's major customers will continue to purchase services from it at
current levels, if at all, or that the Company will be able to replace revenues
from such customers with revenues from other customers. See "Risk
Factors -- Concentration of Revenues; Dependence on Major Customers."
SALES AND MARKETING
The Company markets and sells its services directly through its
professional sales and marketing staff and senior management operating
principally from the Company's offices in Quincy, Massachusetts. As of March 31,
1998, ADS had 17 persons engaged in sales and marketing activities.
ADS's senior business development representatives are assigned to a limited
number of customers to foster an in-depth understanding of each customer's
individual needs and build a long-term customer relationship. Many of the
Company's customer relationships begin as small, focused projects, with
subsequent projects increasing in size and complexity. The Company develops such
relationships through a carefully coordinated effort between its sales and
professional services staff. Initial sales calls are made at the customers'
senior management level and followed up by detailed presentations targeted to
their specific needs.
The Company employs a variety of business development and marketing
techniques to communicate directly with current and prospective customers,
including targeted print and direct mail advertisements; participation in
financial services industry trade shows and conferences; and the Company's web
site. In addition, ADS maintains relationships with key industry research groups
such as the Tower Group, the American Bankers Association, and the Information
Technology Association of America.
As part of its sales and marketing strategy, the Company intends, from time
to time, to partner with other IT consulting firms, including in some instances
its competitors, and to explore relationships with certain third party software
providers to the financial services market. The Company believes these
relationships may result in increased direct client referrals and enhanced
industry recognition. ADS also believes these relationships will enable it to
broaden its customer base, increase its competitiveness and maintain its
technological leadership through access to the most current information and
training on leading software and information systems.
COMPETITION
The IT and systems integration market, especially in the financial services
industry, includes a large number of competitors and is subject to rapid
technological and market changes. The Company competes for customer projects and
experienced personnel with a number of companies having significantly greater
financial, technical and marketing resources and revenues than the Company. Many
of these competitors also have greater name recognition in the financial
services industry. ADS's competitors operate in a variety of market segments
including systems consulting and integration,
30
<PAGE> 32
application software, professional services (such as computer equipment
companies like International Business Machines Corporation), multinational
accounting firms, and general management consulting firms (such as Andersen
Consulting, Computer Sciences Corporation and Electronic Data Systems
Corporation). In addition, the custom software development market is highly
fragmented with numerous firms, many of which focus on their respective local
markets. The Company also faces competition from internal IT departments of its
customers.
The Company expects to experience increasing competition from companies
offering established integration services and new service offerings and
technologies. In addition, current and potential competitors may make strategic
acquisitions or establish cooperative relationships among themselves or with
others, thereby increasing their ability to expand or increase their service
offerings to address the needs of ADS's existing or prospective customers.
Accordingly, it is possible that new competitors or alliances among current and
new competitors may emerge and rapidly gain significant market share. Increased
competition could result in lower utilization rates, billing rate reductions,
fewer customer engagements, reduced gross margins, and loss of market share for
the Company, any of which could materially adversely affect its business,
financial condition and results of operations.
The Company believes the principal competitive factors in its market are
knowledge of the financial services industry, responsiveness to customer needs,
quality of service, project management capability, technical expertise and
price. ADS believes it competes favorably in most of these areas and excels in
the depth of industry knowledge and experience it brings to its financial
services customers. The Company believes its ability to compete also depends in
part on factors outside its control, including the ability of its competitors to
attract, motivate and retain project managers and other personnel.
To be successful in the future, the Company must respond promptly and
effectively to customer demands, technological changes and competitors'
innovations. The Company's competitors may be able to respond more quickly than
the Company to new or emerging technologies and changes in customer requirements
and devote greater resources to the development, promotion and sale of new
service offerings to prospective customers. There is no assurance that the
Company will be able to compete successfully with existing or new competitors or
that competition will not have a material adverse effect on the Company's
business, financial condition and results of operations.
INTELLECTUAL PROPERTY RIGHTS
The Company's success is dependent on certain proprietary methodologies and
software tools, including its Engagement Management Methodology, CPT and Year
2000 Methodology, that it uses in providing services to customers. The Company's
business also includes developing custom software for various customers.
Ownership of such software is generally assigned to the customer, and the
Company retains no right, title or interest in it.
The Company relies on a combination of trade secret, nondisclosure and
other contractual arrangements, and copyright and trademark laws to protect its
proprietary rights. The Company currently holds no patents or registered
copyrights. The Company generally enters into confidentiality agreements with
its consultants, customers and potential customers and limits access to and
distribution of its proprietary information. While ADS does not usually enter
into confidentiality agreements with its employees, such employees are generally
required to sign confidentiality agreements in connection with specific client
engagements. There is no assurance that these steps will be adequate to deter
misappropriation of proprietary information of the Company or its customers or
that the Company will be able to detect unauthorized use of and take appropriate
steps to enforce its intellectual property rights.
In the future, litigation may be necessary to enforce and protect the
Company's trade secrets, copyrights and other intellectual property or
proprietary rights. The Company may also be subject to litigation to defend
against claimed infringement or to determine the scope and validity of the
intellectual property or proprietary rights of others. In the event of
litigation involving the Company's use of technology, the Company could be
required to expend significant resources to develop non-infringing technology or
to obtain licenses to technology involved in litigation. There is no assurance
31
<PAGE> 33
that the Company would be successful in any such development or that any such
licenses would be available on commercially reasonable terms, if at all.
Although ADS is not aware that its services, trademarks or other proprietary
rights infringe upon the proprietary rights of others, there is no assurance
that third parties will not assert infringement claims against the Company and
that such claims will not result in a material adverse effect on its business,
financial condition and results of operations. Any litigation concerning the
Company's use of technology could result in substantial cost to the Company in
defending such actions and divert management's attention from the Company's
operations, either of which could have a material adverse effect on its
business, financial condition and results of operations. Adverse determinations
in such litigation could result in the loss of the Company's proprietary rights,
subject it to significant liabilities, or prevent it from selling its services,
any one of which could have a material adverse effect on its business, financial
condition and results of operations. See "Risk Factors -- Intellectual Property
Rights."
HUMAN RESOURCES
As of March 31, 1998, the Company employed 295 people, with 252 in
professional services and consulting, 17 in sales and marketing, and 26 in
general and administrative. As of March 31, 1998, the Company also utilized 30
individuals under independent contracts. None of the Company's employees is
represented by a labor union, and the Company has never experienced a work
stoppage. The Company considers its relations with its employees to be good.
The Company's success depends in large part on its ability to attract,
train, motivate, and retain highly skilled technical employees. Qualified
technical employees are in great demand and are likely to remain a limited
resource for the foreseeable future. ADS also needs to recruit technicians
knowledgeable in financial services, further complicating the recruiting task.
ADS dedicates significant resources to recruiting employees with IT consulting
and financial services industry experience. Many of the Company's employees are
hired from large IT, accounting and other professional services organizations
and from the financial services industry.
The Company believes its success in attracting, motivating and retaining
highly skilled technical employees is in part attributable to its commitment to
provide a work environment featuring continuous and extensive professional
development opportunities and diverse and challenging work projects. The Company
has historically experienced turnover rates that it believes are below industry
averages for IT professional services companies; however, there is no assurance
that these rates will continue. ADS has comprehensive and specialized training
programs focusing on industry knowledge, project management skills, relationship
building skills, and ADS's culture and history. The Company provides an
extensive training program for employees including in-house instruction and a
specialized management training program offered twice annually in conjunction
with Babson College. ADS believes its management structure, corporate culture,
human resources organization and comprehensive benefits package are designed to
maximize its ability to efficiently expand the Company's consulting staff in
response to customer needs. The Company's success will depend in part on its
continued ability to attract, motivate and retain highly qualified personnel in
a competitive market for project managers, professional services staff, and
sales and marketing personnel. See "Risk Factors -- Dependence on Key
Personnel," "-- Availability of Professional Staff."
FACILITIES
The Company's headquarters and administrative, sales and marketing
operations are in Quincy, Massachusetts in a leased facility consisting of
approximately 23,742 square feet. The Company has a right of first refusal to
lease any additional space becoming available in part of the premises. Although
this lease expires on March 31, 2000, the Company has an option to extend it for
an additional five-year term upon nine months' notice prior to the lease term's
expiration. ADS anticipates that additional space may be required as its
business expands.
LEGAL PROCEEDINGS
The Company is not a party to any litigation it believes could have a
material adverse effect on its business, financial condition and results of
operations.
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<PAGE> 34
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company and their ages as of
the date of this Prospectus are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Robert W. Howe...................... 51 Chief Executive Officer and Chairman of the Board
William H. Gallagher................ 50 President, Chief Operating Officer, Assistant Clerk
and Director
Paul K. McGrath..................... 51 Senior Vice President, Finance and Administration,
and Chief Financial Officer
Peter A. Cahill..................... 43 Executive Vice President and Director of Operations
David E. Olsson..................... 46 Executive Vice President and Director of Business
Development
Lee M. Kennedy(1)................... 63 Director
David C. Hodgson(1)(2).............. 41 Director
George F. Raymond(2)................ 61 Director
Richard D. Driscoll(1).............. 67 Director
</TABLE>
- ---------------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
Robert W. Howe has been Chief Executive Officer and Chairman of the Board
of Directors of the Company since January 1994 and a Director since March 1980.
From March 1980 to January 1994, Mr. Howe served as President of the Company; he
served as Treasurer from March 1980 to July 1991. Prior to forming the Company
in March 1980 with Mr. Gallagher, Mr. Howe served as Executive Vice President of
Savings Management Computer Corporation, a bank service bureau. Mr. Howe
received his B.A. from Boston College.
William H. Gallagher has been President and Chief Operating Officer of the
Company since January 1994 and a Director since March 1980. From March 1980 to
January 1994, Mr. Gallagher served as Executive Vice President and Clerk of the
Company. Prior to forming the Company in March 1980 with Mr. Howe, Mr. Gallagher
served as Vice President of Savings Management Computer Corporation. Mr.
Gallagher attended Harvard University Extension School.
Paul K. McGrath has been Senior Vice President, Finance and Administration,
and Chief Financial Officer of the Company since January 1998. Prior to joining
the Company, Mr. McGrath served as Vice President, Chief Financial Officer and
Treasurer of Pivotpoint, Inc., an enterprise resource planning software company,
from December 1995 to January 1998. From April 1990 to January 1995, Mr. McGrath
served as Vice President, Chief Financial Officer and Treasurer of Bachman
Information Systems, Inc., a public software company in the computer aided
software engineering industry. Mr. McGrath is a Certified Public Accountant and
received his M.S. from Northeastern University and his B.A. from St. Anselm
College.
Peter A. Cahill has been Executive Vice President and Director of
Operations of the Company since October 1995. From April 1992 to October 1995,
Mr. Cahill served as Senior Vice President of Operations of the Company, and
from April 1989 to April 1992, Mr. Cahill served as Vice President of
Operations. Mr. Cahill also served in a number of technical positions at the
Company from April 1980 to April 1989. Prior to joining the Company in April
1980, Mr. Cahill served as Senior Technician at Savings Management Computer
Corporation. Mr. Cahill attended Bridgewater State College.
David E. Olsson has been Executive Vice President and Director of Business
Development of the Company since August 1996. Prior to joining the Company, Mr.
Olsson served as Senior Vice President and General Manager of Logica plc, an IT
consulting services company, from December 1994 to August
33
<PAGE> 35
1996. From January 1991 to July 1994, Mr. Olsson served as Senior Vice President
of Business Development and Marketing at Boston Technology, Inc., a
telecommunications company. Mr. Olsson received his M.B.A. from Bentley College,
his Ed.M. from Boston University and a B.A. from the University of Massachusetts
at Amherst.
David C. Hodgson has been a Director of the Company since July 1988. Mr.
Hodgson has been a managing member of General Atlantic Partners, LLC ("GAP
LLC"), the general partner of General Atlantic Partners II, L.P., a private
equity investment firm, or a general partner of its predecessor partnerships
since February 1989. Mr. Hodgson is also a director of Baan Company N.V.,
ProBusiness Services, Inc., and several private information technology
companies. Mr. Hodgson received his M.B.A. from Stanford University and his A.B.
from Dartmouth College.
Lee M. Kennedy has been a Director of the Company since March 1980. Mr.
Kennedy served as President of Lee Kennedy Co., Inc., a general contracting
company, from February 1978 until July 1995, and has served as Chairman and
Chief Executive Officer since August 1995. Mr. Kennedy attended Curry College
and the Boston Architectural Center.
George F. Raymond has been a Director of the Company since April 1991. Mr.
Raymond retired as the President and Founder of Automatic Business Centers, Inc.
in 1990. Mr. Raymond is also a director of BMC Software, Inc., Docucorp
International, Inc. and several private information technology companies. Mr.
Raymond received his B.A. from the University of Massachusetts.
Richard D. Driscoll has been a Director of the Company since February 1998.
Mr. Driscoll served as President and Chief Executive Officer of the
Massachusetts Bankers Association from November 1990 to January 1997. From April
1987 to January 1990, Mr. Driscoll served as the Chairman and Chief Executive
Officer of The Bank of New England, N.A. Mr. Driscoll is also a director of
Chittenden Corporation and the Massachusetts Business Development Corporation.
Mr. Driscoll received his M.B.A. from Harvard Business School and his A.B. from
Boston College.
Executive officers of the Company are elected by the Board of Directors on
an annual basis and serve until their successors are duly elected and qualified.
Messrs. Howe, Gallagher and Hodgson were selected as Directors of the Company
pursuant to a Shareholders' Agreement dated July 15, 1988 between the Company
and certain of its shareholders, which agreement will terminate as of the
effective date of this offering. There are no family relationships among any of
the executive officers or directors of the Company.
Upon the closing of the offering, the Company's Board of Directors will be
divided into three classes, with the members of each class of directors serving
for staggered three-year terms. Messrs. Hodgson and Driscoll will serve in the
class the term of which expires in 1999; Messrs. Kennedy and Gallagher will
serve in the class the term of which expires in 2000; and Messrs. Howe and
Raymond will serve in the class the term of which expires in 2001. Upon the
expiration of the term of each class of directors, nominees for such class will
be elected for a three-year term at the next annual meeting of stockholders. The
Company's adoption of a classified Board of Directors could have the effect of
increasing the length of time necessary to change the composition of a majority
of the Board of Directors. In general, at least two annual meetings of
stockholders will be necessary for stockholders to effect a change in a majority
of the members of the Board of Directors. See "Description of Capital
Stock -- Massachusetts Law and Certain Provisions of the Company's Second
Amended and Restated Articles of Organization and Second Amended and Restated
By-Laws."
COMMITTEES OF THE BOARD OF DIRECTORS
The Compensation Committee consists of Messrs. Hodgson and Raymond. The
Compensation Committee reviews and evaluates the compensation and benefits of
all officers of the Company, reviews general policy matters relating to
compensation and benefits of employees of the Company and make recommendations
concerning these matters to the Board of Directors. The Compensation
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<PAGE> 36
Committee also administers the Company's stock option and stock purchase plans.
See "-- Equity Plans."
The Audit Committee consists of Messrs. Kennedy, Hodgson and Driscoll. The
Audit Committee reviews, with the Company's independent auditors, the scope and
timing of their audit services and any other services they are asked to perform,
the auditors' report on the Company's consolidated financial statements
following completion of their audit, and the Company's policies and procedures
with respect to internal accounting and financial controls. In addition, the
Audit Committee will make annual recommendations to the Board of Directors for
the appointment of independent auditors for the ensuing year.
DIRECTOR COMPENSATION
Directors who are not employees of the Company (also referred to as
"outside directors"), who currently consist of Messrs. Kennedy, Hodgson, Raymond
and Driscoll, receive an annual retainer fee of $10,000 and a fee of $750 for
attending regular meetings of the Board of Directors and for meetings of any
committees of the Board of Directors on which they serve, if such meetings are
held separately. Directors are also reimbursed for reasonable out-of-pocket
expenses incurred in attending such meetings. Outside directors are also
eligible for participation in the Company's 1997 Stock Plan. See "-- Equity
Plans."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee is comprised of Messrs. Hodgson and Raymond. No
member of the Compensation Committee serves as a member of the board of
directors or compensation committee of any entity that has one or more executive
officers serving as a member of the Board or Compensation Committee.
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<PAGE> 37
EXECUTIVE COMPENSATION
Summary Compensation. The following table sets forth the compensation
earned by Robert W. Howe, the Company's Chief Executive Officer, and the
Company's four other most highly compensated executive officers who were serving
as executive officers at the end of fiscal 1998 (together with the Chief
Executive Officer, the "Named Executive Officers") for services rendered in all
capacities to the Company in fiscal 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION -------------
----------------------------------------- SECURITIES ALL OTHER
NAME AND OTHER ANNUAL UNDERLYING COMPENSATION
PRINCIPAL POSITION SALARY($) BONUS($) COMPENSATION($)(1) OPTIONS(#)(2) ($)(1)(3)
- ------------------ --------- -------- ------------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Robert W. Howe.................. 342,805 100,000 64,067 -- 3,625
Chief Executive Officer
and Chairman of the Board
William H. Gallagher............ 342,805 100,000 46,534(4) -- 3,531
President and Chief Operating
Officer
Paul K. McGrath(5).............. 35,795 15,000 -- 90,000 --
Senior Vice President, Finance
and Administration, and Chief
Financial Officer
Peter A. Cahill................. 174,865 150,098 -- 20,000 3,625
Executive Vice President and
Director of Operations
David E. Olsson................. 175,000 320,098 -- 20,000 2,646
Executive Vice President and
Director of Business
Development
</TABLE>
- ---------------
(1) In accordance with the rules of the Securities and Exchange Commission,
other compensation in the form of perquisites and other personal benefits,
securities or property has been omitted for certain Named Executive Officers
because such perquisites and other personal benefits, securities or property
constituted in the aggregate less than the lesser of $50,000 or 10% of such
persons' salary and bonus shown in the table.
(2) The Company did not make any restricted stock awards, grant any stock
appreciation rights or make any long-term incentive payments during fiscal
1998 to its executive officers. Options granted to the Named Executive
Officers were granted at fair market value as determined by the Board of
Directors based on all factors available to them on the grant date.
(3) Represents matching contributions paid by the Company on behalf of the Named
Executive Officers under the Company's 401(k) Plan.
(4) The Company provides a leased vehicle and automobile insurance to Mr.
Gallagher. The total cost to the Company for the automobile lease and
insurance in fiscal 1998 was $11,925. The Company paid $14,539 for financial
consulting services provided to Mr. Gallagher in fiscal 1998.
(5) Mr. McGrath commenced employment with the Company in January 1998.
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<PAGE> 38
Option Grants. The following table provides information concerning grants
of stock options made during fiscal 1998 by the Company to each of the Named
Executive Officers:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT
----------------------------------------------------- ASSUMED ANNUAL
NUMBER OF PERCENT OF RATES OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(2)
OPTIONS EMPLOYEES IN PRICE/ EXPIRATION ---------------------
NAME GRANTED(#)(1) FISCAL 1998 SHARE(1) DATE 5% 10%
---- ------------- ------------- -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Paul K. McGrath.......... 90,000 16.45% $4.25 1/11/2008 240,552 609,606
Peter A. Cahill.......... 20,000 3.65% $9.00 2/10/2008 113,201 286,874
David E. Olsson.......... 20,000 3.65% $9.00 2/10/2008 113,201 286,874
</TABLE>
- ------------
(1) All options were granted pursuant to the Company's 1997 Stock Plan (the
"1997 Plan") at not less than fair market value as determined by the Board
of Directors of the Company as of the date of grant. All options were
incentive stock options to the extent the aggregate fair market value
(determined at the time such options were granted) of the shares with
respect to which the options were exercisable for the first time by such
optionee during any calendar year did not exceed $100,000. One-third of Mr.
McGrath's options vested immediately upon grant and the remaining shares
underlying the options vest in equal installments on the first and second
anniversary of the date of grant. Twenty-five percent of each of Messrs.
Cahill's and Olsson's options vested immediately upon grant and the
remaining shares underlying each of their options vest in equal installments
on the first, second and third anniversary of the date of grant.
(2) Amounts reported in this column represent hypothetical values that may be
realized upon exercise of the options immediately prior to the expiration of
their term, assuming that the stock price on the date of grant appreciates
at the specified annual rates of appreciation, compounded annually over the
term of the options. These numbers are calculated based on rules promulgated
by the Securities and Exchange Commission. Actual gains, if any, on stock
option exercises and Common Stock holdings are dependent on the time of such
exercise and the future performance of the Company's Common Stock.
Option Exercises and Unexercised Option Holdings. The following table
provides information regarding options exercised during fiscal 1998 and
unexercised stock options held as of March 31, 1998 by each of the Named
Executive Officers.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF SECURITIES IN-THE-MONEY
UNDERLYING UNEXERCISED OPTIONS AT FISCAL
SHARES VALUE OPTIONS AT FISCAL YEAR-END(#) YEAR-END($)(1)
ACQUIRED REALIZED ----------------------------- ---------------------------
NAME ON EXERCISE(#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------------- --------- ------------ -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Paul K. McGrath...... 30,000 -- -- 60,000 -- 585,000
Peter A. Cahill...... 73,000 237,740 198,000 15,000 2,551,370 75,000
David E. Olsson...... 420,000 1,242,900 5,000 15,000 25,000 75,000
</TABLE>
- ---------------
(1) There was no public trading market for the Common Stock as of March 31,
1998. Accordingly, these values have been calculated by determining the
difference between the fair market value of the securities underlying the
option as of March 31, 1998 (assuming an initial public offering price of
$14.00 per share) and the exercise price of the Named Executive Officer's
options.
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<PAGE> 39
EQUITY PLANS
Key Person Stock Plan. The Company's Key Person Stock Plan (the "Key
Person Plan") was adopted by the Board of Directors in March 1985. Under the Key
Person Plan, the Company is authorized to award shares of Class A Common Stock
to officers and other employees of and consultants to the Company. The aggregate
number of shares of Class A Common Stock which may be issued under the Key
Person Plan is 560,000. To date, 394,800 shares have been awarded under the Key
Person Stock Plan, of which an aggregate of 112,000 shares were repurchased by
the Company on October 11, 1991 pursuant to a stockholder's agreement between
the Company and a former employee. The Company does not intend to award any
further shares of Class A Common Stock under the Key Person Plan.
Amended and Restated 1992 Incentive Stock Option Plan. The Company's 1992
Incentive Stock Option Plan was adopted by the Board of Directors and approved
by the Company's voting stockholders in January 1993 and amended and restated by
the Board of Directors and stockholders in October 1997 (the "1992 Plan"). Under
the 1992 Plan, the Company is authorized to grant incentive stock options
("ISOs") to purchase shares of Class A Common Stock to officers and other
employees of and consultants to the Company. The 1992 Plan provides for the
accelerated vesting of options if the Company is consolidated with or acquired
by another entity in a merger or there is a sale of all or substantially all of
the Company's assets. The aggregate number of shares of Class A Common Stock
which may be issued under the 1992 Plan is 812,000. To date, options for all
authorized shares have been granted under the 1992 Plan. The Company does not
intend to award any further options under the 1992 Plan.
1997 Stock Plan. The Company's 1997 Stock Plan (the "1997 Plan") was
adopted by the Board of Directors and approved by the Company's voting
stockholders in October 1997. The aggregate number of shares of Class A Common
Stock which may be issued under the 1997 Plan is 500,000. In March 1998, the
Board of Directors and in April 1998, the stockholders, voted to amend and
restate the 1997 Plan to provide, effective immediately prior to the closing of
this offering, that the number of shares reserved for issuance under the 1997
Plan be increased from 500,000 shares of Class A Common Stock to 1,500,000
shares of Class A Common Stock. Under the 1997 Plan, the Company is authorized
to grant ISOs and non-qualified stock options ("NQSOs") (collectively, "Stock
Options"), as well as awards of Class A Common Stock ("Awards") and
opportunities to make direct purchases of Class A Common Stock ("Purchases") to
employees, consultants, directors and officers of the Company.
The 1997 Plan is administered by the Compensation Committee of the Board of
Directors. Subject to the provisions of the 1997 Plan, the Compensation
Committee has the authority to select the participants and determine the terms
of the Stock Options, Awards and Purchases granted under the 1997 Plan,
including: (i) the time or times at which Stock Options, Awards and Purchases
may be granted; (ii) whether a Stock Option will be an ISO or a NQSO; (iii) the
number of shares subject to each Stock Option, Award and Purchase; (iv) when the
Stock Option becomes exercisable; (v) the exercise price of the Stock Option,
which in the case of an ISO cannot be less than the fair market value of the
Class A Common Stock as of the date of grant, or not less than 110% of the fair
market value in the case of an ISO granted to an employee or officer holding 10%
or more of the voting stock of the Company; (vi) the duration of the Stock
Option; and (vii) the time, manner and form of payment upon exercise of a Stock
Option. A Stock Option is not transferable by the recipient except by will or by
the laws of descent and distribution, or in the case of a NQSO, only to the
extent set forth in the agreement relating to such option or pursuant to a valid
domestic relations order. Generally, no ISO may be exercised more than 30 days
following termination of employment, and no Stock Option may be exercised
following termination of employment for cause. However, in the event that
termination is due to death or disability, the Stock Option is exercisable for a
maximum of one year after such termination. To date, the Company has granted
Stock Options to purchase an aggregate of 371,500 shares of Class A Common Stock
pursuant to the 1997 Plan (not including 175,500 shares which will be granted as
of the effective date of this offering at an exercise price equal to the initial
public offering price).
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1998 Employee Stock Purchase Plan. The 1998 Employee Stock Purchase Plan
(the "1998 Purchase Plan") was adopted by the Board of Directors in March 1998
and approved by the stockholders in April 1998, to be effective upon the
effective date of this offering. The 1998 Purchase Plan provides for the
issuance of a maximum of 500,000 shares of Common Stock.
The 1998 Purchase Plan is administered by the Compensation Committee of the
Board of Directors. All employees of the Company whose customary employment is
for more than 20 hours per week and for more than three months in any calendar
year are eligible to participate in the 1998 Purchase Plan. Outside Directors
and employees who would own 5% or more of the total combined voting power or
value of the Company's stock immediately after the grant may not participate in
the 1998 Purchase Plan. To participate in the 1998 Purchase Plan, an employee
must authorize the Company to deduct an amount (not less than one percent nor
more than 10 percent of a participant's total cash compensation) from his or her
pay during six-month payment periods (each, a "Payment Period"). The first
Payment Period will commence upon the registration of the Company's Common Stock
under the Securities Exchange Act of 1934, as amended, and will end on the
earlier of the following September 30 or March 31. Thereafter, the Payment
Periods will commence on the six-month periods commencing on April 1 and October
1, respectively, and ending on the following September 30 and March 31,
respectively, of each year, but in no case shall an employee be entitled to
purchase more than 500 shares in any one Payment Period. The exercise price for
the option granted in each Payment Period is 85% of the lesser of the average
market price of the Common Stock on the first or last business day of the
Payment Period, in either event rounded up to the nearest cent to avoid
fractions of a dollar other than 1/4, 1/2 and 3/4. If an employee is not a
participant on the last day of the Payment Period, such employee is not entitled
to exercise his or her option, and the amount of his or her accumulated payroll
deductions will be refunded. Options granted under the 1998 Purchase Plan may
not be transferred or assigned. An employee's rights under the 1998 Purchase
Plan terminate upon his or her voluntary withdrawal from the plan at any time or
upon termination of employment. No options have been granted to date under the
1998 Purchase Plan.
401(K) PLAN
The Company has a Section 401(k) Profit Sharing Plan (the "401(k) Plan").
The 401(k) Plan is a tax-qualified plan covering Company employees who are over
21 years of age. Under the 401(k) Plan, participants may elect to defer a
portion of their compensation, subject to certain limitations. In addition, at
the discretion of the Board of Directors, the Company may make matching
contributions into the 401(k) Plan for all eligible employees. During fiscal
1998 the Company contributed $301,300 to the 401(k) Plan.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements (the "Agreements") with
each of its Named Executive Officers. The Agreements set forth the base salaries
of each such executive officer and such officer's entitlement to participate in
the Company's standard benefits package generally available for all other
officers of the Company similarly situated. Generally, these employees are
entitled to a cash severance payment upon termination by the Company of their
employment without "cause" or upon termination by the employee of his or her
employment for any reason following a "change of control" (as defined in the
Agreements). Such lump-sum severance payment is equal to 12 months' salary at
the employee's then current base rate, payable in the same manner as such salary
was payable during the period of such employee's employment. In addition, upon a
change of control, the Company is obligated to continue the employee's health
benefits for a 12 month period from the date of such change of control.
The Agreements also include certain restrictive covenants for the benefit
of the Company relating to non-disclosure by the employee of the Company's
confidential business information and the Company's right to inventions and
technical improvements made by the employee. The Agreements
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<PAGE> 41
also contain a provision prohibiting the employee from soliciting employees or
customers of the Company for a period of two years after any termination of the
employee's employment.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
The By-laws of the Company provide that the directors and officers of the
Company shall be indemnified by the Company to the fullest extent authorized by
Massachusetts law, as it now exists or may in the future be amended, against all
expenses and liabilities reasonably incurred in connection with service for or
on behalf of the Company. Insofar as indemnification for liabilities arising
under the Securities Act may be permitted to directors, officers and controlling
persons of the Company pursuant to the By-laws, in the opinion of the Securities
and Exchange Commission, such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. The Company
intends to obtain insurance which insures the directors and officers of the
Company against certain losses and which insures the Company against certain of
its obligations to indemnify such directors and officers. In addition, the
Articles of Organization of the Company provide that the directors of the
Company will not be personally liable for monetary damages to the Company for
breaches of their fiduciary duty as directors, unless they violate their duty of
loyalty to the Company or its stockholders, act in bad faith, or engage in
intentional misconduct or a knowing violation of law, authorize illegal
dividends or redemptions or derive an improper personal benefit from their
actions as directors. Such limitations of personal liability under the
Massachusetts Business Corporation Law do not apply to liabilities arising out
of certain violations of the federal securities laws. While non-monetary relief
such as injunctive relief, specific performance and other equitable remedies may
be available to the Company, such relief may be difficult to obtain or, if
obtained, may not adequately compensate the Company for its damages.
There is no pending litigation or proceeding involving any director,
officer, employee or agent of the Company where indemnification by the Company
will be required or permitted. The Company is not aware of any threatened
litigation or proceeding that might result in a claim for such indemnification.
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CERTAIN TRANSACTIONS
Lee Kennedy Co., Inc., whose Chairman and Chief Executive Officer, Lee M.
Kennedy, is a director of the Company, has provided certain construction
services to the Company at its Quincy, Massachusetts facility. The aggregate
value of these services in fiscal 1996, 1997 and 1998 was $66,555, $59,958 and
$54,847, respectively.
The Company has contracted with the J. Barry Driscoll Insurance Agency for
insurance coverage for certain of the Company's executive officers and for
certain corporate polices. J. Barry Driscoll, the Chairman of the Board of
Directors of J. Barry Driscoll Insurance Agency, is the brother of Richard D.
Driscoll, a director of the Company. The aggregate cost of the insurance
coverage provided through the J. Barry Driscoll Insurance Agency to the Company
in fiscal 1996, 1997 and 1998 was $66,169, $64,124 and $69,808, respectively.
The Company believes the transactions set forth above were made on terms no
less favorable to the Company than would have been obtained from unaffiliated
third parties. The Company has adopted a policy whereby all future transactions
between the Company and its officers, directors and affiliates will be on terms
no less favorable to the Company than could be obtained from unaffiliated third
parties and will be approved by a majority of the disinterested members of the
Company's Board of Directors.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information known to the Company
regarding beneficial ownership of the Company's Common Stock as of the date of
this Prospectus and as adjusted to reflect the sale of the shares of Common
Stock offered hereby by (i) each person known by the Company to be the
beneficial owner of more than 5% of the Company's Common Stock; (ii) each of the
Company's directors; (iii) each Named Executive Officer (see
"Management -- Executive Compensation"); (iv) all executive officers and
directors as a group; and (v) each Selling Stockholder.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO THE OFFERING(1) AFTER OFFERING(1)(2)
------------------------ ----------------------
NUMBER OF SHARES NUMBER OF
NAME OF BENEFICIAL OWNER(3) SHARES PERCENTAGE OFFERED(4) SHARES PERCENTAGE
--------------------------- ---------- ----------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
General Atlantic Partners II,
L.P.(5)............................. 3,104,080 28.8% -- 3,104,080 24.3%
Robert W. Howe(6)..................... 2,329,740 21.6 250,000 2,079,740 16.3
William H. Gallagher(7)............... 2,329,740 21.6 250,000 2,079,740 16.3
Paul K. McGrath....................... 30,000 * -- 30,000 *
Peter A. Cahill(8).................... 439,000 4.0 -- 439,000 3.4
David E. Olsson(9).................... 425,000 3.9 -- 425,000 3.3
Lee M. Kennedy(10).................... 1,068,400 9.9 -- 1,068,400 8.4
David C. Hodgson(11).................. 3,104,080 28.8 -- 3,104,080 24.3
George F. Raymond(12)................. 42,000 * -- 42,000 *
Richard D. Driscoll(13)............... 15,000 * -- 15,000 *
Edward B. Gardner, Jr.(14)............ 542,360 5.0 -- 542,360 4.2
All executive officers and directors
as a group (9 persons)(15).......... 9,782,960 88.8% 500,000 9,282,960 71.3%
</TABLE>
- ---------------
* Indicates less than 1%.
(1) Assumes conversion of all of the Company's outstanding shares of Special
Common Stock and Class A Common Stock on a 1-for-1 basis into Common Stock.
Unless otherwise indicated below, the persons and entities named in the
table have sole voting and sole investment power with respect to all shares
beneficially owned. Shares of Common Stock subject to options that are
currently exercisable or exercisable within 60 days from the date of this
Prospectus are deemed to be outstanding and to be beneficially owned by the
person holding such options for the purpose of computing the percentage
ownership of such person but are not treated as outstanding for the purpose
of computing the percentage ownership of any other person.
(2) Assumes that the Underwriters' over-allotment option to purchase up to an
additional 375,000 shares from certain Selling Stockholders is not
exercised.
(3) See "Management -- Executive Officers and Directors." Unless otherwise
indicated, the address for each beneficial owner is c/o Atlantic Data
Services, Inc., One Batterymarch Park, Quincy, MA 02169.
(4) If the Underwriters exercise their over-allotment option to purchase up to
an additional 375,000 shares, then the following stockholders will sell up
to the following number of additional shares: Robert W. Howe, 55,800
shares; Howe Family Limited Partnership, 35,000 shares; Robert W. Howe
Grantor Retained Annuity Trust, 20,000 shares; William H. Gallagher, 55,800
shares; Gallagher Family Limited Partnership, 35,000 shares; William H.
Gallagher Grantor Retained Annuity Trust, 20,000 shares; Peter A. Cahill,
45,000 shares; Lee M. Kennedy, 68,400 shares; and Edward B. Gardner, Jr.,
40,000 shares.
(5) The address of General Atlantic Partners II, L.P. ("GAP II") is c/o General
Atlantic Service Corporation, 3 Pickwick Plaza, Greenwich, CT 06830.
(6) Includes 258,860 shares held by the Howe Family Limited Partnership. Mr.
Howe disclaims beneficial ownership of these shares except to the extent of
his proportionate pecuniary interest
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therein, which interest is a 1% general partnership interest. Does not
include 258,860 shares held by Stephen A. Hurwitz as Trustee of the Robert
W. Howe Grantor Retained Annuity Trust. Mr. Howe retains the right to an
annual annuity payment from this trust payable in each of 1998 through 2002
which may result in certain of the 258,860 shares being returned to him.
(7) Includes 258,860 shares held by the Gallagher Family Limited Partnership.
Mr. Gallagher disclaims beneficial ownership of the shares except to the
extent of his proportionate pecuniary interest therein, which interest is a
1% general partnership interest. Does not include 258,860 shares held by
Stephen A. Hurwitz as Trustee of the William H. Gallagher Grantor Retained
Annuity Trust. Mr. Gallagher retains the right to an annual annuity payment
from this trust which may result in certain of the 258,860 shares being
returned to him.
(8) Includes 198,000 shares of Common Stock issuable upon exercise of stock
options. Also includes 100,000 shares held by the Peter & Andrea Cahill
Family Limited Partnership. Mr. Cahill has shared voting and investment
power with his spouse with respect to such shares. Mr. Cahill disclaims
beneficial ownership of these shares except to the extent of his
proportionate pecuniary interest therein, which interest is a 1% general
partnership interest held by each of Mr. Cahill and his spouse.
(9) Includes 5,000 shares of Common Stock issuable upon exercise of stock
options.
(10) Mr. Kennedy's address is c/o Lee Kennedy Co., Inc., 1792 Dorchester Avenue,
Boston, MA 02124. Does not include 20,000 shares held by Mary Elizabeth
Kennedy and Jennifer C. Snyder, and their Successors, as Trustees of the
Lee M. Kennedy 1997 Irrevocable Trust f/b/o Eugene Kennedy dated November
6, 1997; 20,000 shares held by Mary Elizabeth Kennedy and Jennifer C.
Snyder, and their Successors, as Trustees of the Lee M. Kennedy 1997
Irrevocable Trust f/b/o Lee Michael Kennedy dated November 6, 1997; and
20,000 shares held by Mary Elizabeth Kennedy and Jennifer C. Snyder, and
their Successors, as Trustees of the Lee M. Kennedy 1997 Irrevocable Trust
f/b/o Shaila Kennedy dated November 6, 1997 (collectively, the "Trusts").
(11) Mr. Hodgson's address is c/o General Atlantic Service Corporation, 3
Pickwick Plaza, Greenwich, CT 06830. Consists of 3,104,080 shares held by
GAP II. Mr. Hodgson is a managing member of GAP LLC, the general partner of
GAP II. Mr. Hodgson disclaims beneficial ownership of these shares except
to the extent of his proportionate pecuniary interest therein.
(12) Mr. Raymond's address is 210 E. Oak Avenue, Morristown, NJ 08057. Consists
of 42,000 shares of Common Stock issuable upon exercise of options pursuant
to the Company's 1992 Plan.
(13) Mr. Driscoll's address is 116 Laurel Road, Chestnut Hill, MA 02167.
(14) Includes 128,000 shares of Common Stock held by the Gardner Family Limited
Partnership. Mr. Gardner has shared voting and investment power with his
spouse with respect to such shares. Mr. Gardner disclaims beneficial
ownership of these shares except to the extent of his proportionate
pecuniary interest therein, which interest is a 1% general partnership
interest held by each of Mr. Gardner and his spouse.
(15) Includes 245,000 shares of Common Stock issuable upon exercise of stock
options.
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DESCRIPTION OF CAPITAL STOCK
Effective upon the closing of this offering and the filing of the Company's
Second Amended and Restated Articles of Organization (the "Second Amended and
Restated Articles"), the authorized capital stock of the Company will consist of
60,000,000 shares of common stock, $.01 par value per share (the "Common
Stock"), and 1,000,000 shares of preferred stock, $.01 par value per share (the
"Preferred Stock").
Prior to the closing of this offering and in accordance with the Company's
Amended and Restated Articles of Organization as currently in effect (the
"Amended and Restated Articles"), the Company is authorized to issue up to
15,000,000 shares of Common Stock, $.01 par value per share, of which 6,847,960
shares are issued and outstanding; 3,104,080 shares of Special Common Stock,
$.01 par value per share, of which 3,104,080 shares are issued and outstanding;
and 1,806,800 shares of Class A Common Stock, of which 831,790 shares are issued
and outstanding. Upon the closing of this offering, all shares of Special Common
Stock and Class A Common Stock will be converted into an equivalent number of
shares of Common Stock.
The following summary of certain provisions of the Common Stock, the
Special Common Stock and the Class A Common Stock does not purport to be
complete and is subject to, and qualified in its entirety by, the provisions of
applicable law and by the Company's Second Amended and Restated Articles and
Amended and Restated Articles, copies of which are filed as exhibits to the
Registration Statement of which this Prospectus is a part.
COMMON STOCK
As of March 31, 1998, there were 10,768,830 shares of Common Stock
outstanding on a pro forma basis (giving effect to the conversion of all
outstanding Special Common Stock and Class A Common Stock upon the closing of
this offering), held of record by 21 stockholders. Based upon the pro forma
number of shares outstanding as of that date and giving effect to the issuance
of the 2,000,000 shares of Common Stock offered hereby, there will be 12,768,830
shares of Common Stock outstanding upon the closing of this offering.
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders, do not have cumulative voting
rights and, prior to this offering, vote together with the Special Common Stock
as a single class. Holders of Common Stock are entitled to receive ratably such
dividends, if any, as may be declared by the Board of Directors out of funds
legally available therefor; prior to this offering, this right is subject to any
preferential dividend rights of outstanding shares of Special Common Stock. Upon
the liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to receive ratably the net assets of the Company available
after the payment of all debts and other liabilities; prior to this offering,
this right is subject to the prior rights of any outstanding shares of Special
Common Stock. Holders of the Common Stock have no preemptive, subscription,
redemption or conversion rights. The outstanding shares of Common Stock are, and
the shares offered by the Company in this offering will be, when issued and paid
for, fully paid and nonassessable. The rights, preferences and privileges of
holders of Common Stock are subject to, and may be adversely affected by, the
rights of the holders of shares of any series of Preferred Stock which the
Company may designate and issue in the future as set forth in the Company's
Second Amended and Restated Articles.
SPECIAL COMMON STOCK
Upon the closing of this offering, all outstanding shares of Special Common
Stock will be converted into shares of Common Stock. Holders of Special Common
Stock are entitled to one vote for each share held on all matters submitted to a
vote of stockholders and do not have cumulative voting rights. Holders of
Special Common Stock and Common Stock vote together as a single class on all
matters; provided, however, that the affirmative vote of the holders of Special
Common Stock is required to authorize any action which alters or changes the
rights, preferences or privileges of the
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<PAGE> 46
Special Common Stock, increases the authorized number of shares of Special
Common Stock, Common Stock or Class A Common Stock or creates any new class of
shares having preference over or on a parity with the Special Common Stock.
Holders of Special Common Stock are not entitled to dividends; however, if the
Board of Directors declares a dividend or other distribution payable upon any
other class of the outstanding shares of Common Stock, the holders of Special
Common Stock are entitled to receive ratably such dividends. Upon the
liquidation, dissolution or winding up of the Company, the holders of Special
Common Stock are entitled to receive ratably the net assets of the Company
available after the payment of all debts and other liabilities and prior to any
payment to the holders of the Common Stock or the Class A Common Stock. Shares
of Special Common Stock are convertible at any time, subject to certain
requirements, into an equivalent number of shares of Common Stock, and will be
so converted upon the closing of this offering.
CLASS A COMMON STOCK
Upon the closing of this offering, all outstanding shares of Class A Common
Stock will be converted into Common Stock in accordance with the Company's
Amended and Restated Articles. Holders of Class A Common Stock are entitled to
the same powers, preferences and special rights as are holders of Common Stock,
except that holders of Class A Common Stock have no voting rights (other than
the right under Massachusetts law to vote separately as a class on any
amendment, repeal or modification of any provision of the Amended and Restated
Articles or on any merger that would adversely affect their powers, preferences
or special rights as holders of Class A Common Stock) and are not entitled to
receive or share in dividends. Shares of Class A Common Stock are not included
in determining the shares entitled to vote on any matter on which the
stockholders of the Company are entitled to vote. Shares of Class A Common Stock
are convertible at any time, subject to certain requirements, into an equivalent
number of shares of Common Stock, and will be so converted upon the closing of
this offering.
PREFERRED STOCK
Upon the closing of this offering, the Company's Board of Directors will be
authorized, subject to certain limitations prescribed by law, without further
stockholder approval, to issue from time to time up to an aggregate of 1,000,000
shares of Preferred Stock in one or more series and to fix or alter the
designations, preferences, rights and any qualifications, limitations or
restrictions of the shares of each such series thereof, including the dividend
rights, dividend rates, conversion rights, voting rights, terms of redemption
(including sinking fund provisions), redemption price or prices, liquidation
preferences and the number of shares constituting any series or designations of
such series. The issuance of Preferred Stock may have the effect of delaying,
deferring or preventing a change of control of the Company. The Company has no
present plans to issue any shares of Preferred Stock.
MASSACHUSETTS LAW AND CERTAIN PROVISIONS OF THE COMPANY'S SECOND AMENDED AND
RESTATED ARTICLES OF ORGANIZATION AND SECOND AMENDED AND RESTATED BY-LAWS
Following the closing of this offering, the Company expects that it will
have more than 200 stockholders, thus making it subject to Chapter 110F of the
Massachusetts General Laws, an anti-takeover law. In general, this statute
prohibits a publicly-held Massachusetts corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person becomes an interested
stockholder, unless (i) the interested stockholder obtains the approval of the
Board of Directors prior to becoming an interested stockholder, (ii) the
interested stockholder acquires 90% of the outstanding voting stock of the
corporation (excluding shares held by certain affiliates of the corporation) at
the time it becomes an interested stockholder, or (iii) the business combination
is approved by both the Board of Directors and the holders of two-thirds of the
outstanding voting stock of the corporation (excluding shares held by the
interested stockholder). An "interested stockholder" is a person who, together
with affiliates and associates, owns (or at any time within the prior three
years did own) 5% or more of the outstanding
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<PAGE> 47
voting stock of the corporation. A "business combination" includes a merger, a
stock or asset sale, and certain other transactions resulting in a financial
benefit to the interested stockholder. By a vote of a majority of its
stockholders, the Company may elect not to be governed by Chapter 110F, but such
an amendment would not be effective for 12 months and would not apply to a
business combination with any person who became an interested stockholder prior
to the adoption of the amendment. The Company has not elected to opt out of this
coverage.
Massachusetts General Laws Chapter 156B, Section 50A generally requires
that publicly-held Massachusetts corporations have a classified board of
directors consisting of three classes as nearly equal in size as possible,
unless the corporation elects to opt out of the statute's coverage. The Board of
Directors has opted out of the statute's coverage. The Company's Second Amended
and Restated Articles do, however, contain a provision providing for a staggered
board of directors.
The Company's proposed Second Amended and Restated By-Laws to be effective
upon the closing of this offering include a provision excluding the Company from
the applicability of Massachusetts General Laws Chapter 110D, entitled
"Regulation of Control Share Acquisitions." In general, this statute provides
that any stockholder of a corporation subject to this statute who acquires 20%
or more of the outstanding voting stock of a corporation may not vote such stock
unless the stockholders of the corporation so authorize. The Board of Directors
may amend the Company's Second Amended and Restated By-Laws at any time to
subject the Company to this statute prospectively.
The Second Amended and Restated By-Laws require that a stockholder seeking
to have any business conducted at a meeting of stockholders, including
nominations for the Board of Directors, give notice to the Company not less than
60 and not more than 90 days prior to the scheduled meeting, provided in certain
circumstances that a 10-day notice rule applies. The notice from the stockholder
must describe the proposed business to be brought before the meeting and include
information about the stockholder making the proposal, any beneficial owner on
whose behalf the proposal is made and any other stockholder known to be
supporting the proposal. The Second Amended and Restated By-Laws require the
Company to call a special stockholders meeting at the request of stockholders
holding at least 40% of the voting power of the Company.
The Second Amended and Restated By-laws provide that the directors and
officers of the Company shall be indemnified by the Company to the fullest
extent authorized by Massachusetts law, as it now exists or may in the future be
amended, against all expenses and liabilities reasonably incurred in connection
with services for or on behalf of the Company. Insofar as indemnification for
liabilities arising under the Securities Act may be permitted to directors,
officers and controlling persons of the Company pursuant to the Second Amended
and Restated By-laws, in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. The Company intends to obtain insurance which
insures the directors and officers of the Company against certain losses and
which insures the Company against certain of its obligations to indemnify such
directors and officers. In addition, the Second Amended and Restated Articles
provide that the directors of the Company will not be personally liable for
monetary damages to the Company for breaches of their fiduciary duty as
directors, unless they violate their duty of loyalty to the Company or its
stockholders, act in bad faith, knowingly or intentionally violate the law,
authorize illegal dividends or redemptions or derive an improper personal
benefit from their actions as directors. Such limitations of personal liability
under the Massachusetts Business Corporation Law do not apply to liabilities
arising out of certain violations of the federal securities laws. While
non-monetary relief such as injunctive relief, specific performance and other
equitable remedies may be available to the Company, such relief may be difficult
to obtain or, if obtained, may not adequately compensate the Company for its
damages.
The Second Amended and Restated Articles provide that any amendment to the
Second Amended and Restated Articles, the sale, lease or exchange of all or
substantially all of the Company's property and assets or the merger or
consolidation of the Company into or with any other corporation may be
authorized by the approval of the holders of a majority of the shares of each
class of stock entitled to
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<PAGE> 48
vote thereon, rather than by two-thirds as otherwise provided by statute,
provided that the transactions have been authorized by a majority of the members
of the Board of Directors and the requirements of any other applicable
provisions of the Second Amended and Restated Articles have been met.
In addition, the Second Amended and Restated Articles provide that shares
of the Company's Preferred Stock may be issued in the future without stockholder
approval and upon such terms and conditions, and having such rights, privileges
and preferences, as the Board of Directors may determine. See "-- Preferred
Stock."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is BankBoston, N.A.
47
<PAGE> 49
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 12,783,830 shares
of Common Stock outstanding (based upon shares of Common Stock outstanding as of
the date of this Prospectus, the conversion of all outstanding shares of Special
Common Stock and Class A Common Stock, and assuming no exercise of outstanding
stock options). Of these shares, the 2,500,000 shares sold in this offering will
be freely tradeable without restriction or further registration under the
Securities Act, except that any shares purchased by "affiliates" of the Company,
as that term is defined in Rule 144 ("Rule 144") under the Securities Act
("Affiliates"), may generally only be sold in compliance with the limitations of
Rule 144 described below. The remaining 10,283,830 shares of Common Stock (the
"Restricted Shares") held by existing stockholders upon completion of this
offering will be "restricted" securities within the meaning of Rule 144 and may
not be sold except in compliance with the registration requirements of the
Securities Act or an applicable exemption under the Securities Act, including an
exemption pursuant to Rule 144.
SALES OF RESTRICTED SHARES
Beginning 180 days after the date of this Prospectus, approximately
10,283,830 Restricted Shares subject to lock-up agreements (the "Lock-up
Agreements") between the Underwriters and certain stockholders, including
officers and directors, will become eligible for sale in the public market
pursuant to Rule 144(k), Rule 144 or Rule 701. In addition, certain existing
holders of an aggregate of 9,452,040 shares of Common Stock have the right to
require registration of their shares under certain circumstances. However, such
stockholders have entered into the Lock-up Agreements with respect to all shares
owned by them and not sold in this offering, which provide that they will not
sell or otherwise dispose of any shares of Common Stock (except for shares sold
in this offering) without the prior written consent of BancAmerica Robertson
Stephens for a period of 180 days from the date of this Prospectus. BancAmerica
Robertson Stephens may, in its sole discretion and at any time without notice,
release all or any portion of the securities subject to the Lock-up Agreements.
See "-- Registration Rights" and "Underwriting."
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an Affiliate, who has beneficially owned
Restricted Shares for at least one year (including the holding period of certain
prior owners) is entitled to sell in "brokers' transactions" or to market
makers, within any three-month period commencing 90 days after the Company
becomes subject to the reporting requirements of Section 13 of the Exchange Act,
a number of such shares that does not exceed the greater of (i) one percent of
the then outstanding shares of Common Stock (approximately 127,838 shares
immediately after this offering) or (ii) the average weekly trading volume in
the Common Stock on the Nasdaq National Market during the four calendar weeks
preceding the date on which notice of such sale is filed. Sales under Rule 144
are also subject to certain limitations on manner of sale, notice requirements
and availability of current public information about the Company. In addition,
under Rule 144(k), a person who is not an Affiliate and has not been an
Affiliate for at least three months prior to the sale and who has beneficially
owned Restricted Shares for at least two years may resell such shares without
regard to the limitations described above. In meeting the one and two year
holding periods described above, a holder of Restricted Shares can include the
holding periods of a prior owner who was not an Affiliate. Further, Rule 144A
under the Securities Act as currently in effect permits the immediate sale of
restricted shares to certain qualified institutional buyers without regard to
the volume restrictions described above.
STOCK OPTIONS
In general, under Rule 701 of the Securities Act as currently in effect,
any employee, consultant or advisor of the Company who purchased shares from the
Company in connection with a compensatory stock or option plan or other written
compensatory agreement is entitled to resell such shares without having to
comply with the public-information, holding-period, volume-limitation or notice
provisions of Rule 144, and Affiliates are entitled to sell their Rule 701
shares under Rule 144 without having to
48
<PAGE> 50
comply with Rule 144's holding-period restrictions, in each case commencing 90
days after the Company becomes subject to the reporting requirements of Section
13 of the Exchange Act. Rule 701 is available for stockholders of the Company as
to all shares issued pursuant to exercise of options granted prior to the
offering.
As of the date of this Prospectus, the Board of Directors has authorized an
aggregate of up to 2,308,010 shares of Common Stock for issuance pursuant to the
Company's stock option and stock purchase plans. As of the date of this
Prospectus, and assuming the conversion of all shares of Class A Common Stock
reserved for issuance under the Company's stock option plans into Common Stock,
options to purchase a total of 649,510 shares of Common Stock were outstanding;
145,750 of the shares issuable pursuant to such options are not yet exercisable;
and an additional 1,628,500 shares of Common Stock are available for future
grants under the Company's stock option and stock purchase plans. In addition,
options to purchase 175,500 shares will be granted as of the effective date of
this offering at an exercise price equal to the initial public offering price.
Certain holders of such options have executed Lock-up Agreements. See
"Management -- Equity Plans."
The Company intends to file one or more registration statements on Form S-8
under the Securities Act promptly after the date of this prospectus to register
all shares of Common Stock subject to outstanding stock options and Common Stock
issuable pursuant to the Company's stock option plans. Such registration
statements are expected to become effective upon filing. Shares covered by these
registration statements will thereupon be eligible for sale in the public
markets, subject to the Lock-up Agreements, to the extent applicable.
LOCK-UP AGREEMENTS
Certain security holders and all officers and directors of the Company have
agreed, pursuant to the Lock-up Agreements, that they will not, without the
prior written consent of BancAmerica Robertson Stephens, offer, sell, contract
to sell or otherwise dispose of, directly or indirectly, any shares of Common
Stock beneficially owned by them for a period of 180 days after the date of this
Prospectus.
REGISTRATION RIGHTS
Upon the expiration of the contractual lock-up period, certain security
holders of the Company (the "Rights Holders") will be entitled to require the
Company to register under the Securities Act up to a total of 9,452,040 shares
of outstanding Common Stock (the "Registrable Shares") under the terms of an
agreement between the Company and the Rights Holders (the "Registration Rights
Agreement"). The Registration Rights Agreement provides that if the Company
proposes to register in a firm commitment underwritten offering any of its
securities under the Securities Act at any time or times, the Rights Holders,
subject to certain exceptions, shall be entitled to include Registrable Shares
in such registration. However, the managing underwriter of any such offering may
exclude for marketing reasons some or all of such Registrable Shares from such
registration. The Rights Holders also have, subject to certain conditions and
limitations, the right to require the Company, on no more than three occasions,
to prepare and file a registration statement under the Securities Act with
respect to their Registrable Shares. The Company is generally required to bear
the expenses of all such registrations, except underwriting discounts and
commissions. The Registration Rights Agreement terminates in March 2001.
Prior to this offering, there has not been any public market for the
securities of the Company. No predictions can be made as to the effect, if any,
that market sales of shares or the availability of shares for sale will have on
the market price prevailing from time to time. Nevertheless, sales of
substantial amounts of Common Stock in the public market could materially
adversely affect the prevailing market price. See "Risk Factors -- Shares
Eligible for Future Sale."
49
<PAGE> 51
UNDERWRITING
The Underwriters named below acting through their representatives,
BancAmerica Robertson Stephens, BT Alex. Brown and Adams, Harkness & Hill, Inc.
(the "Representatives"), have severally agreed, subject to the terms and
conditions of the Underwriting Agreement, to purchase from the Company and the
Selling Stockholders the number of shares of Common Stock set forth opposite
their respective names below. The Underwriters are committed to purchase and pay
for all of such shares if any are purchased:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
----------- ----------------
<S> <C>
BancAmerica Robertson Stephens..............................
BT Alex. Brown..............................................
Adams, Harkness & Hill, Inc. ...............................
---------
Total............................................. 2,500,000
=========
</TABLE>
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public at the initial public
offering price set forth on the cover page of this Prospectus and to certain
dealers at such price, less a concession of not more than $ per share,
of which $ per share may be reallowed to other dealers. After the
initial public offering, the public offering price, concession and reallowances
to dealers may be reduced by the Representatives.
Certain of the Selling Stockholders have granted to the Underwriters an
option, exercisable during the 30-day period after the date of this Prospectus,
to purchase an aggregate of up to an additional 375,000 shares of Common Stock
at the same price per share as the Company and the Selling Stockholders received
for the 2,500,000 shares that the Underwriters have agreed to purchase. To the
extent that the Underwriters exercise such option, each of the Underwriters will
have a firm commitment to purchase approximately the same percentage of such
additional shares that the number of shares of Common Stock to be purchased by
it shown in the above table represents as a percentage of the 2,500,000 shares
offered hereby. If purchased, such additional shares will be sold by the
Underwriters on the same terms as those on which the 2,500,000 shares are being
sold. The Selling Stockholders subject to such over-allotment option will be
obligated, pursuant to the option, to sell shares to the Underwriters to the
extent the option is exercised. The Underwriters may exercise such option only
to cover over-allotments made in connection with the sale of Common Stock
offered hereby.
The Underwriting Agreement contains covenants of indemnity between the
Underwriters, the Company and the Selling Stockholders against certain civil
liabilities, including liabilities under the Securities Act and liability
arising from breaches of representations and warranties contained in the
Underwriting Agreement.
Certain securityholders of the Company have agreed with the Representatives
that, until 180 days after the date of this Prospectus, subject to certain
limited exceptions, they will not, directly or indirectly, sell, offer, contract
to sell, pledge, grant any option to purchase or otherwise dispose of any shares
of Common Stock or any securities convertible into, or exchangeable for, or any
rights to purchase or acquire, shares of Common Stock, owned directly by such
holders or with respect to which they have the power of disposition, without the
prior written consent of BancAmerica Robertson Stephens. BancAmerica Robertson
Stephens may, in its sole discretion and without notice, release all or any
portion of the securities subject to the lock-up agreements. See "Shares
Eligible for
50
<PAGE> 52
Future Sale -- Lock-up Agreements." Approximately 10,283,830 of such shares will
be eligible for immediate public sale following expiration of the lock-up
period, subject to Rule 144. In addition, the Company has agreed that, until 180
days from the date of this Prospectus, the Company will not, without the prior
written consent of BancAmerica Robertson Stephens, subject to certain limited
exceptions, sell or otherwise dispose of any shares of Common Stock, any options
or warrants to purchase any shares of Common Stock or any securities convertible
into, exercisable for or exchangeable for shares of Common Stock other than the
Company's sale of shares in this offering, the issuance of Common Stock upon the
exercise of outstanding options, or the Company's grant of options and issuance
of stock under existing employee stock option or stock purchase plans.
The Representatives have advised the Company and the Selling Stockholders
that the Underwriters do not intend to confirm sales to accounts over which they
exercise discretionary authority.
The Representatives have advised the Company that, pursuant to Regulation M
under the Securities Act, certain persons participating in this offering may
over-allot or effect transactions which stabilize, maintain or otherwise affect
the market price of the Common Stock at levels above those which might otherwise
prevail in the open market, including by entering stabilizing bids, effecting
syndicate covering transactions or imposing penalty bids. A stabilizing bid
means the placing of any bid or effecting of any purchase, for the purpose of
pegging, fixing or maintaining the price of the Common Stock. A syndicate
covering transaction means the placing of any bid on behalf of the underwriting
syndicate or the effecting of any purchase to reduce a short position created in
connection with the offering. A penalty bid means an arrangement that permits
the Underwriters to reclaim a selling concession from a syndicate member in
connection with the offering when shares of Common Stock sold by the syndicate
member are purchased in syndicate covering transactions. Such transaction may be
effected, where permitted, on the Nasdaq National Market, in the
over-the-counter market, or otherwise. Such stabilizing, if commenced, may be
discontinued at any time.
The Underwriters have reserved for sale, at the initial public offering
price, up to 5% of the shares of Common Stock offered hereby for employees of
the Company and certain individuals who have expressed an interest in purchasing
shares of Common Stock in this offering. The number of shares available for sale
to the general public will be reduced to the extent such persons purchase such
reserved shares. Any reserved shares not so purchased will be offered by the
Underwriters to the general public on the same basis as the other shares offered
hereby.
Prior to this offering, there has been no public market for the Common
Stock of the Company. Consequently, the initial public offering price for the
Common Stock was determined through negotiations between the Company,
representatives of the Selling Stockholders and the Representatives. The
material factors considered in such negotiations were prevailing market and
economic conditions, revenues and earnings and other financial information of
the Company, the market valuations of other companies engaged in activities
similar to those of the Company, estimates of the business potential and
prospects of the Company, the present state of the Company's business
operations, the Company's management and other factors deemed relevant. There
can be no assurance that an active or orderly trading market will develop for
the Common Stock or that the Common Stock will trade in the public market
subsequent to this offering at or above the initial trading price. See "Risk
Factors -- No Prior Public Market; Possible Volatility of Stock Price" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
51
<PAGE> 53
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts.
Certain legal matters in connection with this offering will be passed upon for
the Underwriters by Hale and Dorr LLP, Boston, Massachusetts. Mr. Hurwitz, a
partner of Testa, Hurwitz & Thibeault, LLP, serves as Trustee of each of the
Robert W. Howe Grantor Retained Annuity Trust and the William H. Gallagher
Grantor Retained Annuity Trust (collectively, the "Trusts"), which Trusts each
beneficially own 258,860 shares of the Company's Common Stock.
EXPERTS
The audited consolidated financial statements and schedule of the Company
as of March 31, 1997 and 1998 and for each of the three years in the period
ended March 31, 1998 included in this Prospectus and elsewhere in the
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon appearing elsewhere herein, and
are included herein in reliance upon such reports given upon the authority of
such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (including all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act with respect to the Common Stock offered
hereby. As permitted by the rules and regulations of the Commission, this
Prospectus omits certain information contained in the Registration Statement.
For further information with respect to the Company and the Common Stock offered
hereby, reference is hereby made to the Registration Statement and to the
exhibits and schedules filed therewith. Statements contained in this Prospectus
regarding the contents of any agreement or other document filed as an exhibit to
the Registration Statement are not necessarily complete, and in each instance
reference is made to the copy of such agreement filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference. The Registration Statement, including the exhibits and schedules
thereto, may be inspected at the public reference facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, DC
20549, and at its regional offices in New York (Seven World Trade Center, New
York, New York 10007) and in Chicago (Citicorp Center, Suite 1400, 500 West
Madison Street, Chicago, Illinois 60611) and copies of all or any part thereof
may be obtained from such offices upon payment of the prescribed fees. In
addition, the Commission maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants (including
the Company) that file electronically with the Commission which can be accessed
at http://www.sec.gov.
The Company intends to furnish holders of its Common Stock offered hereby
with annual reports containing consolidated financial statements audited by an
independent accounting firm and with quarterly reports containing unaudited
summary consolidated financial statements for each of the first three quarters
of each fiscal year.
52
<PAGE> 54
ATLANTIC DATA SERVICES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets as of March 31, 1997 and March
31, 1998.................................................. F-3
Consolidated Statements of Income for the Years Ended March
31, 1996, 1997 and 1998................................... F-4
Consolidated Statements of Stockholders' Equity for the
Years Ended March 31, 1996, 1997 and 1998................. F-5
Consolidated Statements of Cash Flows for the Years Ended
March 31, 1996, 1997 and 1998............................. F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 55
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Atlantic Data Services, Inc.
We have audited the accompanying consolidated balance sheets of Atlantic
Data Services, Inc. as of March 31, 1997 and 1998, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended March 31, 1998. 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Atlantic Data Services, Inc. at March 31, 1997 and 1998, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended March 31, 1998 in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
April 13, 1998
F-2
<PAGE> 56
ATLANTIC DATA SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE AND SHARES)
<TABLE>
<CAPTION>
MARCH 31,
--------------------
1997 1998
--------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $2,653 $ 3,401
Accounts receivable, net of allowance for doubtful
accounts of $231 in 1997 and $375 in 1998.............. 4,414 9,100
Prepaid expenses.......................................... 124 462
Deferred taxes............................................ 207 284
------ -------
Total current assets................................... 7,398 13,247
Property and equipment, net................................. 649 995
Other assets................................................ 154 243
------ -------
$8,201 $14,485
====== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses..................... $1,994 $ 4,174
Deferred revenue.......................................... 1 40
Billings in excess of costs and estimated earnings on
contracts ............................................. 168 640
Federal and state income taxes............................ 49 830
Deferred compensation..................................... 117 83
------ -------
Total current liabilities.............................. 2,329 5,767
Capital lease obligation.................................... 56 35
Stockholders' equity:
Common stock, $.01 par value, 11,746,840 shares
authorized, 6,847,960 shares issued and outstanding.... 68 68
Class A common stock, $.01 par value, 1,694,800 shares
authorized, 394,800 and 928,790 shares issued and
outstanding at March 31, 1997 and 1998................. 4 9
Special common stock, $.01 par value, 3,104,080 shares
authorized, 3,104,080 shares issued and outstanding
(liquidating value of $2,827).......................... 31 31
Additional paid-in capital................................ 1,281 2,245
Retained earnings......................................... 4,457 6,355
Less 112,000 shares of treasury Class A common stock at
cost................................................... (25) (25)
------ -------
Total stockholders' equity............................. 5,816 8,683
------ -------
$8,201 $14,485
====== =======
</TABLE>
See accompanying notes.
F-3
<PAGE> 57
ATLANTIC DATA SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------
MARCH 31, MARCH 31, MARCH 31,
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Revenues.................................................... $20,052 $23,843 $42,830
Cost of revenues............................................ 12,377 15,218 24,223
------- ------- -------
Gross profit................................................ 7,675 8,625 18,607
Operating expenses:
Sales and marketing....................................... 1,173 1,493 3,737
General and administrative................................ 3,875 3,947 6,567
------- ------- -------
Total operating expenses.......................... 5,048 5,440 10,304
Income from operations...................................... 2,627 3,185 8,303
Interest income............................................. 199 120 146
Interest expense............................................ (2) (5) (4)
------- ------- -------
Income from continuing operations before provision for
income taxes.............................................. 2,824 3,300 8,445
Provision for income taxes.................................. 1,261 1,359 3,547
------- ------- -------
Income from continuing operations........................... 1,563 1,941 4,898
Discontinued operations, net of tax......................... 780 100 --
------- ------- -------
Net income........................................ $ 2,343 $ 2,041 $ 4,898
======= ======= =======
Earnings per share of Common Stock and Special Common Stock:
Continuing operations..................................... $ 0.16 $ 0.20 $ 0.49
Discontinued operations................................... 0.08 -- --
------- ------- -------
Earnings per share of Common Stock and Special Common
Stock.................................................. $ 0.24 $ 0.20 $ 0.49
======= ======= =======
Pro forma earnings per common share:........................ $ 0.47
=======
Pro forma earnings per common share
-- assuming dilution:.................................... $ 0.46
=======
</TABLE>
See accompanying notes.
F-4
<PAGE> 58
ATLANTIC DATA SERVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARES)
<TABLE>
<CAPTION>
CLASS A SPECIAL
COMMON STOCK COMMON STOCK COMMON STOCK ADDITIONAL
----------------- --------------- ----------------- PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS
--------- ------ ------- ------ --------- ------ ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1995........ 6,847,960 $68 394,800 $4 3,104,080 $31 $1,281 $ 5,573
Dividend....................... -- -- -- -- -- -- -- (4,000)
Net income..................... -- -- -- -- -- -- -- 2,343
--------- --- ------- -- --------- --- ------ -------
Balance at March 31, 1996........ 6,847,960 68 394,800 4 3,104,080 31 1,281 3,916
Dividend....................... -- -- -- -- -- -- -- (1,500)
Net income..................... -- -- -- -- -- -- -- 2,041
--------- --- ------- -- --------- --- ------ -------
Balance at March 31, 1997........ 6,847,960 68 394,800 4 3,104,080 31 1,281 4,457
Dividend....................... -- -- -- -- -- -- -- (3,000)
Exercise of stock options...... -- -- 533,990 5 -- -- 581 --
Tax benefit from exercise of
stock options................ -- -- -- -- -- -- 383 --
Net income..................... -- -- -- -- -- -- -- 4,898
--------- --- ------- -- --------- --- ------ -------
Balance at March 31, 1998........ 6,847,960 $68 928,790 $9 3,104,080 $31 $2,245 $ 6,355
========= === ======= == ========= === ====== =======
<CAPTION>
TREASURY STOCK TOTAL
--------------- STOCKHOLDERS'
SHARES AMOUNT EQUITY
------- ------ -------------
<S> <C> <C> <C>
Balance at March 31, 1995........ 112,000 $(25) $ 6,932
Dividend....................... -- -- (4,000)
Net income..................... -- -- 2,343
------- ---- -------
Balance at March 31, 1996........ 112,000 (25) 5,275
Dividend....................... -- -- (1,500)
Net income..................... -- -- 2,041
------- ---- -------
Balance at March 31, 1997........ 112,000 (25) 5,816
Dividend....................... -- -- (3,000)
Exercise of stock options...... -- -- 586
Tax benefit from exercise of
stock options................ -- -- 383
Net income..................... -- -- 4,898
------- ---- -------
Balance at March 31, 1998........ 112,000 $(25) $ 8,683
======= ==== =======
</TABLE>
See accompanying notes.
F-5
<PAGE> 59
ATLANTIC DATA SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 2,343 $ 2,041 $ 4,898
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 154 150 262
(Benefit) provision for deferred taxes.................... 130 (61) (119)
Provision for bad debts................................... 376 120 144
Tax benefit from exercise of stock options................ -- -- 383
Other..................................................... (126) (186) --
Change in assets and liabilities:
Accounts receivable..................................... (773) (325) (4,830)
Prepaid expenses and other assets....................... (84) 28 (385)
Accounts payable and accrued expenses................... (264) 250 2,183
Billings in excess of costs and estimated earnings on
contracts.............................................. 30 138 472
Federal and state income taxes.......................... 110 (180) 781
------- ------- -------
Net cash provided by operating activities.......... 1,896 1,975 3,789
INVESTING ACTIVITIES
Purchases of property and equipment......................... (226) (221) (608)
Proceeds from sale of business.............................. 165 186 --
------- ------- -------
Net cash used in investing activities.............. (61) (35) (608)
FINANCING ACTIVITIES
Principal payments under capital lease obligation........... (40) (18) (19)
Exercise of stock options................................... -- -- 586
Dividends paid.............................................. (4,000) (1,500) (3,000)
------- ------- -------
Net cash used in financing activities.............. (4,040) (1,518) (2,433)
------- ------- -------
Net increase (decrease) in cash............................. (2,205) 422 748
Cash and cash equivalents at beginning of year.............. 4,436 2,231 2,653
------- ------- -------
Cash and cash equivalents at end of year.................... $ 2,231 $ 2,653 $ 3,401
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest.................................................. $ 2 $ 6 $ 5
======= ======= =======
Taxes..................................................... $ 816 $ 1,697 $ 2,566
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Capital lease obligation incurred for equipment........... $ 100
=======
</TABLE>
See accompanying notes.
F-6
<PAGE> 60
ATLANTIC DATA SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
1. DESCRIPTION OF BUSINESS
Atlantic Data Services, Inc. ("ADS") was organized in 1980. ADS provides
information technology ("IT") strategy consulting and systems integration
services to customers exclusively in the financial services industry, primarily
banks. ADS's services allow customers to rapidly deploy proven technologies and
mission-critical business processes and more effectively manage change within
their organizations. ADS provides its services, primarily on a time and
materials basis, through offerings organized around five practice areas: IT
Strategy Consulting, Consolidations and Conversions, Year 2000 Resolution,
Application Outsourcing, and Electronic Commerce and Home Banking.
Description of On-Line Processing Division
In April 1990, ADS acquired a 55% interest in Data Management Systems, Inc.
("DMS") for $1.1 million. Effective September 1, 1994, ADS acquired the
remaining 45% from the minority stockholder for cash of $577,800, which was
accounted for using the purchase method. DMS provided data processing services
to financial institutions. Refer to Note 6 for information regarding
discontinued operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Atlantic Data
Services, Inc. and DMS, its wholly owned subsidiary (collectively "the
Company"). DMS discontinued its operations effective June 30, 1995. All
intercompany accounts and transactions have been eliminated in consolidation.
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
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
Cash Equivalents
Cash equivalents are defined as short-term, highly liquid investments with
an original maturity of three months or less. Cash equivalents primarily consist
of money market accounts and repurchase agreements whose fair value approximates
cost and are classified as available for sale.
The Company periodically enters into repurchase agreements with Citizens
Bank. At March 31, 1997 and 1998, the carrying value of the agreement, stated at
cost which approximates market, amounted to $2,608,000 and $3,835,000,
respectively. The agreements are collateralized by U.S. Treasury Securities
which are physically controlled by Citizens Bank, in an amount equal to 102% of
the agreement value.
F-7
<PAGE> 61
ATLANTIC DATA SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Property and Equipment
Property and equipment are stated at cost. Depreciation, which includes
amortization of assets under capital leases, has been provided using the
straight-line method for all assets over their estimated useful lives as
follows:
<TABLE>
<S> <C>
Computer equipment and software... 2 to 5 years
Office furniture and equipment.... 7 years
Leasehold improvements............ Lesser of remaining lease-term or useful life
Building.......................... 31.5 years
Equipment under capital lease..... 5 years
</TABLE>
Concentration of Credit Risk
Financial instruments that potentially subject the Company to credit risk
consist primarily of cash equivalents and accounts receivable. The risk with
respect to cash equivalents is minimized by the Company's policies in which
investments have relatively short maturities and are only placed with highly
rated issuers. A significant portion of the Company's revenues and accounts
receivable are derived from services provided to banks and other financial
institutions. The risk with respect to accounts receivable is minimized by the
creditworthiness of the Company's customers and the Company's credit and
collection policies. The Company performs ongoing credit evaluations of its
customers, generally does not require collateral, and maintains allowances for
potential credit losses which, when realized, have been within the range of
management's expectations.
Revenue Recognition
The Company primarily derives its revenue from consulting services under
time and material billing arrangements. Under these arrangements, revenue is
recognized as the services are provided. Deferred revenue pertains to time and
material billing arrangements and represents cash collected in advance of the
performance of services.
Revenue on fixed price contracts is recognized using the percentage of
completion method of accounting and is adjusted monthly for the cumulative
impact of any revision in estimates. The Company determines the percentage of
completion of its contracts by comparing costs incurred to date to total
estimated costs. Contract costs include all direct labor and expenses related to
the contract performance. An asset, "Costs and estimated earnings on contracts
in excess of billings," would represent revenues recognized in excess of amounts
billed. A liability, "Billings in excess of costs and estimated earnings on
contracts," would represent billings in excess of revenues recognized.
Included in revenues are reimburseable contract-related travel and
entertainment expenses which are separately billable to clients.
Stock Compensation
The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair value of the shares at the date of
grant. The Company has adopted the disclosure only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-based
Compensation" ("FAS 123") and accounts for stock options granted to employees in
accordance with the provisions of APB 25 "Accounting for Stock Issued to
Employees."
F-8
<PAGE> 62
ATLANTIC DATA SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Advertising
The Company expenses the production costs of advertising as incurred. For
the years ended March 31, 1996, 1997 and 1998, the Company incurred
approximately $0, $0 and $474,000, respectively, in advertising costs.
Income Taxes
Deferred income taxes are provided for differences between the financial
reporting and tax bases of assets and liabilities at income tax rates expected
to be in effect when the taxes are actually paid or recovered.
Earnings Per Common Share and Pro Forma Earnings Per Common Share
On December 31, 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("FAS 128"). FAS 128 requires the
presentation of two amounts, earnings per common share and earnings per common
share assuming dilution. The two class method of computing earnings per share
has been used because Common Stock and Special Common Stock share ratably in
dividends when declared, while Class A Common Stock is not entitled to receive
dividends. Accordingly, earnings per share are equal for Common Stock and
Special Common Stock. No earnings have been allocated to Class A Common Stock.
Earnings per share of Common Stock and Special Common Stock is calculated by
dividing net income by the weighted average number of shares of Common Stock and
Special Common Stock outstanding during the period. Diluted earnings per share
of Common Stock and Special Common Stock is not presented as there are no
securities outstanding that would result in dilution.
Pro forma earnings per common share is computed using the weighted average
number of shares of Common Stock outstanding, and assumes the conversion into
Common Stock of Special Common Stock and Class A Common Stock at April 1, 1997
or at the date of issuance if later, and dilutive equivalent shares from stock
options using the treasury stock method.
New Accounting Pronouncements
The Company intends to adopt Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS 130") and Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131") in fiscal 1999. Both Standards
will require additional disclosure, but will not have a material effect on the
Company's financial position or results of operations. SFAS No. 130 establishes
standards for the reporting and display of comprehensive income. Components of
comprehensive income include items such as net income and changes in value of
available-for-sale securities. SFAS No. 131 changes the way companies report
segment information and requires segments to be determined based on how
management measures performance and makes decisions about allocating resources.
F-9
<PAGE> 63
ATLANTIC DATA SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
MARCH 31,
-----------------
1997 1998
------ -------
(IN THOUSANDS)
<S> <C> <C>
Computer equipment and software............................. $ 671 $ 1,147
Office furniture and equipment.............................. 425 459
Leasehold improvements...................................... 335 418
Building.................................................... 183 183
------ -------
1,614 2,207
Less accumulated depreciation and amortization.............. (965) (1,212)
------ -------
$ 649 $ 995
====== =======
</TABLE>
Assets recorded under capital leases and included in office furniture and
equipment amounted to approximately $100,000 at March 31, 1997 and 1998. Related
accumulated amortization amounted to approximately $30,000 and $50,000 at March
31, 1997 and 1998, respectively.
4. RELATED PARTY TRANSACTIONS
The Company has a program under which it may loan employees up to $3,000 to
purchase personal computers. Loans are repayable through payroll deductions over
a three year period and bear a preferred rate of interest (0% for all periods
presented). Such loans outstanding at March 31, 1997 and 1998 amounted to
approximately $64,000 and $90,000, respectively, and are included in other
assets.
Construction services are provided by a firm whose owner is a director of
the Company. Amounts paid to such firm in fiscal years ended March 31, 1996,
1997 and 1998 are $66,555, $59,958, and $54,847, respectively. All amounts have
been capitalized and are included in leasehold improvements in the financial
statements.
Insurance coverage is provided by an agency whose Chairman is the brother
of a director of the Company. The aggregate cost of the insurance coverage
provided through such agency to the Company in fiscal years ended March 31,
1996, 1997 and 1998 is $66,169, $64,124 and $69,808, respectively.
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
----------------
1997 1998
------ ------
(IN THOUSANDS)
<S> <C> <C>
Trade accounts payable...................................... $ 401 $1,061
Accrued payroll............................................. 900 1,760
Accrued medical............................................. 242 379
Compensated absences........................................ 150 223
Other....................................................... 301 751
------ ------
$1,994 $4,174
====== ======
</TABLE>
F-10
<PAGE> 64
ATLANTIC DATA SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. DISCONTINUED OPERATIONS
During September 1994, the Company approved a plan and entered into an
agreement with a third party that called for the Company to discontinue its
on-line processing division (the "Agreement"). As consideration for entering
into the Agreement, the Company was entitled to receive future payments
contingent upon the acquirer generating specified revenues from the transferred
customer base. The Company is not entitled to any further payments.
The on-line processing division represented a separate line of business
and, accordingly, the results of its operations have been reported as
discontinued operations for all periods presented. The results from discontinued
operations can be summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31,
--------------
1996 1997
----- -----
(IN THOUSANDS)
<S> <C> <C>
Income from operations of the discontinued on-line
processing division, less applicable income taxes of
$113...................................................... $186 --
Gain on disposal of the on-line processing division, net of
income tax benefit of $312 in 1996, less applicable income
taxes of $70 in 1997...................................... 594 $100
---- ----
$780 $100
==== ====
</TABLE>
The gain on disposal of the on-line processing division in fiscal 1996
primarily represents the contingent payments provided for in the Agreement plus
a tax benefit of approximately $418,000 from the deduction of goodwill. The gain
on disposal of the on-line processing division in fiscal 1997 primarily
represents the contingent payments provided for in the Agreement.
The following table sets forth summary financial information of the on-line
processing division's results of operations for the year ended March 31, 1996
(in thousands):
<TABLE>
<S> <C>
Revenues.................................................... $1,248
Operating earnings.......................................... 329
Depreciation and amortization............................... 37
Other income................................................ 7
Provision for taxes......................................... 113
Net income.................................................. 186
</TABLE>
7. DEFERRED COMPENSATION
Deferred compensation represents compensation deferred by a former employee
of the Company through the year ended March 31, 1995. This balance accrues
interest at a rate equal to the average of the three and five year treasury
rates (ranging from 6.0% to 6.9% for the years presented) and is being paid out
in annual installments of approximately $37,000, with the final installment
payable in fiscal year ending March 31, 2000.
F-11
<PAGE> 65
ATLANTIC DATA SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. INCOME TAXES
Significant components of the provision for income taxes follow:
<TABLE>
<CAPTION>
CONTINUING DISCONTINUED
OPERATIONS OPERATIONS CONSOLIDATED
---------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
FISCAL YEAR 1996:
Current:
Federal..................................... $1,040 $ (318) $ 722
State....................................... 302 (92) 210
Deferred:
Federal..................................... (64) 161 97
State....................................... (17) 50 33
------ ------ ------
$1,261 $ (199) $1,062
====== ====== ======
FISCAL YEAR 1997:
Current:
Federal..................................... $1,201 $ 53 $1,254
State....................................... 217 19 236
Deferred:
Federal..................................... (50) (1) (51)
State....................................... (9) (1) (10)
------ ------ ------
$1,359 $ 70 $1,429
====== ====== ======
FISCAL YEAR 1998:
Current:
Federal..................................... $2,880 $2,880
State....................................... 786 786
Deferred:
Federal..................................... (94) (94)
State....................................... (25) (25)
------ ------
$3,547 $3,547
====== ======
</TABLE>
The reconciliation of the consolidated effective tax rate of the Company
for the years ended March 31, 1996, 1997 and 1998 is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Pretax income............................. $3,405 100% $3,470 100% $8,445 100%
====== === ====== === ====== ===
Tax at 34%................................ $1,158 34% $1,180 34% $2,871 34%
State taxes, net of federal benefit....... 160 5 149 4 502 6
Tax deductible goodwill related to the on-
line processing division................ (356) (11) -- -- -- --
Permanent differences..................... 98 3 96 3 153 2
Other..................................... 2 -- 4 -- 21 --
------ --- ------ --- ------ ---
Total provision................. $1,062 31% $1,429 41% $3,547 42%
====== === ====== === ====== ===
</TABLE>
F-12
<PAGE> 66
ATLANTIC DATA SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The effect of temporary differences and carryforwards that give rise to
deferred tax assets are as follows:
<TABLE>
<CAPTION>
MARCH 31,
--------------
1997 1998
----- -----
(IN THOUSANDS)
<S> <C> <C>
Bad debt allowance.......................................... $ 93 $150
Compensated absence accrual................................. 60 89
Interest on deferred compensation........................... 22 22
Deferred rent............................................... 27 18
Depreciation................................................ 25 67
Other costs................................................. 5 5
---- ----
Total deferred tax assets.............................. $232 $351
==== ====
</TABLE>
The Company continually reviews the recoverability of its deferred tax
assets and would, if necessary, establish a valuation allowance if it is more
likely than not that such deferred tax assets will not be realized. At March 31,
1997 and 1998, management believes that it is more likely than not that the tax
benefit will be realized for its deferred tax assets.
9. LEASES
The Company leases office space, automobiles and other equipment under
various noncancelable operating leases. Rent expense recognized under these
leases during the fiscal years ended March 31, 1996, 1997 and 1998 amounted to
approximately $406,000, $438,000 and $500,000, respectively.
The Company is also party to a lease agreement for telephone equipment that
has been recorded as a capital lease.
Future minimum annual lease payments due under noncancelable leases as of
March 31, 1998 are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
--------- -------
(IN THOUSANDS)
<S> <C> <C>
Year ending March 31:
1999...................................................... 505 24
2000...................................................... 499 24
2001...................................................... 31 14
------ ---
Total minimum lease payments................................ $1,035 62
======
Less amount representing interest......................... 6
---
56
Less current portion of capital lease (included in
accounts payable and accrued expenses)................. 21
---
Long-term portion of capital lease........................ $35
===
</TABLE>
10. STOCKHOLDERS' EQUITY
The authorized capital of the Company consists of Common Stock, Class A
Common Stock, and Special Common Stock. On October 31, 1997, the Company
completed a recapitalization whereby the number of shares of Common Stock, Class
A Common Stock, and Special Common Stock authorized was increased from 410,860,
150,000 and 110,860, respectively, to 11,746,840, 1,694,800 and 3,104,080,
respectively. In addition, the Company's Board of Directors approved a 28-for-1
stock split in the form of a stock dividend on October 31, 1997. The
accompanying consolidated financial statements give effect to the stock split
for all periods presented.
F-13
<PAGE> 67
ATLANTIC DATA SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Common Stock and Special Common Stock are entitled to one vote per
share and are entitled to dividends at the same rate, when a dividend is
declared. The Special Common Stock has a preference in the event of liquidation
amounting to $0.91 per share and is convertible at any time into Common Stock on
a share-for-share basis. The Special Common Stock will automatically convert to
Common Stock upon the closing of a public offering of the Company's Common
Stock.
The Class A Common Stock is nonvoting and is not entitled to receive
dividends. Coincident with the recapitalization on October 31, 1997, the Class A
Common Stock is now required to convert to Common Stock on a share-for-share
basis upon the closing of a public offering of the Company's Common Stock or
earlier at the Company's option.
For the years ended March 31, 1996, 1997 and 1998, the Company paid
dividends of $0.40 per share, $0.15 per share, and $0.30 per share,
respectively, on its Special Common Stock and Common Stock.
11. STOCK PLANS
Key Person Stock Plan
In March 1985, the Board of Directors approved the Company's Key Person
Stock Plan (the "Key Person Plan") and authorized that 560,000 shares of Class A
Common Stock be reserved for issuance under such plan. Under the terms of the
Key Person Plan, the Company is authorized to sell shares at the then fair
market value of Class A Common Stock to officers and other key employees of and
consultants to the Company. To date, 394,800 shares have been issued under the
Key Person Plan, of which an aggregate 112,000 shares were repurchased by the
Company. No Class A Common Stock was issued pursuant to this plan during the
years ended March 31, 1996, 1997 and 1998. At March 31, 1998, 165,200 shares of
Class A Common Stock were available for future issuance, although the Company
intends not to issue additional shares under the Key Person Plan.
Incentive Stock Option Plan
On January 26, 1993, the Board of Directors approved the Company's 1992
Incentive Stock Option Plan (the "Plan"). Under the terms of the Plan, the
Company is authorized to grant incentive stock options to purchase shares of
Class A Common Stock to officers and other employees of and consultants to the
Company. The aggregate number of shares of Class A Common Stock which may be
issued pursuant to the Plan is 812,000. Vesting is determined by the Board of
Directors. All options issued in 1997 were to employees and vested immediately
upon issuance. The Company intends not to issue additional options under the
Plan.
1997 Stock Plan
In October 1997, the Board of Directors approved the Company's 1997 Stock
Plan (the "Stock Plan"), and authorized that 500,000 shares of Class A Common
Stock be reserved for issuance under such plan. Under the terms of the Stock
Plan, the Company is authorized to grant incentive stock options and
non-qualified stock options, as well as awards and direct purchases of Class A
Common Stock to employees, consultants, directors, and officers of the Company.
In March 1998, the Board of Directors voted to amend the Stock Plan to provide,
among other things, that the number of shares reserved for issuance under the
Stock Plan be increased from 500,000 shares of Class A Common Stock to 1,500,000
shares of Class A Common Stock.
F-14
<PAGE> 68
ATLANTIC DATA SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1998 Employee Stock Purchase Plan
The 1998 Employee Stock Purchase Plan (the "Purchase Plan") was adopted by
the Board of Directors in March 1998 and approved by the stockholders in April
1998, to be effective upon the effective date of the public offering of the
Company's Common Stock. The Purchase Plan provides for the issuance of a maximum
of 500,000 shares of Common Stock.
The following table presents the activity of the Plan for the years ended
March 31, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
1996 1997 1998
------------------ ------------------ -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding options at
beginning of year........... 140,000 $0.91 140,000 $0.91 812,000 $0.91
Granted..................... -- -- 672,000 0.91 371,500 7.91
Exercised................... -- -- -- -- (533,990) (1.11)
------- ----- ------- ----- -------- -----
Outstanding options at end of
year........................ 140,000 $0.91 812,000 $0.91 649,510 $6.41
======= ===== ======= ===== ======== =====
Exercisable at end of year.... 105,000 $0.91 812,000 $0.91 503,760 $4.05
======= ===== ======= ===== ======== =====
Available for grant at end of
year........................ -- -- -- -- 128,500 --
======= ===== ======= ===== ======== =====
Weighted average fair value
per share of options granted
during the year............. $ 0.06 $ 1.07
======= ========
</TABLE>
The following table represents weighted average price and life information
about significant option groups outstanding at March 31, 1998.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- -----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
OPTION GRANT DATE OUTSTANDING LIFE (YRS.) PRICE EXERCISABLE PRICE
----------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
1998...................... 341,500 9.9 $7.91 195,750 $7.91
1997...................... 195,000 8.4 0.91 195,000 0.91
1993...................... 113,010 4.8 0.91 113,010 0.91
------- -------
649,510 503,760
======= =======
</TABLE>
As required under FAS 123, the following pro forma net income and earnings
per share presentations reflect the amortization of the option grant fair value
as expense. For purposes of this disclosure, the estimated fair value of the
options is amortized to expense over the options' vesting periods. The Company's
pro forma information follows:
<TABLE>
<CAPTION>
FISCAL 1997 FISCAL 1998
----------- -----------
<S> <C> <C>
Pro forma net income........................................ $2,011,000 $4,726,000
Pro forma earnings per common share......................... $ 0.20 $ 0.47
</TABLE>
Significant assumptions used in determining this value include: risk free
interest rates ranging from 5.3-6.6% in 1997 and 1998; expected life of the
options between one and three years; and dividend
F-15
<PAGE> 69
ATLANTIC DATA SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
rates of zero as Class A Common Stock was not entitled to dividends, and the
Company does not expect to pay cash dividends in the foreseeable future.
The effects on pro forma disclosures of applying FAS 123 are not likely to
be representative of the effects on pro forma disclosures of future years.
12. EARNINGS PER SHARE
The following table sets forth the reconciliation of the numerators and
denominators of the pro forma earnings per common share and pro forma earnings
per common share -- assuming dilution computations for the year ended March 31,
1998.
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31, 1998
--------------
<S> <C>
Numerator:
Net income (numerator for earnings per common share and
earnings per common share assuming dilution)........... $ 4,898,000
Denominator:
Denominator for earnings per share -- weighted average
shares................................................. 10,428,936
Effect of dilutive securities:
Employee stock options................................. 146,968
-----------
Denominator for earnings per share assuming
dilution -- adjusted weighted average shares and
assumed conversions.................................... 10,575,904
===========
Pro forma earnings per common share......................... $ 0.47
===========
Pro forma earnings per common share -- assuming dilution.... $ 0.46
===========
</TABLE>
Pro forma earnings per common share has been calculated by dividing net
income by weighted average common shares outstanding (common shares and assuming
the conversion into Common Stock of Special Common Stock and Class A Common
Stock at April 1, 1997 or the date of issuance if later). Pro forma earnings per
common share -- assuming dilution reflects the potential dilution arising from
the exercise of stock options using the treasury stock method.
F-16
<PAGE> 70
ATLANTIC DATA SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the computation of earnings per share of
Common Stock and Special Common Stock from continuing operations for the years
ended March 31, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Numerator:
Income from continuing operations (numerator
for earnings per common share)............. $ 1,563,000 $ 1,941,000 $ 4,898,000
Dividends declared
Common Stock.................................. (2,752,384) (1,032,144) (2,064,288)
Special Common Stock.......................... (1,247,616) (467,856) (935,712)
----------- ----------- -----------
(4,000,000) (1,500,000) (3,000,000)
Undistributed earnings.......................... $(2,437,000) $ 441,000 $ 1,898,000
Denominator for earnings per common share --
weighted average shares.................... 9,952,040 9,952,040 9,952,040
Undistributed earnings per common share
Common Stock and Special Common Stock......... $ (0.24) $ 0.05 $ 0.19
Assumed distribution of earnings
Common Stock and Special Common Stock......... $ 0.40 $ 0.15 $ 0.30
Earnings per common share from continuing
operations -- Common Stock and Special Common
Stock......................................... $ 0.16 $ 0.20 $ 0.49
=========== =========== ===========
</TABLE>
Earnings per common share from continuing operations has been calculated
under the two class method for Common Stock and Special Common Stock. Class A
Common Stock does not share in dividends with Common Stock and Special Common
Stock, and therefore does not share in earnings. There were no dilutive
securities outstanding at March 31, 1996, 1997 or 1998.
13. EMPLOYEE RETIREMENT PLAN
The Company maintains a defined contribution retirement plan for eligible
employees which is funded by employee contributions and by discretionary Company
contributions. Under the plan, employees may make tax deferred contributions and
the Company, at its discretion, may match 50% of employee contributions up to 5%
of payroll. The Company may also opt to make additional contributions to the
plan. Company contributions vest ratably over five years of employment. Company
contributions amounted to $91,771, $83,062 and $301,300 for the years ended
March 31, 1996, 1997 and 1998, respectively.
14. MAJOR CUSTOMERS
The nature of the Company's services results in the Company deriving
significant amounts of revenue from certain customers in a particular year. For
the year ended March 31, 1998, five customers accounted for 17.4%, 13.7%, 13.3%,
10.1%, and 10.0% of the Company's revenues. For the year ended March 31, 1997,
two customers accounted for 18.8% and 12.4% of the Company's revenues. For the
year ended March 31, 1996, three customers accounted for 22.2%, 18.1% and 10.7%
of the Company's revenues.
15. SECURITIES AND EXCHANGE COMMISSION FILING
The Company filed a Form S-1 Registration Statement under the Securities
Act of 1933 with the Securities and Exchange Commission on March 26, 1998.
F-17
<PAGE> 71
[A color graphic depicting the Company's logo superimposed over
certain images associated with the financial services industry
and its information technology needs, with the caption
"Partnering With Financial Services Companies to Manage Change."]
<PAGE> 72
[ADS Corporate Logo]
<PAGE> 73
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Estimated expenses (other than underwriting discounts and commissions)
payable in connection with the sale of the Common Stock offered hereby are as
follows:
<TABLE>
<S> <C>
SEC registration fee........................................ $ 12,722
NASD filing fee............................................. 4,813
Nasdaq National Market listing fee.......................... 84,875
Printing and engraving expenses............................. 150,000
Legal fees and expenses..................................... 300,000
Accounting fees and expenses................................ 150,000
Blue Sky fees and expenses (including legal fees)........... 15,000
Transfer agent and registrar fees and expenses.............. 15,000
Miscellaneous............................................... 17,590
-----------
Total............................................. $ 750,000
===========
</TABLE>
The Company will bear all expenses shown above.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Massachusetts Business Corporation Law and the Company's By-laws
provide for indemnification of the Company's directors and officers for
liabilities and expenses that they may incur in such capacities, except with
respect to any matter as to which the indemnified person shall have been
adjudicated in any proceeding not to have acted in good faith in the reasonable
belief that his or her action was in the best interest of the Company. Reference
is made to the Company's Amended and Restated By-laws and Second Amended and
Restated By-laws filed as Exhibits 3.03 and 3.04 hereto, respectively.
The Underwriting Agreement provides that the Underwriters are obligated,
under certain circumstances, to indemnify directors, officers and controlling
persons of the Company against certain liabilities, including liabilities under
the Securities Act of 1933, as amended (the "Securities Act"). Reference is made
to the form of Underwriting Agreement filed as Exhibit 1.01 hereto.
The Company intends to obtain directors' and officers' liability insurance
for the benefit of its directors and certain of its officers.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In the three years preceding the filing of this registration statement, the
Company has issued the following securities that were not registered under the
Securities Act:
On October 31, 1997, the Board of Directors of the Company declared a
28-for-1 stock split in the form of a stock dividend of 27 shares for each share
of the Company's capital stock outstanding as of the effective filing of the
Company's Amended and Restated Articles of Organization with the Secretary of
the Commonwealth of the Commonwealth of Massachusetts (the "Split"). In
connection with the Split, the Company issued an aggregate 10,274,310 shares of
its capital stock to its stockholders of record on November 6, 1997. During the
past three years, the Company has not issued any shares of its capital stock
other than in connection with the Split and in connection with stock awards and
stock option exercises as described below.
II-1
<PAGE> 74
On November 4, 1997 and November 6, 1997, the Company issued an aggregate
of 420,000 shares of its Class A Common Stock (including 405,000 shares issued
on November 6 in connection with the Split) upon the exercise of employee stock
options under the Company's 1992 Incentive Stock Option Plan (the "1992 Plan")
by Mr. Olsson, the Company's Executive Vice President and Director of Business
Development, at a price of $0.91 per share, for an aggregate consideration of
$382,200.
On December 30, 1997, the Company issued 16,000 shares of its Class A
Common Stock upon the exercise of employee stock options under the 1992 Plan by
Mr. Cahill, the Company's Executive Vice President and Director of Operations,
at a price of $0.91 per share, for an aggregate consideration of $14,560.
On January 5, 1998, the Company issued 10,990 shares of its Class A Common
Stock upon the exercise of employee stock options under the 1992 Plan by an
employee of the Company, at a price of $0.91 per share, for an aggregate
consideration of $10,000.
On January 22, 1998, the Company issued 57,000 shares of its Class A Common
Stock upon the exercise of employee stock options under the 1992 Plan by Mr.
Cahill, at a price of $0.91 per share, for an aggregate consideration of
$51,870.
On February 6, 1998, the Company issued 30,000 shares of its Class A Common
Stock upon the exercise of employee stock options under the Company's 1997 Stock
Plan (the "1997 Plan") by Mr. McGrath, the Company's Senior Vice President,
Finance and Administration, and Chief Financial Officer, at a price of $4.25 per
share, for an aggregate consideration of $127,500.
On February 10, 1998, the Company granted Mr. Driscoll, a director of the
Company, a right to purchase under the 1997 Plan 15,000 shares of its Class A
Common Stock at a price of $9.00, for an aggregate consideration of $135,000. On
April 6, 1998, the Company issued 15,000 shares of its Class A Common Stock to
Mr. Driscoll in connection with this right.
No underwriters were involved in the foregoing sales of securities. Such
sales were made in reliance upon an exemption from the registration provisions
of the Securities Act set forth in Section 4(2) thereof relative to sales by an
issuer not involving any public offering or the rules and regulations
thereunder, or, in the case of options to purchase Common Stock, Rule 701 under
the Securities Act. All of the foregoing securities are deemed restricted
securities for purposes of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- -------
<S> <C>
1.01* Form of Underwriting Agreement.
3.01+ Amended and Restated Articles of Organization of the
Company.
3.02 Form of Second Amended and Restated Articles of Organization
of the Company.
3.03 Amended and Restated By-laws of the Company.
3.04 Form of Second Amended and Restated By-laws of the Company.
4.01+ Specimen Certificate for shares of the Company's Common
Stock.
4.02 Description of Capital Stock (contained in the Amended and
Restated Articles of Organization and the Second Amended and
Restated Articles of Organization of the Company, filed as
Exhibits 3.01 and 3.02, respectively).
4.03 Shareholders' Agreement among the Company and Certain
Shareholders dated July 15, 1988, as amended November 24,
1997.
5.01+ Legal Opinion of Testa, Hurwitz & Thibeault, LLP.
10.01** Key Person Stock Plan.
</TABLE>
II-2
<PAGE> 75
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- -------
<S> <C>
10.02** Form of Key Person Stockholders Agreement as amended.
10.03** Amended and Restated 1992 Incentive Stock Option Plan.
10.04** Form of Incentive Stock Option Agreement for Shares Issued
Under the Amended and Restated 1992 Incentive Stock Option
Plan.
10.05** Form of Amended and Restated Stockholders Agreement for
Shares Issued Under the Amended and Restated 1992 Incentive
Stock Option Plan.
10.06** 1997 Stock Plan.
10.07** Amended and Restated 1997 Stock Plan.
10.08** Form of Incentive Stock Option Agreement under the Amended
and Restated 1997 Stock Plan.
10.09** Form of Non-Qualified Stock Option Agreement under the
Amended and Restated 1997 Stock Plan.
10.10** Form of Stock Purchase and Restriction Agreement under the
Amended and Restated 1997 Stock Plan.
10.11** 1998 Employee Stock Purchase Plan.
10.12** Employment Agreement between the Company and Robert W. Howe
dated March 25, 1998.
10.13** Employment Agreement between the Company and William H.
Gallagher dated March 25, 1998.
10.14** Employment Agreement between the Company and Paul K. McGrath
dated March 25, 1998.
10.15** Employment Agreement between the Company and Peter A. Cahill
dated March 25, 1998.
10.16 Employment Agreement between the Company and David E. Olsson
dated March 25, 1998.
10.17 Registration Rights Agreement dated March 25, 1998 by and
among the Company and Certain Stockholders.
10.18 Lease Agreement between the Company and National Fire
Protection Association dated April 1, 1995, as amended July
31, 1995 and January 15, 1997.
23.01+ Consent of Testa, Hurwitz & Thibeault, LLP (contained in
Exhibit 5.01).
23.02+ Consent of Ernst & Young LLP.
24.01 Power of Attorney (contained on page II-5).
27.01+ Financial Data Schedule.
</TABLE>
- ------------
* To be filed by amendment.
** Indicates a management contract or any compensatory plan, contract or
arrangement.
+ Filed herewith.
II-3
<PAGE> 76
(b) Financial Statement Schedule.
Schedule II Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore have
been omitted.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 14 above, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes (1) to provide to the
underwriters at the closing specified in the underwriting agreement certificates
in such denominations and registered in such names as required by the
underwriters to permit prompt delivery to each purchaser; (2) that for purposes
of determining any liability under the Securities Act, the information omitted
from the form of prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act
shall be deemed to be part of this registration statement as of the time it was
declared effective; and (3) that for the purpose of determining any liability
under the Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 77
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Pre-Effective Amendment No. 1 to the
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in Quincy, Massachusetts on April 23, 1998.
ATLANTIC DATA SERVICES, INC.
By: /s/ ROBERT W. HOWE
------------------------------------
Robert W. Howe
Chief Executive Officer and
Chairman of the Board
POWER OF ATTORNEY AND SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, this
Pre-Effective Amendment No. 1 to the Registration Statement has been signed by
the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
--------- -------- ----
<S> <C> <C>
/s/ ROBERT W. HOWE Chief Executive Officer and Chairman April 23, 1998
- ------------------------------------------ of the Board (Principal Executive
Robert W. Howe Officer)
/s/ WILLIAM H. GALLAGHER President, Chief Operating Officer and April 23, 1998
- ------------------------------------------ Director
William H. Gallagher
/s/ PAUL K. MCGRATH Senior Vice President, Finance and April 23, 1998
- ------------------------------------------ Administration, and Chief Financial
Paul K. McGrath Officer (Principal Financial and
Accounting Officer)
* Director April 23, 1998
- ------------------------------------------
David C. Hodgson
* Director April 23, 1998
- ------------------------------------------
Lee M. Kennedy
* Director April 23, 1998
- ------------------------------------------
George F. Raymond
* Director April 23, 1998
- ------------------------------------------
Richard D. Driscoll
</TABLE>
II-5
<PAGE> 78
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
ATLANTIC DATA SERVICES, INC.
<TABLE>
<CAPTION>
BALANCE AT
BEGINNING OF CHARGED TO BALANCE AT
DESCRIPTION PERIOD OPERATIONS DEDUCTIONS END OF PERIOD
----------- ------------ ---------- ---------- -------------
<S> <C> <C> <C> <C>
Year ended March 31, 1996
Reserves and allowances deducted from
asset accounts
Allowance for uncollectible
accounts........................... $101,536 375,694 363,875(1) $113,355
Year ended March 31, 1997
Reserves and allowances deducted from
asset accounts
Allowance for uncollectible
accounts........................... $113,355 120,000 1,989(1) $231,366
Year ended March 31, 1998
Reserves and allowances deducted from
asset accounts
Allowance for uncollectible
accounts........................... $231,366 144,000 -- $375,366
</TABLE>
- ---------------
(1) Uncollectible accounts written off, net of recoveries
S-1
<PAGE> 79
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- -------
<S> <C>
1.01* Form of Underwriting Agreement.
3.01+ Amended and Restated Articles of Organization of the
Company.
3.02 Form of Second Amended and Restated Articles of Organization
of the Company.
3.03 Amended and Restated By-laws of the Company.
3.04 Form of Second Amended and Restated By-laws of the Company.
4.01+ Specimen Certificate for shares of the Company's Common
Stock.
4.02 Description of Capital Stock (contained in the Amended and
Restated Articles of Organization and the Second Amended and
Restated Articles of Organization of the Company, filed as
Exhibits 3.01 and 3.02, respectively).
4.03 Shareholders' Agreement among the Company and Certain
Shareholders dated July 15, 1988, as amended November 24,
1997.
5.01+ Legal Opinion of Testa, Hurwitz & Thibeault, LLP.
10.01** Key Person Stock Plan.
10.02** Form of Key Person Stockholders Agreement as amended.
10.03** Amended and Restated 1992 Incentive Stock Option Plan.
10.04** Form of Incentive Stock Option Agreement for Shares Issued
Under the Amended and Restated 1992 Incentive Stock Option
Plan.
10.05** Form of Amended and Restated Stockholders Agreement for
Shares Issued Under the Amended and Restated 1992 Incentive
Stock Option Plan.
10.06** 1997 Stock Plan.
10.07** Amended and Restated 1997 Stock Plan.
10.08** Form of Incentive Stock Option Agreement under the Amended
and Restated 1997 Stock Plan.
10.09** Form of Non-Qualified Stock Option Agreement under the
Amended and Restated 1997 Stock Plan.
10.10** Form of Stock Purchase and Restriction Agreement under the
Amended and Restated 1997 Stock Plan.
10.11** 1998 Employee Stock Purchase Plan.
10.12** Employment Agreement between the Company and Robert W. Howe
dated March 25, 1998.
10.13** Employment Agreement between the Company and William H.
Gallagher dated March 25, 1998.
10.14** Employment Agreement between the Company and Paul K. McGrath
dated March 25, 1998.
10.15** Employment Agreement between the Company and Peter A. Cahill
dated March 25, 1998.
10.16 Employment Agreement between the Company and David E. Olsson
dated March 25, 1998.
10.17 Registration Rights Agreement dated March 25, 1998 by and
among the Company and Certain Stockholders.
10.18 Lease Agreement between the Company and National Fire
Protection Association dated April 1, 1995, as amended July
31, 1995 and January 15, 1997.
23.01+ Consent of Testa, Hurwitz & Thibeault, LLP (contained in
Exhibit 5.01).
23.02+ Consent of Ernst & Young LLP.
24.01 Power of Attorney (contained on page II-5).
27.01+ Financial Data Schedule.
</TABLE>
- ------------
* To be filed by amendment.
** Indicates a management contract or any compensatory plan, contract or
arrangement.
+ Filed herewith.
<PAGE> 1
Exhibit 3.01
FEDERAL IDENTIFICATION
NO. 04-2696393
- -------- THE COMMONWEALTH OF MASSACHUSETTS
Examiner WILLIAM FRANCIS GALVIN
Secretary of the Commonwealth
One Ashburton Place, Boston, Massachusetts 02108-1512
RESTATED ARTICLES OF ORGANIZATION
(GENERAL LAWS, CHAPTER 156B, SECTION 74)
- --------
Name We, William H. Gallagher , *President,
Approved
and Susan L. Gorman , *Clerk,
of Atlantic Data Services, Inc., Inc. ,
(Exact name of corporation)
located at One Batterymarch Park, Quincy, MA 02169 ,
-------------------------------------------------
(Street address of corporation in Massachusetts)
do hereby certify that the following Restatement of the Articles of
Organization was duly adopted by unanimous written consent dated
October 31, 1997 by a vote of the directors and by:
<TABLE>
<S> <C> <C> <C> <C> <C>
110,860 shares of Special Common Stock, $.01 par value of 110,860 shares outstanding,
- ------- --------------------------------------- ------------
(type, class & series, if any)
244,570 shares of Common Stock, $.01 par value of 244,570 shares outstanding, and
- ------- --------------------------------------- ------------
(type, class & series, if any)
10,100 shares of Class A Common Stock, $.01 par value of 10,100 shares outstanding
- ------- --------------------------------------- ------------
(type, class & series, if any)
</TABLE>
C [ ] **xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx:
/ **being at least two-thirds of each type, class or series
outstanding and entitled to vote thereon and of each type, class or
P [ ] series of stock whose rights are adversely affected thereby:
ARTICLE I
M [ ] The name of the corporation is:
R.A. [ ] Atlantic Data Services, Inc.
ARTICLE II
The purpose of the corporation is to engage in the following
business activities:
See Continuation Sheets at Attachment II and
incorporated herein by reference.
- --------
P.C.
*Delete the inapplicable words. **Delete the inapplicable clause.
NOTE: IF THE SPACE PROVIDED UNDER ANY ARTICLE OR ITEM ON THIS FORM IS
INSUFFICIENT, ADDITIONS SHALL BE SET FORTH ON OF SEPARATE 8 1/2 X 11 SHEETS OF
PAPER WITH A LEFT MARGIN OF AT LEAST 1 INCH. ADDITIONS TO MORE THAN ONE ARTICLE
MAY BE MADE ON A SINGLE SHEET SO LONG AS EACH ARTICLE REQUIRING EACH ADDITION IS
CLEARLY INDICATED.
<PAGE> 2
ARTICLE III
State the total number of shares and par value, if any, of each class of stock
which the corporation is authorized to issue.
<TABLE>
<CAPTION>
WITHOUT PAR VALUE WITH PAR VALUE
----------------------------------- ---------------------------------------------------------------
TYPE NUMBER OF SHARES TYPE NUMBER OF SHARES PAR VALUE
---- ---------------- ---- ---------------- ---------
<S> <C> <C> <C> <C>
Common: Common: 11,746,840 $.01
Class A Common: 1,694,800 $.01
Preferred: Special Common 3,104,080 $.01
</TABLE>
ARTICLE IV
If more than one class of stock is authorized, state a distinguishing
designation for each class. Prior to the issuance of any shares of a class, if
shares of another class are outstanding, the corporation must provide a
description of the preferences, voting powers, qualifications, and special or
relative rights or privileges of that class and of each other class of which
shares are outstanding and of each series then established within any class.
See Continuation Sheets at Attachment IV and incorporated herein by reference.
ARTICLE V
The restrictions, if any, imposed by the Articles of Organization upon the
transfer of shares of stock of any class are:
See Continuation Sheets at Attachment V and incorporated herein by reference.
ARTICLE VI
**Other lawful provisions, if any, for the conduct and regulation of the
business and affairs of the corporation, for its voluntary dissolution, or for
limiting, defining, or regulating the powers of the corporation, or of its
directors or stockholders, or of any class of stockholders:
See Continuation Sheets at Attachment VI and incorporated herein by reference.
**If there are no provisions state "None".
NOTE: THE PRECEDING SIX (6) ARTICLES ARE CONSIDERED TO BE PERMANENT AND MAY ONLY
BE CHANGED BY FILING APPROPRIATE ARTICLES OF AMENDMENT.
<PAGE> 3
ARTICLE VII
The effective date of the restated Articles of Organization of the corporation
shall be the date approved and filed by the Secretary of the Commonwealth. If a
later effective date is desired, specify such date which shall not be more than
thirty days after the date of filing.
ARTICLE VIII
THE INFORMATION CONTAINED IN ARTICLE VIII IS NOT A PERMANENT PART OF THE
ARTICLES OF ORGANIZATION.
a. The street address (post office boxes are not acceptable) of the
principal office of the corporation in Massachusetts is: One
Batterymarch Park, Quincy, MA 02169
b. The name, residential address and post office address of each director
and officer of the corporation is as follows:
<TABLE>
<CAPTION>
NAME RESIDENTIAL ADDRESS POST OFFICE ADDRESS
---- ------------------- -------------------
<S> <C> <C> <C>
President: William H. Gallagher 72 Katy-Did Lane Same
Hanson, MA 02341
Treasurer: Susan L. Gorman 529 Crafts Street Same
Newton, MA 02165
Clerk: Susan L. Gorman 529 Crafts Street Same
Newton, MA 02165
Directors: Robert W. Howe 3 Jason's Lane Same
Scituate, MA 02060
William H. Gallagher 72 Katy-Did Lane Same
Hanson, MA 02341
David Hodgson 3 Pickwick Plaza Same
Greenwich, CT 06830
Lee M. Kennedy 98 King Caesar Road Same
Duxbury, MA 02332
George Raymond 210 East Oak Avenue Same
Morrestown, NJ 08057
</TABLE>
c. The fiscal year (i.e., tax year) of the corporation shall end on the
last day of the month of: March
d. The name and business address of the resident agent, if any, of the
corporation is:
William H. Gallagher
One Batterymarch Park
Quincy, MA 02169
**We further certify that the foregoing Restated Articles of Organization affect
no amendments to the Articles of Organization of the corporation as heretofore
amended, except amendments to the following articles. Briefly describe
amendments below:
See Continuation Sheets at Attachment VIII and incorporated herein by reference.
SIGNED UNDER THE PENALTIES OF PERJURY, this 31st day of October, 1997,
/s/ William H. Gallagher , *President,
- -------------------------
William H. Gallagher
/s/ Susan L. Gorman , *Clerk.
- -------------------------
Susan L. Gorman
*Delete the inapplicable words. **If there are no amendments, state 'None'.
<PAGE> 4
THE COMMONWEALTH OF MASSACHUSETTS
RESTATED ARTICLES OF ORGANIZATION
(GENERAL LAWS, CHAPTER 156B, SECTION 74)
I hereby approve the within Restated Articles of
Organization and, the filing fee in the amount of
$16,274 - having been paid, said articles are deemed
to have been filed with me this 6th day of November,
1997.
Effective date:
/s/ William Francis Galvin
---------------------------
WILLIAM FRANCIS GALVIN
Secretary of the Commonwealth
TO BE FILLED IN BY CORPORATION
PHOTOCOPY OF DOCUMENT TO BE SENT TO:
Testa, Hurwitz & Thibeault, LLP
125 High Street
High Street Tower
Boston, MA 02110
Attn: Christina R. Schaper, Esq.
Telephone: (617) 248-7775
<PAGE> 5
Atlantic Data Services, Inc.
Restated Articles of Organization
Continuation Sheet II.1
Attachment II
"Article II. The purpose of the corporation is to engage in the
following business activities:
(a) To conduct a business of performing computer services for the
scientific, technical and engineering professions;
(b) To devise formulae and programs for the development, accumulation,
processing, analysis, presentation, distribution and recording of data
required for clients engaged in professional services, research or
publication in the fields of medicine (including paramedical areas of
practice, research and study), physics, chemistry, biology, astronomy,
engineering and other scientific and technical fields;
(c) To render professional data processing services and computer services
and consulting and planning services in connection therewith;
(d) To develop, devise, design and manufacture computers and computer
programming equipment and systems, and to prepare or manufacture and
distribute the resulting products at wholesale, at retail, or on
commission consignment, including research, development, or production
contracts for public agencies, research or educational institutions,
professional groups and business units;
(e) To maintain one or more data banks or any other type of library or
storage facilities for scientific and technical data or for the results
of research, development and design work of the Corporation or of any
other agency, and to buy, sell, lease, license and exchange data, data
systems or data collections or storage modules or units;
(f) To acquire patents, copyrights and other interests or forms of
protection of interests or rights, including the power to purchase,
lease, license or receive grants or gifts of interests from the owners
of an existing patent or other rights, and to sell, assign, lease or
license such rights or interests thereunder to others;
(g) To acquire by purchase, lease or license space and facilities for
research, development, design, production, analysis and storage
activities for scientific or technical data or for other operations of
the Corporation or for administrative purposes, including the power to
construct new facilities or to expand or improve existing facilities
and the power to enter into condominium, compound lease,
cross-licensing or other joint or cooperative programs for the
acquisition or
<PAGE> 6
Atlantic Data Services, Inc.
Restated Articles of Organization
- Continuation Sheet II.2
development of operational or administrative space; and
to acquire, maintain and operate wholesale or resale distribution
outlets for its products;
(h) To enter into any type of syndicate, joint enterprise or other
combination of corporate or non-corporate business organizations or
entities for the furtherance of its operational activities, including
its wholesale and retail trading business;
(i) To do all things necessary, appropriate or ancillary to the conduct of
a general computer services business;
(j) To buy, own, sell, develop, maintain, lease and/or operate and
otherwise deal with, either for itself or for others, real and personal
property of any kind whatsoever and to do all things and carry on all
activities necessary or incidental thereto;
(k) To carry on any manufacturing, mercantile, selling, management, service
or other business, transaction or activity which may be lawfully
carried on by a corporation organized under General Laws of the
Commonwealth of Massachusetts, Chapter 156B, as amended (or the
provisions of any substituted chapter of the General Laws of the
Commonwealth of Massachusetts, dealing with the same general subject
matter or such Chapter as now in effect, which may hereafter be
enacted);
(l) To transfer to other persons or corporations, by grant, license,
franchise, or other method, the right or privilege to carry on any kind
of business on such terms as the Corporation shall deem expedient or
proper;
(m) To acquire the good will, business, property or assets (including a
trademark, trade name or trade style), and to assume or undertake the
whole or any part of the liabilities of any person, firm, association
or corporation and to pay for the same in cash, stock, bonds,
debentures or other securities of the Corporation, or otherwise, as the
Board of Directors may determine;
(n) To carry on any business, transaction or activity through a wholly or
partly-owned subsidiary;
(o) To carry on any business, transaction or activity referred to in the
foregoing paragraphs to the same extent as might an individual, whether
as principal, agent, contractor or otherwise, and either alone or in
conjunction with any corporation, association, trust, firm, individual
or government agency, and to be a general partner, managing general
partner, partner and/or limited partner in a partnership
<PAGE> 7
Atlantic Data Services, Inc.
Restated Articles of Organization
-Continuation Sheet II.3
or limited partnership engaged in any business enterprise which it
would have power to conduct by itself; and
(p) To have as additional purposes all powers granted and conferred by the
laws of the Commonwealth of Massachusetts upon business corporations
organized under Chapter 156B (or any such substituted chapter) of the
General Laws of Massachusetts; provided, however, that no such purpose
shall include any activity inconsistent with such Chapter 156B (or any
such substituted chapter), or any other applicable provisions of the
General Laws of Massachusetts."
<PAGE> 8
Atlantic Data Services, Inc.
Amended and Restated Articles of Organization
Continuation Sheet IV.1
Attachment IV
"Article IV. The total number of shares of stock which the Corporation
shall have authority to issue is 16,545,720 shares of which 11,746,840 shares,
with a par value of $.01 per share, are designated Common Stock ("Common
Stock"), 1,694,800 shares, with a par value of $.01 per share are designated the
Common Stock Class A (the "Class A Common Stock") and 3,104,080 shares, with a
par value of $.01 per share are designated Special Common Stock (the "Special
Common Stock").
The powers, designations, preferences and privileges and relative participation,
optional or other special rights and the qualifications, limitations or
restrictions of the Corporation's Common Stock, Class A Common Stock and Special
Common Stock are as follows:
A. COMMON STOCK:
1. Dividends. Dividends may be paid upon the Common Stock as
and when declared by the Board of Directors out of any funds legally available
therefore.
2. Liquidation. That upon any liquidation, dissolution or
winding up of the Corporation, after payment shall have been made in full to all
holders of the Special Common Stock as provided in this Article IV, the holders
of the Common Stock shall be entitled to receive any and all assets remaining to
be paid or distributed pro rata with the holders of the Class A Common Stock and
without preference or priority between the Common Stock and the Class A Common
Stock.
3. Voting. Except as herein or by law expressly provided, each
share of Common Stock shall be entitled to one vote for the election of
directors and upon all other matters.
B. CLASS A COMMON STOCK:
1. Dividends. The Class A Common Stock shall not be entitled
to receive or share in dividends.
2. Voting. The Class A Common Stock shall not have any voting
rights of any kind whatsoever.
3. Liquidation. Upon any liquidation, dissolution or winding
up of the Corporation, after payment shall have been made in full to all holders
of the Special Common Stock as provided in this Article IV, the holders of the
Class A Common Stock shall be entitled to receive any and all assets remaining
to be paid or distributed pro rata
<PAGE> 9
Atlantic Data Services, Inc.
Amended and Restated Articles of Organization
Continuation Sheet IV.2
with the holders of all Common Stock and without preference or priority between
the Common Stock and the Class A Common Stock.
4. Conversion.
(a) Optional Conversion. Each share of Class A Common Stock shall be
convertible at any time at the sole option of the Corporation into
one share of fully paid and non-assessable Common Stock (the
"Conversion Rate"). The Conversion Rate shall be subject to
adjustment from time to time in certain instances as hereinafter
provided, except that no adjustment shall be made unless, by reason
of the happening of any one or more of the events hereinafter
specified, the Conversion Rate then in effect would be changed by 1%
or more. Any adjustment of less than 1% that would otherwise be
required to be made shall be carried forward and shall be made at
the time of and together with any subsequent adjustment which,
together with any adjustment or adjustments so carried forward,
amounts of 1% or more.
(b) At the request of the Corporation, any holder of shares of Class A
Common Stock shall surrender the certificate or certificates for
such shares of Class A Common Stock at the head office of the
Corporation, which certificate or certificates, if the Corporation
shall so request, shall be duly endorsed to the Corporation or in
blank, or accompanied by proper instruments of transfer to the
Corporation or in blank.
(c) The Corporation will, as soon as practicable, after such surrender
of certificates for shares of Class A Common Stock, issue and
deliver to the person for whose account such Class A Common Stock
was so surrendered certificates for the number of full shares of
Common Stock to which he, she or it shall be entitled as aforesaid,
together with a cash adjustment computed in accordance with Section
5 of this Article IV.B for any fraction of his, her or its shares as
hereinafter stated, if not evenly convertible. Subject to the
following provisions of this paragraph, such conversion shall be
deemed to have been made as of the date such surrender of Class A
Common Stock to be converted was duly completed in accordance with
this Section 4(c) and each person named to receive the Common Stock
issuable upon the conversion of such Class A Common Stock shall be
deemed to be for all purposes the record holder of the surrendered
shares of Common Stock as of such date.
(d) The Conversion Rate shall be subject to adjustment from time to time
as follows:
(i) Stock Dividends, Subdivisions, Combinations. If the
Corporation shall at any time (x) subdivide its outstanding
shares of Common Stock into a larger number of shares of
<PAGE> 10
Atlantic Data Services, Inc.
Amended and Restated Articles of Organization
Continuation Sheet IV.3
Common Stock; or (y) combine its outstanding shares of Common
Stock into a smaller number of shares of Common Stock, the
Conversion Rate in effect immediately prior thereto shall be
adjusted ratably. An adjustment made pursuant to this
Subsection 4(d)(i) shall become effective retroactively to the
record date of the stock dividend, subdivision or combination,
as the case may be.
(ii) Reorganization, Reclassification, Merger,
Consolidation or Conveyance of Assets. In case of any capital
reorganization or any reclassification of the capital stock of
the Corporation or in case of the consolidation or merger of
the Corporation with or into another corporation or in the
case of any sale or conveyance of all or substantially all of
the property, assets or business of the Corporation, each
share of Class A Common Stock shall thereafter be convertible
into the number of shares of stock or the securities or
property receivable upon such capital reorganization,
reclassification of capital stock, consolidation, merger, sale
or conveyance, as the case may be, by holder of the number of
shares of Common Stock into which such share of Class A Common
Stock was convertible immediately prior to such capital
reorganization, reclassification of capital stock,
consolidation, merger, sale or conveyance.
(iii) Whenever the Conversion Rate is adjusted as herein
provided, the Secretary of the Corporation shall forthwith
adjust the corporate records and cause a notice stating the
adjustment and the Conversion Rate as adjusted to be mailed to
the holders of record of the Class A Common Stock as of the
effective date of the such adjustment.
(e) Mandatory Conversion. If at any time the Corporation shall effect a
firm commitment underwritten public offering of shares of Common
Stock, then effective upon the closing of the sale of such shares by
the Corporation pursuant to such public offering, all outstanding
shares of Class A Common Stock shall automatically convert to shares
of Common Stock on the basis set forth in this Subsection 4. Holders
of shares of Class A Common Stock shall surrender the certificate or
certificates for such shares of Class A Common Stock at the head
office of the Corporation, which certificate or certificates, if the
Corporation shall so request, shall be duly endorsed to the
Corporation or in blank, or accompanied by proper instruments of
transfer to the Corporation. As promptly as practicable thereafter,
the Corporation shall issue and deliver to such holder a certificate
or certificates for the number of whole shares of Common Stock to
which such holder is entitled. Until such time as a holder of shares
of Class A Common Stock shall surrender his, her or its certificates
therefor as provided
<PAGE> 11
Atlantic Data Services, Inc.
Amended and Restated Articles of Organization
Continuation Sheet IV.4
above, such certificates shall be deemed to represent the shares of
Common Stock to which such holder shall be entitled upon the
surrender thereof.
5. Fractional Shares. The Corporation shall not issue
fractional shares of Common Stock under this Article IV.B, but in lieu thereof,
the Corporation shall pay in cash the fair market value of fractions of a share
of Common Stock as of the time when those entitled to receive such fractions are
determined.
C. SPECIAL COMMON STOCK:
1. Dividends. No dividends shall be declared or paid or
distribution made for any shares of the Special Common Stock; provided, however,
that notwithstanding the foregoing, if the Board of Directors shall declare a
dividend or other distribution payable upon any other class of the outstanding
shares of Common Stock, there shall be declared a dividend of equal amount per
share payable on the shares of Special Common Stock outstanding on such date.
2. Voting.
(a) Each share of Special Common Stock of the Corporation shall be
entitled to one vote for the election of directors and upon all other
matters.
(b) Except as provided in Subsection 2(c) of this Section 2, Special
Common Stock and Common Stock shall be voted together as a single
class on all matters.
(c) Notwithstanding Subsection 2(a) and (b) of this Section 2, the
affirmative vote of the holders of a majority of the outstanding
shares of Special Common Stock shall be required to authorize any
action which alters or changes the rights, preferences or privileges
of the Special Common Stock, increases the authorized number of
shares of Special Common Stock, Common Stock or Class A Common Stock
or creates any new class of shares having preference over or being on
a parity with the Special Common Stock in any respect.
3. Liquidation. In the event of any voluntary or involuntary
liquidation, dissolution or winding-up of the affairs of the Corporation, the
holders of shares of Special Common Stock then outstanding shall be entitled to
receive and be paid out of the assets of the Corporation available for
distribution to its stockholders an amount in cash equal to $25.50 per share of
Special Common Stock before any payment shall be made or any assets distributed
to the holders of shares of Common Stock or Class A Common Stock or any other
class of capital stock of the Corporation. If the assets of the Corporation are
not sufficient to pay in full the liquidation payments payable to holders of
outstanding shares of Special Common Stock, the holders of all such shares
<PAGE> 12
Atlantic Data Services, Inc.
Amended and Restated Articles of Organization
Continuation Sheet IV.5
shall share ratably in the distribution of such assets. Any assets remaining
after all required payments have been made to the holders of Special Common
Stock shall be distributed to the holders of Common Stock and Class A Common
Stock and any other class of capital stock in accordance with their respective
interests, and no further distributions shall be made to the holders of shares
of Special Common Stock.
4. Conversion.
(a) Each share of Special Common Stock shall be convertible at any time
at the option of the holder thereof into one share of fully paid and
non-assessable Common Stock (the "Conversion Rate"). The Conversion
Rate shall be subject to adjustment from time to time in certain
instances as hereinafter provided, except that no adjustment shall
be made unless, by reason of the happening of any one or more of the
events hereinafter specified, the Conversion Rate then in effect
would be changed by 1% or more. Any adjustment of less than 1% that
would otherwise be required to be made shall be carried forward and
shall be made at the time of and together with any subsequent
adjustment which, together with any adjustment or adjustments so
carried forward, amounts of 1% or more.
(b) Before any holder of shares of Special Common Stock shall be
entitled to convert the same into Common Stock, such holder shall
surrender the certificate or certificates for such shares of Special
Common Stock at the head office of the Corporation, which
certificate or certificates, if the Corporation shall so request,
shall be duly endorsed to the Corporation or in blank, or
accompanied by proper instruments of transfer to the Corporation or
in blank, and shall give written notice to the Corporation that he
elects so to convert said shares of Special Common Stock, and shall
state in writing therein the name or names in which he wishes the
certificate or certificates for the conversion shares of Common
Stock to be issued.
(c) The Corporation will, as soon as practicable, after such surrender
of certificates for shares of Special Common Stock accompanied by
the written notice and statement above prescribed, issue and deliver
to the person for whose account such Special Common Stock was so
surrendered, or to his, her or its nominee or nominees, certificates
for the number of full shares of Common Stock to which he shall be
entitled as aforesaid, together with a cash adjustment computed in
accordance with Section 5 of this Article IV.C for any fraction of
his, her or its share as hereinafter stated, if not evenly
convertible. Subject to the following provisions of this paragraph,
such conversion shall be deemed to have been made as of the date
such surrender of Special Common Stock to be converted was duly
completed in accordance with this Section 4(c) and each
<PAGE> 13
Atlantic Data Services, Inc.
Amended and Restated Articles of Organization
Continuation Sheet IV.6
person named to receive the Common Stock issuable upon the
conversion of such Special Common Stock shall be deemed to be for
all purposes the record holder of the surrendered shares of Common
Stock as of such date.
(d) The Corporation shall not be required to effect any conversion of
shares of Special Common Stock while the stock transfer books of the
Corporation are closed for any purpose; but any shares of Special
Common Stock surrendered for conversion during any period while such
books are so closed shall be converted, effective retroactively to
the date on which such Special Common Stock was surrendered, and at
the Conversion Rate in effect at such date.
(e) The Conversion Rate shall be subject to adjustment from time to time
as follows:
(i) Stock Dividends, Subdivisions, Combinations. If the
Corporation shall at any time (x) subdivide its outstanding
shares of Common Stock into a larger number of shares of
Common Stock; or (y) combine its outstanding shares of Common
Stock into a smaller number of shares of Common Stock, the
Conversion Rate in effect immediately prior thereto shall be
adjusted ratably. An adjustment made pursuant to this
Subsection 4(e)(i) shall become effective retroactively to the
record date of the stock dividend, subdivision or combination,
as the case may be.
(ii) Reorganization, Reclassification, Merger,
Consolidation or Conveyance of Assets. In case of any capital
reorganization or any reclassification of the capital stock of
the Corporation or in case of the consolidation or merger of
the Corporation with or into another corporation or in the
case of any sale or conveyance of all or substantially all of
the property, assets or business of the Corporation, each
share of Special Common Stock shall thereafter be convertible
into the number of shares of stock or the securities or
property receivable upon such capital reorganization,
reclassification of capital stock, consolidation, merger, sale
or conveyance, as the case may be, by holder of the number of
shares of Common Stock into which such share of Special Common
Stock was convertible immediately prior to such capital
reorganization, reclassification of capital stock,
consolidation, merger, sale or conveyance; provided, however,
that if the value of the exchange is less that $25.50 per
share, the holders of Special Common Stock shall receive at
least the equivalent of $25.50 per share before the holders of
Common Stock or Class A Common Stock receive any payment or
exchange for their shares; and in any case, appropriate
adjustment (as reasonably determined in good faith by the
Board of Directors of the Corporation) shall be made in the
application of the provisions herein set forth with respect to
the rights and
<PAGE> 14
Atlantic Data Services, Inc.
Amended and Restated Articles of Organization
Continuation Sheet IV.7
interest thereafter of the holders of the Special Common Stock
to the end that the provision set forth herein (including the
specified changes in, and other adjustments of, the Conversion
Rate) shall there after be applicable, as nearly as reasonably
may be in relation to any shares of stock or other securities
or other property thereafter deliverable on the conversion of
the Special Common Stock.
(iii) Whenever the Conversion Rate is adjusted as herein
provided, the Secretary of the Corporation shall forthwith
adjust the corporate records and cause a notice stating the
adjustment and the Conversion Rate as adjusted to be mailed to
the holders of record of the Special Common Stock as of the
effective date of the such adjustment.
5. Fractional Shares. The Corporation shall not issue fractional
shares of Common Stock under this Article IV.C, but in lieu thereof, the
Corporation shall pay in cash the fair market value of fractions of a
share of Common Stock as of the time when those entitled to receive such
fractions are determined.
6. Reacquired Shares of Special Common Stock. Shares of Special
Common Stock which are converted into Common Stock shall be cancelled and
shall not be available for reissuance.
<PAGE> 15
Atlantic Data Services, Inc.
Amended and Restated Articles of Organization
Continuation Sheet V.1
Attachment V
"Article V. The restrictions, if any, imposed by the Articles of
Organization upon the transfer of shares of stock of any class are as
follows:
A. Common Stock and Special Common Stock:
Shares of Common Stock and Special Common Stock are
transferable only after compliance with the provisions of any
agreement between the Corporation and the shareholders who own
all of the Common Stock and Special Common Stock, a copy of
which is on file in the office of the Corporation, available
for inspection by any holder of Common Stock or Special Common
Stock who may obtain a copy, without charge, upon application.
B. Class A Common Stock:
Shares of Class A Common Stock are transferable only after
compliance with the provisions of an agreement between the
Corporation and each shareholder of the Class A Common Stock
of the Corporation, a copy of which is one file in the office
of the Corporation, available for inspection by any holder of
Class A Common Stock who may obtain a copy, without charge,
upon application.
<PAGE> 16
Atlantic Data Services, Inc.
Amended and Restated Articles of Organization
Continuation Sheet VI.1
Attachment VI
"Article VI. Other lawful provisions, if any, for the conduct and
regulation of business and affairs of the corporation, for its voluntary
dissolution, or for limiting, defining or regulating the powers of the
corporation, or of its directors or stockholders or of any class of
stockholders, are as follows:
(a) Meetings of the stockholders may be held anywhere in the United
States;
(b) Each Director and each officer elected by the stockholders
(including persons elected by the Board of Directors to fill
vacancies in the Board of Directors or in any such offices), and
each former Director and officer, and the heirs, executors,
administrators, successors and assigns of each of them, shall be
indemnified by the Corporation against all costs and expenses,
including fees and disbursements of counsel and the cost of
settlements (other than amounts paid to the Corporation itself)
reasonably incurred by, or imposed upon, him or her in connection
with or arising out of any action, suit or proceeding, civil or
criminal, in which he may be involved, or incurred in anticipation
of any action, suit or proceeding, by reason of his or her being or
having been an officer or Director of the Corporation; or by reason
of any action alleged to have been taken or omitted by him or her as
a Director of the Corporation.
Officers elected by the Board of Directors and employees and other
agents of the Corporation (including persons who serve at its
request as directors or officers of other organizations in which it
owns shares or of which it is a creditor), and each such former
officer, employee and agent, and the heirs, executors,
administrators, successors and assigns of each of them, may be
indemnified by the Corporation to the extent, if any, authorized by
the Board of Directors.
No indemnification shall be provided to any person, or to his or her
heirs, executors, administrators, successors or assigns, with
respect to any matter as to which he shall have been finally
adjudicated in any action, suit or proceeding not to have acted in
good faith in the reasonable belief that his or her action was in
the best interests of the Corporation.
The foregoing indemnification shall not be exclusive of any other
rights of indemnification to which any such Director, officer,
employee or agent may be entitled.
<PAGE> 17
Atlantic Data Services, Inc.
Amended and Restated Articles of Organization
Continuation Sheet VI.2
(c) No contract or other transaction between the Corporation and any
other person, firm or corporation, shall, in the absence of fraud,
in any way be affected or invalidated nor shall any Director be
subject to surcharge with respect to any such contact or transaction
by the fact that such Director, or any firm of which such Director
is a member, or any corporation of which such Director is a
shareholder, officer or director, is a party to, or may be
pecuniarily or otherwise interested in, such contract or
transaction; provided, that the fact that he individually, or such
firm or corporation, is so interested shall be disclosed to the
Board of Directors at the meeting at which (or prior to the
Directors' executing their written consents by which) action to
authorize, ratify or approve such contract or transaction is to be
taken. Any Director of the Corporation may vote upon or give his or
her written consent to any contract or other transaction between the
Corporation and any other person, firm, corporation or other entity
without regard to the fact that he is also a director or officer of
such other firm, or corporation or entity, a subsidiary or
affiliated corporation thereof, or is such other person;
(d) Each Director and officer of the Corporation shall, in the
performance of his or her duties, be fully protected in relying in
good faith upon the books of account of the Corporation, reports
made to the Corporation by any of its officers or employees or by
counsel, accountants, appraisers or other experts or consultants
selected with reasonable care by the Directors, or upon the other
records of the Corporation;
(e) In furtherance and not in limitation of the powers enumerated in
this Article 6, the Corporation shall have as additional powers all
purposes granted and allowed by the laws of the Commonwealth of
Massachusetts to business corporations organized under Chapter 156B
(or any such substituted chapter) of the General Laws of
Massachusetts; provided, that no such power shall be exercised in a
manner inconsistent with such Chapter 156B (or any such substituted
chapter) or any other applicable provision of the General Laws of
Massachusetts;
(f) The Corporation eliminates the personal liability of each Director
to the Corporation or its stockholders for monetary damages for
breach of fiduciary duty as a Director notwithstanding any provision
of law imposing such liability; provided, however, that, to the
extent provided by applicable law, this provision shall not
eliminate or limit the liability of a Director (i) for any breach of
the Director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii)
under Section 61 or 62 or successor provisions of the Massachusetts
Business Corporation Law, or (iv) for any transaction from
<PAGE> 18
Atlantic Data Services, Inc.
Amended and Restated Articles of Organization
Continuation Sheet VI.3
which the Director derived an improper personal benefit. This
provision shall not eliminate or limit the liability of a Director
of the Corporation for any act or omission occurring prior to the
date on which this provision becomes effective. No amendment to or
repeal of this provision shall apply to or have any effect on the
liability or alleged liability of any Director for or with respect
to any acts or omissions of such Director occurring prior to such
amendment or repeal;
(g) The Directors of the Corporation may make, amend or repeal the
By-Laws in whole or in part, except with respect to any provision
thereof which by law or the By-Laws requires action by the
stockholders; and
(h) The Corporation may become a partner in any business."
<PAGE> 19
Atlantic Data Services, Inc.
Amended and Restated Articles of Organization
Continuation Sheet VIII.1
Attachment VIII
"We further certify that the foregoing Restated Articles of
Organization affect no amendments to the Articles of Organization of the
corporation as heretofore amended, except amendments to the following articles.
Briefly describe amendments below:
Articles III, IV and VI have been amended.
Article III is amended to increase the number of authorized shares of
Common Stock, $.01 par value per share, from 410,860 shares to 11,746,800
shares, the number of authorized shares of Class A Common Stock, $.01 par value
per share, from 150,000 shares to 1,694,800 shares, and the number of authorized
shares of Special Common Stock, $.01 par value per share, from 110,860 shares to
3,104,080 shares.
Article IV is amended to provide for the conversion of the Class A
Common Stock into Common Stock upon notice by the Corporation or upon the
closing of a public offering of shares of the Company's Common Stock.
Article VI is amended to add other lawful provisions for the conduct
and regulation of the business and affairs of the Corporation which additions
include the (i) elimination of the personal liability of Directors and
Stockholders of the Corporation for money damages for breach of fiduciary duty
by the Directors, subject to certain exceptions; (ii) authority of the Directors
of the Corporation to make, amend or repeal the By-Laws of the corporation,
unless such action is required by the stockholders of the Corporation; and (iii)
authorization for the Corporation to become a partner in any business."
<PAGE> 20
FEDERAL IDENTIFICATION
NO. 04-2696393
THE COMMONWEALTH OF MASSACHUSETTS
WILLIAM FRANCIS GALVIN
Secretary of the Commonwealth
One Ashburton Place, Boston, Massachusetts 02108-1512
ARTICLES OF AMENDMENT
(GENERAL LAWS, CHAPTER 156B, SECTION 72)
I, William H. Gallagher , *President
-------------------------------------------------
and Susan L. Gorman , *Clerk
------------------------------------------------
of Atlantic Data Services, Inc. ,
---------------------------------------------------------------------------
(Exact name of corporation)
located at One Batterymarch Park, Quincy, MA 02169 ,
------------------------------------------------------------------
(Street address of corporation in Massachusetts)
certify that these Articles of Amendment affecting articles numbered:
3
- --------------------------------------------------------------------------------
(Number those articles 1, 2, 3, 4, 5 and/or 6 being amended)
of the Articles of Organization were duly adopted by unanimous written consent
on April 7 , 19 98 , by vote of:
-------- -----------
<TABLE>
<C> <C> <C>
3,104,080 shares of Special Common Stock, $.01 par value of 3,104,080 shares outstanding,
- ------------ ------------------------------------- ---------------------
(type, class & series, if any)
6,847,960 shares of Common Stock, $.01 par value of 6,847,960 shares outstanding, and
- ------------ ------------------------------------- ---------------------
(type, class & series, if any)
831,790 shares of Class A Common Stock, $.01 par value of 831,790 shares outstanding,
- ------------ ------------------------------------- ---------------------
(type, class & series, if any)
</TABLE>
1**being at least a majority of each type, class or series outstanding and
entitled to vote thereon:
*Delete the inapplicable words. **Delete the inapplicable clause.
1 For amendments adopted pursuant to Chapter 156B, Section 70.
2 For amendments adopted pursuant to Chapter 156B, Section 71.
NOTE: IF THE SPACE PROVIDED UNDER ANY ARTICLE OR ITEM ON THIS FORM IS
INSUFFICIENT, ADDITIONS SHALL BE SET FORTH ON ONE SIDE ONLY OF SEPARATE 8 1/2 X
11 SHEETS OF PAPER WITH A LEFT MARGIN OF AT LEAST 1 INCH. ADDITIONS TO MORE THAN
ONE ARTICLE MAY BE MADE ON A SINGLE SHEET SO LONG AS EACH ARTICLE REQUIRING EACH
ADDITION IS CLEARLY INDICATED.
<PAGE> 21
To change the number of shares and the par value (if any) of any type, class or
series of stock which the corporation is authorized to issue, fill in the
following:
The total presently authorized is:
<TABLE>
<CAPTION>
- ------------------------------------------------------ ---------------------------------------------------------------
WITHOUT PAR VALUE STOCKS WITH PAR VALUE STOCKS
- ------------------------- ---------------------------- ----------------------- ---------------------- ----------------
<S> <C> <C> <C> <C>
TYPE NUMBER OF SHARES TYPE NUMBER OF SHARES PAR VALUE
- ------------------------- ---------------------------- ----------------------- ---------------------- ----------------
Common: Common 11,746,840 $.01
- ------------------------- ---------------------------- ----------------------- ---------------------- ----------------
Class A Common Stock 1,694,800 $.01
- ------------------------- ---------------------------- ----------------------- ---------------------- ----------------
Preferred: Special Common Stock 3,104,080 $.01
- ------------------------- ---------------------------- ----------------------- ---------------------- ----------------
- ------------------------- ---------------------------- ----------------------- ---------------------- ----------------
Change the total authorized to:
- ------------------------------------------------------ ---------------------------------------------------------------
WITHOUT PAR VALUE STOCKS WITH PAR VALUE STOCKS
- ------------------------------------------------------ ---------------------------------------------------------------
- ------------------------- ---------------------------- ----------------------- ---------------------- ----------------
TYPE NUMBER OF SHARES TYPE NUMBER OF SHARES PAR VALUE
- ------------------------- ---------------------------- ----------------------- ---------------------- ----------------
Common: Common 15,000,000 $.01
- ------------------------- ---------------------------- ----------------------- ---------------------- ----------------
Class A Common Stock 1,806,800 $.01
- ------------------------- ---------------------------- ----------------------- ---------------------- ----------------
Preferred: Special Common Stock 3,104,080 $.01
- ------------------------- ---------------------------- ----------------------- ---------------------- ----------------
- ------------------------- ---------------------------- ----------------------- ---------------------- ----------------
</TABLE>
<PAGE> 22
The foregoing amendment(s) will become effective when these Articles of
Amendment are filed in accordance with General Laws, Chapter 156B, Section 6
unless these articles specify, in accordance with the vote adopting the
amendment, a later effective date not more than thirty days after such filing,
in which event the amendment will become effective on such later date.
Later effective date: .
-----------------------------------------
SIGNED UNDER THE PENALTIES OF PERJURY, this 7th day of
---------------------
April , 19 98 ,
----------------------------------------- -----------------
/s/ William H. Gallagher
- --------------------------------------------------, *President/*
William H. Gallagher
/s/ Susan L. Gorman
- --------------------------------------------------, *Clerk/*
Susan L. Gorman
*Delete the inapplicable words.
<PAGE> 23
THE COMMONWEALTH OF MASSACHUSETTS
ARTICLES OF AMENDMENT
(GENERAL LAWS, CHAPTER 156B, SECTION 72)
================================================================================
I hereby approve the within Articles of Amendment and, the filing fee in the
amount of $_______________ having been paid, said articles are deemed to have
been filed with me this ______ day of _________________ 19________.
Effective date: _____________________________________________________________
WILLIAM FRANCIS GALVIN
Secretary of the Commonwealth
TO BE FILLED IN BY CORPORATION
PHOTOCOPY OF DOCUMENT TO BE SENT TO:
Joseph L. Farmer, Esq., c/o Testa, Hurwitz & Thibeault, LLP
- --------------------------------------------------------------------------------
125 High Street, High Street Tower
- --------------------------------------------------------------------------------
Boston, MA 02110
- --------------------------------------------------------------------------------
Telephone: (617) 248-7140
- --------------------------------------------------------------------------------
<PAGE> 1
EXHIBIT 4.01
ADS
[LOGO]
NUMBER SHARES
ATLANTIC DATA SERVICES, INC.
ADS
<TABLE>
<S> <C> <C>
THIS CERTIFICATE IS TRANSFERABLE INCORPORATED UNDER THE LAWS OF THE COMMON STOCK
IN BOSTON, MA OR NEW YORK, NY COMMONWEALTH OF MASSACHUSETTS $.01 PAR VALUE
</TABLE>
THIS CERTIFIES THAT CUSIP 048523 10 4
SEE REVERSE FOR
CERTAIN DEFINITIONS
is the owner of
FULLY-PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, $.01 PAR VALUE, OF
ATLANTIC DATA SERVICES, INC. transferable on the books of the Corporation in
person or by attorney upon surrender of this certificate properly endorsed. This
Certificate and the shares represented hereby are subject to the laws of the
Commonwealth of Massachusetts and to the Articles of Organization and the
By-laws of the Corporation as from time to time amended.
This Certificate is not valid until countersigned and registered by the
Transfer Agent and Registrar.
IN WITNESS WHEREOF ATLANTIC DATA SERVICES, INC. has caused its
facsimile corporate seal and the facsimile signatures of its duly authorized
officers to be hereunto affixed.
Dated:
<TABLE>
<S> <C> <C>
Atlantic Data Services, Inc.
Incorporated
/s/ Susan L. Gorman 1980 /s/ William H. Gallagher
VICE PRESIDENT AND TREASURER Massachusetts PRESIDENT
[Seal]
</TABLE>
----------------------------------------
COUNTERSIGNED AND REGISTERED:
BANKBOSTON, N.A.
TRANSFER AGENT AND REGISTRAR
AUTHORIZED SIGNATURE
<PAGE> 1
EXHIBIT 5.01
April 23, 1998
Atlantic Data Services, Inc.
One Batterymarch Park
Quincy, Massachusetts 02169
Re: Registration Statement on Form S-1 (File No. 333-48703)
Relating to 2,875,000 Shares of Common Stock
Dear Sir or Madam:
This opinion relates to an aggregate of 2,875,000 shares of Common
Stock, par value $.01 per share (the "Common Stock"), of Atlantic Data Services,
Inc. (the "Company"), which are the subject matter of a Registration Statement
on Form S-1 initially filed with the Securities and Exchange Commission on March
26, 1998 (File No. 333-48703) (the "Registration Statement").
The 2,875,000 shares of Common Stock covered by the Registration
Statement consist of 2,000,000 shares being sold by the Company, 500,000 shares
being sold by certain selling stockholders of the Company (the "Primary Selling
Stockholders") and an additional 375,000 shares subject to an over-allotment
option granted by certain of the Primary Selling Stockholders and other
stockholders of the Company (collectively with the Primary Selling Stockholders,
the "Selling Stockholders") to the underwriters to be named in the prospectus
(the "Prospectus") included in the Registration Statement.
We have examined such documents, records and matters of law as we have
deemed necessary for this opinion. Based upon and subject to the foregoing, we
are of the opinion that (i) the shares of Common Stock to be issued and sold by
the Company have been duly and validly authorized and, when sold in the manner
contemplated by the underwriting agreement (the "Underwriting Agreement")
substantially in the form as filed as Exhibit 1.01 to the Registration
Statement, and upon receipt by the Company of payment therefor as provided in
the Underwriting Agreement, will be duly authorized, validly issued, fully paid
and non-assessable; and (ii) upon conversion of the Company's Class A Common
Stock, $.01 par value per share, on the closing date of the transactions
contemplated by the Underwriting Agreement, the shares of Common Stock to be
sold by the Selling Stockholders will be duly authorized, validly issued, fully
paid and non-assessable.
We are members only of the Bar of the Commonwealth of Massachusetts and
are not experts in, and express no opinion regarding, the laws of any
jurisdiction other than the Commonwealth of Massachusetts and the United States
of America.
We hereby consent to the filing of this opinion as Exhibit 5.01 to the
Registration Statement and to the reference to our firm in the Prospectus under
the caption "Legal Matters."
Very truly yours,
TESTA, HURWITZ & THIBEAULT, LLP
<PAGE> 1
EXHIBIT 23.02
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Experts" and
"Selected Consolidated Financial Data" and to the use of our report dated April
13, 1998, in the Pre-Effective Amendment No. 1 to the Registration Statement and
related Prospectus of Atlantic Data Services, Inc. for the registration of
2,500,000 shares of its common stock.
Our audits also included the financial statement schedule of Atlantic Data
Services, Inc. included in the Registration Statement. This schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on the schedule based on our audits. In our opinion, the financial
statement schedule referred to above, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
April 21, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's consolidated financial statements, and notes thereto, included in the
Company's registration statement, to which this schedule is an exhibit, and is
qualified in its entirety by reference to such consolidated financial
statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> MAR-31-1997 MAR-31-1998
<PERIOD-START> APR-01-1996 APR-01-1997
<PERIOD-END> MAR-31-1997 MAR-31-1998
<CASH> 2,653 3,401
<SECURITIES> 0 0
<RECEIVABLES> 4,645 9,475
<ALLOWANCES> 231 375
<INVENTORY> 0 0
<CURRENT-ASSETS> 7,398 13,247
<PP&E> 1,614 2,207
<DEPRECIATION> (965) (1,212)
<TOTAL-ASSETS> 8,201 14,485
<CURRENT-LIABILITIES> 2,329 5,767
<BONDS> 0 0
0 0
0 0
<COMMON> 103 108
<OTHER-SE> 5,713 8,575
<TOTAL-LIABILITY-AND-EQUITY> 8,201 14,485
<SALES> 23,843 42,830
<TOTAL-REVENUES> 23,843 42,830
<CGS> 15,218 24,223
<TOTAL-COSTS> 5,440 10,304
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 5 4
<INCOME-PRETAX> 3,300 8,445
<INCOME-TAX> 1,359 3,547
<INCOME-CONTINUING> 1,941 4,898
<DISCONTINUED> 100 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,041 4,898
<EPS-PRIMARY> .20 .49
<EPS-DILUTED> .20 .49
</TABLE>
