<PAGE>
As filed with the Securities and Exchange Commission on July 16, 1999
Registration No. 333-78517
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
Under the Securities Act of 1933
----------------
AVERSTAR, INC.
(Exact name of registrant as specified in its charter)
Delaware 8711 043411541
(State or other (Primary standard industrial (I.R.S. employer
jurisdiction of classification code number) identification number)
incorporation or
organization)
----------------
23 Fourth Avenue
Burlington, MA 01803
(781) 221-6990
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
----------------
Michael B. Alexander
Chief Executive Officer
AverStar, Inc.
23 Fourth Avenue
Burlington, MA 01803
(781) 221-6990
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
Gerald Adler, Esq. Julie M. Allen, Esq.
Swidler Berlin Shereff Friedman, LLP
919 Third Avenue Proskauer Rose LLP
New York, New York 10022
(212) 758-9500 1585 Broadway
New York, New York 10036
(212) 969-3000
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement is declared 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 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 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 this Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+This information in this prospectus is not complete and may be changed. We +
+may not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and we are not soliciting offers to buy these +
+securities in any jurisdiction where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JULY 16, 1999
PROSPECTUS
4,000,000 Shares
[Logo of AverStar]
________________________
Common Stock
-----------
This is an initial public offering of shares of our common stock. We are
offering 4,000,000 shares of our common stock. We anticipate that the initial
public offering price will be between $7.00 and $9.00 per share.
We have applied to have our common stock approved for listing on the Nasdaq
National Market under the symbol "ASTR".
See "Risk Factors" beginning on page 8 to read about risks that you should
consider before buying shares of our common stock.
Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
-----------
<TABLE>
<CAPTION>
Per
Share Total
----- -----
<S> <C> <C>
Public offering price............................................... $ $
Underwriting discounts and commissions.............................. $ $
Total proceeds, before expenses, to us from this offering........... $ $
</TABLE>
-----------
The underwriters may purchase up to an additional 600,000 shares of our common
stock from us at the initial public offering price less the underwriting
discount to cover over-allotments.
-----------
Bear, Stearns & Co. Inc. Legg Mason Wood Walker
Incorporated
The date of this prospectus is , 1999
<PAGE>
Inside Cover:
The words AverStar, Assurance, Consulting, Development and Operations, on a
background with pictures of the AverStar logo, the American flag, an aircraft
carrier, the space shuttle, the front of a government building, a man and woman
in conversation, a man walking, a spider web with the earth at its center, and a
computer screen with credit cards.
Caption: "Customers Trust AverStar to Create and Validate Exceptional Systems
and Software for Critical Applications."
Back Cover:
The customer chart contained on page 36 of the Registration Statement.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
You should read the entire prospectus carefully, especially the risks of
investing in our common stock discussed under "Risk Factors," before investing
in our common stock.
Our Business
AverStar is a pioneer in providing information technology, or IT, services
and software products for the mission-critical systems of a significant number
of civilian and defense agencies of the United States government. Our customers
include 16 of the 20 government agencies with the largest IT budgets for the
government's 1999 fiscal year. We also provide our services to large commercial
companies. We have established long-term customer relationships, some of which
have extended over 20 years. During our 30-year history, we have maintained a
strong record of customer satisfaction based on the quality and reliability of
our services and products.
We provide an integrated offering of services and products in four areas of
IT:
. IT Assurance. We provide independent analysis, testing and verification
of critical information systems under development or being upgraded. We
also provide security for customers' information systems.
. IT Development. We offer a full range of software and systems
development services for customer-specific applications and Internet
applications.
. IT Operations. We manage and operate information system networks and
data centers at our customers' facilities.
. IT Consulting. We serve as consultants with respect to our customers'
development of innovative applications or improvements to existing
critical systems.
We provide IT assurance services for many of the United States government's
mission-critical systems. An IT system is mission-critical if the failure of
the system would pose a risk to health and safety or cause disruption of a
vital service or function. Our key IT assurance contracts include NASA's space
shuttle, space station and ground systems, the Health Care Finance
Administration's Medicare transactions system and the United States Postal
Service's automation systems. Once a customer retains us to perform assurance
services, we believe that we can gain expertise about the customer's business
and therefore become well positioned to provide additional services and
products to that customer. Since June 1994, more than one-half of our customers
who originally awarded us IT assurance contracts of more than $1.0 million
subsequently awarded us IT development or IT consulting contracts. For example,
after first being engaged to provide IT assurance services, we have been
awarded contracts to provide IT development and IT consulting services to the
United States Postal Service and the Department of Health and Human Services.
We serve as the prime contractor on a majority of our contracts. Prime
contracts accounted for approximately 78% of our 1998 pro forma revenues. We
believe that our position as prime contractor allows us to develop closer
relationships with our customers, to control the quality of services and
products delivered to the customer and to expand our customer relationships.
Our Market
The demand for third-party IT services has grown substantially in recent
years. Organizations are increasingly using IT to improve the quality of their
products and services, to reduce their costs and to improve operating
efficiencies. International Data Corporation, or IDC, forecasts that the United
States market for IT services will grow from an estimated $139 billion in 1998
to $207 billion in 2002. IDC forecasts that the IT system services segment of
the worldwide IT services market will grow at a compound annual growth rate of
approximately 12% over this period.
1
<PAGE>
According to Federal Sources, Inc., the United States government is the
world's largest single buyer of IT services and products. The Electronics
Industry Association, or EIA, reports that the United States government's IT
budget for fiscal 1999 is approximately $30 billion, nearly double the budget
ten years ago. The EIA also estimates that the outsourced portion of the
federal IT budget will be $26 billion in 1999, with approximately 64% allocated
to civilian agencies of the government and 36% allocated to the Department of
Defense.
We believe that the increasing emphasis by the United States government on
downsizing and reducing budgets will result in the growing use of IT to enhance
productivity and in more testing and upgrading of existing IT systems. In
addition, government agencies are increasingly using commercial procurement
practices. With our position in IT assurance, reputation for quality and
reliability and broad customer base, we believe that we are well positioned to
take advantage of these trends.
Our Corporate History
Our current business and operations result from a series of strategic
acquisitions of well established IT companies, executed by our current
management team. In February 1998, we combined the businesses of Intermetrics,
Inc. and Pacer Infotec, Inc. Previously, Pacer acquired Infotec Development,
Inc. in July 1996. Founded in 1969, Intermetrics brought us expertise in IT
assurance and IT consulting services for United States civilian and defense
agencies and for commercial organizations and IT development services for
customer-specific applications. Founded in 1968, Pacer broadened our base of
contracts for IT assurance and IT development services for United States
defense and civilian agencies. In March 1999, we acquired Computer Based
Systems, Inc. Founded in 1978, CBSI strengthened our IT operations services and
broadened our customer base among civilian agencies of the federal government.
Our acquisitions have provided us with an experienced management team, a broad
base of long term contracts, a diverse group of established customers,
substantial backlog and strong sales and marketing resources. We believe that
these strengths enable us to compete effectively in our industry.
Our Strategy
Our goal is to be the leading quality supplier of IT services and software
products for mission-critical systems. To achieve our goal, our strategy is to:
. Leverage our position in IT assurance. We intend to continue to
capitalize on our position in IT assurance to attract new customers and
to provide additional services and products to our existing customers.
. Pursue targeted acquisition opportunities. We seek to acquire companies
that operate in defined vertical market niches complementary to our
current business or that have well established relationships with key
customers.
. Expand our commercial business. We intend to leverage our expertise and
reputation in the federal IT market to compete for commercial projects.
. Continue our investment in sales and marketing. We are continuing to
strengthen our sales and marketing efforts to compete effectively for
government contracts in a changing procurement environment and to expand
our commercial customer base.
. Maintain our high level of customer satisfaction. We believe that
maintaining our high level of customer satisfaction and the resulting
long-term relationships provide a stable customer base from which we can
grow our business.
We are incorporated in Delaware. Our principal executive offices are located
at 23 Fourth Avenue, Burlington, Massachusetts 01803. Our telephone number at
that location is (781) 221-6990. Our web site address is www.averstar.com.
Information contained on our web site does not constitute part of this
prospectus.
2
<PAGE>
The Offering
<TABLE>
<S> <C>
Common Stock Offered ...... 4,000,000 shares
Common Stock Outstanding
After this Offering....... 10,880,655 shares
Use of Proceeds............ To repay a portion of our indebtedness. Please see
"Use of Proceeds."
Proposed Nasdaq National
Market Symbol............. ASTR
</TABLE>
Additional shares may be issued after this offering.
You should be aware that we are permitted, and in some cases obligated, to
issue shares of common stock in addition to the common stock to be outstanding
after this offering. If and when we issue these shares, the percentage of
common stock you own may be diluted. 1,513,433 shares are issuable upon the
exercise of outstanding options at a weighted average exercise price of $3.26
per share, of which 757,055 shares are exercisable. Options to purchase an
additional 504,180 shares of common stock will become exercisable upon the
closing of this offering. In addition, 1,836,014 shares are available for
future option grants.
Unless otherwise indicated, all information in this prospectus assumes that
the underwriters do not exercise their option to purchase additional shares
after the closing of this offering to cover over-allotments.
----------------
All pro forma statement of operations information in this prospectus is
presented as if our acquisitions of Pacer and of CBSI had occurred as of
January 1, 1998, unless otherwise noted.
----------------
AverStar, Inc., Intermetrics, Inc., Pacer Infotec, Inc., JWatch, EWatch, Ada
Magic and our logo are our trademarks. Each other trademark, trade name or
service mark appearing in this prospectus belongs to its holder.
3
<PAGE>
Summary Financial Data
The following tables set forth our summary financial data. These tables do
not present all of our financial information. You should read this information
together with our financial statements and the notes to those statements
beginning on page F-1 of this prospectus and the information under "Selected
Financial Data" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." On March 13, 1995, an investor group led
by current management formed a holding company that acquired Intermetrics in
August 1995. Substantially all data for the period March 13, 1995 through
February 29, 1996 relate to the operations and financial position of
Intermetrics. The summary financial data for the 12 months ended February 29,
1996, which are unaudited, combine the two preceding columns which reflect the
operations of Intermetrics for the first six months of the period based on
Intermetrics' basis of accounting prior to the acquisition, and our operations
giving effect to the acquisition of Intermetrics in August 1995. In February
1998, we acquired Pacer, whose results of operations are included from the date
of acquisition in our results for the 12 months ended December 31, 1998. In
March 1999, we acquired CBSI. The pro forma column below presents our statement
of operations data as if the acquisitions of Pacer and CBSI had occurred as of
January 1, 1998. The pro forma as adjusted statement of operations data reflect
our sale of shares of common stock in this offering, after deducting
underwriting discounts and estimated offering expenses, and the application of
the proceeds to repay debt as if both these events had occurred as of January
1, 1998. The selected financial data for the 12 months ended February 28, 1997,
the 10 months ended December 31, 1997 and the 12 months ended December 31, 1998
are derived from our audited financial statements included elsewhere in this
prospectus. The selected financial data for the 12 months ended February 28,
1995 are derived from audited financial statements not included in this
prospectus. The consolidated financial data for the three months ended March
31, 1998 and 1999, have been prepared on the same basis as our consolidated
financial statements. In our opinion, all necessary adjustments, consisting of
normal recurring accruals, have been included. Results of operations for
interim periods are not necessarily indicative of results we may achieve in a
full year. Historical results are not necessarily indicative of the results we
may achieve in the future.
Adjusted EBITDA is net income (loss) from continuing operations before
taxes, interest expense, interest income, depreciation expense, amortization
expense, in process research and development expense and merger-related
expense. Depreciation expense is included in cost of revenues in the following
tables. In process research and development expenses and merger-related
expenses are included in selling, general and administrative expense in the
following tables. Adjusted EBITDA is provided because we believe that investors
may find it to be a useful tool for analyzing our ability to service debt.
Adjusted EBITDA should not be construed:
. As an indicator of our operating performance instead of operating income;
or
. As a measure of liquidity instead of cash flows from operating
activities.
We may calculate adjusted EBITDA differently than other companies.
4
<PAGE>
<TABLE>
<CAPTION>
Intermetrics
-----------------------
Pro Forma
<CAPTION> Twelve Six March 13, Twelve Twelve Ten Twelve Twelve
Months Months 1995 Months Months Months Months Months
Ended Ended through Ended Ended Ended Ended Ended
FProeFormabruary 28, August 31, February 29, February 29, February 28, December 31, December 31, December 31,
As Adjusted1995 1995 1996 1996 1997 1997 1998 1998
---Twelve--------- ---------- ------------ ------------ ------------ ------------ ------------ ------------
Months
Ended
December 31,
1998
------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(In thousands)
Statement of
Operations
Data:
Revenues........ $53,964 $27,103 $27,787 $54,890 $53,274 $53,646 $121,056 $169,039
Cost of
revenues....... 37,964 20,470 21,399 41,869 40,704 41,685 93,604 128,520
Selling, general
and
administrative
expense........ 14,139 6,908 5,247 12,155 10,159 10,253 19,531 31,007
Amortization
expense........ -- -- 514 514 1,085 150 1,050 4,344
In process
research and
development
expense........ -- -- 8,600 8,600 -- -- -- --
------- ------- ------- ------- ------- ------- -------- --------
Income (loss)
from
operations..... 1,861 (275) (7,973) (8,248) 1,326 1,558 6,871 5,168
Interest
expense........ 26 13 734 747 1,441 1,302 2,513 4,973
Interest
income......... 525 363 149 512 160 96 244 244
------- ------- ------- ------- ------- ------- -------- --------
Income (loss)
from continuing
operations
before taxes... 2,360 75 (8,558) (8,483) 45 352 4,602 439
Provision for
income taxes... 945 40 32 72 18 154 2,168 366
------- ------- ------- ------- ------- ------- -------- --------
Net income
(loss) from
continuing
operations..... $ 1,415 $ 35 $(8,590) $(8,555) $ 27 $ 198 $ 2,434 $ 73
======= ======= ======= ======= ======= ======= ======== ========
<S> <C>
Statement of
Operations
Data:
Revenues........ $169,039
Cost of
revenues....... 128,520
Selling, general
and
administrative
expense........ 31,007
Amortization
expense........ 4,344
In process
research and
development
expense........ --
------------
Income (loss)
from
operations..... 5,168
Interest
expense........ 2,431
Interest
income......... 244
------------
Income (loss)
from continuing
operations
before taxes... 2,981
Provision for
income taxes... 1,371
------------
Net income
(loss) from
continuing
operations..... $ 1,610
============
Computation of
Adjusted
EBITDA:
Net income
(loss) from
continuing
operations..... $ 1,415 $ 35 $(8,590) $(8,555) $ 27 $ 198 $ 2,434 $ 73
Provision for
income taxes... 945 40 32 72 18 154 2,168 366
Interest
income......... (525) (363) (149) (512) (160) (96) (244) (244)
Interest
expense........ 26 13 734 747 1,441 1,302 2,513 4,973
Depreciation
expense........ 1,918 709 561 1,270 1,066 785 2,178 2,465
Amortization
expense........ -- -- 514 514 1,085 150 1,050 4,344
In process
research and
development
expense........ -- -- 8,600 8,600 -- -- -- --
Merger-related
expense........ -- 1,592 -- 1,592 -- 700 560 560
------- ------- ------- ------- ------- ------- -------- --------
Adjusted
EBITDA......... $ 3,779 $ 2,026 $ 1,702 $ 3,728 $ 3,477 $ 3,193 $ 10,659 __12,537$
======= ======= ======= ======= ======= ======= ======== ========
Adjusted EBITDA
as a percentage
of revenues.... 7.0% 7.5% 6.1% 6.8% 6.5% 6.0% 8.8% 7.4%
======= ======= ======= ======= ======= ======= ======== ========
Computation of
Adjusted
EBITDA:
Net income
(loss) from
continuing
operations..... $ 1,610
Provision for
income taxes... 1,371
Interest
income......... (244)
Interest
expense........ 2,431
Depreciation
expense........ 2,465
Amortization
expense........ 4,344
In process
research and
development
expense........ --
Merger-related
expense........ 560
------------
Adjusted
EBITDA......... __12,537$__
============
Adjusted EBITDA
as a percentage
of revenues.... 7.4%
============
Cash Flows:
Continuing
operating
activities..... $ 2,652 $ 3,106 $ 1,147 $ 4,253 $ 433 $ 1,007 $ 1,299
Discontinued
operating
activities..... -- -- -- -- -- (1,367) (8,951)
2,652 3,106 1,147 4,253 433 (360) (7,652)
Investing
activities..... (1,537) 7,829 (405) 7,424 (1,297) (2,471) (7,999)
Financing
activities of
continuing
operations..... (366) 384 603 987 133 2,348 11,997
Financing
activities of
discontinued
operations..... -- -- -- -- -- -- 3,855
(366) 384 603 987 133 2,348 15,852
------- ------- ------- ------- ------- ------- --------
Net cash
increase
(decrease)..... $ 749 $11,319 $ 1,345 $12,664 $ (731) $ (483) $ 201
======= ======= ======= ======= ======= ======= ========
Cash Flows:
Continuing
operating
activities.....
Discontinued
operating
activities.....
Investing
activities.....
Financing
activities of
continuing
operations.....
Financing
activities of
discontinued
operations.....
Net cash
increase
(decrease).....
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------------------------
Pro Forma
As
Actual Pro Forma Adjusted
----------------- ---------------- ---------
1998 1999 1998 1999 1999
------- -------- ------- ------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues....................... _22,738$ __36,346$ _38,790$ _46,948$ _46,948$
Cost of revenues............... 17,310 28,841 30,177 36,121 36,121
Selling, general and adminis-
trative expense............... 4,017 4,940 7,181 7,422 7,422
Amortization expense........... 149 357 1,083 1,056 1,056
------- -------- ------- ------- -------
Income from operations......... 1,262 2,208 349 2,349 2,349
Interest expense, net.......... 476 760 1,177 1,261 625
Income (loss) from continuing
operations before taxes....... 786 1,448 (828) 1,088 1,724
Provision for income taxes..... 370 656 (322) 479 758
------- -------- ------- ------- -------
Net income (loss) from continu-
ing operations................ ____416$ _____792$ ___(506)$____609$ ____966$
======= ======== ======= ======= =======
Computation of Adjusted EBITDA:
Net income (loss) from continu-
ing operations................ ____416$ _____792$ ___(506)$____609$ ____966$
Provision for income taxes..... 370 656 (322) 479 758
Interest expense, net.......... 476 760 1,177 1,261 625
Depreciation expense........... 406 452 543 452 452
Amortization expense........... 149 357 1,083 1,056 1,056
Merger-related expense......... 56 -- 56 -- --
------- -------- ------- ------- -------
Adjusted EBITDA................ __1,873$ ___3,017$ __2,031$ __3,857$ __3,857$
======= ======== ======= ======= =======
Adjusted EBITDA as a percentage
of revenues................... 8.2% 8.3% 5.2% 8.2% 8.2%
======= ======== ======= ======= =======
Cash Flows:
Continuing operating activi-
ties......................... (706) 927
Discontinued operating activi-
ties......................... (2,230) --
------- --------
(2,936) 927
Investing activities.......... 1,049 (24,167)
Financing activities of con-
tinuing operations........... 9,877 24,685
Financing activities of dis-
continued operations......... -- --
------- --------
9,877 24,685
Net cash increase (de-
crease)..................... $_7,990 $__1,445
======= ========
</TABLE>
6
<PAGE>
The following table is a summary of our balance sheet data as of March 31,
1999. The as adjusted column reflects our sale of 4,000,000 shares of common
stock in this offering, assuming an initial public offering price of $8.00 per
share and after deducting underwriting discounts and estimated offering
expenses, and the application of the proceeds to repay debt.
<TABLE>
<CAPTION>
March 31, 1999
---------------------
--- As
Actual Adjusted
------- --- --------
(In thousands)
Balance Sheet Data:
<S> <C> <C> <C>
Cash and cash equivalents................................. $ 1,777 ___ $1,777
Working capital........................................... 7,653 7,653
Total assets.............................................. 94,212 94,212
Total debt................................................ 58,169 29,914
Redeemable common stock................................... 5,598 0
Stockholders' equity (deficit)............................ (2,048) 31,967
</TABLE>
7
<PAGE>
RISK FACTORS
Any investment in our common stock involves a high degree of risk. You
should consider carefully the following information about these risks, together
with the other information contained in this prospectus, before you decide to
buy our common stock. If any of the following risks actually occur, our
business, results of operations and financial condition would likely suffer. In
this case, the market price of our common stock could decline, and you may lose
all or part of the money you paid to buy our common stock.
Most of our revenues are derived from contracts with agencies of the United
States government, and uncertainties in government contracts could adversely
affect our business.
Our largest customers are agencies of the United States government. In 1998,
government contracts, and contracts with prime contractors of the United States
government, accounted for approximately 90% of our pro forma revenues. We
believe that United States government contracts are likely to continue to
account for a significant portion of our revenues for the foreseeable future.
Significant changes in the contracting policies or fiscal policies of the
United States government could adversely affect our business, results of
operations or financial condition.
Changes in government contracting policies could directly affect our
financial performance. Among the factors that could materially adversely affect
our United States government contracting business are:
. Budgetary constraints affecting government spending generally, or
specific departments or agencies in particular, and changes in fiscal
policies or available funding;
. Cancellation of government programs;
. Curtailment of the government's use of technology services firms;
. The adoption of new laws or regulations;
. Technological developments;
. Governmental shutdowns;
. Competition and consolidation in the IT industry; and
. General economic conditions.
These or other factors could cause governmental agencies to reduce their
purchases under contracts, to exercise their right to terminate contracts or
not to exercise options to renew contracts, any of which could have a material
adverse effect on our business, financial condition or results of operations.
Many of our United States government customers are subject to increasingly
stringent budgetary constraints. We have substantial contracts in place with
many departments and agencies, and our continued performance under these
contracts, or award of additional contracts from these agencies, could be
materially adversely affected by spending reductions or budget cutbacks at
these agencies. Such reductions or cutbacks could have a material adverse
effect on our business, financial condition or results of operations.
Our government contracts may be terminated prior to their completion, and we
may not retain these contracts in any competitive rebidding process.
We derive substantially all of our revenues from government contracts that
typically span one or more base years and one or more option years and are
awarded through formal competitive bidding processes. Many of the option
periods cover more than half of the contract's potential duration. United
States government agencies generally have the right not to exercise these
option periods. In addition, our contracts typically also contain provisions
permitting a government customer to terminate the contract on short notice,
with or without cause. A decision not to exercise option periods or to
terminate contracts would reduce the profitability of these contracts to us.
8
<PAGE>
Upon expiration, if the customer requires further services of the type
provided in the contract, there is frequently a competitive rebidding process,
and we may not win any particular bid, or be able to replace business lost upon
expiration or completion of a contract. Further, all government contracts are
subject to protest by competitors. The unexpected termination of one or more of
our significant contracts could result in significant revenue shortfalls. The
termination or non-renewal of any of our significant contracts, short-term
revenue shortfalls, the imposition of fines or damages or our suspension or
debarment from bidding on additional contracts could have a material adverse
effect on our business, financial condition or results of operations.
A negative audit could adversely affect our business, and we could be
required to reimburse the government for costs that we have expended on our
contracts.
Government agencies routinely audit government contracts. These agencies
review a contractor's performance on its contract, pricing practices, cost
structure and compliance with applicable laws, regulations and standards. Any
costs found to be improperly allocated to a specific contract will not be
reimbursed, while improper costs already reimbursed must be refunded.
Therefore, an audit could result in a substantial adjustment to our revenues.
No material adjustments have resulted from any audits of us completed as of
December 31, 1994, and we believe that adjustments resulting from subsequent
audits will not adversely affect our business. If a government audit uncovers
improper or illegal activities, we may be subject to civil and criminal
penalties and administrative sanctions, including termination of contracts,
forfeitures of profits, suspension of payments, fines and suspension or
debarment from doing business with United States government agencies. In
addition, we could suffer serious reputational harm if allegations of
impropriety were made against us. Any such government determination of
impropriety or illegality, or allegation of impropriety, could have a material
adverse effect on our business, financial condition or results of operations.
Many of our United States government customers spend their procurement
budgets through General Service Administration Schedule contracts and we are
required to compete for post-award orders.
Budgetary pressures and reforms in the procurement process have caused many
United States government agencies to increasingly purchase goods and services
through General Service Administration Schedule contracts and other multiple
award and/or government-wide acquisition contract vehicles. We must continually
persuade government agencies to purchase our IT services and products because
government agencies have a larger number of IT service providers from which to
choose under these contracts. We may not maintain or increase revenues or
otherwise sell successfully under these contracts. Our failure to compete
effectively in this procurement environment could have a material adverse
effect on our business, financial condition or results of operations.
We may be liable for penalties under a variety of procurement rules and
regulations, and changes in government regulations could adversely affect our
business.
Our defense and commercial businesses must comply with and are affected by
various government regulations. Among the most significant regulations are the
Federal Acquisition Regulations, which comprehensively regulate the formation,
administration and performance of government contracts; the Truth in
Negotiations Act, which requires certification and disclosure of all cost and
pricing data in connection with contract negotiations; the Cost Accounting
Standards, which impose accounting requirements that govern our right to
reimbursement under certain cost-based government contracts; and laws,
regulations and Executive Orders restricting the use and dissemination of
information classified for national security purposes and the exportation of
certain products and technical data. These regulations affect how our customers
and we do business and, in some instances, impose added costs on our
businesses. Any changes in applicable laws could adversely affect the financial
performance of the business affected by the changed regulations. Any failure to
comply with applicable laws could result in contract termination, price or fee
reductions or suspension or debarment from contracting with the United States
government.
9
<PAGE>
If we fail to recruit, train and retain skilled personnel, our costs could
increase and our growth would be limited.
Our success depends to a significant extent upon our ability to attract,
retain and motivate highly skilled personnel. If we fail to attract, train and
retain sufficient numbers of skilled people, our business, results of
operations or financial condition would suffer. We must continue to hire
skilled people to perform services under our existing contracts and new
contracts that we will enter into. Competition for skilled personnel is intense
in the IT services industry. Recruiting and training skilled personnel require
substantial resources. We also experience significant turnover of skilled
employees. We must pay an increasing amount to hire and retain a skilled
workforce. These factors may create variations and uncertainties in our
compensation expense.
In addition, our ability to implement our business strategy and to operate
profitably depends largely on the skills, experience and performance of our
management team. If several members of our management team become unable or
unwilling to serve in their present positions, our business, results of
operations or financial condition could suffer.
If we fail to maintain our security clearances, we may not be able to perform
classified work for the government.
Government contracts require us, and some of our employees, to maintain
security clearances. The loss of these security clearances could curtail the
term and renewal of these government contracts. We maintain facility security
clearances complying with the requirements of the Department of Defense and
other agencies. In addition, approximately 30% of our employees have security
clearances.
We may not successfully execute our acquisition strategy.
Through acquisitions of companies, we intend to expand our geographic
presence and to expand the products and services we offer to new and existing
customers. If our acquisition strategy fails, we may not continue to grow at
historical rates or at all. We cannot assure you that we will consummate any
acquisitions, or that any acquisitions, if consummated, will be advantageous to
us.
Various risks may prevent us from completing acquisitions. These risks
include:
. Increased competition for acquisitions;
. Fewer suitable acquisition candidates available at acceptable prices;
. Insufficient capital resources for acquisitions; and
. Inability to enter into definitive agreements for desired acquisitions
on acceptable terms.
In addition, there are risks that we may not benefit from our acquisitions.
These risks include:
. Inability to integrate or operate acquired companies successfully or at
expected levels of profitability;
. Accounting charges that adversely affect our financial results;
. Issuance of additional shares of common stock, which could dilute your
investment; and
. Incurrence of additional debt.
If we fail to properly manage our growth, our business could be adversely
affected.
If we do not manage our growth effectively, our business, results of
operations or financial condition could be materially adversely affected. We
intend to continue the expansion of our operations in the foreseeable future to
pursue existing and potential market opportunities. Our growth places
significant demands on our management and operational resources. In order to
manage our growth effectively, we must continue to invest in our systems of
internal controls and procedures, and continue to expand, train and manage our
workforce.
10
<PAGE>
We are highly leveraged.
We have a substantial amount of indebtedness. If we default on our debt
agreements, our business, financial condition or results of operations would be
materially adversely affected. As of March 31, 1999 we had debt with a face
amount of approximately $59.0 million outstanding. We will repay approximately
$28.7 million of this debt from the proceeds of this offering. We will have
approximately $30.0 million of debt outstanding after this offering. We pay
interest on this debt at variable rates averaging approximately 8.5% per annum.
In addition, we may incur additional debt to finance acquisitions or future
growth.
Our leverage could have the following important consequences:
. Repayment of debt reduces funds available for other purposes;
. Our ability to obtain additional debt financing in the future for
working capital, general corporate purposes or acquisitions may be
constrained; and
. We may be more vulnerable to downturns in general economic conditions or
our business than our competitors.
We may require additional financing that we may not be able to secure on
favorable terms or at all.
We may need more financing than currently anticipated to support our growth,
to develop new or enhanced services, to respond to competitive pressures or
unanticipated requirements or to make acquisitions. Any required additional
financing may not be available on terms favorable to us, or at all. If adequate
funds are not available on acceptable terms, we may be unable to fund our
expansion, to develop or enhance services, to respond to competitive pressures
or to take advantage of acquisition opportunities, any of which could have a
material adverse effect on our business, results of operations or financial
condition. If additional funds are raised by our issuing equity securities,
stockholders may experience dilution of their ownership interest and the newly
issued equity securities may have rights superior to those of the common stock.
If additional funds are raised by our issuing debt, we may be subject to
limitations on our operations, including limitations on the payment of
dividends.
Amortization of our intangible assets may have an adverse impact on our
operating results.
Approximately $35 million, or 37%, of our assets as of March 31, 1999,
consisted of intangible assets, including goodwill, arising from our
acquisitions. This amount will be amortized over 18 months to 20 years. This
non-cash expense, some of which is not tax deductible, will reduce net income
or increase net loss in each amortization period. This reduction in our net
income or increase in our net loss may have an adverse effect on the market
price of our common stock.
In addition, we may never realize the value of our intangible assets. We
evaluate current events and circumstances to determine whether the remaining
balance of our intangible assets will be recoverable. If we deem all or part of
our intangible assets to be not recoverable, we would reduce the carrying value
of our intangible assets, which could have a material adverse effect on our
operating results for the period in which the reduction is recognized.
We may not be able to compete successfully.
Our business could suffer if we are not able to compete successfully. We
experience significant competition in all areas of our business. In general,
the markets in which we compete are not dominated by a single company or a
small number of companies. Thousands of companies offer services and products
that are competitive with our IT service and product offerings. However, we
compete regularly with approximately seven different competitors in our IT
assurance service offerings, 18 in our IT development service offerings, six in
our IT operations service offerings and four in our IT consulting service
offerings.
11
<PAGE>
Many of our competitors are significantly larger and have greater financial
resources than we do. In addition, many of our competitors have significantly
more experience in the commercial IT market than we have. These factors may
place us at a disadvantage in responding to competition, technological changes
and changes in customer requirements. In addition, some of the contracts on
which we have the technical capability to bid are set aside for companies which
the United States government classifies as "small businesses" or "minority
businesses." After 1999, we will not qualify for any of these classifications.
The pricing provisions of our contracts may adversely affect our profits.
Some of our contracts are fixed-price contracts which contain pricing
provisions that require the payment of a set price by the customer for our
services regardless of the costs we incur in performing these services, or
provide for penalties in the event we fail to achieve contract requirements.
Failure to anticipate technical problems, estimate costs accurately or control
costs during our performance of a fixed-price contract may reduce our profit or
cause us to suffer a loss. The number of our fixed-price contracts may increase
as our commercial business increases.
Recently, a growing percentage of our contracts are time-and-materials
contracts. Typically, time-and-materials contracts provide for the customer to
pay a specified rate per hour of labor dedicated to the project. If market or
other conditions require us to increase our employees' salaries or other costs
and we cannot convince our customers to pay proportionately higher prices, we
would suffer reduced profits or losses under these contracts.
Fluctuations in our operating results may negatively impact our stock price.
The price of our common stock may fall because of fluctuations in our
quarterly operating results and our inability to meet market expectations. Our
operating results may fluctuate significantly in the future due to a variety of
factors that could affect our revenues or our expenses in any particular
quarter. Factors that may affect our quarterly results include, but are not
limited to:
. The number, size and scope of projects;
. Our expenditures;
. The accuracy of our estimates of resources required to complete ongoing
projects;
. The demand for our services and products; and
. The adequacy of our reserves for losses.
Accordingly, we believe that quarter-to-quarter comparisons of operating
results are not necessarily meaningful. You should not rely on the results of
any one quarter as an indication of our results for a full year or any other
quarter.
We may not realize all of the revenues included in our backlog.
Although our contract backlog was approximately $450 million as of March 31,
1999, we may not realize all of this backlog as revenue. Backlog represents
management's estimate of our realizable revenues on our contracts. Please see
"Business--Backlog." Government contracts comprise substantially all of our
backlog. The following factors may affect our ability to realize revenues
included in our backlog:
. The government's failure to fund all of the years of a multi-year
contract;
. The government's failure to exercise its option to extend the length of
a contract;
. The government's failure to request any services under contracts that we
provide only upon request of the government; and
. The government's decision to decrease the size or scope of a contract.
12
<PAGE>
We may not be able to replace our Year 2000 testing and assessment contracts
with equally profitable business.
As demand for Year 2000 services declines, unless we are able to replace our
Year 2000 business with equally profitable work, our rate of revenue growth and
our profits could suffer. In 1998, approximately 6% of our pro forma revenues
related to Year 2000 testing and assessment services.
We may not be successful in expanding our commercial business.
Only a small portion of our business is currently derived from the
commercial IT market. If we are not able to increase the amount of services and
products we sell to the commercial market, we may not grow at expected rates
and our reliance on federal government agencies may continue.
Changes in technology could adversely affect our business.
Our business could suffer if we are not successful in adopting and
integrating new technologies into our service and product offerings in a timely
and cost-effective manner. The markets for our IT services and products change
rapidly because of technological innovations, new product introductions,
changes in customer requirements, declining prices and evolving industry
standards, among other factors. New products and new technology often render
existing information services or technology infrastructure obsolete. As a
result, our success depends on our ability to integrate new technologies into
our service offerings.
Further, we cannot be sure that we will be able to continue to commit the
resources necessary to refresh our technology infrastructure at the rate
demanded by our markets. Advances in technology require us to commit
substantial resources to acquire and deploy new technologies for use in our
operations. We must continue to commit resources to train our personnel in the
use of these new technologies. We must also continue to maintain the
compatibility of existing hardware and software systems with these new
technologies.
We may be unable to protect our intellectual property rights, and we may be
liable for infringing the intellectual property rights of others.
Third parties may infringe or misappropriate our patents, trademarks or
other proprietary rights, which could have a material adverse effect on our
business, results of operations or financial condition. The steps we have taken
to protect our proprietary rights may not prevent misappropriation. Our
suppliers, customers and competitors may have patents and other proprietary
rights that cover technology utilized by us. These persons may also seek
patents in the future. United States patent applications are confidential until
a patent is issued, and most technologies are developed in secret. Accordingly,
we are not aware of all patents or other intellectual property rights that our
services and products may infringe.
We could incur substantial costs to prosecute or defend any litigation
against others who allege infringement of intellectual property rights.
Intellectual property litigation could force us to do one or more of the
following:
. Cease selling or using services or products that incorporate infringed
intellectual property;
. Obtain from the holder of the infringed intellectual property right a
license to sell or use the relevant technology; and
. Redesign those services or products that incorporate infringed
intellectual property.
Our shares may experience extreme price and volume fluctuations.
Just as the shares of other IT companies have experienced price and volume
fluctuations, the market price of our common stock may be volatile. You may not
be able to resell your shares at or above the initial public offering price and
may suffer a loss of your investment.
13
<PAGE>
The market price of our common stock may fluctuate significantly in response
to a number of factors, some of which are beyond our control, including:
. Quarterly variations in operating results;
. Changes in financial estimates by securities analysts;
. Changes in market valuations of IT service companies;
. Announcements by us of significant contracts, acquisitions, strategic
partnerships, joint ventures or capital commitments;
. Losses of major contracts;
. Additions or departures of key personnel; and
. Sales of common stock by our stockholders.
In the past, securities class action litigation has often been initiated
against a company following periods of volatility in the market price of their
securities. If a suit is initiated against us, regardless of the outcome, it
could result in substantial costs, diversion of our management's attention and
resources, and a material adverse effect on our business, results of operations
or financial condition.
Future sales of large amounts of our stock, or the perception that such sales
could occur, may adversely affect our stock price.
The market price of our common stock could drop as a result of sales of a
large number of shares of common stock in the market after this offering, or
the perception that such sales could occur. Assuming no exercise of the
underwriters' over-allotment option, there will be 10,880,655 shares of common
stock outstanding immediately after this offering. The 4,000,000 shares of
common stock sold in this offering will be freely tradeable without restriction
or further registration under the Securities Act of 1933, unless such shares
are held by our "affiliates," as that term is defined in Rule 144 under the
Securities Act. As of March 1, 2000, holders of approximately 5,254,977 shares
of our common stock will be able to sell their shares without limitation under
Rule 144(k). After this offering, we will have 3,349,447 shares of common stock
reserved for issuance upon the exercise of stock options, of which 1,513,433
shares are subject to currently outstanding options. Following this offering,
we intend to file registration statements on Form S-8 to register these shares.
Please see "Shares Eligible for Future Sale."
Provisions of our certificate of incorporation and bylaws and Delaware law
could deter takeover attempts.
Some provisions in our certificate of incorporation and bylaws could delay,
defer, prevent or make more difficult a merger, tender offer or proxy contest
involving our company. However, our stockholders might view such a transaction
as being in their best interests because, for example, a change of control
might result in a price higher than the market price for shares of our common
stock. Among other things, these provisions:
. Require an 80% vote of the stockholders to amend certain provisions of
our certificate of incorporation and by-laws;
. Permit only our chairman, president or a majority of the board of
directors to call stockholder meetings;
. Authorize our board of directors to issue shares of preferred stock in
series with the terms of each series to be fixed by our board of
directors without any further action by our stockholders;
. Divide our board of directors into three classes so that only
approximately one-third of the total number of directors will be elected
each year; and
. Specify advance notice requirements for stockholder proposals and
director nominations to be considered at a meeting of stockholders.
14
<PAGE>
In addition, with certain exceptions, Section 203 of the Delaware General
Corporation Law restricts certain mergers and other business combinations
between us and any holder of 15% or more of our voting stock.
Potential Year 2000 problems could adversely affect our business.
We believe that it is not possible to determine with complete certainty that
all Year 2000 problems affecting us or our customers have been identified or
corrected. As a result, we believe that the following consequences are
possible:
. Operational inconveniences and inefficiencies for us and our customers
may divert management's time and attention and financial and human
resources from ordinary business activities;
. Routine business disputes and claims for pricing adjustments or
penalties due to Year 2000 problems may occur, which will be resolved in
the ordinary course of business;
. Serious system failures may require significant efforts by us or our
customers to prevent or alleviate material business disruptions; and
. Serious business disputes alleging that we failed to comply with the
terms of contracts or industry standards of performance may result in
litigation or contract termination.
In addition, any system failures could interfere with our ability to
properly manage contracted projects and could adversely affect our business.
You will suffer immediate and substantial dilution.
Investors purchasing shares in this offering will suffer immediate and
substantial dilution of their investment, because the initial public offering
price per share will significantly exceed the net tangible book value per
share.
15
<PAGE>
FORWARD-LOOKING STATEMENTS
Many statements made in this prospectus under the captions "Prospectus
Summary," "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business" and elsewhere are forward-
looking statements. In some cases, you can identify forward-looking statements
by terminology such as "may," "will," "should," "expects," "plans,"
"anticipates," "believes," "estimates," "predicts" or "continue" or the
negative of these terms or other comparable terminology. Forward-looking
statements are speculative and uncertain and not based on historical facts.
Because forward-looking statements involve risks and uncertainties, there are
important factors that could cause actual results to differ materially from
those expressed or implied by these forward-looking statements, including those
discussed under "Risk Factors." Although we believe that the expectations
reflected in the forward-looking statements are reasonable, we cannot guarantee
future results, performance or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of these
forward-looking statements. We are under no duty to update any of the forward-
looking statements after the date of this prospectus to conform such statements
to actual results.
16
<PAGE>
USE OF PROCEEDS
Our net proceeds from the sale of the shares offered by us in this offering
are estimated to be approximately $28.7 million, or approximately $33.1 million
if the underwriters' over-allotment option is exercised in full, assuming an
initial public offering price of $8.00 per share and after deducting
underwriting discounts and estimated offering expenses payable by us.
We intend to use these net proceeds as follows:
. To repay $23.7 million of the amount outstanding as of March 31, 1999
under our credit agreement with First Union Commercial Corporation, as
agent, and the other lenders that are parties to our credit agreement;
and
. To repay subordinated debt outstanding with a face value of $5.0 million
as of March 31, 1999 under our subordinated debt agreement with
MassMutual.
As of March 31, 1999, approximately $53.4 million was outstanding under our
credit agreement with First Union. We used approximately $25.0 million to
acquire CBSI, $24.0 million to repay existing debt and $5.0 million to pay
transaction fees and expenses and to fund general working capital requirements.
Our credit agreement with First Union expires in 2004 and March 2005. Loans
outstanding at March 31, 1999 under our credit agreement with First Union bear
interest at variable rates averaging approximately 8% per year.
In connection with the acquisition of Intermetrics by an investor group led
by our current management, we obtained a credit facility with Massachusetts
Mutual Life Insurance Company, or MassMutual, and affiliates of MassMutual in
August 1995. As of March 31, 1999, subordinated debt with a face value of $5.0
million was outstanding under our credit agreement with MassMutual. The loan
outstanding under our credit agreement with MassMutual bears interest at a rate
of 13% per year. This credit agreement expires in June 2005.
DIVIDEND POLICY
We intend to retain all future earnings, if any, to finance the expansion of
our business. We have not declared or paid any cash dividends on our common
stock since our inception and do not expect to declare or pay any cash
dividends in the foreseeable future. In addition, our credit agreement with
First Union contains restrictions on our ability to pay dividends.
17
<PAGE>
CAPITALIZATION
The following table sets forth, as of March 31, 1999, our capitalization:
. On an actual basis; and
. On an as adjusted basis to give effect to our sale of 4,000,000 shares
in this offering, assuming an initial public offering price of $8.00 per
share and after deducting underwriting discounts and the estimated
offering costs payable by us, and the application of the proceeds to
repay debt.
This information should be read together with our financial statements and the
notes relating to those statements appearing elsewhere in this prospectus.
The table below does not reflect the following changes to our capitalization
since March 31, 1999:
. We issued 37,500 shares to the AverStar Profit Sharing & Savings Plan;
. We redeemed 84,870 shares from stockholders under the terms of existing
agreements for an aggregate of approximately $410,000; and
. At the closing of this offering, we will issue approximately 911 shares
from treasury to stockholders pursuant to obligations incurred in
connection with the acquisition of Intermetrics.
<TABLE>
<CAPTION>
At March 31, 1999
------------------------------
As
Actual Adjusted
---------- ----- ------------
(In thousands, except share
and per share data)
<S> <C> <C> <C>
Total debt:
Term notes...................................... $ 43,125 $ 19,465
Current portion of long-term debt............... 1,704 1,704
Revolver notes.................................. 8,745 8,745
Subordinated notes due June 17, 2005, net of un-
amortized original issue
discount....................................... 4,595 --
---------- ----- ----------
Total debt..................................... 58,169 29,914
Redeemable common stock, 2,202,875 shares out-
standing........................................ 5,598 --
Stockholder' equity:
Preferred stock, $.001 par value, 1,000,000
shares authorized; no shares issued and
outstanding actual or as adjusted.............. -- --
Common stock, $.001 par value, 17,000,000 shares
authorized, 4,766,344 issued shares actual;
25,000,000 shares authorized, 10,969,219 issued
shares as adjusted............................. 5 11
Additional paid in capital...................... 10,189 44,441
Accumulated deficit............................. (12,055) (12,298)
Deferred compensation........................... (73) (73)
Treasury stock at cost, 42,105 shares........... (114) (114)
----------
Total stockholders' equity (deficit)........... (2,048) 31,967
Total capitalization.......................... $ 61,719 $ 61,881
========== ===== ==========
</TABLE>
18
<PAGE>
DILUTION
Our net tangible book value as of March 31, 1999 was $(31,008,000), or
$(4.48) per share. Our net tangible book value per share is equal to the amount
of our total tangible assets less total liabilities, divided by the number of
shares of common stock outstanding as of March 31, 1999. Assuming that we sell
the 4,000,000 shares offered by us in this offering at an initial public
offering price of $8.00 per share, after deducting the underwriting discounts
and the estimated offering expenses payable by us, and apply the proceeds to
repay debt, our pro forma net tangible book value as of March 31, 1999 would
have been $(2,591,000),
or $(0.24) per share. This amount represents an immediate increase in pro forma
net tangible book value of $4.24 per share to existing stockholders and an
immediate dilution in pro forma net tangible book value of $8.24 per share to
investors purchasing shares in this offering. The following table illustrates
this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................ $8.00
Net tangible book value per share as of March 31, 1999......... $(4.48)
Pro forma increase in net tangible book value per share attrib-
utable to new investors purchasing shares in this offering.... $ 4.24
Pro forma net tangible book value per share after this offer-
ing........................................................... (0.24)
Pro forma dilution per share to new investors purchasing shares
in this offering.............................................. $8.24
=====
</TABLE>
The following table summarizes, as of March 31, 1999, differences between
existing stockholders and the new investors purchasing shares in this offering
in:
. The total number of shares of common stock purchased from us;
. The total consideration paid to us; and
. The average price per share paid by existing stockholders and by new
investors purchasing shares in this offering:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ -------------------
Average Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.... 6,927,114 63.4% $15,678,000 32.9% $2.26
New investors purchasing
shares in this offer-
ing..................... 4,000,000 36.6 32,000,000 67.1 8.00
---------- ---- ----------- ----
Total.................. 10,927,114 100% $47,678,000 100%
========== ==== =========== ====
</TABLE>
None of the foregoing tables or calculations assumes that any options
outstanding as of March 31, 1999 will be exercised. If all outstanding options
were exercised on the date of the closing of this offering, new investors
purchasing shares in this offering would suffer total dilution of $8.16 per
share.
The above tables do not reflect the following changes to our capitalization
since March 31, 1999:
. We issued 37,500 shares to the Averstar Profit Sharing & Savings Plan;
. We redeemed 84,870 shares from stockholders under the terms of existing
agreements for an aggregate of approximately $410,000; and
. At the closing of this offering, we will issue approximately 911 shares
from treasury to stockholders pursuant to obligations incurred in
connection with the acquisition of Intermetrics.
19
<PAGE>
SELECTED FINANCIAL DATA
The following tables set forth our selected financial data. These tables do
not present all of our financial information. You should read this information
together with our financial statements and the notes to those statements
beginning on page F-1 of this prospectus and the information under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." On March 13, 1995, an investor group formed a holding company
which acquired Intermetrics in August 1995. Substantially all data for the
period March 13, 1995 through February 29, 1996 relate to the operations and
financial position of Intermetrics. The selected financial data for the 12
months ended February 29, 1996, which are unaudited, combine the two preceding
columns which reflect the operations of Intermetrics for the first six months
of the period based on Intermetrics' basis of accounting prior to the
acquisition, and our operations giving effect to the acquisition of
Intermetrics in August 1995. In February 1998, we acquired Pacer, whose results
of operations are included from the date of acquisition in our results for the
12 months ended December 31, 1998. In March 1999, we acquired CBSI. The pro
forma column presents our statement of operations data as if the acquisitions
of Pacer and CBSI had occurred as of January 1, 1998. The pro forma as adjusted
statement of operations data reflect our sale of shares of common stock in this
offering, after deducting underwriting discounts and estimated offering
expenses, and the application of the proceeds to repay debt as if both these
events had occurred as of January 1, 1998. The selected financial data for the
12 months ended February 28, 1997, the 10 months ended December 31, 1997 and
the 12 months ended December 31, 1998 are derived from our audited financial
statements included elsewhere in this prospectus. The selected financial data
for the 12 months ended February 28, 1995 are derived from audited financial
statements not included in this prospectus. The consolidated financial data for
the three months ended March 31, 1998 and 1999 have been prepared on the same
basis as our consolidated financial statements. In our opinion, all necessary
adjustments, consisting of normal recurring accruals, have been included.
Results of operations for interim periods are not necessarily indicative of
results we may achieve in a full year.
20
<PAGE>
<TABLE>
<CAPTION>
Intermetrics
------------------------
Pro Forma
March 13 Twelve Twelve Ten Twelve Twelve
Twelve Months Six Months 1995 Months Months Months Months Months
Ended Ended Through Ended Ended Ended Ended Ended
February 28, August 31, February 29, February 29, February 28, December 31, December 31, December 31,
1995 1995 1996 1996 1997 1997 1998 1998
------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of
Operations Data:
Revenues......... $53,964 $27,103 $27,787 $54,890 $53,274 $53,646 $121,056 $169,039
Cost of
revenues........ 37,964 20,470 21,399 41,869 40,704 41,685 93,604 128,520
Selling, general
and
administrative
expense......... 14,139 6,908 5,247 12,155 10,159 10,253 19,531 31,007
Amortization
expense......... -- -- 514 514 1,085 150 1,050 4,344
In process
research and
development
expense......... -- -- 8,600 8,600 -- -- -- --
------- ------- ------- ------- ------- ------- -------- --------
Income (loss)
from
operations...... 1,861 (275) (7,973) (8,248) 1,326 1,558 6,871 5,168
Interest
expense......... 26 13 734 747 1,441 1,302 2,513 4,973
Interest income.. 525 363 149 512 160 96 244 244
------- ------- ------- ------- ------- ------- -------- --------
Income (loss)
from continuing
operations
before taxes.... 2,360 75 (8,558) (8,483) 45 352 4,602 439
Provision for
income taxes.... 945 40 32 72 18 154 2,168 366
------- ------- ------- ------- ------- ------- -------- --------
Net income (loss)
from continuing
operations...... $ 1,415 $ 35 $(8,590) $(8,555) $ 27 $ 198 $ 2,434 $ 73
======= ======= ======= ======= ======= ======= ======== ========
Income (loss) per
share from
continuing
operations:
Basic........... $ 0.35 $ 0.01 $ (2.20) $ (2.19) $ 0.01 $ 0.05 $ 0.38 $ 0.01
======= ======= ======= ======= ======= ======= ======== ========
Diluted......... $ 0.35 $ 0.01 $ (2.20) $ (2.19) $ 0.01 $ 0.04 $ 0.36 $ 0.01
======= ======= ======= ======= ======= ======= ======== ========
Weighted average
common shares
and equivalents:
Basic........... 4,019 4,151 3,901 3,901 3,878 3,865 6,428 6,428
Diluted......... 4,019 4,151 3,901 3,901 4,523 4,552 6,847 6,847
<CAPTION>
Pro Forma
As Adjusted
Twelve
Months
Ended
December 31,
1998
------------
<S> <C>
Statement of
Operations Data:
Revenues......... $169,039
Cost of
revenues........ 128,520
Selling, general
and
administrative
expense......... 31,007
Amortization
expense......... 4,344
In process
research and
development
expense......... --
------------
Income (loss)
from
operations...... 5,168
Interest
expense......... 2,431
Interest income.. 244
------------
Income (loss)
from continuing
operations
before taxes.... 2,981
Provision for
income taxes.... 1,371
------------
Net income (loss)
from continuing
operations...... $ 1,610
============
Income (loss) per
share from
continuing
operations:
Basic........... $ 0.15
============
Diluted......... $ 0.15
============
Weighted average
common shares
and equivalents:
Basic........... 10,428
Diluted......... 10,847
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------------------
Pro Forma
Actual Pro Forma As Adjusted
--------------- ---------------- -----------
1998 1999 1998 1999 1999
------- ------- ------- ------- -----------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues......................... $22,738 $36,346 $38,790 $46,948 $46,948
Cost of revenues................. 17,310 28,841 30,177 36,121 36,121
Selling, general and administra-
tive expense.................... 4,017 4,940 7,181 7,422 7,422
Amortization expense............. 149 357 1,083 1,056 1,056
------- ------- ------- ------- -------
Income from operations........... 1,262 2,208 349 2,349 2,349
Interest expense, net............ 476 760 1,177 1,261 625
Income (loss) from continuing op-
erations before taxes........... 786 1,448 (828) 1,088 1,724
Provision for (benefit from) in-
come taxes...................... 370 656 (322) 479 758
------- ------- ------- ------- -------
Net income (loss) from continued
operations...................... $ 416 $ 792 $ (506) $ 609 $ 966
======= ======= ======= ======= =======
Income (loss) per share from con-
tinuing operations:
Basic.......................... $ 0.08 $ 0.11 $ (0.10) $ 0.09 $ 0.09
Diluted........................ $ 0.08 $ 0.11 $ (0.10) $ 0.08 $ 0.08
Weighted average common shares
and equivalents:
Basic.......................... 4,991 6,927 4,991 6,927 10,927
Diluted........................ 5,470 7,440 5,470 7,440 11,440
</TABLE>
The following table is a summary of our balance sheet data.
<TABLE>
<CAPTION>
As of As of As of As of As of As of
February 28, February 29, February 28, December 31, December 31, March 31,
1995 1996 1997 1997 1998 1999
------------ ------------ ------------ ------------ ------------ ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equiva-
lents.................. $ 1,304 $ 1,345 $ 614 $ 131 $ 332 $ 1,777
Working capital......... 16,099 6,608 19,850 2,567 9,256 7,653
Total assets............ 30,979 19,192 17,039 23,646 59,663 94,212
Total debt.............. -- 12,710 12,769 15,060 31,610 58,169
Redeemable common
stock.................. -- -- -- 1,412 5,598 5,598
Stockholders' equity
(deficit).............. 21,192 (3,312) (3,218) (5,795) (3,412) (2,048)
</TABLE>
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read together with the financial statements and the notes
to those statements included elsewhere in this prospectus. This discussion
contains forward-looking statements that involve risks and uncertainties.
Please see "Risk Factors" and "Forward-Looking Statements."
Overview
We provide IT services and products to the United States government and to
commercial companies. Through both internal growth and a series of
acquisitions, we have increased our revenues from $53.3 million for the fiscal
period ended February 28, 1997 to $169 million in pro forma revenues for the
fiscal period ended December 31, 1998. Our growth has resulted in a broader
base of long-term contracts and a more diverse group of established customers.
AverStar is the result of a series of strategic acquisitions executed by our
current management. In February 1998, we combined the businesses of
Intermetrics and Pacer. In March 1999, we acquired CBSI for $26 million in
cash, $25 million of which was paid to the former CBSI stockholders at the
closing and $1 million of which will be paid ratably over the next five years.
All three transactions were accounted for as purchases. During 1997, we changed
our fiscal year to a December 31 year end in anticipation of the merger with
Pacer. As a result, the fiscal period ended December 31, 1997 is a ten-month
period.
A substantial portion of our revenues are derived from contracts with the
United States government. Approximately 90% of our pro forma revenues in the
fiscal period ended December 31, 1998 were derived from government contracts,
either directly with government customers or indirectly through government
prime contractors.
We enter into three types of contracts: cost-reimbursable, time-and-
materials, and fixed-price contracts. Of our total pro forma revenues for 1998,
cost-reimbursable contracts represented approximately 46%, time-and-materials
contracts approximately 45% and fixed-price contracts approximately 9%. Cost-
reimbursable contracts provide for the reimbursement of costs plus the payment
of a fixed fee. Under time-and-materials contracts, we are reimbursed for labor
hours at negotiated hourly billing rates and reimbursed for travel and other
direct expenses at actual cost plus applied indirect, general and
administrative expenses. Under fixed-price contracts, we agree to perform
certain work for a fixed price and, accordingly, realize a benefit or detriment
to the extent that our actual cost of performing the work differs from the
negotiated price.
We assume greater financial risk on fixed-price contracts than on either
time-and-materials or cost-reimbursable contracts. We believe that an
increasing percentage of our contracts will be fixed-price as our commercial
business increases. Failure to anticipate technical problems, estimate costs
accurately or control costs during performance of a fixed-price contract may
reduce our profits or cause us to suffer a loss. If we are successful in
providing our services at a reduced cost, however, we expect that fixed-price
contracts will result in greater profitability. In addition, greater risks are
involved under time-and-materials contracts than under cost-reimbursement
contracts because we assume the responsibility for the delivery of specified
skills at a fixed hourly rate. Our management believes that adequate reserves
for our fixed-price and time-and-materials contracts are reflected in our
financial statements.
We recognize revenues on government and commercial contracts under the
percentage-of-completion method. This method involves a periodic assessment of
the estimated total cost to complete each contract. The percentage-of-
completion method is determined by relating the actual costs incurred to date
to the estimated total costs at completion. The cumulative effects resulting
from revisions of estimated total costs and revenues are recorded in the period
in which the facts requiring revisions become known. When a loss is anticipated
on a contract, the full amount of the anticipated loss is provided for at that
time.
23
<PAGE>
Revenues from standard software products are recognized upon shipment in
accordance with Statement of Position 97-2, "Software Revenue Recognition."
Revenues from maintenance agreements are deferred and amortized over the life
of the maintenance agreements. Our royalty income is derived from licensing
agreements that we have with commercial companies. Typically, the amount of our
royalty income is based on a percentage of our customer's revenues for the
products that incorporate our technology. Per unit royalties earned from the
license of standard software products are recognized when received from the
customer. Our royalty income does not represent a significant portion of our
revenues.
Results of Operations
The following table sets forth, for each period indicated, the percentage of
items in the consolidated statement of operations in relation to revenues and
the percentage increase (decrease) of each item for the periods indicated:
<TABLE>
<CAPTION>
Percentage of Revenues Period to Period Increase (Decrease)
---------------------------------------------------------- -------------------------------------
Three Three February 28, December 31, March 31,
Twelve Ten Twelve Months Months 1997 1997 1998
Months Ended Months Ended Months Ended Ended Ended Compared to Compared to Compared to
February 28, December 31, December 31, March 31, March 31, December 31, December 31, March 31,
1997 1997 1998 1998 1999 1997 1998 1999
------------ ------------ ------------ --------- --------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............... 100.0% 100.0% 100.0% 100.0% 100.0% 1% 126% 60%
Cost of revenues....... 76.4 77.7 77.3 76.1 79.3 2 125 67
Selling, general &
administrative
expense............... 21.1 19.4 17.0 18.3 14.6 (7) 98 27
----- ----- ----- ----- -----
Income from
operations............ 2.5 2.9 5.7 5.6 6.1 17 341 75
Interest expense, net.. 2.4 2.2 1.9 2.1 2.1 (6) 88 60
----- ----- ----- ----- -----
Income from continuing
operations before
taxes................. 0.1 0.7 3.8 3.5 4.0 682 1,207 84
Provison for income
taxes................. -- 0.3 1.8 1.7 1.8 756 1,308 77
----- ----- ----- ----- -----
Net income from
continuing
operations............ 0.1 0.4 2.0 1.8 2.2 633 1,129 90
Loss from discontinued
operations............ -- (3.2) (4.2) (2.6) --
Net income (loss)...... 0.1 (2.8) (2.2) (0.8) 2.2
</TABLE>
Three-Month Periods Ended March 31, 1998 and 1999
The results of operations for the three months ended March 31, 1998 reflect
the activity of Intermetrics for the entire three months of the quarter and the
activity of Pacer for one month of the quarter. The results of operations for
the three months ended March 31, 1999 reflect the activity of Intermetrics and
Pacer for the entire three months of the quarter and ten days of activity of
CBSI.
Revenues. For the three months ended March 31, 1999, our revenues were $36.3
million compared to $22.7 million for the three months ended March 31, 1998. Of
the $13.6 million or 60% increase, approximately $8.6 million or 63% related to
the acquisition of Pacer and approximately $950,000 or 7% related to the
acquisition of CBSI. The remaining 30% of the increase was associated with new
task orders and additional work performed under existing contracts, mainly with
the United States Postal Service, Government Services Agency Schedule or GSA,
National Institutes of Health and NASA.
Cost of revenues. For the three months ended March 31, 1999, our cost of
revenues was $28.8 million compared to $17.3 million for the three months ended
March 31, 1998, an increase of $11.5 million or 67%. As a percentage of
revenues, cost of revenues was 79.3% for the period ended March 31, 1999 and
76.1% for
24
<PAGE>
the period ended March 31, 1998. The increase in cost of revenues as a
percentage of revenues resulted from higher costs in relation to revenues from
acquired contracts and less than full utilization of office facilities acquired
to support the increase in the number of contracts and task orders performed.
Selling, general and administrative expense. For the three months ended
March 31, 1999, our selling, general and administrative, or SG&A, expense,
including amortization expense, was $5.3 million compared to $4.2 million for
the first quarter of 1998, an increase of $1.1 million or 27%. Amortization
expense was $300,000 of the $5.3 million in 1999 and $100,000 of the $4.2
million in 1998. The $200,000 increase in amortization expense reflects three
months amortization related to Pacer in 1999 and ten days related to CBSI
compared with one month and none, respectively, in the 1998 first quarter
results. Of the remaining $900,000 increase in total SG&A expense,
approximately 50% was associated with the increased staff from Pacer,
approximately 22% related to the growth in the sales and marketing function and
the remainder related to acquisition and financing activities. As a percentage
of revenues, SG&A expense decreased to 14.6% in the first quarter 1999 from
18.3% in the first quarter 1998, primarily because SG&A expense was spread over
a larger revenue base in 1999.
Income from continuing operations. For the three months ended March 31,
1999, our income from continuing operations before interest and taxes was $2.2
million compared with $1.3 million for the three months ended March 31, 1998,
representing a $900,000 or 75% increase. Approximately $500,000 or 53% of this
increase was attributable to the acquisition of Pacer and about 5% was
attributable to the acquisition of CBSI. The remainder of the increase resulted
from increased profit recorded on new and additional work performed.
Net income from continuing operations. For the three months ended March 31,
1999, net income from continuing operations was $800,000 compared to $400,000
in 1998, an increase of 100%. The increase resulted from higher operating
income of $900,000 reduced by an increase in interest expense of $300,000 and an
increase in income taxes of $200,000. The increase in interest expense resulted
from additional borrowings to fund the acquisition of CBSI and to support
working capital requirements. The increase in taxes was caused by the increase
in taxable income.
Net income. For the three months ended March 31, 1999, our net income was
$800,000 compared to a net loss of $200,000 for the first quarter of 1998. The
net loss for 1998 was the result of income from continuing operations of
$400,000 offset by a net loss from discontinued operations of $600,000.
Fiscal Periods Ended February 28, 1997, December 31, 1997 and December 31,
1998
Revenues. For the 12 months ended December 31, 1998, our revenues were
$121.1 million compared to $53.6 million for the ten months ended December 31,
1997 and $53.3 million for the 12 months ended February 28, 1997, representing
a 127% increase over this period. Of the approximately $68 million increase in
revenues over this period, approximately $39 million, or 57% of the increase,
was the result of the acquisition of Pacer which became effective February 27,
1998. Approximately $12 million, or 18% of the increase, resulted from our
winning two contracts with the United States Postal Service in mid-1997. We
benefitted from the first full-year effect of these contracts in 1998. The
increased work under a contract awarded by NASA in 1996 accounted for
approximately $9 million, or 13% of the increase. Revenues were also positively
affected by increased business with commercial customers, by new contracts with
the National Institute of Health and the United States Navy and by increased
royalty income.
Cost of revenues. For the 12 months ended December 31, 1998, our cost of
revenues was $93.6 million compared to $41.7 million for the ten months ended
December 31, 1997 and $40.7 million for the 12 months ended February 28, 1997,
representing a 130% increase over this period. The increase primarily resulted
from higher labor costs to support a larger number of contracts. As a
percentage of revenues, cost of revenues has not changed significantly: 77.3%
for the period ended December 31, 1998, 77.7% for the period ended December 31,
1997 and 76.4% for the period ended February 28, 1997.
25
<PAGE>
Selling, general and administrative expense. For the 12 months ended
December 31, 1998, our selling, general and administrative expense, including
amortization expense, was $20.6 million compared to $10.4 million for the ten
months ended December 31, 1997, and $11.2 million for the 12 months ended
February 28, 1997, representing an increase of $9.4 million, or 84%, over this
period. This increase is attributed to increased staff related to the
acquisition of Pacer, increased sales and marketing staff and $1.5 million of
expenditures related to the consolidation of Pacer. The decrease of $800,000
from the 12-month period ended February 28, 1997 to the ten-month period ended
December 31, 1997 was primarily due to the ten-month reporting period. As a
percentage of revenues, SG&A expense decreased to 17% in the 12 months ended
December 31, 1998, from 19% in the ten months ended December 31, 1997 and from
21% in the 12 months ended February 28, 1997, primarily because SG&A expense
was spread over a larger revenue base in 1998.
Income from operations. For the 12 months ended December 31, 1998, our
income from operations was $6.9 million compared to $1.6 million for the ten
months ended December 31, 1997 and $1.3 million for the 12 months ended
February 28, 1997, representing a 431% increase over this period. Of the $5.6
million increase in income from operations over this period, approximately $1.9
million, or 34% of the increase, is attributable to the acquisition of Pacer.
Approximately $1.8 million of the increase, or 32%, was the result of higher
royalty revenues.
Net income from continuing operations. For the 12 months ended December 31,
1998, net income from continuing operations was $2.4 million compared to
$198,000 for the ten months ended December 31, 1997 and $27,000 for the 12
months ended February 28, 1997. The increase in net income from continuing
operations of $2.4 million over this period resulted from the increase in
income from operations of $5.5 million offset by a $1.0 million net increase in
interest expense and an increase in taxes of $2.2 million. The increase in
interest resulted from additional borrowing to partially fund the acquisition
of Pacer and to support working capital needs. The increase in taxes resulted
from the increased operating income.
Net income. For the 12 months ended December 31, 1998, our net loss was $2.7
million, compared to a net loss of $1.5 million for the ten months ended
December 31, 1997 and net income of $27,000 for the 12 months ended February
28, 1997. The net loss for 1998 resulted from income from continuing operations
of $2.4 million offset by a net loss from the discontinued operations of $2.5
million and by a net loss on the disposal of discontinued operations of $2.6
million. Similarly, the net loss for the ten months ended December 31, 1997 was
the result of income from continuing operations of $198,000 and a net loss from
discontinued operations of $1.7 million. There was no loss from discontinued
operations for the 12 months ended February 28, 1997.
Liquidity and Capital Resources
In March 1999, we refinanced our outstanding debt in conjunction with the
purchase of CBSI. We obtained a $75.0 million credit facility from a group of
lenders led by First Union Commercial Corporation. This facility comprised
$45.0 million in senior debt and $30.0 million in revolving credit. In
addition, we maintain a $5.0 million subordinated debt agreement, which we
obtained in August 1995, with MassMutual. Our total debt capacity has a face
value of $80 million. At March 31, 1999, our outstanding debt under these
agreements was approximately $58.4 million. The availability of approximately
$21.3 million under the revolving credit agreement is subject to certain
covenants and collateral limitations. At March 31, 1999, about $10.0 million of
additional borrowing under the revolving credit facility was available to us
based on the covenants and limitations. Our First Union Credit Facility is
secured by the stock of our subsidiaries, our accounts receivable and
substantially all our other assets. The agreements expire in March 2004 and
March 2005. Loans outstanding under these agreements bear interest at variable
rates generally based on LIBOR approximating 8.5% per year.
Our current credit agreements require that at least 50% of the proceeds of a
sale of equity be used to reduce debt under the agreements. We expect to apply
$28.7 million to reduce the senior and subordinated debt under our current
agreements thereby increasing the amount of our borrowing capacity. Please see
"Use of
26
<PAGE>
Proceeds." As of March 31, 1999, after giving effect to this offering and the
application of the proceeds to repay debt, approximately $21.0 million would be
outstanding in senior debt, $0 in subordinated debt, and approximately $8.7
million in revolving credit. We intend to seek to increase the borrowing
capacity under our revolving credit facility from a group of lenders led by
First Union after this offering, primarily to fund acquisitions.
We believe the capital resources available to us under our credit agreements
and cash from our operations are adequate to fund our ongoing operations and to
support the internal growth we expect to achieve for at least the next 12
months. In the longer term, we anticipate financing our internal and external
growth from acquisitions through one or a combination of the following: cash
from operations; additional borrowing; issuance of equity; use of the existing
revolver facility; or a refinancing of our credit facilities. Please see "Risk
Factors--We may require additional financing that we may not be able to secure
on favorable terms or at all."
Backlog
Backlog represents management's estimate of our aggregate realizable
revenues over the term of all of our contracts, including any option periods.
However, backlog is not necessarily indicative of future revenues. Our contract
backlog was approximately $450 million as of March 31, 1999. Our backlog is
composed of:
. Customer authorized contract values for which the customer has set
aside, appropriated or committed funds for specifically identified
services, products, tasks or delivery orders; and
. Management's estimate of the realizable contract values for all expected
future services, products, tasks or delivery orders, for which funds
have not yet been set aside, appropriated or committed.
The actual timing of our receipt of revenues, if any, on projects included
in our backlog could change because many factors affect the scheduling of
projects. In addition, cancellations or adjustments to contracts may occur. Our
backlog is subject to large variations from quarter to quarter as existing
contracts are renewed or new contracts are awarded. Additionally, virtually all
of our backlog represents contracts with the United States government which may
be terminated at any time for any reason.
Discontinued Operations
In August 1997, we combined our computer and video game business with the
operations of Looking Glass Technologies, Inc. to form Intermetrics
Entertainment Software, LLC, or IES. After the combination, we owned 66% of IES
and consolidated the results of IES' operations with our operations for our
financial reporting purposes. In December 1998, we approved a plan of
divestiture of IES by means of a distribution of our interest in IES to our
stockholders. We effected the distribution in March 1999. Please see note 3 to
our consolidated financial statements. As part of our plan of divestiture, we
structured financial arrangements with IES that included the conversion of $1.3
million of capital contributed to IES into a term loan, and the establishment
of a $2.0 million revolving credit facility for use by IES through December 31,
1999. The term loan is equal to our capital contributed to IES, reduced by the
operating losses of IES during our ownership period. We converted the
contributed capital to a term loan because the term loan provides us with the
possibility to recover some of the advances we made to IES without creating
adverse tax consequences. The revolving credit facility obligates us to advance
up to $2.0 million to IES through December 31, 1999. These advances must be
made available at any time, for any amount up to $2.0 million, as long as IES
has not filed for bankruptcy and is not in the process of liquidation or the
equivalent. Amounts advanced under the term loan and revolving credit facility
and an additional $400,000 in term loans mature on December 31, 2001. If not
prepaid, we will pursue collection of all amounts due. However, we presently do
not believe that we will be successful in our collection efforts.
As a result of the plan of divestiture approved by us in December 1998 and
completed in March 1999, we have accounted for our investment in IES as a
discontinued operation in 1997 and 1998. For the five months
27
<PAGE>
ended December 31, 1997, IES recorded revenues of $1.9 million and a net loss
from operations of $1.7 million. For the twelve months ended December 31, 1998,
IES recorded revenues of $7.2 million and a net loss from operations of $2.5
million. The increase in revenues in 1998 over 1997 was the result of a full
year of operations and a higher level of development activities supported by
advances of royalties from publishers of the games under development. The
increased loss in 1998 over 1997 is primarily attributable to the full year of
operations in 1998. The operating losses in both years were the result of the
increasing number of game development projects, for some of which the estimated
costs to complete the development exceeded the expected advances from
publishers, resulting in the recording of losses in current periods. The net
losses in both 1997 and 1998 are accounted for in our statement of operations
as losses from discontinued operations. In addition, we incurred a net loss
from the disposal of IES of $2.6 million, $3.9 million on a pre-tax basis,
representing the write-off of $1.7 million of term loans, $200,000 of
professional fees, $500,000 of estimated operating losses through the disposal
date and the accrual of our remaining estimated funding commitment of $1.5
million described in the preceding paragraph.
Quantitative and Qualitative Disclosures About Market Risk
Our exposure to market risk relates to changes in interest rates for
borrowings under our senior term loans and our revolving credit facility. These
borrowings bear interest at variable rates. The unsecured notes bear interest
at a fixed rate. Based on our borrowings during 1998, a hypothetical 10%
increase in interest rates would have increased our annual interest expense by
approximately $250,000 and would have decreased our annual cash flow from
operations by approximately $150,000.
Impact of the Year 2000 Issue
General. Many currently installed computer systems and software products are
coded to accept or recognize only two-digit entries in the date code field.
These systems may recognize a date using "00" as the year 1900 rather than the
year 2000. As a result, computer systems and/or software used by many companies
and governmental agencies may need to be upgraded to comply with Year 2000
requirements or risk system failure or miscalculations causing disruptions of
normal business activities. We are exposed to the risk that the systems we, our
customers and vendors depend on to conduct operations are not Year 2000
compliant.
State of Readiness. We have developed a Year 2000 program that was
structured to address our Year 2000 exposure. Our Year 2000 program focuses on
certain tasks that address critical Year 2000 issues. These tasks include
assessing each of the following:
. Our computer hardware and software, including data, networks, servers
and workstations, human resources systems and financial systems;
. Our telephone systems, computer room systems and office equipment; and
. Our financial interfaces and leased facilities.
We also monitor critical suppliers and vendors for Year 2000 readiness as
follows:
. We require Year 2000 compliance in all new purchases of hardware and
software, both for internal use and for the use by our customers;
. We regularly monitor vendor information for additional Year 2000
readiness information and obtain and apply software changes
appropriately;
. We monitor the readiness of our financial services vendors to provide
timely services;
. We are conducting a letter survey of landlords requesting information as
to the readiness and reliability of building systems including security
access, elevators and environmental control systems.
28
<PAGE>
We have substantially completed the process of determining the Year 2000
readiness of our IT systems. We believe that our internal systems, as a whole,
are Year 2000 compliant. Our remaining Year 2000 tasks include:
. Migrating employee records and data from legacy computer systems;
. Reviewing how our systems interface with those of our financial services
companies, including payroll functions, direct deposits, health and
retirement benefits, and customer electronic interfaces;
. Completing our review of Year 2000 compliance by critical suppliers and
vendors;
. Implementing a strategy for deploying uniform desktop applications
across our operations and maintaining desktop systems in a Year 2000
compliant configuration;
. Completing upgrades for data and voice communications equipment; and
. Working with landlords to assess Year 2000 issues in building systems.
We are not currently aware of any Year 2000 problems that would have a
material adverse effect on our business, financial condition or results of
operations. We intend to complete our assessment, and the replacement or
remediation of any non-Year 2000 compliant technologies, by September 1999.
Costs. As of March 31, 1999, we have expended approximately $100,000 in
connection with Year 2000 compliance efforts. We estimate that the total
remaining cost of our Year 2000 compliance efforts will be approximately
$500,000. Most of these expenses relate to costs for licensing standardized
Year 2000 compliant software, costs for personal computer hardware upgrades and
operating costs associated with time spent by employees in Year 2000 compliance
matters. If we encounter unexpected difficulties, or if we are unable to obtain
compliance information from material third parties, we may need to spend
additional amounts to ensure that our systems are Year 2000 complaint.
Risks. We provide our IT assurance services for information systems affected
by Year 2000 problems. Although we attempt to contractually limit our liability
for damages arising from errors, mistakes, omissions or negligent acts in
rendering services, our attempts to limit liability may not be successful. Our
failure or inability to meet a customer's expectations could cause our
customer's operations to suffer and, therefore, could give rise to claims
against us or damage our reputation, adversely affecting our business,
operating results and financial condition.
Although our assessment may be finalized without identifying any material
non-compliant systems operated by us or by third parties, a systemic failure
beyond our control, such as a prolonged telecommunications or electrical
failure, is possible. This type of failure could prevent us from operating our
business. We believe that the primary business risks, in the event of such
failure, would include, but not be limited to, lost business revenues,
increased operating costs or other business interruptions of a material nature,
as well as claims of mismanagement, misrepresentation or breach of contract.
Presently, we believe we are unable to reasonably estimate the duration and
extent of any such interruption, or quantify the effect it may have on our
future revenues.
Contingency Plan. We have not yet developed a contingency plan to address
the worst-case scenario that might occur if our technologies are not Year 2000
compliant. The results of our Year 2000 simulation testing and the responses
received from the Year 2000 readiness disclosures obtained from critical
providers will be taken into account in determining the need for and nature and
extent of any contingency plans. We intend to complete the development of any
required contingency plan by September 1999.
Effects of Recent Accounting Pronouncements
In 1998, the Accounting Standards Executive Committee issued Statement of
Position 98-5, "Reporting on the Costs of Start-up Activities," which must be
adopted for fiscal years beginning after December 15, 1998, and the Financial
Accounting Standards Board issued Statement No. 133, "Accounting for Derivative
Investments and Hedging Activities," which must be adopted for fiscal years
beginning after June 15, 1999. The adoption of these statements is not expected
to have a material impact on us.
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BUSINESS
Overview
AverStar is a pioneer in providing IT services and software products for the
mission-critical systems of a significant number of civilian and defense
agencies of the United States government.
We provide an integrated offering of services and products in four areas of
IT:
. IT Assurance. We provide independent analysis, testing and verification
of critical information systems under development or being upgraded. We
also provide security for customers' information systems.
. IT Development. We offer a full range of software and systems
development services for customer-specific applications and Internet
applications.
. IT Operations. We manage and operate information system networks and
data centers at our customers' facilities.
. IT Consulting. We serve as consultants with respect to our customers'
development of innovative applications or improvements to existing
critical systems.
Industry Background
Growth of IT Industry
The demand for third-party IT services has grown substantially in recent
years. Organizations are increasingly using IT to improve the quality of their
products and services, to reduce their costs and to improve operating
efficiencies. IDC forecasts that the United States market for IT services will
grow from an estimated $139 billion in 1998 to $207 billion in 2002. IDC
forecasts that the IT system services segment of the worldwide IT services
market will grow at a compound annual growth rate of approximately 12% over
this period.
According to Federal Sources, Inc., the United States government is the
world's largest single buyer of IT services and products. The EIA reports that
the United States government's IT budget for fiscal 1999 is approximately $30
billion, nearly double the budget ten years ago. The EIA also estimates that
the outsourced portion of the federal IT budget will be $26 billion in 1999,
with approximately 64% allocated to civilian agencies of the government and 36%
allocated to the Department of Defense.
We believe that the increasing emphasis by the United States government on
downsizing and reducing budgets will result in the growing use of IT to enhance
productivity and in more testing and upgrading of existing IT systems.
Trends in Federal IT Industry
Historically, the United States government purchased IT services and
products primarily through a protracted, competitive bidding process involving
numerous service providers. Recent government procurement reform has
streamlined the government's buying practices, resulting in a more commercial
approach. These changes have led to the following trends in the federal IT
procurement process:
. The government now places greater emphasis on an IT service provider's
past performance. In evaluating contract bids, the government examines
an IT service provider's technical merit, reputation and references,
leading to an increasing emphasis on the quality and reliability of IT
services and products.
. The government increasingly awards government-wide acquisition
contracts, or GWACs. GWACs are contracts awarded by a government agency
to many IT service contractors to provide IT services and products at
pre-negotiated prices, terms and conditions. GWACs streamline the
government's
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procurement process by allowing any government agency to choose IT
services and products from any agency's existing GWAC rather than going
through its own protracted contract procurement process.
. Government contracts procured by a single agency are increasing in size.
Government agencies are consolidating more work under single contracts
to reduce the time and effort required to procure IT services and
products. These larger contracts favor IT service providers with greater
management, financial and technical resources and broader service
offerings. In addition, these contracts may lead to preferred contractor
relationships for successful IT service providers.
. Government agencies have moved toward multiple-award contracts.
Multiple-award contracts are awarded by one government agency to several
IT service contractors, each with similar service offerings and
products. These contracts provide the government agency that awarded the
contract a choice among IT service providers. In addition, multiple-
award contracts favor IT service contractors with broad technical
resources.
These trends in the federal procurement process have led to the following
responses by IT service providers:
. Federal IT service providers are increasing their investments in sales
and marketing. As the government adopts a more commercial approach to
contract procurement, IT service contractors must increase their sales
and marketing efforts. Government-wide acquisition contracts and
multiple-award contracts require continued sales and marketing efforts
over the life of the contract because a government agency has the
freedom to choose among several pre-approved IT service providers.
. There is increasing consolidation among federal IT service providers.
The trends toward government-wide acquisition contracts, multiple-award
contracts and larger single agency contracts requires IT service
providers to have greater management, financial, technical and sales
resources. As a result, IT service providers increasingly seek to
consolidate complementary businesses.
The AverStar Solution
We provide high-quality and cost-effective IT services and products
designed to meet all the needs of mission-critical information systems. Our
solution to the challenges presented by the federal IT industry consists of
the following components which we believe differentiate us from our
competitors.
. Emphasis on Quality and Reliability. Over our 30-year history, we
believe that we have established a reputation for providing IT services
and products of the highest quality and reliability. We have developed a
company culture that emphasizes and rewards the delivery of services and
products of the highest quality and reliability. As a result, over the
last 10 years, we have won over 95% of our government contracts for
which we have recompeted.
. In-Depth Knowledge of Mission-Critical Systems. Mission-critical systems
are complex and perform vital functions in which even a minor failure
exposes customers to substantial losses, including potential loss of
life. We have developed significant expertise in addressing the needs of
these large, complex systems. For 30 years, we have worked on some of
the country's most sensitive and critical systems, including NASA's
manned flight systems and the Health Care Finance Administration's
Medicare transactions system. We also provide services for commercial
customers' critical systems.
. Highly Developed Project Management Skills. Each of our projects is
headed by an experienced project manager. The project manager works
closely with our customers' management and IT personnel to ensure that
the project is completed on-time and within budget. We currently have
approximately 100 project managers with an average of over 20 years
experience in the IT industry.
. Comprehensive Offering of Services and Products. We offer a
comprehensive range of IT services and products. We can support a
customer throughout the entire life cycle of an information system from
design and development through deployment and operation.
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. Expertise in Multiple Technologies. Our IT professionals have experience
and expertise in diverse technical environments, legacy platforms,
programming languages and software, as well as newer technologies
including client/server applications and the Internet. This expertise
enables us to assist customers in determining the best solutions for
their specific IT needs. We also have extensive knowledge of customers'
mission-critical systems and operations, which allows us to design and
integrate new systems or applications.
Our Business Strategy
Our goal is to be the leading quality supplier of IT services and software
products for mission-critical systems. To achieve our goal, our strategy is to:
. Leverage Our Position in IT Assurance. We intend to continue to leverage
our position in IT assurance to attract new customers and to provide
additional services and products to our existing customers. We believe
that the knowledge we gain concerning our customers' business, processes
and technologies while performing IT assurance services allows us to
expand our customer relationships over time.
. Pursue Targeted Acquisition Opportunities. Strategic acquisitions of IT
service providers are an integral part of our growth strategy. We seek
to acquire companies that operate in defined vertical market niches
complementary to our current business or that have well established
relationships with key customers. These acquisitions may allow us to:
-- Offer products and services which we do not currently provide;
-- Add new markets and customers which we do not currently serve;
and
-- Compete more effectively for larger contracts with increased
technical, financial and sales and marketing resources.
Our recent acquisition of CBSI is an example of our targeted
acquisition strategy. Through CBSI, we acquired several new customer
relationships as well as significantly increased our IT operations
capabilities.
. Expand Our Commercial Business. We intend to capitalize on our expertise
and reputation in the federal IT market to compete for commercial
projects. As the size of IT systems of commercial companies has grown in
response to the demand for improved product quality, reduced costs and
improved operating efficiencies, information systems have become
critical to their businesses. As a result, the need for high-quality IT
services is likely to grow. We believe that our reputation for high
quality and reliability together with our position in IT assurance will
enable us to take advantage of this opportunity in the commercial
market.
. Continue Our Investment in Sales and Marketing. Over the last three
years, we have significantly strengthened our sales and marketing
efforts and have increased the number of our employees dedicated to
sales and marketing from eight to twenty-six as of May 31, 1999. Our
investment in sales and marketing enables us to compete effectively for
larger government contracts, to provide the continuous sales presence
necessary to obtain additional work under government-wide acquisition
contracts and multiple-award contracts and to expand our commercial
customer base.
. Maintain Our High Level of Customer Satisfaction. We remain focused on
customer satisfaction which has been a major factor in our past success.
Our highly qualified, responsive project teams ensure quick and
effective responses to customers' IT concerns. We believe that
maintaining our high level of customer satisfaction and the resulting
long-term relationships provide a stable customer base from which we can
grow our business.
Our Services and Products
We provide our customers with an integrated offering of services and
products in four areas: IT assurance, IT development, IT operations and IT
consulting. Through these offerings, we are able to support customers during
all or any particular phase of the life cycle of an information system.
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IT Assurance
Our IT assurance services include the independent analysis, review, testing,
verification and validation of information systems under development or being
upgraded. Customers increasingly view more of their information systems as
being critical to their operations. This growth in the number of critical
systems, which must operate correctly and be delivered within schedule and cost
constraints, has increased the market demand for our IT assurance services.
We provide the following types of IT assurance services:
Systems Assurance. Our systems assurance services involve independent
assessment of the specification, design, implementation and testing of
information systems being developed for our customers. We focus on early
detection of problems so that cost-effective corrections can be made early in
the development cycle. We also evaluate the processes and tools being used by
the systems developer and provide oversight in tracking the customer's schedule
and budget. Our systems assurance methodologies, tools and services verify our
customers' information systems and provide them with comprehensive technical
reports detailing any and all tracking and reporting problems.
Information Assurance. Our information assurance services include providing
customers with security risk assessments, security policy and architecture
design, and certification and accreditation of IT systems. Our solutions help
customers automate highly secure transmissions of data across communications
networks. With more information systems migrating to Internet and Intranet
applications, the potential threat from computer viruses and computer hackers
increases the demand for these services. We also offer products that provide
customers with the ability to control a user's access to network systems in a
multi-level, secure environment.
Compliance Assessments. Customers retain us to determine whether a specific
component of an information system complies with their specifications. The
scope of our compliance assessment services may vary from assessing the
readiness of software for operational implementation, to assessing the process,
cost and schedule for an information system upgrade.
As part of our business strategy, we have begun to apply our expertise in
assessing critical information systems to the commercial IT services market. As
a result of current market demand, the majority of our recent commercial
projects have focused on the Year 2000 problem. We believe that the high demand
for these services presents a significant opportunity for us to expand our
customer base in the commercial IT market. Already, some of the commercial
companies that originally hired us to do Year 2000 work have retained us to
provide broader-based IT assurance as well as IT development services such as
building web-based applications for legacy systems.
IT Development
Our IT development services include specification and design, coding and
implementation, system integration, testing and verification, training and
operational deployment of IT systems. We use both our proprietary and
commercially available tools, together with well established procedures, to
develop and implement IT systems. Our many years of experience in performing IT
assurance services on major systems provide us with a competitive advantage as
an IT developer through the use of processes that avoid common development
problems and through the utilization of project management disciplines to
control the cost, schedule and performance of our projects. Our IT development
services specialize in the following:
Mission Applications. Mission applications involve developing and
maintaining software and systems to support customer-specific programs or
operations.
Electronic Business. Applications for electronic business involve enabling
legacy systems for web-based access and building new Internet and intranet
applications for government and commercial customers.
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IT Operations
Our IT operations include network and desktop operations and complete data
center operations at our customers' facilities. We install, maintain and
support our customers' network and desktop operations. Our data center
operations include software development, data collection and input, database
archives, report generation and hardware maintenance. We also support customers
in incorporating new technologies and requirements into their operations. As a
provider of end-to-end services for these operations, we frequently call upon
our expertise in IT assurance, IT development and IT consulting to fulfill
particular requirements of an IT operations contract.
We recently expanded our IT operations services through the acquisition of
CBSI, a company that has significant expertise in providing IT operations
services to several civilian agencies of the federal government.
IT Consulting
Our IT consulting services include supporting customers' innovative
applications of new technologies or enhancements to existing critical
information systems. Through our IT consulting services, we gain knowledge of
customers' systems, providing us with opportunities to capture other IT
projects. Our IT consulting services include:
Technology Studies. When customers want to investigate the application of a
new or developing technology for a particular use, they can engage us to
provide our IT consulting services in order to study feasibility of the
concept, define the scope of the project, plan the detailed steps involved in
phasing in new technology to replace an existing system, or develop a detailed
plan, including schedules and budget, for a development project.
Prototyping. We develop rapid prototype demonstrations for a variety of
systems or applications.
Language and Software Tool Development and Services. We deliver custom
language and software tool development products and services to support web-
based or private network systems and to support electronic design and
manufacturing.
. Monitoring and Debugging Tools. JWatch, our proprietary software
debugging tool, provides users with the ability to analyze Java code
execution and to display data and information to isolate problems and
repair them within a Java software development environment. We license
JWatch to software product companies that incorporate it into their
products. Building on our JWatch technology, we have developed a new
product, EWatch, which is currently being beta tested. EWatch supports
monitoring and debugging in a distributed computing environment. We
expect EWatch to enter the marketplace in late 1999 or early 2000.
. Computer-Aided Design Automation Tools. We are a leader in developing
languages to support the design and simulation of integrated circuits.
We lead a group of design automation companies in an effort to develop
an industry solution for the exchange of design information for
integrated circuits directly between the designer and manufacturer.
. Software Languages and Tool Development Services. We have been one of
the leaders in creating higher order programming languages for building
software-intensive systems for the United States government. We created
NASA's HAL/S language, the standard for manned space avionics software,
and the latest version of Ada, the standard language of the Department
of Defense.
These tools and related high-technology capabilities distinguish us and
enable us to capture IT services contracts. In addition, our tools have
intrinsic value of their own. By licensing some of our tools to third-party
distributors, we are able to generate higher margin royalty revenues.
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Our Markets and Customers
Our primary customers are agencies of the United States government. Our ten
largest contracts by revenues are all with United States government agencies
and accounted for approximately 45% of our 1998 pro forma revenues. In 1998,
the United States Navy accounted for approximately 15% of our pro forma
revenues, and NASA accounted for approximately 12% of our pro forma revenues.
These revenues are the result of various contracts awarded by several
procurement offices within these agencies. Our experience has indicated that
particular contracts are subject to the discretion of each procurement office.
Of the 20 government agencies with the largest IT budgets for the government's
1999 fiscal year, we have contracts with 16. The breadth of our government
contract base and service offerings provides us with less dependence on any one
agency and more opportunities to sell additional services to our customers.
The following chart illustrates a selected number of our customers across
our markets from January 1998 to the date of this prospectus.
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<TABLE>
<CAPTION>
SERVICES
- ---------------------------------------------------------------------------------------------------------------------------------
MARKET IT Assurance IT Development IT Operations IT Consulting
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Health Care Department Of TRW/Department National
Finance Housing & Urban Of Interior Institute Of
Administration Development (Data Center Operations) Standards &
(Systems Assurance) (Electronic Business) Technology
Federal Deposit (Prototyping, Monitoring
NASA SAIC/Department insurance & Debugging Tools)
(Systems Assurance) Of Justice Corporation
(Mission Applications) (Network & Data Operations) NASA
United States (Technology Studies)
Postal Service NASA Department Of
(Systems Assurance) (Mission Applications) Labor
(Data Collection and
Department Of Jet Propulsion Reporting)
Civilian Labor Laboratory
Government (Y2K Compliance Assessment) (Mission Applications) Environmental
Protection
Securities & Department Of Agency
Exchange Health & Human (Data Collection and
Commission Services Reporting)
(Y2K Compliance Assessment) (Electronic Business &
Mission Applications) United States
Patent &
Trademark Office
(Network Operations)
- ------------------------------------------------------------------------------------------------------------------------------------
United States United States United States Defense
Navy Navy Navy Advanced
(Systems Assurance) (Mission Applications) (Logistic Operations) Research
Projects Agency
Lockheed Martin/ Lockheed Martin Lockheed Martin/
United States (Electronic Business) United States (Technology Studies
Air Force Air Force & Prototyping)
(Information Assurance) Boeing Rockwell (Network Operations)
(Mission Applications)
Defense Computer Sciences
Government Corp/Defense
Information
Systems Agency
(Information Assurance)
Lear Siegler/
United States
Army
(Systems Assurance)
- ------------------------------------------------------------------------------------------------------------------------------------
AT&T Delphi Automotive Metropolitan Analog Devices
(Information Assurance) Systems Washington (Language Tool
(Mission Applications) Airports Development)
J.P. Morgan & Authority
Company Vanguard (Network Operations) Green Hills
(Y2K Compliance Assessment) (Mission Applications) Software, Inc.
(Language Tool
Commercial America Online Development)
Prudential (Electronic Business)
Insurance Inprise Software
(Y2K Compliance Assessment) (Language Tool
Development)
Deutsche Bank
(Y2K Compliance Assessment) Sony Pictures
Entertainment
Lehman Brothers (Technology Studies)
(Y2K Compliance Assessment)
Celera Genomics
(Technology Studies)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Illustrative Customer Relationships
We have long standing relationships with several of our customers. Over
time, we have been successful in expanding the range of services that we
provide to these customers.
National Aeronautics Space Agency
The National Aeronautics and Space Administration, or NASA, is currently one
of our largest customers. Our contractual relationships with NASA go back
nearly 30 years. In the early 1970s, we won a contract to design a programming
system for the next generation of manned spacecraft operations, including the
space shuttle and space station programs. We designed and developed an advanced
programming language called HAL/S which NASA adopted as a standard for avionics
software for manned applications. HAL/S was used to program the software for
all on-board computers and is still used today for all software updates for
each space shuttle flight. Based on the success of HAL/S for the space shuttle,
NASA adopted HAL/S for other missions including on-board programming for the
Galileo spacecraft that recently visited Jupiter. We continue to maintain HAL/S
for NASA today.
During the development and initial operational phases of the space shuttle,
we played several key contracting roles for NASA. We developed the design
requirements for the operating system for the on-board system that is still in
use today. We were one of two subcontractors involved, together with one prime
contractor, in the development of the backup flight software system that the
crew uses in the event of catastrophic failure to the space shuttle's primary
on-board flight system. We were also the prime contractor for the validation of
the flight navigation system. We invented and implemented the Dynamic
Integrated Test Technique, a concept for fully-integrated testing of the
software and hardware systems while the shuttle is on the launch pad with the
crew in the cockpit, just prior to launch. This test is recognized as the
critical end-to-end evaluation of the shuttle's avionics, software, crew and
communications prior to an actual flight.
Following the Challenger accident in 1986, NASA recommended that we perform
a complete audit of all software processes and the key interfaces of software
to hardware to determine whether the shuttle was ready to fly again. As a
result of our staffing up to perform this high-visibility task, NASA continued
our role as the independent verification and validation contractor to assess
all changes to the software made for each shuttle flight. Today, we continue to
perform this role for NASA and our contract has expanded to include the space
station program, ground control systems and robotic spacecraft. Also, within
the scope of this contract, we oversee the avionics and software development
for the X-33 spacecraft and are supporting NASA in the testing of its software
for a ground control system.
In 1994, because of our reputation on past work with NASA, we won a contract
to perform independent verification and validation for NASA's Earth Observing
System and Data Information System, or DIS. Under this contract, we support
NASA in the testing and integration of the DIS, which will archive
approximately one million megabytes of environmental data per day, collected
from satellite-based sensors. The DIS will distribute data over the Internet to
scientific and commercial users throughout the world.
United States Navy
The United States Navy was one of our first and continues to be one of our
largest customers. The first contract we received from the Navy over 30 years
ago was to define the ground support requirements for the yet-to-be-deployed P-
3C anti-submarine warfare land based aircraft. Since that time, we have been a
major contributor to every version of P-3 aircraft that has been delivered to
the Navy fleet. Our contributions have included definition of system and
software requirements, generation of detailed equipment and software
specifications, design and development of system test and integration
facilities, validation and verification of system performance in the lab and
onboard the aircraft, and development of training media and the training of
fleet personnel.
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Other major Navy programs we have supported in similar capacities include
the S-3A carrier-based anti-submarine warfare aircraft, used to detect and
destroy enemy submarines; the executive helicopter, used for transporting the
President of the United States and his staff; the Light Airborne Multi-Purpose
System Helicopter, used onboard ships for submarine and anti-missile detection
and defense; and the Landing Craft Air Cushion vehicle, or LCAC, used to
transport personnel and equipment in hostile, shallow water operations. For the
LCAC, we also provide the crews used to operate the test craft, and perform all
logistics support functions for the United States Navy for all LCACs deployed
throughout the world.
For over 15 years, we have performed analytical, design, testing and
validation efforts associated with the integration of global positioning
systems and other navigation systems into a wide range of Navy and joint
aircraft and ship programs. We have supported the design, development, testing
and operation of the Naval Wargaming System at both the Naval War College and
Tactical Training Group Pacific for approximately 20 years. In addition, for
approximately 12 years, we have worked closely with the Navy in the design,
development, validation and operation of the software used to resolve
operational problems and test future avionic upgrades for the EA-6B aircraft.
Delphi Automotive Systems
Delphi Electronics Systems, a division of Delphi Automotive Systems, a
leading manufacturer of automotive control systems, has been one of our largest
commercial customers, and we have sustained our relationship with them over a
15-year period.
In the mid-1980s, Delphi decided to design and build a proprietary software
development system to program the computer chips used in automotive control
systems. With over six million vehicles equipped on a yearly basis and a
significant increase in the number of individual computers involved to control
and monitor various parts of the vehicle, the needs for the programming system
were threefold:
. To enhance the productivity and lower the time for development to meet
manufacturing schedules;
. To improve the efficiency of the code generated to reduce memory needs;
and
. To enhance reliability and maintainability because of the critical
nature of the functions performed for the vehicle.
At that time, these needs were not met through the use of available
programming tools. We won a contract in 1985 to develop this programming system
and the related compilers for several of the major microcomputer chips being
used in vehicles at that time.
Following the initial development of the Delphi system, we designed and
developed a complete configuration management system to support the building
and control of the software used in Delphi-equipped vehicles and computers. Our
role was extended to include building new versions of compilers for the
microcomputer chips being planned for future Delphi-equipped vehicles. In
addition, Delphi asked us to convert our software from a mainframe to a fully
integrated workstation environment. During the 1990s, we built an electronic
specification system for distributing and controlling documentation for the
vehicle-based electronic systems. This system is used to distribute and control
documentation on a worldwide basis. Delphi now uses this system to distribute
and control other information beyond the documentation of vehicle-based
electronics systems. We have recently added a web-based interface to the
system.
Sales and Marketing
Over the last four years, we have significantly increased the investment in
our sales and marketing efforts. As of May 31, 1999, we had 26 employees
dedicated to our sales and marketing efforts. These employees all belong to our
corporate-wide business development team. The majority of these employees work
with project managers and operating teams to pursue new business. Several of
our sales and marketing employees work primarily at the corporate level to
identify and develop new sales targets and to obtain government awards.
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Our management works to foster an environment in which every employee shares
the responsibility for our sales and marketing and internal growth. In addition
to our dedicated sales and marketing personnel, many other employees spend
significant amounts of their time on sales and marketing activities. We seek to
ensure that each employee understands how he or she can contribute to our
growth, whether by communicating to management opportunities for new business,
by building a new customer relationship or by supporting a proposal.
As we grow, we will continue to invest our resources in sales and marketing.
Our continually growing sales presence is necessary to compete for larger,
long-term government contracts, and to develop the ongoing relationships with
present and prospective customers demanded by the prevalence of multiple-award
government contracts and by our expansion of commercial opportunities.
A significant portion of our new business derives from existing customer
relationships. We frequently leverage our strong incumbent positions to expand
the scope of our customer relationships. In addition, we identify new contract
opportunities through the use of industry contacts, attendance at conferences
and review of publications that identify new contracting opportunities.
While the services and products we provide to commercial customers are the
same as or similar to those we offer to government customers, the process of
selling to commercial customers is somewhat different. A portion of our sales
and marketing staff is, therefore, dedicated to selling services to commercial
customers. We expect to continue to expand our commercial sales and marketing
staff. We also have a sales effort dedicated to licensing our technology and
products to companies that sell our products and pay us royalties.
We have an incentive compensation program for sales and marketing personnel.
Incentive awards are based on achievement of our goals for profitability and
bookings of new business.
Contracts
Government Contracts
We have several multi-year contracts with United States government agencies,
typically for three to five years. These contracts require us to provide a
broad range of requested services. We receive specific assignments under a
given contract through the issuance by the government of task orders. Task
orders describe the specific assignment, the number of employees allocated to
the assignment and the estimated cost, fee and travel allocated to the
assignment.
Under our Government Services Agency Schedule, which is a type of GWAC, any
government agency may purchase IT services and products at pre-approved prices
and without any additional competitive bidding. The term of our current
Government Services Agency Schedule contract expires in September 2002.
Commercial Contracts
Typically, commercial contracts require us to complete a specific task or
provide a defined range of services and support. Payments are usually made
incrementally during the performance of each specific work assignment.
Currently, we are working to expand our customer base and increase the sales of
our products and services in the commercial IT market. Most of our existing
commercial contracts are fixed-price contracts.
Backlog
Backlog represents management's estimate of our aggregate realizable
revenues over the term of all of our contracts, including any option periods.
However, backlog is not necessarily indicative of future revenues. Our contract
backlog was approximately $450 million as of March 31, 1999. Our backlog is
composed of:
. Customer authorized contract values for which the customer has set
aside, appropriated or committed funds for specifically identified
services, products, tasks or delivery orders; and
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. Management's estimate of the realizable contract values for all expected
future services, products, tasks or delivery orders, for which funds
have not yet been set aside, appropriated or committed.
The actual timing of our receipt of revenues, if any, on projects included
in our backlog could change because many factors affect the scheduling of
projects. In addition, cancellations or adjustments to contracts may occur. Our
backlog is subject to large variations from quarter to quarter as existing
contracts are renewed or new contracts are awarded. Additionally, virtually all
of our backlog represents contracts with the United States government which may
be terminated at any time for any reason.
Competition
We experience significant competition in all areas of our business. In
general, the markets in which we compete are not dominated by a single company
or a small number of companies. Rather, a large number of companies offer
services that overlap and are competitive with our services and products.
However, we compete regularly with approximately seven different competitors in
our IT assurance service offerings, 18 in our IT development service offerings,
six in our IT operation service offerings and four in our IT consulting service
offerings.
We believe that the principal competitive factors in our business are
technical understanding, management capability, past contract performance,
personnel qualifications and price. While we have considerable experience,
there are many other contractors that have comparable skills. Many of our
competitors are significantly larger and have greater financial resources than
we do. In addition, many of our competitors have significantly more experience
in the commercial IT market than we do.
Proprietary Information
Although much of our work is performed for the United States government,
wherever possible we attempt to retain proprietary rights in our products. We
rely on copyright, patent and trade secret laws and internal non-disclosure
safeguards, as well as restrictions incorporated into software product license
agreements and other contractual provisions to protect our proprietary rights.
However, these measures may not prevent the unauthorized disclosure or use of
our technical knowledge, practices or procedures, or prevent others from
independently developing similar knowledge, practices or procedures. Further,
the government may acquire certain proprietary rights to software programs and
other products that we develop while performing services under government
contracts. The government may disclose this information to others, including
our competitors. Disclosure or loss of control over our proprietary information
could have a material adverse effect on our business, financial condition and
results of operations.
Employees
As of May 31, 1999, we had a total of 1,765 employees, consisting of 1,643
full-time and 122 part-time or temporary employees. Of our total full-time
employees, approximately 1,499 are in engineering, technical and technical
support positions, 118 are in general and administrative positions and 26 are
in sales and marketing positions. None of our employees are covered by a
collective bargaining agreement.
We have several full-time employees dedicated to recruiting technical and
administrative professionals and managing our human resources. As part of our
retention efforts, we seek to minimize turnover by emphasizing our reputation,
the nature of our work, our work environment, our encouragement of technical
publications, our participation in professional societies and our competitive
compensation packages.
Certain Regulatory Matters
United States government contracts are subject to the Federal Acquisition
Regulations, or FAR, and other agency FAR supplements. Major contracts are also
subject to the Truth in Negotiations Act, or TIN Act, and Cost Accounting
Standards, or CAS. Among other procurement regulations, the FAR contains the
cost
40
<PAGE>
principles for setting contract prices while the TIN Act requires us to provide
current, accurate and complete cost or pricing data in connection with the
negotiation of a contract. CAS requires consistency of accounting practices
over time and compliance with specific cost accounting criteria.
To the extent that a company fails to comply with procurement requirements,
the United States government may adjust contract prices. Additionally, changes
in cost accounting practices are subject to a required procedure for
negotiation of the cost of the change. The United States government is
protected from paying increased costs resulting from accounting changes.
Finally, the United States government has the right to audit contractors for
three years after final payment. Accordingly, our revenues are subject to
adjustment.
United States law and regulations restrict and regulate the export of
technology as well as goods and commodities provided by United States
businesses to controlled foreign subsidiaries and affiliates. We are subject to
certain of these regulations with respect to our technology that is sold to
non-United States customers.
Facilities
We currently lease approximately 310,000 square feet of space comprised of
24 facilities. We consider these properties to be modern, well maintained and
suitable for their intended purposes. We lease our principal executive and
administrative offices and software facility located in 38,800 square feet of
space in Burlington, Massachusetts. This lease expires in 2003. We also have
offices located in:
. Fountain Valley, Huntington Beach, Pasadena, Point Mugu, Sacramento, San
Diego and Santa Clara, California;
. Colorado Springs, Colorado;
. Panama City, Florida;
. Baltimore, Greenbelt and Lexington Park, Maryland;
. Billerica, Massachusetts;
. Kansas City, Missouri;
. Eatontown, New Jersey;
. Lawton, Oklahoma;
. Portland, Oregon;
. Warminster, Pennsylvania;
. Charleston, South Carolina;
. Houston, Texas; and
. Arlington, Fairfax and Vienna, Virginia.
Legal Proceedings
We are not involved in any material litigation.
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MANAGEMENT
Executive Officers and Directors
The following table sets forth, as of the date of this prospectus, the name,
age and position of each of our executive officers and directors.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Michael B. Alexander.... 48 Chief Executive Officer and Chairman of the Board of Directors
John C. Rennie.......... 61 Vice Chairman of the Board of Directors
Joseph A. Saponaro...... 59 President, Chief Operating Officer and Director
Bruce A. Burton......... 44 Executive Vice President
Sigmund H. Goldblum..... 61 Executive Vice President and Director
Barbara L. Landes....... 49 Executive Vice President and Chief Financial Officer
Nicholas A. Pettinella.. 56 Senior Vice President, Treasurer and Secretary
Mary Ann Gilleece....... 58 Director
Joel N. Levy............ 57 Director
Peter M. Schulte........ 41 Director
</TABLE>
Executive Officers
Michael B. Alexander has served as our Chief Executive Officer and Chairman
from February 1998 to the present, and as Chief Executive Officer and Chairman
of Intermetrics from August 1995 to February 1998. From 1993 to August 1995,
Mr. Alexander was the principal of AFH Partners, which invests in public and
private computer software companies. From 1990 to 1993, Mr. Alexander served as
President and Chief Operating Officer of Pinelands, Inc., a New York Stock
Exchange company that was a spin-off from MCA, Inc. From 1981 to 1990, Mr.
Alexander worked for MCA/Universal in several capacities, including as
President and General Manager of WWOR-TV, Executive Vice President of MCA
Broadcasting and Vice President and Chief Financial Officer of USA Network. Mr.
Alexander is a member of the Board of Directors of IES Holding, Inc. Mr.
Alexander received an AB from Harvard College, cum laude, an MA in Education
from Ohio State and completed the course work for a doctorate in education from
the Harvard Graduate School of Education.
John C. Rennie has served as Vice Chairman of the Board of Directors from
February 1998 to the present, and as Chairman of the Board of Directors and
Chief Executive Officer of Pacer since he founded Pacer in 1968 until February
1998. Mr. Rennie was Chairman at the time Pacer was named the Overseas Company
of the Year in 1987 on the Unlisted Securities Market of the London Stock
Exchange. Mr. Rennie has served as a director on a number of private technology
companies' boards of directors, and has also served as a director on numerous
organizations' boards, including the United States Chamber of Commerce and the
National Security Industrial Association. Mr. Rennie has an engineering degree
from the United States Naval Academy and a graduate engineering management
degree from Northeastern University and is also a graduate of the Harvard
Business School, Smaller Company Management Program.
Joseph A. Saponaro has served as our President and Chief Operating Officer
from March 1999 to the present. From August 1986 to December 1998, Mr. Saponaro
served as President of Intermetrics, and from August 1986 to August 1995 served
as Chief Executive Officer of Intermetrics. Mr. Saponaro has served as our
director from February 1998 to the present and served as a director of
Intermetrics from 1986 until February 1998. Mr. Saponaro joined Intermetrics in
1969 and served in a number of management positions before becoming President
in August 1986. Mr. Saponaro was a director of Intermetrics from 1979 to 1998.
Mr. Saponaro is a member of the Board of Directors of IES Holding, Inc.
Mr. Saponaro received a BS in Navigation and Astronomy from Massachusetts
Maritime Academy, an MS in Mathematics from Northeastern University and
attended Massachusetts Institute of Technology's Aeronautics PhD program.
Bruce A. Burton, Ph.D. was appointed as our Executive Vice President in
March 1999. Prior to March 1999, Dr. Burton served as Senior Vice President of
Intermetrics' Information Systems and Services business
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area from 1996 to March 1999. Dr. Burton has been an employee of Intermetrics
for 16 years and has held a number of technical and management positions. Dr.
Burton received a BS in chemistry from California State University at
Bakersfield and an MS degree in computer science and a PhD in chemistry from
the University of California in Irvine.
Sigmund H. Goldblum has served as our Executive Vice President from March
1999 to the present. From January 1989 to December 1998, Mr. Goldblum served as
President and Chief Operating Officer of Pacer. Mr. Goldblum has served as our
director from February 1998 to the present and as a director of Pacer from 1989
to February 1998. Mr. Goldblum served as Chief Operating Officer of Pacer from
1983. Previously, Mr. Goldblum served Pacer as Senior Vice President from 1977
to 1983 and Vice President from 1973 to 1977. Mr. Goldblum joined Pacer in
December 1969. Mr. Goldblum received a BS in electrical engineering from Drexel
University and an MS in electrical engineering from the University of
Pennsylvania.
Barbara L. Landes has served as our Executive Vice President and Chief
Financial Officer since May 1999. From October 1998 to April 1999, Ms. Landes
was self-employed. Ms. Landes served as Vice President and Chief Financial
Officer of Watson Wyatt & Company from May 1994 until October 1998. From
January 1991 through August 1992, Ms. Landes worked as Vice President, Chief
Financial Officer and Treasurer of Pinelands, Inc., a New York Stock Exchange
company which was a spin-off from MCA, Inc. From November 1989 to December
1993, Ms. Landes was Senior Vice President, Finance and Operations of WWOR-TV.
From 1980 to 1989, Ms. Landes worked for NBC in several capacities, including
Vice President, Finance and Administration of NBC Radio. Ms. Landes received a
BA in political science from Washington University and an MBA from Wharton
Graduate School of the University of Pennsylvania.
Nicholas A. Pettinella has served as our Senior Vice President and Treasurer
from February 1998 to the present, and as Senior Vice President and Chief
Financial Officer of Intermetrics from 1983 to December 1998. Mr. Pettinella
joined Intermetrics as Director of Finance in November 1981. Mr. Pettinella
received a BS in accounting from Bentley College and an MBA from Babson
College, and attended the Corporate Finance Management program at Harvard
University and the Executive Financial Management Program at Stanford
University. He is a licensed Certified Public Accountant in the Commonwealth of
Massachusetts.
Directors
Mary Ann Gilleece has served as our director since September 1998. Ms.
Gilleece is a partner of the law firm of Manatt, Phelps and Philips, where she
counsels domestic and foreign corporations on issues related to legislative,
government contract and regulatory matters. Prior to joining Manatt, Phelps and
Philips in June 1997, Ms. Gilleece held several senior positions in the United
States government including Deputy Undersecretary of Defense for Research and
Engineering, representative for the Department of Defense on the OMB Executive
Committee on Procurement Reforms, and Counsel to the United States House of
Representatives Committee on Armed Services. Ms. Gilleece sits on the National
Board of Trustees of the National Defense Industrial Association, the Board of
Advisors of the National Contract Management Association and is vice chair of
the Legislative Coordinating Committee of the Section of Public Contract Law of
the American Bar Association. Ms. Gilleece received a BA from the University of
Connecticut, a JD from Suffolk University Law School, and an LLM in government
procurement from George Washington University.
Joel N. Levy has served as our director from February 1998 to the present
and as a director of Intermetrics from August 1995 to February 1998. Mr. Levy
is a managing partner of CMLS Management, L.P. and CM Equity Partners, L.P.,
and a principal officer of Joel N. Levy/Peter M. Schulte, L.L.C. Joel N.
Levy/Peter M. Schulte, L.L.C. supported the management buyout of Intermetrics
in August 1995. Mr. Levy managed the buyout group at Arnhold and S.
Bleichroeder, Inc., from 1990 to 1992. From 1986 to 1990, Mr. Levy managed
Resource Holdings Capital Group, a buyout fund comprised of Swiss investors
(Trident II) acquiring United States-based companies. Mr. Levy is a member of
the Boards of Directors of ICF Consulting Group, Inc., Tep Fund, Inc., C-3,
Inc., Examination Management Services, Inc., Kronos-Central Products, Inc.
(Chairman), Beta Brands Incorporated, Evans Consoles, Inc. and Resource
Consultants, Inc. Mr. Levy received a BA from American University in
Washington, D.C.
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<PAGE>
Peter M. Schulte has served as our director from February 1998 to the
present and as a director of Intermetrics from August 1995 to February 1998.
Mr. Schulte is a managing partner of CMLS Management, L.P. and CM Equity
Partners, L.P. and is a principal officer of Joel N. Levy/Peter M. Schulte,
L.L.C. Joel N. Levy/Peter M. Schulte, L.L.C. supported the management buyout of
Intermetrics in August 1995. Mr. Schulte was a member of the buyout group at
Arnhold and S. Bleichroeder, Inc. from 1990 to 1992. From 1983 to 1990, Mr.
Schulte was a Vice President of Salomon Brothers Inc, where he managed the
firm's southeast United States corporate finance relationships and activities
with industrial companies. Mr. Schulte is a member of the Boards of Directors
of IES Holding, Inc., ICF Consulting Group, Inc., Kronos-Central Products,
Inc., Evans Consoles, Inc. and Resource Consultants, Inc. (Chairman). Mr.
Schulte received a BA from Harvard University and a Masters in Public and
Private Management from Yale University.
Executive Compensation
The following table sets forth all compensation awarded to, earned by or
paid to our Chief Executive Officer and our other four most highly compensated
executive officers for services rendered to us during 1998.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
------------------------------
Other Annual All Other
Name and Principal Position Salary Bonus Compensation Compensation
--------------------------- -------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Michael B. Alexander
Chief Executive Officer and Chair-
man............................... $339,068 $105,000 $ 3,809 $2,801
John C. Rennie
Vice Chairman...................... 267,315 70,000 699 6,787
Joseph A. Saponaro
President and Chief Operating Offi-
cer............................... 266,200 85,000 24,912 7,575
Sigmund H. Goldblum
Executive Vice President........... 223,575 60,000 1,910 5,702
Bruce A. Burton
Executive Vice President........... 177,011 80,000 9,631 1,703
</TABLE>
Other annual compensation consists of the portion of an automobile lease
paid by us, and cash payments in lieu of vacation days. All other compensation
consists of the imputed income associated with the group term life insurance
premium for policy values in excess of $50,000.
In accordance with the rules of the SEC, other compensation in the form of
perquisites and other personal benefits has been omitted for the named
executive officers because the aggregate amount of these perquisites and other
personal benefits constituted less than the lesser of $50,000 or 10% of the
total of annual salary and bonuses for each of the named executive officers in
1998.
Options Granted in Last Year
No options were granted to the named executive officers during the year
ended December 31, 1998.
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<PAGE>
The following table sets forth information concerning the value realized
upon exercise of options during 1998 and the number and value of unexercised
options held by each of the named executive officers at December 31, 1998.
There was no public trading market for the common stock as of December 31,
1998. Accordingly, the values set forth below have been calculated on the basis
of the assumed initial public offering price of $8.00 per share, less the
applicable exercise price per share, multiplied by the number of shares
underlying the options.
<TABLE>
<CAPTION>
Option Exercises in the Year Ended December 31, 1998 and Year-End Option Values
Number of Securities Value of Unexercised
Value Realized Underlying Unexercised In- the-
Shares (Market Price Options at Money Options at
Acquired at Exercise less December 31, 1998 December 31, 1998
on Exercise ------------------------- -------------------------
Name Exercise Price)(/1/) Exercisable Unexercisable Exercisable Unexercisable
- ---- -------- ---------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Michael B. Alexander.... -- -- -- 387,831(/2/) -- $2,571,320
John C. Rennie.......... 17,117 $118,450 24,453 -- $103,192 --
Joseph A. Saponaro...... -- -- -- 116,349(/3/) -- $ 771,394
Sigmund H. Goldblum..... 17,117 $118,450 48,906 -- $206,383 --
Bruce A. Burton......... -- -- -- -- -- --
</TABLE>
- --------
(1) Solely for purposes of this calculation, the fair market value of the
common stock at the time of the exercise was deemed to be the initial
public offering price of $8.00 per share. The exercise price of the options
was $1.08 per share.
(2) All of Mr. Alexander's options to purchase 387,831 shares of common stock
will become exercisable when this offering closes and will have a value of
$2,571,320 based on an assumed initial public offering price of $8.00 per
share and an exercise price of $1.37 per share.
(3) All of Mr. Saponaro's options to purchase 116,349 shares of common stock
will become exercisable when this offering closes and will have a value of
$771,394 based on an assumed initial public offering price of $8.00 per
share and an exercise price of $1.37 per share.
Classified Board of Directors
The board of directors presently consists of seven persons. Our board of
directors is divided into three classes. Directors of each class serve for
three years and are elected at the annual meeting of stockholders held in the
year in which the term for such class expires. Michael B. Alexander, Mary Ann
Gilleece and Peter M. Schulte serve as Class 1 directors with their terms
expiring at the 2000 annual meeting of stockholders. Joseph A. Saponaro and
John C. Rennie serve as Class 2 directors with their terms expiring at the 2001
annual meeting of stockholders. Sigmund H. Goldblum and Joel N. Levy serve as
Class 3 directors with their terms expiring at the 2002 annual meeting of
stockholders. For further information on the effect of the classification of
the Board of Directors, please see "Description of Securities--Anti-Takeover
Effects of Certain Provisions of Delaware Law and Our Certificate of
Incorporation and Bylaws."
Directors Compensation
In September 1998, we began compensating our non-employee directors $20,000
per year, paid in arrears in semi-annual increments. In addition, we reimburse
each non-employee director for customary and reasonable out-of-pocket expenses
for attending each board of directors or committee meeting. At the discretion
of the board of directors, non-employee directors may be granted options to
purchase common stock at the then prevailing fair market value. We also have a
consulting agreement with Messrs. Levy and Schulte. Please see "Certain
Relationships and Related-Party Transactions." Prior to September 1998,
directors received no cash compensation for their service on our board of
directors or any of our committees.
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<PAGE>
Committees of the Board
Audit Committee
The audit committee currently consists of Mary Ann Gilleece (chair), Peter
M. Schulte and Michael B. Alexander. After this offering, the audit committee
will consist of Mary Ann Gilleece (chair) and Peter M. Schulte. The audit
committee selects and evaluates our independent auditors, reviews the scope of
the annual audit with management and our independent auditors, consults with
management and our independent auditors about our systems of internal
accounting controls and reviews the non-audit services performed by our
independent auditors.
Compensation Committee
Our compensation committee currently consists of Peter M. Schulte (chair),
Joel N. Levy and John C. Rennie. The compensation committee is responsible for
approving or recommending salaries and benefits for our employees,
consultants, directors and other individuals compensated by us. The
compensation committee also reviews our benefit plans.
Option Committee
Our option committee currently consists of Peter M. Schulte (chair) and
Joel N. Levy. The option committee is responsible for approving or
recommending option grants, and administering our long-term incentive plan.
1998 Long Term Incentive Plan
General. Our 1998 long term incentive plan was approved by our board of
directors and our stockholders in June 1998. The purpose of our 1998 long term
incentive plan is to enable us to attract, retain and reward employees,
officers and directors and to strengthen the mutuality of interests between
our employees, officers and directors and our stockholders, by permitting them
to participate in our ownership. Pursuant to the plan, we may grant options
intended to qualify as "incentive stock options" under Section 422 of the
Internal Revenue Code of 1986, non-qualified stock options, stock appreciation
rights, restricted stock, deferred stock, stock purchase rights or other
stock-based awards.
Shares reserved for issuance. A total of 3,349,447 shares of common stock
have been reserved for issuance under the plan. Appropriate adjustments in the
aggregate number of shares subject to the plan will be made in the event of
any recapitalization, dividend of stock or property other than cash, stock
split, reclassification or other change in corporate structure affecting the
common stock. As of March 31, 1999, we have granted stock options to purchase
1,513,433 shares of common stock.
Eligibility. Our employees, officers and directors who are responsible for
or contribute to the management, growth and/or profitability of our business
are eligible to be granted awards under the plan. However, only our employees
are eligible to receive incentive stock options.
Administration. Our stock option committee is authorized to administer the
plan, including the selection of individuals eligible for grants under the
plan and the terms of grants. Generally, the stock option committee has broad
authority to amend the plan to take into account changes in applicable
securities and tax laws and accounting rules, as well as other developments.
We may grant any of the following, or any combination of the following,
types of awards under the plan:
Stock options. We may grant incentive stock options and non-qualified stock
options. A stock option may have a term of not more than ten years. Our option
committee determines the price per share, which may be equal to, greater than
or less than the fair market value of common stock purchasable under stock
options granted under the plan on the date of grant based on the following
factors:
. The price per share of common stock purchasable under an incentive stock
option cannot be less than the fair market value of our common stock on
the date of grant; and
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<PAGE>
. In the case of an incentive stock option granted to an employee who, at
the time of grant, owns common stock with more than ten percent (10%) of
the total combined voting power of our outstanding common stock, the
price per share of common stock cannot be less than one hundred ten
percent (110%) of the fair market value of our common stock on the date
of grant.
The fair market value of our common stock is its closing price on the stock
exchange on which it is listed; if it is not listed, the fair market value is
determined by the option committee after considering various factors, including
our operating results, transactions with third parties involving the exchange
of our stock, and independent valuations of our stock which we receive
periodically.
Stock appreciation rights. A stock appreciation right is the right to
surrender to us all or a portion of a stock option in exchange for an amount
equal to the difference between:
. The fair market value, as of the date any part of a stock option is
surrendered, of the shares of common stock covered by any part of a
stock option, subject to pricing provisions, and
. The aggregate exercise price of any part of a stock option.
A stock appreciation right granted with respect to a given stock option
shall terminate and no longer be exercisable upon the termination or exercise
of the related stock option, subject to provisions specified by the stock
option committee.
Restricted stock. A restricted stock award entitles the holder to receive
shares of common stock at the end of a restricted period determined by the
stock option committee. During the restricted period, the holder is not
permitted to sell, transfer, pledge or assign shares of restricted stock. The
stock option committee may provide for the lapse of such restrictions in
installments and may accelerate or waive such restriction in whole or in part,
based on service, performance and other criteria as the stock option committee
may determine.
Deferred stock. A deferred stock award entitles the holder to receive shares
of common stock at the end of a specified deferral period. The stock option
committee shall determine, among other things, the duration of the period
during which, and the conditions under which, receipt of the common stock will
be deferred.
Stock purchase rights. Stock purchase rights entitle the holder to purchase
common stock, including deferred stock and restricted stock:
. At its fair market value on the date of grant;
. At fifty percent (50%) of the fair market value on the date of grant;
. At an amount equal to book value on the date of grant; or
. At an amount equal to the par value of the common stock on the date of
grant.
Other stock-based awards. We may also make other awards of common stock and
other awards that are valued in whole or in part by reference to, or are
otherwise based on, common stock, including performance shares, convertible
preferred stock, convertible debentures, exchangeable securities and stock
awards or options valued by reference to book value or our performance.
Employment, Severance and Other Agreements with Management
Mr. Alexander serves as Chief Executive Officer and Chairman of the Board of
Directors pursuant to the terms of a five-year employment agreement dated as of
August 21, 1995 between us and Mr. Alexander. Under the terms of his employment
agreement, Mr. Alexander receives a base salary of $300,000 per year, which
increases by at least 5% each year plus any additional amounts as may be
approved from time to time by the board. In addition, commencing April 1, 1997,
Mr. Alexander will be paid a tax anticipation payment of $50,000 or a bonus, at
the discretion of our board of directors, of not less that $50,000. If Mr.
Alexander's employment agreement is terminated by us for any reason other than
"cause", as defined in Mr. Alexander's
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<PAGE>
employment agreement, or long-term disability, then he is entitled to any
earned but unpaid salary and bonus and the following severance for the lesser
of 36 months following the date of his termination or the remaining term of his
employment agreement:
. His then current salary;
. His tax anticipation payments; and
. Continued medical benefits on the same basis as immediately prior to his
termination.
If Mr. Alexander's employment agreement is terminated for a long-term
disability, then he is entitled to the following severance:
. $25,000 per month and his tax anticipation payments for 12 months
following his termination;
. Any earned but unpaid salary and bonus amounts; and
. Benefits under our long-term disability policy and medical benefits from
the date of termination until his 65th birthday.
If Mr. Alexander's employment agreement is terminated by his death, or if
Mr. Alexander voluntarily terminates his employment agreement, then he, or his
estate in the event of his death, is entitled to receive any earned but unpaid
salary and bonus amounts.
Under his employment agreement, Mr. Alexander also received options to
purchase a maximum of 387,831 shares of common stock, at an exercise price of
$1.37 per share. This stock option will vest and become exercisable upon the
closing of this offering.
Mr. Saponaro serves as President and director pursuant to the terms of an
employment agreement, dated as of August 21, 1995, between us and Mr. Saponaro.
Under the terms of his employment agreement, Mr. Saponaro receives an annual
base salary of $230,000 or such greater amount as may be approved from time to
time by our board of directors. Mr. Saponaro's employment agreement provides
that he will be eligible to receive a bonus at the discretion of the board of
directors. If Mr. Saponaro's employment agreement is terminated by us for any
reason other than "cause", as defined in Mr. Saponaro's employment agreement,
or long-term disability, or we fail to renew his employment agreement, then he
is entitled to the following severance:
. One-half of his then current salary, on a monthly basis, and one-half of
his bonus, on an annual basis, for four years following the date of his
termination;
. Any earned but unpaid salary and bonus amounts; and
. Continued medical benefits on the same basis as immediately prior to his
termination for the greater of the remaining term of his employment
agreement or 18 months.
If Mr. Saponaro's employment agreement is terminated for a long-term
disability, then he is entitled to the following severance:
. His then current salary and bonus for 12 months following his
termination, and $9,000 per month thereafter or such greater amount as
our disability insurance policy permits, less our medical benefits
described below;
. Any earned but unpaid salary and bonus amounts;
. Benefits under our long-term disability policy from the date of
termination until his 65th birthday; and
. Continued medical benefits to the extent permitted under our policies or
plans, at no greater out-of-pocket cost to Mr. Saponaro than incurred
prior to termination.
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<PAGE>
If Mr. Saponaro's employment agreement is terminated by his death, or if Mr.
Saponaro voluntarily terminates his employment agreement, then he, or his
estate in the event of his death, is entitled to receive any earned but unpaid
salary and bonus amounts.
In addition, Mr. Saponaro received options to purchase a maximum of 116,349
shares of common stock at an exercise price of $1.37 per share. This stock
option will vest and become exercisable upon the closing of this offering.
Mr. Rennie serves as Vice Chairman of our board of directors pursuant to the
terms of a three-year employment agreement, dated as of February 27, 1998,
between us and Mr. Rennie. Mr. Rennie receives a base salary of $275,000 per
year, or such greater amount as may be approved from time to time by us. The
agreement provides that Mr. Rennie will be eligible to receive a bonus at the
discretion of the board of directors. If Mr. Rennie's employment agreement is
terminated by us for any reason other than "cause", as defined in Mr. Rennie's
employment agreement, or long-term disability or by Mr. Rennie for "good
reason", then he is entitled to the following severance:
. His base salary, on a monthly basis, and a company car through the term
of his employment agreement;
. One-half of his then current salary, on a monthly basis, for two years
following the expiration of the term of his employment agreement;
. Any earned but unpaid vacation, salary and bonus amounts; and
. Continued medical benefits on the same basis as immediately prior to his
termination for the greater of the remaining term of his employment
agreement or 18 months after his date of termination.
If Mr. Rennie's employment agreement is terminated for a long-term
disability, then he is entitled to the following severance from the date of
termination until the earlier of his 65th birthday or the date specified by our
long-term disability plan:
. His then current salary and bonus for 12 months following his
termination, and $10,000 per month thereafter, less our medical benefits
described below;
. Any earned but unpaid vacation, salary and bonus amounts;
. Continued use of a company car; and
. Benefits under our long-term disability policy and medical benefits from
the date of termination until the earlier of the date specified by our
disability policy or his 65th birthday.
If Mr. Rennie's employment agreement is terminated by his death, or if Mr.
Rennie voluntarily terminates his employment agreement, then he, or his estate
in the event of his death, is entitled to receive any earned but unpaid
vacation, salary and bonus amounts.
Mr. Goldblum serves as Executive Vice President and Director pursuant to the
terms of a three-year employment agreement, dated as of February 27, 1998,
between us and Mr. Goldblum. Mr. Goldblum receives a base salary of $225,000
per year or such greater amount as may be approved from time to time by our
board of directors. The agreement provides that Mr. Goldblum will be eligible
to receive a bonus at the discretion of the board of directors. If Mr.
Goldblum's employment agreement is terminated by us for any reason other than
"cause", as defined in Mr. Goldblum's employment agreement, or long-term
disability or by Mr. Goldblum for "good reason", then he is entitled to the
following severance:
. His base salary, on a monthly basis, and a company car through the term
of his employment agreement;
. One-half of his then current salary, on a monthly basis, for two years
following the expiration of the term of his employment agreement;
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<PAGE>
. Any earned but unpaid vacation, salary and bonus amounts; and
. Continued medical benefits on the same basis as immediately prior to his
termination for the greater of the remaining term of his employment
agreement or 18 months after his date of termination.
If Mr. Goldblum's employment agreement is terminated for a long-term
disability, then he is entitled to the following severance from the date of
termination until the earlier of his 65th birthday or the date specified by our
long-term disability plan:
. His then current salary and bonus for 12 months following his
termination, and $10,000 per month thereafter, less our medical benefits
described below;
. Any earned but unpaid vacation, salary and bonus amounts;
. Continued use of a company car; and
. Benefits under our long-term disability policy and medical benefits from
the date of termination until the earlier of the date specified by our
disability policy or his 65th birthday.
If Mr. Goldblum's employment agreement is terminated by his death, or if Mr.
Goldblum voluntarily terminates his employment agreement, then he, or his
estate in the event of his death, is entitled to receive any earned but unpaid
vacation, salary and bonus amounts.
50
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to the beneficial
ownership of our common stock as of July 12, 1999, and as adjusted to reflect
the sale of the shares of common stock offered by this prospectus, by:
. Each of our directors and named executive officers;
. All of our directors and executive officers as a group; and
. Each person, or group of affiliated persons, who we know beneficially
owns 5% or more of the common stock.
In accordance with the SEC's rules, the following table gives effect to the
shares of common stock that could be issued upon the exercise of outstanding
options and warrants within 60 days of July 12, 1999. The following table also
gives effect to the shares of common stock that could be issued upon the
exercise of outstanding options that will become fully vested upon the closing
of this offering. Unless otherwise indicated in the footnotes to the table, the
following individuals have sole voting and sole investment control with respect
to the shares they beneficially own.
<TABLE>
<CAPTION>
Percentage
before Percentage
Number of this after this
Beneficial Owner shares offering offering
- ---------------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Directors and Officers:+
Michael B. Alexander(/1/)............. 1,119,645 15.4% 9.9%
John C. Rennie(/2/)................... 330,085 4.8 3.0
Joseph A. Saponaro(/3/)............... 281,052 4.0 2.6
Sigmund H. Goldblum(/4/).............. 138,458 2.0 1.3
Nicholas A. Pettinella(/5/)........... 131,774 1.9 1.2
Peter M. Schulte(/6/)................. 73,176 1.1 0.7
Bruce A. Burton(/7/).................. 73,234 1.1 0.7
Joel N. Levy(/6/)(/8/)................ 54,882 0.8 0.5
Barbara L. Landes(/9/)................ -- *
Mary Ann Gilleece..................... -- *
All Directors and Executive Officers
as a group
(10 persons)(/10/) .................. 2,202,306 31.1% 19.9%
Other 5% Stockholders:
J. Fernando Niebla(/11/).............. 672,315 9.8% 6.2%
Richards Capital Fund, L.P.(/12/)..... 548,817 8.0 5.0
AFH Partners(/13/).................... 537,841 7.8 4.9
Massachusetts Mutual Life Insurance
Company
--Pension Management(/14/)........... 276,695 4.0 2.5
Massachusetts Mutual Life Insurance
Company
--IMF Traditional(/14/).............. 276,695 4.0 2.5
MassMutual Corporate Investors(/14/).. 147,499 2.1 1.4
MassMutual Corporate Value Partners
(Gerlach & Co.)(/14/)................ 147,499 2.1 1.4
MassMutual Participation Invest-
ors(/14/)............................ 73,749 1.1% 0.7%
</TABLE>
- --------
* Less than 1%
+ Unless otherwise indicated, the address of our directors and officers is
c/o AverStar, Inc., 23 Fourth Avenue, Burlington, Massachusetts 01803.
51
<PAGE>
(1) Includes options to purchase 387,831 shares of common stock for $1.37 per
share. Includes 537,841 shares of common stock held by AFH Partners.
Includes 58 shares of common stock held for the benefit of Mr. Alexander
in the AverStar Profit Sharing & Savings Plan.
(2) Includes options to purchase 24,453 shares of common stock at $3.78 per
share. Includes 2,966 shares of common stock held in the Pacer Infotec
Employee Stock Bonus Plan, or ESBP, for the benefit of Mr. Rennie.
Excludes 155,351 shares held by the ESBP with respect to which Mr. Rennie,
as trustee, has voting power but no pecuniary interest. After this
offering, Mr. Rennie will not have the right to vote the shares held by
the ESBP.
(3) Includes options to purchase 116,349 shares of common stock for $1.37 per
share. Includes 58 shares of common stock held for the benefit of Mr.
Saponaro in the AverStar Profit Sharing & Savings Plan. Excludes 188,367
shares held by the AverStar Profit Sharing & Savings Plan with respect to
which Mr. Saponaro has voting power but no pecuniary interest.
(4) Includes options to purchase 48,906 shares of common stock at $3.78 per
share. Includes 2,932 shares of common stock held for the benefit of Mr.
Goldblum in the ESBP.
(5) Includes 58 shares of common stock held for the benefit of Mr. Pettinella
in the AverStar Profit Sharing & Savings Plan.
(6) Excludes shares to be received by Messrs. Levy and Schulte from certain
other AverStar stockholders pursuant to agreements between Messrs. Levy
and Schulte and such stockholders. In connection with the acquisition of
Intermetrics by Apollo Holding, Inc. in 1995, certain stockholders of
Apollo who are now stockholders of AverStar agreed to share a percentage
of their interest in Intermetrics' profits with Messrs. Levy and Schulte.
Each of Mr. Levy and Mr. Schulte will receive (i) approximately 75,551
shares of common stock (assuming an initial public offering price of
$8.00) immediately after this offering, approximately 911 of these shares
will be issued out of our treasury shares and (ii) an additional number of
shares of common stock six months after this offering to be determined
based on the market price of the common stock at that time. The address of
Messrs. Levy and Schulte is CM Equity Partners, 135 East 57th Street, 27th
Floor, New York, New York 10022.
(7) Includes 58 shares of common stock held for the benefit of Dr. Burton in
the AverStar Profit Sharing & Savings Plan. Does not include options to
purchase 15,000 shares of common stock issuable upon exercise of options
that do not vest within 60 days of July 12, 1999.
(8) Includes 54,882 shares of common stock owned by Levy Family 2/14/96
Limited Partnership, of which Mr. Levy is the general partner.
(9) Does not include options to purchase 50,000 shares of common stock
issuable upon exercise of options that do not vest within 60 days of July
12, 1999.
(10) Includes options to purchase 577,539 shares of common stock.
(11) The address of Mr. Niebla is 7524 Saddlehill Trail, Orange, California
92869.
(12) The general partner of Richards Capital Fund L.P. is Richards Managers
L.P. The general partner of Richards Managers L.P. is Richards LLC. The
address of Richards Capital Fund L.P. is c/o James C. Richards, 303
Peachtree Street, N.E., Suite 4100, Atlanta, GA 30308.
(13) Mr. Alexander is the President of Bronto, Inc., which is the general
partner of AFH Partners. The address of AFH Partners is c/o Bronto, Inc.,
127 Farm Road, Sherborn, Massachusetts 01770.
(14) The address of these stockholders is c/o Michael P. Hermsen, CFA,
MassMutual Life Insurance Co., 1295 State Street, Springfield,
Massachusetts 01111.
52
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED-PARTY TRANSACTIONS
In connection with the acquisition of Intermetrics by an investor group led
by current management, we obtained a $35.0 million credit facility with
Massachusetts Mutual Life Insurance Company, or MassMutual, and certain
affiliates of MassMutual. This facility comprised $25 million in senior debt,
$5 million in subordinated debt and $5 million in revolving credit. In
connection with this facility, MassMutual and its affiliates received warrants
to purchase shares of common stock. In connection with our acquisition of Pacer
in February 1998, these warrants were exchanged for 605,286 shares of our
common stock. At December 31, 1998, we owed $23.6 million under the senior term
agreement, $5 million under the subordinated debt agreement and $2.5 million
under the revolving credit agreement. An additional $2.5 million was available
under the revolving credit agreement. We repaid the $2.5 million borrowed under
the revolving credit early in 1999 as we collected outstanding receivables. In
March 1999, we refinanced our outstanding debt in conjunction with our
acquisition of CBSI, and repaid our outstanding debt of $23.2 million under the
senior term agreement. Currently, we maintain the $5 million subordinated debt
agreement with MassMutual. MassMutual is also one of our lenders under our
credit agreement with First Union.
In connection with our divestiture of IES, we:
. Provided a $2.0 million credit facility to IES;
. Received a $1.3 million promissory note from IES; and
. Extended the due date of two $200,000 secured notes from IES.
Outstanding amounts under the credit facility and the promissory note bear
interest at a rate of 8.5% per year. Outstanding amounts under the secured
notes bear interest at a rate of 10.5% per year. AfterDecember 31, 1999, we are
not required to fund any additional amounts under the credit facility, which
matures on December 31, 2001. The promissory note and secured notes mature on
December 31, 2001.
Mr. Levy and Mr. Schulte, both members of our board, are the principal
officers of Joel N. Levy/Peter M. Schulte, LLC, or L&S, which supported the buy
out of Intermetrics in August 1995. We have retained L&S to provide financial,
strategic and business planning and consulting services, including analysis and
advice with respect to programs relating to value of our common stock. The
consulting agreement with L&S terminates on the first anniversary of this
offering. The total amounts of fees paid to L&S by us in 1996, 1997 and 1998
were $100,000, $200,000 and $263,000, respectively.
J. Fernando Niebla was founder, chairman and chief executive officer of
Infotec Development Inc. until it was merged into Pacer, and vice-chairman of
Pacer until we acquired Pacer. In connection with our formation, Mr. Niebla
entered into a repurchase agreement with us. This agreement provides that
during 1998, 1999, 2000 and 2001, he can require us to repurchase some of his
shares of common stock. Our total cost to repurchase all of the shares of his
common stock under this agreement is $1,557,000. However, approximately
$1,000,000 of such amount will be paid by cancellation of the outstanding
indebtedness owed to us by Mr. Niebla. Mr. Niebla's right to require us to
repurchase some of his shares of common stock terminates upon the closing of
this offering.
Each of our stockholders, including executive officers, who own 3% or more
of our common stock calculated on a fully diluted basis have granted us a right
of first refusal to purchase their shares at the prevailing market price. For
three years following the date of this prospectus, each of these stockholders,
other than MassMutual and its affiliates, must offer their shares to us before
they may sell their shares on the public market. If we do not buy these shares,
then these stockholders may sell their shares on the public market.
53
<PAGE>
The following table sets forth loans made by us to our executive officers
and 5% stockholders:
<TABLE>
<CAPTION>
Principal
Amount
Amount of Currently
Name and Principal Position Loan Outstanding Interest Rate Due Date
- --------------------------- --------- ----------- ------------- --------
<S> <C> <C> <C> <C>
Michael B. Alexander........ $200,000 $100,000 8.4% August 31, 2000
Chief Executive Officer and $265,000 $ 0 7.0% Paid in Full
Chairman of the Board of
Directors
Bruce A. Burton............. $ 80,000 $ 80,000 7.0% August 31, 2005
Executive Vice President
Joseph A. Saponaro.......... $ 75,000 $ 0 Imputed Paid in Full
President, Chief Operating interest
Officer and Director based on
IRS
guidelines
John C. Rennie.............. $ 94,762 $ 0 6.5% Paid in Full
Vice Chairman of the Board
of Directors
Sigmund H. Goldblum......... $ 27,957 $ 0 6.5% Paid in Full
Executive Vice President
and Director
J. Fernando Niebla.......... $848,730 $848,730 6.36% May 1, 2001
</TABLE>
The amounts of the loans set forth above represent the largest principal
amounts owed to us at any time during our last three fiscal periods, or since
March 1, 1996. The loans set forth above are evidenced by notes, payable to us
as indicated.
54
<PAGE>
DESCRIPTION OF SECURITIES
The following descriptions of our common stock and preferred stock, and
provisions of our certificate of incorporation and bylaws, reflect changes that
will occur upon the filing of an amended and restated certificate of
incorporation immediately prior to the closing of this offering.
Our authorized capital stock consists of 25,000,000 shares of common stock,
par value $.001 per share, and 1,000,000 shares of preferred stock, par value
$.001 per share.
Common Stock
As of the date of this prospectus, there are 6,879,744 shares of common
stock outstanding and held of record by 111 stockholders. Stockholders do not
have cumulative voting with respect to the election of directors. There will be
10,880,655 shares of common stock outstanding upon the closing of this
offering. Holders of common stock are entitled to one vote for each share on
all matters submitted to a vote of stockholders. Holders of a majority of the
shares of common stock entitled to vote in any election of directors may elect
all of the directors standing for election. Stockholders will not be liable for
any further calls or assessments. Holders of common stock are entitled to
receive dividends, if, as and when declared by the board of directors out of
funds legally available for such purposes, subject to any dividend preferences
of any outstanding preferred stock. Upon our liquidation, dissolution or
winding up, the holders of common stock are entitled to share ratably in our
assets available for distribution, subject to the preferential rights of any
outstanding preferred stock. Holders of the common stock have no preemptive,
subscription, redemption or conversion rights. Upon the closing of this
offering, there will be no shares of preferred stock outstanding. 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 that we may designate and issue in the future.
Preferred Stock
As of the date of this prospectus, there are no shares of preferred stock
outstanding. Upon the closing of this offering, the board of directors will be
authorized, 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.
The board of directors may fix or alter the designations, preferences, rights
and any qualifications, limitations or restrictions of the shares of each of
these series, including the dividend rights, dividend rates, conversion rights,
voting rights, terms of redemption, redemption price or prices, liquidation
preferences and the number of shares constituting any series or designations of
these series. We have no present plans to issue any shares of preferred stock.
Stock Options
Options to purchase a total of 3,349,447 shares of common stock may be
granted under our stock option plan. As of the date of this prospectus, there
are outstanding options to purchase a total of 1,513,433 shares of common stock
under our stock option plan. Of these, stock options to purchase 757,055 shares
are currently exercisable and options to purchase 504,180 shares will become
exercisable upon the closing of this offering. As soon as practicable following
the closing of this offering, we intend to file a registration statement on
Form S-8 which will register the offer and sale of the shares to be issued upon
exercise of these options. Upon the filing of the Form S-8, these shares will
be immediately available for sale in the public market, subject to the terms of
lock-up agreements entered into between certain of these option holders and the
underwriters.
Anti-Takeover Effects of Certain Provisions of Delaware Law and Our
Certificate of Incorporation and Bylaws
Delaware Law. We are subject to the provisions of Section 203 of the
Delaware General Corporation Law, or the DGCL. Section 203 of the DGCL
generally prohibits a publicly-held Delaware 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 became an
interested stockholder, unless the interested stockholder
55
<PAGE>
attained that status with the approval of the board of directors or unless the
business combination is approved in a prescribed manner. A "business
combination" includes mergers, asset sales and other transactions resulting in
a financial benefit to the interested stockholder. Subject to exceptions, an
"interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years did own, fifteen percent (15%) or more
of a corporation's voting stock. The provisions of Section 203 of the DGCL are
intended to assure that the price that stockholders receive for the common
stock in certain transactions is fair in relation to the market value of and
the prices paid by the "interested stockholder" in its initial acquisitions of
common stock and to allow the board of directors and the stockholders to
prevent the consummation of such a transaction because it may not be in our
best interest or in the best interest of our stockholders. Under those
circumstances in which this statute would apply, minority stockholders may
prevent a transaction favored by a majority of stockholders. This statute could
prohibit or delay the accomplishment of mergers or other takeover or change in
control attempts with respect to us and, accordingly, may discourage attempts
to acquire us.
Our Certificate of Incorporation and Bylaws. Certain provisions of our
certificate of incorporation and bylaws, which will be in effect upon the
closing of this offering and which are described in the following paragraphs,
may be deemed to have an anti-takeover effect and may delay, defer or prevent a
tender offer or takeover attempt that a stockholder might consider in its best
interest, including those attempts that might result in a premium over the
market price for the shares held by stockholders. However, these provisions are
designed to help to ensure that stockholders are treated fairly and equally in
a multi-step acquisition, and are intended to encourage persons seeking to
acquire control of us to pursue their acquisition in arms-length negotiations
with our board of directors.
Classified Board of Directors. Our board of directors is divided into three
classes of directors serving staggered terms. The terms of our current
directors expire at the 2000, 2001 or 2002 annual stockholders meeting. One
class of directors will be elected at each annual stockholders meeting for a
three-year term. This classification of directors may deter stockholders from
changing the composition of our board of directors in a relatively short period
of time. At least two annual stockholders meetings, instead of one, generally
will be required to change the majority of directors. Because of the additional
time required to change the directors, classification of directors also may
delay the removal of our current management team. A classified board of
directors helps to assure the continuity and stability of our board of
directors and our business strategies and policies because generally a majority
of directors at any given time will have had prior experience as directors.
Board of Directors Vacancies. The certificate authorizes the board of
directors to fill vacant directorships or increase the size of the board of
directors. In addition, the certificate permits stockholders to remove
directors only for cause. This may deter a stockholder from removing incumbent
directors or simultaneously gaining control of the board of directors by
filling the vacancies created by that removal with its own nominees.
Stockholder Action; Special Meeting of Stockholders. The certificate
provides that stockholders may only take action at duly called annual or
special meetings of stockholders and not by written consent. The certificate
further provides that special meetings of stockholders may be called only by
the president, the chief executive officer, chairman of the board of directors
or a majority of the board of directors. These provisions may delay a
stockholders vote for a proposal over the objection of the board of directors.
Advance Notice Requirements for Stockholder Proposals and Director
Nominations. The bylaws provide that stockholders seeking to bring business
before an annual meeting of stockholders, or to nominate candidates for
election as directors at an annual meeting of stockholders, must deliver a
written notice to our principal executive offices within a prescribed time
period. The bylaws also specify requirements as to the form and content of a
stockholder's notice. These provisions may preclude stockholders from bringing
matters before an annual meeting of stockholders or from making nominations for
directors at an annual meeting of stockholders. Advance notice requirements may
also delay a contest for the election of directors, and discourage or deter a
tender offer or takeover attempt.
Authorized But Unissued Shares. The authorized but unissued shares of common
stock and preferred stock are available for future issuance without stockholder
approval, subject to limitations imposed by the Nasdaq
56
<PAGE>
National Market. These additional shares may be utilized for a variety of
corporate purposes, including future public offerings, acquisitions and
employee benefit plans. The existence of authorized but unissued and unreserved
common stock and preferred stock could complicate or discourage an attempt to
obtain control of us by means of a proxy contest, tender offer, merger or
otherwise.
Restrictions on Certain Business Combinations. The certificate contains
provisions which are substantially similar to Section 203 of the DGCL. Such
provisions may dely or discourage mergers or other acquisition attempts with
respect to us.
Vote Required to Amend our Certificate of Incorporation and Bylaws. Subject
to certain exceptions, our certificate and bylaws require the vote of 80% of
the stockholders to amend, repeal or adopt any provision inconsistent with the
anti-takeover and indemnification provisions discussed in this prospectus. This
supermajority vote prevents a controlling stockholder from avoiding the
requirements of these provisions by simply amending or repealing such
provisions.
Limitation of Liability and Indemnification Matters
To the extent permitted under the DGCL, the certificate limits the personal
liability of our directors to us or our stockholders for monetary damages for
any breach of fiduciary duty as our directors. Under the DGCL, our directors
have a fiduciary duty to us that is not eliminated by this provision of the
certificate and, in appropriate circumstances, injunctions and other
nonmonetary relief will remain available. This provision also does not affect
the directors' responsibilities under any other laws, including the federal
securities laws.
Section 145 of the DGCL enables a corporation to indemnify its directors and
officers and to purchase insurance with respect to liability arising out of
their capacity or status as directors and officers. However, this provision
does not eliminate or limit the liability of a director:
. For any breach of the director's duty of loyalty to the corporation or
its stockholders;
. For acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. For payments of dividends or approval of stock repurchases or
redemptions that are prohibited by the DGCL; or
. For any transaction from which the director derived an improper personal
benefit.
Our certificate of incorporation provides that we may fully indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding (whether civil,
criminal, administrative or investigative) by reason of the fact that the
person is or was one of our directors or officers or is or was serving at our
request as a director or officer of another corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise, against expenses
(including attorney's fees), judgments, fine and amount paid in settlement
actually and reasonably incurred by that person in connection with any
threatened, pending or completed action, suit or proceeding.
We believe that the provisions of our certificate and bylaws are necessary
to attract and retain qualified directors and executive officers. Our bylaws
also permit us to secure insurance on behalf of any officer, director, employee
or other agent for any liability arising out of his or her actions, regardless
of whether the DGCL would permit indemnification. We have obtained liability
insurance for our officers and directors.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent for which indemnification will be required
or permitted under the certificate. We are not aware of any threatened
litigation or proceeding that may result in a claim for indemnification.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock will be Chase Mellon
Shareholder Services, Ridgefield Park, New Jersey.
57
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has not been any public market for our common
stock. We cannot predict the effect, if any, that market sales of shares of
common stock or the availability of shares of common stock for sale will have
on the prevailing market price of our common stock. Nevertheless, sales of
substantial amounts of common stock in the public market, or the perception
that such sales could occur, could adversely affect the market price of our
common stock and could impair our future ability to raise capital through the
sale of our equity securities.
Upon the closing of this offering, we will have an aggregate of 10,880,655
shares of common stock outstanding, assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options. Of the
outstanding shares, the 4,000,000 shares being sold in this offering will be
freely tradable, subject to the lock-up agreements and the right of first
refusal described below. Additional shares will be available for sale in the
public market as follows:
<TABLE>
<CAPTION>
Number of Shares Date
---------------- -----------------------------------------------------------
<C> <S>
21,929 After the date of this prospectus, subject to volume
limitations in some cases
6,857,815 After 180 days from the date of this prospectus, subject to
volume limitations in some cases
1,513,433 Upon the filing of a registration statement on Form S-8 to
register the offer and sale of shares of common stock
issuable upon the exercise of options granted under our
stock option plan
</TABLE>
In general, under Rule 144, as currently in effect, a person, or persons
whose shares are required to be aggregated, including an affiliate, who has
beneficially owned shares for at least one year is entitled to sell, within any
three-month period commencing 90 days after the date of this prospectus, a
number of shares that does not exceed the greater of:
. 1% of the then outstanding shares of common stock, approximately 108,881
shares, immediately after this offering; or
. The average weekly trading volume in the common stock during the four
calendar weeks preceding the date on which notice of that sale is filed,
subject to restrictions.
In addition, a person who is not deemed to have been our affiliate at any
time during the 90 days preceding a sale and who has beneficially owned the
shares proposed to be sold for at least two years is entitled to sell those
shares under Rule 144(k) without regard to the requirements described above. To
the extent that shares are acquired from our affiliate, the acquiring person's
holding period for the purpose of effecting a sale under Rule 144 generally
commences on the date of transfer from the affiliate.
As of the date of this prospectus, options to purchase a total of 1,513,433
shares of common stock are outstanding, of which options to purchase 757,055
shares are currently exercisable. Of the options to purchase 756,378 shares of
common stock that are not currently exercisable, options to purchase 504,180
shares of common stock shall immediately vest and become exercisable upon the
closing of this offering. Upon the commencement of this offering, we intend to
file a registration statement to register the 1,836,014 shares of common stock
reserved for issuance under the stock option plan. That registration statement
will automatically become effective upon filing. Accordingly, shares issued
upon the exercise of stock options granted under the stock option plan will be
eligible for resale in the public market from time to time, subject to vesting
restrictions and, in the case of some of the options, the lock-up agreements
and the right of first refusal referred to below.
Our directors and officers and stockholders who hold 6,871,537 shares in the
aggregate, together with the holders of options to purchase 1,513,433 shares of
common stock, have agreed that they will not sell, directly or indirectly, any
shares of common stock without the prior written consent of Bear, Stearns & Co.
Inc. for a period of 180 days from the date of this prospectus. Please see
"Underwriting."
58
<PAGE>
Except in limited circumstances, we have agreed not to sell or otherwise
dispose of any shares of common stock during the 180-day period following the
date of the prospectus.
Stockholders who own more than 3% of our common stock calculated on a fully
diluted basis, have granted us a right of first refusal to purchase their
shares at the prevailing market price. For three years following the date of
this prospectus, these stockholders, other than MassMutual and its affiliates,
must offer their shares to us before they may sell their shares on the public
market. If we do not buy these shares, then these stockholders may sell their
shares on the public market.
59
<PAGE>
UNDERWRITING
The underwriters of this offering named below, for whom Bear, Stearns & Co.
Inc. and Legg Mason Wood Walker, Incorporated are acting as representatives,
have severally agreed with us, subject to the terms and conditions of the
underwriting agreement, to purchase from us the aggregate number of shares of
common stock set forth opposite their respective names below:
<TABLE>
<CAPTION>
Underwriter Number of Shares
----------- ----------------
<S> <C>
Bear, Stearns & Co. Inc.....................................
Legg Mason Wood Walker, Incorporated........................
---------
Total..................................................... 4,000,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters are subject to approval of certain legal matters by counsel and to
various other conditions. We have agreed to indemnify the several underwriters
against certain liabilities, including liabilities under the Securities Act,
and where such indemnification is unavailable, to contribute to payments that
the underwriters may be required to make in respect of such liabilities. The
nature of the underwriters' obligations is such that they are committed to
purchase and pay for all of the above shares of common stock if any are
purchased.
If the underwriters sell more than the total number set forth in the table
above, the underwriters have an option to buy up to an additional 600,000
shares to cover such sales from us. The underwriters may exercise that option
for 30 days. If any shares are purchased pursuant to this option, the
underwriters will severally purchase shares in the same proportion as set forth
in the table above.
The underwriters, at our request, have reserved for sale at the initial
public offering price up to 200,000 of the shares of common stock to be sold in
this offering for sale to our employees and directors and other persons
designated by us. The number of shares available for sale to the general public
will be reduced to the extent that any reserved shares are purchased. Any
reserved shares not so purchased will be offered by the underwriters on the
same basis as the other shares offered hereby.
The underwriters do not expect to confirm sales of common stock to any
accounts over which they exercise discretionary authority.
We, all of our directors and officers and stockholders holding an aggregate
of 6,857,815 shares of our common stock have agreed that, subject to certain
exceptions, for a period of 180 days from the date of this prospectus, without
the prior written consent of Bear, Stearns & Co. Inc., which may be waived, we
will not, directly or indirectly, issue, sell, offer or agree to sell, grant
any option for the sale of, pledge, make any short sale, establish an open "put
equivalent position" within the meaning of Rule 16a-1(h) under the Exchange Act
or otherwise dispose of any shares of our common stock or securities
convertible into, exercisable for or exchangeable for our common stock.
The following table shows the per share and total underwriting discounts and
commissions to be paid to the underwriters by us. These amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares.
<TABLE>
<CAPTION>
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per Share.......................................... $ $
Total.............................................. $ $
</TABLE>
60
<PAGE>
Shares sold by the underwriters to the public will initially be offered at
the public offering price set forth on the cover of this prospectus. Any shares
sold by the underwriters to securities dealers may be sold at a discount of up
to $ per share from the public offering price. Any such securities dealers may
resell any shares purchased from the underwriters to certain other brokers or
dealers at a discount of up to $ per share from the public offering price. If
all the shares are not sold at the offering price, the representatives may
change the offering price and the other selling terms.
Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price for the common stock
will be determined by negotiations among us and the representatives of the
underwriters. Among the factors to be considered in those negotiations will be:
. Our results of operations in recent periods;
. Estimates of our prospects and the industry in which we compete;
. An assessment of our management;
. The general state of the securities markets at the time of this
offering; and
. The prices of similar securities of generally comparable companies.
We have applied to have our common stock approved for quotation on the
Nasdaq National Market under the symbol ASTR. However, 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 markets subsequent to
this offering at or above the initial offering price.
In connection with the offering, certain persons participating in this
offering may purchase and sell shares of common stock in the open market. These
transactions may include short sales, stabilizing transactions and purchases to
cover positions created by short sales. Short sales involve the sale by the
underwriters of a greater number of shares than they are required to purchase
in this offering. Stabilizing transactions consist of certain bids or purchases
made for the purpose of preventing or retarding a decline in the market price
of the common stock while this offering is in progress. The underwriters also
may impose a penalty bid. This occurs when a particular underwriter repays to
the underwriters a portion of the underwriting discount received by it because
the representative has repurchased shares sold by or for the account of such
underwriter in stabilizing or short covering transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the
open market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
We estimate that the total expenses of the offering, excluding underwriting
discounts and commissions, will be approximately $1,100,000.
In the ordinary course of business, certain of the underwriters and their
affiliates have provided, and may in the future provide, financial advisory and
investment banking services for us and our affiliates for customary fees. Legg
Mason Wood Walker, Incorporated acted as financial advisor to CBSI in
connection with the acquisition of CBSI by us and was paid a fee by CBSI of
$625,000 for their services plus expenses and was also given the right to
receive up to an additional $25,000 based on the achievement of certain
financial thresholds by CBSI.
LEGAL MATTERS
The validity of the shares of common stock offered by this prospectus will
be passed upon for us by Swidler Berlin Shereff Friedman, LLP, New York, New
York, and for the underwriters by Proskauer Rose LLP, New York, New York.
61
<PAGE>
EXPERTS
The consolidated financial statements and schedule of AverStar, Inc. at
December 31, 1997 and 1998, and for the year ended February 27, 1997, the ten-
month period ended December 31, 1997 and the year ended December 31, 1998
appearing in this prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
on the authority of such firm as experts in accounting and auditing.
The consolidated financial statements of Pacer Infotec, Inc. and
subsidiaries at December 31, 1996 and 1997, and for the years then ended and
for the two months ended December 31, 1998, appearing in this prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report given on the authority of such firm
as experts in accounting and auditing.
The financial statements of Looking Glass Technologies, Inc. for the year
ended March 31, 1997 and the period from April 1, 1997 through August 8, 1997,
appearing in this prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
on the authority of such firm as experts in accounting and auditing.
The financial statements for CBSI as of December 31, 1997 and 1998 included
in this prospectus have been audited by Aronson, Fetridge & Weigle, independent
auditors, as stated in their report appearing in this prospectus. These
financial statements have been included in reliance upon the report of Aronson,
Fetridge & Weigle, upon the authority of said firm as experts in accounting and
auditing.
The financial statements for CBSI as of December 31, 1996 included in this
prospectus have been audited by Grant Thornton LLP, independent auditors, as
stated in their report appearing in this prospectus. These financial statements
have been included in reliance upon the report of Grant Thornton LLP, upon the
authority of said firm as experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1, including
amendments, exhibits, annexes and schedules, under the Securities Act with
respect to the shares of common stock to be sold in this offering. This
prospectus does not contain all of the information set forth in the
registration statement. For further information with respect to us and our
common stock to be sold in this offering, reference is made to the registration
statement. Statements contained in this prospectus as to the contents of any
contract or other documents referred to are not necessarily complete. In each
instance, reference is made to the copy of that contract or document filed as
an exhibit to the registration statement.
You may read and copy all or any portion of the registration statement or
any other information we file with the SEC, at the SEC's public reference room
at 450 Fifth Street, N.W., Washington, D.C. 20549. You can request copies of
these documents, upon payment of a duplicating fee, by writing to the SEC.
Please call the SEC at 1-800-SEC-0330 for further information on the operation
of the public reference rooms. Our SEC filings, including the registration
statement, are also available to you on the SEC's web site, www.sec.gov.
As a result of this offering, we will become subject to the information and
reporting requirements of the Securities Exchange Act, and, in accordance with
those requirements, will file periodic reports, proxy statements and other
information with the SEC. These reports, proxy and information statements and
other information may also be inspected at the offices of Nasdaq Operations,
1735 K Street, N.W., Washington, D.C. 20006.
We intend to furnish our stockholders with annual reports containing audited
financial statements and with quarterly reports for the first three quarters of
each year containing unaudited interim financial information.
62
<PAGE>
AVERSTAR, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Unaudited Pro Forma Condensed Consolidated Financial Information
Overview................................................................. F-2
Unaudited Pro Forma Condensed Consolidated Balance Sheet, as of December
31, 1998................................................................ F-3
Unaudited Pro Forma Condensed Consolidated Statement of Operations for
the year ended December 31, 1998........................................ F-4
Unaudited Pro Forma Condensed Consolidated Statement of Operations for
the three months ended March 31, 1999................................... F-5
Notes to Unaudited Pro Forma Condensed Consolidated Financial
Information............................................................. F-6
AverStar, Inc.
Report of Independent Auditors........................................... F-8
Consolidated Balance Sheets as of December 31, 1997 and 1998 and March
31, 1999................................................................ F-9
Consolidated Statements of Operations for the year ended February 28,
1997, the ten-month period ended December 31, 1997, the year ended
December 31, 1998 three months ended March 31, 1998 and three months
ended March 31, 1999.................................................... F-10
Consolidated Statements of Changes in Redeemable Common Stock and
Stockholders' Deficit for the year ended February 28, 1997, the ten-
month period ended December 31, 1997, the year ended December 31, 1998
and the three months ended March 31, 1999............................... F-11
Consolidated Statements of Cash Flows for the year ended February 28,
1997, the ten-month period ended December 31, 1997, the year ended
December 31, 1998 and the three months ended March 31, 1998 and 1999.... F-12
Notes to Consolidated Financial Statements............................... F-13
Computer Based Systems, Inc.
Report of Independent Auditors........................................... F-25
Report of Independent, Certified Public Accountants...................... F-26
Balance Sheets as of December 31, 1997 and 1998.......................... F-27
Statements of Operations for the years ended December 31, 1996, 1997 and
1998.................................................................... F-28
Statements of Other Comprehensive Income for the years ended December 31,
1996, 1997 and 1998..................................................... F-29
Statements of Stockholders' Equity for the years ended December 31, 1996,
1997 and 1998........................................................... F-30
Statements of Cash Flows for the years ended December 31, 1996, 1997 and
1998.................................................................... F-31
Notes to Financial Statements for the years ended December 31, 1998, 1997
and 1996................................................................ F-32
Pacer Infotec, Inc. and Subsidiaries
Report of Independent Auditors........................................... F-38
Consolidated Balance Sheets as of December 31, 1996 and 1997............. F-39
Consolidated Statements of Operations for the years ended December 31,
1996 and 1997 and the period from January 1, 1998 to February 28, 1998.. F-40
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1996 and 1997 and the period from January 1, 1998 to
February 28, 1998....................................................... F-41
Consolidated Statements of Cash Flows for the years ended December 31,
1996 and 1997 and the period from January 1, 1998 to February 28, 1998.. F-42
Notes to Consolidated Financial Statements............................... F-43
Looking Glass Technologies, Inc.
Report of Independent Auditors........................................... F-50
Statements of Operations for the year ended March 31, 1997 and the period
from April 1, 1997 through August 8, 1997............................... F-51
Statement of Changes in Stockholders' Equity (Deficit) for the year ended
March 31, 1997 and the period from April 1, 1997 through August 8,
1997.................................................................... F-52
Statements of Cash Flows for the year ended March 31, 1997 and the period
from April 1, 1997 through August 8, 1997............................... F-53
Notes to Consolidated Financial Statements............................... F-54
</TABLE>
F-1
<PAGE>
AVERSTAR, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
Overview
On February 27, 1998, we acquired Pacer. The purchase price was
approximately $17 million, plus transaction-related expenses of approximately
$1.7 million. Of the total purchase price, approximately $7 million was paid in
cash to Pacer shareholders, with the balance paid by the issuance of
approximately 2,255,000 shares of our common stock. The merger has been
accounted for using the purchase method of accounting.
On March 18, 1999, we acquired Computer Based Systems, Inc. for $26 million.
We did not acquire certain assets of CBSI that we believed were not related to
IT operations. $25 million of the purchase price was paid at the closing, with
the $1 million balance to be paid equally over five years. The transaction
costs are estimated to be $600,000. The purchase price is subject to
adjustment, based on CBSI's net worth on the closing date.
Simultaneous with the CBSI closing, we entered into a $75 million secured
financing agreement comprised of $45 million in senior term loans and a $30
million revolving credit note. Expenses associated with the financing were
estimated to be $1.9 million. Proceeds from the financing agreement were used
to acquire CBSI and retire debt, and for working capital purposes. The senior
term loans are comprised of two tranches: Term A of $15 million with periodic
principal payments maturing in five years carrying a variable interest rate of
up to LIBOR plus 2.75% and Term B of $30 million with periodic payments
maturing in six years carrying a variable interest rate of LIBOR plus 3%.
The Unaudited Pro Forma Condensed Consolidated Statement of Operations for
the year ended December 31, 1998 gives effect to the acquisitions of Pacer and
CBSI, including the financing of these acquisitions, as if they had occurred on
January 1, 1998. The Unaudited Pro Forma Condensed Statement of Operations
includes the historical results of operations of Pacer for the two months ended
February 28, 1998 and CBSI for the year ended December 31, 1998.
The Unaudited Pro Forma Condensed Consolidated Balance Sheet gives effect to
the acquisition of CBSI as if it had occurred on December 31, 1998. The
following pro forma statements and the accompanying notes should be read in
conjunction with the historical financial statements of us, Pacer and CBSI and
notes thereto.
The Unaudited Pro Forma Condensed Consolidated Financial Information is
intended for informational purposes only and is not necessarily indicative of
the future position or future results of operations of the consolidated company
after the acquisitions of Pacer and CBSI or of the financial position or
results of operations of the consolidated company that would have actually
occurred had the acquisitions of Pacer and CBSI been effected on January 1,
1998.
F-2
<PAGE>
AVERSTAR, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
As of
December 31, 1998
------------------- Pro Forma Pro Forma
AverStar CBSI Adjustments Balance Sheet
---------- -------- ----------- -------------
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents... $ 332 $ 1,305 $ -- $ 1,637
Accounts receivable, net of
allowances................. 23,923 12,311 -- 36,234
Unbilled receivable, net of
allowances................. 10,261 -- -- 10,261
Other current assets........ 3,496 1,525 (761) 1)e 4,260
-------- -------- ------- -------
Total current assets...... 38,012 15,141 (761) 52,392
Fixed assets, net........... 4,264 2,912 (2,399) 1)e 4,777
Intangible and other assets,
net........................ 15,593 -- 21,880 1)a,d 37,473
Other assets................ 1,794 88 -- 1,882
-------- -------- ------- -------
Total assets.............. $ 59,663 __18,141$ _18,720$ $96,524
======== ======== ======= =======
Liabilities & Stockholders'
Equity (Deficit)
Revolving credit note
payable.................... $ 2,500 $ 1,357 $ 7,520 1)c,e $11,377
Accounts payable & accrued
expenses................... 25,302 6,537 (1,137) 1)e 30,702
Due to stockholders......... -- -- 826 1)a 826
Current portion of long-term
debt....................... 954 514 (514) 1)e 954
-------- -------- ------- -------
Total current
liabilities.............. 28,756 8,408 6,695 43,859
Long-term debt.............. 28,156 1,413 20,004 1)c,e 49,573
Other long-term
liabilities................ 565 341 -- 906
Redeemable common stock..... 5,598 -- -- 5,598
Stockholders' equity
(deficit).................. (3,412) 7,979 (7,979) 1)b,e (3,412)
-------- -------- ------- -------
Total liabilities and
stockholders' equity
(deficit)................ $ 59,663 __18,141$ _18,720$ $96,524
======== ======== ======= =======
</TABLE>
F-3
<PAGE>
AVERSTAR, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
For the year ended December 31, 1998
-----------------------------------------
2 Months of Pro Forma Pro Forma
AverStar Pacer CBSI Adjustments Total
------------- --------------------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenue................. $ 121,056 $ 7,479 $ 40,685 $ (181) 2)f $169,039
Costs and expenses:
Cost of revenues...... 93,604 6,230 28,686 -- 128,520
Selling, general and
administrative
expenses............. 20,581 1,180 10,296 3,294 2)a,b,c 35,351
------------- ----------- ------------ ------- --------
Income from continuing
operations before
interest and taxes..... 6,871 69 1,703 (3,475) 5,168
Interest, net......... 2,269 65 236 2,159 2)d,f 4,729
------------- ----------- ------------ ------- --------
Income from continuing
operations before
taxes.................. 4,602 4 1,467 (5,634) 439
Provision for income
taxes................ 2,168 4 -- (1,806) 2)e 366
------------- ----------- ------------ ------- --------
Net income from
continuing operations.. 2,434 -- 1,467 (3,828) 73
============= =========== ============ ======= ========
Basic net income per
share.................. $ 0.38 $ 0.01
============= ========
Weighted average shares
used in computing net
income per share....... 6,428 6,428
============= ========
Diluted net income per
share.................. $ 0.36 $ 0.01
============= ========
Weighted average shares
used in computing
diluted net income per
share.................. 6,847 6,847
============= ========
</TABLE>
F-4
<PAGE>
AVERSTAR, INC.
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
For the three months ended March 31, 1999
(In thousands, except per share data)
<TABLE>
<CAPTION>
AverStar CBSI
Three Months January 1, 1999
Ended March 31, to March 21, Pro Forma Pro Forma
1999 1999 Adjustments Total
--------------- --------------- ----------- ---------
<S> <C> <C> <C> <C>
Revenue................. $36,346 $10,724 $ (122) 3)e $46,948
Costs and expenses:
Cost of revenues...... 28,841 7,280 36,121
Selling, general and
administrative
expenses............. 5,297 2,482 $ (699 3)a,b 8,478
------- ------- ------- -------
Income from continuing
operations before
interest and taxes..... 2,208 962 (821) 2,349
Interest, net......... 760 42 459 3)c,e 1,261
------- ------- ------- -------
Income from continuing
operations before
taxes.................. 1,448 920 $(1,280) 1,088
Provision for income
taxes................ 656 -- (177) 3)d 479
------- ------- ------- -------
Net income from
continuing operations.. $ 792 $ 920 $(1,103) $ 609
Basic net income per
share.................. $ 0.11 $ 0.09
Weighted average shares
used in computing net
income per share....... 6,927 6,927
Diluted net income per
share.................. $ 0.11 $ 0.08
Weighted average shares
used in computing
diluted net income per
share.................. 7,440 7,440
</TABLE>
F-5
<PAGE>
AVERSTAR, INC.
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION
1. Pro Forma Adjustments and Assumptions--Balance Sheet
The pro forma adjustments to the unaudited pro forma condensed consolidated
balance sheet, assuming the acquisition occurred on December 31, 1998 are as
follows:
1(a) Adjustment to record the purchase price and intangible assets acquired
of CBSI as follows:
<TABLE>
<S> <C>
Cash portion of purchase price............................. $25,000,000
Present value for non-competition agreement to be paid over
5 years................................................... 825,830
Estimated transaction costs................................ 600,000
-----------
Purchase price............................................. 26,425,830
Less: estimated fair value of net assets to be acquired as
of December 31, 1998...................................... 6,446,000
-----------
Estimated cost in excess of fair value of net assets
acquired (goodwill)....................................... $19,979,830
===========
</TABLE>
Of the estimated amount of goodwill, the Company expects to allocate
this amount and amortize it over estimated useful lives as follows:
<TABLE>
<S> <C> <C>
Contract backlog.................................... $2,300,000 18 Months
Assembled workforce................................. 1,000,000 4 Years
Non-competition agreement........................... 825,830 5 Years
Residual............................................ 15,854,000 20 Years
</TABLE>
1(b) Adjustment to eliminate the equity of CBSI in consolidation.
1(c) Adjustment to record the financing from First Union for the
acquisition of CBSI as follows:
<TABLE>
<S> <C>
Senior Term Loan A........................................... $15,000,000
Senior Term Loan B........................................... 30,000,000
Revolver loan drawdown....................................... 6,458,000
-----------
Total Amount Borrowed...................................... $51,458,000
Senior Notes repayment....................................... 23,958,000
-----------
Additional Borrowings...................................... $27,500,000
===========
</TABLE>
1(d) Adjustment to record the estimated financing costs of $1,900,000
associated with the refinancing with First Union to be amortized over
6 years.
1(e) Adjustments to eliminate the assets and liabilities of CBSI not
acquired, which are as follows:
<TABLE>
<S> <C>
Land and building............................................ 2,455,000
Tenant improvements.......................................... 119,000
Accumulated depreciation..................................... (175,000)
Notes and other receivables.................................. 761,000
Long-term debt............................................... (1,927,000)
Income taxes................................................. (1,137,000)
</TABLE>
F-6
<PAGE>
2. Pro Forma Adjustments and Assumptions--Statement of Operations
The pro forma adjustments to the unaudited pro forma condensed consolidated
statement of operations, assuming the acquisition occurred on January 1, 1998,
are as follows:
2(a) Adjustment to record 12 months of amortization associated with the
CBSI intangible assets acquired as follows:
<TABLE>
<S> <C>
Contract backlog............................................. $1,533,000
Assembled workforce.......................................... 250,000
Cost in excess of net assets acquired........................ 765,000
Non-competition agreement.................................... 165,000
----------
Total...................................................... $2,713,000
==========
</TABLE>
2(b) Adjustment to record 2 months of amortization associated with the
Pacer intangible assets acquired as follows:
<TABLE>
<S> <C>
Contract backlog............................................... $189,000
Assembled workforce............................................ 25,000
Cost in excess of net assets acquired.......................... 50,000
--------
Total........................................................ $264,000
========
</TABLE>
2(c) Adjustment to record the amortization of the financing costs
associated with the First Union refinancing.
2(d) Adjustment to record the incremental interest costs associated with
the First Union Senior and Revolving Credit Notes used to finance the
acquisition of CBSI. The interest rate on the Company's new borrowing
is comparable to those in prior borrowing arrangements.
2(e) Adjustment to record the federal and state income taxes associated
with CBSI operations assumed to be part of a C Corporation in 1998 and
with the pro forma adjustments based upon the statutory rates in
effect.
2(f) Adjustment to eliminate earnings for real estate and interest expense
for real estate property not acquired.
The pro forma adjustments to the unaudited pro forma condensed consolidated
statement of operations, assuming the acquisition occurred on January 1, 1999,
are as follows:
3(a) Adjustment to record amortization from January 1, 1999 to March 21,
1999 associated with the CBSI intangible assets acquired.
3(b) Adjustment to record the amortization of the financing costs from
January 1, 1999 to March 18, 1999 associated with the First Union
refinancing.
3(c) Adjustment to record the incremental interest costs associated with
the First Union Senior and Revolving Credit Notes used to finance the
acquisition of CBSI. The interest rate on the Company's new borrowing
is comparable to those in prior borrowing arrangements.
3(d) Adjustment to record the federal and state income taxes associated
with CBSI operations assumed to be part of a C corporation in 1999 and
with the pro forma adjustments based upon the statutory rates in
effect.
3(e) Adjustment to eliminate earnings for real estate and interest expense
for real estate property not acquired.
F-7
<PAGE>
AVERSTAR, INC.
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders of AverStar, Inc.
We have audited the accompanying consolidated balance sheets of AverStar,
Inc. (the Company), as of December 31, 1997 and 1998, and the related
consolidated statements of operations, changes in stockholders' deficit, and
cash flows for the year ended February 28, 1997, the ten-month period ended
December 31, 1997 and the year ended December 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 AverStar, Inc. at December 31, 1997 and 1998, and the consolidated results
of its operations and its cash flows for the year ended February 28, 1997, the
ten-month period ended December 31, 1997 and the year ended December 31, 1998,
in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Boston, Massachusetts
March 30, 1999
F-8
<PAGE>
AVERSTAR, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31
------------------ March 31,
1997 1998 1999
-------- -------- -----------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................... $ 131 $ 332 $ 1,777
Accounts receivable, net of allowances of
$169,000 and $287,000 at December 31, 1997
and 1998 and $293,000 at March 31, 1999
(unaudited).................................. 11,423 23,923 31,857
Unbilled receivables, net of allowances of
$265,000 and $310,000 at December 31, 1997
and 1998 and $329,000 at March 31, 1999
(unaudited).................................. 4,927 10,261 13,888
Other current assets.......................... 740 1,100 1,333
Refundable income taxes....................... 1,050 1,662 1,006
Deferred income taxes......................... -- 734 734
-------- -------- -------
Total current assets......................... 18,271 38,012 50,595
Property and equipment:
Land.......................................... -- 90 90
Computer, equipment and furniture............. 4,591 9,711 12,183
Building and improvements..................... 832 1,610 1,707
-------- -------- -------
5,423 11,411 13,980
Less allowances for depreciation.............. 2,337 7,147 8,998
-------- -------- -------
3,086 4,264 4,982
Other assets:
Deferred income taxes......................... -- 1,794 1,794
Intangible and other assets, net.............. 2,289 15,593 36,841
-------- -------- -------
2,289 17,387 38,635
-------- -------- -------
Total assets................................. $ 23,646 $ 59,663 $94,212
======== ======== =======
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.............................. $ 5,634 $ 7,371 $ 7,432
Accrued payroll and employee benefits......... 2,850 7,109 11,005
Accrued liabilities........................... 3,559 9,909 13,144
Revolving credit notes payable................ 2,000 2,500 8,745
Current portion of long-term debt............. 735 954 1,704
Unearned revenue.............................. 926 913 912
-------- -------- -------
Total current liabilities.................... 15,704 28,756 42,942
Long-term debt:
Senior debt................................... 7,833 23,583 43,125
Subordinated debt............................. 4,492 4,573 4,595
-------- -------- -------
12,325 28,156 47,720
Net liabilities of discontinued operations..... -- 565 --
Redeemable common stock issued and outstanding,
1,179,225, 2,202,875 and 2,202,875 shares at
December 31, 1997 and 1998 and March 31, 1999
(unaudited)................................... 1,412 5,598 5,598
Stockholders' deficit:
Common Stock, $.001 par value per share-
authorized 9,146,950 shares in 1997 and
17,000,000 in 1998 and March 31, 1999
(unaudited); issued 2,850,011, 4,766,344 and
4,766,344 shares at December 31, 1997 and
1998 and March 31, 1999 (unaudited).......... 3 5 5
Additional paid in capital.................... 4,502 9,624 10,189
Accumulated deficit........................... (10,159) (12,847) (12,055)
Deferred compensation......................... (106) (80) (73)
Treasury stock at cost, 23,306, 42,105 and
42,105 shares at December 31, 1997 and 1998
and March 31, 1999 (unaudited)............... (35) (114) (114)
-------- -------- -------
Total stockholders' deficit.................. (5,795) (3,412) (2,048)
-------- -------- -------
Total liabilities and stockholders'
deficit.................................... $ 23,646 $ 59,663 $94,212
======== ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
<PAGE>
AVERSTAR, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
For the year ended February 28, 1997, ten months ended December 31, 1997, year
ended
December 31, 1998, three months ended March 31, 1998 and three months ended
March 31, 1999
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
(unaudited)
Years Ended Three Months Ended
-------------------------------------- -------------------
February 28, December 31, December 31, March 31, March 31,
1997 1997 1998 1998 1999
------------ ------------ ------------ --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues................ $53,274 $53,646 $121,056 $22,738 $36,346
Costs and Expenses
Cost of revenues...... 40,704 41,685 93,604 17,310 28,841
Selling, general and
administrative....... 11,244 10,403 20,581 4,166 5,297
------- ------- -------- ------- -------
Income from operations.. 1,326 1,558 6,871 1,262 2,208
Interest expense, net... 1,281 1,206 2,269 476 760
------- ------- -------- ------- -------
Income from continuing
operations before
income taxes........... 45 352 4,602 786 1,448
Provision for income
taxes.................. 18 154 2,168 370 656
------- ------- -------- ------- -------
Income from continuing
operations............. 27 198 2,434 416 792
Loss from discontinued
operations, net of
income tax benefit of
$664,000 for the year
ended December 31,
1997, $1,659,000 for
the year ended December
31, 1998, and $396,000
for the three months
ended March 31, 1998
(unaudited)............ -- (1,727) (2,489) (593) --
Loss on disposal of
discontinued
operations, net of
income tax benefit of
$1,267,000............. -- -- (2,633) -- --
------- ------- -------- ------- -------
Net income (loss)....... $ 27 $(1,529) $ (2,688) $ (177) $ 792
======= ======= ======== ======= =======
Earnings per share:
Basic
Income from continuing
operations........... $ 0.01 $ 0.05 $ 0.38 $ 0.08 $ 0.11
Discontinued
operations........... -- (0.45) (0.80) (0.12) --
------- ------- -------- ------- -------
Net income (loss)..... $ 0.01 $ (0.40) $ (0.42) $ (0.04) $ 0.11
======= ======= ======== ======= =======
Diluted
Income from continuing
operations........... $ 0.01 $ 0.04 $ 0.36 $ 0.08 $ 0.11
Discontinued
operations........... -- (0.45) (0.80) (0.12) --
------- ------- -------- ------- -------
Net income (loss)..... $ 0.01 $ (0.40) $ (0.42) $ (0.04) $ 0.11
======= ======= ======== ======= =======
Weighted-average shares
outstanding:
Basic................... 3,878 3,865 6,428 4,991 6,927
Diluted................. 4,523 4,552 6,847 5,470 7,440
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-10
<PAGE>
AVERSTAR, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE COMMON STOCK AND STOCKHOLDERS'
DEFICIT
(In thousands)
<TABLE>
<CAPTION>
Stockholders' Deficit
-----------------------------------------------------------------------------
Redeemable Treasury
Common Stock Common Stock Additional Stock
-------------- ------------- Paid-In Accumulated Deferred ------------ Stockholders'
Shares Amount Shares Amount Capital Deficit Compensation Shares Cost Deficit
------ ------ ------ ------ ---------- ----------- ------------ ------ ----- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, February 29,
1996.................. 1,179 $1,147 2,699 $ 3 $ 4,129 $ (8,657) $(4,525)
Payment of promissory
notes................ 133 --
Net income............ 27 27
----- ------ ----- ---- ------- -------- ----- --- ----- -------
Balance, February 28,
1997.................. 1,179 $1,280 2,699 $ 3 $ 4,129 $ (8,630) -- -- -- $(4,498)
Payment of promissory
notes................ 132 --
Purchase of treasury
stock................ (23) (35) (35)
Deferred
compensation......... 133 (133) --
Stock option vesting.. 27 27
Stock contribution to
Profit Sharing Plan.. -- 151 240 240
Net loss.............. (1,529) (1,529)
----- ------ ----- ---- ------- -------- ----- --- ----- -------
Balance, December 31,
1997.................. 1,179 $1,412 2,850 $ 3 $ 4,502 $(10,159) $(106) (23) $ (35) $(5,795)
Issuance of shares in
connection with
acquisition.......... 1,030 4,211 1,831 2 5,010 5,012
Options Exercised..... -- -- 79 -- 87 87
Purchased treasury
stock................ -- (13) (54) (54)
Redeemed stock........ (6) (25) 6 -- 25 (6) (25) --
Deferred
compensation......... 26 26
Net loss.............. (2,688) (2,688)
----- ------ ----- ---- ------- -------- ----- --- ----- -------
Balance, December 31,
1998.................. 2,203 $5,598 4,766 $ 5 $ 9,624 $(12,847) $ (80) (42) $(114) $(3,412)
Distribution to
shareholders of net
liabilities of
discontinued operation
(unaudited).......... 565 565
Deferred compensation
(unaudited).......... 7 7
Net income
(unaudited).......... 792 792
----- ------ ----- ---- ------- -------- ----- --- ----- -------
Balance, March 31,
1999.................. 2,203 $5,598 4,766 $ 5 $10,189 $(12,055) $ (73) (42) $(114) $(2,048)
===== ====== ===== ==== ======= ======== ===== === ===== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-11
<PAGE>
AVERSTAR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended February 28, 1997, ten months ended December 31, 1997,
year ended December 31, 1998 and three months ended March 31, 1998 and 1999
(In thousands)
<TABLE>
<CAPTION>
(Unaudited)
-------------------
February 28, December 31, December 31, March 31, March 31,
1997 1997 1998 1998 1999
------------ ------------ ------------ --------- ---------
<S> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities
Income from continuing
operations............. $ 27 $ 198 $ 2,434 $ 416 $ 792
Adjustments to derive
cash flows from
continuing operating
activities:
Depreciation and
amortization.......... 2,151 935 3,228 568 838
Changes in deferred
income taxes.......... (78) 29 (2,384) -- --
Loss on disposal of
fixed assets.......... 22 5 315 95 --
Change in assets and
liabilities
Accounts receivable.... (1,034) (839) (7,987) (1,835) (1,535)
Unbilled receivables... 706 (1,322) 209 592 (253)
Other current assets... 143 (110) 861 103 1
Accounts payable....... (223) 2,323 (3,451) (723) (1,639)
Accrued payroll and
employee benefits..... (519) 487 1,491 (936) 985
Accrued liabilities.... (902) 422 6,817 636 1,082
Unearned revenue....... (272) (71) 378 378 --
Refundable income
taxes................. 412 (1,050) (612) -- 656
------- ------- ------- ------- -------
Net cash provided by
(used in) continuing
operating activities... 433 1,007 1,299 (706) 927
Net cash used by
discontinued operating
activities............. (1,367) (8,951) (2,230) --
------- ------- ------- ------- -------
Net cash provided by
(used in) operating
activities............. 433 (360) (7,652) (2,936) 927
Cash flows from
investing activities:
Acquisitions net of cash
acquired............... -- (400) (6,749) 202 (23,260)
Proceeds from sale of
division............... 300 100 1,000 1,000 --
Purchase of equipment
and leaseholds......... (1,376) (1,866) (2,615) (372) (693)
Deposits and investment
in other assets........ (221) (305) 365 219 (214)
------- ------- ------- ------- -------
Net cash provided by
(used in) investing
activities............. (1,297) (2,471) (7,999) 1,049 (24,167)
Cash flows from
financing activities:
Issuance of common
Stock.................. -- 240 87 -- --
Purchase of redeemable
and treasury stock..... -- (35) (79) -- --
Net borrowings
(repayments) of
revolving credit....... -- 2,000 500 (2,000) 6,245
Repayments of long term
debt................... -- (1) (5,011) (4,623) (24,658)
Proceeds from issuance
of long term debt...... 16,500 16,500 43,098
Repayment of loan from
shareholder............ 133 144 -- -- --
------- ------- ------- ------- -------
Net cash provided by
financing activities of
continuing operations.. 133 2,348 11,997 9,877 24,685
Net cash provided by
financing activities of
discontinued
operations............. 3,855 -- --
------- ------- ------- ------- -------
133 2,348 15,852 9,877 24,685
Net increase (decrease)
in cash and cash
equivalents............ (731) (483) 201 7,990 1,445
Cash and cash
equivalents at
beginning of year...... 1,345 614 131 131 332
------- ------- ------- ------- -------
Cash and cash
equivalents at end of
period................. $ 614 $ 131 $ 332 $ 8,121 $ 1,777
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-12
<PAGE>
AVERSTAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies and Basis of Presentation
Nature of Operations
AverStar provides information technology, or IT, services and software
products for the mission-critical systems of civilian and defense agencies of
the United States government, as well as, large commercial companies.
Basis of Presentation
These consolidated financial statements include the accounts of AverStar,
Inc. (the Company) and its wholly owned subsidiaries, Apollo Holding, Inc.,
(Apollo), and Pacer Infotec, Inc. (Pacer). The Company was incorporated in
Delaware on February 4, 1998 for the purpose of combining the businesses of
Apollo and Pacer (see Note 2). All material intercompany balances and
transactions have been eliminated.
Prior to February 4, 1998, the Company operated as Apollo, and the financial
statements included herein reflect the operations of Apollo for those periods
presented. On February 4, 1998 Averstar, Inc. (the Company) was formed by the
Apollo shareholders to acquire the business of Pacer (see Note 2) and to
combine the businesses of Apollo and Pacer. In connection with these
activities, the Company effected exchanges of stock with both Apollo and Pacer
shareholders at the time of the acquisition of Pacer. As described in Note 2,
the acquisition of Pacer has been accounted for as a purchase. The exchange by
Apollo shareholders of their shares in Apollo for their shares in Averstar was
accounted for as an exchange of shares by entities under common control in
accordance with paragraph 5 of APB #16. Accordingly, the Apollo operations
retained their historical cost basis. All share and per share data in these
financial statements and related footnotes have been adjusted to reflect such
exchanges.
In 1997, the Board of Directors changed Apollo's fiscal year from the last
day of February to the last day of December. For the year ended December 31,
1998, the financial statements include twelve months of operations for Apollo
and ten months of operations for Pacer. For the period ended December 31, 1997,
the financial statements include ten months of operations for Apollo.
Revenue Recognition
Contracts with the Federal Government, or prime contractors of the Federal
Government, are cost reimbursable with a fee that is fixed or awarded based on
performance. Contracts with commercial enterprises and some Government
contracts are time and materials. Overhead and general and administrative costs
charged on U.S. Government contracts are generally subject to audit by the
Federal Government for allowability and proper charging under the contracts.
These contracts provide for periodic payments as the services are performed and
generally do not represent any unusual burden on the Company's liquidity. All
contracts with the Federal Government are subject to termination by the
customer. The Company has not suffered any adverse effects from the termination
of Government contracts in the past.
The Company recognizes revenue on government and commercial contracts under
the percentage-of-completion method in accordance with Statement of Position
81-1, "Accounting for Performance of Construction-Type and Certain Production-
Type contracts." The percentage of completion is determined by relating the
costs incurred to date to the estimated total costs at completion. The
cumulative effects resulting from revisions of estimated total contract costs
and revenues are recorded in the period in which the facts requiring revision
become known. When a loss is anticipated on a contract, the full amount of the
anticipated loss is provided for when it becomes probable. The Company
sometimes recognizes revenue that is not billable to the customer at a given
balance sheet date. Such amounts are included in unbilled receivables.
Revenues from standard software products are recognized upon shipment in
accordance with Statement of Position 97-2, "Software Revenue Recognition."
Revenues from maintenance agreements are deferred and amortized over the life
of the maintenance agreement. Per unit royalties earned from the license of
standard software products are recognized when received from the customer.
F-13
<PAGE>
AVERSTAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Cash Equivalents
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
Unbilled Receivables
Unbilled receivables represent amounts earned on contracts in process and
retainage that are not billable at the balance sheet date. Such amounts
generally become billable upon completion of a specific phase of the contract,
documentation of approved contract modifications, completion of government
audit or upon customer acceptance, if the Company believes the acceptance
criteria present no risk to the Company. The Company estimates that all billed
receivables and 80% of unbilled receivables will be collected within one year.
The Company has not recognized significant revenue relating to customer claims
for amounts in excess of agreed upon contract prices. To the extent that
billings exceed costs incurred, plus fees or less losses, the difference is
recorded as unearned revenue.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. The Company provides for
depreciation and amortization over estimated useful lives using the straight-
line method as follows:
<TABLE>
<CAPTION>
Asset Classification Estimated Useful Life
-------------------- ---------------------
<S> <C>
Building & improvements........ 30 years, lesser of remaining life
of lease or estimated life of improvement
Computer, equipment and
furniture..................... 2-7 years
</TABLE>
Stock Compensation
The Company accounts for grants of stock options in accordance with the
provisions of APB Opinion No. 25, "Accounting for Stock Issued to Employees."
The Company has adopted the disclosure-only provision of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation." See
Note 9.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities, at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual amounts could differ from those estimates.
Impairment Evaluation
The Company examines the carrying value of its long lived assets,
identifiable intangibles, and goodwill to determine whether there are any
impairment losses. If indicators of impairment were present in those assets,
and future undiscounted cash flows were not expected to be sufficient to
recover the assets' carrying amounts, an impairment loss would be charged to
expense in the period identified. No event has been identified that would
indicate an impairment of the value of long-lived assets, identifiable
intangibles, and goodwill recorded in the accompanying consolidated financial
statements.
F-14
<PAGE>
AVERSTAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Concentration of Credit Risk
Financial instruments which subject the Company to credit risk consist of
cash equivalents and accounts receivable. The risk with respect to cash
equivalents is minimized by the Company's policies in which investments are
placed with highly rated issuers with relatively short maturities. The risk
with respect to accounts receivable is minimized due to the fact that customer
accounts and unbilled receivables represent amounts earned under the Company's
contracts, which are principally with U.S. Government agencies.
Fair Value of Financial Instruments
The Company's cash equivalents, accounts receivable, long-term debt and
redeemable common stock are carried at cost, which approximates fair value.
Reclassifications
Certain reclassifications have been made to the 1997 financial statements to
conform to the 1998 basis of presentation.
Earnings Per Share
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings Per Share," of SFAS 128, which was required to be adopted for fiscal
years ending after December 15, 1997. Earnings per share amounts for all
periods presented conform to the SFAS 128 requirements. See Note 11 for the
computation of basic and diluted earnings per share.
Comprehensive Income
In 1997, the Financial Accounting Standards Board issued Statement No. 130,
"Reporting Comprehensive Income," or SFAS 130, which was required to be adopted
for fiscal years beginning after December 15, 1997. This statement established
new rules for reporting and display of comprehensive income and its components.
The adoption of this Statement had no impact on the Company's financial
statements.
Segments of an Enterprise
In 1997, the Financial Accounting Standards Board issued statement No. 131,
"Disclosures About Segments of an Enterprise and Related Information," or SFAS
131, which was required to be adopted for fiscal years beginning after December
15, 1997. SFAS 131, superseded SFAS No. 14, "Financial Reporting for Segments
of a Business Enterprise." This statement changes the way public companies
report segment information in annual financial statements. SFAS 131 requires
public companies to report financial and descriptive information about their
operating segments in interim financial reports to shareholders as well. The
adoption of this Statement had no impact on the disclosures in the Company's
financial statements as the Company has one reportable segment from continuing
operations: the development and delivery of information technology products and
services. The U.S. Government and its prime aerospace, civil and defense
contractors accounted for approximately 88%, 80% and 90% of the Company's
revenues for the year ended February 28, 1997, the ten-month period ended
December 31, 1997 and the year ended December 31, 1998.
Pending Accounting Pronouncements
In 1998, the Accounting Standard Executive Committee issued Statement of
Position 98-5, "Reporting on the Costs of Start-up Activities," which must be
adopted for fiscal years beginning after December 15, 1998, and the Financial
Accounting Standards Board issued Statement No. 133, "Accounting for Derivative
F-15
<PAGE>
AVERSTAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Investments and Hedging Activities," which must be adopted for fiscal years
beginning after June 15, 1999. The adoption of these statements is not expected
to have a material impact on AverStar.
Note 2. Acquisition
On February 27, 1998, Pacer, a company providing software engineering
services primarily to government customers, was acquired for a purchase price
of approximately $17,000,000, plus transaction related expenses of
approximately $1,700,000. Of the total purchase price, approximately $7,000,000
was paid in cash to Pacer shareholders, with the balance paid by the issuance
of approximately 2,255,000 shares of Class F common stock issued by AverStar
and the fair value of options exchanged in the transaction; said shares and
options having a value of approximately $10,000,000. The acquisition has been
accounted for using the purchase method of accounting, whereby assets and
liabilities have been allocated based upon their respective fair values,
resulting in goodwill and other intangible assets of approximately $12 million.
Unaudited pro forma revenue, net loss and loss per share shown below for the
ten month period ended December 31, 1997 and the year ended December 31, 1998
assumes the acquisition of Pacer occurred on March 1, 1997:
<TABLE>
<CAPTION>
1997 1998
------- --------
(In thousands,
except per share
data)
-----------------
<S> <C> <C>
Revenue................................................ $95,519 $128,530
Income (loss) from continuing operations............... $ (403) $ 2,109
Net loss............................................... $(2,130) $ (3,013)
Net loss per share..................................... $ (0.55) $ (0.47)
</TABLE>
On March 18, 1999, the Company acquired all of the outstanding shares of
Computer Based Systems, Inc. (CBSI) for $26,000,000. CBSI provides software
engineering services primarily to government customers. Of the total purchase
price, $25,000,000 was paid to the shareholders at the closing, with the
balance paid equally over five years. The transaction costs are estimated to be
$600,000. The acquisition was accounted for using the purchase method of
accounting, whereby assets and liabilities have been allocated based upon their
respective fair value, resulting in goodwill and other intangibles assets of
approximately $19,400,000 which will be amortized for periods not to exceed 20
years.
Unaudited pro forma revenue, and income per share (basic) shown below for
the three-month periods ended March 31, 1998 and March 31, 1999 assumes the
acquisition of CBSI occurred on January 1, 1998:
<TABLE>
<CAPTION>
March 31,
----------------
1998 1999
------- -------
(In thousands,
except per
share data)
----------------
<S> <C> <C>
Revenue................................................... $38,790 $46,948
Income from continuing operations......................... 349 2,349
Net income (loss)......................................... (506) 609
Net income (loss) per share............................... (0.10) 0.09
</TABLE>
Note 3. Discontinued Operations
In December 1998, the Board of Directors of AverStar, Inc. adopted a plan to
divest of its 66% interest in Intermetrics Entertainment Software, Inc.'s (IES)
operations, which developed software games, by distributing such interest to
AverStar shareholders.
As part of the plan to dispose of IES, the Company converted $1.3 million of
contributed capital (representing capital contributed by the Company reduced by
cumulative operating losses) into an 8.5% term loan due on December 31, 2001.
In connection with this conversion, the Company recorded the term loan and
fully reserved the amount and also fully reserved a pre-existing term loan of
$400,000 because,
F-16
<PAGE>
AVERSTAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
based upon forecasted operating results for IES, the Company believes it is
uncollectible. This write-off is part of the loss on disposal of discontinued
operations described below. In addition, AverStar is obligated to provide on
demand financing of up to $2 million pursuant to an 8.5% revolving credit
agreement, unless IES has filed for bankruptcy, is in the process of
liquidation or the equivalent. Under the terms of the revolving credit
agreement, no new borrowings may occur subsequent to December 31, 1999 and
amounts borrowed are due on December 31, 2001. Based upon forecasted operating
results for IES, AverStar management believes it is probable that the full
amount available will be drawn by IES and, further, management does not believe
such amounts which will become due under the revolving credit agreement will be
recoverable and, therefore, has assigned no value to it in the accompanying
financial statements. The Company will, however, pursue collection efforts. Any
subsequent recovery of such amounts due under the term loans or the revolving
credit agreement all of which are due not later than December 31, 2001, and
currently represent a deferred gain of $3,700,000, will be reflected as a gain
from discontinued operations at the time of such recovery.
The major components of the $3,900,000 loss from disposal of discontinued
operations are estimated operating losses through the disposal date of
$500,000, estimated remaining funding commitment of $1,500,000 pursuant to a
$2,000,000 revolving credit agreement estimated professional fees of $200,000
and write-offs of estimated non-recoverable term loans of $1,700,000.
As of December 31, 1998, the liabilities of IES exceeded its assets by
$565,000, which is comprised of billed and unbilled receivables of $4,200,000,
other assets and equipment of $2,300,000, bank debt of $3,900,000, accrued
expenses of $1,500,000, and obligations to AverStar of approximately
$1,700,000. Included in the loss on disposal in 1998 is approximately $500,000
of operating losses from the date the Plan was adopted through the date of
divestiture, which occurred on March 18, 1999.
In addition, interest of $293,000 was allocated to the loss from
discontinued operations based on the financing that was specifically attributed
to those operations.
Revenues from discontinued operations were $7,232,000 for the year ended
December 31, 1998 and $1,928,000 for the period from August 9 through December
31, 1997.
Note 4. Intangible Assets
The following represents the components of net intangible assets at December
31, 1997 and 1998 and their estimated useful lives:
<TABLE>
<CAPTION>
December 31,
Estimated Useful December 31, ------------
Life 1997 1998
---------------- ------------ ------------
<S> <C> <C> <C> <C>
Cost in excess of fair value of
net assets acquired........... 15-20 years $488 $12,458
Contract backlog............... 18 months -- 256
Assembled workforce............ 7 years -- 875
---- -------
$488 $13,589
==== =======
</TABLE>
Accumulated amortization relating to these intangible assets is $62,000 and
$1,005,000 at December 31, 1997 and 1998.
F-17
<PAGE>
AVERSTAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 5. Income Taxes
The provision for (benefit from) income taxes from continuing operations for
the year ended February 28, 1997 and the ten-month period ended December 31,
1997 and the year ended December 31, 1998 consists of the following:
<TABLE>
<CAPTION>
February 28, 1997 December 31, 1997 December 31, 1998
----------------- ----------------- -----------------
($ in thousands)
<S> <C> <C> <C>
Current:
Federal............. $ 75 $117 $2,507
State............... 21 8 502
---- ---- ------
96 125 3,009
Deferred:
Federal............. (60) 63 (715)
State............... (18) (34) (126)
---- ---- ------
(78) 29 (841)
---- ---- ------
Total................. $ 18 $154 $2,168
==== ==== ======
</TABLE>
The following table reconciles the provision (benefit) for income taxes to
the amount computed by applying the statutory federal income tax rate to income
from continuing operations before the provision for (benefit from) income taxes
for the year ended February 28, 1997, the ten-month period ended December 31,
1997 and the year ended December 31, 1998:
<TABLE>
<CAPTION>
February 28, 1997 % December 31, 1997 % December 31, 1998 %
----------------- ---- ----------------- ---- ----------------- ----
($ in thousands)
<S> <C> <C> <C> <C> <C> <C>
Income tax
expense/(benefit) at
statutory rate......... $ 15 34.0 % $120 34.0% $1,564 34.0%
State income tax (net).. 6 13.0 21 6.0 276 6.0
Non-deductible items.... (3) (7.0) 13 4.0 328 7.1
----- ---- ---- ---- ------ ----
Total................. $ 18 40.0 % $154 44.0% $2,168 47.1%
===== ==== ======
Income taxes paid
(refunded)............. $(799) $418 $1,481
===== ==== ======
</TABLE>
Deferred income taxes arise from temporary differences between the tax bases
of assets and liabilities and their reported amounts in the financial
statements. The significant temporary differences included in net deferred tax
assets at December 31, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1998
----------------- -----------------
($ in thousands)
<S> <C> <C>
Accrued liabilities................... $ 530 $ 3,195
Accounts and unbilled receivables..... (1,874) (1,511)
Depreciation and amortization......... 370 766
Net operating loss.................... 312 --
Other................................. 662 78
------- -------
Deferred income tax asset............. $ -- $ 2,528
======= =======
</TABLE>
F-18
<PAGE>
AVERSTAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 6. Benefit Plans
The Company has a 401(k) profit-sharing plan that covers substantially all
employees and provides for a company matching contribution. As defined under
the Plan, employees are allowed to contribute the maximum established by law,
and the Company may match up to 4% of the employee's contribution. Expenses
relating to this Plan amounted to $402,000 for the year ended February 28,
1997, $784,000 for the ten-month period ended December 31, 1997 and $1,405,000
for the year ended December 31, 1998.
The Company has a noncontributory defined contribution plan that covered
substantially all employees of Pacer prior to the acquisition described in Note
2. Substantially all of the contributions have been invested in the Company's
common stock. At December 31, 1998, the Plan is dormant and the Company did not
incur any expense related to the Plan in 1998.
Note 7. Borrowings
At December 31, 1998, the Company had $24,333,000 of secured Senior Notes,
secured by substantially all of the Company's tangible and intangible assets,
and $5,000,000 of unsecured Subordinated Notes. The interest rate on the Senior
Notes of $7,833,000 was a variable rate based on the three-month London
Interbank Offered Rate (LIBOR) plus 3% (8.065% at December 31, 1998). The
interest rate on the Senior Bridge Notes of $16,500,000 was LIBOR plus 3% and
increased 0.5% each six months during the term. The interest rate on the
Subordinated Notes is fixed at 13% per annum. The Senior Notes contain
covenants and restrictions involving consolidated net worth, ratio of current
assets to current liabilities, fixed charge and interest coverage, limitations
on liens, restricted payments and investments, transactions with affiliates,
sale of assets, sale and leaseback transactions, and mergers and
consolidations.
At December 31, 1998 the Company also had a secured Senior Revolving Credit
Agreement that provided for aggregate borrowings of $5,000,000 maturing on
August 31, 2001. The revolving credit facility was available to finance general
operating requirements. The outstanding borrowings under this facility were
$2,000,000 as of December 31, 1997 and $2,500,000 as of December 31, 1998.
On March 18, 1999, simultaneous with the CBSI closing described in Note 2,
the Company entered into an agreement to provide up to $75,000,000 of secured
financing, based upon availability, comprised of $45,000,000 in Senior Term
Loans and a $30,000,000 revolving credit facility note. Expenses associated
with the financing are estimated to be $1,900,000. Proceeds from the financing
agreement were used to pay CBSI shareholders, retire existing debt, and provide
for working capital requirements. The Senior Term Loans comprise two tranches.
The Term A Note of $15,000,000 matures March 17, 2004 and carries a variable
interest rate of up to LIBOR plus 2.75%. The Term B Note of $30,000,000 matures
March 17, 2005 and carries a variable interest rate of LIBOR plus 3%. The
revolving facility note matures on March 17, 2004 and carries a variable
interest rate of LIBOR plus 2.75%. These agreements contain covenants and
restrictions pertaining to the maintenance of net worth and certain ratios
relating to operating results.
At March 31, 1999, the Company had $44.8 million, $8.7 million and $5.0
million outstanding under the senior term loans, revolving credit facility note
and subordinated notes respectively. The interest paid on all borrowings was
$1,255,000 for the ten-month period ended December 31, 1997, $2,809,000 for the
year ended December 31, 1998 and $764,000 for the three months ended March 31,
1999.
F-19
<PAGE>
AVERSTAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following represents aggregate maturities of long term debt pursuant to
these borrowing arrangements:
<TABLE>
<S> <C>
1999......................................................... $ 1,500,000
2000......................................................... 2,700,000
2001......................................................... 3,600,000
2002......................................................... 4,200,000
2003......................................................... 4,500,000
Thereafter................................................... 33,500,000
-----------
$50,000,000
===========
</TABLE>
Note 8. Capital Stock
The following summarizes the classes of stock the Company has authorized
and issued as of December 31, 1997 and 1998:
<TABLE>
<CAPTION>
Shares Authorized Shares Issued
------------------------- -------------------------
Class of December 31, December 31, December 31, December 31,
Common Stock 1997 1998 1997 1998
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
A--Voting............... 1,943,727 2,280,471 1,847,687 1,847,687
A--Non-Voting........... 91,470 105,190 84,152 84,152
B--Voting............... 1,737,921 1,867,808 1,494,246 1,494,246
B--Non-Voting........... 233,247 290,873 232,698 232,698
C--Voting............... 146,350 182,939 146,352 146,352
D--Voting............... 3,388,945 2,924,643 150,925 150,925
D--Non-Voting........... 617,419 -- -- --
E--Voting............... 73,176 91,470 73,176 73,176
F--Voting............... -- 6,000,000 -- 2,334,697
G--Voting............... -- 756,608 -- --
G--Non-Voting........... -- 756,608 -- 605,286
Not designated.......... 914,695 1,743,390 -- --
--------- ---------- --------- ---------
Total Shares.......... 9,146,950 17,000,000 4,029,236 6,969,219
========= ========== ========= =========
</TABLE>
In connection with the merger of Apollo and Pacer as described in Note 2,
the Apollo stockholders agreed to exchange their shares of Class A, B, C, D,
E, and G into shares of AverStar at a ratio of approximately 4.6:1. Pacer
stockholders were given the choice of receiving $2.00 per share in cash or
exchanging their shares of Pacer into Class F shares of AverStar at a ratio of
approximately 0.5:1. Such issuance and exchanges are reflected in the table.
Certain classes of common stock noted above have provisions which require
the holders, in certain circumstances, to share a portion of proceeds received
upon the sale of such shares with holders of other classes of common stock.
F-20
<PAGE>
AVERSTAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Redeemable Common Stock
In connection with the acquisition described in Note 2, the Company granted
certain shareholders rights that require the company to purchase up to a
maximum number of shares of Class F--Voting common stock held by the
shareholders at $4.09 per share over a four year period. Shares that are not
redeemed in a year convert to shareholders' equity and the shareholders' rights
to redeem these shares expire. The 1998 activity and schedule of Class F--
Voting redeemable shares are as follows:
<TABLE>
<S> <C>
Beginning balance at February 28, 1998............................ 484,597
Lapsed in 1998.................................................... (24,450)
Redeemed in 1998.................................................. (6,112)
-------
Balance at December 31, 1998...................................... 454,035
=======
</TABLE>
Class F--Voting redeemable shares and related maximum amounts redeemable
annually as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Year Shares Amount
---- ------- ----------
<S> <C> <C>
1999.................................................... 122,249 $ 500,000
2000.................................................... 137,531 562,500
2001.................................................... 194,255 794,500
------- ----------
Total................................................. 454,035 $1,857,000
======= ==========
</TABLE>
Certain Class F voting, redeemable shares serve as collateral on a note
receivable of approximately $850,000 issued to the Company by a former
employee. The note bears interest at 6.36% per annum with scheduled repayments
through May 2001. In the event the Class F shareholder presents certain shares
to the Company for redemption, the proceeds from such redemption are required
to be remitted to the Company in satisfaction of this note, which is included
in other assets in the accompanying balance sheet.
In addition to the redemption features of the Class F--Voting shares, the
Company has also granted to certain management shareholders the right to have
the Company redeem approximately 1,749,000 shares of Class A-F stock at certain
amounts, as defined. The estimated fair value of such redemption at December
31, 1998 was $3,941,225. The redemption of such shares is limited in the first
five years by amounts stipulated in the Stockholder Agreements. The shares are
subject to redemption at a price and upon terms as defined in the Stockholder
Agreements. Upon the occurrence of certain events, including an initial public
offering, the redemption features for all classes of stock lapse.
The Company holds Promissory Notes of $200,000 issued by certain employees
for the purchase of Class A Common Stock. The Notes, which are fully recourse
to the issuers and have been classified as a reduction of redeemable common
stock, bear interest at 7% per annum. Interest is payable semiannually or
annually, and the principal is scheduled for payment from March 2000 through
August 2005.
Note 9. Stock Options
The Company has a Long Term Incentive Plan (the Plan) pursuant to which the
Company may grant Incentive Stock Options, Non-qualified Stock Options, Stock
Appreciation Rights, Restricted Stock, Deferred Stock, Stock Purchase Rights or
Other Stock-Based Awards.
F-21
<PAGE>
AVERSTAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The maximum aggregate number of shares of Stock reserved and available for
distribution under the Plan shall be 3,349,447 shares of Stock, reduced by the
number of shares of Stock subject to being issued from time to time upon the
exercise of outstanding awards granted under the Plan. At December 31, 1998
there were 3,349,447 shares of stock reserved and available for distribution.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation," and will continue to account for option grants to employees
under the Plan in accordance with APB No. 25, "Accounting for Stock Issued to
Employees." Adoption of SFAS No. 123 did not have a material impact on the
Company's financial statements and, accordingly, no pro forma net income has
been disclosed for the year ended February 28, 1997, the ten-month period ended
December 31, 1997 and the year ended December 31, 1998, for the compensation
expense of options grants which otherwise would be required under the
disclosure requirements of SFAS No. 123.
The fair market value of each option grant is estimated on the date using
the Minimum Value option-pricing model with the following weighted-average
assumptions used for grants issued in the year ended February 28, 1997, the
ten-month period ended December 31, 1997 and the year ended December 31, 1998:
<TABLE>
<CAPTION>
February 28, 1997 December 31, 1997 December 31, 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Dividend yield.......... 0% 0% 0%
Expected lives (years).. 5 5 5
Range of risk-free
interest rates......... 5.70-6.29 5.70-6.37 6.22-6.36
</TABLE>
A summary of the status of AverStar's stock compensation plan as of February
28, 1997, December 31, 1997 and December 31, 1998 and changes during the years
ending on those dates is presented below:
<TABLE>
<CAPTION>
February 28, 1997 December 31, 1997 December 31, 1998
----------------- ----------------- --------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- --------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Fixed Options
Outstanding at beginning
of year................ 504,180 $1.37 533,908 $1.37 588,789 $1.37
Granted................. 29,728 1.37 54,881 1.37 -- --
Exchanged............... 845,086 3.29
Exercised............... -- -- -- -- (79,473) 1.10
Forfeited............... -- -- -- -- (30,969) 2.70
------- ------- ---------
Outstanding at end of
year................... 533,908 1.37 588,789 1.37 1,323,433 2.58
======= ======= =========
Options exercisable at
year-end............... -- 100,836 757,055
Weighted-average fair
market value of options
granted/exchanged
during the year........ $ 0.37 $ 0.34 $ 0.94
</TABLE>
F-22
<PAGE>
AVERSTAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about stock options at December
31, 1998:
<TABLE>
<CAPTION>
Options
Options Outstanding Exercisable
------------------------------- -----------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Contractual Exercise Exercise
Exercise Prices Number Life Price Number Price
- --------------- --------- ----------- --------- ------- ---------
<S> <C> <C> <C> <C> <C>
$1.37 to $2.11................ 615,917 8.8 years $1.41 49,538 $1.88
2.44 to 2.99................ 98,828 7.6 2.50 98,828 2.50
3.15 to 3.91................ 591,571 8.3 3.78 591,572 3.78
$4.05 to $4.25................ 17,117 7.5 4.08 17,117 4.08
--------- -------
1,323,433 8.5 $2.58 757,055 $3.49
========= =======
</TABLE>
Note 10. Commitments and Contingencies
The Company leases certain equipment and operating facilities under non-
cancelable operating leases expiring at various dates through November 2004.
Most facilities have leases with renewable options of between three and five
years. Facilities and equipment rental expense charged to operations was
approximately $3,273,000 for the year ended December 31, 1998 and $1,766,000
for the ten-month period ended December 31, 1997 and $1,528,000 for the
twelve-month period ended February 28, 1997.
As of December 31, 1998, future minimum rental commitments under operating
leases were as follows:
<TABLE>
<CAPTION>
Fiscal Year Facilities Equipment Total
- ----------- ---------- --------- -------
(In thousands)
<S> <C> <C> <C>
1999........................................... $ 3,110 $496 $ 3,606
2000........................................... 2,469 154 2,623
2001........................................... 2,168 27 2,195
2002........................................... 1,715 -- 1,715
2003........................................... 961 -- 961
Thereafter..................................... 198 -- 198
------- ---- -------
Total........................................ $10,621 $677 $11,298
======= ==== =======
</TABLE>
In connection with improvements made to leased office facilities, the
Company has issued standby letters of credit for $435,000 in favor of the
landlord.
Certain shareholders are entitled to receive fees for ongoing business
planning and consulting services under the terms of consulting agreements
between such shareholders and the Company, up to an aggregate annual amount of
$300,000. These consulting agreements terminate on August 31, 2002. Such fees
totaled $200,000 for the year ended February 28, 1997, $106,000 in the ten-
month period ended December 31, 1997 and $263,000 for the twelve-month period
ended December 31, 1998.
F-23
<PAGE>
AVERSTAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 11. Earnings Per Share
The calculations of earnings per share are as follows:
<TABLE>
<CAPTION>
February 28, December 31, December 31, March 31, March 31,
1997 1997 1998 1998 1999
------------ ------------ ------------ --------- ---------
(unaudited)
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Numerator:
Income from
continuing
operations.......... $ 27 $ 198 $2,434 $ 416 $ 792
Denominator:
Denominator for basic
earnings per share:
Weighted-average
shares
outstanding....... 3,878 3,865 6,428 4,991 6,927
Effect of dilutive
securities:
Employee stock
options............. 40 82 419 479 513
Warrants............. 605 605 -- -- --
------ ------ ------ ------ ------
645 687 419 479 513
Dilutive potential
common shares:
Denominator for
diluted earnings per
share:
Adjusted weighted-
average shares
outstanding and
assumed
conversions....... 4,523 4,552 6,847 5,470 7,440
====== ====== ====== ====== ======
Basic earnings per
share................. $ 0.01 $ 0.05 $ 0.38 $ 0.08 $ 0.11
====== ====== ====== ====== ======
Diluted earnings per
share................. $ 0.01 $ 0.04 $ 0.36 $ 0.08 $ 0.11
====== ====== ====== ====== ======
</TABLE>
Options to purchase 24,494 and 46,391 shares of common stock at December 31,
1998 and March 31, 1999 were outstanding but were not included in the
computation of diluted earnings per share because the options' exercise prices
were greater than the average market price of the common shares and, therefore,
the effect would be anti-dilutive. There were no shares of common stock
excluded in the computation of diluted earnings per share at February 28, 1997
and December 31, 1997.
F-24
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Computer Based Systems, Inc.
Fairfax, Virginia
We have audited the accompanying Balance Sheets of COMPUTER BASED SYSTEMS,
INC. (An S Corporation) as of December 31, 1997 and 1998, and the related
Statements of Operations, Other Comprehensive Income, Stockholders' Equity and
Cash Flows for the years then ended. 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. The financial
statements of COMPUTER BASED SYSTEMS, INC. as of December 31, 1996, were
audited by other auditors whose report dated April 18, 1997, expressed an
unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of COMPUTER BASED SYSTEMS,
INC. as of December 31, 1997 and 1998, and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ Aronson, Fetridge & Weigle
Rockville, Maryland
March 12, 1999
F-25
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors
Computer Based Systems, Inc.
We have audited the accompanying statements of operations, changes in
stockholders' equity and cash flows of Computer Based Systems, Inc. (a Virginia
corporation), for the year ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations equity and cash flows of
Computer Based Systems, Inc., for the year ended December 31, 1996, in
conformity with generally accepted accounting principles.
/s/ Grant Thornton LLP
Vienna, Virginia
April 18, 1997
F-26
<PAGE>
COMPUTER BASED SYSTEMS, INC.
BALANCE SHEETS
December 31, 1997 and 1998
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents (Note 1).................. $ 215,120 $ 1,304,849
Marketable securities (Note 3)...................... 1,142,495 --
Accounts receivable--contracts (Notes 2 and 5)...... 11,184,784 12,310,839
Prepaid expenses.................................... 631,374 612,302
Current portion of notes and other receivables
(Note 4)........................................... 608,902 912,755
----------- -----------
Total current assets.............................. 13,782,675 15,140,745
----------- -----------
Property and Equipment, Net (Notes 1 and 5)
Office equipment and software....................... 1,315,634 1,378,002
Furniture and fixtures.............................. 409,589 410,868
Vehicles............................................ 138,954 71,135
Land and building................................... 2,455,184 2,455,184
Tenant improvements................................. 76,010 131,304
----------- -----------
Total............................................. 4,395,371 4,446,493
Less: Accumulated depreciation and amortization..... (1,437,934) (1,534,139)
----------- -----------
Net property and equipment.......................... 2,957,437 2,912,354
----------- -----------
Other Assets
Deposits............................................ 52,374 62,831
Notes receivable, net of current portion (Note 4)... 88,851 25,831
----------- -----------
Total other assets................................ 141,225 88,662
----------- -----------
Total Assets...................................... $16,881,337 $18,141,761
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
ZBA account balance (Note 1)........................ $ -- $ 2,758,759
Note payable--line of credit (Note 5)............... 4,510,000 1,357,313
Current portion of long-term notes payable (Note
5)................................................. 592,681 514,588
Accounts payable.................................... 442,676 284,332
Accrued expenses and wages.......................... 1,805,577 2,310,533
Distributions payable............................... 128,131 --
Current portion of accrued rent payable (Note 9).... 55,725 46,208
Deferred income taxes (Note 1)...................... 1,136,881 1,136,881
----------- -----------
Total current liabilities......................... 8,671,671 8,408,614
----------- -----------
Long-term Liabilities, Net of Current Portion
Accrued rent payable (Note 9)....................... 334,600 341,002
Long-term notes payable (Note 5).................... 1,437,689 1,412,717
Total long-term liabilities....................... 1,772,289 1,753,719
----------- -----------
Total liabilities................................. 10,443,960 10,162,333
----------- -----------
Commitments and Contingencies (Notes 7, 8, 9, 10 and
11) -- --
Stockholders' Equity (Note 12)
Common stock--$1 par value per share,
Voting--500,000 shares authorized, issued and
outstanding...................................... 500,000 500,000
Nonvoting--1,500,000 shares authorized, issued and
outstanding...................................... 1,500,000 1,500,000
Accumulated other comprehensive income
Unrealized losses on investments held as available
for sale (Note 3)................................ (74,918) --
Retained earnings................................... 4,512,295 5,979,428
----------- -----------
Total stockholders' equity........................ 6,437,377 7,979,428
----------- -----------
Total Liabilities and Stockholders' Equity....... $16,881,337 $18,141,761
=========== ===========
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
financial statements.
F-27
<PAGE>
COMPUTER BASED SYSTEMS, INC.
STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1996, 1997 and 1998
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Contract Revenue and Other Income......... $23,052,976 $30,035,802 $40,685,426
----------- ----------- -----------
Costs and Expenses
Cost of contract service and sales...... 15,265,645 20,560,682 28,685,685
Selling, general and administrative..... 7,899,435 8,175,058 10,295,156
Interest................................ 226,422 195,332 237,452
----------- ----------- -----------
Total costs and expenses.............. 23,391,502 28,931,072 39,218,293
----------- ----------- -----------
Income (Loss) Before Income Taxes......... (338,526) 1,104,730 1,467,133
Federal and State Income Taxes (Note 1)... -- -- --
----------- ----------- -----------
Net Income (Loss)......................... $ (338,526) $ 1,104,730 $ 1,467,133
=========== =========== ===========
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
financial statements.
F-28
<PAGE>
COMPUTER BASED SYSTEMS, INC.
STATEMENTS OF OTHER COMPREHENSIVE INCOME
For the Years Ended December 31, 1996, 1997 and 1998
<TABLE>
<CAPTION>
1996 1997 1998
--------- ---------- ----------
<S> <C> <C> <C>
Net Income (loss)............................. $(338,526) $1,104,730 $1,467,133
Other Comprehensive Income
Unrealized losses on investments held as
available for sale......................... -- (74,918) --
Adjustment for realized losses on
investments held as available for sale..... -- -- 74,918
--------- ---------- ----------
Comprehensive Income (loss)................... $(338,526) $1,029,812 $1,542,051
========= ========== ==========
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
financial statements.
F-29
<PAGE>
COMPUTER BASED SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1996, 1997 and 1998
<TABLE>
<CAPTION>
Voting Nonvoting Unrealized
Common Common Retained Loss on
Stock Stock Earnings Investment Total
-------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance, January 1,
1996, as Restated
(Note 12).............. $500,000 $1,500,000 $3,831,241 $ -- $5,831,241
Distribution of Retained
Earnings Paid or
Accrued................ -- -- (85,150) -- (85,150)
Net Loss................ -- -- (338,526) -- (338,526)
-------- ---------- ---------- ------- ----------
Balance, December 31,
1996, as Restated
(Note 12).............. 500,000 1,500,000 3,407,565 -- 5,407,565
Unrealized Loss on
Investment (Note 3).... -- -- -- (74,918) (74,918)
Net Income.............. -- -- 1,104,730 -- 1,104,730
-------- ---------- ---------- ------- ----------
Balance, December 31,
1997................... 500,000 1,500,000 4,512,295 (74,918) 6,437,377
Adjustment for Realized
Gain on Investment
(Note 3)............... -- -- -- 74,918 74,918
Net Income.............. -- -- 1,467,133 -- 1,467,133
-------- ---------- ---------- ------- ----------
Balance, December 31,
1998................... $500,000 $1,500,000 $5,979,428 $ -- $7,979,428
======== ========== ========== ======= ==========
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
financial statements.
F-30
<PAGE>
COMPUTER BASED SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1996, 1997 and 1998
<TABLE>
<CAPTION>
1996 1997 1998
---------- ----------- ------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income (loss)....................... $ (338,526) $ 1,104,730 $ 1,467,133
Adjustments to reconcile net income
(loss) to net cash provided (used) by
operating activities
Depreciation and amortization......... 190,306 209,915 232,172
Gain on sale of fixed assets.......... -- -- (5,542)
Gain on sale of marketable
securities........................... -- -- (712)
(Increase) decrease in
Accounts receivable--contracts....... 1,162,836 (3,026,280) (1,126,055)
Prepaid expenses..................... (473,810) 389,640 19,072
Other receivables.................... (114,228) -- --
Deposits............................. (37,182) (6,996) (10,457)
Increase (decrease)
ZBA account balance.................. -- -- 2,758,759
Accounts payable..................... (88,625) 370,732 (158,344)
Accrued expenses and wages........... (140,779) 729,977 504,956
Accrued rent payable................. 23,361 2,034 (3,115)
---------- ----------- ------------
Net cash provided (used) by
operating activities............... 183,353 (226,248) 3,677,867
---------- ----------- ------------
Cash Flows from Investing Activities
Purchase of fixed assets................ (66,816) (446,221) (188,547)
Proceeds from sales of fixed assets..... -- -- 7,000
Advances under notes and other
receivables............................ (32,389) (368,610) (984,408)
Repayment of notes and other
receivables............................ -- 5,717 743,575
Purchase of marketable securities....... -- (1,217,413) (480,429)
Cash proceeds from sale of marketable
securities............................. -- -- 1,698,554
---------- ----------- ------------
Net cash provided (used) by investing
activities............................. (99,205) (2,026,527) 795,745
---------- ----------- ------------
Cash Flows from Financing Activities
Proceeds from line of credit............ -- 2,920,000 17,898,093
Curtailments of line of credit.......... 125,000 (485,000) (21,050,780)
Shareholder distributions paid.......... (52,378) (25,221) (128,131)
Payments of long-term debt.............. (25,116) (180,989) (203,065)
Proceeds on long-term debt.............. -- 30,000 100,000
---------- ----------- ------------
Net cash provided (used) by financing
activities............................ 47,506 2,258,790 (3,383,883)
---------- ----------- ------------
Net Increase in Cash.................... $ 131,654 $ 6,015 $ 1,089,729
Cash and Cash Equivalents, Beginning of
Year................................... 77,451 209,105 215,120
---------- ----------- ------------
Cash and Cash Equivalents, End of Year.. $ 209,105 $ 215,120 $ 1,304,849
========== =========== ============
Supplemental Cash Flow Information
Actual cash payments for:
Interest................................ $ 226,422 $ 195,332 $ 237,452
========== =========== ============
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
financial statements.
F-31
<PAGE>
COMPUTER BASED SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
NOTE 1--Organization And Significant Accounting Policies
(A) Organization
Computer Based Systems, Inc. (CBSI) was incorporated in 1978 under the laws
of the Commonwealth of Virginia. The Company's primary business is providing
engineering, management and analytical services to principally civilian
agencies of the U.S. Government.
(B) Revenue recognition
Revenue from cost-type contracts is recognized as costs are incurred on the
basis of direct costs plus allowable indirect costs and an allocable portion of
a fixed fee.
Revenue from fixed-price type contracts is recognized under the percentage-
of-completion method of accounting with costs and estimated profits included in
contract revenue as work is performed. If actual and estimated costs to
complete a contract indicate a loss, provision is made currently for the loss
anticipated on the contract.
Revenue from time and materials contracts is recognized as costs are
incurred at amounts represented by the agreed-upon billing amounts.
Revenue recognized on contracts for which billings have not been presented
to customers at year end, is included in the Accounts receivable--contracts
classification on the Balance Sheets as detailed in Note 2.
(C) Property and equipment
Property and equipment are recorded at cost. Depreciation and amortization
is provided using the straight-line method over the estimated useful lives of
the assets. The estimated lives used in determining depreciation and
amortization are:
<TABLE>
<S> <C>
Office equipment and software...... 5 years
Furniture and fixtures............. 7 years
Vehicles........................... 5 years
Tenant improvements................ shorter of term of lease or useful life
Building........................... 39 years
</TABLE>
(D) Income taxes
Effective January 1, 1990, the Company elected S-Corporation status whereby
the taxable income of the Company, subject to certain restrictions and
elections, is taxed directly to the Company's shareholders. The Company
continues to be liable for tax on built-in gains existing at the date of the
election which are primarily deferred taxable income from the Company's use of
the cash basis of accounting for income tax purposes, net of available net
operating loss and investment tax credit carryforwards. Such tax is payable to
the extent the Company would have otherwise paid income taxes on a C
Corporation basis during the ten-year period following the election. A deferred
tax liability has been provided in the accompanying financial statements for
this liability. The liability is classified as current due to the uncertainty
as to when this liability might be required to be paid.
F-32
<PAGE>
COMPUTER BASED SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
NOTE 1--Organization And Significant Accounting Policies--(continued)
(E) Cash and cash equivalents
The Company maintains cash balances which may exceed Federally insured
limits. The Company does not believe that this results in any significant
credit risk.
For purposes of the financial statement presentation, the Company considers
all highly liquid debt instruments with initial maturities of ninety days or
less to be cash equivalents.
Beginning in 1998, the Company has a Money Management Zero Balance Account
(ZBA) arrangement for its checking account activity. Under this arrangement,
the bank automatically draws/repays the line of credit based upon the net daily
activity in the checking accounts and invests any excess cash balance
overnight. Therefore, checks not yet presented for payment are reflected on the
Balance Sheet as ZBA account balance which at December 31, 1998 was $2,758,759.
(F) Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(G) Comprehensive income
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
This statement established standards for the reporting and display of
comprehensive income and its components in the financial statements. In
accordance with the provisions of this statement, the Company has included a
separate Statement of Other Comprehensive Income in the accompanying financial
statements. Comprehensive income for the years ended December 31, 1996 and 1997
has been presented for comparative purposes.
(H) Reclassifications
Certain 1996 amounts have been reclassified to conform to the 1997 and 1998
presentation.
NOTE 2--Accounts Receivable--Contracts
The accounts receivable consist mainly of billed and unbilled recoverable
amounts under contracts in progress with governmental units, principally with
four agencies of the Federal Government. Unbilled receivables consist primarily
of award fees earned on cost-reimbursement contracts earned during the year.
The components of accounts receivable at December 31, 1997 and 1998 are as
follows:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Billed............................................... $10,896,170 $12,196,691
Unbilled............................................. 288,614 114,148
----------- -----------
Total.............................................. $11,184,784 $12,310,839
=========== ===========
</TABLE>
All billed and unbilled amounts are expected to be collected during the next
fiscal year. The accounts receivable are pledged to Crestar Bank as collateral
on the line of credit arrangement described in Note 5.
F-33
<PAGE>
COMPUTER BASED SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
NOTE 3--Marketable Securities
The Company held marketable equity securities which are considered to be
available for sale as of December 31, 1997, as follows:
<TABLE>
<S> <C>
Fair market value............................................... $ 1,142,495
Cost of securities.............................................. $(1,217,413)
-----------
Net unrealized loss............................................. $ (74,918)
===========
</TABLE>
During 1998, the Company sold the securities and realized a gain of $712.
As of December 31, 1997, the aggregate unrealized loss on marketable
securities was $101,386 and the aggregate unrealized gain was $26,468 which
resulted in the net unrealized loss of $74,918 which has been reflected as a
separate component of stockholders' equity in the accompanying financial
statements. Realized gains and losses are determined using the specific
identification method to determine cost.
NOTE 4--Notes and Other Receivables
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Note receivable from two stockholders, bearing
interest at 7%, due on demand, paid in 1998.......... $ 67,770 $ --
Note receivable from affiliated company (Note 6),
bearing interest at 8%, payable in monthly
installments of $649, including interest, final
payment due May 2001................................. 22,715 22,715
Due from affiliate (Note 6)........................... 457,345 681,003
Advances and other receivables........................ 149,923 234,868
--------- ---------
Total............................................... 697,753 938,586
Less: Current portion................................. (608,902) (912,755)
--------- ---------
Long-term portion................................... $ 88,851 $ 25,831
========= =========
</TABLE>
NOTE 5--Notes Payable
(A) Line of Credit
At December 31, 1997 and 1998, the Company had a line of credit with Crestar
Bank which had a maximum amount available of $5,000,000. Under the terms of the
line of credit, interest is payable monthly at the bank's prime rate. The line
is secured by all accounts receivable and equipment. In addition, the agreement
requires the Company to maintain a minimum taxable net worth, which the Company
was in compliance with at December 31, 1997 and 1998. The outstanding balance
at December 31, 1997 and 1998 was $4,510,000 and $1,357,313, respectively.
F-34
<PAGE>
COMPUTER BASED SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
NOTE 5--Notes Payable--(continued)
(B) Long-term debt
At December 31, 1997 and 1998, long-term debt was as follows.
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Notes payable to shareholders, due upon demand with
interest ranging from 7% to 10%, uncollateralized.. $ 490,000 $ 490,000
Notes payable to relatives of the shareholders due
upon demand; with interest ranging from 7.5% to
10%; uncollateralized, paid off in 1998............ 80,000 --
Note payable to bank; balloon payment due in 2002
with interest at 8.10%; monthly principal and
interest payments of $11,677; collateralized by a
building and land.................................. 1,460,370 1,437,305
---------- ----------
Total............................................. 2,030,370 1,927,305
Less: Current portion............................... (592,681) (514,588)
---------- ----------
Long-term debt.................................... $1,437,689 $1,412,717
========== ==========
</TABLE>
The aggregate amount of principal payments due as of December 31, 1998 is as
follows:
<TABLE>
<CAPTION>
Year Ending
December 31 Amount
----------- ----------
<S> <C>
1999............................................................. $ 514,588
2000............................................................. 26,320
2001............................................................. 28,868
2002............................................................. 1,357,529
----------
Total.......................................................... $1,927,305
==========
</TABLE>
(C) Letters of Credit
The Company is contingently liable under irrevocable letters of credit
aggregating approximately $56,000 at December 31, 1998. The letters of credit
expire in March 1999.
NOTE 6--Related Party Transactions
CBSI owns a rental real estate property which is managed, at no cost, by a
Company which is owned by the shareholders of CBSI. The 1996, 1997 and 1998 net
earnings of approximately $181,000, $203,000 and $181,000, respectively, are
included in other income on the statements of operations. As of December 31,
1997 and 1998, the Company had a net intercompany receivable of $457,345 and
$681,003, respectively, due from the management company. There are no specific
repayment terms on these amounts due from the management company.
During 1996 and 1997, the Company paid $34,000 and $22,000, respectively, in
consulting fees to a Company owned by an officer/shareholder. The Company paid
no such consulting fees during 1998.
In addition, at December 31, 1996 and 1997, the Company had interest bearing
notes receivable (Note 4) with stockholders of the Company in the amount of
$53,500 and $67,770, respectively. The notes were due on demand or on a
specific future date and were repaid during 1998.
F-35
<PAGE>
COMPUTER BASED SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
NOTE 7--Retirement Plan
The Company maintains a qualified profit sharing plan with a 401(k) deferred
contribution option for all present and future employees that have reached 21
years of age and are employed on the first day of any calendar quarter with the
Company. The annual contribution to the profit sharing plan is determined by
the Board of Directors with the maximum contributions equal to the maximum
allowed by Internal Revenue Service regulations, which at the present time is
15% of gross salaries. There was no profit sharing contribution for 1996, 1997
and 1998.
The participants in the 401(k) deferred contribution option may elect to
contribute from 1% to 17.5% of their gross annual earnings up to $7,000, as
indexed for inflation. The Company may, at its discretion, make a matching
contribution of each participants' contributions. Employees become fully vested
in the Company's contributions at the rate of 20% per year after three years
and are fully vested after seven years. Participants are fully vested in their
voluntary contributions. For the years ended December 31, 1996, 1997 and 1998,
the Company's matching contribution was $53,000, $12,112 and $94,620 net of
forfeitures of $69,933, $86,810 and $54,351, respectively.
NOTE 8--Self Insurance
The Company maintains a self-insurance program for certain health care costs
of its employees. The Company is liable for claims of up to $75,000 for the
year ended December 31, 1996 and $50,000 per employee annually for the years
ended December 31, 1997 and 1998, and aggregate claims up to $1,500,000
annually. Self-insurance costs are accrued based upon the aggregate of the
liability for reported claims and an actuarially determined estimated liability
for claims incurred but not reported. Total expense under the program for the
years ended December 31, 1996, 1997 and 1998, was approximately $814,000,
$597,000 and $730,000, respectively.
NOTE 9--Leases
The Company is obligated under certain noncancelable operating leases for
facilities and equipment. The following is a schedule by years of the
approximate future minimum rental payments required under operating leases that
have an initial and remaining noncancelable lease term of one year or more as
of December 31, 1998:
<TABLE>
<CAPTION>
Year Ending Office Office
December 31 Space Subleases Furniture Total
----------- ---------- ----------- --------- ----------
<S> <C> <C> <C> <C>
1999......................... 1,365,890 (279,290) (60,417) 1,026,183
2000......................... 1,387,622 (221,329) (60,417) 1,105,876
2001......................... 1,407,018 (180,138) (60,417) 1,166,463
2002......................... 1,316,122 (180,138) (60,417) 1,075,567
2003......................... 964,802 (142,609) (60,417) 761,776
Thereafter................... 18,218 (15,012) (5,035) (1,829)
---------- ----------- --------- ----------
Total...................... $6,459,672 $(1,018,516) $(307,120) $5,134,036
========== =========== ========= ==========
</TABLE>
Total rental expense under all leases, net of sublease income, charged to
operations for the years ended December 31, 1996, 1997 and 1998, was
approximately $1,285,000, $1,133,000 and $1,220,000, respectively. In addition,
the Company received approximately $140,000, $286,000 and $349,000 in rental
income during the years ended December 31, 1996, 1997 and 1998, respectively,
from sublease agreements. During 1997, the
F-36
<PAGE>
COMPUTER BASED SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
NOTE 9--Leases--(continued)
Company entered into an agreement to lease office furniture to one of its
tenants which resulted in income from furniture rental of $66,417 and $60,417
for the years ended December 31, 1997 and 1998, respectively.
Certain leases have escalation clauses and rent for certain office space was
abated by a lessor for approximately four months. The Company has recorded rent
on a straight-line basis based upon the total of lease payments to be paid over
the life of the leases. The straight-line recognition of rent expense has
created a deferred rent payable which will be paid over the remaining life of
these leases.
NOTE 10--Contracts
Billings under cost-based government contracts are calculated using
provisional rates that permit recovery of indirect costs. These rates are
subject to audit on an annual basis by the government agencies' cognizant audit
agency. The cost audit will result in the negotiation and determination of the
final indirect cost rates that the Company may use for the period(s) audited.
The final rates, if different from the provisionals, may create an additional
receivable or liability.
As of December 31, 1998, the Company has final settlements on indirect rates
through December 31, 1995. The Company periodically reviews its cost estimates
and experience rates, and adjustments, if needed, are made and reflected in the
period in which the estimates are revised. In the opinion of management,
redetermination of any cost-based contracts will not have a material effect on
the Company's financial position or results of operations.
NOTE 11--Subsequent Event
As of December 31, 1998, the Company had entered into a letter of intent for
the sale of the Company. On January 31, 1999, the Company signed an agreement
and Plan of Merger with the acquiring company.
NOTE 12--Restatement Of Stockholders' Equity
During 1998, the Company corrected an error to the par value of its voting
and non-voting common stock. During 1996, the financial statements reflected a
par value of $.01 per share for voting and non-voting common stock. The error
has been corrected by restating the components of stockholders' equity as of
January 1, 1996 to reflect $1 par value of voting and non-voting common stock.
F-37
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders of Pacer Infotec, Inc.
We have audited the accompanying consolidated balance sheets of Pacer
Infotec, Inc. and subsidiaries (the Company) as of December 31, 1996 and 1997
and the related consolidated statements of operations, stockholders equity, and
cash flows for the years ended December 31, 1996 and 1997 and the period from
January 1, 1998 to February 28, 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Pacer Infotec,
Inc. and subsidiaries at December 31, 1996 and 1997, and the consolidated
results of their operations and their cash flows for the years ended December
31, 1996 and 1997 and the period from January 1, 1998 to February 28, 1998 in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Boston, Massachusetts
April 17, 1998
F-38
<PAGE>
PACER INFOTEC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------------
1996 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 140,224 $ 48,234
Customer accounts receivable....................... 10,449,685 5,556,779
Unbilled amounts on contracts in process........... 6,837,843 5,443,807
Inventory.......................................... 159,055 172,566
Prepaid expenses and other current assets.......... 915,186 472,024
Deferred income taxes.............................. -- 573,800
Refundable income taxes............................ 681,002 --
----------- -----------
Total current assets............................. 19,182,995 12,267,210
Property, equipment and leasehold improvements:
Land............................................... 89,800 89,800
Building and improvements.......................... 884,872 751,827
Furniture and equipment............................ 3,613,619 4,181,279
----------- -----------
4,588,291 5,022,906
Less allowance for depreciation.................... (2,671,392) (3,248,496)
----------- -----------
1,916,899 1,774,410
Other assets:
Deferred income taxes.............................. 339,000 1,094,500
Cost in excess of net assets acquired of business
acquired, net of amortization of $87,795 and
$413,970 at December 31, 1996 and 1997............ 4,246,477 5,430,303
Notes receivable from stockholders................. 1,238,102 1,160,960
Deposits, notes receivable and other assets........ 1,021,036 1,072,467
----------- -----------
6,844,615 8,758,230
----------- -----------
Total assets..................................... $27,944,509 $22,799,850
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses.............. $ 7,699,526 $ 7,011,660
Notes payable to bank.............................. 7,500,000 4,300,000
Compensation and related payroll taxes............. 2,739,476 2,433,342
Federal and state income taxes..................... -- 161,317
Deferred income taxes.............................. 111,000 --
Current portion of long-term debt.................. 210,282 207,749
----------- -----------
Total current liabilities........................ 18,260,284 14,114,068
Long-term debt:...................................... 400,000 200,000
Stockholders' equity:
Common stock, $.01 par value per share--authorized
15,000,000 shares at
December 31, 1996 and 1997, issued and
outstanding 7,962,339 shares at
December 31, 1996, and 8,086,716 at December 31,
1997 respectively............................... 79,623 80,867
Additional paid-in capital......................... 5,997,196 6,120,065
Retained earnings.................................. 3,207,406 2,284,850
----------- -----------
Total stockholders' equity....................... 9,284,225 8,485,782
----------- -----------
Total liabilities and stockholders' equity....... $27,944,509 $22,799,850
=========== ===========
</TABLE>
See accompanying notes.
F-39
<PAGE>
PACER INFOTEC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from
January 1,
Year ended December 31, 1998 to
----------------------- February 28,
1996 1997 1998
----------- ----------- ------------
<S> <C> <C> <C>
Contract revenues and other income...... $41,337,214 $51,708,445 $7,478,506
Costs and expenses:
Cost of contract service and product
sales................................ 33,794,564 42,874,426 6,229,752
Selling, general and administrative... 5,685,093 7,976,362 1,179,496
Interest.............................. 381,056 636,026 65,252
----------- ----------- ----------
39,860,713 51,486,814 7,474,500
----------- ----------- ----------
Earnings before income taxes............ 1,476,501 221,631 4,006
Federal and state income taxes.......... 622,000 384,000 4,000
----------- ----------- ----------
Net earnings (loss)..................... $ 854,501 $ (162,369) $ 6
=========== =========== ==========
Net earnings (loss) per share:
Basic................................. $ .13 $ (.02) $ .00
=========== =========== ==========
Diluted............................... $ .13 $ (.02) $ .00
=========== =========== ==========
Shares used in computing net earnings
(loss) per share:
Basic................................. 6,392,566 8,013,599 8,086,716
=========== =========== ==========
Diluted............................... 6,687,051 8,013,599 8,343,953
=========== =========== ==========
</TABLE>
See accompanying notes.
F-40
<PAGE>
PACER INFOTEC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional
----------------- Paid-in Retained
Shares Amount Capital Earnings Total
--------- ------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1995..................... 5,267,588 $52,676 $2,283,400 $2,537,498 $4,873,574
Exercise of option...... 6,500 65 4,010 -- 4,075
Issuance of shares in
connection with
acquisition............ 2,688,251 26,882 3,709,786 -- 3,736,668
Cash dividends.......... -- -- -- (184,593) (184,593)
Net earnings............ -- -- -- 854,501 854,501
--------- ------- ---------- ---------- ----------
Balance at December 31,
1996..................... 7,962,339 79,623 5,997,196 3,207,406 9,284,225
Exercise of options..... 124,377 1,244 122,869 -- 124,113
Cash dividends.......... -- -- -- (760,187) (760,187)
Net loss................ -- -- -- (162,369) (162,369)
--------- ------- ---------- ---------- ----------
Balance at December 31,
1997..................... 8,086,716 $80,867 $6,120,065 $2,284,850 $8,485,782
Net earnings............ -- -- -- 6 6
--------- ------- ---------- ---------- ----------
Balance at February 28,
1998..................... 8,086,716 $80,867 $6,120,065 $2,284,856 $8,485,788
========= ======= ========== ========== ==========
</TABLE>
See accompanying notes.
F-41
<PAGE>
PACER INFOTEC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
January 1,
Year ended December 31, 1998 to
------------------------ February 28,
1996 1997 1998
----------- ----------- ------------
<S> <C> <C> <C>
Operating activities
Net earnings (loss)..................... $ 854,501 $ (162,369) $ 6
Adjustments to reconcile net earnings
(loss) to net cash flows provided by
operations:
Depreciation and amortization......... 602,927 948,617 135,966
Deferred income tax benefit........... (764,000) (653,100) --
Changes in operating assets and
liabilities, net of effect of
acquisition:
Customer accounts receivable and
unbilled amounts on contracts in
process.............................. 1,600,068 5,786,942 591,299
Inventory............................. 155,441 (13,511) (107,313)
Accounts payable and accrued
expenses............................. (1,715,131) (2,374,020) (920,616)
Compensation and related payroll
taxes................................ -- (306,135) 428,886
Income taxes.......................... 899,972 731,319 4,000
Prepaid expenses and other assets..... 18,601 443,087 30,017
----------- ----------- -----------
Net cash provided by operating
activities............................. 1,652,379 4,400,830 162,245
Investing activities
Costs incurred in connection with
acquisition, including reduction of
notes payable of acquired business,
less cash acquired of $354,435......... (4,032,713) -- --
Acquisition of equipment and
leaseholds............................. (276,466) (455,520) (20,398)
Deposits and investment in other assets,
net.................................... 53,096 1,307 3,380
----------- ----------- -----------
Net cash used in investing activities... (4,256,083) (454,213) (17,018)
Financing activities
Cash received in connection with
merger................................. -- -- 16,500,000
Issuance of common stock................ 4,075 124,113 --
Notes payable to bank repayments........ -- (3,200,000) (4,300,000)
Net repayment of long-term debt......... (180,714) (202,533) --
Cash dividends.......................... (184,593) (760,187) --
----------- ----------- -----------
Net cash provided by (used in) financing
activities............................. (361,232) (4,038,607) 12,200,000
----------- ----------- -----------
Net increase in cash and cash
equivalents............................ (2,964,936) (91,990) 12,345,227
Cash and cash equivalents at beginning
of period.............................. 3,105,160 140,224 48,234
----------- ----------- -----------
Cash and cash equivalents at end of
period................................. $ 140,224 $ 48,234 $12,393,461
=========== =========== ===========
</TABLE>
See accompanying notes.
F-42
<PAGE>
PACER INFOTEC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements of Pacer Infotec, Inc. (formerly Pacer
Systems, Inc.) and subsidiaries (collectively, the Company) include the
accounts of the Company and its wholly-owned subsidiaries, Computing
Applications Software Technology, Inc. (CAST), acquired in 1992, and Infotec
Development, Inc. (IDI), which was merged with Pacer Systems, Inc. in 1996 by
way of acquisition. In connection with this merger, the Company's name was
changed to Pacer Infotec, Inc. All significant intercompany transactions have
been eliminated in consolidation. On February 27, 1998, the Company merged with
Apollo Holding, Inc. (see Note 2).
Cash Equivalents
The Company considers all highly liquid investments with maturities of three
months or less from the date acquired to be cash equivalents.
Inventory
Inventory, principally electrical and mechanical components and assemblies,
is stated at the lower of cost or market. Cost is determined using the first-
in, first-out (FIFO) method.
Property and Equipment
Property and equipment are valued at historical cost or fair value if
obtained in connection with an acquisition. Depreciation of office building,
furniture and equipment is provided for over the estimated useful lives of the
assets, which range from five to thirty years. Amortization of leasehold
improvements is provided for over the term of the lease or their estimated
useful lives, whichever is shorter. Depreciation and amortization are
calculated on the straight-line basis for financial reporting purposes.
Cost in Excess of Net Assets of Business Acquired
This balance represents the excess of the value of shares issued and other
costs incurred over the fair value of the net assets acquired of IDI. The
excess cost is being amortized using the straight-line method over 20 years.
Impairment of Long-Lived Assets
In 1996, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 121, "Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed Of." SFAS No. 121 requires recognition of impairment losses on long-
lived assets when indicators of impairment losses on long-lived assets are
present and future undiscounted cash flows are insufficient to support the
assets' recovery. Adoption of SFAS No. 121 had no material impact on the
Company's financial statements.
Revenue Recognition
A major portion of the Company's sales consists of revenues earned from
long-term professional engineering service and other contracts, principally
with U.S. Government agencies. The Company recognizes revenue as services are
performed or the percentage-of-completion method based upon the terms of the
contracts. Sales of air data systems are recognized as revenue at the time of
shipment.
F-43
<PAGE>
PACER INFOTEC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Significant Accounting Policies--(continued)
Risks and Uncertainties
Concentration of Credit Risk
Financial instruments which subject the Company to credit risk consist of
cash equivalents and accounts receivable. The risk with respect to cash
equivalents is minimized by the Company's policies in which investments are
only placed with highly rated issuers with relatively short maturities. The
risk with respect to accounts receivable is minimized due to the fact that
customer accounts and unbilled receivables represent amounts earned under the
Company's contracts, which are principally with U.S. Government agencies.
Estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Significant estimates and assumptions are required by
management in the area of determining contract completion. Significant
estimates and assumptions have also been made by management in connection with
the merger discussed in Note 2. Actual results could differ from those
estimates.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standard No. 109, "Accounting for Income Taxes." This
method requires income taxes to be recognized based on income taxes currently
payable and the change in deferred taxes during the year. Deferred taxes are
recognized based on the temporary differences between the financial statement
and tax bases of assets and liabilities at enacted tax rates as of the dates
the differences are expected to reverse.
Earnings per Share
In 1997, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 128, "Earnings per Share." SFAS No. 128 establishes criteria for
calculating basic earnings per share in which the dilutive effect of stock
options is excluded, and requires restatement of all prior period earnings per
share data presented. Adoption of SFAS No. 128 did not have a material impact
on the Company's financial statements.
Basic earnings per share is computed using the weighted-average number of
common shares outstanding during the year. Diluted earnings per share includes
the effect of all potentially dilutive securities.
Reclassification
Certain amounts at December 31, 1996 have been reclassified to permit
comparison with December 31, 1997.
Stock-Based Compensation
The Company accounts for stock option grants to employees in accordance with
APB Opinion No. 25, "Accounting for Stock Issued to Employees."
Accounting Pronouncements
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income", which is effective for all financial statements
beginning after December 15, 1997. Under SFAS No. 130, the
F-44
<PAGE>
PACER INFOTEC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Significant Accounting Policies--(continued)
Company is required to report and display comprehensive income and its
components in a full set of general purpose financial statements and to
reclassify earlier periods provided for comparative purposes. For the period
from January 1, 1998 to February 28, 1998, net earnings and comprehensive
income are the same.
In 1997, the Financial Accounting Standards Board issued statement No. 131,
"Disclosures About Segments of an Enterprise and Related Information," or SFAS
131, which was required to be adopted for fiscal years beginning after December
15, 1997, SFAS 131, superseded SFAS No. 14, "Financial Reporting for Segments
of a Business Enterprise." This statement changes the way public companies
report segment information in annual financial statements. SFAS 131 requires
public companies to report financial and descriptive information about their
operating segments in interim financial reports to shareholders as well. The
adoption of this Statement had no impact on the disclosures in the Company's
financial statements as the Company has once reportable segment.
2. Business Combination
On June 28, 1996, Pacer Systems, Inc. (Pacer) and IDI entered into an
Agreement of Merger and Plan of Reorganization (Merger Agreement) in which each
share of IDI common stock was exchanged for 4.1856 shares of Pacer. In
accordance with the Merger Agreement, and subsequent modifications, 2,688,251
shares of stock were issued by Pacer and exchanged for all the outstanding
common stock of IDI. In connection with the merger, Pacer changed its name to
Pacer Infotec, Inc. The merger has been accounted for under the purchase method
and, accordingly, the fair value of the shares and costs including professional
fees and certain liabilities, principally related to severance arrangements,
incurred in connection with the merger have been allocated to the net assets of
IDI based upon their fair value. The excess of the cost over fair value of net
assets is being amortized over 20 years on a straight-line basis. The operating
results of IDI have been included in the Company's consolidated financial
statements from July 25, 1996, the effective date of the merger. As previously
discussed, management allocated the cost of the acquisition to the net assets
of IDI based on its estimate of their fair value. Significant estimates were
made with respect to the fair value of unbilled receivables recoverable under
certain contracts which are subject to final settlement with the U.S.
Government agencies. Although at the date of the merger, management believed
its estimates to be appropriate, the final resolution of actual amounts due in
connection with these contract settlements differed from the estimates. As a
result, the Company increased costs in excess of net assets during the year by
$857,651 to reflect the final resolution of these estimates.
In connection with the merger, certain stockholders of IDI executed new
promissory notes representing principal and accrued interest owed to IDI on
notes entered into in previous years in exchange for cash. The promissory notes
bear interest at 6.3 6%, mature at various dates ranging from 1997 to 2001 and
are collateralized by shares of the Company owned by these stockholders.
On February 27, 1998, Pacer Infotec, Inc. and Apollo Holding, Inc. merged to
form AverStar, Inc. (AverStar), a newly formed corporation. The merger was
consummated by the contribution of approximately 4.6 million shares of common
stock of Pacer Infotec, Inc. and all of the outstanding shares of Apollo
Holding, Inc. As a result, the Company's business and operations will be
combined into AverStar, Inc. In connection with the merger, AverStar provided
cash to the Company to reduce its bank debt (see Note 3). In addition, AverStar
will pay approximately $7 million to redeem the remaining 3.5 million
outstanding shares of Pacer Infotec, Inc. publicly registered common stock on
the London Stock Exchange. The Company terminated its listing on the London
Stock Exchange on February 27, 1998.
3. Financing Arrangements
In July 1996, in connection with the acquisition discussed in Note 2, the
Company entered into a revolving credit agreement (Agreement) with its bank
which permits borrowings up to $12,000,000 based on specified
F-45
<PAGE>
PACER INFOTEC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Financing Arrangements--(continued)
levels of billed and unbilled accounts receivable on contracts in process. At
the date of the merger, approximately $11,000,000 of IDI debt was repaid from
$7,500,000 of proceeds from borrowings under the Agreement and the Company's
existing cash balances. Borrowings are due on demand and bear interest at the
bank's prime lending rate plus 1.75% (10% at December 31, 1997). Substantially
all of the Company's assets are secured as collateral under the Agreement.
The Agreement as amended in January 1997, includes certain quarterly and
annual operating and net worth covenants. The Agreement expires on June 30,
1998. At December 31, 1996 and 1997, $7,500,000 and $4,300,000 were outstanding
under the Agreement.
On February 27, 1998, the Company, in connection with its acquisition
disclosed in Note 2, canceled the Agreement by paying its outstanding line of
credit balance.
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Obligation under settlement agreement, payable in
annual installments of $200,000 bearing interest
at 8%............................................. $ 600,000 $ 400,000
Other.............................................. 10,282 7,749
--------- ---------
610,282 407,749
Less current portion............................... (210,282) (207,749)
--------- ---------
$ 400,000 $ 200,000
========= =========
</TABLE>
Future maturities of long-term debt are as follows: 1998--$207,240 and
1999--$200,000.
The carrying value of the Company's debt approximates fair value. Interest
paid for the years ended December 31, 1996 and 1997 and the period from January
1, 1998 to February 28, 1998 approximates interest expense.
4. Stock Options
The Company has an Incentive Stock Option Plan (the Plan). Under terms of
the Plan, as amended, options may be granted to key employees to purchase up to
3,000,000 shares of common stock at prices not less than fair market value at
date of grant. The options expire up to ten years from date of grant, or upon
termination of employment, and are exercisable in installments based on vesting
schedules approved by the Board of Directors.
The Company has adopted the disclosure provisions only of Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock Based-
Compensation," and will continue to account for option grants to employees
under the Plan in accordance with APB No. 25, "Accounting for Stock Issued to
Employees." Adoption of SFAS No. 123 would not have a material impact on the
Company's financial statements and, accordingly, no pro forma net income has
been disclosed for the years ended December 31, 1997 and for the period from
January 1, 1998 to February 28, 1998 and for the compensation expense of option
grants which otherwise would be required under the disclosure requirements of
SFAS No. 123.
F-46
<PAGE>
PACER INFOTEC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Stock Options--(continued)
Information regarding options under the Plan is summarized below:
<TABLE>
<CAPTION>
Weighted-
Average
Number of Exercise
Shares Price
--------- ---------
<S> <C> <C>
Balance at December 31, 1995.......................... 351,200 $0.74
Granted............................................. 35,000 2.08
Exercised........................................... (6,500) 0.63
Canceled............................................ (7,500) 0.96
Exchanged for options of IDI........................ 740,849 1.67
---------
Balance at December 31, 1996.......................... 1,113,049 1.37
Granted............................................. 785,000 1.85
Exercised........................................... (124,377) 1.00
Canceled............................................ (45,700) .95
---------
Balance at December 31, 1997.......................... 1,727,972 1.61
---------
Granted............................................. --
Canceled............................................ --
Balance at February 28, 1998.......................... 1,727,972 $1.61
=========
</TABLE>
The options for 740,849 shares of the Company's common stock were issued in
exchange for all of the outstanding options of IDI at the merger date. The
number of shares and exercise prices were adjusted based upon the exchange
ratio of 4.1856 described in Note 2. At December 31, 1996, December 31, 1997
and February 28, 1998, options for the purchase of 947,482, 1,722,972 and
1,727,972 shares, respectively, were exercisable with weighted average exercise
prices of $.93, $1.61 and $1.45, respectively. Exercise prices for options
outstanding as of February 28, 1998 ranged from $0.53 to $2.08. The weighted
average remaining contractual life of options outstanding at February 28, 1998
is 6.67.
5. Retirement Plans
Defined Contribution Plan
The Company has a 401(k) profit-sharing plan which covers substantially all
employees and provides for a Company matching contribution. As defined under
the plan, employees are allowed to contribute the maximum established by law,
and the Company may match up to 4% of the employee's compensation. The
Company's expense relating to this plan amounted to $289,975 for the year ended
December 31, 1996, $499,983 for the year ended December 31, 1997 and $96,679
for the period January 1, 1998 to February 28, 1998.
Employee Stock Bonus Plan
The Company has a noncontributory defined contribution plan which covers
substantially all employees and provides for an annual discretionary
contribution by the Company as determined by the Board of Directors based on
the Company's performance. The contribution is allocated among participating
employees in proportion to each participant's basic annual salary, as defined
in the plan. Substantially all of the Company's contributions will be invested
in the Company's common stock. The Company recognized $132,000 for the year
ended December 31, 1996 and $157,004 of expense for the year ended December 31,
1997 and did not recognize any expense for the period from January 1, 1998 to
February 28, 1998 related to the plan.
F-47
<PAGE>
PACER INFOTEC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Leases
The Company leases office space, office equipment and automobiles which have
been accounted for as operating leases. The base agreements expire at various
times through 2003. Total rent expense amounted to $996,019 for the year ended
December 31, 1996, $1,504,925 for the year ended December 31, 1997 and $230,592
for the period from January 1, 1998 to February 28, 1998, respectively. The
future minimum annual rental commitments under these long-term noncancelable
leases are as follows:
<TABLE>
<S> <C> <C>
Year ending December 31, 1998.............. $1,460,856
1999.............. 1,275,082
2000.............. 854,963
2001.............. 617,114
2002.............. 288,655
Thereafter........ 188,264
----------
$4,684,934
==========
</TABLE>
7. Income Taxes
Significant components of the Company's deferred tax liabilities and assets
as of December 31, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
December 31
-----------------------
1996 1997
----------- ----------
<S> <C> <C>
Deferred tax asset (liability):
Cash to accrual method.......................... $(1,018,000) $ --
Depreciation and amortization................... 339,000 243,100
Contracts in progress........................... 92,000 925,600
Compensation.................................... 605,000 399,700
Other........................................... 210,000 99,900
----------- ----------
Net deferred tax asset............................ 228,000 1,668,300
Net current deferred asset (liability)............ 111,000 (573,800)
----------- ----------
Noncurrent net deferred tax asset................. $ 339,000 $1,094,500
=========== ==========
</TABLE>
In connection with the merger described in Note 2, the Company assumed a net
deferred tax liability, the most significant component of which related to the
change in 1993 by IDI from the cash to the accrual method of reporting taxable
income. The effect of this change has been included in taxable income ratably
over tax reporting periods beginning in 1993 and ending February 28, 1998. In
addition, due to significant losses of IDI incurred prior to the merger, the
Company was entitled to refundable income taxes of approximately $1,533,000 as
of December 31, 1996.
F-48
<PAGE>
PACER INFOTEC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Income Taxes--(continued)
These refundable income taxes have been included in the accompanying 1996
balance sheet net of federal and state taxes otherwise payable by the Company.
In addition, in 1997, as a result of the final resolution of amounts due under
certain IDI contracts assumed as of the acquisition, the Company recognized a
deferred tax asset of $787,200 in connection with the final adjustment of costs
in excess of net assets of IDI acquired.
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Current:
Federal........................................ $1,113,000 $ 787,000
State.......................................... 273,000 250,100
---------- ----------
1,386,000 1,037,100
Deferred benefit, principally federal............ (764,000) (653,100)
---------- ----------
$ 622,000 $ 384,000
========== ==========
</TABLE>
The Company's tax provision for the period from January 1, 1998 to February
28, 1998 exceeds the statutory rate due to the amortization of the excess of
costs over net assets acquired, which are not deductible for income tax
purposes.
The 1997 effective income tax rate is higher than the expected statutory
rate due to amortization of the excess of costs over net assets acquired and
merger-related costs (see Note 8) which are not deductible for income tax
reporting purposes.
The Company made payments of approximately $571,000 for the year ended
December 31, 1996, $1,295,000 for the year ended December 31, 1997 and did not
make any income tax payments from January 1, 1998 to February 28, 1998
F-49
<PAGE>
LOOKING GLASS TECHNOLOGIES, INC.
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Looking Glass Technologies, Inc.
We have audited the accompanying statements of operations, changes in
stockholders' equity (deficit) and cash flows of Looking Glass Technologies,
Inc. for the year ended March 31, 1997 and the period from April 1, 1997
through August 8, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of Looking
Glass Technologies, Inc. for the year ended March 31, 1997 and the period from
April 1, 1997 through August 8, 1997 in conformity with generally accepted
accounting principles.
Ernst & Young LLP
April 30, 1999
F-50
<PAGE>
LOOKING GLASS TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
Year ended March 31, 1997 and the period from April 1, 1997 through August 8,
1997
<TABLE>
<CAPTION>
March 31, August 8,
1997 1997
--------- ---------
<S> <C> <C>
Revenues:
Product Sales....................................... $ 3,579,879 $ 1,356,867
Software Development................................ 555,555 933,333
Other royalties and licenses........................ 270,172 31,730
----------- -----------
4,405,606 2,321,930
Cost and expenses:
Cost of revenues.................................... 661,675 445,766
Research and development............................ 4,459,537 1,327,451
Selling, general and administrative................. 4,059,154 1,752,838
----------- -----------
Total costs and expenses.......................... 9,180,366 3,526,055
----------- -----------
Loss from operations................................. (4,774,760) (1,204,125)
Interest expense..................................... 3,934 33,144
----------- -----------
Net loss............................................. $(4,778,694) $(1,237,269)
=========== ===========
</TABLE>
See accompanying notes.
F-51
<PAGE>
LOOKING GLASS TECHNOLOGIES, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICITS)
Year ended March 31, 1997 and the period ended August 8, 1997
<TABLE>
<CAPTION>
Series A Series B Series C
preferred stock preferred stock preferred stock Common Stock
----------------- -------------------- ------------------ ----------------
Additional
Par paid in Accumulated
Shares Amount Shares Amount Shares Amount Shares value capital deficit
--------- ------- --------- ---------- ------- ---------- --------- ------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March
31, 1996........ 1,650,000 $73,540 2,280,000 $3,749,893 995,139 $3,901,990 3,735,600 $3,735 $10,140 $ (5,657,991)
Issuance of
common stock
pursuant to
exercise
of options...... 503,000 503 45,068
Net (loss)...... (4,778,694)
--------- ------- --------- ---------- ------- ---------- --------- ------ ------- ------------
Balance at March
31, 1997........ 1,650,000 73,540 2,280,000 3,749,893 995,139 3,901,990 4,238,600 4,238 55,208 (10,436,685)
Issuance of
common stock
pursuant to
exercise
of options...... 28,100 28 4,656
Net (loss)...... (1,237,269)
--------- ------- --------- ---------- ------- ---------- --------- ------ ------- ------------
Balance at
August 8, 1997.. 1,650,000 $73,540 2,280,000 $3,749,893 995,139 $3,901,990 4,266,700 $4,266 $59,864 $(11,673,954)
========= ======= ========= ========== ======= ========== ========= ====== ======= ============
<CAPTION>
Total
stockholders'
equity (deficit)
----------------
<S> <C>
Balance at March
31, 1996........ $ 2,081,307
Issuance of
common stock
pursuant to
exercise
of options...... 45,571
Net (loss)...... (4,778,694)
----------------
Balance at March
31, 1997........ (2,651,816)
Issuance of
common stock
pursuant to
exercise
of options...... 4,684
Net (loss)...... (1,237,269)
----------------
Balance at
August 8, 1997.. $(3,884,401)
================
</TABLE>
F-52
<PAGE>
LOOKING GLASS TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
Year ended March 31, 1997 and period from
April 1, 1997 through August 8, 1997
<TABLE>
<CAPTION>
Period
Year ended ended
March 31, August 8,
1997 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss.......................................... $(4,778,694) $(1,237,269)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization..................... 465,200 118,800
Changes in assets and liabilities:
Accounts receivable............................. 327,914 327,881
Inventories..................................... 33,193 --
Prepaid expenses................................ (38,475) 56,334
Other assets.................................... 779 (99)
Accounts payable................................ (129,855) 670,337
Accrued expenses................................ 28,142 903,866
Deferred revenue................................ (453,964) 70,267
----------- -----------
Net cash (used) provided by operating activities.... (4,545,760) 910,117
Cash flows from investing activities:
Purchases of fixed assets......................... (184,881) (9,474)
Cash flows from financing activities:
Proceeds (repayment) from revolving line of
credit........................................... 2,000,000 (2,000,000)
Proceeds (repayment) from secured note payable.... -- 400,000
Repayment of capital lease obligations............ (189,454) (97,531)
Proceeds from issuance of common stock............ 45,571 4,684
----------- -----------
Net cash (used) provided by financing activities.... 1,856,117 (1,692,847)
----------- -----------
Net decrease in cash and cash equivalents........... (2,874,524) (792,204)
----------- -----------
Cash and cash equivalents, beginning of year........ 3,692,830 818,306
Cash and cash equivalents, end of year.............. $ 818,306 $ 26,102
=========== ===========
</TABLE>
Supplemental disclosure of cash flow information:
Cash paid for interest during the period from April 1, 1997 through August
8, 1997 and the year ended March 31, 1997 was $13,000 and $51,000,
respectively.
See accompanying notes.
F-53
<PAGE>
LOOKING GLASS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. Nature of Business and Summary of Significant Accounting Policies
Looking Glass Technologies, Inc. (the Company) was incorporated in Delaware
on June 29, 1992. The Company designs, develops and publishes interactive
entertainment software. The Company sells its products to distributors
primarily in North America and the United Kingdom and its principal market is
the consumer market. The Company also licenses to other leading industry
publishers the right to publish and distribute the Company's software in
exchange for product development fees and future royalties.
Effective August 9, 1997 the company contributed all its assets, liabilities
and operations to a newly formed entity, Intermetrics Entertainment Software
LLC (IES), and the shareholders of the Company received approximately a 34%
interest in IES.
A summary of the Company's significant accounting policies follows:
Fixed Assets
Fixed assets are stated at cost and depreciated using the straight-line
method over the related estimated useful lives. Maintenance and repair costs
are expensed as incurred.
Revenue Recognition
Revenues from product sales are recognized upon shipment, net of allowances
for estimated returns and price protection, provided that no significant vendor
obligations remain and collection of the related receivable is probable.
Nonrefundable advances on future royalties pursuant to software development
agreements with publishers are recognized as revenue as work is performed and
milestones defined in the related agreements are attained. The publishers are
entitled to set off all payments made to the Company during development of the
software against initial royalty payments due to the Company. Such right of set
off is conditioned upon the successful development and commercialization of the
software. Royalties in excess of payments made to the Company during
development of the software are recognized as revenue when earned based upon
product shipments from the publisher, net of allowances for returns and price
protection, as and when reported to the Company by the respective publishers.
Payments received under licensing agreements are initially recorded as deferred
revenue and recognized as revenue when earned based upon product shipments to
licensees.
Research and Development and Software Development Costs
Costs incurred in the research and development of the Company's products
through the establishment of technological feasibility, as defined by Statement
of Financial Accounting Standards No. 86, Accounting for the Costs of Computer
Software to be Sold, Leases, or Otherwise Marketed, are expensed as incurred.
Development costs incurred thereafter and until the products are first
available for release have not been material and have therefore been expensed
as incurred.
Advertising
Advertising costs are expensed as incurred. Advertising expense for the year
ended March 31, 1997 and for the period from April 1, 1997 through August 8,
1997 were $420,000 and $225,000, respectively.
Concentration of Credit Risk and Significant Customers
At March 31, 1997 and August 8, 1997 the Company maintained cash balances in
certain bank accounts in excess of federally insured limits. All such accounts
are maintained in a highly rated financial institution. Accordingly, these
accounts bear minimal credit and market risk.
F-54
<PAGE>
LOOKING GLASS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
At March 31, 1997 $295,000 of the Company's accounts receivable was due from
one customer.
Two customers accounted for 57% of the Company's total revenues during the
year ended March 31, 1997. During the period from April 1, 1997 through August
8, 1997, one customer accounted for 60% of the Company's total revenues.
Accounting 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
reporting period. Actual results could differ from those estimates.
Accounting for Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation. The Company has adopted this standard through disclosure only in
the accompanying financial statements.
2. Income Taxes
The Company has gross deferred tax assets of approximately $868,000 at March
31, 1997 and August 8, 1997. Gross deferred tax assets consist of federal and
state net operating loss carryforwards, research and development credit
carryforwards and temporary differences resulting from certain transactions
recognized in different periods for financial reporting and income tax
purposes. The Company has no deferred tax liabilities at March 31, 1997 and
August 8, 1997. The Company has provided a valuation allowance for the full
amount of the deferred tax assets at March 31, 1997 and August 8, 1997 since
realization of these future benefits is not sufficiently assured.
At March 31, 1997, the Company has federal and state net operating loss
carryforwards of approximately $8,336,000 and $7,832,000, respectively, which
expire at various dates through 2011. At March 31, 1997, the Company also has
federal and state research and development tax credit carryforwards of
approximately $144,000 and $199,000, respectively, which expire at various
dates through 2011.
Under the Internal Revenue Code, certain substantial changes in the
Company's ownership may limit the amount of net operating loss and tax credit
carryforwards that can be utilized to offset future taxable income or tax
liability.
3. Stockholders' Equity
Issuance of Preferred Stock
Series A preferred stock consists of 825,000 shares of Series A-1 preferred
stock, issued for net proceeds of $36,770, and 825,000 shares of Series A-2
preferred stock, issued for net proceeds of $36,770. The Series A-1 preferred
stock and the Series A-2 preferred stock differ only as to voting rights, as
defined in the amended and restated certificate of incorporation. The 2,280,000
shares of Series B preferred stock were issued at a price of $1.67 per share
for aggregate consideration of $3,800,000. On August 10, 1995, the Company
issued 995,139 shares of Series C preferred stock at a price of $4.01 per share
for gross proceeds of $3,990,000.
F-55
<PAGE>
LOOKING GLASS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Each share of Series A, Series B and Series C preferred stock is convertible
into common stock at the option of the holder as a conversion price per share
defined in the amended and restated certificate of incorporation, or
automatically upon the earlier of (I) a vote of the holders of a least two-
thirds of each series of the outstanding preferred shares or (ii) the closing
of a public offering of the Company's common stock at a price of at least $4.33
per share and with aggregate net proceeds to the Company in excess of
$15,000,000. At March 31, 1997 and August 8, 1997, the Company has reserved a
total of 4,925,139 shares of common stock for the conversion of the outstanding
Series A, Series B and Series C preferred stock.
Stockholders of Series A, Series B, and Series C preferred stock are
entitled to one vote for each share of common stock into which the Series A,
Series B and Series C preferred stock is convertible.
The holders of the Series A, Series B and Series C preferred stock are
entitled to receive dividends when and if declared by the Board of Directors
and are noncumulative. Through August 8, 1997, no dividends have been declared
or paid.
Warrants
In connection with the issuance of Series C preferred stock in August 1995,
the Company issued a warrant for the purchase of up to 150,000 shares of Series
C preferred stock (Preferred Stock Warrant). The Preferred Stock Warrant is
exercisable at a price of $4.01 per share and expired on December 31, 1996. The
Company also issued a warrant for the purchase of up to 150,000 shares of
common stock (Common Stock Warrant), exercisable upon the effective date of an
initial public offering (IPO) at the IPO price per common share. The Common
Stock Warrant expires twenty four months after the IPO date. The values
ascribed to the preferred and common stock warrants were not significant. The
Company has reserved 150,000 shares of preferred stock and 150,000 shares of
common stock for issuance upon exercise of the warrants.
4. 1992 Stock Plan
At August 8, 1997 Looking Glass Technologies, Inc. had a stock compensation
plan which is described below. Looking Glass Technologies, Inc. applies APB
Opinion 25 related Interpretations in accounting for its plan. Looking Glass
Technologies, Inc. has adopted the disclosure-only provision of SFAS 123.
Accordingly, no compensation cost has been recognized for its stock
compensation plans. Adoption of SFAS 123 would not have a material impact on
the Company's financial statements and accordingly no pro forma net income has
been disclosed for the year ended March 31, 1997 and the period from April 1,
1997 through August 8, 1997. The weighted-average grant date fair value of
options granted is not material.
The effects on pro forma net income of expensing the estimated fair market
value of stock options are not necessarily representative of effects on
reported net income for future years due to such factors as the vesting period
of the stock options and the potential issuance of additional stock options in
future years. Additionally, because SFAS 123 is applicable only to options
granted subsequent to December 31, 1994, its pro forma effect will not be fully
reflected until 1999 or 2000.
Fixed stock compensation plans:
The 1992 Stock Plan (the "1992 Plan") provides for the grant of incentive
stock options, nonqualified stock options and stock purchase rights for the
purchase of up to an aggregate of 2,700,000 shares of the Company's common
stock by employees, consultants and directors. The Board of Directors is
responsible for administration of the 1992 Plan and, accordingly, determines
the term, exercise price, number of shares and vesting period of each option.
Options granted under the 1992 Plan generally expire ten years from the date of
the grant.
F-56
<PAGE>
LOOKING GLASS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Incentive stock options may be granted to an employee at an exercise price
per share of not less fair value per common share on the date of grant (not
less than 110% of the fair value in the case of holders of more than 10% of
Company's voting stock). Non qualified stock options may be granted to
employees, consultants and directors at an exercise price per share not less
than 85% of the fair value per common share on the date of the grant (110% of
the fair value in the case of holders of more than 10% of the Company's voting
stock).
The fair market value of each option grant is estimated on the date of the
grant using the Minimum Value option-pricing model with the following weighted
average assumptions used for grants in the year ended March 31, 1997 and the
period April 1, 1997 through August 8, 1997:
<TABLE>
<CAPTION>
March 31, August 8,
1997 1997
--------- ---------
<S> <C> <C>
Expected life (years)....................................... 5 5
Range of risk-free interest rates........................... 6.73% 6.76%
</TABLE>
A summary of the status of Looking Glass Technologies, Inc. 1992 Plan
compensation plan at March 31, 1997 and August 8, 1997 is presented below:
The following table summarizes stock option activity under the 1992 Plan:
<TABLE>
<CAPTION>
Year ended April 1, 1997
March 31, through August
1997 8, 1997
---------------- ----------------
Weighted Weighted
Average Average
Shares Exercise Shares Exercise
(000) Price (000) Price
------ -------- ------ --------
<S> <C> <C> <C> <C>
Outstanding at beginning of year.............. 1,772 $.18 1,431 $.25
Granted....................................... 444 .40 147 .40
Exercised..................................... (501) .09 (28) .16
Canceled...................................... (284) .26 (76) .20
----- -----
Outstanding at end of year.................... 1,431 .25 1,474 .25
===== =====
Options exercisable at year end............... 634 614
</TABLE>
The following table summarizes information about the 1992 Plan at August 8,
1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------- --------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Outstanding Exercise
Prices at 8/8/97 Life Price at 8/8/97 Price
- -------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$.08 338,600 6.2 $.08 225,726 $.08
.17 498,900 7.6 .17 249,209 .17
.40 636,500 8.9 .40 139,050 .40
--------- -------
1,474,000 613,985
--------- -------
</TABLE>
F-57
<PAGE>
LOOKING GLASS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Related-Party Transactions
In connection with the Series C preferred stock issuance in August 1995
(Note 4), the Company entered into a technology licensing and product
development agreement with the sole Series C preferred stockholder whereby the
Company granted to the stockholder the exclusive right to distribute and
license certain of the Company's products. Under the terms of the agreement,
the Company is entitled to receive royalty payments based on sales of the
Company's products. During the year ended March 31, 1997, the Company received
and recognized as revenue nonrefundable fees for software development pursuant
to this agreement totaling $400,000.
In January 1994, the Company and its two founders entered into an agreement
which provides that, upon termination of a founder's employment with the
Company prior to an initial public offering of the Company's common stock, such
founder's stock shall be subject to a right of repurchase by the other founder.
6. Commitments
The Company leases its facilities and certain computer equipment and
furniture under noncancellable lease agreements. Future minimum lease
obligations are approximately as follows:
<TABLE>
<CAPTION>
Period ending August 8 Capital Lease Operating Leases
---------------------- ------------- ----------------
<S> <C> <C>
1997....................................... $100,000 $ 150,000
1998....................................... 218,000 523,000
1999....................................... 42,000 537,000
2000....................................... 537,000
2001....................................... 45,000
-------- ----------
Thereafter................................. $1,792,000
Less amount representing interest.......... (22,000)
--------
$338,000
========
</TABLE>
Rental expense under operating leases for the year ended March 31, 1997 and
the period from April 1, 1997 through August 8, 1997 was approximately $349,000
and $120,000, respectively.
7. Licensing and Distribution Agreements
In August 1995, the Company entered into a distribution agreement with a
publisher of interactive entertainment software (the Publisher). Under the
terms of the agreement, the Company granted the Publisher the exclusive right
to distribute and license certain of the Company's products in North America
and the United Kingdom.
The agreement is effective through August 1996 and is thereafter renewable
for two-year periods by mutual agreement of the Company and the Publisher. On
June 25, 1997, the Company exercised its right to terminate the agreement
effective August 31, 1997.
During the year ended March 31, 1997 and for the period from April 1, 1997
through August 8, 1997, the Company entered into licensing and distribution
agreements whereby the Company is entitled to receive royalty payments based on
sales of the Company's products. Advances on future royalties pursuant to these
agreements aggregating $233,000 and $300,000 have been included in deferred
revenue at March 31, 1997 and August 8, 1997, respectively.
F-58
<PAGE>
LOOKING GLASS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. Debt
Under the licensing and distribution agreements disclosed in Note 8, the
Company has an available line of credit facility of $3,000,000. Any outstanding
balance is to be repaid not later than 12 months following general release of
the relevant product. Borrowings bear interest at prime. The line of credit
facility is secured by the Company's intellectual property rights in products
and revenues from them. At March 31, 1997, the Company had an outstanding line
of credit balance of $2,000,000 relating to this agreement.
The company also has outstanding as of August 8, 1997, $400,000 of 10.5%
secured convertible promissory notes. $200,000 of the notes mature on August
22, 1997 and $200,000 mature in December 1997. Amounts outstanding under these
promissory notes are payable to the stockholders of IES-please see Note 1.
9. 401(k) Plan
In January 1996, the Company adopted a retirement savings plan (the Plan)
under section 401(k) of the Internal Revenue Code. The Plan covers
substantially all employees who meet minimum age and service requirements and
allows participants to defer a portion of their annual compensation on a pre-
tax basis. Company contributions to the Plan may be made at the discretion of
the Board of Directors. There were no contributions by the Company to the Plan
for the period from April 1, 1997 through August 8, 1997 or the year ended
March 31, 1997.
F-59
<PAGE>
<TABLE>
<CAPTION>
SERVICES
- ---------------------------------------------------------------------------------------------------------------------------------
MARKET IT Assurance IT Development IT Operations IT Consulting
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Health Care Department Of TRW/Department National
Finance Housing & Urban Of Interior Institute Of
Administration Development (Data Center Operations) Standards &
(Systems Assurance) (Electronic Business) Technology
Federal Deposit (Prototyping, Monitoring
NASA SAIC/Department insurance & Debugging Tools)
(Systems Assurance) Of Justice Corporation
(Mission Applications) (Network & Data Operations) NASA
United States (Technology Studies)
Postal Service NASA Department Of
(Systems Assurance) (Mission Applications) Labor
(Data Collection and
Department Of Jet Propulsion Reporting)
Civilian Labor Laboratory
Government (Y2K Compliance Assessment) (Mission Applications) Environmental
Protection
Securities & Department Of Agency
Exchange Health & Human (Data Collection and
Commission Services Reporting)
(Y2K Compliance Assessment) (Electronic Business &
Mission Applications) United States
Patent &
Trademark Office
(Network Operations)
- ------------------------------------------------------------------------------------------------------------------------------------
United States United States United States Defense
Navy Navy Navy Advanced
(Systems Assurance) (Mission Applications) (Logistic Operations) Research
Projects Agency
Lockheed Martin/ Lockheed Martin Lockheed Martin/
United States (Electronic Business) United States (Technology Studies
Air Force Air Force & Prototyping)
(Information Assurance) Boeing Rockwell (Network Operations)
(Mission Applications)
Defense Computer Sciences
Government Corp/Defense
Information
Systems Agency
(Information Assurance)
Lear Siegler/
United States
Army
(Systems Assurance)
- ------------------------------------------------------------------------------------------------------------------------------------
AT&T Delphi Automotive Metropolitan Analog Devices
(Information Assurance) Systems Washington (Language Tool
(Mission Applications) Airports Development)
J.P. Morgan & Authority
Company Vanguard (Network Operations) Green Hills
(Y2K Compliance Assessment) (Mission Applications) Software, Inc.
(Language Tool
Commercial America Online Development)
Prudential (Electronic Business)
Insurance Inprise Software
(Y2K Compliance Assessment) (Language Tool
Development)
Deutsche Bank
(Y2K Compliance Assessment) Sony Pictures
Entertainment
Lehman Brothers (Technology Studies)
(Y2K Compliance Assessment)
Celera Genomics
(Technology Studies)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
You should rely only on the information contained in this prospectus. Nei-
ther AverStar, any selling stockholder nor any underwriter has authorized any-
one to provide prospective investors with different or additional information.
This prospectus is not an offer to sell nor is it seeking an offer to buy
these securities in any jurisdiction where the offer or sale is not permitted.
The information contained in this prospectus is correct only as of the date of
this prospectus, regardless of the time of delivery of this prospectus or any
sale of these securities.
-------------------
TABLE OF CONTENTS
-------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 1
The Offering............................................................. 3
Summary Financial Data................................................... 4
Risk Factors............................................................. 8
Forward-Looking Statements............................................... 16
Use of Proceeds.......................................................... 17
Dividend Policy.......................................................... 17
Capitalization........................................................... 18
Dilution................................................................. 19
Selected Financial Data.................................................. 20
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 23
Business................................................................. 30
Management............................................................... 42
Principal Stockholders................................................... 51
Certain Relationships and Related-Party Transactions..................... 53
Description of Securities................................................ 55
Shares Eligible For Future Sale.......................................... 58
Underwriting............................................................. 60
Legal Matters............................................................ 61
Experts.................................................................. 62
Where You Can Find Additional Information................................ 62
</TABLE>
-------------------
Until , 1999 (25 days after the date of this prospectus), all dealers
effecting transactions in the common stock, whether or not participating in
this distribution, may be required to deliver a prospectus. This delivery re-
quirement 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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
4,000,000 Shares
[LOGO OF AVERSTAR]
_________________________________________________________________________
Common Stock
-----------------------------------
PROSPECTUS
-----------------------------------
Bear, Stearns & Co. Inc.
Legg Mason Wood Walker
Incorporated
, 1999
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the costs and expenses, other than the
underwriting discount and commissions, payable by the registrant in connection
with the sale of the common stock being registered hereby. All amounts shown
are estimates, except the Securities and Exchange Commission registration fee,
the NASD filing fee and the Nasdaq National Market listing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee................. $ 12,788
NASD filing fee..................................................... 5,100
Nasdaq National Market listing application fee...................... 85,000
Blue Sky fees and expenses.......................................... 10,000
Printing and engraving expenses..................................... 200,000
Legal fees and expenses............................................. 350,000
Accounting fees and expenses........................................ 350,000
Transfer agent and registrar fees................................... 25,000
Miscellaneous expenses.............................................. 62,112
----------
TOTAL............................................................. $1,100,000
==========
</TABLE>
Item 14. Indemnification of Directors and Officers.
Our amended and restated bylaws that will become effective upon the closing
of this offering provide that we will indemnify our directors and executive
officers to the fullest extent permitted by Delaware law and may indemnify our
other officers, employees and other agents to the fullest extent permitted by
Delaware law.
In addition, our second amended restated certificate of incorporation that
will become effective upon the closing of this offering provides that, to the
fullest extent permitted by Delaware law, our directors will not be personally
liable to us or our stockholders for monetary damages for any breach of
fiduciary duty as directors. This provision of the restated certificate of
incorporation does not eliminate the directors' duty of care. In appropriate
circumstances, equitable remedies such as an injunction or other forms of non-
monetary relief are available under Delaware law. This provision also does not
affect the directors' responsibilities under any other laws, such as the
federal securities laws.
Each director will continue to be subject to liability for:
. Breach of a director's duty of loyalty to us and our stockholders;
. Acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. Unlawful payments of dividends or unlawful stock repurchases or
redemptions; and
. Any transaction from which a director derived an improper personal
benefit.
We have purchased liability insurance for our directors and executive
officers.
There is no pending litigation or proceeding involving any of our directors
or officers as to which indemnification is being sought. We are not aware of
any pending or threatened litigation that may result in a claim for
indemnification.
II-1
<PAGE>
Item 15. Recent Sales of Unregistered Securities.
Common Stock. In connection with the combination of the businesses of
Intermetrics and Pacer and our acquisition of Pacer on February 27, 1998, we
issued an aggregate of:
. 4,611,211 shares of common stock in exchange for all of the issued and
outstanding capital stock of Apollo Holding, Inc., the parent of
Intermetrics; and
. 2,255,224 shares of common stock, and paid $7 million in exchange for
all of the issued and outstanding capital stock of Pacer Infotec, Inc.
The issuance and sale of these shares of common stock was exempt from
registration pursuant to Section 4(2) of the Securities Act.
Options. In connection with the combination of the business of Intermetrics
and Pacer and our acquisition of Pacer, we assumed all outstanding stock
options of each of Intermetrics and Pacer in reliance upon exemptions from
registration pursuant to either Section 4(2) of the Securities Act, or (ii)
Rule 701 under the Securities Act. In addition, we have granted and may grant
stock options to employees in reliance upon exemptions from registration
pursuant to Rule 701 under the Securities Act. From March 1, 1998 to March 31,
1999, we have granted options under our 1998 Long Term Incentive Plan to
purchase 190,000 shares of common stock at an exercise price per share of
$8.00.
Underwriters. No underwriters were involved in the transactions referred to
in this Item 15.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1+ Amended and Restated Certificate of Incorporation of AverStar.
3.2* Certificate of Amendment of Amended and Restated Certificate of
Incorporation of AverStar.
3.3 Form of Second Amended and Restated Certificate of Incorporation of
AverStar, to become effective upon the closing of this offering.
3.4+ Bylaws of AverStar.
3.5 Form of Amended and Restated Bylaws of AverStar, to become effective
upon the closing of this offering.
4.1 Reference is made to exhibits 3.1 through 3.5.
4.2* Specimen of stock certificate representing shares of our common
stock.
5.1 Opinion of Swidler Berlin Shereff Friedman, LLP regarding the
legality of the common stock being registered in this registration
statement.
10.1 Business Loan and Security Agreement, dated as of March 18, 1999, by
and among AverStar, Inc., Computer Based Systems, Inc., and other
borrower parties thereto from time to time, First Union Commercial
Corporation, and other lender parties hereto from time to time, and
First Union Commercial Corporation, as the Agent.
10.2(a)+ Amended and Restated Securities Purchase Agreement, dated February
27, 1998, by and among AverStar, Inc., Apollo Holding, Inc.,
Intermetrics, Inc. and Pacer Infotec, Inc., and each of Massachusetts
Mutual Life Insurance Company, MassMutual Corporate Investors,
MassMutual Participation Investors and MassMutual Corporate Value
Partners Limited.
10.2(b)+ Amendment to Amended and Restated Securities Purchase Agreement,
dated March 18, 1999.
10.3+ Lease, dated July 31, 1996, by and between Trustees of Maryland
Building's Trust and
Intermetrics, Inc.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<C> <S>
10.4+ Lease Agreement, dated as of May 23, 1997, between The Equitable Life
Assurance Society of the United States and Intermetrics, Inc.
10.5+ Lease Amendment, dated October 31, 1997, between The Equitable Life
Assurance Society of the United States and Intermetrics,
10.6+ Second Lease Amendment, dated March 16, 1999, between The Equitable
Life Assurance Society of the United States and AverStar, Inc.
10.7+ Consulting Agreement, dated August 31, 1995, between Joel N.
Levy/Peter M. Schulte, LLC and Intermetrics, Inc.
10.8+ Assignment Agreement and Amendment to Consulting Agreement, dated as
of February 27, 1998, by and among Joel L. Levy/Peter M. Schulte, LLC,
Intermetrics, Inc. and AverStar, Inc.
10.9+ AverStar, Inc. 1998 Long Term Incentive Plan.
10.10+ Employment Agreement, dated as of August 21, 1995, by and among IMT
Acquisition Corp., Apollo Holding, Inc. and Michael B. Alexander.
10.11+ Amendment to Employment Agreement, dated as of March 1998, among
Apollo Holding Inc., AverStar, Inc. and Michael B. Alexander.
10.12 Intentionally omitted.
10.13+ Employment Agreement, dated as of August 21, 1995, by and among IMT
Acquisition Corp., Apollo Holding, Inc. and Joseph A. Saponaro.
10.14+ Amendment to Employment Agreement, dated as of March 1998, among
Apollo Holding, Inc., AverStar, Inc. and Joseph A. Saponaro.
10.15 Intentionally omitted.
10.16+ Assignment and Assumption Agreement, dated as of February 27, 1998
among Apollo Holding Inc., Intermetrics, Inc. and IP Technologies,
Inc.
10.17+ Employment Agreement, dated as of February 27, 1998 by and among Pacer
Infotec, Inc., AverStar, Inc. and John C. Rennie.
10.18+ Non-Competition Agreement, dated as of February 27, 1998, by and
between AverStar, Inc. and John C. Rennie.
10.19+ Employment Agreement, dated as of February 27, 1998, by and among
Pacer Infotec, Inc., AverStar, Inc. and Sigmund H. Goldblum.
10.20+ Non-Competition Agreement, dated as of February 27, 1998, by and
between AverStar, Inc. and Sigmund Goldblum.
10.21+ Employment Agreement, dated as of April 22, 1999, between AverStar,
Inc. and Barbara Landes.
10.22+ Termination Benefit Agreement, dated as of February 27, 1998, among
Pacer Infotec, Inc., AverStar, Inc. and Rudolph R. Koczera.
21+ List of Subsidiaries of AverStar, Inc.
23.1 Consent of Swidler Berlin Shereff Friedman, LLP (included in exhibit
5.1).
23.2(a) Consent of Ernst & Young LLP.
23.2(b) Consent of Ernst & Young LLP.
23.2(c) Consent of Ernst & Young LLP.
23.3 Consent of Grant Thornton LLP.
23.4 Consent of Aronson, Fetridge & Weigle.
23.5 Consent of International Data Corporation.
24.1+ Powers of Attorney.
27.1 Financial Data Schedule.
</TABLE>
+ Previously filed as an Exhibit to Registration Statement on Form S-1
(Registration No. 333-78517) filed with the Securities and Exchange Commission
on May 14, 1999.
* To be filed by Amendment.
II-3
<PAGE>
(b) Financial Statement Schedules.
The following financial statement schedules are filed herewith, accompanied
by reports of independent accountants for such schedules.
Year Ended February 28, 1997, Ten Months Ended December 31, 1997 and Year Ended
December 31, 1998
Schedule II--Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Balance at Additions Additions
beginning due to charged to costs Amounts Balance at
of year acquisitions and expenses written off end of year
---------- ------------ ---------------- ----------- -----------
(In thousands)
<S> <C> <C> <C> <C> <C>
February 28, 1997
Allowance for doubtful
accounts............. $ 73 $-- $-- $(27) $ 46
Allowance for unbilled
receivables.......... 192 -- 10 -- 202
---- ---- ---- ---- ----
Total............... $265 $-- $ 10 $(27) $248
December 31, 1997
Allowance for doubtful
accounts............. $ 46 $ 15 $108 $-- $169
Allowance for unbilled
receivables.......... 202 -- 63 -- 265
---- ---- ---- ---- ----
Total............... $248 $ 15 $171 $-- $434
December 31, 1998
Allowance for doubtful
accounts............. $169 $ 93 $ 25 $-- $287
Allowance for unbilled
receivables.......... 265 -- 45 -- 310
---- ---- ---- ---- ----
Total............... $434 $ 93 $ 70 $-- $597
==== ==== ==== ==== ====
</TABLE>
Financial statement schedules other than those listed above have been
omitted because they are inapplicable, are not required under applicable
provisions of Regulation S-X, or the information that would otherwise be
included in such schedules is contained in the registrant's financial
statements or accompanying notes.
II-4
<PAGE>
Item 17. Undertakings.
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement certificates in those
denominations and registered in those names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to provisions described in Item 14 or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission this indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against those 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
this indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of that issue.
The undersigned registrant hereby undertakes that:
(1) 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.
(2) 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 this offering of these securities at that time shall
be deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Burlington, Commonwealth
of Massachusetts on July 16, 1999.
Averstar, Inc.
/s/ Michael B. Alexander
By: _________________________________
Michael B. Alexander
Chief Executive Officer and
Chairman of the Board of
Directors
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Michael B. Alexander Chief Executive Officer July 16, 1999
______________________________________ and Chairman of the Board
Michael B. Alexander of Directors
* Vice Chairman of the Board July 16, 1999
______________________________________ of Directors
John C. Rennie
* President, Chief Operating July 16, 1999
______________________________________ Officer and Director
Joseph A. Saponaro
* Executive Vice President July 16, 1999
______________________________________ and Director
Sigmund H. Goldblum
* Executive Vice President July 16, 1999
______________________________________ and Chief Financial
Barbara L. Landes Officer
* Director July 16, 1999
______________________________________
Mary Anne Gilleece
* Director July 16, 1999
______________________________________
Joel N. Levy
* Director July 16, 1999
______________________________________
Peter M. Schulte
/s/ Michael B. Alexander
*By: _________________________________
Michael B. Alexander
Attorney-in-fact
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1+ Amended and Restated Certificate of Incorporation of AverStar.
3.2* Certificate of Amendment of Amended and Restated Certificate of
Incorporation of AverStar.
3.3 Form of Second Amended and Restated Certificate of Incorporation of
AverStar, to become effective upon the closing of this offering.
3.4+ Bylaws of AverStar.
3.5 Form of Amended and Restated Bylaws of AverStar, to become effective
upon the closing of this offering.
4.1 Reference is made to exhibits 3.1 through 3.5.
4.2* Specimen of stock certificate representing shares of our common
stock.
5.1 Opinion of Swidler Berlin Shereff Friedman, LLP regarding the
legality of the common stock being registered in this registration
statement.
10.1 Business Loan and Security Agreement, dated as of March 18, 1999, by
and among AverStar, Inc., Computer Based Systems, Inc., and other
borrowers parties thereto from time to time, First Union Commercial
Corporation, and other lenders parties hereto from time to time, and
First Union Commercial Corporation, as the Agent.
10.2(a)+ Amended and Restated Securities Purchase Agreement, dated February
27, 1998, by and among AverStar, Inc., Apollo Holding, Inc.,
Intermetrics, Inc. and Pacer Infotec, Inc., and each of Massachusetts
Mutual Life Insurance Company, MassMutual Corporate Investors,
MassMutual Participation Investors and MassMutual Corporate Value
Partners Limited.
10.2(b)+ Amendment to Amended and Restated Securities Purchase Agreement,
dated March 18, 1999.
10.3+ Lease, dated July 31, 1996, by and between Trustees of Maryland
Building's Trust and Intermetrics, Inc.
10.4+ Lease Agreement, dated as of May 23, 1997, between The Equitable Life
Assurance Society of the United States and Intermetrics, Inc.
10.5+ Lease Amendment, dated October 31, 1997, between The Equitable Life
Assurance Society of the United States and Intermetrics, Inc.
10.6+ Second Lease Amendment, dated March 16, 1999, between The Equitable
Life Assurance Society of the United States and AverStar, Inc.
10.7+ Consulting Agreement, dated August 31, 1995, between Joel N.
Levy/Peter M. Schulte, LLC and Intermetrics, Inc.
10.8+ Assignment Agreement and Amendment to Consulting Agreement, dated as
of February 27, 1998, by and among Joel L. Levy/Peter M. Schulte,
LLC, Intermetrics, Inc. and AverStar, Inc.
10.9+ AverStar, Inc. 1998 Long Term Incentive Plan.
10.10+ Employment Agreement, dated as of August 21, 1995, by and among IMT
Acquisition Corp., Apollo Holding, Inc. and Michael B. Alexander.
10.11+ Amendment to Employment Agreement, dated as of March 1998, among
Apollo Holding Inc., AverStar, Inc. and Michael B. Alexander.
10.12 Intentionally omitted.
10.13+ Employment Agreement, dated as of August 21, 1995, by and among IMT
Acquisition Corp., Apollo Holding, Inc. and Joseph A. Saponaro.
10.14+ Amendment to Employment Agreement, dated as of March 1998, among
Apollo Holding, Inc., AverStar, Inc. and Joseph A. Saponaro.
10.15 Intentionally omitted.
10.16+ Assignment and Assumption Agreement, dated as of February 27, 1998
among Apollo Holding Inc., Intermetrics, Inc. and IP Technologies,
Inc.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<C> <S>
10.17+ Employment Agreement, dated as of February 27, 1998 by and among Pacer
Infotec, Inc., AverStar, Inc. and John C. Rennie.
10.18+ Non-Competition Agreement, dated as of February 27, 1998, by and
between AverStar, Inc. and John C. Rennie.
10.19+ Employment Agreement, dated as of February 27, 1998, by and among
Pacer Infotec, Inc., AverStar, Inc. and Sigmund H. Goldblum.
10.20+ Non-Competition Agreement, dated as of February 27, 1998, by and
between AverStar, Inc. and Sigmund Goldblum.
10.21+ Employment Agreement, dated as of April 22, 1999, between AverStar,
Inc. and Barbara Landes.
10.22+ Termination Benefit Agreement, dated as of February 27, 1998, among
Pacer Infotec, Inc., AverStar, Inc. and Rudolph R. Koczera.
21+ List of Subsidiaries of AverStar, Inc.
23.1 Consent of Swidler Berlin Shereff Friedman, LLP (included in exhibit
5.1).
23.2(a) Consent of Ernst & Young LLP.
23.2(b) Consent of Ernst & Young LLP.
23.2(c) Consent of Ernst & Young LLP.
23.3 Consent of Grant Thornton LLP.
23.4 Consent of Aronson, Fetridge & Weigle.
23.5 Consent of International Data Corporation.
24.1+ Powers of Attorney.
27.1 Financial Data Schedule.
</TABLE>
- --------
+ Previously filed as an Exhibit to Registration Statement on Form S-1
(Registration No. 333-78517) filed with the Securities and Exchange
Commission on May 14, 1999.
*To be filed by amendment.
<PAGE>
EXHIBIT 1.1
4,000,000 Shares of Common Stock
AVERSTAR, INC.
UNDERWRITING AGREEMENT
_________ __ , 1999
BEAR, STEARNS & CO. INC.
Legg Mason Wood Walker, Incorporated
as Representatives of the
several Underwriters named in
Schedule I attached hereto
c/o Bear, Stearns & Co. Inc.
245 Park Avenue
New York, New York 10167
Dear Sirs:
AverStar, Inc., a corporation organized and existing under the laws of
the State of Delaware (the "Company"), proposes, subject to the terms and
conditions stated herein, to issue and sell to the several underwriters named in
Schedule I hereto (the "Underwriters") an aggregate of 4,000,000 shares (the
"Firm Shares") of its common stock, par value $.001 per share (the "Common
Stock"), and, for the sole purpose of covering over-allotments in connection
with the sale of the Firm Shares, at the option of the Underwriters, up to an
additional 600,000 shares (the "Additional Shares") of Common Stock. The Firm
Shares and any Additional Shares purchased by the Underwriters are referred to
herein as the "Shares." The Shares are more fully described in the Registration
Statement referred to below.
1. Representations and Warranties of the Company. The Company represents
---------------------------------------------
and warrants to, and agrees with, the Underwriters that:
(a) The Company has filed with the Securities and Exchange
Commission (the "Commission") a registration statement on Form S-1 (No.
333-78517), and may have filed an amendment or amendments thereto, for the
registration of the Shares under the Securities Act of 1933, as amended
(the "Act"). Such registration statement, including the prospectus,
financial statements and schedules, exhibits and all other documents filed
as a part thereof, as amended at the time of effectiveness of the
registration statement, including any information deemed to be a part
thereof as of the time of effectiveness pursuant to paragraph (b) of Rule
430A or Rule 434 of the Rules and Regulations of the Commission under the
Act (the "Regulations"), is herein called the "Registration Statement" and
the prospectus, in the form first filed with the Commission pursuant to
Rule 424(b) of the Regulations or filed as part of the Registration
Statement at the time of effectiveness if no Rule 424(b) or Rule 434 filing
is required, is herein called the "Prospectus." The term "preliminary
prospectus" as used herein means a preliminary prospectus as described in
Rule 430 of the Regulations.
<PAGE>
(b) At the time of the effectiveness of the Registration Statement or
the effectiveness of any post-effective amendment to the Registration
Statement, when the Prospectus is first filed with the Commission pursuant
to Rule 424(b) or Rule 434 of the Regulations, when any supplement to or
amendment of the Prospectus is filed with the Commission and at the Closing
Date and the Additional Closing Date, if any (as hereinafter respectively
defined), the Registration Statement and the Prospectus and any amendments
thereof and supplements thereto complied or will comply in all material
respects with the applicable provisions of the Act and the Regulations and
do not or will not contain an untrue statement of a material fact and do
not or will not omit to state any material fact required to be stated
therein or necessary in order to make the statements therein (i) in the
case of the Registration Statement, not misleading and (ii) in the case of
the Prospectus, in light of the circumstances under which they were made,
not misleading. When the preliminary prospectus relating to the Shares was
first filed with the Commission (whether filed as part of the registration
statement for the registration of the Shares or any amendment thereto or
pursuant to Rule 424(a) of the Regulations) and when any amendment thereof
or supplement thereto was first filed with the Commission, such preliminary
prospectus and any amendments thereof and supplements thereto complied in
all material respects with the applicable provisions of the Act and the
Regulations and did not contain an untrue statement of a material fact and
did not omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. No representation
and warranty is made in this subsection (b), however, with respect to any
information contained in or omitted from the Registration Statement or the
Prospectus or any related preliminary prospectus or any amendment thereof
or supplement thereto in reliance upon and in conformity with information
furnished in writing to the Company by or on behalf of any Underwriter
through the Representatives as herein stated expressly for use in
connection with the preparation thereof. If Rule 434 is used, the Company
will comply with the requirements of Rule 434.
(c) Each of Ernst & Young LLP, Aronson, Fetridge & Weigle and Grant
Thornton LLP, who have certified certain financial statements and
supporting schedules included in the Registration Statement, are
independent public accountants as required by the Act and the Regulations.
(d) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, except as set forth
in the Registration Statement and the Prospectus, there has been no
material adverse change or any development involving a prospective material
adverse change in the business, prospects, properties, operations,
condition (financial or other) or results of operations of the Company and
its subsidiaries taken as a whole, whether or not arising from transactions
in the ordinary course of business ("Material Adverse Effect"), and since
the date of the latest balance sheet presented in the Registration
Statement and the Prospectus, neither the Company nor any of its
subsidiaries has incurred or undertaken any liabilities or obligations,
direct or contingent, whether or not arising from transactions in the
ordinary course of business, which are material to the Company and its
subsidiaries taken as a whole, except for liabilities or obligations that
are reflected in the Registration Statement and the Prospectus.
2
<PAGE>
(e) This Agreement and the transactions contemplated herein have been
duly and validly authorized by the Company and this Agreement has been duly
and validly executed and delivered by the Company.
(f) Neither the Company nor any of its subsidiaries is (i) in
violation of its respective certificate of incorporation or by-laws (or
other organizational documents), (ii) in violation of any law, ordinance or
regulation applicable to it, its business as now being conducted and as
described in the Registration Statement or the ownership of its assets,
except such violations that would not have a Material Adverse Effect, or
(iii) in default in the performance of any obligation, agreement or
condition contained in any agreement, instrument, franchise, license,
permit, judgment, order or decree to which the Company or any of its
subsidiaries is a party or by which it or any of its subsidiaries or their
respective property or assets is bound, except such defaults that would not
have a Material Adverse Effect.
(g) The execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby do not and will not
(i) conflict with or result in a breach of any of the terms and provisions
of, or constitute a default (or an event which with notice or lapse of
time, or both, would constitute a default) under, or result in the creation
or imposition of any lien, charge or encumbrance upon any property or
assets of the Company or any of its subsidiaries pursuant to, any
agreement, instrument, franchise, license or permit to which the Company or
any of its subsidiaries is a party or by which any of such corporations or
their respective properties or assets may be bound or (ii) violate or
conflict with any provision of applicable law or the certificate of
incorporation or by-laws (or other organizational documents) of the Company
or any of its subsidiaries or any judgment, decree, order, statute, rule or
regulation of any court or any public, governmental or regulatory agency or
body having jurisdiction over the Company or any of its subsidiaries or any
of their respective properties or assets. No consent, approval,
authorization, order, registration, filing, qualification, license or
permit of or with any court or any public, governmental or regulatory
agency or body having jurisdiction over the Company or any of its
subsidiaries or any of their respective properties or assets is required
for the execution, delivery and performance of this Agreement or the
consummation of the transactions contemplated hereby, including the
issuance, sale and delivery of the Shares to be issued, sold and delivered
by the Company hereunder, except the registration under the Act of the
Shares and such consents, approvals, authorizations, orders, registrations,
filings, qualifications, licenses and permits as may be required under
state securities or Blue Sky laws in connection with the purchase and
distribution of the Shares by the Underwriters.
(h) All of the outstanding shares of Common Stock are duly and
validly authorized and issued, fully paid and nonassessable and were not
issued and are not now in violation of or subject to any preemptive or
similar rights. The Shares, when issued, delivered and sold in accordance
with this Agreement, will be duly and validly issued and outstanding, fully
paid and nonassessable, and will not have been issued in violation of or be
subject to any preemptive or similar rights. The Company had, at March 31,
1999, an authorized and outstanding capitalization as set forth in the
Registration Statement and
3
<PAGE>
the Prospectus. The Common Stock, the Firm Shares and the Additional Shares
conform to the descriptions thereof contained in the Registration Statement
and the Prospectus.
(i) Each of the Company and its subsidiaries has been duly organized
and is validly existing as a corporation in good standing under the laws of
its jurisdiction of incorporation. Each of the Company and its subsidiaries
is duly qualified and in good standing as a foreign corporation in each
jurisdiction in which the character or location of its properties (owned,
leased or licensed) or the nature or conduct of its business makes such
qualification necessary, except for those failures to be so qualified or in
good standing which will not, individually or in the aggregate, have a
Material Adverse Effect. Each of the Company and its subsidiaries has all
requisite power and authority, and all necessary consents, approvals,
authorizations, orders, registrations, qualifications, licenses and permits
of and from all public, regulatory or governmental agencies and bodies, to
own, lease and operate its properties and conduct its business as now being
conducted and as described in the Registration Statement and the
Prospectus, and no such consent, approval, authorization, order,
registration, qualification, license or permit contains a materially
burdensome restriction not adequately disclosed in the Registration
Statement and the Prospectus. Each of the Company and its subsidiaries has
complied with all Federal, state, local and foreign laws, ordinances,
regulations and orders applicable to it, its business as now being
conducted and as described in the Registration Statement or the ownership
of its assets, except where the failure to be in compliance would not have
a Material Adverse Effect. All of the issued shares of capital stock of
each subsidiary of the Company have been duly and validly authorized and
issued, are fully paid and nonassessable and were not issued in violation
of any preemptive or similar rights and are owned directly or indirectly by
the Company, free and clear of any lien, encumbrance, claim, security
interest, restriction on transfer, stockholder's agreement, voting trust or
other defect of title whatsoever, except as described in the Registration
Statement and the Prospectus.
(j) Except as described in the Prospectus, there is no litigation or
governmental proceeding to which the Company or any of its subsidiaries is
a party or to which any property of the Company or any of its subsidiaries
is subject or which is pending or, to the knowledge of the Company,
contemplated against the Company or any of its subsidiaries which might
result in a Material Adverse Effect or which is required to be disclosed in
the Registration Statement and the Prospectus, and there are no statutes,
regulations, contracts or other documents that are required to be described
in the Registration Statement or the Prospectus or to be filed as exhibits
to the Registration Statement that are not described or filed as required.
(k) The Company has not taken and will not take, directly or
indirectly, any action designed to cause or result in, or which constitutes
or which might reasonably be expected to constitute, the stabilization or
manipulation of the price of the shares of Common Stock to facilitate the
sale or resale of the Shares.
(l) The financial statements, including the notes thereto, and
supporting schedules included in the Registration Statement and the
Prospectus present fairly the consolidated financial position of the
Company, Apollo Holding, Inc. ("Apollo"), Pacer
4
<PAGE>
Infotec, Inc. ("Pacer," Apollo and Pacer being collectively referred to
herein as the "Predecessor Companies") and Computer Based Systems, Inc., as
of the dates indicated and the results of their operations and changes in
cash flows for the periods specified; except as otherwise stated in the
Registration Statement, said financial statements have been prepared in
conformity with generally accepted accounting principles applied on a
consistent basis; and the supporting schedules included in the Registration
Statement present fairly the information required to be stated therein; and
the pro forma financial information included in the Registration Statement
and the Prospectus has been prepared in accordance with the Commission's
rules and guidelines with respect to pro forma financial statements and the
assumptions used in the preparation thereof are, in the Company's opinion,
reasonable; and the other financial and statistical information and data
included in the Registration Statement and the Prospectus is, in all
material respects, accurately presented and prepared on a basis consistent
with such financial statements and the books and records of the Company.
(m) Except as described in the Prospectus, no holder of securities of
the Company has any rights to the registration of securities of the Company
because of the filing of the Registration Statement or otherwise in
connection with the sale of the Shares contemplated hereby.
(n) The Company is not, and upon consummation of the transactions
contemplated hereby will not be, subject to registration as an "investment
company" under the Investment Company Act of 1940.
(o) The Shares have been approved for quotation subject to notice of
issuance on the Nasdaq National Market System.
(p) No labor dispute with the employees of the Company or any of its
subsidiaries exists or, to the knowledge of the Company, is imminent; and
the Company is not aware of any existing, threatened or imminent labor
dispute or disturbance by the employees of any of its principal customers,
suppliers, contractors or providers of outsourced services that might have
a Material Adverse Effect.
(q) Except as described in the Registration Statement and the
Prospectus, the Company and its subsidiaries own or possess valid and
enforceable licenses or other rights to use all inventions, patents, patent
applications, trademarks, service marks, trade names, copyrights,
technology, know-how (including trade secrets and other unpatented and/or
unpatentable proprietary or confidential information, systems or
procedures), proprietary techniques (including processes and substances)
and other intellectual property rights necessary to conduct the business
now conducted or presently contemplated to be conducted by the Company and
its subsidiaries, taken as a whole, as described in the Registration
Statement and the Prospectus ("Intellectual Property"), subject to such
exceptions as would not have a Material Adverse Effect. Other than as
described in the Registration Statement and the Prospectus: (i) there are
no third parties who have any rights in the Intellectual Property that
could preclude the Company or its subsidiaries from conducting its business
as currently conducted or as presently contemplated to be conducted as
described in the Registration Statement and the
5
<PAGE>
Prospectus; (ii) there are no pending or, to the Company's knowledge,
threatened actions, suits, proceedings, investigations or claims by others
challenging the rights of the Company, its subsidiaries or (if the
Intellectual Property is licensed) the licensor thereof in any Intellectual
Property owned or licensed to the Company or its subsidiaries; (iii) the
Company, its subsidiaries and (if the Intellectual Property is licensed) to
the Company's knowledge the licensor thereof has not infringed, or received
any notice of infringement of or conflict with, any rights of others with
respect to the Intellectual Property; and (iv) there is no dispute between
it or any licensor with respect to any Intellectual Property, subject, with
respect to any of (i), (ii), (iii) or (iv), to such exceptions,
individually or in the aggregate, as would not have a Material Adverse
Effect.
(r) The Company and its subsidiaries (i) are in compliance with any
and all applicable foreign, federal, state and local laws and regulations
relating to the protection of human health and safety, the environment or
hazardous or toxic substances or wastes, pollutants or contaminants
("Environmental Laws"), (ii) have received all permits, licenses or other
approvals required of them under applicable Environmental Laws to conduct
their respective businesses and (iii) are in compliance with all terms and
conditions of any such permit, license or approval, except where such
noncompliance with Environmental Laws, failure to receive required permits,
licenses or other approvals or failure to comply with the terms and
conditions of such permits, licenses or approvals would not, singly or in
the aggregate, have a Material Adverse Effect.
(s) There are no costs or liabilities associated with Environmental
Laws (including, without limitation, any capital or operating expenditures
required for clean-up, closure of properties or compliance with
Environmental Laws or any permit, license or approval, any related
constraints on operating activities and any potential liabilities to third
parties) which would, singly or in the aggregate, have a Material Adverse
Effect.
(t) The Company and its subsidiaries have good and marketable title
in fee simple to all real property and good and marketable title to all
personal property owned by them which is material to the business of the
Company and its subsidiaries, in each case free and clear of all liens,
encumbrances and defects except such as are described in the Prospectus or
such as do not materially affect the value of such property and do not
interfere with the use made and proposed to be made of such property by the
Company and its subsidiaries; and any real property and buildings held
under lease by the Company and its subsidiaries are held by them under
valid, subsisting and enforceable leases with such exceptions as are not
material and do not interfere with the use made and proposed to be made of
such property and buildings by the Company and its subsidiaries, in each
case except as described in or contemplated by the Prospectus.
(u) The Company and each of its subsidiaries are insured by insurers
of recognized financial responsibility against such losses and risks and in
such amounts as are prudent and customary in the businesses in which they
are engaged; neither the Company nor any such subsidiary has been refused
any insurance coverage sought or applied for; and neither the Company nor
any such subsidiary has any reason to believe that it will not be able to
renew its existing insurance coverage as and when such
6
<PAGE>
coverage expires or to obtain similar coverage from similar insurers as may
be necessary to continue its business at a cost that would not result in a
Material Adverse Effect.
(v) The Company and each of its subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurance
that (i) transactions are executed in accordance with management's general
or specific authorizations; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability; (iii)
access to assets is permitted only in accordance with management's general
or specific authorization; and (iv) the recorded accountability for assets
is compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(w) Except as described in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this
Agreement), the Company has not sold, issued or distributed any shares of
Common Stock during the six-month period preceding the date hereof,
including any sales pursuant to Rule 144A under, or Regulation D or S of,
the Act, other than shares issued pursuant to employee benefit plans,
qualified stock option plans or other employee compensation plans or
pursuant to outstanding options, rights or warrants.
(x) No relationship, direct or indirect, exists between or among the
Company or any of its subsidiaries on the one hand, and the directors,
officers, stockholders, customers, suppliers or providers of outsourced
services of the Company or any of its subsidiaries on the other hand, which
is required by the Act to be described in the Registration Statement and
the Prospectus which is not so described.
2. Purchase, Sale and Delivery of the Shares.
-----------------------------------------
(a) On the basis of the representations, warranties, covenants and
agreements herein contained, but subject to the terms and conditions herein
set forth, the Company agrees to sell to the Underwriters and the
Underwriters, severally and not jointly, agree to purchase from the
Company, at a purchase price per share of $__________, the number of Firm
Shares set forth opposite the respective names of the Underwriters in
Schedule I hereto plus any additional number of Shares which such
Underwriter may become obligated to purchase pursuant to the provisions of
Section 9 hereof.
(b) Payment of the purchase price for, and delivery of certificates
for, the Shares shall be made at the offices of Proskauer Rose LLP, 1585
Broadway, New York, New York 10036, or at such other place as shall be
agreed upon by the Representatives and the Company, at 9:00 A.M. on the
third or fourth business day (as permitted under Rule 15c6-1 under the
Exchange Act) (unless postponed in accordance with the provisions of
Section 9 hereof), following the date of the effectiveness of the
Registration Statement (or, if the Company has elected to rely upon Rule
430A of the Regulations, the third or fourth business day (as permitted
under Rule 15c6-1 under the Exchange Act) after the determination of the
initial public offering price of the Shares), such time and date of payment
and delivery being herein called the "Closing Date". Payment shall be made
to
7
<PAGE>
the Company by certified or official bank check or checks drawn in federal
funds or similar same day funds payable to the order of the Company or by
wire transfer in same day funds at the option of the Underwriters, against
delivery to the Representatives for the respective accounts of the
Underwriters of certificates for the Shares to be purchased by them.
Certificates for the Shares shall be registered in such name or names and
in such authorized denominations as the Representatives may request in
writing at least two full business days prior to the Closing Date. The
Company will permit the Representatives to examine and package such
certificates for delivery at least one full business day prior to the
Closing Date.
(c) In addition, the Company hereby grants to the Underwriters options
to purchase up to an aggregate of 600,000 Additional Shares at the same
purchase price per share to be paid by the Underwriters to the Company for
the Firm Shares as set forth in this Section 2, for the sole purpose of
covering over-allotments in the sale of Firm Shares by the Underwriters.
Such options may be exercised at any time and from time to time, in whole
or in part, on or before the thirtieth day following the date of the
Prospectus, by written notice by the Representatives to the Company. Each
such notice shall set forth the aggregate number of Additional Shares as to
which an option is being exercised and the date and time, as reasonably
determined by the Representatives, when the Additional Shares are to be
delivered (each such date and time being herein sometimes referred to as
the "Additional Closing Date"); provided, however, that no Additional
-------- -------
Closing Date shall be earlier than the Closing Date or earlier than the
second full business day after the date on which the option shall have been
exercised nor later than the eighth full business day after the date on
which the option shall have been exercised (unless such time and date are
postponed in accordance with the provisions of Section 9 hereof).
Certificates for Additional Shares shall be registered in such name or
names and in such authorized denominations as the Representatives may
request in writing at least two full business days prior to the applicable
Additional Closing Date. The Company will permit the Representatives to
examine and package such certificates for delivery at least one full
business day prior to the applicable Additional Closing Date.
The number of Additional Shares to be sold to each Underwriter on an
Additional Closing Date shall be the number which bears the same ratio to the
aggregate number of Additional Shares being purchased on such Additional Closing
Date as the number of Firm Shares set forth opposite the name of such
Underwriter in Schedule I hereto (or such number increased as set forth in
Section 9 hereof) bears to 4,000,000, subject, however, to such adjustments to
eliminate any fractional shares as the Representatives in their sole discretion
shall make.
Payment for the Additional Shares shall be made by certified or
official bank check or checks drawn in federal funds or similar same day funds,
payable to the order of the Company, or by wire transfer in same day funds at
the option of the Underwriters at the offices of Proskauer Rose LLP, 1585
Broadway, New York, New York 10036, or such other location as may be mutually
acceptable, upon delivery of the certificates for the Additional Shares to the
Representatives for the respective accounts of the Underwriters.
8
<PAGE>
3. Offering.
--------
(a) Upon the Representatives' authorization of the release of the Firm
Shares, the Underwriters propose to offer the Shares for sale to the public
upon the terms set forth in the Prospectus.
(b) The Company and the Underwriters hereby agree that up to _______
of the Firm Shares to be purchased by the Underwriters (the "Directed
Shares") shall be reserved for sale by the Underwriters to eligible
employees of and certain persons designated by the Company (the "Directed
Shares Purchasers"), as part of the distribution of the Offered Shares by
the Underwriters subject to the terms of this Agreement, the applicable
rules, regulations and interpretations of the National Association of
Securities Dealers, Inc. and all other applicable laws, rules and
regulations, provided, however, that under no circumstances will Bear,
-------- -------
Stearns & Co. Inc. or any other Underwriter be liable to the Company or to
any of the Directed Shares Purchasers for any action taken or omitted in
good faith in connection with transactions effected with regard to the
Directed Shares Purchasers. To the extent that such Directed Shares are not
orally confirmed for purchase by such persons by the end of the first day
after the date of this Agreement, such Directed Shares will be offered to
the public as part of the underwritten offering contemplated hereby.
4. Covenants of the Company. The Company covenants and agrees with the
------------------------
Underwriters that:
(a) If the Registration Statement has not yet been declared effective,
the Company will use its best efforts to cause the Registration Statement
and any amendments thereto to become effective as promptly as possible, and
if Rule 430A is used or the filing of the Prospectus is otherwise required
under Rule 424(b) or Rule 434, the Company will file the Prospectus
(properly completed if Rule 430A has been used) pursuant to Rule 424(b) or
Rule 434 within the prescribed time period and will provide evidence
satisfactory to you of such timely filing. If the Company elects to rely on
Rule 434, the Company will prepare and file a term sheet that complies with
the requirements of Rule 434.
The Company will notify you immediately (and, if requested by you will
confirm such notice in writing) (i) when the Registration Statement and any
amendments thereto become effective, (ii) of any request by the Commission
for any amendment of or supplement to the Registration Statement or the
Prospectus or for any additional information, (iii) of the mailing or the
delivery to the Commission for filing of any amendment of or supplement to
the Registration Statement or the Prospectus, (iv) of the issuance by the
Commission of any stop order suspending the effectiveness of the
Registration Statement or any post-effective amendment thereto or of the
initiation, or the threatening, of any proceedings therefor, (v) of the
receipt of any comments from the Commission, and (vi) of the receipt by the
Company of any notification with respect to the suspension of the
qualification of the Shares for sale in any jurisdiction or the initiation
or threatening of any proceeding for that purpose. If the Commission shall
propose or enter a stop order at any time, the Company will use its best
effort to prevent the issuance of any such stop order and, if issued, to
obtain the lifting of such order as soon as possible. The Company will not
file any amendment to the Registration Statement or any amendment of or
supplement to the Prospectus (including the
9
<PAGE>
prospectus required to be filed pursuant to Rule 424(b) or Rule 434) that
differs from the prospectus on file at the time of the effectiveness of the
Registration Statement before or after the effective date of the
Registration Statement to which the Representatives shall reasonably object
in writing after being timely furnished in advance a copy thereof.
(b) If at any time when a prospectus relating to the Shares is
required to be delivered under the Act any event shall have occurred as a
result of which the Prospectus as then amended or supplemented would, in
the judgment of the Representatives or the Company, include an untrue
statement of a material fact or omit to state any material fact required to
be stated therein, in light of the circumstances under which they were
made, not misleading, or if it shall be necessary, in the judgment of the
Representatives or the Company, at any time to amend or supplement the
Prospectus or the Registration Statement to comply with the Act or the
Regulations, the Company will notify you promptly and prepare and file with
the Commission an appropriate amendment or supplement (in form and
substance satisfactory to the Representatives) which will correct the
statement or omission and will use its best efforts to have any amendment
to the Registration Statement declared effective as soon as possible.
(c) The Company will promptly deliver to you one signed copy of the
Registration Statement, including exhibits and all amendments thereto, and
the Company will promptly deliver to each of the Underwriters such number
of copies of any preliminary prospectus, the Prospectus, the Registration
Statement and all amendments of and supplements to such documents, if any,
as the Representatives may reasonably request.
(d) The Company will endeavor in good faith, in cooperation with you,
at or prior to the time of effectiveness of the Registration Statement, to
qualify the Shares for offering and sale under the securities laws relating
to the offering or sale of the Shares of such jurisdictions as the
Representatives may designate and to maintain such qualification in effect
for so long as required for the distribution thereof; except that in no
event shall the Company be obligated in connection therewith to qualify as
a foreign corporation or to execute a general consent to service of
process.
(e) The Company will make generally available (within the meaning of
Section 11(a) of the Act) to its security holders and to you as soon as
practicable, but not later than 45 days after the end of its fiscal quarter
in which the first anniversary date of the effective date of the
Registration Statement occurs, an earnings statement (in form complying
with the provisions of Rule 158 of the Regulations) covering a period of at
least twelve consecutive months beginning after the effective date of the
Registration Statement.
(f) During the period of 180 days from the date of the Prospectus, the
Company will not, without the prior written consent of Bear, Stearns & Co.
Inc. (i) issue, sell, offer or agree to sell, grant any option for the sale
of, pledge, make any short sale, establish an open "put equivalent
position" within the meaning of Rule 16a-1(h) under the Securities Exchange
Act of 1934, as amended), or otherwise dispose of, any Common Stock (or any
securities convertible into, exercisable for or exchangeable for Common
Stock) of the
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Company or of any of its subsidiaries or (ii) enter into any swap,
derivative transaction or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the
Common Stock, whether any such transaction described in clause (i) or (ii)
above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise, provided that the foregoing shall not
apply to (A) the Shares to be sold hereunder, and (B) the issuance by the
Company of shares of Common Stock upon the exercise of any option or
warrant outstanding on the date hereof and disclosed in the Prospectus; and
the Company will obtain the undertaking of each of its officers and
directors and such of its stockholders as have been heretofore designated
by the Representatives and listed on Schedule II attached hereto not to
engage in any of the aforementioned transactions on their own behalf.
(g) During a period of three years from the effective date of the
Registration Statement, the Company will furnish to you copies of (i) all
reports to its stockholders and (ii) all reports, financial statements and
proxy or information statements filed by the Company with the Commission or
any national securities exchange.
(h) The Company will apply the proceeds from the sale of the Shares as
set forth under "Use of Proceeds" in the Prospectus.
(i) The Company will use its best efforts to cause the Shares to
continue to qualify for inclusion in the Nasdaq National Market System.
(j) The Company will use its best efforts to ensure that the Directed
Shares are restricted as required by the National Association of Securities
Dealers, Inc. or the National Association of Securities Dealers, Inc. rules
from sale, transfer, assignment, pledge or hypothecation for a period of
three (3) months following the date of this Agreement. The Underwriters
will notify the Company as to which persons will need to be so restricted.
At the request of the Underwriters, the Company will direct the transfer
agent to place a stop transfer restriction upon such securities for such a
period of time. Should the Company release, or seek to release, from such
restrictions any of the Directed Shares, the Company agrees to reimburse
the Underwriters for any reasonable expenses (including, without
limitation, legal expenses) they incur in connection with such release.
5. Payment of Expenses. Whether or not the transactions contemplated in
-------------------
this Agreement are consummated or this Agreement is terminated, the Company
hereby agrees to pay all costs and expenses incident to the performance of the
obligations of the Company hereunder, including those in connection with (i)
preparing, printing, duplicating, filing and distributing the Registration
Statement, as originally filed and all amendments thereof (including all
exhibits thereto), any preliminary prospectus, the Prospectus and any amendments
or supplements thereto (including, without limitation, fees and expenses of the
Company's accountants and counsel), the underwriting documents (including this
Agreement and the Agreement Among Underwriters) and all other documents related
to the public offering of the Shares (including those supplied to the
Underwriters in quantities as hereinabove stated), (ii) the issuance, transfer
and delivery of the Shares to the Underwriters, including any transfer or other
taxes payable thereon, (iii) the qualification of the Shares under state or
foreign securities or Blue Sky laws, including the costs
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of printing and mailing a preliminary and final "Blue Sky Survey", (iv) the fees
of counsel for the Underwriters in connection with the qualification of the
Shares under state or foreign securities or Blue Sky laws and in connection with
the review and qualification of the offering of the Shares by the National
Association of Securities Dealers Inc., and such counsel's disbursements in
relation thereto, (v) quotation of the Shares on the Nasdaq National Market
System, (vi) filing fees of the Commission and the National Association of
Securities Dealers, Inc., (vii) the cost of printing certificates representing
the Shares and (viii) the cost and charges of any transfer agent or registrar.
6. Conditions of Underwriters' Obligations. The obligations of the
---------------------------------------
Underwriters to purchase and pay for the Firm Shares and the Additional Shares,
as provided herein, shall be subject to the accuracy of the representations and
warranties of the Company herein contained, as of the date hereof and as of the
Closing Date (for purposes of this Section 6, "Closing Date" shall refer to the
Closing Date for the Firm Shares and any Additional Closing Date, if different,
for the Additional Shares), to the absence from any certificates, opinions,
written statements or letters furnished to you or to Proskauer Rose LLP
("Underwriters' Counsel"), pursuant to this Section 6 of any misstatement or
omission, to the performance by the Company of its obligations hereunder and to
the following additional conditions:
(a) The Registration Statement shall have become effective not later
than, if pricing pursuant to Rule 430A, 5:30 P.M., New York time, on the
date of this Agreement or, if pricing pursuant to a pricing amendment,
12:00 P.M., New York time on the date an amendment to the Registration
Statement containing the public offering price has been filed with the
Commission, or at such later time and date as shall have been consented to
in writing by the Representatives; if the Company shall have elected to
rely upon Rule 430A or Rule 434 of the Regulations, the Prospectus shall
have been filed with the Commission in a timely fashion in accordance with
Section 4(a) hereof; and, at or prior to the Closing Date, no stop order
suspending the effectiveness of the Registration Statement or any post-
effective amendment thereof shall have been issued and no proceedings
therefor shall have been initiated or threatened by the Commission.
(b) At the Closing Date you shall have received the opinion of Swidler
Berlin Shereff Friedman, LLP, counsel for the Company, dated the Closing
Date addressed to the Underwriters and in form and substance satisfactory
to Underwriters' Counsel, to the effect that:
(i) Each of the Company and its subsidiaries has been duly
organized and is validly existing as a corporation in good standing
under the laws of its jurisdiction of incorporation. Each of the
Company and its subsidiaries is duly qualified and in good standing as
a foreign corporation in [list those states to be specified in such
opinion]. Each of the Company and its subsidiaries has all requisite
power and authority, and all consents, approvals, authorizations,
orders, registrations, qualifications, licenses and permits of and
from all public, regulatory or governmental agencies and bodies that
are material to the Company's business, to own, lease and operate its
respective properties and conduct its business as now being conducted
and as described in the Registration
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Statement and the Prospectus. All of the issued and outstanding capital
stock of each subsidiary of the Company has been duly and validly
authorized and issued and is fully paid and nonassessable and was not
issued in violation of any statutory or, to such counsel's knowledge, other
preemptive rights and, is owned directly or indirectly by the Company, free
and clear of any encumbrance, claim, security interest, restriction on
transfer, stockholders' agreement, voting trust or, to such counsel's
knowledge, any lien, except as described in the Registration Statement and
the Prospectus.
(ii) The Company has authorized and outstanding capital stock as set
forth in the Registration Statement and the Prospectus. All of the
outstanding shares of Common Stock are duly and validly authorized and
issued, are fully paid and nonassessable and were not issued in violation
of or subject to any statutory or, to such counsel's knowledge, other
preemptive rights. The Shares to be delivered on the Closing Date have been
duly and validly authorized and, when delivered by the Company in
accordance with this Agreement, will be duly and validly issued, fully paid
and nonassessable and will not have been issued in violation of or subject
to any statutory or, to such counsel's knowledge, other preemptive rights.
The Common Stock, the Firm Shares and the Additional Shares conform to the
descriptions thereof contained in the Registration Statement and the
Prospectus.
(iii) The Common Stock is duly authorized for quotation on the
Nasdaq National Market System, subject to official notice of issuance.
(iv) This Agreement has been duly and validly authorized,
executed and delivered by the Company.
(v) To such counsel's knowledge, there is no litigation or
governmental or other action, suit, proceeding or investigation before any
court or before or by any public, regulatory or governmental agency or body
pending or threatened against, or involving the properties or business of,
the Company or any of its subsidiaries, which is of a character required to
be disclosed in the Registration Statement and the Prospectus which has not
been properly disclosed therein and there are no statutes, regulations,
contracts or other documents that are required to be described in the
Registration Statement or the Prospectus or to be filed as exhibits to the
Registration Statement that are not described or filed as required.
(vi) The execution, delivery and performance of this Agreement and
the consummation of the transactions contemplated hereby by the Company do
not and will not (A) conflict with or result in a breach of any of the
terms and provisions of, or constitute a default (or an event which with
notice or lapse of time, or both, would constitute a default) under, or
result in the creation or imposition of any lien, charge or encumbrance
upon any property or assets of the Company or any of its subsidiaries
pursuant to, any agreement, instrument, franchise, license or permit known
to such counsel to which the Company or any of its subsidiaries is a party
or by which any of such corporations or their respective properties or
assets may be bound, subject to such exceptions that would not have a
Material
13
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Adverse Effect, or (B) violate or conflict with any provision of applicable
law or the certificate of incorporation or by-laws (or other organizational
documents) of the Company or any of its subsidiaries, or, to the knowledge
of such counsel, any judgment, decree, order, statute, rule or regulation
of any court or any public, governmental or regulatory agency or body
having jurisdiction over the Company or any of its subsidiaries or any of
their respective properties or assets. No consent, approval, authorization,
order, registration, filing, qualification, license or permit of or with
any court or any public, governmental, or regulatory agency or body having
jurisdiction over the Company or any of its subsidiaries or any of their
respective properties or assets is required for the execution, delivery and
performance of this Agreement or the consummation of the transactions
contemplated hereby, except for (1) such as may be required under state
securities or Blue Sky laws in connection with the purchase and
distribution of the Shares by the Underwriters (as to which such counsel
need express no opinion) and (2) such as have been made or obtained under
the Act.
(vii) The statements (A) in the Prospectus under the captions "Risk
Factors--Most of our revenues are derived from contracts with agencies of
the United States government, and uncertainties in government contracts
could adversely affect our business,""Business--Contracts--Governement
Contracts," "--Certain Regulatory Matters,""--Legal Proceedings,"
"Management--Employment Severance and Other Agreements with Management,""--
Executive Officers and Directors," "--1998 Long Term Incentive Plan,"
"Description of Securities" and "Shares Eligible for Future Sale" and (B)
in the Registration Statement in Items 14 and 15, in each case insofar as
such statements constitute summaries of the legal matters, documents or
proceedings referred to therein, fairly present the information called for
with respect to such legal matters, documents and proceedings and fairly
summarize the matters referred to therein.
(viii) The Company is not, and upon consummation of the transactions
contemplated hereby, will not be, an "investment company" as such term is
defined in the Investment Company Act of 1940, as amended.
(ix) The Registration Statement and the Prospectus and any
amendments thereof or supplements thereto (other than the financial
statements and schedules and other financial data included therein, as to
which no opinion need be rendered) comply as to form in all material
respects with the requirements of the Act and the Regulations.
(x) The Registration Statement is effective under the Act, and, to
the knowledge of such counsel, no stop order suspending the effectiveness
of the Registration Statement or any post-effective amendment thereof has
been issued and no proceedings therefor have been initiated or threatened
by the Commission and all filings required by Rule 424(b) of the
Regulations have been made.
(xi) To such counsel's knowledge, no holder of any security of the
Company has any right, not effectively satisfied or waived, to require
inclusion of
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shares of Common Stock or any other security of the Company in the
Registration Statement.
In addition, such opinion shall also contain a statement that such
counsel has participated in conferences with officers and representatives of the
Company, representatives of the independent public accountants for the Company
and the Underwriters at which the contents of the Registration Statement and the
Prospectus and related matters were discussed and, no facts have come to the
attention of such counsel which would lead such counsel to believe that either
the Registration Statement at the time it became effective (including the
information deemed to be part of the Registration Statement at the time of
effectiveness pursuant to Rule 430A(b) or Rule 434, if applicable), or any
amendment thereof made prior to the Closing Date as of the date of such
amendment, contained an untrue statement of a material fact or omitted to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading or that the Prospectus as of its date (or any
amendment thereof or supplement thereto made prior to the Closing Date as of the
date of such amendment or supplement) and as of the Closing Date contained or
contains an untrue statement of a material fact or omitted or omits to state any
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading (it being understood that such counsel need express no belief or
opinion with respect to the financial statements and schedules and other
financial data included therein).
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws other than the laws of the United States, the
General Corporation Law of the State of Delaware, the laws of the State of New
York and jurisdictions in which they are admitted, to the extent such counsel
deems proper and to the extent specified in such opinion, if at all, upon an
opinion or opinions (in form and substance reasonably satisfactory to
Underwriters' Counsel) of other counsel reasonably acceptable to Underwriters'
Counsel, familiar with the applicable laws; and (B) as to matters of fact, to
the extent they deem proper, on certificates of responsible officers of the
Company and certificates or other written statements of officers of departments
of various jurisdictions having custody of documents respecting the corporate
existence or good standing of the Company and its subsidiaries, provided that
copies of any such statements or certificates shall be delivered to
Underwriters' Counsel. The opinion of such counsel for the Company shall state
that the opinion of any such other counsel is in form satisfactory to such
counsel and, in their opinion, you and they are justified in relying thereon.
The opinion of Swidler Berlin Shereff Friedman, LLP described in this
Section 6(b) shall be rendered to the Underwriters at the request of the Company
and shall so state therein.
(c) All proceedings taken in connection with the sale of the Firm
Shares and the Additional Shares as herein contemplated shall be
satisfactory in form and substance to you and to Underwriters' Counsel, and
the Underwriters shall have received from said Underwriters' Counsel a
favorable opinion, dated as of the Closing Date with respect to the
issuance and sale of the Shares, the Registration Statement and the
Prospectus and such other related matters as the Representatives may
reasonably require, and the Company shall have furnished to Underwriters'
Counsel such documents as they request for the purpose of enabling them to
pass upon such matters.
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(d) At the Closing Date, you shall have received a certificate of the
Chief Executive Officer and Chief Financial Officer of the Company, dated
the Closing Date, to the effect that (i) the condition set forth in
subsection (a) of this Section 6 has been satisfied, (ii) as of the date
hereof and as of the Closing Date, the representations and warranties of
the Company set forth in Section 1 hereof are accurate, (iii) as of the
Closing Date, the obligations of the Company to be performed hereunder on
or prior thereto have been duly performed and (iv) subsequent to the
respective dates as of which information is given in the Registration
Statement and the Prospectus, the Company and its subsidiaries have not
sustained any material loss or interference with their respective
businesses or properties from fire, flood, hurricane, accident or other
calamity, whether or not covered by insurance, or from any labor dispute or
any legal or governmental proceeding, and there has not been any material
adverse change, or any development involving a material adverse change, in
the business, prospects, properties, operations, condition (financial or
otherwise) or results of operations of the Company and its subsidiaries
taken as a whole, except in each case as described in or contemplated by
the Prospectus.
(e) At the time this Agreement is executed and at the Closing Date,
you shall have received a letter, from Ernst & Young LLP, independent
public accountants for the Company and the Predecessor Companies, dated,
respectively, as of the date of this Agreement and as of the Closing Date
addressed to the Underwriters and in form and substance satisfactory to the
Representatives, to the effect that: (i) they are independent certified
public accountants with respect to the Company and the Predecessor
Companies within the meaning of the Act and the Regulations and stating
that the answer to Item 10 of the Registration Statement is correct insofar
as it relates to them; (ii) stating that, in their opinion, the financial
statements and schedules of the Company and the Predecessor Companies
included in the Registration Statement and the Prospectus and covered by
their opinion therein comply as to form in all material respects with the
applicable accounting requirements of the Act and the applicable published
rules and regulations of the Commission thereunder; (iii) on the basis of
procedures consisting of a reading of the latest available unaudited
interim consolidated financial statements of the Company, and its
subsidiaries, a reading of the minutes of meetings and consents of the
stockholders and boards of directors of the Company and its subsidiaries
and the committees of such boards subsequent to December 31, 1998,
inquiries of officers and other employees of the Company and its
subsidiaries who have responsibility for financial and accounting matters
of the Company and its subsidiaries with respect to transactions and events
subsequent to December 31, 1998 and other specified procedures and
inquiries to a date not more than five days (three days in the case of the
letter delivered on the Closing Date) prior to the date of such letter,
nothing has come to their attention that would cause them to believe that:
(A) the unaudited consolidated financial statements and schedules of the
Company presented in the Registration Statement and the Prospectus do not
comply as to form in all material respects with the applicable accounting
requirements of the Act and the applicable published rules and regulations
of the Commission thereunder or that such unaudited consolidated financial
statements are not fairly presented in conformity with generally accepted
accounting principles applied on a basis substantially consistent with that
of the audited consolidated financial statements of the Company included in
the Registration Statement and the Prospectus; (B) with respect to the
period subsequent to
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[ ], 1999, there were, as of the date of the most recent available monthly
consolidated financial statements of the Company and its subsidiaries, if
any, and as of a specified date not more than five days (three days in the
case of the letter delivered on the Closing Date) prior to the date of such
letter, any changes in the capital stock or long-term indebtedness of the
Company or any decrease in the net current assets or stockholders' equity
of the Company, in each case as compared with the amounts shown in the most
recent balance sheet presented in the Registration Statement and the
Prospectus, except for changes or decreases which the Registration
Statement and the Prospectus disclose have occurred or may occur or which
are set forth in such letter or (C) that during the period from [ ], 1999
to the date of the most recent available monthly consolidated financial
statements of the Company and its subsidiaries, if any, and to a specified
date not more than five days (three days in the case of the letter
delivered on the Closing Date) prior to the date of such letter, there was
(1) any decrease, as compared with the corresponding period in the prior
fiscal year, in total revenues, or any increase, as compared with the
corresponding period in the prior fiscal year, in operating loss or the
total or per share net loss or (2) any decrease, as compared with the
corresponding period in the prior fiscal quarter, in revenues, except in
any such case for decreases or increases which the Registration Statement
and the Prospectus disclose have occurred or may occur or which are set
forth in such letter; (iv) nothing has come to their attention that would
cause them to believe that the pro forma financial information included in
the Registration Statement do not comply in all material respects with the
applicable accounting requirements of Rule 11-02 of Regulation S-X or that
the pro forma adjustments have not been properly applied to the historical
amounts in the compilation of such financial information; and (v) stating
that they have compared specific dollar amounts, numbers of shares,
percentages of revenues and earnings, and other financial information
pertaining to the Company and its subsidiaries set forth in the
Registration Statement and the Prospectus, which have been specified by you
prior to the date of this Agreement, to the extent that such amounts,
numbers, percentages, and information may be derived from the general
accounting and financial records of the Company and its subsidiaries or
from schedules furnished by the Company, and excluding any questions
requiring an interpretation by legal counsel, with the results obtained
from the application of specified readings, inquiries, and other
appropriate procedures specified by you set forth in such letter, and found
them to be in agreement.
(f) Prior to the Closing Date, the Company shall have furnished to you
such further information, certificates and documents as you may reasonably
request.
(g) You have shall received from each person who is a director or
officer of the Company or such stockholder as have been heretofore
designated by the Representatives and listed on Schedule II hereto an
agreement to the effect that such person will not, directly or indirectly,
without the prior written consent of Bear, Stearns & Co. Inc., offer, sell,
offer or agree to sell, grant any option to purchase, pledge, make any
short sale, establish an open "put equivalent position" within the meaning
of Rule 16a-1(h) under the Securities Exchange Act of 1934, as amended), or
otherwise dispose of, any Common Stock (or any securities convertible into,
exercisable for or exchangeable for Common Stock) of the Company or of any
of its subsidiaries or (ii) enter into any swap, derivative transaction or
other arrangement that transfers to another, in whole or in part, any of
the
17
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economic consequences of ownership of the Common Stock, whether any such
transaction described in clause (i) or (ii) above is to be settled by
delivery of Common Stock or such other securities, in cash or otherwise,
for a period of 180 days after the date of the Prospectus.
(h) At the Closing Date, the Shares shall have been approved for
quotation on the Nasdaq National Market System.
If any of the conditions specified in this Section 6 shall not have
been fulfilled when and as required by this Agreement, or if any of the
certificates, opinions, written statements or letters furnished to you or to
Underwriters' Counsel pursuant to this Section 6 shall not be in all material
respects reasonably satisfactory in form and substance to the Representatives
and to their counsel, all obligations of the Underwriters hereunder may be
cancelled by the Representatives at, or at any time prior to, the Closing Date
and the obligations of the Underwriters to purchase the Additional Shares may be
cancelled by the Representatives at, or at any time prior to, the Additional
Closing Date. Notice of such cancellation shall be given to the Company in
writing, or by telephone, telex or telegraph, confirmed in writing.
7. Indemnification.
---------------
(a) The Company agrees to indemnify and hold harmless each Underwriter
and each person, if any, who controls any Underwriter within the meaning of
Section 15 of the Act or Section 20(a) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), against any and all losses,
liabilities, claims, damages and expenses whatsoever as incurred (including
but not limited to attorneys' fees and any and all expenses whatsoever
incurred in investigating, preparing or defending against any litigation,
commenced or threatened, or any claim whatsoever, and any and all amounts
paid in settlement of any claim or litigation), joint or several, to which
they or any of them may become subject under the Act, the Exchange Act or
otherwise, insofar as such losses, liabilities, claims, damages or expenses
(or actions in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of a material fact contained in the
registration statement for the registration of the Shares, as originally
filed or any amendment thereof, or any related preliminary prospectus or
the Prospectus, or in any supplement thereto or amendment thereof, or arise
out of or are based upon the omission or alleged omission to state therein
a material fact required to be stated therein or necessary to make the
statements therein not misleading; provided, however, that the Company will
-------- -------
not be liable in any such case to the extent but only to the extent that
any such loss, liability, claim, damage or expense arises out of or is
based upon any such untrue statement or alleged untrue statement or
omission or alleged omission made therein in reliance upon and in
conformity with written information furnished to the Company by or on
behalf of any Underwriter through the Representatives expressly for use
therein. This indemnity agreement will be in addition to any liability
which the Company may otherwise have including under this Agreement.
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(b) Each Underwriter severally, and not jointly, agrees to indemnify
and hold harmless the Company, each of the directors of the Company, each
of the officers of the Company who shall have signed the Registration
Statement, and each other person, if any, who controls the Company within
the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act,
against any losses, liabilities, claims, damages and expenses whatsoever as
incurred (including but not limited to attorneys' fees and any and all
expenses whatsoever incurred in investigating, preparing or defending
against any litigation, commenced or threatened, or any claim whatsoever,
and any and all amounts paid in settlement of any claim or litigation),
jointly or several, to which they or any of them may become subject under
the Act, the Exchange Act or otherwise, insofar as such losses,
liabilities, claims, damages or expenses (or actions in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue
statement of a material fact contained in the registration statement for
the registration of the Shares, as originally filed or any amendment
thereof, or any related preliminary prospectus or the Prospectus, or in any
amendment thereof or supplement thereto, or arise out of or are based upon
the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading, in each case to the extent, but only to the extent, that any
such loss, liability, claim, damage or expense arises out of or is based
upon any such untrue statement or alleged untrue statement or omission or
alleged omission made therein in reliance upon and in conformity with
written information furnished to the Company by or on behalf of any
Underwriter through the Representatives expressly for use therein;
provided, however, that in no case shall any Underwriter be liable or
responsible for any amount in excess of the underwriting discount
applicable to the Shares purchased by such Underwriter hereunder. This
indemnity will be in addition to any liability which any Underwriter may
otherwise have including under this Agreement. The Company acknowledges
that the statements set forth in the fifth, seventh, eleventh and twelfth
paragraphs under the caption "Underwriting" in the Prospectus constitute
the only information furnished in writing by or on behalf of any
Underwriter expressly for use in the Registration Statement relating to the
Shares as originally filed or in any amendment thereof, any related
preliminary prospectus or the Prospectus or in any amendment thereof or
supplement thereto, as the case may be.
(c) In connection with the offer and sale of the Directed Shares, the
Company agrees, promptly upon a request in writing, to indemnify and hold
harmless the Underwriters from and against any and all losses, liabilities,
claims, damages and expenses incurred by them as a result of the failure of
the Directed Shares Purchasers to pay for and accept delivery of the
Directed Shares which, by the end of the day following the date of this
Agreement, were subject to a properly confirmed agreement to purchase such
Directed Shares.
(d) Promptly after receipt by an indemnified party under subsection
(a) or (b) above of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made
against the indemnifying party under such subsection, notify each party
against whom indemnification is to be sought in writing of the commencement
thereof (but the failure so to notify an indemnifying party shall not
relieve it from any liability which it may have under this Section 7). In
case any such
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action is brought against any indemnified party, and it notifies an
indemnifying party of the commencement thereof, the indemnifying party will
be entitled to participate therein, and to the extent it may elect by
written notice delivered to the indemnified party promptly after receiving
the aforesaid notice from such indemnified party, to assume the defense
thereof with counsel satisfactory to such indemnified party.
Notwithstanding the foregoing, the indemnified party or parties shall have
the right to employ its or their own counsel in any such case, but the fees
and expenses of such counsel shall be at the expense of such indemnified
party or parties unless (i) the employment of such counsel shall have been
authorized in writing by one of the indemnifying parties in connection with
the defense of such action, (ii) the indemnifying parties shall not have
retained counsel to have charge of the defense of such action within a
reasonable time after notice of commencement of the action, or (iii) such
indemnified party or parties shall have reasonably concluded that there may
be defenses available to it or them which are different from or additional
to those available to one or all of the indemnifying parties (in which case
the indemnifying parties shall not have the right to direct the defense of
such action on behalf of the indemnified party or parties), in any of which
events such fees and expenses shall be borne by the indemnifying parties.
Anything in this subsection to the contrary notwithstanding, an
indemnifying party shall not be liable for any settlement of any claim or
action effected without its written consent; provided, however, that such
-------- ---------
consent was not unreasonably withheld.
8. Contribution. In order to provide for contribution in circumstances in
------------
which the indemnification provided for in Section 7 hereof is for any reason
held to be unavailable from any indemnifying party or is insufficient to hold
harmless a party indemnified thereunder, the Company and the Underwriters shall
contribute to the aggregate losses, claims, damages, liabilities and expenses of
the nature contemplated by such indemnification provision (including any
investigation, legal and other expenses incurred in connection with, and any
amount paid in settlement of, any action, suit or proceeding or any claims
asserted, but after deducting in the case of losses, claims, damages,
liabilities and expenses suffered by the Company any contribution received by
the Company from persons, other than the Underwriters, who may also be liable
for contribution, including persons who control the Company within the meaning
of Section 15 of the Act or Section 20(a) of the Exchange Act, officers of the
Company who signed the Registration Statement and directors of the Company) as
incurred to which the Company and one or more of the Underwriters may be
subject, in such proportions as is appropriate to reflect the relative benefits
received by the Company and the Underwriters from the offering of the Shares or,
if such allocation is not permitted by applicable law or indemnification is not
available as a result of the indemnifying party not having received notice as
provided in Section 7 hereof, in such proportion as is appropriate to reflect
not only the relative benefits referred to above but also the relative fault of
the Company and the Underwriters in connection with the statements or omissions
which resulted in such losses, claims, damages, liabilities or expenses, as well
as any other relevant equitable considerations. The relative benefits received
by the Company and the Underwriters shall be deemed to be in the same proportion
as (x) the total proceeds from the offering (net of underwriting discounts and
commissions but before deducting expenses) received by the Company and (y) the
underwriting discounts and commissions received by the Underwriters,
respectively, in each case as set forth in the table on the cover page of the
Prospectus. The relative fault of the Company and of the Underwriters shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material
20
<PAGE>
fact or the omission or alleged omission to state a material fact relates to
information supplied by the Company or the Underwriters and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Company and the Underwriters agree that
it would not be just and equitable if contribution pursuant to this Section 8
were determined by pro rata allocation (even if the Underwriters were treated as
one entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to above. Notwithstanding
the provisions of this Section 8, (i) in no case shall any Underwriter be liable
or responsible for any amount in excess of the underwriting discount applicable
to the Shares purchased by such Underwriter hereunder, and (ii) no person guilty
of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. Notwithstanding the provisions of this Section 8
and the preceding sentence, no Underwriter shall be required to contribute any
amount in excess of the amount by which the total price at which the Shares
underwritten by it and distributed to the public were offered to the public
exceeds the amount of any damages that such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. For purposes of this Section 8, each person, if any, who
controls an Underwriter within the meaning of Section 15 of the Act or Section
20(a) of the Exchange Act shall have the same rights to contribution as such
Underwriter, and each person, if any, who controls the Company within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, each
officer of the Company who shall have signed the Registration Statement and each
director of the Company shall have the same rights to contribution as the
Company, subject in each case to clauses (i) and (ii) of this Section 8. Any
party entitled to contribution will, promptly after receipt of notice of
commencement of any action, suit or proceeding against such party in respect of
which a claim for contribution may be made against another party or parties,
notify each party or parties from whom contribution may be sought, but the
omission to so notify such party or parties shall not relieve the party or
parties from whom contribution may be sought from any obligation it or they may
have under this Section 8 or otherwise. No party shall be liable for
contribution with respect to any action or claim settled without its consent;
provided, however, that such consent was not unreasonably withheld.
- -------- -------
9. Default by an Underwriter.
-------------------------
(a) If any Underwriter or Underwriters shall default in its or their
obligation to purchase Firm Shares or Additional Shares hereunder, and if
the Firm Shares or Additional Shares with respect to which such default
relates do not (after giving effect to arrangements, if any, made by you
pursuant to subsection (b) below) exceed in the aggregate 10% of the number
of Firm Shares or Additional Shares, to which the default relates shall be
purchased by the non-defaulting Underwriters in proportion to the
respective proportions which the numbers of Firm Shares set forth opposite
their respective names in Schedule I hereto bear to the aggregate number of
Firm Shares set forth opposite the names of the non-defaulting
Underwriters.
(b) In the event that such default relates to more than 10% of the
Firm Shares or Additional Shares, as the case may be, the Representatives
may in their discretion arrange for yourself or for another party or
parties (including any non-defaulting Underwriter or
21
<PAGE>
Underwriters who so agree) to purchase such Firm Shares or Additional
Shares, as the case may be, to which such default relates on the terms
contained herein. In the event that within five calendar days after such a
default you do not arrange for the purchase of the Firm Shares or
Additional Shares, as the case may be, to which such default relates as
provided in this Section 9, this Agreement or, in the case of a default
with respect to the Additional Shares, the obligations of the Underwriters
to purchase and of the Company to sell the Additional Shares shall
thereupon terminate, without liability on the part of the Company with
respect thereto (except in each case as provided in Section 5, 7(a) and 8
hereof) or the Underwriters, but nothing in this Agreement shall relieve a
defaulting Underwriter or Underwriters of its or their liability, if any,
to the other Underwriters and the Company for damages occasioned by its or
their default hereunder.
(c) In the event that the Firm Shares or Additional Shares to which
the default relates are to be purchased by the non-defaulting Underwriters,
or are to be purchased by another party or parties as aforesaid, the
Representatives or the Company shall have the right to postpone the Closing
Date or the applicable Additional Closing Date, as the case may be, for a
period, not exceeding five business days, in order to effect whatever
changes may thereby be made necessary in the Registration Statement or the
Prospectus or in any other documents and arrangements, and the Company
agrees to file promptly any amendment or supplement to the Registration
Statement or the Prospectus which, in the opinion of Underwriters' Counsel,
may thereby be made necessary or advisable. The term "Underwriter" as used
in this Agreement shall include any party substituted under this Section 9
with like effect as if it had originally been a party to this Agreement
with respect to such Firm Shares and Additional Shares.
10. Survival of Representations and Agreements. All representations and
------------------------------------------
warranties, covenants and agreements of the Underwriters and the Company
contained in this Agreement, including the agreements contained in Section 5,
the indemnity agreements contained in Section 7 and the contribution agreements
contained in Section 8, shall remain operative and in full force and effect
regardless of any investigation made by or on behalf of any Underwriter or any
controlling person thereof or by or on behalf of the Company, any of its
officers and directors or any controlling person thereof, and shall survive
delivery of and payment for the Shares to and by the Underwriters. The
representations contained in Section 1 and the agreements contained in Sections
5, 7, 8 and 11(d) hereof shall survive the termination of this Agreement,
including termination pursuant to Section 9 or 11 hereof.
11. Effective Date of Agreement; Termination.
----------------------------------------
(a) This Agreement shall become effective, upon the later of when (i)
the Representatives and the Company shall have received notification of the
effectiveness of the Registration Statement or (ii) the execution of this
Agreement. If either the initial public offering price or the purchase
price per Share has not been agreed upon prior to 5:00 P.M., New York time,
on the fifth full business day after the Registration Statement shall have
become effective, this Agreement shall thereupon terminate without
liability to the Company or the Underwriters except as herein expressly
provided. Until this Agreement becomes effective as aforesaid, it may be
terminated by the Company by
22
<PAGE>
notifying you or by the Representatives notifying the Company.
Notwithstanding the foregoing, the provisions of this Section 11 and of
Section 1, 5, 7 and 8 hereof shall at all times be in full force and
effect.
(b) You shall have the right to terminate this Agreement at any time
prior to the Closing Date or the obligations of the Underwriters to
purchase Additional Shares at any time prior to the applicable Additional
Closing Date, as the case may be (A) if any domestic or international event
or act or occurrence has materially disrupted, or in the opinion of the
Representatives will in the immediate future materially disrupt, the market
for the Company's securities or securities in general; or (B) if trading on
the New York or American Stock Exchanges or the Nasdaq shall have been
suspended, or minimum or maximum prices for trading shall have been fixed,
or maximum ranges for prices for securities shall have been required, on
the New York or American Stock Exchanges or the Nasdaq by the New York or
American Stock Exchanges, the National Association of Securities Dealers,
Inc. or by order of the Commission or any other governmental authority
having jurisdiction; or (C) if a banking moratorium has been declared by a
state or federal authority or if any new restriction materially adversely
affecting the distribution of the Firm Shares or the Additional Shares, as
the case may be, shall have become effective; or (D) (i) if the United
States becomes engaged in hostilities or there is an escalation of
hostilities involving the United States or there is a declaration of a
national emergency or war by the United States or (ii) if there shall have
been such change in political, financial or economic conditions if the
effect of any such event in (i) or (ii) as in the judgment of the
Representatives makes it impracticable or inadvisable to proceed with the
offering, sale and delivery of the Firm Shares or the Additional Shares, as
the case may be, on the terms contemplated by the Prospectus.
(c) Any notice of termination pursuant to this Section 11 shall be by
telephone, telex, or telegraph, confirmed in writing by letter.
(d) If this Agreement shall be terminated pursuant to any of the
provisions hereof (otherwise than pursuant to (i) notification by the
Representatives as provided in Section 11(a) hereof or (ii) Section 9(b) or
11(b) hereof), or if the sale of the Shares provided for herein is not
consummated because any condition to the obligations of the Underwriters
set forth herein is not satisfied or because of any refusal, inability or
failure on the part of the Company to perform any agreement herein or
comply with any provision hereof, the Company will, subject to demand by
the Representatives, reimburse the Underwriters for all out-of-pocket
expenses (including the fees and expenses of their counsel), incurred by
the Underwriters in connection herewith.
12. Notices. All communications hereunder, except as may be otherwise
-------
specifically provided herein, shall be in writing and , if sent to any
Underwriter, shall be mailed, delivered, or telexed or telegraphed and confirmed
in writing, to such Underwriter c/o Bear, Stearns & Co. Inc., 245 Park Avenue,
New York, New York 10167, Attention: [ ] with copies to
Proskauer Rose LLP, 1585 Broadway, New York, New York 10036, Attention: Julie M.
Allen, Esq.; if sent to the Company, shall be mailed, delivered, or telegraphed
and confirmed in writing to the Company, 23 Fourth Avenue, Burlington,
Massachusetts 01803, Attention: Chief
23
<PAGE>
Financial Officer, with copies to Swidler Berlin Shereff Friedman, LLP, 919
Third Avenue, New York, New York 10022, Attention: Gerald Adler, Esq.
13. Parties. This Agreement shall inure solely to the benefit of, and
-------
shall be binding upon, the Underwriters and the Company and the controlling
persons, directors, officers, employees and agents referred to in Section 7 and
8, and their respective successors and assigns, and no other person shall have
or be construed to have any legal or equitable right, remedy or claim under or
in respect of or by virtue of this Agreement or any provision herein contained.
The term "successors and assigns" shall not include a purchaser, in its capacity
as such, of Shares from any of the Underwriters.
14. Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of New York, but without regard to
principles of conflicts of law.
24
<PAGE>
If the foregoing correctly sets forth the understanding between you
and the Company, please so indicate in the space provided below for that
purpose, whereupon this letter shall constitute a binding agreement among us.
Very truly yours,
AverStar, Inc.
By ___________________________________
Michael B. Alexander
Chairman of the Board and Chief Executive
Officer
Accepted as of the date first above written
BEAR, STEARNS & CO. INC.
Legg Mason Wood Walker, Incorporated
on behalf of themselves and the other
Underwriters named in Schedule I hereto
BY: BEAR, STEARNS & CO. INC.
By __________________________
Name:
Title:
25
<PAGE>
SCHEDULE I
----------
Number of Firm
Name of Underwriter Shares to be Purchased
------------------- ----------------------
Bear, Stearns & Co. Inc
Legg Mason Wood Walker, Incorporated
Total............. _________________
26
<PAGE>
SCHEDULE II
-----------
[To be provided]
27
<PAGE>
EXHIBIT 3.3
SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
AVERSTAR, INC.
_______________________________________
AverStar, Inc., a corporation organized and existing under the laws of
the State of Delaware, hereby certifies as follows:
1. The name of the corporation is AverStar Inc. (the "Corporation").
The Corporation was originally incorporated under IP Technologies, Inc., and the
original Certificate of Incorporation of the Corporation was filed with the
Secretary of State of the State of Delaware on February 4, 1998. The original
Certificate of Incorporation was amended by an Amended and Restated Certificate
of Incorporation of IP Technologies, Inc. filed with said Secretary on February
27, 1998.
2. Pursuant to Sections 241 and 245 of the General Corporation Law
of the State of Delaware, this Second Amended and Restated Certificate of
Incorporation amends and restates the provisions of the Certificate of
Incorporation of the Corporation in all respects.
3. The text of the Second Amended and Restated Certificate of
Incorporation as heretofore amended or supplemented is hereby amended and
restated to read in its entirety as follows:
FIRST: Name. The name of the Corporation is:
AverStar, Inc.
SECOND: Registered Agent. The registered office of the Corporation is
to be located at 1013 Centre Road, Wilmington, Delaware 19085, in the County of
New Castle, State of Delaware. The name of its registered agent at that address
is Corporation Service Company.
THIRD: Purpose. The purpose of the Corporation and the nature of its
business are to engage in any lawful act or activity for which corporations may
be organized under the General Corporation Law of Delaware, and, in general, to
possess powers and privileges granted by the General Corporation Law of the
State of Delaware or by this Certificate of Incorporation, together with any
powers incidental thereto.
FOURTH: Capitalization.
-1-
<PAGE>
SECTION 1. Authorized Capital. The total number of shares of stock
------------------
which the Corporation shall have authority to issue is Twenty-Six Million
(26,000,000) shares, of which Twenty-Five Million (25,000,000) shares shall be
common stock, par value $.001 per share, and One Million (1,000,000) shares
shall be preferred stock, par value $.001 per share.
SECTION 2. Preferred Stock. The designations and the powers,
---------------
preferences and rights, and the qualifications, limitations or restrictions
thereof, of each class of stock are as follows:
The Board of Directors is expressly authorized at any time, and from
time to time, to provide for the issuance of shares of preferred stock in one or
more series, with such voting powers, full or limited, or without voting powers
and with such designations, preferences and relative, participating, optional or
other special rights, and qualifications, limitations or restrictions thereof,
as shall be stated and expressed in the resolution or resolutions providing for
the issue thereof adopted by the Board of Directors, subject to the limitations
prescribed by law and in accordance with the provisions hereof, including (but
without limiting the generality thereof) the following:
(a) The designation of the series and the number of shares to
constitute the series;
(b) The dividend rate, if any, of the series, the conditions and
dates upon which such dividends shall be payable, the relation which such
dividends shall bear to the dividends payable on any other class or classes of
stock, and whether such dividends shall be cumulative or noncumulative;
(c) Whether the shares of the series shall be subject to redemption
by the Corporation and, if made subject to such redemption, the times, prices
and other terms and conditions of such redemption;
(d) The terms and amount of any sinking fund provided for the
purchase or redemption of the shares of the series;
(e) Whether or not the shares of the series shall be convertible into
or exchangeable for shares of any other class or classes or of any other series
of any class or classes of stock of the Corporation, and, if provision be made
for conversion or exchange, the times, prices, rates, adjustments and other
terms and conditions of such conversion or exchange;
(f) The extent, if any, to which the holders of the shares of the
series shall be entitled to vote with respect to the election of directors or
otherwise;
(g) The restrictions, if any, on the issue or reissue of any
additional preferred stock; and
(h) The rights of the holders of the shares of the series upon the
dissolution, liquidation, or winding up of the Corporation.
-2-
<PAGE>
Subject to the prior or equal rights, if any, of the preferred stock
of any and all series stated and expressed by the Board of Directors in the
resolution or resolutions providing for the issuance of such preferred stock,
the holders of common stock shall be entitled (i) to receive dividends when and
as declared by the Board of Directors out of any funds legally available
therefor, (ii) in the event of any dissolution, liquidation or winding up of the
Corporation, to receive the remaining assets of the Corporation, ratably
according to the number of shares of common stock held, and (iii) to one vote
for each share of common stock held on all matters submitted to a vote of
stockholders. No holder of common stock shall have any preemptive right to
purchase or subscribe for any part of any issue of stock or of securities of the
Corporation convertible into stock of any class whatsoever, whether now or
hereafter authorized.
FIFTH: Board of Directors.
SECTION 1. Number. The business and affairs of the Corporation shall
------
be managed by or under the direction of the Board of Directors. The number of
directors, subject to any right of the holders of any series of Preferred Stock
to elect additional directors, shall be fixed from time to time by the Board of
Directors pursuant to the By-Laws.
SECTION 2. Classification. The Board of Directors shall be divided
--------------
into three classes, as nearly equal in number as the then total number of
directors constituting the whole board permits, with the term of office of one
class expiring each year. At each annual meeting of stockholders the successors
to the class of directors whose term shall then expire shall be elected to hold
office for a term expiring at the third succeeding annual meeting and each
director so elected shall hold office until his successor is elected and
qualified, or until his earlier resignation or removal.
If the number of directors is changed, any increase or decrease in the
number of directors shall be apportioned among the three classes so as to make
all classes as nearly equal in number as possible, and the Board of Directors
shall decide which class shall contain an unequal number of directors.
Notwithstanding the foregoing, whenever holders of any shares of Preferred
Stock, or any series thereof, shall be entitled, voting separately as a class,
to elect any directors, all directors so elected shall be allocated, each time
they are so elected, to the class whose term expires at the next succeeding
annual meeting of stockholders.
SECTION 3. Nomination. Only persons who are nominated in accordance
----------
with the procedures set forth in this Article Fifth, Section 3 of the
Certificate of Incorporation shall be eligible to serve as directors.
Nominations of persons for election to the Board of Directors of the Corporation
may be made at an annual meeting of stockholders (a) by or at the direction of
the Board of Directors or (b) by any stockholder of the Corporation who is a
stockholder of record at the time of giving notice provided for in this Section
3, who shall be entitled to vote for the election of directors at the meeting
and who complies with the procedures set forth below. Any such nominations
(other than those made by or at the direction of the Board of Directors) must be
made
-3-
<PAGE>
pursuant to timely notice in writing to the Secretary of the Corporation. To be
timely, a stockholder's notice must be delivered to or mailed and received at
the principal executive offices of the Corporation not less than 60 days nor
more than 90 days prior to the anniversary date of the immediately preceding
annual meeting; provided, however, that in the event that the annual meeting
with respect to which such notice is to be tendered is not held within 30 days
before or after such anniversary date, notice by the stockholder to be timely
must be received no later than the close of business on the 10th day following
the day on which notice of the meeting or public disclosure thereof was given or
made. Such stockholder's notice shall set forth (a) as to each person whom the
stockholder proposes to nominate for election or reelection as a director all
information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors, or is otherwise required, in
each case pursuant to Regulation 14A under the Securities and Exchange Act of
1934, as amended (including such person's written consent to being named as a
nominee and to serving as a director if elected); and (b) as to the stockholder
giving the notice (i) the name and address, as they appear on the Corporation's
books, of such stockholder, (ii) the class and number of shares of stock of the
Corporation which are beneficially owned by such stockholder and (iii) a
description of all arrangements or understandings between such stockholder and
any other person or persons (including their names) in connection with such
nomination and any material interest of such stockholder in such nomination. At
the request of the Board of Directors, any person nominated by the Board of
Directors for election as a director shall furnish to the Secretary of the
Corporation that information required to be set forth in a stockholder's notice
of nomination which pertains to the nominee. Notwithstanding anything in this
Section 3 to the contrary, no person shall be eligible to serve as a director of
the Corporation unless nominated in accordance with the procedures set forth in
this Section 3. If the Board of Directors shall determine, based on the facts,
that a nomination was not made in accordance with the procedures set forth in
this Section 3, the Chairman shall so declare to the meeting and the defective
nomination shall be disregarded. Notwithstanding the foregoing provisions of
this Section 3, a stockholder shall also comply with all applicable requirements
of the Securities Exchange Act of 1934, as amended, and the rules and
regulations thereunder with respect to the matters set forth in this Section 3.
SECTION 4. Vacancies. Subject to the rights of the holders of any
---------
series of Preferred Stock, newly created directorships resulting from death,
resignation, retirement, disqualification, removal from office or other cause,
may be filled by a majority vote of the remaining directors then in office,
although less than a quorum, or by the sole remaining director, and each
director so chosen shall hold office for a term expiring at the annual meeting
of stockholders at which the term of the class to which he or she has been
elected expires and until such director's successor shall have been duly elected
and qualified. No decrease in the authorized number of directors shall shorten
the term of any incumbent director.
SECTION 5. Removal. A director may be removed only for cause by the
-------
holders of a majority of the outstanding shares of all classes of capital stock
of the Corporation entitled to vote in the election of directors, considered for
this purpose as one class.
-4-
<PAGE>
SIXTH: Stockholder Action. Subject to the rights of the holders of
any series of Preferred Stock, any action required or permitted to be taken by
stockholders pursuant to Articles Fifth, Seventh, Tenth or Eleventh may be
effected only at a duly called annual or special meeting of stockholders with
prior notice and with a vote, and may not be effected by consent in writing.
Except as otherwise required by law and subject to the rights of Preferred
Stock, annual meetings may be called only by the Board of Directors pursuant to
a resolution approved by a majority of the Continuing Directors (as defined in
Article Seventh), or by the Chairman, the President or the Chief Executive
Officer, and special meetings of stockholders of the Corporation may be called
only by the Chairman of the Board, the President, the Chief Executive Officer or
the Board of Directors pursuant to a resolution approved by a majority of the
Continuing Directors (as defined in Article Seventh). Subject to the rights of
holders of any series of Preferred Stock, stockholders are not permitted to call
an annual meeting and, subject to the rights of holders of any series of
preferred stock, stockholders are not permitted to call a special meeting of
stockholders or to require that the Board of Directors call such an annual or
special meeting.
SEVENTH: Certain Business Combinations.
SECTION 1. Stockholder Approval. In addition to any affirmative vote
--------------------
required by or other conditions to be complied with pursuant to applicable law
or this Certificate of Incorporation, and except as otherwise expressly provided
in Section 2 of this Article Seventh,
(a) any merger or consolidation of the Corporation or any
Subsidiary (as hereinafter defined) with (i) an Interested Stockholder
(as hereinafter defined) or (ii) any other corporation (whether or not
itself an Interested Stockholder) which is, or after such merger or
consolidation would be, an Affiliate or Associate (as such terms are
hereinafter defined) of an Interested Stockholder, or
(b) any sale, lease, exchange, mortgage, pledge, grant of a
security interest, transfer or other disposition (in one transaction
or a series of transactions) to or with (i) an Interested Stockholder
or (ii) any other Person (as hereinafter defined)(whether or not
itself an Interested Stockholder) which is, or after such sale, lease,
exchange, mortgage, pledge, grant of a security interest, transfer or
other disposition would be, an Affiliate or Associate of an Interested
Stockholder, directly or indirectly, of assets of the Corporation
(including, without limitation, any voting securities of a Subsidiary)
or any Subsidiary, or both, having an aggregate Fair Market Value (as
hereinafter defined) of $8,000,000 or more, or
(c) the issuance or transfer by the Corporation or any
Subsidiary (in one transaction or series of transactions) of any
securities of the Corporation or any Subsidiary, or both, to (i) an
Interested Stockholder or (ii) any other Person (whether or not itself
an Interested Stockholder) which is, or after such issuance or
transfer would be, an Affiliate or Associate of an Interested
Stockholder, in exchange for cash, securities or other property (or a
combination thereof) having an aggregate Fair
-5-
<PAGE>
Market Value of $8,000,000 or more, other than the issuance of
securities upon the conversion of convertible securities of the
Corporation or any Subsidiary which were not acquired by such
Interested Stockholder (or such Affiliate or Associate) from the
Corporation or a Subsidiary, or
(d) the adoption of any plan or proposal for the liquidation or
dissolution of the Corporation proposed by or on behalf of an
Interested Stockholder or any Affiliate or Associate of an Interested
Stockholder, or
(e) any reclassification of securities (including any reverse
stock split), or recapitalization of the Corporation, or any merger or
consolidation of the Corporation with any of its Subsidiaries or any
other transaction (whether or not with or into or otherwise involving
an Interested Stockholder), which has the effect, directly or
indirectly, of increasing the proportionate share of the outstanding
shares of any class of equity or convertible securities of the
Corporation or any Subsidiary directly or indirectly beneficially
owned by (i) an Interested Stockholder or (ii) any other Person
(whether or not itself an Interested Stockholder) which is, or after
such reclassification, recapitalization, merger or consolidation or
other transaction would be, an Affiliate or Associate or an Interested
Stockholder;
shall not be consummated unless such consummation shall have been approved by
the affirmative vote of the holders of record of outstanding shares representing
(i) at least 80% of the voting power of the then outstanding Voting Shares (as
hereinafter defined) of the Corporation, voting together as a single class and
(ii) at least a majority of the voting power of the then outstanding Voting
Shares of the Corporation, voting together as a single class, which are not
beneficially owned, directly or indirectly, by such Interested Stockholder.
Such affirmative vote shall be required notwithstanding the fact that no vote
may be required, or that a lesser percentage may be specified, by law, in this
Certificate of Incorporation or in any agreement with any national securities
exchange or otherwise.
SECTION 2. Alternative Procedural Requirements. The provisions of
-----------------------------------
Section 1 of this Article Seventh shall not be applicable to any particular
Business Combination (as hereinafter defined), and such Business Combination
shall require only such affirmative vote as is required by law and any other
provisions of this Certification of Incorporation, if the Business Combination
shall have been approved by a majority of the Continuing Directors (as
hereinafter defined). The approval of a majority of the Continuing Directors
shall be required whether or not the particular Business Combination meets the
criteria set forth below, provided, however, that if such criteria are not met,
then prior to approving such Business Combination, the Continuing Directors
shall obtain the advice of a financial advisor to the effect that such Business
Combination is fair to the holders of Voting Shares (other than an Interested
Stockholder); provided, further, that the Continuing Directors shall have no
obligation to approve such Business Combination (but meeting such criteria shall
not be deemed to mean the proposed Business Combination is fair and must be
approved by the Continuing Directors) unless:
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<PAGE>
(a) The transaction constituting the Business Combination shall
provide for a consideration to be received by all holders of Common Stock in
exchange for all shares of their Common Stock, and the aggregate amount of the
cash and the Fair Market Value as of the date of the consummation of the
Business Combination of consideration other than cash to be received per share
by holders of Common Stock in such Business Combination shall be at least equal
to the higher of the following:
(i) if applicable, the highest per-share price (including
any brokerage commissions, transfer taxes and soliciting dealers'
fees) paid in order to acquire any shares of Common Stock
beneficially owned by an Interested Stockholder (1) within the
two-year period immediately prior to the Announcement Date (as
hereinafter defined), (2) within the two-year period immediately
prior to the Determination Date (as hereinafter defined) or (3)
in the transaction in which it became an Interested Stockholder,
whichever is highest; or
(ii) the Fair Market Value per share of Common Stock on the
Announcement Date or on the Determination Date, whichever is
higher;
(b) If the transaction constituting the Business Combination
shall provide for consideration to be received by holders of any class or series
of outstanding Voting Shares other than Common Stock, the aggregate amount of
the cash and the Fair Market Value as of the date of the consummation of the
Business Combination of consideration other than cash to be received per share
by holders of shares of such class or series of Voting Shares shall be at least
equal to the highest of the following (it being intended that the requirements
of this subsection (b) shall be required to be met with respect to every class
and series of outstanding Voting Shares, whether or not an Interested
Stockholder has previously acquired any shares of a particular class of Voting
Shares):
(i) if applicable, the highest per-share price (including
any brokerage commissions, transfer taxes and soliciting dealers'
fees) paid in order to acquire any shares of such class or series
of Voting Shares beneficially owned by an Interested Stockholder
(1) within the two-year period immediately prior to the
Announcement Date, (2) within the two-year period immediately
prior to the Determination Date or (3) in the transaction in
which it became an Interested Stockholder, whichever is highest;
or
(ii) the Fair Market Value per share of such class or
series of Voting Shares on the Announcement Date or the
Determination Date, whichever is higher; or
(iii) if applicable, the highest preferential amount per
share to which the holders of shares of such class or series of
Voting Shares are
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<PAGE>
entitled in the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Corporation;
(c) The consideration to be received by holders of a particular
class or series of outstanding Voting Shares (including Common Stock) shall be
in cash or in the same form as was previously paid in order to acquire shares of
such class or series of Voting Shares which are beneficially owned by an
Interested Stockholder and, if an Interested Stockholder beneficially owns
shares of any class or series of Voting Shares which were acquired with varying
forms of consideration, the form of consideration for such class or series of
Voting Shares shall be either cash or the form used to acquire the largest
number of shares of such class or series of Voting Shares beneficially owned by
it. The price determined in accordance with subsections (a) and (b) of this
Section 2 shall be subject to appropriate adjustment in the event of any
recapitalization, stock dividend, stock split, combination of shares or similar
event;
(d) After such Interested Stockholder has become an Interested
Stockholder and prior to the consummation of such Business Combination:
(i) except as approved by a majority of the Continuing
Directors, there shall have been no failure to declare and pay at
the regular date therefor any full quarterly dividends (whether
or not cumulative) on any outstanding stock having preference
over the Common Stock as to dividends or liquidation;
(ii) there shall have been (1) no reduction in the annual
rate of dividends paid on the Common Stock (except as necessary
to reflect any subdivision of the Common Stock), except as
approved by a majority of the Continuing Directors, and (2) an
increase in such annual rate of dividends as necessary to reflect
any reclassification (including any reverse stock split),
recapitalization, reorganization or any similar transaction which
has the effect of reducing the number of outstanding shares of
the Common Stock, unless the failure to so increase such annual
rate is approved by a majority of the Continuing Directors; and
(iii) such Interested Stockholder shall not have become the
Beneficial Owner (as hereinafter defined) of any additional
Voting Shares except as part of the transaction in which it
became an Interested Stockholder;
(e) After such Interested Stockholder has become an Interested
Stockholder, such Interested Stockholder shall not have received the benefit,
directly or indirectly (except proportionately as a stockholder), of any loans,
advances, guaranties, pledges or other financial assistance or any tax credits
or other tax advantages provided by the Corporation, whether in anticipation of
or in connection with such Business Combination or otherwise; and
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<PAGE>
(f) A proxy or information statement describing the proposed
Business Combination and complying with the requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and
regulations thereunder (or any subsequent provisions replacing the Exchange Act
or such rules and regulations) shall be mailed to the stockholders of the
Corporation, not later than the earlier of (i) 30 days prior to any vote on the
proposed Business Combination or (ii) if no vote on such Business Combination is
required, 60 days prior to the consummation of such Business Combination
(whether or not such proxy or information statement is required to be mailed
pursuant to the Exchange Act or subsequent provisions). Such proxy statement
shall contain at the front thereof, in a prominent place, any recommendations as
to the advisability (or inadvisability) of the Business Combination which the
Continuing Directors, or any of them, may have furnished in writing and, if
deemed advisable by a majority of the Continuing Directors, an opinion of a
reputable investment banking firm as to the fairness (or lack of fairness) of
the terms of such Business Combination, from the point of view of the holders of
Voting Shares other than an Interested Stockholder (such investment banking firm
to be selected by a majority of the Continuing Directors, to be furnished with
all information it reasonably requests and to be paid a reasonable fee for its
services upon receipt by the Corporation of such opinion).
SECTION 3. Certain Definitions. For the purposes of this Article
-------------------
Seventh:
(a) "Business Combination" shall mean any transaction which is
referred to in any one or more of subsections (a) through (e) of Section 1 of
this Article Seventh.
(b) "Voting Shares" shall mean shares of all classes and series
of stock of the Corporation entitled to vote generally in the election of
directors.
(c) "Person" shall mean any individual, corporation,
partnership, unincorporated association or other entity.
(d) "Interested Stockholder" shall mean any person (other than
the Corporation, any Subsidiary of the Corporation, any employee benefit plan of
the Corporation or any Subsidiary of the Corporation or any entity holding
shares of Common Stock for or pursuant to the terms of any such plan, any person
who is the Beneficial Owner of more than 15% of the outstanding Voting Shares
prior to consummation of an initial registered underwritten public offering of
shares of common stock under the Securities Act of 1933, as amended, or any
person who acquires beneficial ownership of more than 15% of the outstanding
Voting Shares with the prior approval of a majority of the Continuing
Directors), who or which;
(i) is the Beneficial Owner, directly or indirectly, of more
than 15% of the combined voting power of the then outstanding
Voting Shares; or
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<PAGE>
(ii) is an assignee of or has otherwise succeeded to the
beneficial ownership of any Voting Shares which were at any time
within the two-year period immediately prior to the date in
question beneficially owned by an Interested Stockholder.
Notwithstanding the foregoing, no person shall become an Interested Stockholder
as the result of an acquisition of Voting Shares by the Corporation which, by
reducing the number of shares of Common Stock outstanding, increases the
proportionate number of shares beneficially owned by such person to 15% or more
of the Voting Shares of the Corporation then outstanding; provided, however,
-------- -------
that if a person shall become the Beneficial Owner of 15% or more of the Voting
Shares of the Corporation then outstanding by reason of shares purchased by the
Corporation, and after such purchases by the Corporation becomes the Beneficial
Owner of any additional Voting Shares of the Corporation, then such person shall
be deemed to be an Interested Stockholder.
For purposes of determining whether a person is an "Interested Stockholder," the
number of Voting Shares deemed to be outstanding shall include shares deemed
owned through application of subsection (e) below but shall not include any
other Voting Shares which may be issuable pursuant to any agreement, arrangement
or understanding, or upon exercise of conversion rights, warrants or options, or
otherwise.
(e) A person shall be a "Beneficial Owner" of any Voting Shares:
(i) which such person or any of its Affiliates or
Associates beneficially owns, directly or indirectly, through any
contract, arrangement, understanding, relationship, or otherwise;
(ii) which such person or any of its Affiliates or
Associates has (1) the right to acquire beneficial ownership
(whether such right is exercisable immediately or within 60 days)
pursuant to (A) any agreement, arrangement or understanding; (B)
upon the exercise of any option, warrants or rights; or (C) upon
the conversion of a security; or (2) the right to vote or to
direct the voting thereof pursuant to any agreement, arrangement
or understanding; or
(iii) which is beneficially owned, directly or indirectly,
by any other person with which such person or any of its
Affiliates or Associates has any agreement, arrangement or
understanding for the purpose of acquiring, holding, voting or
disposing of any Voting Shares.
(f) "Affiliate" and "Associate" shall have the respective
meanings ascribed to such terms in Rule 12b-2 of the General Rules and
Regulations under the Exchange Act.
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<PAGE>
(g) "Subsidiary" shall mean any corporation, partnership or other
entity of which a majority of any class of equity security (as defined in Rule
3a(11)-1 of the General Rules and Regulations under the Exchange Act), is owned,
directly or indirectly, by the Corporation; provided, however, that for purposes
of the definition of Interested Stockholder set forth above in subsection (d),
the term "Subsidiary" shall mean only a corporation, partnership or other entity
of which a majority of each class of equity security is beneficially owned,
directly or indirectly, by the Corporation.
(h) "Continuing Director" shall mean any member of the Board of
Directors who is unaffiliated with, and not a nominee of, an "Interested
Stockholder," and was a director prior to any person becoming or was approved or
not opposed by a majority of the Board of Directors in office prior to any
person becoming an Interested Stockholder.
(i) "Announcement Date" shall mean the date of the first public
announcement of the proposed Business Combination.
(j) "Determination Date" shall mean the date which is two years prior
to the date on which the Interested Stockholder became an Interested
Stockholder.
(k) "Fair Market Value" shall mean: (1) in the case of stock, (A) if
the shares are listed or admitted for trading on any national securities
exchange or included in The Nasdaq National Market or Nasdaq SmallCap Market,
the last reported sales price as reported on such exchange or market; (B) if the
shares are not listed or admitted for trading on any national securities
exchange or included in The Nasdaq National Market or Nasdaq SmallCap Market,
the average of the last reported closing bid and asked quotation for the shares
as reported on the National Association of Securities Dealers Automated
Quotation System ("NASDAQ") or a similar service if NASDAQ is not reporting such
information; (C) if the shares are not listed or admitted for trading on any
national securities exchange or included in The Nasdaq National Market or Nasdaq
SmallCap Market or quoted by NASDAQ or a similar service, the average of the
last reported bid and asked quotation for the shares as quoted by a market maker
in the shares (or if there is more than one market maker, the bid and asked
quotation shall be obtained from two market makers and the average of the lowest
bid and highest asked quotation), or (D) if no such quotations are available,
the fair market value on the date in question of a share of such stock as
determined by a majority of the Continuing Directors in good faith; and (ii) in
the case of property other than cash or stock, the fair market value of such
property on the date in question as determined by a majority of the Continuing
Directors in good faith.
SECTION 4. Determinations by the Board of Directors. A majority of the
----------------------------------------
Continuing Directors shall have the power and duty to determine for the purposes
of this Article Seventh, on the basis of information known to them after
reasonable inquiry, all facts necessary to determine compliance with this
Article Seventh including, without limitation, (i) whether a person is an
Interested Stockholder, (ii) the number of Voting Shares beneficially owned by
any person, (iii) whether a person is an Affiliate or Associate of another, (iv)
whether the assets which are the
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<PAGE>
subject of any Business Combination have, or the consideration to be received
for the issuance or transfer of securities by the Corporation or any Subsidiary
in any Business Combination has, an aggregate Fair Market Value of $8,000,000 or
more, (v) whether the requirements of Section 2 of this Article Seventh have
been met and (vi) such other matters with respect to which a determination is
required under this Article Seventh. The good faith determination of a majority
of the Continuing Directors on such matters shall be conclusive and binding for
all purposes of this Article Seventh, and no director will have any liability to
the Corporation or any other person by reason of any such determination so made.
SECTION 5. Fiduciary Obligations. Nothing contained in this Article Seventh
---------------------
shall be construed to relieve the members of the Board of Directors or an
Interested Stockholder from any fiduciary obligation imposed by law.
The fact that any Business Combination complies with the provisions of
Section 2 of this Article Seventh shall not be construed to impose any fiduciary
duty, obligation or responsibility on the Board of Directors, or any member
thereof, to approve such Business Combination or recommend its adoption or
approval to the stockholders of the Corporation, nor shall such compliance
limit, prohibit or otherwise restrict in any manner the Board of Directors, or
any member thereof, with respect to evaluations of or actions and responses
taken with respect to such Business Combination.
EIGHTH: Liability of Directors. No director shall be personally liable to
the Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director; provided, however, that to the extent required by the
provisions of Section 102(b)(7) of the General Corporation Law of the State of
Delaware or any successor statute, or any other laws of the State of Delaware,
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 174 of
the General Corporation Law of the State of Delaware, or (iv) for any
transaction from which the director derived an improper personal benefit. If the
General Corporation Law of the State of Delaware hereafter is amended to
authorize the further elimination or limitation on personal liability of
directors, then the liability of a director of the Corporation, in addition to
the limitation on personal liability provided herein, shall be limited to the
fullest extent permitted by the amended General Corporation Law of the State of
Delaware. Any repeal or modification of this Article Eighth by the stockholders
of the Corporation shall be prospective only, and shall not adversely affect any
limitation on the personal liability of a director of the Corporation existing
at the time of such repeal or modification.
NINTH: Indemnification and Advancement of Expenses
SECTION 1. Indemnification. The Corporation shall indemnify each person
---------------
who was or is made a party or is threatened to be made a party to or is involved
in any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or
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<PAGE>
investigative (other than an action by or in the right of the Corporation)
(hereinafter a "proceeding"), by reason of the fact that he or she, or a person
of whom he or she is the legal representative, is or was a director or officer
of the Corporation or is or was serving at the request of the Corporation as
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, including service with respect to employee
benefit plans, whether the basis of such proceeding is alleged action in an
official capacity as a director, officer, employee or agent or alleged action in
any other capacity while service as a director, officer, employee or agent, to
the maximum extent authorized by the General Corporation Law of the State of
Delaware, as the same exists or may hereafter be amended (but, in the case of
any such amendment, only to the extent that such amendment permits the
Corporation to provide broader indemnification rights than said law permitted
the Corporation to provide prior to such amendment), against all expense,
liability and loss (including attorneys' fees, judgments, fines, ERISA excise
taxes or penalties, amounts paid or to be paid in settlement) actually and
reasonably incurred by such person in connection with such proceeding if the
person acted in good faith and in a manner the person reasonably believed to be
in or not opposed to the best interests of the Corporation, and, with respect to
any criminal proceeding, had no reasonable cause to believe that the person's
conduct was unlawful. Such indemnification shall continue as to a person who has
ceased to be a director, officer, employee or agent and shall inure to the
benefit of his or her heirs, executors and administrators. The right to
indemnification conferred in this Article Ninth shall be a contract right and
shall include the right to be paid by the Corporation the expenses incurred in
defending any such proceeding in advance of its final disposition; provided
that, if the General Corporation Law of the State of Delaware so requires, the
payment of such expenses incurred by a director or officer in advance of the
final disposition of a proceeding shall be made only upon receipt by the
Corporation of an undertaking by or on behalf of such person to repay all
amounts so advanced if it shall ultimately be determined that such person is not
entitled to be indemnified by the Corporation as authorized in this Article
Ninth or otherwise.
SECTION 2. Nonexclusivity. The right to indemnification and advancement of
--------------
expenses conferred on any person by this Article Ninth shall not limit the
Corporation from providing any other indemnification permitted by law nor shall
it be deemed exclusive of any other right which any such person may have or
hereafter acquire under any statute, provision of this Certificate of
Incorporation, by-law, agreement, vote of stockholders or disinterested
directors or otherwise.
SECTION 3. Insurance. The Corporation may purchase and maintain insurance,
---------
at its expense, to protect itself and any director, officer, employee or agent
of the Corporation or another corporation, partnership, joint venture, trust or
other enterprises against any expenses, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such expense,
liability or loss under the General Corporation Law of the State of Delaware.
TENTH: Amendment of By-Laws. The Board of Directors shall have power to
make, amend and repeal the By-Laws. Any By-Laws made by the Board of Directors
under the powers conferred hereby may be amended or repealed by the Board of
Directors or by the
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<PAGE>
stockholders. Notwithstanding the foregoing and anything contained in this
Certificate of Incorporation to the contrary, Article II, Sections 2.3, 2.4, 2.6
and 2.11, Article II, Sections 3.1 and 3.2 and Article VIII, Section 8.1 of the
By-Laws shall not be amended or repealed, and no provision inconsistent
therewith shall be adopted, without the affirmative vote of the holders of
record of outstanding shares representing (i) at least 80% of the voting power
of the then outstanding Voting Shares (as defined in Article Seventh) of the
Corporation, voting together as a single class and (ii) if there is then an
Interested Stockholder (as defined in Article Seventh), at least a majority of
the voting power of the then outstanding Voting Shares of the Corporation,
voting together as a single class, which are not beneficially owned, directly or
indirectly, by an Interested Stockholder, effected at a duly called annual or
special meeting of such stockholders, with such prior notice as is required by
the By-Laws; provided, however, that the provisions of this sentence shall not
apply to any amendment, repeal or adoption of any inconsistent provision
declared advisable by the Board of Directors by the affirmative vote of a
majority of the total number of directors which the Corporation would have if
there were no vacancies on the Board of Directors and, if there is then an
Interested Stockholder, a majority of the Continuing Directors (as defined above
in Article Seventh).
ELEVENTH: Amendment of Certificate of Incorporation. The Corporation
reserves the right to amend or repeal any provision contained in this
Certificate of Incorporation, in the manner now or hereafter prescribed by
statute, and all rights conferred upon stockholders herein are granted subject
to this reservation. Notwithstanding any other provision of this Certificate of
Incorporation or the By-Laws (and in addition to any other vote that may be
required by applicable law, by this Certificate of Incorporation or by the By-
Laws), the affirmative vote of the holders of record of outstanding shares
representing (i) at least 80% of the voting power of the then outstanding Voting
Shares of the Corporation, voting together as a single class, and (ii) if there
is then an Interested Stockholder (as defined in Article Seventh), at least a
majority of the voting power of the then outstanding Voting Shares of the
Corporation, voting together as a single class, which are not beneficially
owned, directly or indirectly, by an Interested Stockholder, effected at a duly
called annual or special meeting of such stockholders, with prior notice, and
with a vote and not by written consent, shall be required to amend or repeal, or
adopt any provisions inconsistent with this Article Eleventh, or Articles Fifth
through Tenth of this Certificate of Incorporation; provided, however, that the
provisions of this sentence shall not apply to any amendment, repeal or adoption
of any inconsistent provision declared advisable by the Board of Directors by
the affirmative vote of a majority of the total number of directors which the
Corporation would have if there were no vacancies on the Board of Directors and,
if there is then an Interested Stockholder, a majority of the Continuing
Directors (as defined above in Article Seventh).
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<PAGE>
IN WITNESS WHEREOF, this Restated Certificate of Incorporation has
been signed and alleged to under penalties of perjury this _____th day of June,
1999.
AVERSTAR, INC.
By: __________________________________
Michael B. Alexander
Chief Executive Officer and
Chairman of the Board of Directors
Attest:
_______________________
Nicholas A. Pettinella
Secretary
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<PAGE>
Exhibit 3.5
AMENDED AND RESTATED
BY-LAWS
OF
AVERSTAR, INC.
_______________________________________
ARTICLE I
OFFICES
Section 1.1 Registered Office. The registered office of the
----------- -----------------
Corporation within the State of Delaware shall be located at the principal place
of business in said State of such corporation or individual acting as the
Corporation's registered agent in Delaware.
Section 1.2 Other Offices. The Corporation may also have offices and
----------- -------------
places of business at such other places both within and without the State of
Delaware as the Board of Directors may from time to time determine or the
business of the Corporation may require.
ARTICLE II
MEETINGS OF THE STOCKHOLDERS
Section 2.1 Place of Meetings. All meetings of stockholders shall be
----------- -----------------
held at the principal office of the Corporation, or at such other place within
or without the State of Delaware as shall be stated in the notice of the meeting
or in a duly executed waiver of notice thereof.
Section 2.2 Annual Meetings. The annual meeting of stockholders for
----------- ---------------
the election of directors and for the transaction of any other proper business
shall be held on the date and at the time fixed, from time to time, by the
person or persons set forth in the Certificate of Incorporation.
Section 2.3 Special Meetings. Subject to the rights of holders of any
----------- ----------------
series of Preferred Stock, special meetings of stockholders, for any purpose or
purposes, may be called only by or at the direction of the person or persons set
forth in the Certificate of Incorporation. At any special meeting of
stockholders, only such business may be transacted as is related to the purpose
or purposes set forth in the notice of such meeting.
Section 2.4 Notice of Meetings. Written notice of every meeting of
----------- ------------------
stockholders, stating the place, date and hour thereof and, in the case of a
special meeting of stockholders, the purpose or purposes thereof and the person
or persons by whom or at whose direction such meeting has been called and notice
is being issued, shall be given not less than ten (10) nor more than sixty (60)
days before the date of the meeting, either personally or by mail, by or at the
direction of the Chairman of the Board, President, or the persons calling the
meeting, to each stockholder of record entitled to vote at such meeting. If
mailed, such notice shall be deemed to be given when deposited
<PAGE>
in the United States mail, postage prepaid, directed to the stockholder at his
address as it appears on the stock transfer books of the Corporation.
Section 2.5 Quorum. The holders of a majority of the issued and
----------- ------
outstanding shares of stock of the Corporation entitled to vote, represented in
person or by proxy, shall be necessary to and shall constitute a quorum for the
transaction of business at any meeting of stockholders. If, however, such quorum
shall not be present or represented at any meeting of stockholders, the
stockholders entitled to vote there at, present in person or represented by
proxy, shall have power to adjourn the meeting from time to time, without notice
other than announcement at the meeting, until a quorum shall be present or
represented. At such adjourned meeting at which a quorum shall be present or
represented, any business may be transacted which might have been transacted at
the meeting as originally noticed. Notwithstanding the foregoing, if after any
such adjournment the Board of Directors shall fix a new record date for the
adjourned meeting, or if the adjournment is for more than thirty (30) days, a
notice of such adjourned meeting shall be given as provided in Section 2.4 of
these By-Laws.
Section 2.6 Voting. The voting rights of stockholders shall be as
----------- ------
provided in the Certificate of Incorporation.
Section 2.7 Proxies. Every stockholder entitled to vote at a meeting
----------- -------
or by consent without a meeting may authorize another person or persons to act
for him by proxy. Each proxy shall be in writing executed by the stockholder
giving the proxy or by his duly authorized attorney. No proxy shall be valid
after the expiration of eleven (11) months from its date, unless a longer period
is provided for in the proxy. Unless and until voted, every proxy shall be
revocable at the pleasure of the person who executed it, or his legal
representatives or assigns, except in those cases where an irrevocable proxy
permitted by statute has been given.
Section 2.8 Stock Records. The Secretary or agent having charge of
----------- -------------
the stock transfer books shall make, at least ten (10) days before each meeting
of stockholders, a complete list of the stockholders entitled to vote at such
meeting or any adjournment thereof, arranged in alphabetical order and showing
the address of and the number and class and series, if any, of shares held by
each. Such list, for a period of ten (10) days prior to such meeting, shall be
kept at the principal place of business of the Corporation or at the office of
the transfer agent or registrar of the Corporation and such other places as
required by statute and shall be subject to inspection by any stockholder at any
time during the meeting.
Section 2.9 Conduct of Meeting. The Chairman of the Board shall
----------- ------------------
preside at all meetings of the stockholders. In the absence of a Chairman, the
Vice Chairman shall preside at all such meetings. If neither the Chairman of the
Board nor the Vice Chairman are present, then any other director chosen by the
directors in attendance shall preside. The Secretary of the Corporation, or, in
his absence, an Assistant Secretary, if any, shall act as secretary of every
meeting, but if neither the Secretary nor an Assistant Secretary is present the
Chairman for the meeting shall appoint a secretary of the meeting.
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<PAGE>
Section 2.10 Inspection and Judges. The directors, in advance of any
------------ ---------------------
meeting, may, but need not, appoint one or more inspectors of election or judges
of the vote, as the case may be, to act at the meeting or any adjournment
thereof. If an inspector or inspectors or judge or judges are not appointed, the
person presiding at the meeting may, but need not, appoint one or more
inspectors or judges. In case any person who may be appointed as an inspector or
judge fails to appear or act, the vacancy may be filled by appointment made by
the person presiding at the meeting. Each inspector or judge, if any, before
entering upon the discharge of his duties, shall take and sign an oath
faithfully to execute the duties of inspector or judge at such meeting with
strict impartiality and according to the best of his ability. The inspectors or
judges, if any, shall determine the number of shares of stock outstanding and
the voting power of each, the shares of stock represented at the meeting, the
existence of a quorum, the validity and effect of proxies, and shall receive
votes, ballots or consents, hear and determine all challenges and questions
arising in connection with the right to vote, count and tabulate all votes,
ballots or consents, determine the result, and do such acts as are proper to
conduct the election or vote with fairness to all stockholders. On request of
the person presiding at the meeting, the inspector or inspectors or judge or
judges, if any, shall make a report in writing on any challenge, question or
matter determined by him or them and execute a certificate of any fact found by
him or them.
Section 2.11 Stockholder Proposals. At any annual meeting of the
------------ ---------------------
stockholders, only such business shall be conducted as shall have been brought
before the meeting (a) by or at the direction of the Board of Directors or (b)
by any stockholder of the Corporation who is a stockholder of record at the time
of giving of the notice provided for in this Section 2.11, who shall be entitled
to vote at such meeting and who complies with the procedure set forth below. For
business to be properly brought before a stockholder annual meeting by a
stockholder, the stockholder must have given timely notice thereof in writing to
the Secretary of the Corporation. To be timely, a stockholder's notice must be
delivered to or mailed and received at the principal executive offices of the
Corporation not less than 60 days nor more than 90 days prior to the anniversary
date of the immediately preceding annual meeting; provided, however, that in the
event that the annual meeting with respect to which such notice is to be
tendered is not held within 30 days before or after such anniversary date,
notice by the stockholder to be timely must be received no later than the close
of business on the 10th day following the day on which notice of the date of
the meeting or public disclosure thereof was given or made. Such stockholder's
notice shall be set forth as to each matter the stockholder proposes to bring
before the meeting (a) a brief description of the business desired to be brought
before the meeting and the reasons for conducting such business at the meeting,
(b) the name and address, as they appear on the Corporation's books, of the
stockholder proposing such business, (c) the class and the number of shares of
stock of the Corporation which are beneficially owned by the stockholder and (d)
a description of all arrangements or understandings between such stockholder and
any other person or persons (including their names) in connection with such
business and any material interest of the stockholder in such business.
Notwithstanding anything in these By-laws to the contrary, no business shall be
conducted at a stockholder meeting except in accordance with the procedures set
forth in this Section 2.11. If the Board of Directors at the meeting shall
determine, based on the facts, that business was not properly brought before the
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<PAGE>
meeting in accordance with the procedures set forth in this Section 2.11, the
Chairman of the Board shall so declare to the meeting and any such business not
properly brought before the meeting shall not be transacted. Notwithstanding the
foregoing provisions of this Section 2.11, a stockholder shall also comply with
all applicable requirements of the Securities and Exchange Act of 1934, as
amended, and the rules and regulations thereunder with respect to the matters
set forth in this Section 2.11.
ARTICLE III
DIRECTORS
Section 3.1 Number. Subject to any right of the holder of any series
----------- ------
of preferred stock to elect additional directors, the number of directors shall
be fixed from time to time by the Board of Directors.
Section 3.2 Nomination, Classification, Election, Term, Removal and
----------- -------------------------------------------------------
Vacancies. The nomination, classification, election, term and removal of
- ---------
directors and the filling of newly created directorships and vacancies in the
Board of Directors shall be governed by the Certificate of Incorporation.
Section 3.3 Powers and Duties. Subject to the applicable provisions of
----------- -----------------
law, these By-Laws or the Certificate of Incorporation, but in furtherance and
not in limitation of any rights therein conferred, the Board of Directors shall
have the control and management of the business and affairs of the Corporation
and shall exercise all such powers of the Corporation and do all such lawful
acts and things as may be exercised by the Corporation.
Section 3.4 Place of Meeting. All meetings of the Board of Directors
----------- ----------------
may be held either within or without the State of Delaware.
Section 3.5 Annual Meetings. An annual meeting of each newly elected
----------- ---------------
Board of Directors shall be held immediately following the annual meeting of
stockholders, and no notice of such meeting to the newly elected directors shall
be necessary in order legally to constitute the meeting, provided a quorum shall
be present, or the newly elected directors may meet at such time and place as
shall be fixed by the written consent of all of such directors.
Section 3.6 Regular Meetings. Regular meetings of the Board of
----------- ----------------
Directors may be held upon such notice or without notice, and at such time and
at such place as shall from time to time be determined by the Board of
Directors.
Section 3.7 Special Meetings. Special meetings of the Board of
----------- ----------------
Directors may be called by the Chairman of the Board, Vice-Chairman, President
or Vice President and shall be called promptly by the Chairman of the Board, the
President or the Secretary upon the written request of at least 75% of the Board
of Directors specifying the special purpose thereof, on not less than two (2)
days notice to each director. Such request shall ]state the date, time and place
of the
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meeting. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the Board of Directors need be specified in the
notice or waiver of notice of such meeting.
Section 3.8 Notice of Meetings. Notice of each special meeting of the
----------- ------------------
Board of Directors (and of each regular meeting for which notice shall be
required) shall be given by the Secretary or an Assistant Secretary and shall
state the place, date and time of the meeting. Notice of each such meeting shall
be given orally or shall be mailed to each director at his residence or usual
place of business. If notice of less than two (2) days is given, it shall be
oral, whether by telephone or in person, or sent by special delivery mail or
telegraph. If mailed, the notice shall be given when deposited in the United
States mail, postage prepaid. Notice of any adjourned meeting, including the
place, date and time of the new meeting, shall be given to all directors not
present at the time of the adjournment, as well as to the other directors unless
the place, date and time of the new meeting is announced at the adjourned
meeting.
Section 3.9 Quorum and Voting. At all meetings of the Board of
----------- -----------------
Directors a majority of the entire Board of Directors shall be necessary to and
shall constitute a quorum for the transaction of business, unless otherwise
provided by any applicable provision of law, by these By-Laws or by the
Certificate of Incorporation. The act of a majority of the directors present at
the time of the vote, if a quorum is present at such time, shall be the act of
the Board of Directors, unless otherwise provided by any applicable provision of
law, by these By-Laws or by the Certificate of Incorporation. If a quorum shall
not be present at any meeting of the Board of Directors, the directors present
thereat may adjourn the meeting from time to time, until a quorum shall be
present.
Section 3.10 Compensation. The Board of Directors, by the affirmative
------------ ------------
vote of a majority of the directors then in office, and irrespective of any
personal interest of any of its members, shall have authority to establish
reasonable compensation of all directors for services to the Corporation as
directors, officers or otherwise.
Section 3.11 Books and Records. The directors may keep the books of
------------ -----------------
the Corporation, except such as are required by law to be kept within the state,
outside of the State of Delaware, at such place or places as they may from time
to time determine.
Section 3.12 Action Without a Meeting. Any action required or
------------ ------------------------
permitted to be taken by the Board of Directors, or by a committee of the Board
of Directors, may be taken without a meeting if all members of the Board of
Directors or the committee, as the case may be, consent in writing to the
adoption of a resolution authorizing the action. Any such resolution and the
written consents thereto by the members of the Board of Directors or committee
shall be filed with the minutes of the proceedings of the Board of Directors or
committee.
Section 3.13 Telephone Participation. Any one or more members of the
------------ -----------------------
Board of Directors, or any committee of the Board of Directors, may participate
in a meeting of the Board of Directors or committee by means of a conference
telephone call or similar communications
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<PAGE>
equipment allowing all persons participating in the meeting to hear each other
at the same time. Participation by such means shall constitute presence in
person at a meeting.
Section 3.14 Committees of the Board of Directors. The Board of
------------ ------------------------------------
Directors, by resolution adopted by a majority of the entire Board of Directors,
may designate one or more committees, each consisting of one or more directors.
The Board of Directors may designate one or more directors as alternate members
of any such committee. Such alternate members may replace any absent member or
members at any meeting of such committee. Each committee (including the members
thereof) shall serve at the pleasure of the Board of Directors and may keep
minutes of its meetings and report the same to the Board of Directors. Except as
otherwise provided by law, each such committee, to the extent provided in the
resolution establishing it, shall have and may exercise all the authority of the
Board of Directors with respect to all matters. However, no such committee shall
have power or authority to:
(a) amend the Certificate of Incorporation;
(b) adopt an agreement of merger or consolidation;
(c) recommend to the stockholders the sale, lease or exchange of
all or substantially all of the Corporation's property and
assets;
(d) recommend to the stockholders a dissolution of the
corporation or a revocation of a dissolution;
(e) amend these By-Laws; and unless expressly so provided by
resolution of the Board of Directors, no such committee
shall have power or authority to:
(f) declare a dividend; or
(g) authorize the issuance of shares of the Corporation of any
class.
ARTICLE IV
WAIVER
Section 4.1 Waiver. Whenever a notice is required to be given by any
----------- ------
provision of law, by these By-Laws, or by the Certificate of Incorporation, a
waiver thereof in writing, whether before or after the time stated therein,
shall be deemed equivalent to such notice. In addition, any stockholder
attending a meeting of stockholders in person or by proxy without protesting
prior to the conclusion of the meeting the lack of notice thereof to him, and
any director attending a meeting of the Board of Directors without protesting
prior to the meeting or at its commencement such lack of notice, shall be
conclusively deemed to have waived notice of such meeting.
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ARTICLE V
OFFICERS
Section 5.1 Executive Officers. The executive officers of the
----------- ------------------
Corporation shall be a Chairman of the Board, President, one or more Vice
Presidents, a Secretary and a Treasurer, one or more Assistant Secretaries and
Assistant Treasurers. Any person may hold two or more of such offices. The
executive officers of the Corporation shall be elected annually (and from time
to time by the Board of Directors, as vacancies occur) at the annual meeting of
the Board of Directors following the meeting of stockholders at which the Board
of Directors was elected.
Section 5.2 Other Officers. The Board of Directors may also elect
----------- --------------
or may delegate to the Chairman of the Board the power to appoint such other
officers as it may at any time or from time to time deem advisable, and any
officers so elected or appointed shall have such authority and perform such
duties as the Board of Directors or the Chairman of the Board, if he shall have
appointed them, may from time to time prescribe.
Section 5.3 Authorities and Duties. All officers, as between
----------- ----------------------
themselves and the Corporation, shall have such authority and perform such
duties in the management of the business and affairs of the Corporation as may
be provided in these By-Laws, or, to the extent not so provided, as may be
prescribed by the Board of Directors.
Section 5.4 Tenure and Removal. The officers of the Corporation
----------- ------------------
shall be elected or appointed to hold office until their respective successors
are elected or appointed. All officers shall hold office at the pleasure of the
Board of Directors, and any officer elected or appointed by the Board of
Directors may be removed at any time by the Board of Directors for cause or
without cause at any regular or special meeting.
Section 5.5 Vacancies. Any vacancy occurring in any office of the
----------- ---------
Corporation, whether because of death, resignation or removal, with or without
cause, or any other reason, shall be filled by the Board of Directors.
Section 5.6 Compensation. The salaries and other compensation of all
----------- ------------
officers and agents of the Corporation shall be fixed by or in the manner
prescribed by the Board of Directors.
Section 5.7 Chairman of the Board. The Chairman of the Board shall
----------- ---------------------
preside at the meetings of the Stockholders and of the Board of Directors and
shall be the Chief Executive Officer of the Corporation and shall have the
general management of the general affairs of the Corporation.
Section 5.8 Vice Chairman. In the absence of the Chairman, the Vice
----------- -------------
Chairman shall perform the duties of the Chairman and shall preside at the
meetings of the Stockholders and of the Board of Directors.
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Section 5.9 President. The President, if there shall be one, shall
----------- ---------
exercise and perform those duties delegated to him or her by the Board of
Directors, Chairman or Vice Chairman.
Section 5.10 Vice President. The Vice-Presidents shall, in the
------------ --------------
absence or incapacity of the President, perform the duties of the President;
they shall also perform such other duties and have such powers as may be
prescribed or assigned to them from time to time by the Board of Directors or
the By-laws.
Section 5.11 Chief Financial Officer. The Chief Financial Officer
------------ -----------------------
shall perform all the duties customary to that office, shall have the care and
custody of the funds and securities of the Corporation, subject always to the
control and supervision of the Board of Directors, and shall have the general
supervision of the books of account. The Chief Financial Officer shall have such
other powers and duties as the Board of Directors from time to time may
prescribe. The Chief Financial Officer shall give such bonds for the faithful
performance of his or her duties as the Board of Directors from time to time may
determine.
Section 5.12 Treasurer. The Treasurer shall supervise the
------------ ---------
Corporation's relationships with banking and lending institutions, subject
always to the control and supervision of the Board of Directors. The Treasurer
shall have such other powers and duties as the Board of Directors from time to
time may prescribe.
Section 5.13 Secretary. The Secretary shall keep the minutes of the
------------ ---------
meetings of the Board of Directors and of the Stockholders and shall have the
custody of the seal of the Corporation and shall affix the same to certificates
of stock and other documents when authorized to do so. The Secretary shall
perform all the other duties usual to that office, and such other duties as the
Board of Directors from time to time may prescribe.
ARTICLE VI
PROVISIONS RELATING TO STOCK CERTIFICATES AND STOCKHOLDERS
Section 6.1 Form and Signature. The shares of the Corporation shall
----------- ------------------
be represented by certificates signed by the Chairman of the Board of Directors,
the Vice Chairman, the President or a Vice-President, and by the Secretary, an
Assistant Secretary, the Treasurer or an Assistant Treasurer, and shall bear the
seal of the Corporation or a facsimile thereof. Each certificate representing
shares shall state upon its face (a) that the Corporation is formed under the
laws of the State of Delaware, (b) the name of the person or persons to whom it
is issued, (c) the number of shares which such certificate represents and (d)
the par value, if any, of each share represented by such certificate. Where any
such certificate is signed by a transfer agent or transfer clerk and by a
registrar, the signatures of any such Chairman of the Board, Vice Chairman,
President, Vice-President, Secretary, Assistant Secretary, Treasurer or
Assistant Treasurer, may be facsimiles, engraved or printed..
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<PAGE>
Section 6.2 Registered Stockholders. The Corporation shall be
----------- -----------------------
entitled to recognize the exclusive right of a person registered on its books as
the owner of shares of stock to receive dividends or other distributions, and to
vote as such owner, and to hold liable for calls and assessments a person
registered on its books as the owner of shares of stock, and shall not be bound
to recognize any equitable or legal claim to or interest in such shares on the
part of any other person.
Section 6.3 Transfer of Stock. Upon surrender to the Corporation or
----------- -----------------
the appropriate transfer agent, if any, of the Corporation, of a certificate
representing shares of stock duly endorsed or accompanied by proper evidence of
succession, assignment or authority to transfer, and, in the event that the
certificate refers to any agreement restricting transfer of the shares which it
represents, proper evidence of compliance with such agreement, a new certificate
shall be issued to the person entitled thereto, and the old certificate
cancelled and the transaction recorded upon the books of the Corporation.
Section 6.4 Lost Certificates, etc. The Corporation may issue a new
----------- ----------------------
certificate for shares in place of any certificate theretofore issued by it,
alleged to have been lost, mutilated, stolen or destroyed, and the Board of
Directors may require the owner of such lost, mutilated, stolen or destroyed
certificate, or his legal representatives, to make an affidavit of that fact
and/or to give the Corporation a bond in such sum as it may direct as indemnity
against any claim that may be made against the Corporation on account of the
alleged loss, mutilation, theft or destruction of any such certificate or the
issuance of any such new certificate.
Section 6.5 Record Date. For the purpose of determining the
----------- -----------
stockholders entitled to notice of, or to vote at, any meeting of stockholders
or any adjournment thereof, or to express written consent to any corporate
action without a meeting, or for the purpose of determining stockholders
entitled to receive payment of any dividend or other distribution or allotment
of any rights, or entitled to exercise any rights in respect of any change,
conversion or exchange of stock, or for the purpose of any other lawful action,
the Board of Directors may fix, in advance, a record date. Such date shall not
be more than sixty (60) nor less than ten (10) days before the date of any such
meeting, nor more than sixty (60) days prior to any other action.
Section 6.6 Regulations. Except as otherwise provided by law, the
----------- -----------
Board of Directors may make such additional rules and regulations, not
inconsistent with these By-Laws, as it may deem expedient, concerning the issue,
transfer and registration of certificates for the securities of the Corporation.
The Board of Directors may appoint, or authorize any officer or officers to
appoint, one or more transfer agents and one or more registrars and may require
all certificates for shares of capital stock to bear the signature or signatures
of any of them.
ARTICLE VII
GENERAL PROVISIONS
Section 7.1 Dividends and Distributions. Dividends and other
----------- ---------------------------
distributions upon or with respect to outstanding shares of stock of the
Corporation may be declared by the Board of
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<PAGE>
Directors at any regular or special meeting, and may be paid in cash, bonds,
property, or in stock of the Corporation. The Board of Directors shall have full
power and discretion, subject to the provisions of the Certificate of
Incorporation or the terms of any other corporate document or instrument binding
upon the Corporation to determine what, if any, dividends or distributions shall
be declared and paid or made.
Section 7.2 Checks, etc. All checks or demands for money and notes
----------- -----------
or other instruments evidencing indebtedness or obligations of the Corporation
shall be signed by such officer or officers or other person or persons as may
from time to time be designated by the Board of Directors.
Section 7.3 Seal. The corporate seal shall have inscribed thereon
----------- ----
the name of the Corporation, the year of its incorporation and the words
"Corporate Seal Delaware." The seal may be used by causing it or a facsimile
thereof to be impressed or affixed or otherwise reproduced.
Section 7.4 Fiscal Year. The fiscal year of the Corporation shall be
----------- -----------
determined by the Board of Directors.
Section 7.5 General and Special Bank Accounts. The Board of
----------- ---------------------------------
Directors may authorize from time to time the opening and keeping of general and
special bank accounts with such banks, trust companies or other depositories as
the Board of Directors may designate or as may be designated by any officer or
officers of the Corporation to whom such power of designation may be delegated
by the Board of Directors from time to time. The Board of Directors may make
such special rules and regulations with respect to such bank accounts not
inconsistent with the provisions of these By-Laws, as it may deem expedient.
ARTICLE VIII
ADOPTION AND AMENDMENTS
Section 8.1 Power to Amend. The power to make, amend and repeal the
----------- --------------
By-Laws shall be as provided in the Certificate of Incorporation.
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<PAGE>
EXHIBIT 5.1
July __, 1999
AverStar, Inc.
23 Fourth Avenue
Burlington, MA 01803
Ladies and Gentlemen:
On the date hereof, AverStar, Inc., a Delaware corporation (the "Company"),
is transmitting for filing with the Securities and Exchange Commission
Amendment No. 1 to a Registration Statement under the Securities Act of 1933, as
amended, on Form S-1 (the "Registration Statement") relating to the sale of up
to 4,600,000 shares (the "Shares") of the Company's common stock, par value
$.001 per share (the "Common Stock"), (including 4,000,000 shares to be sold
by the Company, and 600,000 shares subject to the underwriters' over-allotment
option. This opinion is an exhibit to the Registration Statement.
We have acted as special counsel to the Company with respect to certain
corporate and securities matters, and in such capacity we have participated in
various corporate and other proceedings taken by or on behalf of the Company in
connection with the proposed offer and sale of the Shares by the Company as
contemplated by the Registration Statement. However, we are not general counsel
to the Company and would not ordinarily be familiar with or aware of matters
relating to the Company unless they are brought to our attention by
representatives of the Company.
We have examined copies (in each case signed, certified or otherwise proven
to our satisfaction to be genuine) of the Company's Certificate of Incorporation
and all amendments thereto, and By-Laws as presently in effect, minutes and
other instruments evidencing actions taken by the Company's directors and
stockholders, the Registration Statement and exhibits thereto, and such other
documents and instruments relating to the Company and the proposed offering as
we have deemed necessary under the circumstances. In our examination of all such
agreements, documents, certificates and instruments, we have assumed the
completeness of the minutes submitted to us by the Company, the genuineness of
all signatures, the legal capacity of all signatures and the authenticity of all
agreements, documents, certificates and instruments submitted to us as originals
and the
<PAGE>
AverStar, Inc.
July___, 1999
Page 2
conformity with the originals of all agreements, instruments, documents and
certificates submitted to us as copies.
Except as expressly set forth in the next sentence, we express no opinion
on the laws of any jurisdiction other than the State of New York, the federal
laws of the United States and, to the extent set forth below, the laws of the
State of Delaware. This opinion, insofar as it relates to the law of Delaware,
based solely on our reading of standard published compilations of the Delaware
General Corporation Law. We express no opinion as to the application of the
securities or "blue sky" laws of any state, including the State of Delaware or
the State of New York, to the offer and sale of the Shares.
Our opinion in paragraph 1 below as to the due incorporation of the Company
in its state of incorporation is (i) based solely upon a Certificate of Good
Standing from the Secretary of State of the State of Delaware and (ii) rendered
as of the date of said certificate.
Based on the foregoing, and subject to and in reliance on the accuracy and
completeness of the information relevant thereto provided to us, it is our
opinion that:
1. The Company has been duly incorporated under the laws of the State of
Delaware and, upon proper filing of the Second Amended and Restated Certificate
of Incorporation of the Company in the form filed as Exhibit 3.3 to the
Registration Statement, the Company will have an authorized capital stock
consisting of 25,000,000 shares of Common Stock and 1,000,000 shares of
preferred stock, par value $.001 per share.
2. Upon proper filing of the Second Amended and Restated Certificate of
Incorporation of the Company in the form filed as Exhibit 3.3 to the
Registration Statement, the maximum of 4,600,000 shares of Common Stock to be
sold by the Company will have been duly authorized and, subject to the
effectiveness of the Registration Statement and compliance with applicable
securities or other laws of the states of the United States in which the Shares
will be offered and/or sold in the proposed public offering, when issued and
delivered against payment therefor in accordance with the terms set forth in the
Registration Statement, will be legally and validly issued, fully paid and non-
assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and as an exhibit to any filing made by the Company under
the securities or other laws of any state
<PAGE>
AverStar, Inc.
July___, 1999
Page 3
of the United States, which relate to the proposed public offering which is the
subject of this opinion, and to the reference to this firm appearing under the
heading "Legal Matters" in the prospectus which is contained in the Registration
Statement.
This opinion is as of the date hereof and we undertake no obligation to
advise you of any change, any applicable law or in facts or circumstances which
might affect any matters or opinions set forth herein. This opinion is
furnished to you in connection with the filing of the Registration Statement,
and is not to be used, circulated, quoted or otherwise relied upon for any other
purposes, except as expressly provided in the preceding paragraph.
Very truly yours,
/s/ Swidler Berlin Shereff Friedman, LLP
SWIDLER BERLIN SHEREFF FRIEDMAN, LLP
SBSF, LLP:GA:JSH:RMF
<PAGE>
Exhibit 10.1
BUSINESS LOAN AND SECURITY AGREEMENT
dated as of March 18, 1999,
by and among
AVERSTAR, INC.,
COMPUTER BASED SYSTEMS, INC.
and other Borrower parties hereto from time to time,
as the Borrowers,
FIRST UNION COMMERCIAL CORPORATION
and other Lender parties hereto from time to time,
as the Lenders,
and
FIRST UNION COMMERCIAL CORPORATION,
as the Agent
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
CERTAIN DEFINITIONS........................................................ 1
ARTICLE 1 COMMITMENT................................................... 15
Section 1.1 Maximum Loan Amount.......................................... 15
Section 1.2 Use of Proceeds.............................................. 16
Section 1.3 Borrowing Base and Maximum Advances.......................... 16
Section 1.4 Advances..................................................... 17
Section 1.5 Additional Mandatory Payments; Reduction of Commitment....... 18
Section 1.6 Field Audits................................................. 20
Section 1.7 Fees......................................................... 20
Section 1.8 Termination of Advances; Reduction of the Revolving Facility
Commitment Amount............................................ 21
Section 1.9 Appointment of AverStar...................................... 21
Section 1.10 Joinder of New Subsidiaries and Affiliates................... 22
ARTICLE 2 LETTERS OF CREDIT............................................ 22
Section 2.1 Issuance..................................................... 22
Section 2.2 Amounts Advanced Pursuant to Letters of Credit............... 23
Section 2.3 Letter of Credit Fees........................................ 23
ARTICLE 3 SECURITY..................................................... 24
Section 3.1 Security Generally........................................... 24
Section 3.2 No Preference or Priority.................................... 26
Section 3.3 Release of Security Interest................................. 26
ARTICLE 4 CONDITIONS TO THE OBLIGATIONS OF THE LENDER(S)............... 26
Section 4.1 Satisfaction of Commitment Letter Conditions;
Compliance with Agreements................................... 26
Section 4.2 No Default................................................... 28
Section 4.3 Documentation................................................ 28
ARTICLE 5 REPRESENTATIONS AND WARRANTIES............................... 29
Section 5.1 Corporate Existence and Qualification........................ 29
Section 5.2 Corporate Authority; Noncontravention........................ 29
Section 5.3 Financial Position........................................... 29
Section 5.4 Payment of Taxes............................................. 30
Section 5.5 Accuracy of Submitted Information; Omissions................. 30
Section 5.6 Government Contracts......................................... 30
</TABLE>
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<TABLE>
<S> <C> <C>
Section 5.7 No Defaults or Liabilities................................... 31
Section 5.8 No Violations of Law......................................... 31
Section 5.9 Litigation and Proceedings................................... 31
Section 5.10 Security Interest in the Collateral.......................... 31
Section 5.11 Principal Place of Business; Location
of Books and Records; No Inventory........................... 32
Section 5.12 Fiscal Year.................................................. 32
Section 5.13 Pension Plans................................................ 32
Section 5.14 O.S.H.A., ADA and Environmental Compliance................... 33
Section 5.15 Intellectual Property........................................ 34
Section 5.16 Existing or Pending Defaults; Material Contracts............. 34
Section 5.17 Leases and Real Property..................................... 34
Section 5.18 Labor Relations.............................................. 34
Section 5.19 Assignment of Government Contracts........................... 35
Section 5.20 Ownership Interests.......................................... 35
Section 5.21 Contribution Agreement....................................... 35
Section 5.22 Solvency..................................................... 35
Section 5.23 Year 2000 Compliance......................................... 35
Section 5.24 Joint and Several Liability.................................. 36
Section 5.25 Survival of Representations and Warranties................... 36
ARTICLE 6 AFFIRMATIVE COVENANTS........................................ 36
Section 6.1 Payment of Loan Obligations.................................. 36
Section 6.2 Payment of Taxes............................................. 36
Section 6.3 Delivery of Financial and Other Statements................... 36
Section 6.4 Maintenance of Records; Review by the Lenders................ 38
Section 6.5 Maintenance of Insurance Coverage............................ 38
Section 6.6 Maintenance of Property/Collateral; Performance of Contracts. 38
Section 6.7 Maintenance of Corporate Existence........................... 39
Section 6.8 Maintenance of Certain Accounts with Lender.................. 39
Section 6.9 Maintenance of Management.................................... 39
Section 6.10 Disclosure of Defaults, Etc.................................. 39
Section 6.11 Security Perfection; Assignment of Claims Act;
Payment of Costs............................................. 40
Section 6.12 Defense of Title to Collateral............................... 40
Section 6.13 Compliance with Law.......................................... 40
Section 6.14 Further Assurances; Additional Requested Information......... 41
Section 6.15 Financial Covenants.......................................... 41
Section 6.16 Year 2000 Compliance......................................... 44
Section 6.17 Landlord Waivers; Subordination.............................. 44
Section 6.18 Substitute Notes............................................. 44
Section 6.19 Interest Rate Contracts...................................... 45
Section 6.20 Joint and Several Liability.................................. 45
</TABLE>
ii
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<TABLE>
<S> <C> <C>
ARTICLE 7 NEGATIVE COVENANTS........................................... 45
Section 7.1 Change of Control; Disposition of Assets;
Merger....................................................... 45
Section 7.2 Margin Stocks................................................ 46
Section 7.3 Change of Operations......................................... 46
Section 7.4 Judgments; Attachments....................................... 46
Section 7.5 Further Assignments; Performance and
Modification of Contracts; etc............................... 46
Section 7.6 Affect Rights of the Agent or Lender(s)...................... 46
Section 7.7 Indebtedness; Granting of Security Interests................. 47
Section 7.8 Dividends; Loans; Advances; Investments
and Certain Other Events..................................... 47
Section 7.9 Lease Obligations............................................ 48
Section 7.10 Capital Expenditures......................................... 48
Section 7.11 Lockbox Deposits............................................. 49
Section 7.12 Shareholders Agreement; Merger Agreement, Etc................ 49
Section 7.13 Transactions With Affiliates................................. 49
Section 7.14 Joint and Several Liability.................................. 49
ARTICLE 8 COLLATERAL ACCOUNT........................................... 49
ARTICLE 9 DEFAULT AND REMEDIES......................................... 50
Section 9.1 Events of Default............................................ 50
Section 9.2 Remedies..................................................... 52
ARTICLE 10 THE AGENT; AGENCY............................................ 55
Section 10.1 Appointment.................................................. 55
Section 10.2 General Nature of the Agent's Duties......................... 55
Section 10.3 Exercise of Powers........................................... 56
Section 10.4 General Exculpatory Provisions............................... 57
Section 10.5 Administration by the Agent.................................. 58
Section 10.6 Lenders Not Relying on the Agent or Other Lenders............ 59
Section 10.7 Indemnification.............................................. 60
Section 10.8 The Agent in its Individual Capacity......................... 60
Section 10.9 Holders of Notes............................................. 60
Section 10.10 Successor Agent.............................................. 61
Section 10.11 Additional Agents............................................ 61
Section 10.12 Calculations................................................. 61
Section 10.13 Funding by Agent............................................. 62
Section 10.14 Benefit of Article........................................... 64
ARTICLE 11 CERTAIN ADDITIONAL RIGHTS AND OBLIGATIONS REGARDING
THE COLLATERAL............................................... 64
Section 11.1 Power of Attorney............................................ 64
Section 11.2 Lockbox...................................................... 65
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C> <C>
Section 11.3 Other Agreements............................................. 66
ARTICLE 12 MISCELLANEOUS................................................ 66
Section 12.1 Remedies Cumulative.......................................... 66
Section 12.2 Waiver....................................................... 67
Section 12.3 Notices...................................................... 67
Section 12.4 Entire Agreement............................................. 68
Section 12.5 Relationship of the Parties.................................. 68
Section 12.6 Waiver of Jury Trial......................................... 69
Section 12.7 Submission to Jurisdiction; Service of Process; Venue........ 69
Section 12.8 Changes in Capital Requirements.............................. 69
Section 12.9 Captions..................................................... 70
Section 12.10 Modification and Waiver...................................... 70
Section 12.11 Transferability.............................................. 70
Section 12.12 Governing Law; Binding Effect................................ 70
Section 12.13 Gender; Number............................................... 71
Section 12.14 Materiality.................................................. 71
Section 12.15 Counterparts................................................. 71
</TABLE>
LIST OF EXHIBITS:
EXHIBIT 1 - Request for Advance
EXHIBIT 1(a)- Request for Swing Line Loan
EXHIBIT 2 LIBOR Election Form and Certification
EXHIBIT 3 LIBOR Interest Election Procedure and
Requirements
EXHIBIT 4 - Borrowing Base/Non-Default Certificate (with Schedules A, B & C)
EXHIBIT 5 - Quarterly Covenant Compliance/Non-Default Certificate
EXHIBIT 6 Form of Joinder Agreement
EXHIBIT 7 Pricing Grid
EXHIBIT 8 Form of Payment Direction Letter
EXHIBIT 9 Form of Assignment and Acceptance Agreement
SCHEDULES
iv
<PAGE>
BUSINESS LOAN AND SECURITY AGREEMENT
------------------------------------
THIS BUSINESS LOAN AND SECURITY AGREEMENT, dated as of March 18, 1999,
is by and among (i) FIRST UNION COMMERCIAL CORPORATION, a North Carolina
corporation, having offices at 1970 Chain Bridge Road, 9th Floor, McLean,
Virginia 22102; (ii) FIRST UNION COMMERCIAL CORPORATION, a North Carolina
corporation, acting in its capacity as Agent for the Lenders, having offices at
1970 Chain Bridge Road, 9th Floor, McLean, Virginia 22102; (iii) each other
person or entity who is now or hereafter becomes a "Lender" pursuant to this
Agreement; (iv) AVERSTAR, INC., a Delaware corporation ("AverStar"), having
offices at 23 Fourth Avenue, Burlington, Massachusetts 01803, COMPUTER BASED
SYSTEMS, INC., a Virginia corporation ("CBSI"), having offices at 2750
Prosperity Avenue, Suite 300, Fairfax, Virginia 22031, COMPUTING APPLICATIONS
SOFTWARE TECHNOLOGY, INC., a California corporation, having offices at 23 Fourth
Avenue, Burlington, Massachusetts 01803, INTERMETRICS SECURITIES, INC., a
Massachusetts corporation, having offices at 23 Fourth Avenue, Burlington,
Massachusetts 01803, and INTERMETRICS INTERNATIONAL, INC., a Massachusetts
corporation, having offices at 23 Fourth Avenue, Burlington, Massachusetts
01803; and (v) each other person or entity hereafter becoming a "Borrower" by
executing, among other things, a "Joinder Agreement" pursuant to this Agreement.
W I T N E S S E T H T H A T:
- - - - - - - - - - - - - -
In consideration of the mutual covenants and agreements herein contained,
Ten Dollars ($10.00) and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree,
represent and warrant as follows:
CERTAIN DEFINITIONS
-------------------
For the purposes of this Business Loan and Security Agreement, the terms
set forth below shall have the following definitions:
"Acceleration Date" shall mean the date on which all principal, interest
and other sums owing on the Obligations shall be declared immediately due and
payable in full prior to the stated maturity thereof.
"Account Debtor" shall mean any person or entity who is (i) unrelated and
unaffiliated with any Borrower, and (ii) indebted to any Borrower for the
payment of any Receivable; it being understood and agreed that when computations
are being made with respect to amounts due and owing from an Account Debtor (a)
such computations shall be made on a contract by contract basis (as opposed to
on an Account Debtor basis), with respect to amounts owing in connection with
Government Contracts, and (b) such
<PAGE>
computations shall be made on the basis of all amounts due from the Account
Debtor and any other person or entity related to or affiliated with the
particular Account Debtor, with respect to amounts owing in connection with
contracts which are not Government Contracts.
"Acquisition" shall mean the acquisition by AverStar of all of the issued
and outstanding capital stock of CBSI pursuant to the terms and provisions of
the Merger Agreement.
"Additional Base Rate Interest Margin" shall have the meaning assigned to
such term in the Notes and in Exhibit 7 attached to this Agreement.
---------
"Additional Libor Interest Rate Margin" shall have the meaning assigned
to such term in the Notes and in Exhibit 7 attached to this Agreement.
---------
"Agent" shall mean First Union Commercial Corporation, a North Carolina
corporation, acting in its capacity as agent for the Lenders, or any successor
Agent appointed pursuant to Section 10.10 of this Agreement.
"Agreement" or "Loan Agreement" shall mean this Business Loan and
Security Agreement, together with all exhibits and schedules attached hereto and
any and all amendments or modifications of any of the foregoing made in
accordance with Section 12.10 of this Agreement.
"Applicable Interest Rate" shall mean either the (i) LIBOR or (ii) Base
Rate, as set forth in the Notes.
"Applicable Laws" shall mean any federal, state or local law, ordinance,
rule or regulation to which any Borrower or the property of any Borrower is
subject, whether domestic or international.
"Assignment of Claims Act" shall mean the Assignment of Claims Act of
1940, 31 U.S.C. Section 3727 and 41 U.S.C. Section 15, as amended.
"Assignment of Promissory Notes as Collateral" shall mean that certain
Assignment of Promissory Notes as Collateral of even date herewith, made by
AverStar and accepted by the Agent for the ratable benefit of the Lenders,
together with any and all modifications and/or amendments thereof.
"Averstar" shall have the meaning attributed to such term in the Preamble
of this Agreement.
"Base Rate" shall mean the higher of the (i) Federal Funds Rate, plus
one-half of one percent (.50%) or (ii) Prime Rate.
2
<PAGE>
"Borrower" or "Borrowers" shall mean AverStar, Inc., a Delaware
corporation, Computer Based Systems, Inc., a Virginia corporation, Computing
Applications Software Technology, Inc., a California corporation, Intermetrics
Securities, Inc., a Massachusetts corporation, Intermetrics International, Inc.,
a Massachusetts corporation, and/or each other person or entity hereafter
executing a Joinder Agreement pursuant to Section 1.10 of this Agreement,
individually or collectively, as the context may require.
"Borrowing Base/Non-Default Certificate" shall mean a certificate in the
form of Exhibit 4 hereto.
---------
"Borrowing Base Deficiency" shall have the meaning assigned to such term
in Section 1.3 of this Agreement.
"Business Day" shall mean any day other than (i) a Saturday, Sunday, or
public holiday under the laws of the Commonwealth of Virginia; (ii) any other
day on which banking institutions are authorized or obligated to close in the
city in which the Agent's office is located; or (iii) with respect to all
notices and determinations in connection with, and payments of principal and
interest on, any Loan bearing interest on a LIBOR basis, any day on which banks
are not open for trading in Dollar deposits in the London interbank market.
"CBSI" shall have the meaning attributed to such term in the Preamble of
this Agreement.
"CERCLA" shall mean the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended (42 U.S.C. Sections 9601 et
seq.).
"Closing" shall mean the settlement of the transactions contemplated
hereby.
"Closing Date" shall mean the date on which Closing occurs.
"Collateral" shall have the meaning assigned to such term in Section 3.1
of this Agreement.
"Collateral Account" shall have the meaning assigned to such term in
Article 8 of this Agreement.
"Commercial Contract" shall mean any written contract to which the
Borrower is a party (other than a Government Contract or a contract with the
District of Columbia or any department, instrumentality or agency thereof) which
gives rise or may give rise to a Receivable.
"Commitment Amount" shall mean Seventy-five Million and No/100 Dollars
($75,000,000.00), or if the maximum aggregate commitment of the Lender(s)
hereunder is reduced pursuant to the terms of this Agreement, such lesser
amount.
3
<PAGE>
"Commitment Fee" shall have the meaning assigned to such term in Section
1.7(a) of this Agreement.
"Commitment Letter" shall mean that certain letter dated February 1, 1999
from the Agent and First Union Capital Markets Corp. to the Borrowers relating
to the Loan.
"Contribution Agreement" shall mean that certain Contribution Agreement
of even date herewith, executed and delivered by and among the Borrowers
immediately prior to the Closing, as amended from time to time pursuant to the
terms thereof.
"Default Rate" shall mean the Applicable Interest Rate, plus the
applicable Additional Base Rate Interest Margin and/or the applicable Additional
Libor Interest Rate Margin (as the case may be), plus two percent (2%).
"EBITDA" shall mean, as of the date of any determination, the Borrowers'
net income (or loss), plus interest expense, plus all charges against income for
foreign, federal, state and local income taxes, plus depreciation expense, plus
amortization expense, and excluding any other non-cash items to the extent
included in determining net income (or loss), all as determined on a
consolidated basis in accordance with GAAP. For the purpose of any applicable
EBITDA calculation, EBITDA for the fiscal quarter ending 12/31/98 may include
"add-backs" for the one-time, non-recurring items set forth on Schedule A
----------
hereto.
"Eligible Accounts Receivables" shall mean, collectively, Eligible Billed
Government Accounts Receivable, Eligible Billed Commercial Accounts Receivable
and Eligible Unbilled Government Costs.
"Eligible Assignee" shall mean any Lender, an affiliate of any Lender, a
Federal Reserve Bank or any other "Qualified Institutional Buyer," as such term
is defined under Rule 144(A), promulgated under the Securities Act of 1933, as
amended.
"Eligible Billed Government Accounts Receivable" shall mean all
Receivables arising from Government Contracts which (a) represent amounts due
and owing for products actually delivered or services actually performed or
rendered by or on behalf of any Borrower to or for the benefit of an Account
Debtor pursuant to a Government Contract; (b) have been properly billed and are
outstanding less than one hundred twenty-one (121) days from the date of
original invoice; (c) arise in the ordinary course of such Borrower's business;
(d) are due, owing and not subject to any defense, set-off or counterclaim; and
(e) are not Ineligible Receivables.
"Eligible Billed Commercial Accounts Receivable" shall mean all
Receivables (other than Receivables arising from Government Contracts) which (a)
represent amounts due and owing for products actually delivered or services
actually performed or rendered by
4
<PAGE>
or on behalf of any Borrower to or for the benefit of an Account Debtor (other
than the Government); (b) have been properly billed and are outstanding less
than ninety-one (91) days from the date of original invoice; (c) arise in the
ordinary course of such Borrower's business; (d) are due, owing and not subject
to any defense, set-off or counterclaim; and (e) are not Ineligible Receivables.
"Eligible Unbilled Government Costs" shall mean all costs actually
incurred by any Borrower and arising out of work actually performed by such
Borrower under Government Contracts which (a) are eligible to be billed to the
Government in accordance with the applicable Government Contract within thirty
(30) days of the certification date of the applicable Borrowing Base/Non-Default
Certificate (or within forty-five (45) days of the certification date of the
applicable Borrowing Base/Non-Default Certificate if incurred in connection with
progress payment/milestone contracts), in each case, with no additional
performance required by any person, and no condition to payment by the
Government, other than receipt of an appropriate invoice); (b) may, in
accordance with GAAP, be included as current assets of such Borrower, even
though such amounts have not been billed to the Government; (c) satisfy all
requirements of Eligible Billed Government Receivables (except that such costs
have not yet been billed and are therefore not yet due and payable); and (d) are
not (i) cost or profit retentions; (ii) variances from approved government
reimbursement rates; or (iii) otherwise deemed ineligible by the Agent or the
Required Lenders.
"Event of Default" shall have the meaning assigned to such term in
Section 9.1 of this Agreement.
"Excess Cash Event" shall mean (i) any sale or disposition of any of the
assets of any Borrower which is (a) not in the ordinary course of business; or
(b) prohibited by the terms of this Agreement; (ii) the receipt by or on behalf
of any Borrower of insurance proceeds in excess of (a) Five Hundred Thousand and
No/100 Dollars ($500,000.00), in the aggregate, during any fiscal year, or (b)
One Million and No/100 Dollars ($1,000,000.00), in the aggregate, during the
term of the Facilities; and/or (iii) the reversion of any pension plan assets.
"Excess Cash Flow" shall mean, as of the date of determination (which
shall occur no later than March 31st of each fiscal year of the Borrowers), the
sum of the Borrowers' net income, plus non-cash charges, minus scheduled
principal payments, minus capital expenditures and minus any increase (or plus
any decreases) in working capital requirements (i.e., any increase or decrease
in the amount by which current assets exceed current liabilities), and minus any
payments required to be paid by the Borrowers pursuant to certain retirement
plans and repurchase agreements described on Schedule B hereto, as the case may
----------
be, in each case for the immediately preceding fiscal year, and determined on a
consolidated basis in accordance with GAAP.
5
<PAGE>
"Facility" or "Facilities" shall mean the Revolving Facility, Term
Facility "A", Term Facility "B" and/or Swing Line Facility, individually or
collectively, as the context may require.
"Federal Funds Rate" for any day shall mean the rate per annum (rounded
upward to the nearest 1/8 of 1%) determined by the Agent to be the rate per
annum announced by the Federal Reserve Bank of New York (or any successor) on
such day as being the weighted average of the rates on overnight Federal Funds
transactions arranged by Federal Funds brokers on the previous trading day, as
computed and announced by such Federal Reserve Bank (or any successor) in
substantially the same manner as such Federal Reserve Bank computes and
announces the weighted average it refers to as the "Federal Funds Effective
Rate" as of the date of this Agreement; provided that if such Federal Reserve
Bank (or its successor) does not announce such rate on any day, the "Federal
Funds Effective Rate" for such day shall be the Federal Funds Rate for the last
day on which such rate was announced.
"Fee Letter" shall mean that certain letter dated February 1, 1999, by
and between the Borrower and the Agent with respect to certain fees payable in
connection with the Loan.
"First Union" shall mean First Union Commercial Corporation, a North
Carolina corporation, acting individually, together with its successors and
assigns.
"Fixed Charge Coverage Ratio" shall have the meaning assigned to such
term in Section 6.15(b) of this Agreement.
"GAAP" shall mean domestic generally accepted accounting principles,
consistently applied.
"Government" shall mean the United States government or any department,
instrumentality or agency thereof, and any state government or any department,
instrumentality or agency thereof; it being expressly understood and agreed that
the District of Columbia is not included within this definition of Government.
"Government Contract Assignments" shall have the meaning assigned to such
term in Section 6.11 of this Agreement.
"Government Contract" or "Government Contracts" shall mean each and all
written contracts between a Borrower and the Government.
"Hazardous Substance" shall mean, without limitation, any flammable
explosives, radon, radioactive materials, asbestos, urea formaldehyde foam
insulation, polychlorinated biphenyls, petroleum and petroleum products,
methane, hazardous materials, hazardous wastes, hazardous or toxic substances,
pollutants or contaminants as
6
<PAGE>
defined in CERCLA, HMTA, RCRA or any other applicable environmental law, rule,
order or regulation.
"Hazardous Wastes" shall mean, without limitation, all waste materials
subject to regulation under CERCLA, RCRA or analogous state law, and/or any
other applicable Federal and/or state law now in force or hereafter enacted
relating to hazardous waste treatment or disposal.
"HMTA" shall mean the Hazardous Materials Transportation Act, as amended
(49 U.S.C. Sections 1801 et seq.)
"IES Notes" shall have the meaning attributed to such term in Section
7.8(b) of this Agreement.
"Ineligible Receivables" shall mean Receivables which are (a) evidenced
by a promissory note or similar instrument; (b) owed or payable by an Account
Debtor pursuant to a Commercial Contract, if payment of fifty percent (50%) or
more of the aggregate balance due from that Account Debtor is outstanding for
more than ninety (90) days from the date of original invoice; (c) owed or
payable by an Account Debtor pursuant to a Government Contract, if payment of
fifty percent (50%) or more of the aggregate balance due from that Account
Debtor under such Government Contract is outstanding for more than one hundred
twenty (120) days from the date of original invoice; (d) owing from any person
that is the subject of any (i) suit, lien, levy or judgment which could
reasonably be expected to affect the collectibility of said account(s), or (ii)
bankruptcy, insolvency or a similar process or proceeding; (e) owing from
foreign Account Debtors; (f) unbilled as a result of rate variances or retainage
provisions; (g) bonded accounts receivable; (h) at-risk receivables (i.e.,
receivables arising from work for which payment from an Account Debtor is not
certain); or (i) other receivables deemed ineligible by the Agent or the
Required Lenders in their sole and absolute discretion.
"Intellectual Property Security Agreement" shall mean that certain
Intellectual Property Security Agreement of even date herewith, made by the
Borrowers in favor of the Agent for the ratable benefit of the Lenders, together
with any and all modifications and/or amendments thereto.
"Interest Expense" shall mean, as of the date of any determination, the
Borrowers' aggregate cash interest expense for borrowed money (including,
without limitation, premiums and interest expense arising from or relating to
interest rate protection agreements and original issue discounts), plus the
amount of all other interest due (whether paid or not paid) on any indebtedness
of the Borrowers for the applicable measurement period, all as determined on a
consolidated basis in accordance with GAAP.
"Interest Period" means as to any Loan proceeds for which LIBOR based
interest has been elected in accordance with this Agreement, the period
commencing on
7
<PAGE>
and including the date such LIBOR election is effective (or the
effective date of the election to convert any portion of the Loan to a LIBOR
interest basis in accordance with the provisions of this Agreement) and ending
on and including the day which is 30, 60, 90 or 180 days thereafter, as
available, and as selected in accordance with the provisions of this Agreement;
provided, however, that: (i) the first day of any Interest Period shall be a
Business Day; (ii) if any Interest Period would end on a day that would not be a
Business Day, such Interest Period shall be extended to the next succeeding
Business Day; and (iii) no Interest Period shall extend beyond the Revolving
Facility Maturity Date, Term Facility "A" Maturity Date or Term Facility "B"
Maturity Date, as applicable.
"Joinder Agreement" shall have the meaning assigned to such term in
Section 1.10 of this Agreement.
"Lender" and/or "Lenders" shall mean, individually or collectively as the
context may require, First Union Commercial Corporation, a North Carolina
corporation, and any and all other banking or financial institutions which have
(i) extended credit to the Borrowers pursuant to this Agreement, and (ii) agreed
to be bound by the terms and provisions of this Agreement.
"Letter of Credit" and "Letters of Credit" shall mean, respectively, each
and all of the trade and standby letters of credit issued pursuant to this
Agreement, if any.
"Letter of Credit Application" shall have the meaning assigned to such
term in Section 2.1 of this Agreement.
"Letter of Credit Administration Fee" shall have the meaning assigned to
such term in Section 2.3 of this Agreement.
"Letter of Credit Fee" shall have the meaning assigned to such term in
Section 2.3 of this Agreement.
"LIBOR" shall mean for any Interest Period with respect to any Loan
proceeds for which a LIBOR election has been made and is effective, the per
annum interest rate (rounded upward, if necessary, to the nearest next 1/8 of
1%) set forth on Telerate Page 3750, on an immediately available funds basis, at
or about 11:00 a.m. (London time) on the date that is two (2) Business Days
prior to the first day of such Interest Period, for the offering by leading
banks in the London Interbank Eurodollar market of Dollar deposits for a period
comparable in time to the duration of such Interest Period and in amounts
comparable to the amounts for which LIBOR is to be determined, adjusted for
reserve requirements, if any. If the Agent shall be unable to obtain LIBOR
quotes on Telerate Page 3750, LIBOR shall be the average of those rates quoted
on the REUTERS "LIBO" page for a period comparable to the applicable Interest
Period (rounded upward, if necessary, to the nearest next 1/8 of 1%).
8
<PAGE>
"LIBOR Election Form and Certification" shall mean that certain LIBOR
Election Form and Certification attached as Exhibit 2 hereto.
---------
"Loan" and "Loans" shall mean, individually or collectively as the
context may require, the loan or loans made by the Lender(s) to the Borrowers in
the aggregate maximum principal amount of Seventy-five Million and No/100
Dollars ($75,000,000.00), or so much thereof as shall be advanced or readvanced
from time to time, which are represented by the Facilities, and which shall be
evidenced by, bear interest and be payable in accordance with the terms and
provisions of the Notes and this Agreement.
"Loan Document" and "Loan Documents" shall mean, respectively, each and
all of this Agreement, the Notes, the Stock Security Agreement, the Pledge of
Accounts, the Assignment of Promissory Notes as Collateral, the Intellectual
Property Security Agreement and each and every other document, instrument or
certificate now or hereafter executed and/or delivered by any Borrower in
connection with the Loan.
"Mandatory Payments" shall mean the mandatory payments required to be
made on the Loan pursuant to Section 1.5 of this Agreement.
"Mass Mutual" shall mean Massachusetts Mutual Life Insurance Company, a
Massachusetts corporation.
"Mass Mutual Entities" shall mean, individually or collectively as the
context may require, Mass Mutual, MassMutual Corporate Investors, a
Massachusetts business trust, MassMutual Participation Investors, a
Massachusetts business trust, MassMutual Corporate Value Partners, a Grand
Cayman Islands corporation and MassMutual High Yield Partners II, LLC, a
Delaware limited liability company, and their successors and assigns.
"Material Contract" shall mean (i) any and all Government Contracts
pursuant to which a Borrower is or may be (a) entitled to receive payments in
excess of One Million and No/100 Dollars ($1,000,000.00), in the aggregate, per
annum, or (b) obligated to make payments or have any other obligation or
liability thereunder (direct or contingent) in excess of One Million and No/100
Dollars ($1,000,000.00), in the aggregate, per annum; and (ii) any and all
contracts or agreements (other than Government Contracts) to which a Borrower is
a party and pursuant to which such Borrower is or may be (a) entitled to receive
payments in excess of Two Hundred Fifty Thousand and No/100 Dollars
($250,000.00), in the aggregate, per annum, or (b) obligated to make payments or
have any other obligation or liability thereunder (direct or contingent) in
excess of Two Hundred Fifty Thousand and No/100 Dollars ($250,000.00), in the
aggregate, per annum.
9
<PAGE>
"Maximum Borrowing Base" shall have the meaning assigned to such term in
Section 1.3(a) of this Agreement.
"Merger Agreement" shall mean that certain Agreement and Plan of Merger
dated as of January 31, 1999, by and among (i) AverStar, (ii) AverStar
Acquisition, Inc., a Virginia corporation, (iii) CBSI, and (iv) the Stockholders
of CBSI party thereto.
"Note" and "Notes" shall mean, individually or collectively as the
context may require, the Revolving Facility Note(s), the Term Facility "A"
Note(s), the Term Facility "B" Note(s), the Swing Line Note and/or any other
promissory notes executed pursuant to this Agreement, together with all
extensions, renewals, modifications, replacements and substitutions thereof and
therefor.
"Note "B" Holder" and "Note "B" Holders" shall mean, individually or
collectively as the context may require, each and all of the holders from time
to time of the Term Facility "B" Notes, and their respective successors and
assigns.
"Obligation" and "Obligations" shall mean, respectively, any and all
obligations or liabilities of any Borrower to any Lender(s) and/or the Agent,
whether now existing or hereafter created or arising, direct or indirect,
matured or unmatured, and whether absolute or contingent, joint, several or
joint and several, and no matter how the same may be evidenced or shall arise
(including, without limitation, any and all interest rate protection agreements,
overdraft protection contracts and foreign exchange contracts).
"Payment Default" shall have the meaning attributed to such term in
Section 9.2(c) of this Agreement.
"Percentage" shall mean with respect to each Lender, the percentage set
forth next to such Lender's name on Schedule 1 to this Agreement, as the same
----------
may be amended from time to time.
"Permitted Liens" shall mean: (a) liens for taxes which are not yet due
and payable or which are being contested in good faith and by appropriate
proceedings, which (i) the Borrower has the financial ability to pay, including
penalties and interest, and (ii) the non-payment thereof will not result in the
execution of any such tax lien or otherwise adversely affect the interests of
the Agent in any part of the Collateral; (b) deposits or pledges to secure
obligations under workers' compensation, social security or similar laws,
incurred in the ordinary course of business; (c) liens securing indebtedness of
the Borrowers permitted by Section 7.7 of this Agreement; (d) cash deposits
pledged to secure the performance of bids, tenders, contracts (other than
contracts for the payment of money), leases, statutory obligations, surety and
appeal bonds and other obligations of like nature made in the ordinary course of
business; (e) mechanics', workmen's, repairmen's, warehousemen's, vendors' or
carriers' liens or other similar liens; provided that such liens arise in the
ordinary course of the Borrower's business and secure sums which are not past
10
<PAGE>
due, or which are separately secured by cash deposits or pledges in an amount
adequate to obtain the release of such liens; (f) except as otherwise provided
in this Agreement, statutory or contractual landlord's liens on the Borrower's
tangible personal property located in the demised premises; (g) zoning or other
similar and customary land use restrictions, which do not materially impair the
use or value of the subject property; (h) judgment liens which are not
prohibited by Section 7.4 of this Agreement; (i) other liens expressly permitted
by the terms and provisions of this Agreement; and (j) liens in favor of the
Agent.
"Pledge of Accounts" shall mean that certain Pledge of Accounts of even
date herewith, made by the Borrowers in favor of the Agent for the ratable
benefit of the Lenders, together with any and all amendments and/or
modifications thereof.
"Prepayment Fee" shall have the meaning attributed to such term in
Exhibit 3 to this Agreement.
- ---------
"Prime Rate" shall mean the rate of interest from time to time
established and publicly announced by First Union as its prime rate, in First
Union's sole discretion, which rate of interest may be greater or less than
other interest rates charged by First Union to other borrowers and is not solely
based or dependent upon the interest rate which First Union may charge any
particular borrower or class of borrowers.
"Principal Borrowers" shall mean, individually or collectively as the
context may require, AverStar, CBSI and/or any other Borrower which, as of any
date of determination, is a "significant subsidiary," as such term is defined in
Title 17, Code of Federal Regulations, Part 210.1-02.
"Quarterly Covenant Compliance Certificate" shall have the meaning
attributed to such term in Section 6.3(d) of this Agreement.
"RCRA" shall mean the Resource Conservation and Recovery Act, as amended
(42 U.S.C. Sections 6901 et. seq.).
"Receivables" shall mean all of the Borrowers' present and future
accounts, contracts, contract rights, chattel paper, general intangibles, notes,
drafts, acceptances, chattel mortgages, conditional sale contracts, bailment
leases, security agreements, contribution rights and other forms of obligations
now or hereafter arising out of or acquired in the course of or in connection
with any business the Borrowers conduct, together with all liens, guaranties,
securities, rights, remedies and privileges pertaining to any of the foregoing,
whether now existing or hereafter created or arising, and all rights with
respect to returned and repossessed items of inventory.
"Reduction/Termination Date" shall mean the date on which, in accordance
with Section 1.8 of this Agreement, the Borrowers shall have terminated the
obligation of
11
<PAGE>
the Lender(s) to make additional advances under the Loan, or irrevocably reduced
the Revolving Facility Commitment Amount.
"Request for Advance and Certification" shall mean the form Request for
Advance and Certification attached as Exhibit 1 hereto.
---------
"Required Lenders" shall mean all of the Lenders who, at any given time
(a) are not in default under or in breach of any of the terms and conditions of
this Agreement applicable to such Lender, and (b) hold Notes or participation
interests representing, in the aggregate, at least fifty-one percent (51%) of
the aggregate Commitment Amount (excluding the Swing Line Commitment Amount).
"Revolving Facility" shall mean the revolving credit facility being
extended pursuant to this Agreement on the basis of Eligible Accounts
Receivable, in the original maximum principal amount of Thirty Million and
No/100 Dollars ($30,000,000.00).
"Revolving Facility Commitment Amount" shall mean Thirty Million and
No/100 Dollars ($30,000,000.00), or if the Revolving Facility Commitment Amount
shall be permanently reduced pursuant to Section 1.8 of this Agreement, such
lesser amount.
"Revolving Facility Lender" shall mean each Lender who, as of any date of
determination, owns and holds a Percentage of the Revolving Facility Commitment
Amount.
"Revolving Facility Maturity Date" shall mean March 17, 2004.
"Revolving Facility Note" and "Revolving Facility Notes" shall mean each
and all of the Revolving Facility Promissory Notes of even date herewith, made
by the Borrowers and payable to the order of certain Lenders, in the aggregate
maximum principal amount of Thirty Million and No/100 Dollars ($30,000,000.00),
together with all extensions, renewals, modifications, replacements and
substitutions thereof or therefor.
"Securities Purchase Agreement" shall mean, individually or collectively
as the context may require, each and all of those certain Amended and Restated
Securities Purchase Agreements dated February 27, 1998, by and among AverStar,
Apollo Holding, Inc., a Delaware corporation, Intermetrics, Inc., a Delaware
corporation, Pacer Infotech, Inc., a Massachusetts corporation, and the
respective Mass Mutual Entities, as amended by that certain letter agreement
dated March 18, 1999 by and among AverStar, Apollo Holding, Inc., a Delaware
corporation, Intermetrics, Inc., a Delaware corporation, Pacer Infotech, Inc., a
Massachusetts corporation and the respective Mass Mutual Entities.
"Shareholders Agreement" shall mean that certain Shareholders Agreement
dated as of February 27, 1998, by and among AverStar and the shareholder parties
thereto.
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"Stock Security Agreement" shall mean that certain Stock Security
Agreement of even date herewith, by and between AverStar and the Agent, made for
the benefit of the Lender(s), together with any and all amendments and/or
modifications thereof.
"Subordination Agreement" shall have the meaning attributed to such term
in Section 7.7 of this Agreement.
"Subordinated Notes" shall have the meaning attributed to such term in
the Subordination Agreement.
"Swing Line Commitment" shall mean the Swing Line Lender's obligation to
make Swing Line Loans to the Borrowers in an aggregate principal amount not to
exceed Two Million and No/100 Dollars ($2,000,000.00).
"Swing Line Commitment Amount" shall mean Two Million and No/100 Dollars
($2,000,000.00).
"Swing Line Commitment Period" shall mean the period commencing on the
Closing Date and ending on the fifth (5th) Business Day prior to the Revolving
Facility Maturity Date.
"Swing Line Facility" shall mean the swing line credit facility being
extended pursuant to this Agreement, in the original maximum principal amount of
Two Million and No/100 Dollars ($2,000,000.00).
"Swing Line Lender" shall mean First Union Commercial Corporation, a
North Carolina corporation.
"Swing Line Loan" or "Swing line Loans" shall have the meaning attributed
to such term in Section 1.1(b) of this Agreement.
"Swing Line Note" shall mean that certain Swing Line Promissory Note of
even date herewith, made by the Borrowers and payable to the order of the Swing
Line Lender, in the aggregate maximum principal amount of Two Million and No/100
Dollars ($2,000,000.00) or so much thereof as shall be advanced, together with
all extensions, renewals, modifications and substitutions thereof or therefor.
"Swing Line Outstandings" shall mean, as of any date of determination,
the aggregate principal amount of all Swing Line Loans then outstanding.
"Swing Line Termination Date" shall mean the fifth (5th) Business Day
prior to the Revolving Facility Maturity Date, or such earlier date on which the
Revolving Facility shall terminate, as provided herein.
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"Term Facilities" shall mean, collectively, Term Facility "A" and Term
Facility "B".
"Term Facility "A"" shall mean the term loan facility being extended
pursuant to this Agreement, in the original principal amount of Fifteen Million
and No/100 Dollars ($15,000,000.00).
"Term Facility "A" Commitment Amount" shall mean Fifteen Million and
No/100 Dollars ($15,000,000.00).
"Term Facility "A" Maturity Date" shall mean March 17, 2004.
"Term Facility "A" Note" and "Term Facility "A" Notes" shall mean each
and all of Term Facility "A" Promissory Notes of even date herewith, made by the
Borrowers and payable to the order of certain Lenders, in the original aggregate
principal amount of Fifteen Million and No/100 Dollars ($15,000,000.00),
together with all extensions, renewals, modifications, replacments and
substitutions thereof or therefor.
"Term Facility "B"" shall mean the term loan facility being extended
pursuant to this Agreement, in the original principal amount of Thirty Million
and No/100 Dollars ($30,000,000.00).
"Term Facility "B" Commitment Amount" shall mean Thirty Million and
No/100 Dollars ($30,000,000.00).
"Term Facility "B" Maturity Date" shall mean March 17, 2005.
"Term Facility "B" Note" and "Term Facility "B" Notes" shall mean each
and all of Term Facility "B" Promissory Notes of even date herewith, made by the
Borrowers and payable to the order of certain Lenders, in the original aggregate
principal amount of Thirty Million and No/100 Dollars ($30,000,000.00), together
with all extensions, renewals, modifications, replacements and substitutions
thereof or therefor.
"Total Debt" shall mean, as of the date of determination, the actual
amount of borrowed money (including, without limitation, subordinated debt,
capital leases and synthetic leases, that remain unpaid or outstanding as of the
date of any determination), plus the aggregate amount of any and all financial
guarantees, contingent obligations (including, without limitation, any
obligation to provide financing pursuant to the IES Notes) and the face amount
of any and all outstanding letters of credit; it being understood and agreed
that trade debt incurred in the ordinary course of the Borrowers' business shall
not be included in the computation of Total Debt.
"Total Debt to EBITDA Ratio" shall have the meaning attributed to such
term in Section 6.15 of this Agreement.
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"Year End Compliance Certificate" shall mean the Quarterly Covenant
Compliance Certificate required to be delivered by the Borrowers to the Agent
and each Lender on or before the one hundred twentieth (120th) day following the
close of each of the Borrowers' fiscal years.
ARTICLE 1
---------
COMMITMENT
Section 1.1 Maximum Loan Amount.
----------- -------------------
(a) Subject to the terms and conditions of this Agreement, (i) each
Lender severally agrees to make the Loan to the Borrowers (except for the Swing
Line Loan, which shall be extended only by the Swing Line Lender), with the
maximum amount of each Lender's obligation being equal to the Lender's
Percentage of the Revolving Facility Commitment Amount, Term Facility "A"
Commitment Amount and Term Facility "B" Commitment Amount; and (ii) as more
fully set forth in Section 1.1(b) below, the Swing Line Lender shall make the
Swing Line Loan to the Borrowers. The Loan, including the Swing Line Loan, shall
bear interest and be payable in accordance with the terms and provisions of the
Notes, each of which shall be payable to the order of a Lender and all of which
together (excluding the Swing Line Note) shall equal the Commitment Amount. The
Notes shall be executed and delivered to the Agent on the Closing Date, and may
be substituted and/or replaced from time to time upon the Agent's request if the
number of Lender parties to this Agreement shall change.
(b) Subject to the terms and conditions of this Agreement, the Swing
Line Lender shall make swing line loans (each, a "Swing Line Loan" and
collectively, the "Swing Line Loans") to the Borrowers from time to time during
the Swing Line Loan Commitment Period, in the aggregate principal amount at any
one time outstanding not to exceed Two Million and No/100 Dollars
($2,000,000.00); provided, however, that at no time may the aggregate
outstanding principal amount of the Swing Line Loans, plus the aggregate
principal amount of the Revolving Facility (including the aggregate face amount
of all Letters of Credit outstanding), exceed the Maximum Borrowing Base. During
the Swing Line Commitment Period, the Borrowers may use the Swing Line
Commitment by borrowing, repaying Swing Line Loans in whole or in part, and
reborrowing, all in accordance with the terms of this Agreement. At the request
of the Swing Line Lender, the Agent may, at any time, on behalf of the Borrowers
(which hereby irrevocably direct the Agent to act on their behalf) request each
Lender having a Percentage of the Revolving Facility, including the Swing Line
Lender, to make, and each such Lender, including the Swing Line Lender, shall
make an advance under the Revolving Facility, in an amount equal to such
Lender's Percentage of the Revolving Facility, of the amount of the Swing Line
Outstandings as of the date such request is made. In such event, each such
Lender shall make the requested proceeds available to the Agent for the account
of the Swing Line Lender in accordance with the funding provisions set forth in
this Agreement. The
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proceeds of the Revolving Facility advanced pursuant to this Section 1.1(b)
shall be immediately applied to repay the Swing Line Outstandings.
Section 1.2 Use of Proceeds. The Loan shall be used by the Borrowers only
---------------
for the following purposes: (i) to refinance certain existing indebtedness of
the Borrowers; (ii) to finance certain costs and expenses incurred by the
Borrowers in connection with the Closing; (iii) to finance the Acquisition and
certain costs and expenses incurred by the Borrowers in connection with the
Acquisition; and (iv) for working capital and general corporate needs.
Notwithstanding the foregoing, the proceeds of (a) the Revolving Facility
necessary to finance the Acquisition may only be used for such purpose if
advanced on the Closing Date and, with respect to certain costs and expenses
(including attorneys' fees and other professional fees) incurred by the
Borrowers in connection with the Acquisition, may only be used for such purpose
if advanced within sixty (60) days of the Closing Date; and (b) any Swing Line
Loan made pursuant to this Agreement shall only be used for general working
capital purposes. The Borrowers agree that the Loan proceeds (including, without
limitation, Swing Line Loan proceeds) shall not be used for any other purpose
without the Agent's prior written consent.
Section 1.3 Borrowing Base and Maximum Advances. Notwithstanding any term
-----------------------------------
or provision of this Agreement or any other Loan Document to the contrary, it is
understood and agreed that in no event whatsoever shall the Agent or any Lender
be obligated to:
(a) advance any amount under the Revolving Facility or Swing Line
Facility, or issue any Letter(s) of Credit hereunder, if such advance or the
issuance of such Letter(s) of Credit would cause the aggregate amount of the
outstanding Loans under the Revolving Facility, the face amount of all
outstanding Letters of Credit, and the Swing Line Outstandings to exceed the
lesser of (the "Maximum Borrowing Base"):
(i) the Revolving Facility Commitment Amount; or
(ii) the aggregate of:
(A) Ninety percent (90%) of Eligible Billed Government
Accounts Receivable which are outstanding less
than one hundred twenty-one (121) days from the
date of original invoice; plus
(B) Eighty percent (80%) of Eligible Billed Commercial
Accounts Receivable which are outstanding less
than ninety-one (91) days from the date of
original invoice; plus
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(C) Fifty percent (50%) of Eligible Unbilled
Receivables which are billable within thirty (30)
days; provided, however, that in no event shall
the amount set forth in this clause (C) exceed the
lesser of:
(1) an amount equal to twenty-five percent (25%) of
the sum of (A) and (B) above; or
(2) $10,000,000.00.
(b) advance any amount under Term Facility "A" in excess of the Term
Facility "A" Commitment Amount; and/or (c)
(c) advance any amount under Term Facility "B" in excess of the
Facility "B" Commitment Amount.
If at any time the outstanding principal balance of the Revolving Facility
(including the aggregate face amount of all Letters of Credit Outstanding and
Swing Line Outstandings) exceeds the Maximum Borrowing Base (such excess being
referred to herein as a "Borrowing Base Deficiency"), the Borrowers shall
immediately make a principal payment in the amount of the Borrowing Base
Deficiency. Notwithstanding the foregoing, in the event a Borrowing Base
Deficiency shall occur as a result of (i) the Agent's determination that a
particular Receivable included in computing the Maximum Borrowing Base is no
longer eligible for inclusion or (ii) the Agent or the Required Lenders imposing
any additional eligibility requirement which has not been previously imposed as
a basis for classifying Receivables as ineligible, the Borrower shall make a
principal payment in the amount of the resulting Borrowing Base Deficiency
within three (3) Business Days of the date on which the Borrower is notified by
the Agent of the ineligibility of the particular Receivable or the additional
eligibility requirement.
Section 1.4 Advances.
--------
(a) Agreement to Advance and Readvance; Procedure. So long as no
---------------------------------------------
Event of Default shall have occurred and be continuing, and no act, event or
condition shall have occurred and be continuing which with notice or the lapse
of time, or both, shall constitute an Event of Default, and subject to the terms
and provisions of this Agreement, the Lender(s) shall (i) advance and readvance
the proceeds of the Revolving Facility from time to time in accordance with this
Agreement; and (ii) advance the proceeds of the Term Facilities, in their
entirety, to the Borrowers at Closing. Requests for advances of Loan proceeds
with respect to the Revolving Facility shall be in the form of Exhibit 1 hereto,
---------
and requests for advances of Swing Line Loan proceeds shall be in the form of
Exhibit 1(a) hereto; it being understood and agreed that in each case such
- ------------
requests may be made via facsimile on a Business Day if the Borrower provides
the Agent, in advance, with a written
17
<PAGE>
list of the names of the specific officers authorized to request disbursements
by facsimile. Upon request by the Agent, the Borrower shall confirm in an
original writing each facsimile request for advance made by the Borrower.
Notwithstanding the foregoing, (a) the Lender(s) shall have no obligation to
make any advance with respect to the Revolving Facility after the Revolving
Facility Maturity Date; and (b) the Swing Line Lender shall have no obligation
to make any advance with respect to the Swing Line Facility after the Swing Line
Termination Date.
(b) Interest Rate Election; Certain Advance Procedures and Limits.
-------------------------------------------------------------
Amounts advanced in connection with the Loan shall bear interest on a Base Rate
basis or LIBOR basis as more fully set forth in the Notes, except that Swing
Line Loans shall only be made available to the Borrowers on a Base Rate basis.
The Borrowers' right to request LIBOR based interest, as well as the terms,
conditions and requirements relating thereto, are set forth in the Notes and/or
on Exhibit 3 of this Agreement, and the parties expressly acknowledge and
---------
consent to such terms, conditions and requirements. Advances bearing interest on
a Base Rate basis shall be in minimum and incremental amounts of One Hundred
Thousand and No/100 Dollars ($100,000.00), and shall be made available on a
same-day basis, if requested by 12:00 Noon Washington, D.C. time on a Business
Day. Advances bearing interest on a LIBOR basis shall be in a minimum amount of
Five Hundred Thousand and No/100 Dollars ($500,000.00) and in incremental
amounts of One Hundred Thousand and No/100 Dollars ($100,000.00), and shall be
made available three (3) Business Days after request therefor, subject to the
terms of the Loan Documents. It is expressly understood and agreed that the
Borrowers shall have the right, subject to the foregoing terms, conditions and
requirements, to elect that amounts previously advanced and outstanding under
the Facilities bear interest on a LIBOR basis following the Agent's receipt of a
LIBOR Election Form and Certification, in the form attached as Exhibit 2 to this
---------
Agreement.
Section 1.5 Additional Mandatory Payments; Reduction of Commitment. In
------------------------------------------------------
addition to all other sums payable by the Borrowers pursuant to any of the
Notes, this Agreement or any other Loan Document, the Borrowers shall also make
mandatory payments on the Notes (applied to the Facilities as provided
hereinbelow), in the following amounts:
(i) one hundred percent (100%) of the cash proceeds (net of
reasonable and customary costs paid to unrelated and unaffiliated
third parties in connection with the particular transaction) arising
from any Excess Cash Event;
(ii) seventy-five percent (75%) of the cash proceeds (net of
reasonable and customary costs paid to unrelated and unaffiliated
third parties in connection with the particular transaction) arising
from any issuance by the Borrower of subordinated debt after the
Closing Date ("Subordinate Debt Issuance");
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<PAGE>
(iii) fifty percent (50%) of the cash proceeds (net of reasonable and
customary costs paid to unrelated and unaffiliated third parties in
connection with the particular transaction) arising from any issuance
by the Borrower of any equity interests in any Borrower ("Equity
Issuance"); it being understood and agreed that the cash proceeds
arising from the issuance of stock in connection with the stock
options listed on Schedule 1.5 hereto shall not be deemed an Equity
------------
Issuance for the purpose of this clause (iii);
(iv) seventy-five percent (75%) of Excess Cash Flow, if the
Borrowers' Total Debt to EBITDA Ratio shall be greater than 3.0 to
1.0, calculated as of the applicable date of determination for Excess
Cash Flow; and
(v) fifty percent (50%) of Excess Cash Flow, if the Borrowers' Total
Debt to EBITDA Ratio shall be less than or equal to 3.0 to 1.0,
calculated as of the applicable date of determination for Excess Cash
Flow.
Mandatory payments arising from any Excess Cash Event, Subordinate Debt
Issuance and/or Equity Issuance shall be due and payable in full upon the
occurrence of such Excess Cash Event, Subordinate Debt Issuance and/or Equity
Issuance (as applicable), and mandatory payments arising from Excess Cash Flow
shall be due and payable in full simultaneously with the Agent's receipt of the
Borrowing Base/Non-Default Certificate for the month of December of each
calendar year (or the date on which such certificate is required to be
delivered, if the Borrowers fail to deliver the same as required by this
Agreement), which Borrowing Base/Non-Default Certificate shall include the
Borrower's detailed computation of Excess Cash Flow. Furthermore, if the
Mandatory Payment amount for Excess Cash Flow set forth in the Year End
Compliance Certificate (the "Required Excess Cash Flow Payment") shall be
greater than the Mandatory Payment arising from Excess Cash Flow paid by the
Borrowers pursuant to the immediately preceding sentence (the "Excess Cash Flow
Paid Amount"), then the Borrowers shall make an additional Mandatory Payment,
simultaneously with the Borrower's submission of the Year End Compliance
Certificate (or the date on which such certificate is required to be delivered,
if the Borrowers fail to deliver the same as required by this Agreement), in an
amount equal to the difference between the Required Excess Cash Flow Payment and
the Excess Cash Flow Paid Amount
Any mandatory payment(s) made pursuant to this Section 1.5 shall be accompanied
by the applicable Prepayment Fee, if any, payable pursuant to Exhibit 3 of this
---------
Agreement. Such mandatory payments shall be applied to the Term Facilities, in
inverse order of maturities, on a pro-rata basis (unless all of the Note "B"
Holders shall have instructed the Agent in writing to apply such payments first
to Term Facility "A" until Term Facility "A" shall have
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<PAGE>
been paid and satisfied in full), then to any Swing Line Outstandings, and then
to principal outstanding under the Revolving Facility.
Section 1.6 Field Audits. The Agent will schedule and conduct not less
------------
than two (2) field audits per annum with respect to the Collateral and the
Borrowers' accounts receivable, inventory, business and operations, and shall
have the right at any time to conduct such other field audits with respect to
the Collateral and the Borrowers' accounts receivable, inventory, business and
operations, as the Agent deems necessary or appropriate, in its sole discretion.
All field audits shall be at the cost and expense of the Borrowers; provided,
however, that, except as otherwise expressly set forth below, in the absence of
an Event of Default hereunder, the cost and expense to the Borrowers of field
audits shall be limited to the cost and expense of no more than two (2) field
audits conducted during any twelve (12) month period (the "Field Audit Cost
Limitation"). Notwithstanding the foregoing, any field audit conducted with
respect to the joinder of a new Borrower pursuant to Section 1.10 of this
Agreement shall not be subject to the Field Audit Cost Limitation.
Section 1.7 Fees.
----
(a) Commitment Fee. In addition to principal, interest and other
--------------
sums payable under the Notes, so long as any amounts remain outstanding in
connection with the Revolving Facility, or any Lender has any obligation to make
any advance in connection therewith, the Borrowers agree to pay to the Agent,
for the benefit of the Lender(s), pro-rata based on each Lender's Percentage of
the Revolving Facility Commitment Amount, a quarter-annual commitment fee (the
"Commitment Fee"), at the annual rate corresponding to the Borrower's Total Debt
to EBITDA Ratio reported as of the immediately preceding quarter, as set forth
on Exhibit 7 hereto, and calculated on the difference between (i) the Revolving
---------
Facility Commitment Amount, and (ii) the sum of the average daily outstanding
principal balance of the Revolving Facility during the applicable quarter, plus
the aggregate face amount of all Letters of Credit issued and/or outstanding
during the applicable quarter. Notwithstanding the foregoing, during the six (6)
month period immediately following the Closing Date, the Commitment Fee annual
percentage shall be fixed and equal to one-half of one percent (.50%). The
Commitment Fee shall be calculated on the basis of the actual number of days
elapsed and a three hundred sixty (360) day year, shall be due for any quarter
in which the Revolving Facility is available to the Borrower or outstanding (for
all or any portion of such quarter), and shall be payable in arrears, commencing
on March 31, 1999, and continuing on the last Business Day of every third (3rd)
calendar month thereafter so long as this Agreement remains in effect.
(b) Out-of-Pocket Fees and Expenses. The Borrowers shall timely pay
-------------------------------
all reasonable out-of-pocket costs and expenses (including reasonable attorneys'
fees and expenses of counsel for the Agent, and of other special and local
counsel and other experts, if any, engaged by the Agent) from time to time
incurred by the Agent in connection with the Agent's administration of,
preservation of rights in and enforcement of this Agreement,
20
<PAGE>
the other Loan Documents and the transactions contemplated by this Agreement.
Without limiting the generality of the foregoing, the Borrowers shall be liable
for all reasonable out-of-pocket costs and expenses associated with fixed asset
appraisals and environmental reports deemed necessary or appropriate by the
Agent, in its reasonable discretion, as well as any and all amendments, waivers
and/or consents relating to any of the Facilities. Furthermore, following the
occurrence of an Event of Default which has continued unremedied beyond any
applicable notice and/or grace period, the Borrowers shall be liable for all
reasonable attorneys' fees and expenses incurred by each Lender in connection
with such Lender's preservation of rights in and enforcement of this Agreement,
the other Loan Documents and the transactions contemplated by this Agreement.
(c) Letter of Credit Fees. The Borrowers shall also pay all fees and
---------------------
expenses related to Letters of Credit, as set forth in Article 2 below.
Section 1.8 Termination of Advances; Reduction of the Revolving Facility
------------------------------------------------------------
Commitment Amount. The Borrowers may (a) following the date on which the Term
- -----------------
Facilities shall have been paid and satisfied in full, terminate the obligation
of the Lender(s) to make additional advances under the Revolving Facility, or
(b) irrevocably reduce the Revolving Facility Commitment Amount in whole or in
part; provided that, in each case, (i) the Borrowers shall have provided written
notice thereof to the Agent at least five (5) Business Days prior to the
Reduction/Termination Date; (ii) any reduction of the Revolving Facility
Commitment Amount shall be in minimum and incremental amounts of Five Hundred
Thousand and No/100 Dollars ($500,000.00), and after giving effect to any such
reduction, the aggregate outstanding principal amount of the Revolving Facility,
together with all accrued interest and all other sums payable under the
Revolving Facility, shall not exceed the Maximum Borrowing Base; (iii)
simultaneously with any such reduction or termination of the Revolving Facility
Commitment Amount, the Borrowers shall have paid to the Agent, for the benefit
of the Lender(s), pro-rata based on each Lender's Percentage of the Revolving
Facility Commitment Amount, the applicable Prepayment Fee, if any; and (iv) no
Event of Default exists hereunder and no act, event or condition shall have
occurred or be continuing which with notice or the passage of time, or both,
would constitute an Event of Default.
Section 1.9 Appointment of Averstar. Each Borrower acknowledges that (i)
-----------------------
the Lenders have agreed to extend credit to each of the Borrowers on an
integrated basis for the purposes herein set forth; (ii) it is receiving direct
and/or indirect benefits from each such extension of credit; and (iii) the
obligations of the "Borrower" or "Borrowers" under this Agreement are the joint
and several obligations of each Borrower. To facilitate the administration of
the Loan, each Borrower hereby irrevocably appoints AverStar as its true and
lawful agent and attorney-in-fact with full power and authority to execute,
deliver and acknowledge on such Borrower's behalf, each Request for Advance and
Certification, Borrowing Base/Non-Default Certificate and all other Loan
Documents or other materials provided or to be provided to the Agent or Lenders
pursuant to this Agreement or in connection with the Loan. This power-of-
attorney is coupled with an
21
<PAGE>
interest and cannot be revoked, modified or amended without the prior written
consent of the Agent. Upon request of the Agent, each Borrower shall execute,
acknowledge and deliver to the Agent a form Power of Attorney confirming and
restating the power-of-attorney granted herein.
Section 1.10 Joinder Of New Subsidiaries and Affiliates. Any present or
------------------------------------------
future subsidiary of any Borrower in which such Borrower now or hereafter owns,
directly or indirectly, an ownership interest of greater than fifty percent
(50%) shall, at the Agent's option, execute and deliver to the Agent (a) a
Joinder Agreement in the form attached hereto as Exhibit 6 (A "Joinder
---------
Agreement"), pursuant to which such subsidiary shall (i) join in and become a
party to this Agreement and the other Loan Documents; (ii) agree to comply with
and be bound by the terms and conditions of this Agreement and all of the other
Loan Documents; and (iii) become a "Borrower" and thereafter be jointly and
severally liable for the performance of all the past, present and future
obligations and liabilities of the Borrowers hereunder and under the Loan
Documents; and (b) such other documents, instruments and agreements as may be
reasonably required by the Agent in connection therewith (including, without
limitation, an opinion of counsel), in form and substance acceptable to the
Agent in all respects. The Borrowers acknowledge and agree that the Agent shall
perform a field audit of the accounts receivable, inventory, business and
operations of any present or future subsidiary proposed to be joined as a
"Borrower" hereunder, if requested by the Required Lenders, and without limiting
any other terms and provisions of this Agreement, the results of such field
audit must be reasonably satisfactory to the Agent.
ARTICLE 2
---------
LETTERS OF CREDIT
Section 2.1 Issuance. The Borrowers and Lenders acknowledge that from
--------
time to time the Borrowers may request that First Union issue or amend Letter(s)
of Credit. Subject to the terms and conditions of this Agreement, and any other
reasonable requirements for letters of credit normally and customarily imposed
by First Union from time to time, First Union agrees to issue such requested
letters of credit, provided that no Event of Default has occurred and is
continuing, and no act, event or condition which with notice or the passage of
time, or both, would constitute an Event of Default has occurred and is
continuing. If any such Letter(s) of Credit are issued by First Union, each
Revolving Facility Lender shall purchase from First Union a risk participation
with respect to such Letter(s) of Credit in an amount equal to such Lender's
Percentage of such Letter(s) of Credit. First Union shall have no obligation to
issue any Letter of Credit which has an expiration date beyond the Revolving
Facility Maturity Date, unless the Borrowers shall have deposited with the
Agent, concurrent with the issuance of any such Letter of Credit, cash security
therefor in an amount equal to the face amount of the Letter of Credit. Any
request for a Letter of Credit shall be made by the Borrowers submitting to the
Agent an Application and Agreement for Letter of Credit or Amendment to Letter
of Credit (each
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<PAGE>
being herein referred to as a "Letter of Credit Application") on First Union's
standard form, at least three (3) Business Days prior to the date on which the
issuance or amendment of the Letter of Credit shall be required, which Letter of
Credit Application shall be executed by an authorized officer of the Borrower,
and be accompanied by such other supporting documentation and information as the
Agent may from time to time reasonably request. Each Letter of Credit
Application shall be deemed to govern the terms of issuance of the subject
Letter of Credit, except to the extent inconsistent with the terms of this
Agreement. It is understood and agreed that Letters of Credit shall not be
issued for durations of longer than one (1) year. Any outstanding Letter of
Credit may be renewed from time to time; provided that (i) at least sixty (60)
days' prior written notice thereof shall have been given by the Borrowers to the
Agent; and (ii) as of the date of application for such renewal, and as of the
date of issuance of such renewal, no Event of Default exists under the terms and
provisions of the particular Letter of Credit or this Agreement, and no act,
event or condition has occurred which with notice or the passage of time, or
both, would constitute an Event of Default under the terms and provisions of the
particular Letter of Credit or this Agreement.
Section 2.2 Amounts Advanced Pursuant to Letters Of Credit. Upon the
----------------------------------------------
issuance of any Letter(s) of Credit (i) any amounts drawn under any Letter of
Credit shall be deemed advanced ratably under the Revolving Facility Notes,
shall bear interest and be payable in accordance with the terms of the Revolving
Facility Notes and shall be secured by the Collateral (in the same manner as all
other sums advanced under the Revolving Facility Notes); and (ii) each Revolving
Facility Lender shall purchase from First Union such risk participations in the
Letter(s) of Credit as shall be necessary to cause each such Lender to share the
funding obligations with respect thereto ratably in accordance with its
particular Percentage. It is expressly understood and agreed that all
obligations and liabilities of the Borrowers to First Union in connection with
any such Letter(s) of Credit shall be deemed to be "Obligations," and the Agent
shall not be required to release its security interest in the Collateral until
(i) all Notes and all other sums due to the Lender(s) in connection with the
Loan have been paid and satisfied in full, (ii) all Letters of Credit have been
canceled or expired, and (iii) no Lender has any further obligation or
responsibility to make additional Loan advances or issue additional Letters of
Credit. Furthermore, in no event whatsoever shall First Union have any
obligation to issue any Letter of Credit which would cause the face amount of
all then outstanding Letters of Credit issued for the benefit of the Borrower,
in the aggregate, to exceed Five Million Dollars ($5,000,000.00).
Section 2.3 Letter of Credit Fees. In connection with each Letter of
---------------------
Credit issued, amended or renewed pursuant to this Agreement, the Borrowers
shall pay: (i) to the Revolving Facility Lender(s) ratably, in advance, a per
annum fee (the "Letter of Credit Fee") at the annual rate corresponding to the
Borrower's Total Debt to EBITDA Ratio reported as of the immediately preceding
quarter, as set forth on Exhibit 7 hereto, which shall be calculated on the face
---------
amount of each Letter of Credit as of the date of issuance (or the anniversary
or amendment date, as applicable), and shall be calculated on the basis of
23
<PAGE>
the actual number of days elapsed and a three hundred sixty (360) day year; and
(ii) to First Union, customary issuance and administrative charges in an amount
not less than one-eighth of one percent (.125%) of the face amount of each
Letter of Credit issued and/or outstanding (the "Letter of Credit Administration
Fee"). The Letter of Credit Administration Fee shall be due and payable in full,
in advance, on the date the Letter of Credit is issued, amended or renewed.
ARTICLE 3
---------
SECURITY
Section 3.1 Security Generally. As collateral security for the Loan and
------------------
all other Obligations, the Borrowers hereby grant and convey to the Agent, for
the ratable benefit of the Lender(s), a security interest in all of the
following (collectively, the "Collateral"):
Receivables. All of each Borrower's present and future accounts,
-----------
contracts, contract rights (including, without limitation, all of
each Borrower's rights and remedies under the Merger Agreement),
chattel paper, general intangibles, notes (including, without
limitation, the IES Notes), drafts, acceptances, chattel mortgages,
conditional sale contracts, bailment leases, security agreements and
other forms of obligations now or hereafter arising out of or
acquired in the course of or in connection with any business any
Borrower conducts, together with all liens, guaranties, securities,
rights, remedies and privileges pertaining to any of the foregoing,
whether now existing or hereafter created or arising, and all rights
with respect to returned and repossessed items of inventory;
Inventory. All of each Borrower's inventory and goods (as defined in
---------
the Uniform Commercial Code in effect in the Commonwealth of
Virginia) now or hereafter owned by each Borrower, whenever acquired
and wherever located, and whether held for sale or lease or
furnished or to be furnished under contracts of service, and all raw
materials, work in process and materials now or hereafter owned by
any Borrower, wherever located, and used or consumed in its
business, including all returned and repossessed items; and all
other property now or hereafter constituting inventory (as defined
in the Uniform Commercial Code in effect in the Commonwealth of
Virginia);
24
<PAGE>
Other Collateral. All of each Borrower's present and future
----------------
furniture, fixtures, equipment, machinery, supplies and other assets
and personal property of every type or nature whatsoever, including
without limitation, all of each Borrower's present and future
investment property (as defined in the Uniform Commercial Code in
effect in the Commonwealth of Virginia), instruments, documents,
inventions, designs, patents, patent applications, trademarks,
trademark applications, trade names, trade secrets, goodwill,
registrations, copyrights, licenses, franchises, customer lists, tax
refunds, tax refund claims, rights of claims against carriers and
shippers, leases and rights to indemnification;
Leases. All of each Borrower's present and future right, title and
------
interest in and to any and all leases, occupancy agreements,
subleases, contracts, licenses, agreements and other understandings
of or relating to the use, enjoyment and occupancy of real property
or any improvements thereon;
Stock. All of AverStar's right, title and interest in and to all of
-----
the issued and outstanding capital stock of the Borrowers (other
than AverStar), whether common and/or preferred, and whether now or
hereafter issued or outstanding and whether now or hereafter
acquired by AverStar, together with all voting or other rights
appurtenant thereto, including, without limitation, the right to
receive all dividends and/or distributions, and all proceeds
thereof, pursuant to the terms and conditions of the Stock Security
Agreement; together with all right, title and interest of any
Borrower in and to all of the issued and outstanding capital stock
or other ownership interests of any entity, whether now or hereafter
issued or outstanding and whether now or hereafter acquired by such
Borrower, together with all voting or other rights appurtenant
thereto, including, without limitation, the right to receive all
dividends and/or distributions, and all proceeds thereof;
Accounts. All of each Borrower's bank accounts, cash from time to
--------
time on deposit therein and all interest from time to time earned
thereon, pursuant to the Pledge of Accounts;
Records. All of each Borrower's records, documents and files, in
-------
whatever form, pertaining to the foregoing or any part thereof; and
25
<PAGE>
Proceeds, Etc. Any and all cash and non-cash proceeds, increases,
--------------
substitutions, replacements and/or additions to any or all of the
foregoing.
Notwithstanding the foregoing, the above described grant and conveyance
shall not be deemed to include the grant or conveyance of any Government
Contract, which by its terms or applicable law may not be conveyed; it being
understood, however, that in any such situation(s), the Agent's security
interest shall include (i) the entirety of each Borrower's right, title and
interest in and to all accounts receivable and all other proceeds directly or
indirectly arising from such Government Contract, and (ii) all other rights and
interests which each Borrower may lawfully convey to the Agent.
Section 3.2 No Preference or Priority. It is expressly understood and
-------------------------
agreed that each of the Notes shall be secured without preference or priority;
it being the intention of the parties that the Notes shall be co-equal and
coordinate in right of payment of principal, interest, late charges and other
sums due thereunder, except as may otherwise be expressly set forth herein.
Section 3.3 Release of Security Interest. At such time as (i) the Notes
----------------------------
and all other sums due to the Lender(s) pursuant to all of the Loan Documents
and/or in connection with the Loan have been paid and satisfied in full, (ii)
all Letters of Credit and interest rate protection agreements have been
cancelled, terminated or expired, and (iii) no Lender has any further obligation
or responsibility hereunder to make additional Loan advances or issue additional
Letters of Credit, the Agent shall, upon request of the Borrower and at no cost
to the Agent or any Lender, execute and deliver such documentation as the
Borrower may reasonably request to release the Collateral from the Agent's lien,
terminate this Agreement and mark the Notes paid and satisfied in full.
ARTICLE 4
---------
CONDITIONS TO THE OBLIGATIONS OF THE LENDER(S)
The obligation of the Lender(s) to proceed to Closing shall be subject to
the following conditions:
Section 4.1 Satisfaction of Commitment Letter Conditions; Compliance with
-------------------------------------------------------------
Agreements. The Borrowers shall have satisfied all conditions precedent to
- ----------
Closing set forth in the Commitment Letter, including without limitation, each
of the following items:
(a) Execution and delivery of Loan Documents, as well as other
ancillary documentation, in each case satisfactory to the Agent in all respects.
26
<PAGE>
(b) The Agent's review of and satisfaction with the (a)
organizational structure of the Borrowers, (b) the Loan structure, and (c) tax,
ownership, capital and legal structure of the Borrowers.
(c) The Agent shall have a perfected first lien security interest in
all Collateral described herein, with such exceptions as shall be satisfactory
to the Agent. Additionally, for each Government Contract the Agent selects to
have specifically assigned pursuant to the Assignment of Claims Act of 1940 as
of the date of Closing, the Borrowers shall have executed all documents
necessary to be executed by the Borrowers in order to cause compliance with such
act.
(d) The Agent's review and satisfaction with the final terms and
conditions of, and all documentation relating to, the Acquisition (including all
representations, warranties and indemnities contained in the Merger Agreement
and related documents, as well as arrangements for the transition of management,
termination of employees and non-compete matters).
(e) The Agent's review and satisfaction with evidence provided by the
Borrowers that all conditions to closing the Acquisition have been satisfied or
waived.
(f) Receipt of legal opinion(s) from counsel to the Borrowers, in
form and substance acceptable to the Agent in all respects.
(g) Evidence of each Borrower's solvency (i.e., a consolidated
balance sheet dated as of the Closing Date), in form and substance satisfactory
to the Agent in all respects.
(h) The Agent's satisfaction that the Loan shall be in full
compliance with all legal requirements, including without limitation, that the
Borrowers have obtained all necessary regulatory and third party consents and
approvals.
(i) Delivery of, and Agent's satisfaction with, an initial Borrowing
Base/Non-Default Certificate.
(j) Evidence satisfactory to the Agent that the Borrowers are in full
compliance with all financial covenants set forth in this Agreement as of the
Closing Date.
(k) Evidence satisfactory to the Agent of the repayment in full of
all outstanding indebtedness of the Borrowers, both direct and contingent, other
than trade payables incurred in the ordinary course of business, operating
leases and/or other indebtedness permitted pursuant to the terms and provisions
of this Agreement; it being understood and agreed that the indebtedness owing by
the Borrower to Mass Mutual shall have been modified or amended to the Agent's
satisfaction.
27
<PAGE>
(l) No litigation by any entity (private or governmental) shall be
pending or threatened against any Borrower at Closing (i) with respect to the
Loan, Loan Documents or transactions contemplated thereby; or (ii) which in the
Agent's good faith judgment could reasonably be expected to have a materially
adverse effect on the business, property, assets, liabilities, condition
(financial or otherwise), or results of operations of the Borrowers going
forward.
(m) The Agent's satisfaction that the Borrowers will be able to
service and maintain any performance bonds that may be required in the ordinary
course of business.
(n) The Borrowers' compliance in all material respects with all
applicable federal, state, local and foreign laws and regulations, including all
applicable labor and environmental laws and regulations.
(o) The Agent's satisfaction with the terms, conditions and existence
of insurance coverage appropriate to the conduct of the Borrowers' business.
(p) No material adverse change in the business, assets, properties,
prospects or condition (financial, proforma financial or otherwise) of AverStar
or CBSI shall have occurred since the date of the most recent financial
statements delivered to the Agent, and the Agent shall be satisfied with the
business, assets, properties, prospects and condition (financial, proforma
financial and otherwise) of AverStar and CBSI.
(q) The Agent's satisfaction that prior to and during the syndication
of the Loan, there shall be no additional offering, placement or arrangement of
any debt securities or bank financing by or on behalf of the Borrowers.
(r) All costs, fees and expenses (including, without limitation,
reasonable legal fees and expenses) of closing the transactions hereunder shall
have been paid in full, to the extent due.
Section 4.2 No Default. There shall exist no Event of Default, and no
----------
act, event or condition shall have occurred which with notice or the lapse of
time, or both, would constitute an Event of Default; and the Borrowers shall
have performed all agreements theretofore to be performed by the Borrowers
pursuant to the Commitment Letter.
Section 4.3 Documentation. The Agent shall have received such certificates
-------------
of good standing, corporate resolutions, opinions and certifications, in such
form and content and from such parties, as the Agent shall require. All
documentation relating to the Acquisition, the Loan and all related transactions
must be satisfactory in all respects to the Agent and its counsel.
28
<PAGE>
ARTICLE 5
---------
REPRESENTATIONS AND WARRANTIES
------------------------------
To induce the Lender(s) to enter into this Agreement, each Borrower jointly
and severally represents, warrants, covenants and agrees as follows:
Section 5.1 Corporate Existence and Qualification. Each Borrower is a
-------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of its state of incorporation, with all corporate power and authority and all
necessary licenses and permits to own, operate and lease its properties and
carry on its business as now being conducted. Each Borrower is duly qualified
and authorized to do business and is in good standing in each jurisdiction in
which the nature of its activities or the character of its properties makes
qualification necessary, except for such failures to qualify which would not
have a material adverse effect on (a) the Borrowers, taken as a whole, or any of
the Principal Borrowers or (b) the ability of the Borrowers, taken as a whole,
or any of the Principal Borrowers, to conduct their respective business or
operations.
Section 5.2 Corporate Authority; Noncontravention. The execution,
-------------------------------------
delivery and performance by each Borrower of its obligations set forth in this
Agreement, the Notes and the other Loan Documents (i) have been duly authorized
by all necessary corporate and/or stockholder action; (ii) do not require the
consent of any governmental body, agency or authority; (iii) will not violate or
result in (and with notice or the lapse of time will not violate or result in)
the breach of any provision of the Articles of Incorporation/Certificate of
Incorporation or By-laws of such Borrower, any material indenture, material
instrument, material agreement or other material undertaking to which such
Borrower is a party or by which such Borrower is bound, or any order or
regulation of any governmental authority or arbitration board or tribunal; and
(iv) except as expressly permitted by the terms and provisions of this
Agreement, result in the creation of a lien, charge or encumbrance of any nature
upon any of the properties or assets of any Borrower. When the Loan Documents
are executed and delivered, they will constitute legal, valid and binding
obligations of the Borrowers, enforceable against the Borrowers in accordance
with their respective terms, except as such enforceability may be subject to the
effect of any applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting creditors' rights generally and subject to the effect of
general principals of equity (whether considered in a proceeding in equity or at
law).
Section 5.3 Financial Position. The financial statements dated December
------------------
31, 1998, copies of which have been delivered to the Agent, present fairly the
financial condition of the Borrowers as of the date thereof and the results of
the Borrowers' operations for the periods indicated therein, were prepared in
accordance with GAAP, are true and accurate in all material respects, and with
respect to the Borrowers (other than CBSI), are not misleading in any respect.
All liabilities, fixed or contingent (other than those liabilities, whether
fixed or contingent, not required by GAAP to be reflected or
29
<PAGE>
reserved on financial statements and which (i) are not letters of credit or (ii)
do not exceed $10,000.00 individually or $200,000 in the aggregate), are fully
shown or provided for on the referenced financial statements or the notes
thereto as of the dates thereof. There has been no material adverse change in
the business, property or condition (financial or otherwise) of any Borrower
since the date of the most recent financial statement dated December 31, 1998,
and all other financial statements and information delivered to First Union
prior to the Closing Date are true and accurate in all material respects, and
are not misleading in any material respect.
Section 5.4 Payment of Taxes. Each Borrower has filed all tax returns and
----------------
reports required to be filed by it with the United States Government and/or with
all state and local governments, and has paid in full or made adequate provision
on its books for the payment of all taxes, interest, penalties, assessments or
deficiencies shown to be due or claimed to be due on or in respect of such tax
returns and reports, except to the extent that the validity or amount thereof is
being contested in good faith by appropriate proceedings and the non-payment
thereof pending such contest will not result in the execution of any tax lien or
otherwise adversely affect the Agent's interests in any part of the Collateral.
Section 5.5 Accuracy of Submitted Information; Omissions. All documents,
--------------------------------------------
certificates, information, materials and financial statements (other than
projections) furnished or to be furnished to the Agent or any Lender pursuant to
this Agreement or otherwise in connection with the Loan, as of the date
furnished, (i) are and will be true and correct in all material respects; (ii)
do not and will not contain any untrue statement of a material fact; and (iii)
do not and will not omit any material fact necessary to make the statements
contained therein or herein not misleading. No Borrower is aware of any fact
which has not been disclosed to the Agent in writing which materially adversely
affects, or so far as any Borrower can now reasonably foresee, could reasonably
be expected to materially adversely affect, the properties, business, profit or
condition (financial or otherwise) of the Borrowers, taken as a whole, or any of
the Principal Borrowers or the ability of the Borrowers, taken as a whole, or
any of the Principal Borrowers to perform their respective obligations under
this Agreement or any other Loan Document.
Section 5.6 Government Contracts. Except as set forth on Schedule 5.6(a)
-------------------- ---------------
hereto, no notice of suspension, debarment, cure notice, show cause notice or
notice of termination for default has been received by any Borrower (or to the
best of each Borrower's knowledge issued) in connection with any Government
Contract, and no Borrower is a party to any pending (or to each Borrower's
knowledge, there is no threatened) suspension, debarment or termination for
default issued or being pursued by the Government or any other adverse
Government action or proceeding in connection with any Government Contract. All
Government Contracts which have a remaining value in excess of One Million and
No/100 Dollars ($1,000,000.00) and a remaining term of twelve (12) months or
longer are listed on Schedule 5.6(b) hereto, and documentation necessary for
---------------
compliance with the Assignment of Claims Act, has been executed and
30
<PAGE>
delivered by the Borrowers to the Agent in connection with each such Government
Contract.
Section 5.7 No Defaults or Liabilities. Except as set forth on Schedule
-------------------------- --------
5.7 hereto, no Borrower is (a) in default in the performance of any obligation,
- ---
covenant or condition contained in any agreement to which it is a party, which
default could reasonably be expected to materially adversely affect the
properties, business, profit or condition (financial or otherwise) of the
Borrowers, taken as a whole, or any of the Principal Borrowers or the ability of
the Borrowers, taken as a whole, or any of the Principal Borrowers to perform
their respective obligations under this Agreement or any other Loan Document; or
(b) aware of any condition, act, event or occurrence, including, without
limitation, any pending or threatened litigation, legal or administrative
proceeding or investigation, not disclosed to the Agent in writing which could
reasonably be expected to prejudice the Agent's or any Lender's rights under any
Loan Document in any respect.
Section 5.8 No Violations of Law. No Borrower is in violation of any
--------------------
Applicable Laws, except for such violations which could not reasonably be
expected to materially adversely affect the properties, business, profit or
condition (financial or otherwise) of the Borrowers, taken as a whole, or any of
the Principal Borrowers or the ability of the Borrowers, taken as a whole, or
any of the Principal Borrowers to perform their respective obligations under
this Agreement or any other Loan Document; no Borrower has failed to obtain any
material license, material permit, material franchise or other material
governmental authorization necessary to the ownership of its properties or to
the conduct of its business; and each Borrower has conducted its business and
operations in full compliance with all Applicable Laws, except for any non-
compliance which is not reasonably likely to limit the ability of the Borrowers,
taken as a whole, or any of the Principal Borrowers, to conduct their respective
business or operations in the manner in which the same are now being conducted.
Section 5.9 Litigation and Proceedings. Except as set forth on Schedule
-------------------------- --------
5.9 hereto, no action, suit or proceeding against or affecting any Borrower is
- ---
presently pending, or to the knowledge of each Borrower, threatened, in any
court, before any governmental agency or department, or before any arbitration
board or tribunal, which could reasonably be expected to result in any judgment
or liability against any Borrower in excess of Two Hundred Fifty Thousand and
No/100 Dollars ($250,000.00) and which is not fully covered by insurance. No
Borrower is aware of any existing basis that is reasonably likely to result in
any such action, suit or proceeding. No Borrower is in default in any material
respect of any applicable order, writ, injunction or decree of any court,
governmental authority or arbitration board or tribunal.
Section 5.10 Security Interest in the Collateral. Each Borrower is the
-----------------------------------
sole legal and beneficial owner of the Collateral owned or purported to be owned
by it, free and clear of all liens, claims and encumbrances of any nature,
except for the Permitted Liens. Each Borrower has provided or will provide to
the Agent upon request written landlord
31
<PAGE>
waivers from each lessor/landlord of any premises at which such Borrower's
tangible personal property (having an aggregate value in excess of $500,000.00)
is located. Each such landlord waiver subordinates or will subordinate any
statutory, contractual or other lien the lessor/landlord may have in any of the
Collateral to the lien, operation and effect of the lien being granted to the
Agent pursuant to this Agreement.
Section 5.11 Principal Place of Business; Location of Books and Records;
-----------------------------------------------------------
No Inventory. Each Borrower (other than CBSI) maintains its principal place of
- ------------
business and the office where it keeps its books and records with respect to
accounts and contracts rights at AverStar's offices located at the address set
forth in the preamble of this Agreement. CBSI's principal place of business and
the office where it keeps its books and records with respect to accounts and
contracts rights is at 2750 Prosperity Avenue, Suite 300, Fairfax, Virginia
22031. Set forth on Schedule 5.11 hereto is a list of each Borrower's business
-------------
locations as of the Closing Date, and all places where Collateral having a value
in excess of One Hundred Thousand and No/100 Dollars ($100,000.00), in the
aggregate, is located. Except as expressly set forth above, the Borrowers agree
to notify the Agent in writing at least ten (10) days prior to any change in any
Borrower's principal place of business, or any change in the location of the
office where the Borrowers keep their books and records with respect to accounts
and contract rights, or any change of or addition to the locations where any
Collateral is located.
Section 5.12 Fiscal Year. Each Borrower's fiscal year ends on December
-----------
31.
Section 5.13 Pension Plans.
-------------
(a) The present value of all benefits vested under all "employee
pension benefit plans," as such term is defined in Section 3(2) of the Employee
Retirement Income Security Act of 1974 ("ERISA"), which are defined benefit
plans, and which are from time to time maintained by each Borrower
(individually, a "Pension Plan" and collectively, the "Pension Plans") did not,
as of December 31, 1998, exceed the value of the assets of the Pension Plans
allocable to such vested benefits;
(b) No Pension Plan, trust created thereunder or other person dealing
with any Pension Plan has engaged in a non-exempt transaction proscribed by
Section 406 of ERISA or a non-exempt "prohibited transaction," as such term is
defined in Section 4975 of the Internal Revenue Code, that could have a material
adverse effect on the Borrowers, taken as a whole, or any of the Principal
Borrowers or the ability of the Borrowers, taken as a whole, or any of the
Principal Borrowers to conduct their respective business or operations;
(c) No Pension Plan or trust created thereunder has been terminated
within the last three (3) years (except pursuant to a "standard termination,"
within the meaning of Section 4041(B) of ERISA), and there have been no material
"reportable events" (as such term is defined in Section 4043 of ERISA and the
regulations thereunder)
32
<PAGE>
with respect to any pension plan or trust created within the three (3) year
period immediately preceding the Closing Date (other than reportable events for
which reporting has been waived pursuant to applicable PGBC regulations); and
(d) No Pension Plan or trust created thereunder has incurred any
"accumulated funding deficiency" (as such term is defined in Section 302 of
ERISA or Section 412 of the Internal Revenue Code) as of the end of any plan
year, whether or not waived.
Section 5.14 O.S.H.A., ADA and Environmental Compliance.
-------------------------------------------
(a) Each Borrower is in compliance with, and its facilities, business
assets, property, leaseholds and equipment are in compliance with, the
provisions of the Federal Occupational Safety and Health Act ("O.S.H.A."), the
Americans with Disabilities Act ("ADA"), the Environmental Protection Act, RCRA
and all other applicable environmental and handicapped access laws; and there
have been no citations, notices, notifications or orders of any such non-
compliance issued to any Borrower or relating to its business, assets, property,
leaseholds or equipment under any such laws, rules or regulations;
(b) each Borrower has been issued all required federal, state and
local licenses, certificates and permits necessary or appropriate in the
operation of its facilities, businesses, assets, property, leaseholds and
equipment; and
(c) (i) there are no visible signs of releases, spills, discharges,
leaks or disposal (collectively referred to herein as "Releases") of Hazardous
Substances at, upon, under or within any real property owned, or premises
leased, by any Borrower; (ii) to the knowledge of each Borrower, there are no
underground storage tanks or polychlorinated biphenyls on any real property
owned, or premises leased, by any Borrower; (iii) to the knowledge of each
Borrower, no real property owned, or premises leased, by any Borrower has ever
been used by any Borrower or any other person as a treatment, storage or
disposal facility for Hazardous Waste; and (iv) to the knowledge of each
Borrower, no Hazardous Substances are present on any real property owned, or
premises leased, by any Borrower, except for such quantities of Hazardous
Substances as are handled in accordance with all applicable manufacturer's
instructions and governmental regulations, and as are necessary or appropriate
for the operation of the business of such Borrower. Each Borrower, for itself
and its successors and assigns, hereby covenants and agrees to indemnify, defend
and hold harmless the Agent and each Lender from and against any and all
liabilities, losses, claims, damages, suits, penalties, costs and expenses of
every kind or nature, including, without limitation, reasonable attorneys' fees
arising from or in connection with (i) the presence or alleged presence of any
Hazardous Substance or Hazardous Waste on, under or about any property of any
Borrower (including, without limitation, any property or premises now or
hereafter owned or leased by any Borrower), or which is caused by or results
from, directly or indirectly, any act or omission to act by any Borrower; and
(ii) any Borrower's violation of the ADA or any environmental statute,
ordinance, order, rule or
33
<PAGE>
regulation of any governmental entity or agency thereof (including, without
limitation, any liability arising under CERCLA, RCRA, HMTA or any Applicable
Laws).
Section 5.15 Intellectual Property. All registered patents, patent
---------------------
applications, registered trademarks, trademark applications, registered
copyrights, copyright applications, registered tradenames, trade secrets and
licenses necessary for the conduct of the business of each Borrower, if any, are
and shall remain (i) owned or utilized by such Borrower, (ii) domestic property
of such Borrower; and (iii) valid and, except with respect to licenses and trade
secrets, have been duly registered or filed with all appropriate governmental
authorities; there is no objection or, to the knowledge of any Borrower, pending
challenge to the validity of any such patent, trademark, copyright, tradename,
trade secret or license, and no Borrower is aware of any grounds for any such
challenge or objection thereto. Except as set forth on Schedule 5.15 attached
-------------
hereto, no Borrower pays any royalty to anyone in connection with any patent,
trademark, copyright, tradename, trade secret or license; and no Borrower has
assigned and each Borrower has the right to bring any legal action for the
infringement of any such patent, trademark, copyright, tradename, trade secret
or license that is owned by such Borrower in accordance with Applicable Laws.
Section 5.16 Existing or Pending Defaults; Material Contracts. All
------------------------------------------------
Material Contracts are listed on Schedule 5.16(a) hereto. Except as set forth on
----------------
Schedule 5.16(b) attached hereto, no Borrower is aware of any pending or
- ----------------
threatened litigation, or any other legal or administrative proceeding or
investigation pending or threatened, against any Borrower arising from or
related to any Material Contract.
Section 5.17 Leases and Real Property. All material leases and other
------------------------
material agreements under which each Borrower occupies real property are in full
force and effect and constitute legal, valid and binding obligations of, and are
legally enforceable against, each Borrower, and to the best of each Borrower's
knowledge, are the binding obligations of and legally enforceable against, the
other parties thereto. All necessary governmental approvals required to have
been obtained by each Borrower, if any, have been obtained for each such
material lease or agreement, and to each Borrower's knowledge there have been no
threatened cancellations thereof, and there are no outstanding material disputes
with respect thereto. No Borrower owns any interest in real property (other
than the real property and leasehold interests listed on Schedule 5.17 hereto).
-------------
SECTION 5.18 Labor Relations. There are no strikes, work stoppages,
---------------
grievance proceedings, union organization efforts or other labor controversies
pending, or to any Borrower's knowledge, threatened or reasonably anticipated,
between any Borrower and (i) any current or former employee of any Borrower, or
(ii) any union or other collective bargaining unit representing any such
employee. Each Borrower is in compliance in all material respects with all
Applicable Laws relating to employment or the workplace, including, without
limitation, provisions relating to wages, hours, collective bargaining, safety
and health, work authorization, equal employment opportunity, immigration,
withholding, unemployment compensation, employee privacy and right to know.
Except
34
<PAGE>
as set forth on Schedule 5.18, there are no collective bargaining agreements,
-------------
employment agreements between any Borrower and any of its employees, or
professional service agreements not terminable at will relating to the
businesses or assets of any Borrower. The consummation of the transactions
contemplated hereby will not cause any Borrower to incur or suffer any liability
relating to, or obligation to pay, severance, termination or other similar
payments to any person or entity.
Section 5.19 Assignment of Government Contracts. No existing Government
----------------------------------
Contract of any Borrower (and no present or future interest of any Borrower, in
whole or in part, in, to or under any such Government Contract) is currently
assigned, pledged, hypothecated or otherwise transferred to any person or entity
(other than the Agent).
Section 5.20 Ownership Interests. All of the issued and outstanding
-------------------
capital stock of AverStar is wholly owned and controlled by the persons and/or
entities set forth on SCHEDULE 5.20 hereto. All of the issued and outstanding
capital stock of the Borrowers (other than AverStar) is wholly owned and
controlled by AverStar, free and clear of all liens, claims and encumbrances
(other than the security interest in favor of the Agent). As of the date hereof
(and except as described above), no Borrower has any subsidiaries or owns any
interest in any other entity or venture.
Section 5.21 Contribution Agreement. The Contribution Agreement is in
----------------------
full force and effect, has not been modified, altered or amended in any respect
(other than to add a new Borrower party thereto from time to time), and no
Borrower is in default thereunder.
Section 5.22 Solvency. Both immediately prior to and after giving effect
--------
to the transactions contemplated by the terms and provisions of this Agreement,
each Borrower (i) owned and owns property whose fair salable value is greater
than the amount required to pay all of such Borrower's Indebtedness (including
contingent debts), (ii) was and is able to pay all of its Indebtedness as such
Indebtedness matures, and (iii) had and has capital sufficient to carry on its
business and transactions and all business and transactions in which it is about
to engage. For purpose hereof, "Indebtedness" means, without duplication (a) all
items which in accordance with GAAP would be included in determining total
liabilities as shown on the liability side of a balance sheet of such Borrower,
as of the date on which Indebtedness is to be determined, (b) all obligations of
any other person or entity which such Borrower has guaranteed, (c) reimbursement
obligations in connection with letters of credit issued for the benefit of such
Borrower, and (d) the Obligations.
Section 5.23 Year 2000 Compliance. Each Borrower has reviewed the areas
--------------------
within its business and operations which could be adversely affected by, and has
developed or is developing a program to address on a timely basis, the "Year
2000 Problem" (that is, the risk that computer based systems and applications
used by such Borrower may be unable to recognize and perform properly date-
sensitive functions involving certain dates
35
<PAGE>
prior to and any date on or after December 31, 1999), and have made related
appropriate inquiry of material suppliers and vendors. Based on such review and
program, each Borrower believes that the "Year 2000 Problem" will not have a
material adverse affect on its business administration or operations.
Section 5.24 Joint and Several Liability. Each and all of the
---------------------------
representations and warranties made or remade to the Agent and each Lender
pursuant to this Article 5 are hereby made and shall be remade by each Borrower
severally and on a joint and several basis.
Section 5.25 Survival of Representations and Warranties. All
------------------------------------------
representations and warranties made herein shall survive the making of the Loan,
and shall be deemed remade and redated as of the date of each request for an
advance or readvance of any Loan proceeds, unless any Borrower is unable to
remake and/or redate any such representation or warranty (other than the
representation and warranty set forth in Section 5.9 hereof), discloses the same
to the Agent in writing, and such inability does not constitute or give rise to
an Event of Default.
ARTICLE 6
---------
AFFIRMATIVE COVENANTS
---------------------
So long as any Obligation remains outstanding or this Agreement remains in
effect, each Borrower jointly and severally covenants and agrees with the Agent
and each Lender that:
Section 6.1 Payment of Loan Obligations. Each Borrower will duly and
---------------------------
punctually pay all sums to be paid to the Agent and/or any Lender in accordance
with the terms and conditions of the Loan Documents, and will comply with,
perform and observe all of the terms thereof.
Section 6.2 Payment of Taxes. Each Borrower will promptly pay and
----------------
discharge when due all federal, state and other governmental taxes, assessments,
fees and charges imposed upon each Borrower, or upon any of its properties or
assets, except to the extent that validity or amount thereof is being contested
in good faith by appropriate proceedings and the non-payment thereof will not
result in the execution of any tax lien or otherwise jeopardize the Agent's
interest in any part of the Collateral.
Section 6.3 Delivery of Financial and Other Statements. The Borrowers
------------------------------------------
shall deliver to the Agent and each Lender financial and other statements, each
of which shall, unless otherwise expressly provided to the contrary, be prepared
in accordance with GAAP consistently applied, as follows:
36
<PAGE>
(a) on or before the one hundred twentieth (120th) day following the
close of each fiscal year, the Borrowers will submit to the Agent and each
Lender (i) annual audited and unqualified financial statements of the Borrowers,
which shall be accompanied by schedules and management letters (if issued) and
certified by an independent certified public accountant acceptable to the Agent,
(ii) an annual budget for the Borrowers for the then current year and
projections for the remainder of the Loan term, in form reasonably satisfactory
to the Agent, certified by the Borrower's Chief Financial Officer or another
duly authorized executive officer of the Borrowers, and (iii) the Year End
Covenant Compliance Certificate, certified by an authorized executive officer of
the Borrowers;
(b) on or before the forty-fifth (45) day following the close of each
calendar quarter, the Borrowers will submit to the Agent and each Lender
internally prepared financial statements of the Borrowers, including a balance
sheet, income statement, cash flow statement and statement of stockholders'
equity, reporting the Borrowers' current financial position and the results of
their respective operations for the month then ended and year-to-date, in form
reasonably satisfactory to the Agent, certified by the Borrower's Chief
Financial Officer or another duly authorized executive officer of the Borrowers;
(c) on or before the fifteenth (15th) day following the close of each
calendar month, the Borrowers will submit to the Agent and each Lender a
Borrowing Base/Non-Default Certificate in the form of Exhibit 4 hereto,
---------
accompanied by a current accounts receivable agings report, an unbilled agings
report and an accounts payable listing, each of which shall be certified by an
authorized executive officer of the Borrowers;
(d) on or before the forty-fifth (45th) day following the close of
each calendar quarter (other than each calendar quarter ending on December
31st), the Borrowers will submit to the Agent and each Lender a contract
status/backlog report and a Quarterly Covenant Compliance/Non-Default
Certificate in the form of Exhibit 5 hereto (the "Quarterly Covenant Compliance
---------
Certificate"), each of which shall be certified by the Borrower's Chief
Financial Officer or another duly authorized executive officer of the Borrowers;
(e) the Borrowers will submit to the Agent and each Lender copies of
all public filings, disclosure statements and/or registration statements which
any Borrower issues to, distributes to or files with the Securities and Exchange
Commission or any state agency or department regulating securities (or any other
person or entity, pursuant to the rules and/or regulations of the Securities and
Exchange Commission or any state agency or department regulating securities).
Each such public filing, disclosure statement and/or registration statement
shall be submitted by the Borrowers to the Agent and each Lender not later than
five (5) days prior to the issuance, distribution or filing thereof (as
applicable), except in circumstances in which it is not practicable to make any
such submission to the Agent and each Lender on an earlier date, in which case
such public filing, disclosure statement and/or registration statement shall be
submitted by the
37
<PAGE>
Borrower to the Agent and each Lender concurrent with the issuance, distribution
or filing thereof (as applicable).
(f) promptly upon the request of the Agent, the Borrowers will
provide to the Agent and each Lender such other information and/or reports
relating to the business, operations, properties or prospects of the Borrowers
as the Agent may from time to time reasonably request.
The Borrowers acknowledge and agree that any and all financial statements,
schedules and other financial information required to be delivered to the Agent
and each Lender pursuant to this Section 6.3 shall be prepared on a consolidated
basis.
Section 6.4 Maintenance of Records; Review by the Lenders. Each Borrower
---------------------------------------------
will maintain at all times proper books of record and account in accordance with
GAAP, consistently applied, and, subject to any confidentiality and secrecy
requirements imposed by any Government agency, will permit the Agent's officers
or any of the Agent's authorized representatives or accountants to visit and
inspect the offices and properties of each Borrower, examine its respective
books of account and other records, and discuss their respective affairs,
finances and accounts with the officers of each Borrower, all at such reasonable
times during normal business hours, and as often as the Agent may desire. Each
Borrower acknowledges and agrees that, following the occurrence of an Event of
Default which has continued unremedied beyond any applicable notice and/or grace
period, each Lender shall have the right to accompany the Agent in the exercise
of the Agent's rights set forth in this Section 6.4.
Section 6.5 Maintenance of Insurance Coverage. Each Borrower will maintain
---------------------------------
in effect fire and extended coverage insurance on any and all the tangible
personal property comprising the Collateral, public liability insurance and
workmen's compensation insurance, with responsible insurance companies, in such
amounts and against such risks as are customary for similar businesses, required
by governmental authorities, if any, having jurisdiction over all or part of its
operations, or otherwise reasonably required by the Agent, and will furnish to
the Agent certificates evidencing such continuing insurance. The Agent shall be
named as loss payee on all hazard and casualty insurance policies by means of a
standard noncontributory mortgagee clause and as an additional insured on all
liability insurance policies. All insurance policies shall also provide for (i)
not less than thirty (30) days written notice to the Agent prior to expiration,
cancellation or material change; and (ii) waiver of subrogation.
Section 6.6 Maintenance of Property/Collateral; Performance of Contracts.
------------------------------------------------------------
Each Borrower will at all times maintain the Collateral and its tangible
property, both real and personal, in good order and repair (subject to ordinary
wear and tear), and will permit the Agent's officers or authorized
representatives to visit and inspect all or any part of the Collateral at such
reasonable times during normal business hours, as
38
<PAGE>
and when the Agent deems necessary or appropriate; provided, however, that the
Agent's review of any and all "classified contracts" shall be subject to
compliance with Applicable Laws. Each Borrower shall perform in all material
respects all obligations under all contracts to which it is a party (including,
without limitation, all obligations of such Borrower as a contractor under any
Material Contract), including all exhibits and other attachments to such
contracts, all modifications thereto and all documents and instruments delivered
pursuant thereto, and will comply in all material respects with all laws, rules
and regulations governing the execution, delivery and performance thereof.
Section 6.7 Maintenance of Corporate Existence. Except as otherwise
----------------------------------
expressly permitted pursuant to this Agreement, each Borrower will maintain its
corporate existence and will provide the Agent with evidence of the same from
time to time upon the Agent's request.
Section 6.8 Maintenance of Certain Accounts with Lender. Each Borrower
-------------------------------------------
will maintain its primary operating accounts, including all depository accounts
(time and demand), disbursement accounts and collection accounts with State
Street Bank & Trust Company, N.A., a national banking association, at its
offices located at 225 Franklin Street, Boston, Massachusetts 02110; it being
understood and agreed that if at any time State Street Bank shall no longer be a
"Lender" party to this Agreement, all such accounts shall be maintained with the
Agent or another Lender designated by the Agent and reasonably satisfactory to
the Borrowers.
Section 6.9 Maintenance of Management. Each Borrower will at all times
-------------------------
maintain management reasonably satisfactory to the Agent or the Required Lenders
in all respects, and shall notify the Agent in writing of the change of any
corporate officer or director of any Borrower, within ten (10) days of the date
of any such change; it being understood and agreed that (a) the Borrowers shall
be deemed in compliance with this covenant so long as (i) Joseph A. Saponaro is
the acting President or Vice President in charge of business operations of
AverStar and performs all duties material to the operation of the Borrowers'
business, as may be required of him acting in such capacity, and (ii) Michael B.
Alexander is the acting Chairman of the board of AverStar and performs all
duties material to the operation of the Borrowers' business, as may be required
of him acting in such capacity; and (b) in the event that Joseph A. Saponaro or
Michael B. Alexander no longer acts as President (or Vice President in charge of
business operations) or Chairman of the board of AverStar, respectively, or in
the event that Joseph A. Saponaro or Michael B. Alexander fails to perform any
duty material to the operation of the Borrowers' business, as may be required of
each of them acting in their respective capacities, any replacement President
(or Vice President in charge of business operations) and/or Chairman of the
board of the Borrowers must be reasonably satisfactory to the Agent or the
Required Lenders in all respects.
Section 6.10 Disclosure of Defaults, Etc. Promptly upon the occurrence
----------------------------
thereof, the Borrowers will provide the Agent with written notice of any Event
of Default,
39
<PAGE>
or any act, event or occurrence that upon the giving of any required notice or
the lapse of time, or both, would constitute an Event of Default. In addition,
the Borrowers will promptly advise the Agent in writing of any condition, act,
event or occurrence which comes to any Borrower's attention that would or could
reasonably be expected to prejudice the Agent's or any Lender's rights in
connection with any Material Contract, any Government Contract, the Collateral,
this Agreement, any Note or any other Loan Document, including, without
limitation, the details of any pending or threatened suspension, debarment or
other governmental action or proceeding, any material pending or threatened
litigation, and any other legal or administrative proceeding or investigation
pending or threatened against any Borrower, including the entry of any judgment
or lien (other than a Permitted Lien) against such Borrower, its assets or
property.
Section 6.11 Security Perfection; Assignment of Claims Act; Payment of
---------------------------------------------------------
Costs. Each Borrower will execute and deliver and pay the costs of recording and
- -----
filing financing statements, continuation statements, termination statements,
assignments and other documents, as the Agent may from time to time deem
necessary or appropriate for the perfection of any liens granted to the Agent
pursuant hereto or pursuant to any other Loan Document, including, without
limitation, all documents or materials necessary or appropriate in order to
comply with the Assignment of Claims Act of 1940 (the "Government Contract
Assignments") in connection with each Government Contract required to be
assigned to the Agent in accordance with the terms of this Agreement; it being
understood and agreed that (i) no Government Contract Assignment is being
required for any Government Contract which (a) has a remaining value of less
than One Million and No/100 Dollars ($1,000,000.00), or (b) has a remaining term
of less than twelve (12) months; and (ii) the Agent will not submit any
Government Contract Assignment to the Government in the absence of an Event of
Default which has continued unremedied beyond any applicable notice and/or grace
period. All costs and expenses incurred in connection with the Government
Contract Assignments shall be borne solely by the Borrowers. Additionally, the
Borrowers will pay any and all costs of Closing hereunder, as well as any and
all taxes (other than the Agent's and each Lender's income and franchise taxes),
which may be payable as a result of the execution of this Agreement or any
agreement supplemental hereto, or as a result of the execution and/or delivery
of any Note or other Loan Document.
Section 6.12 Defense of Title to Collateral. Each Borrower will at all
------------------------------
times defend the Agent's and each Borrower's rights in the Collateral, subject
to the Permitted Liens, against all persons and all claims and demands
whatsoever, and will, upon request of the Agent (i) furnish such further
assurances of title as may be reasonably required by the Agent, and (ii) do any
other acts reasonably necessary to effectuate the purposes and provisions of
this Agreement, or as required by law or otherwise in order to perfect,
preserve, maintain or continue the security interests of the Agent in the
Collateral.
Section 6.13 Compliance with Law. Each Borrower will conduct its businesses
-------------------
and operations in full compliance with (i) all Applicable Laws and requirements
40
<PAGE>
of all federal, state and local regulatory authorities having jurisdiction, (ii)
the provisions of its charter documents and by-laws, (iii) all agreements and
instruments by which it or any of its properties may be bound, and (iv) all
applicable decrees, orders and judgments. It is understood and agreed that any
Borrower's failure to comply with any of the items set forth in clause (i),
(iii) or (iv) of this Section 6.13 shall not constitute a violation of this
covenant if such failure to comply is not reasonably likely to have a material
adverse effect on (a) the Borrowers, taken as a whole, or any of the Principal
Borrowers, or (b) the business, assets, operations, properties or financial
condition of the Borrowers, taken as a whole, or any of the Principal Borrowers.
Section 6.14 Further Assurances; Additional Requested Information. Each
----------------------------------------------------
Borrower will provide to the Agent such further assurances and additional
documents regarding the Collateral and the Agent's security interest therein as
the Agent may from time to time reasonably request, and each Borrower will
promptly provide the Agent with such additional information, reports and
statements respecting the business, operations, properties and financial
condition of the Borrowers, and respecting their respective affiliated
businesses and investments, as the Agent may from time to time reasonably
request.
Section 6.15 Financial Covenants. So long as any Obligation remains
-------------------
outstanding or this Agreement remains in effect, the Borrowers will comply with
each of the financial covenants set forth below:
(a) Net Worth. The Borrowers will at all times maintain Net
---------
Worth of not less than the sum of (i) $1,000,000.00,
plus (ii) fifty percent (50%) of the Borrowers'
consolidated positive net income arising after December
31, 1998 (not to be reduced for subsequently incurred
consolidated losses), plus (iii) one hundred percent
(100%) of the net proceeds (net of reasonable and
customary costs paid to unrelated and unaffiliated
third parties in connection with the particular
transaction) of any issuance by the Borrower after the
Closing Date of equity securities or other equity
interests or obligations (determined on a cumulative
basis and calculated in accordance with GAAP), less
(iv) one hundred percent (100%) of the amount of stock
redemptions paid pursuant to the Repurchase Agreements
listed on Schedule B hereto.
----------
For purposes of this Agreement, "Net Worth" shall mean
total assets minus all liabilities, determined in
accordance with GAAP. Net Worth shall be measured on
3/31/99 and on the last day of each fiscal quarter
thereafter, throughout the term of the Loan.
41
<PAGE>
(b) Fixed Charge Coverage Ratio. The Borrowers will
---------------------------
maintain on a consolidated basis at all times during
the periods specified below, a Fixed Charge Coverage
Ratio of not less than the following:
Minimum
Fixed Charge
Period Coverage Ratio
------ --------------
For the calendar quarter ending on
3/31/99 through the calendar 1.25 to 1.0
quarter ending 12/31/1999.
For the calendar quarter ending on
3/31/2000 through the calendar 1.30 to 1.0
quarter ending on 12/31/2000.
For the calendar quarter ending on
3/31/2001 and for each calendar 1.35 to 1.0
quarter ending thereafter.
For purposes of the foregoing, "Fixed Charge Coverage
Ratio" shall mean the Borrowers' EBITDA, minus capital
expenditures, minus cash paid for taxes, divided by the
sum of Interest Expense, plus required principal
payments on the Term Facilities and payments for
capital lease obligations. The Fixed Charge Coverage
Ratio shall be measured on the last day of each fiscal
quarter, and at the end of each of the Borrowers'
fiscal years, throughout the term of the Loan on a four
(4) quarter rolling basis.
(c) EBITDA to Interest Expense Ratio. The Borrowers will
--------------------------------
maintain on a consolidated basis at all times during
the periods specified below, an EBITDA to Interest
Expense ratio of not less than the following:
Minimum EBITDA to
Period Interest Expense Ratio
------ ---------------------
For the calendar quarter
ending on 3/31/99 through 2.50 to 1.00
the calendar quarter ending
12/31/99.
42
<PAGE>
For the calendar quarter
ending on 3/31/2000 and 3.00 to 1.00
for each calendar quarter
ending thereafter.
The EBITDA to Interest Expense Ratio shall be
calculated and tested on the last day of each fiscal
quarter, throughout the term of the Loan on a four (4)
quarter rolling basis.
(d) Total Debt to EBITDA Ratio. The Borrowers will at all
--------------------------
times maintain on a consolidated basis during the
periods specified below, a Total Debt to EBITDA Ratio
of not more than the following:
Maximum Total
Debt to EBITDA
Period Ratio
------ -----
For the calendar quarter ending
3/31/99 through the calendar 4.25 to 1.00
quarter ending on 12/31/1999.
For the calendar quarter ending
3/31/2000 through the calendar 3.75 to 1.00
quarter ending on 6/30/2000.
For the calendar quarter ending
9/30/2000 through the calendar 3.50 to 1.00
quarter ending on 12/31/2000.
For the calendar quarter ending
3/31/2001 through the calendar 3.25 to 1.00
quarter ending on 6/30/2001.
For the calendar quarter ending
9/30/2001 through the calendar 3.00 to 1.00
quarter ending on 12/31/2001.
For the calendar quarter ending
3/31/2002 through the calendar 2.50 to 1.00
quarter ending on 12/31/2002.
For the calendar quarter ending on
3/31/2003 and for each calendar 2.00 to 1.00
quarter ending thereafter.
43
<PAGE>
For purposes hereof, the "Total Debt to EBITDA Ratio"
shall mean the ratio of Total Debt to EBITDA (a)
calculated and tested using (i) the Borrower's twelve
(12) month trailing EBITDA results and (ii) Total Debt
as of the date of calculation, and (b) measured on the
last day of each fiscal quarter, throughout the term of
the Loan.
The financial covenants referenced above shall be calculated on a four (4)
quarter rolling basis. Unless otherwise defined, all financial terms used in
this Section 6.15 shall have the meanings attributed to such terms in accordance
with GAAP.
Section 6.16 Year 2000 Compliance. Each Borrower shall take all action
--------------------
necessary to assure that its computer systems are capable of effectively
processing data and information, including dates on and after January 1, 2000,
and that all such systems (i) shall not cease to perform or provide (and shall
not cause any software and/or system which is material to the operations of such
Borrower or any interface therewith to provide) invalid or incorrect results as
a consequence of date functionality and/or data; (ii) shall not experience any
degradation of performance or functionality arising from or relating to date
functionality and/or data which is material to the operations of such Borrower
or any material interface therewith and which represents or references different
centuries, more than one century or leap years; (iii) shall effectively and
accurately manage and manipulate data derived from, involving or relating in any
way to dates, including single century formulas and multi-century or leap year
formulas; and (iv) shall not cause an abnormal ending scenario within such
business computer related systems or in any software and/or system with which
such systems interface (or generate incorrect values or invalid results
involving such dates). Each Borrower will, at the reasonable request of the
Agent, provide evidence to the Agent of such compatibility.
Section 6.17 Landlord Waivers; Subordination. Each Borrower shall provide
-------------------------------
landlord waivers to the Agent prior to any Borrower storing, keeping or locating
tangible personal property having an aggregate value in excess of Five Hundred
Thousand and No/100 Dollars ($500,000.00) on any particular lessor's/landlord's
premises. Each landlord waiver shall subordinate any statutory, contractual or
other lien the lessor/landlord may have in any Collateral to the lien, operation
and effect of the lien granted to the Agent pursuant to this Agreement, and
shall be in form and substance reasonably acceptable to the Agent.
Section 6.18 Substitute Notes. Upon request of the Agent, each Borrower
----------------
shall execute and deliver to the Agent substitute promissory notes, in form and
substance satisfactory to the Agent in all respects, payable to the order of
such person or entity as may be designated by the Agent; it being understood and
agreed, however, that the aggregate principal amount of all outstanding
promissory notes shall not exceed the Commitment Amount as of the date any such
substitute note is issued.
44
<PAGE>
Section 6.19 Interest Rate Contracts. If required by the Agent, the
-----------------------
Borrowers shall have in effect at all times interest rate protection agreements
for the Term Facilities ("Interest Rate Contracts") reasonably satisfactory to
the Agent. Any such Interest Rate Contract must be purchased from a Lender, an
affiliate of a Lender or another financial institution reasonably acceptable to
the Agent. The Borrowers' obligations under any Interest Rate Contract purchased
from a Lender or an affiliate of a Lender shall be secured by the Collateral on
a pari passu basis, pursuant to documentation acceptable to the Agent in all
respects. All other Interest Rate Contracts shall be unsecured in all respects.
The Borrowers shall determine to their own satisfaction whether any such
Interest Rate Contract is sufficient to meet the Borrowers' needs for interest
rate protection, and neither the Agent nor any Lender shall have any obligation
or liability with respect thereto, nor any obligation to propose, quote or enter
into any Interest Rate Contract, unless such Interest Rate Contract shall be on
terms and conditions satisfactory to the applicable Lender in all respects.
Section 6.20 Joint and Several Liability. Each Borrower acknowledges and
---------------------------
agrees that each Borrower shall be severally and jointly and severally liable
for each and every affirmative covenant set forth in this Article 6.
ARTICLE 7
---------
NEGATIVE COVENANTS
------------------
So long as any Obligation remains outstanding or this Agreement remains in
effect, each Borrower jointly and severally covenants and agrees that, without
the prior written consent of the Agent, no Borrower will:
Section 7.1 Change of Control; Disposition of Assets; Merger.
------------------------------------------------
(a) Permit majority ownership of any Borrower or control of any
Borrower's business or operations to be sold, assigned or otherwise transferred,
legally or equitably, to any person or entity; or
(b) suffer or permit the issuance of any capital stock of any
Borrower (except for (i) any securities issued pursuant to a stock option plan
approved by Agent in writing, or pursuant to any other equity-based employee
incentive compensation plan approved by the Agent in writing and/or listed in
Schedule 7.1(B) hereto; and (ii) issuances of any capital stock of AverStar
- ---------------
which do not, individually or in the aggregate, cause or result in a default of
any other provision of this Agreement); or
(c) sell, assign, loan, deliver, lease, transfer or otherwise dispose
of property or assets of any Borrower (except in the ordinary course of
business), in excess of Fifty Thousand and No/100 Dollars ($50,000.00), in the
aggregate, per annum; or
45
<PAGE>
(d) merge or consolidate with any company or enterprise, or acquire
or purchase any company or enterprise; it being understood and agreed that this
negative covenant shall not be deemed violated by the merger or consolidation of
any wholly owned subsidiary of AverStar with or into (i) AverStar; provided
that, after giving effect to any such merger or consolidation, AverStar shall be
the surviving entity; or (ii) a Borrower (other than AverStar); provided that,
after giving effect to any such merger or consolidation, the surviving entity
shall be a Borrower party to this Agreement.
Section 7.2 Margin Stocks. Use all or any part of the proceeds of any
-------------
advance made hereunder to purchase or carry, or to reduce or retire any loan
incurred to purchase or carry, any margin stocks (within the meaning of
Regulation U of the Board of Governors of the Federal Reserve System) or to
extend credit to others for the purpose of purchasing or carrying any such
margin stocks.
Section 7.3 Change of Operations. Suffer or permit any change in the
--------------------
general character of any Borrower's business as conducted on the Closing Date,
or suffer or permit any Borrower to engage in any type of business not
reasonably related to or compatible with such business as presently and normally
conducted.
Section 7.4 Judgments; Attachments. Suffer or permit any judgment in
----------------------
excess of Two Hundred Fifty Thousand and No/100 Dollars ($250,000.00) against
any Borrower or any attachment against any Borrower's property (for an amount
not fully covered by insurance) to remain unpaid, undischarged or undismissed
for a period of thirty (30) days, unless enforcement thereof shall be
effectively stayed or bonded.
Section 7.5 Further Assignments; Performance and Modification of
----------------------------------------------------
Contracts; etc. Except as may be expressly permitted by the Loan Documents (i)
- --------------
make any further assignment, pledge or disposition of the Collateral or any part
thereof (other than dispositions of inventory or equipment in the ordinary
course of business or the sale of obsolete equipment or other equipment not
material to the operation of such Borrower's business); (ii) permit any set-off
or reduction, delay the timing of any payment under, or otherwise modify any
Material Contract, if such set-off, reduction, delay or modification would give
rise to a Borrowing Base Deficiency or otherwise adversely affect any of the
Subsidiary Borrowers, taken as a whole, or any of the Principal Borrowers in any
material respect; (iii) create, incur or permit to exist any lien or encumbrance
(other than Permitted Liens) on any real or personal property now or hereafter
owned by any Borrower; or (iv) do or permit to be done anything to impair the
Agent's or any Lender's security in any Collateral or the payments due to any
Borrower thereunder.
Section 7.6 Affect Rights of the Agent or Lender(s). At any time do or
---------------------------------------
perform any act or permit any act to be performed which would or reasonably
could materially adversely affect the interests or rights of the Agent or any
Lender under any Loan Document.
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Section 7.7 Indebtedness; Granting of Security Interests. Suffer or
--------------------------------------------
permit any Borrower to incur any new indebtedness, except for (i) trade debt and
operating leases incurred in the ordinary course of business; (ii) indebtedness
secured by liens listed on Schedule 7.7 hereto, or other indebtedness secured by
------------
Permitted Liens; (iii) indebtedness incurred to finance (by purchase or lease)
equipment constituting capital expenditures, provided that all capital leases
permitted hereby do not, in the aggregate, exceed Two Hundred Fifty Thousand and
No/100 Dollars ($250,000.00) per annum; and (iv) the indebtedness owing directly
(or indirectly by and through Gerlach & Co., Inc., as custodian) to the Mass
Mutual Entities (other than Mass Mutual, acting in its capacity as a Lender
party pursuant to this Agreement) in a principal amount not to exceed Five
Million and No/100 Dollars ($5,000,000.00), evidenced by the Subordinated Notes
and subordinated in all respects to the Obligations pursuant to a certain letter
agreement dated as of the Closing Date (the "Subordination Agreement"), by and
among the Agent, the Mass Mutual Entities and the Borrowers. Except as otherwise
expressly permitted herein, no Borrower shall mortgage, assign, pledge,
hypothecate or otherwise encumber or permit any lien, security interest or other
encumbrance, including purchase money liens, whether under conditional or
installment sales arrangements or otherwise, to affect the Collateral or any
other assets or properties of any Borrower (except for Permitted Liens), nor
shall any Borrower guarantee or otherwise become obligated for any indebtedness
of others. Furthermore, each Borrower agrees that it will not enter into any
agreement or understanding with any person or entity pursuant to which such
Borrower agrees to be bound by a covenant not to encumber all or any part of its
property or assets, unless such agreement or understanding is entered into in
connection with the granting of purchase money security interests permitted
pursuant to the terms and provisions this Agreement (and relates to solely to
the property subject to such purchase money security interests).
Section 7.8 Dividends; Loans; Advances; Investments and Certain Other
---------------------------------------------------------
Events.
- ------
Except as otherwise described on Schedule 7.8(a) hereto:
---------------
(a) suffer or permit any dividend to be declared or paid on any
Borrower's capital stock of any class (other than dividends payable solely to
another Borrower and/or dividends payable in the form of additional capital
stock of AverStar), suffer or permit any alteration or amendment to any
Borrower's capital structure, or suffer or permit any Borrower to purchase,
redeem or otherwise retire any shares of such Borrower's capital stock, or
suffer or permit any voluntary prepayment, acquisition or anticipation of any
sinking fund requirement of any indebtedness of any Borrower, or suffer or
permit any distributions to be made in cash or assets to any shareholders of any
Borrower (other than to another Borrower); or
(b) suffer or permit any loans, salary advances or other payments to
be made by any Borrower to (i) any shareholders of any Borrower (other than to
another Borrower); (ii) any corporation or other enterprise directly or
indirectly owned in whole or
47
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in part by any shareholder of any Borrower (other than another Borrower); or
(iii) any other person or entity; it being understood and agreed that this
negative covenant shall not be deemed violated by (A) normal and customary
operating expenses and trade credit extended to customers of the Borrowers, in
each case made in the ordinary course of business; (B) regularly scheduled
salary payments to shareholders of any Borrower who are also salaried employees
of such Borrower; (C) loans and/or travel and expense reimbursement payments to
salaried employees in an amount not to exceed, at any time, Fifteen Thousand and
No/100 Dollars ($15,000.00), individually, or Two Hundred Fifty Thousand and
No/100 Dollars ($250,000.00), in the aggregate; (D) regularly scheduled
consulting fees payable pursuant to the consulting agreements listed on Schedule
--------
7.8(b) hereto; provided that (i) no Payment Default exists, and (ii) the payment
- ------
of such consulting fees does not, individually or in the aggregate, exceed Three
Hundred Thousand and No/100 Dollars ($300,000.00) per annum; (E) a loan or loans
made by AverStar on or about the Closing Date to IES Holding, Inc., a Delaware
corporation ("IES"), in an amount not to exceed, at any time, Two Million and
No/100 Dollars ($2,000,000.00), in the aggregate, provided that (i) such loan(s)
shall have been made and fully advanced on or before December 31, 1999, without
any obligation to advance or readvance any proceeds of such loan(s) after
December 31, 1999, (ii) such loan(s), including any other indebtedness owing by
IES to a Borrower, shall have been properly evidenced by one or more duly
executed and enforceable promissory notes (collectively, the "IES Notes"), and
reflected as notes receivable on the Borrowers' books, (iii) concurrent with the
making of such loan(s), all of the IES Notes evidencing such loan(s) and such
other indebtedness shall have been pledged to the Agent, for the benefit of the
Lenders, as additional Collateral for the Obligations, pursuant to the
Assignment of Promissory Notes as Collateral, and (iv) at the time any such
loan(s) shall have been made available to IES, no Event of Default exists
hereunder; (F) regularly scheduled payments described in Schedule 7.8(c) hereto;
---------------
and (G) subject to the terms of the Subordination Agreement, regularly scheduled
payments of accrued and unpaid interest payable pursuant to the Subordinated
Notes.
Section 7.9 Lease Obligations. Enter into any new lease of real or
-----------------
personal property, except in the ordinary course of business.
Section 7.10 Capital Expenditures. Make any capital expenditure,
--------------------
including, but not limited to, expenditures for leasehold improvements and
capitalized costs, in excess of (a) $2,500,000, in the aggregate per annum,
during the period commencing on the Closing Date and ending on the day
immediately preceding the second (2nd) anniversary of the Closing Date; (b)
$3,000,000, in the aggregate per annum, during the period commencing on the
second (2nd) anniversary of the Closing Date and ending on the day immediately
preceding the fourth (4th) anniversary of the Closing Date, and (c)
$3,500,000, in the aggregate per annum, from and after the fourth (4th)
anniversary of the Closing Date, except that, in each case, the Borrowers shall
be entitled to carry over availability (on a non-cumulative basis) of any unused
capital expenditure of any particular twelve (12) month period to the succeeding
twelve (12) month period. By way of example
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and not of limitation, if the Borrowers incur $2,000,000 in capital expenditures
during the second year of the Loan term (and the applicable capital expenditure
limitation is $2,500,000), the Borrowers may incur up to $3,500,000 of capital
expenditures during the third year of the Loan term without being in violation
of this negative covenant. However, if the Borrowers incur less than $3,500,000
in capital expenditures during the third year of the Loan term, the dollar
limitation applicable to capital expenditures for the fourth year of the Loan
term will not be increased by any amount whatsoever.
Section 7.11 Lockbox Deposits. If a Lockbox shall have been established
----------------
pursuant to Section 11.2 of this Agreement, permit or cause any and all payments
required to be made directly to the Agent or any Lender pursuant to Section 11.2
of this Agreement to be made or directed to any other person or entity, without
the prior approval of the Agent.
Section 7.12 Shareholders Agreement; Merger Agreement; Etc., Suffer or
----------------------------------------------
permit any modification or amendment to (a) the Shareholders Agreement; (b) the
Subordination Agreement; (c) any of the Subordinated Notes; (d) any Securities
Purchase Agreement, or (e) the Merger Agreement.
Section 7.13 Transactions With Affiliates. Enter into or otherwise bind
----------------------------
any Borrower to any contract, agreement or other understanding with any person
or entity directly or indirectly related to, affiliated with or under common
control or ownership with any Borrower or any stockholder of any Borrower (other
than another Borrower), except upon fair and reasonable terms which are at least
as favorable to such Borrower as would be the case in a comparable, arm's-length
transaction with an unaffiliated and unrelated entity or person.
Section 7.14 Joint and Several Liability. Each Borrower acknowledges and
---------------------------
agrees that each Borrower shall be severally and jointly and severally liable
for each and every negative covenant set forth in this Article 7.
ARTICLE 8
---------
COLLATERAL ACCOUNT
------------------
Following the occurrence of an Event of Default, the Agent may require
that the Borrowers deposit or cause to be deposited into a collateral account
(the "Collateral Account") designated by the Agent, all checks, drafts, cash and
other remittances received by each Borrower, and the Borrowers shall deposit
such items for credit to the Collateral Account within one (1) Business Day of
the receipt thereof and in precisely the form received. Pending such deposit,
no Borrower will commingle any such items of payment with any of its other funds
or property, but will hold them separate and apart.
49
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The Borrowers hereby covenant and agree that the Collateral Account shall
secure the Obligations and hereby grant, assign and transfer to the Agent, for
the ratable benefit of the Lenders, a continuing security interest in all of
each Borrower's right, title and interest in and to the Collateral Account.
Notwithstanding anything to the contrary under applicable state law, the Agent
may apply funds in the Collateral Account to any of the Obligations, including,
without limitation, any principal, interest or other payment(s) not made when
due, whether arising under this Loan Agreement and/or any other Loan Document,
or any other Obligation of any Borrower, without notice to the Borrowers,
without regard to the origin of the deposits in the account, the beneficial
ownership of the funds therein or whether such Obligations are owed jointly with
another or severally; the order and method of such application to be in the sole
discretion of the Agent. The Agent's right to deduct sums due under the Loan
Documents from the account(s) of the Borrowers shall not relieve any Borrower
from its obligation to make all payments required by the Loan Documents as and
when required by the Loan Documents, and the Agent shall not have any obligation
to make any such deductions or any liability whatsoever for any failure to do
so.
ARTICLE 9
---------
DEFAULT AND REMEDIES
--------------------
Section 9.1 Events of Default. Any one of the following events shall be
-----------------
an "Event of Default":
(a) if any Borrower shall fail to pay any principal, interest or
other sum owing on any of the Notes or any other Obligation when the same shall
become due and payable, whether by reason of acceleration or otherwise;
(b) if the Borrowers shall exceed the Maximum Borrowing Base and
fail, immediately upon the happening of any such occurrence, without notice or
demand therefor, to make a payment to the Agent, for the benefit of the
Lender(s), in an amount equal to or greater than the Borrowing Base Deficiency;
provided, however, that upon the occurrence of the circumstances described in
the last paragraph of Section 1.3 of this Agreement, the Borrowers shall not be
required to make an immediate payment, but rather, shall be required to make the
required payment within the time frame specified in the last paragraph of
Section 1.3 of this Agreement;
(c) if any Borrower shall fail to pay and satisfy in full, within
thirty (30) days of the rendering thereof, any judgment against such Borrower in
excess of Two Hundred Fifty Thousand and No/100 Dollars ($250,000.00) which is
not, to the reasonable satisfaction of the Agent, fully bonded, stayed, covered
by insurance or covered by appropriate reserves;
50
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(d) with respect to any warranty or representation expressly
qualified by a "materiality" standard set forth herein or in any other Loan
Document and made by any Borrower or any other person or entity on behalf of any
Borrower, if such warranty or representation shall be untrue in any respect when
made, including, without limitation, any information contained in any financial
statement, application, schedule, report or other document given by any Borrower
or any other person or entity on behalf of any Borrower in connection with any
of the Obligations or Loan Documents; and/or with respect to any warranty or
representation not expressly qualified with a "materiality" standard set forth
herein or in any other Loan Document and made by any Borrower or any other
person or entity on behalf of any Borrower, if such warranty or representation
shall be untrue in any material respect when made, including, without
limitation, any information contained in any financial statement, application,
schedule, report or other document given by any Borrower or any other person or
entity on behalf of any Borrower in connection with any of the Obligations or
Loan Documents;
(e) if there shall be non-compliance with or a breach of any of the
Affirmative Covenants or Negative Covenants contained in this Agreement, or any
other covenants or agreements of any Borrower, in any of the Notes or in any
other Loan Document;
(f) if (i) without the prior written consent of the Agent, any
Borrower shall be liquidated or dissolved or shall discontinue its business;
(ii) a trustee or receiver is appointed for any Borrower or for all or a
substantial part of its assets; (iii) any Borrower makes a general assignment
for the benefit of creditors; (iv) any Borrower files or is the subject of any
insolvency proceeding or petition in bankruptcy, which in the case of an
involuntary bankruptcy, remains undismissed for sixty (60) days; (v) any
Borrower shall become insolvent or at any time fail generally to pay its debts
as such debts become due; or (vi) any governmental agency or bankruptcy court or
other court of competent jurisdiction shall assume custody or control of the
whole or any material part of the assets of any Borrower;
(g) if any property or assets of any Borrower (including, without
limitation, any deposit accounts) having a value, individually or in the
aggregate, in excess of Two Hundred Fifty Thousand and No/100 Dollars
($250,000.00) are levied upon, attached or subject to any other enforcement
proceeding, which is not fully bonded or stayed within thirty (30) days of such
levy, attachment or other enforcement proceeding;
(h) if, except as otherwise expressly permitted pursuant to this
Agreement, any Borrower shall dissolve, merge or consolidate with another
entity, or reorganize, in each case without the prior written consent of the
Agent;
(i) if any obligation of any Borrower for the payment of borrowed
money, which involves amounts in excess of Fifty Thousand and No/100 Dollars
($50,000.00), whether now existing or hereafter created, incurred or arising,
becomes or is
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declared to be due and payable prior to the expressed maturity thereof, whether
such obligation is owed to the Agent, any Lender or any other person or entity;
(j) if (i) there shall be a default under any Material Contract;
(ii) a notice of termination shall have been issued under any Material Contract
or Government Contract; or (iii) a cure notice issued under any Material
Contract or Government Contract shall remain uncured beyond (x) the expiration
of the time period available to the Borrower pursuant to such Material Contract,
Government Contract and/or such cure notice (as the case may be), to cure the
noticed default, or (y) the date on which the other contracting party is
entitled to exercise its rights and remedies under the Material Contract or
Government Contract as a consequence of such default;
(k) if (i) any Borrower is debarred or suspended from contracting
with any part of the Government; (ii) a notice of debarment or suspension shall
have been issued to any Borrower; or (iii) a notice of termination for default
or the actual termination for default of any Material Contract or Government
Contract shall have been issued to or received by any Borrower; or (iv) a
Government investigation or inquiry relating to any Borrower and involving
fraud, deception or willful misconduct shall have been commenced in connection
with any Government Contract or any Borrower's activities;
(l) if either the Agent or the Required Lenders are not satisfied in
their reasonable discretion, with the results of any field audit conducted by
the Agent or its agents;
(m) if any Borrower is in default under any Commercial Contract
involving amounts in excess of Two Hundred Fifty Thousand and No/100 Dollars
($250,000.00);
(n) if either the Agent or the Required Lenders believe in good
faith there is a material adverse change in the business, assets, properties,
prospects, condition (financial or otherwise) of the Borrowers, taken as a
whole, or any of the Principal Borrowers;
(o) if the Borrower is in default under the Subordinated Notes, the
Securities Purchase Agreement, the Subordination Agreement, the Shareholders
Agreement or the Merger Agreement or a default by any party (other than the
Agent) shall occur under the Subordination Agreement; and/or
(p) if, except as otherwise expressly permitted pursuant to this
Agreement, any change in majority ownership or control of any Borrower's
business or operations shall occur.
Section 9.2 Remedies. Upon the occurrence of any Event of Default, the
--------
Agent, acting on behalf of the Lender(s), may exercise any or all of the
following remedies:
52
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(a) Withhold disbursement of all or any part of the Loan proceeds
until such time that such Event of Default is cured to the satisfaction of the
Agent and no other Event of Default exists;
(b) Subject to the expiration of the applicable notice and cure
period set forth in subsection (c) below, terminate the obligation of the
Lender(s) to make further disbursements of the Loan proceeds;
(c) Declare all principal, interest and other sums owing on the
Obligations to be immediately due and payable without demand, protest, notice of
protest, notice of default, presentment for payment or further notice of any
kind; provided, however, that payments of amounts hereunder shall not be
accelerated by reason of (i) a default in the payment of any sum due and payable
hereunder or pursuant to any other Loan Document (a "Payment Default"), unless
such Payment Default remains uncured for five (5) Business Days (with no notice
of default being required); and (ii) a default other than a Payment Default (a
"Non-Payment Default"), unless such Non-Payment Default remains uncured for
twenty (20) days following notice thereof from the Agent to the Borrower.
Notwithstanding the foregoing, no notice of a Non-Payment Default shall be
required prior to acceleration or prior to the Agent or any Lender exercising
any other right or remedy under this Agreement or any other Loan Document, if
(i) the Agent in good faith believes that any such delay would adversely affect
the Agent's security or the Agent's lien priority or (ii) the default is a
violation of Section 6.3(c) or Section 6.15 of this Agreement;
(d) Without notice, offset and apply against all or any part of the
Obligations then owing by any Borrower to the Agent or any Lender, any and all
money, credits, stocks, bonds or other securities or property of any Borrower of
any kind or nature whatsoever on deposit with, held by or in the possession of
the Agent or any Lender in any capacity whatsoever, including, without
limitation, any deposits with the Agent or any Lender or any of its affiliates,
to the credit of or for the account of any Borrower. Notwithstanding any
applicable state law to the contrary (and without limiting the Agent's right,
for the convenience of the Borrowers, to charge any Borrower's account(s) for
any principal, interest or other sums payable pursuant to this Agreement, the
Notes or any other Loan Document when due), the Agent and/or any Lender is
authorized at any time to charge the Obligations against any Borrower's
account(s), without regard to the origin of deposits to the account or
beneficial ownership of the funds;
(e) Exercise all rights, powers and remedies of a secured party under
the Uniform Commercial Code in effect in the Commonwealth of Virginia, any other
jurisdiction in which the Collateral is located and/or any other applicable
law(s), including, without limitation, the right to (i) require the Borrowers to
assemble the Collateral (to the extent that it is movable) and make it available
to the Agent at a place to be designated by the Agent, and (ii) enter upon any
Borrower's premises, peaceably by the Agent's own means or with legal process,
and take possession of, render unusable or dispose of the
53
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Collateral on such premises; each Borrower hereby agreeing not to resist or
interfere with any such action. The Agent agrees to give the Borrower written
notice of the time and place of any public sale of the Collateral or any part
thereof, and the time after which any private sale or any other intended
disposition of the Collateral is to be made, and such notice will be mailed,
postage prepaid, to the principal place of business of the Borrower, at least
ten (10) days before the time of any such sale or disposition, unless any
Applicable Law permits a shorter notice period. Each Borrower acknowledges and
agrees that the ten (10) day notice period (or shorter notice period permitted
by Applicable Law) is commercially reasonable. Each Borrower hereby authorizes
and appoints the Agent and its successors and assigns to (x) sell the
Collateral, and (y) declare that such Borrower assents to the passage of a
decree by a court of proper jurisdiction for the sale of the Collateral. Any
such sale pursuant to (x) or (y) above is to be made in accordance with the
applicable provisions of the laws and rules of procedure of the Commonwealth of
Virginia or other applicable law; and/or
(f) Proceed to enforce such other and additional rights and remedies
as the Agent and/or any Lender may have hereunder, and/or under any of the other
Loan Documents, or as may be provided by applicable law.
It is expressly understood and agreed that the Agent and/or any Lender
may exercise its respective rights under this Agreement or under any other Loan
Document without exercising the rights or affecting the security afforded by any
other Loan Document, and it is further understood and agreed that the Agent may
proceed against all or any portion of the Collateral in such order and at such
times as the Agent, in its sole discretion, sees fit; and each Borrower hereby
expressly waives, to the extent permitted by law, all benefit of valuation,
appraisement, marshaling of assets and all exemptions under the laws of the
Commonwealth of Virginia and/or any other state, district or territory of the
United States. Furthermore, if any Borrower shall default in the performance
when due of any of the provisions of this Agreement, the Agent, without notice
to or demand upon the Borrower (and without any grace or cure period) and
without waiving or releasing any of the Obligations or any default hereunder,
under the Notes or under any other Loan Document, may (but shall be under no
obligation to) perform the same for such Borrower's account, and any monies
expended in so doing shall be chargeable to the Borrowers with interest, at the
Default Rate, until the Event of Default is cured, and added to the indebtedness
secured by the Collateral.
All sums paid or advanced by the Agent or any Lender in connection with
the foregoing or otherwise in connection with the Loan, and all court costs and
expenses of collection, including without limitation, reasonable attorneys' fees
and expenses (and fees and expenses resulting from the taking, holding or
disposition of the Collateral) incurred in connection therewith shall be paid by
the Borrowers upon demand and shall become a part of the Obligations secured by
the Collateral. The Borrowers agree to bear the expense of each lien search,
property and judgment report or other form of Collateral ownership
54
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investigation as the Agent in its discretion, shall deem necessary or desirable
to assure or further assure to the Agent its interests in the Collateral.
Notwithstanding anything to the contrary set forth in this Agreement or
any other Loan Document, in the event that any Collateral proceeds shall have
been received by the Agent to pay any of the Obligations, such proceeds shall be
applied first to the Obligations relating to, arising from or incurred in
connection with the transactions contemplated by this Agreement in accordance
with the terms and provisions of this Agreement, and then to any other
Obligations of any Borrower.
ARTICLE 10
----------
THE AGENT; AGENCY
-----------------
Section 10.1 Appointment. Each Lender hereby irrevocably appoints First
-----------
Union to act as the Agent for each such Lender pursuant to the provisions of
this Agreement and the other Loan Documents, and irrevocably authorizes the
Agent to take such action, and exercise such powers and perform such duties as
are expressly delegated to or required of the Agent by the terms hereof or
thereof, or are reasonably incidental thereto, including without limitation,
executing documents on behalf of the Lender(s), as agent. First Union agrees to
act as Agent on behalf of the Lender(s) on the terms and conditions set forth in
this Agreement and the other Loan Documents, subject to its right to resign as
provided in Section 10.10 of this Agreement. Each Lender agrees that the rights
and remedies granted to the Agent under this Agreement and the other Loan
Documents shall be exercised exclusively by the Agent, and that no Lender shall
have the right individually to exercise any such right or remedy, except to the
extent expressly provided herein or therein.
Section 10.2 General Nature of the Agent's Duties. Notwithstanding
------------------------------------
anything to the contrary elsewhere in this Agreement or any other Loan Document:
(a) The Agent shall have no duties or responsibilities other than
those expressly set forth in this Agreement and the other Loan Documents, and no
implied duties or responsibilities on the part of the Agent shall be read into
this Agreement or any other Loan Document or shall otherwise exist.
(b) The duties and responsibilities of the Agent under this Agreement
and the other Loan Documents shall be mechanical and administrative in nature,
and the Agent shall not have a fiduciary relationship in respect of any Lender,
except with respect to funds or collateral it receives on behalf of any Lender.
(c) The Agent is and shall be solely the agent of the Lender(s). The
Agent does not assume, and shall not at any time be deemed to have, any
relationship of
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agency or trust with or for, or any other duty or responsibility to, any
Borrower or any other person.
(d) The Agent shall be under no obligation to take any action
hereunder or under any other Loan Document if the Agent believes in good faith
that taking such action may conflict with any applicable law, or any provision
of this Agreement or any other Loan Document, or may require the Agent to
qualify to do business in any jurisdiction where it is not then so qualified.
Section 10.3 Exercise of Powers.
------------------
(a) The Agent shall have the authority to take any action of the
type specified in this Agreement or any other Loan Document as being within the
Agent's rights, powers or discretion, as it determines in its sole discretion,
except as provided in subsection (b) below, and except as provided in any other
Loan Document which expressly requires the direction or consent of (i) the
Required Lenders; or (ii) all of the Lenders, in either of which circumstances
the Agent shall not take such action absent such direction or consent. Any
action or inaction pursuant to such direction or consent shall be binding on all
of the Lenders.
(b) Except as otherwise expressly provided in this Agreement,
without the consent or approval of the Required Lenders, the Agent shall not, in
any material respect, amend, modify, grant consents or waive terms or provisions
of this Agreement or any other Loan Document (each, an "Amendment" and
collectively, "Amendments"), or declare an Event of Default, provide formal
written notice of an Event of Default to the Borrowers or exercise any rights or
remedies against any Borrower. Each Lender agrees that its decision to consent
to or reject any request by the Agent for any Amendment or for permission to
declare an Event of Default, provide formal notice thereof to the Borrowers
and/or exercise any rights or remedies arising by virtue of such default, shall
be made as soon as reasonably practicable after the Agent has provided all
information reasonably necessary to act on any such request, but in all events
within fifteen (15) Business Days of the receipt of such information; provided,
however, that in an emergency situation, the Agent may require the Lenders to
respond within such shorter time period as may be specified by the Agent in
writing, but in no event less than five (5) Business Days from the receipt of
such information. Unless otherwise provided herein, the Agent shall exercise any
and all rights and responsibilities on behalf of the Lenders in connection with
an Event of Default. Additionally, the consent or approval of all of the Lenders
shall be required for the Agent to (a) extend the final maturity of the Loan or
any Note, reduce the interest rate payable on or extend the time of payment for
any installment of principal, interest or fees payable in connection with the
Loan, or issue Letters of Credit (i) having an expiration date beyond the
Revolving Facility Maturity Date, except as otherwise expressly provided in this
Agreement, or (ii) causing the aggregate outstanding amount of all such Letters
of Credit issued to exceed Five Million Dollars ($5,000,000); (b) change the
Percentage of the Commitment Amount of any Lender, (c) release all or a
substantial portion of the
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Collateral, except in accordance with the provisions of any applicable Loan
Document, (d) amend the definition of the Required Lenders or Maximum Borrowing
Base, expand the definitions of Eligible Billed Government Accounts Receivable,
Eligible Billed Commercial Accounts Receivable and/or Eligible Unbilled
Government Costs, or limit the definition of Ineligible Receivables, (e) consent
to the assignment or transfer by any Borrower of any of its rights or
obligations hereunder, (f) amend, modify or waive any provisions of this Section
10.3, (g) change the manner of application by the Agent of payments made under
the Loan Documents, or (h) change the method of calculation used in connection
with the computation of interest, commissions or fees. Each Lender agrees that
its decision to approve or reject any request for an amendment or waiver with
respect to this Agreement shall be made as soon as reasonably practicable after
the Lender has received all information deemed by the Agent to be necessary to
act on any such request. Notwithstanding anything to the contrary set forth in
this Article 10, (i) if at any time the vote of all of the Lenders shall be
required under this Agreement, then the vote of all of the Lenders (other than
Mass Mutual, acting in its capacity as a Note "B" Holder) shall be necessary,
except for any reduction to the interest rate payable under the Term Facility
"B" Note, any extension of the Term Facility "B" Maturity Date or any change to
the manner in which Mandatory Payments are to be applied to the Facilities (as
set forth in Section 1.5 of this Agreement), in which event the vote of all of
the Lenders (including Mass Mutual, acting in its capacity as a Note "B" Holder)
shall be required; and (ii) with respect to matters requiring the vote of the
Required Lenders, so long as Mass Mutual and First Union are not the only Lender
parties hereto and the Percentage of Mass Mutual (acting in its capacity as a
Note "B" Holder) and First Union (acting in its capacity as a Lender) equals or
exceeds, in the aggregate, fifty-one percent (51%) of the aggregate Commitment
Amount, such Percentages shall not be included in the calculation of the
required fifty-one percent (51%) of the aggregate Commitment Amount unless one
(1) of the other Lenders (excluding any Lender which is a subsidiary or
affiliate of, or related to, Mass Mutual or First Union) votes in the same
manner as Mass Mutual or First Union.
Section 10.4 General Exculpatory Provisions. Notwithstanding anything to
------------------------------
the contrary elsewhere in this Agreement or any other Loan Document:
(a) The Agent, in its capacity as Agent (but not as a Lender), shall
not be liable for any action taken or omitted to be taken by it under or in
connection with this Agreement or any other Loan Document, unless the same
constitutes gross negligence or willful misconduct, as finally determined by a
court of competent jurisdiction.
(b) The Agent, in its capacity as the Agent (but not a Lender), shall
not be responsible for (i) the execution, delivery, effectiveness,
enforceability, genuineness, validity or adequacy of this Agreement or any other
Loan Document, (ii) any recital, representation, warranty, document,
certificate, report or statement in this Agreement or any other Loan Document,
(iii) any failure of any Borrower or any Lender to perform any of their
respective obligations under this Agreement or any other Loan Document, (iv) the
existence, validity, enforceability, perfection, recordation, priority, adequacy
or value, now
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or hereafter, of any lien or encumbrance or other direct or indirect security
afforded or purported to be afforded by any of the Loan Documents, or otherwise
from time to time, or (v) caring for, protecting, insuring or paying any taxes,
charges or assessments with respect to any Collateral.
(c) The Agent shall be under no obligation to ascertain, inquire or
give any notice relating to (i) the performance or observance of any of the
terms or conditions of this Agreement or any other Loan Document on the part of
any Borrower, (ii) the business, operations, condition (financial or otherwise)
or prospects of any Borrower, or (iii) except to the extent as may be set forth
in Section 10.5(f) of this Agreement, the existence of any Event of Default.
(d) The Agent shall be under no obligation, either initially or on a
continuing basis, to provide any Lender with any notices, reports or information
of any nature, whether in its possession presently or hereafter, except for such
notices, reports and other information expressly required by this Agreement or
any other Loan Document to be furnished by the Agent to such Lender; it being
understood and agreed that the Agent shall promptly deliver to each Lender
copies of any and all notices, documents, instruments and agreements deemed by
the Agent, in its reasonable discretion, to be material to the transactions
contemplated by this Agreement (including, without limitation, copies of any and
all field audit results and requests for the issuance of any Letter(s) of
Credit).
Section 10.5 Administration by the Agent.
---------------------------
(a) The Agent may rely upon any notice or other communication of any
nature (written or oral, including telephone conversations, whether or not such
notice or other communication is made in a manner permitted or required by this
Agreement or any other Loan Document) purportedly made by or on behalf of the
proper party or parties, and the Agent shall have no duty to verify the identity
or authority of any person giving such notice or other communication.
(b) The Agent may consult with legal counsel (including in-house
counsel for the Agent), independent public accountants and any other experts
selected by the Agent from time to time, and the Agent shall not be liable for
any action taken or omitted to be taken in good faith by it in accordance with
the advice of such counsel, accountants or experts.
(c) The Agent may conclusively rely upon the truth of the statements
and the correctness of the opinions expressed in any certificates or opinions
furnished to the Agent in accordance with the requirements of this Agreement or
any other Loan Document. Whenever the Agent shall deem it necessary or desirable
that a matter be proved or established with respect to any Borrower or any
Lender, such matter may (in the Agent's discretion) be established by a
certificate of such Borrower or such Lender, as the case may be, and the Agent
may conclusively rely upon such certificate.
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(d) The Agent may fail or refuse to take any action unless it shall
be indemnified to its reasonable satisfaction from time to time against any and
all amounts, liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses and disbursements of every kind and nature
which may be imposed on, incurred by or asserted against the Agent by reason of
taking or continuing to take any such action; provided that no Lender shall be
obligated to indemnify the Agent for any portion of such amounts, liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses and disbursements resulting solely from the gross negligence or willful
misconduct of the Agent, as finally determined by a court of competent
jurisdiction.
(e) The Agent may perform any of its duties under this Agreement or
any other Loan Document by or through agents or attorneys-in-fact. The Agent
shall not be responsible for the negligence or misconduct of any agents or
attorneys-in-fact selected by it with reasonable care.
(f) In the event that any Lender becomes aware (other than by written
notice from the Agent) that an Event of Default exists, such Lender shall
promptly provide written notice thereof to the Agent, as provided hereinbelow.
The Agent shall not be deemed to have any knowledge or notice of the occurrence
of any Event of Default (other than a default in the payment of regularly
scheduled principal or interest), unless the Agent has received from a Lender or
any Borrower a written notice referring to this Agreement, describing the Event
of Default, and stating that such notice is a "notice of default." If the Agent
receives such a notice from any Lender or Borrower, the Agent shall give prompt
notice thereof to each Lender.
(g) Except in emergency situations requiring immediate audits, as
determined by the Agent, the Agent shall provide three (3) Business Days prior
notice to the Lender(s) of any field audit scheduled to be performed by the
Agent pursuant to Section 1.6 of this Agreement. The Lender(s) shall be entitled
to (i) receive copies of field audits performed by the Agent, and (ii) accompany
the Agent to any field audit, provided that the Agent may, in its discretion,
limit the number of Lenders attending any such field audit.
Section 10.6 Lenders Not Relying on the Agent or Other Lenders. Each
-------------------------------------------------
Lender acknowledges as follows:
(a) Neither the Agent nor any other Lender has made any
representations or warranties to it, and no act taken hereafter by the Agent or
any other Lender shall be deemed to constitute any representation or warranty by
the Agent or such other Lender to it.
(b) It has, independently and without reliance upon the Agent or any
other Lender, and based upon such documents and information as it has deemed
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appropriate, made its own credit and legal analysis and decision to enter into
this Agreement and the other Loan Documents.
(c) It will, independently and without reliance upon the Agent or any
other Lender, and based upon such documents and information as it shall deem
appropriate at the time, make its own decisions to authorize the Agent to take
or not take action under or in connection with this Agreement and the other Loan
Documents.
Section 10.7 Indemnification. Each Lender agrees to reimburse and
---------------
indemnify the Agent and the Agent's directors, officers, employees and agents
(to the extent not reimbursed by any Borrower, and without limitation of the
obligation of the Borrowers to do so), ratably in accordance with each Lender's
Percentage, from and against any and all amounts, losses, liabilities, claims,
damages, expenses, obligations, penalties, actions, judgments, suits, costs and
disbursements of every kind or nature (including the reasonable fees and
disbursements of counsel for the Agent or such other person in connection with
any investigative, administrative or judicial proceeding commenced or
threatened, whether or not the Agent or such other person shall be designated a
party thereto) that may at any time be imposed on, reasonably incurred by or
asserted against the Agent or such other person as a result of this Agreement,
any other Loan Document, any transaction from time to time contemplated hereby
or thereby, or any transaction financed in whole or in part, directly or
indirectly, with the proceeds of the Loan; provided that no Lender shall be
--------
obligated to indemnify the Agent or such other person for any portion of such
amounts, losses, liabilities, claims, damages, expenses, obligations, penalties,
actions, judgments, suits, costs or disbursements resulting solely from the
gross negligence or willful misconduct of the person seeking indemnity, as
finally determined by a court of competent jurisdiction.
Section 10.8 The Agent in its Individual Capacity. With respect to its
------------------------------------
commitments and the Obligations owing to it, First Union shall have the same
rights and powers under this Agreement and each other Loan Document as any other
Lender, and may exercise the same as though it was not the Agent. The terms
"Lender," "holders of Notes" and like terms shall include First Union in its
individual capacity. First Union and its affiliates may make loans to, accept
deposits from, acquire debt or equity interests in, act as trustee under
indentures of and engage in any other business with any Borrower and any
stockholder, subsidiary or affiliate of any Borrower, as though First Union was
not the Agent hereunder, and without liability to account to any other Lender
with respect to the same.
Section 10.9 Holders of Notes. The Agent may deem and treat any Lender
----------------
which is the payee of a Note as the owner and holder of such Note for all
purposes hereof unless and until written notice evidencing such transfer shall
have been filed with the Agent; it being understood and agreed that any such
transfer must comply with the requirements of Section 12.10(b) of this
Agreement. Any authority, direction or consent of any person who at the time of
giving such authority, direction or consent was a Lender
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shall be conclusive and binding on each present and subsequent holder,
transferee or assignee of any Note or Notes payable to such Lender or issued in
exchange therefor.
Section 10.10 Successor Agent. The Agent may resign at any time by giving
---------------
fifteen (15) days prior written notice thereof to the Lender(s) and the
Borrower, subject to appointment of a successor Agent (and such appointees
acceptance of appointment) as below provided in this Section 10.10. Upon any
such resignation, the Required Lenders shall appoint another Lender as the
successor Agent; provided that such Lender is a commercial bank or trust company
organized under the laws of the United States of America or any State thereof
and has a combined capital and surplus of at least $1,000,000,000. In such
event, the Agent's resignation shall not be effective until the successor Agent
shall have accepted its appointment. Upon the acceptance by a successor Agent
of its appointment as Agent hereunder, such successor Agent shall thereupon
succeed to and become vested with all of the properties, rights, powers,
privileges and duties of the former Agent, without further act, deed or
conveyance. Upon the effective date of resignation of a retiring Agent, such
Agent shall be discharged from its duties under this Agreement and the other
Loan Documents, but the provisions of this Agreement shall continue to inure to
its benefit as to any actions taken or omitted by it while it was Agent under
this Agreement. If for any reason, at any time, there is no Agent hereunder,
then during such period, the Required Lenders shall have the right to exercise
the Agent's rights and perform its duties hereunder, except that (i) all notices
or other communications required or permitted to be given to the Agent shall be
given to each Lender, and (ii) with respect to the absence of the Agent, all
payments to be made to the Agent shall be made directly to the Lender for whose
account such payment is made (or to the Borrowers, if applicable).
Section 10.11 Additional Agents. If the Agent shall from time to time deem
-----------------
it necessary or advisable to engage other agents for its own protection in the
performance of its duties hereunder or in the interests of the Lenders, then the
Agent and the Borrowers shall execute and deliver a supplemental agreement and
all other instruments and agreements necessary or advisable, in the opinion of
the Agent, to constitute another commercial bank or trust company, or one or
more other persons approved by the Agent, to act as co-Agent or a separate agent
with respect to any part of the Collateral, with such powers as may be provided
in such supplemental agreement, and with the power to vest in such bank, trust
company or other person (as such co-Agent or separate agent, as the case may
be), any properties, rights, powers, privileges and duties of such Agent under
this Agreement or any other Loan Document.
Section 10.12 Calculations. The Agent shall not be liable for any
------------
calculation, apportionment or distribution of payments made by it in good faith.
If such calculation, apportionment or distribution is subsequently determined to
have been made in error, the sole recourse of any Lender to whom payment was due
but not made shall be to recover from the Lenders any payment in excess of the
amount to which they are determined to be entitled, with interest thereon at the
Federal Funds Rate, or, if the amount due was not
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paid by the Borrowers, to recover such amount from the Borrowers, with interest
thereon at the rate provided in the applicable Note.
Section 10.13 Funding by Agent.
----------------
(a) Except as otherwise expressly provided in this Agreement, the
Agent alone be entitled to make all advances in connection with the Loan and
shall receive all payments and other receipts relating to the Loan; it being
understood, however, that the Agent has reserved the right not to advance any
amounts to the Borrowers which the Agent has not received from the Lender(s).
The Agent will notify each Lender of the date and amount of any requested
advance, and if such notification is received by 1:00 p.m. Washington, D.C. time
on any given Business Day, the Lender(s) shall provide the required funds to the
Agent no later than the close of business on such Business Day. Once per week,
or within such shorter time frame as may be requested by the Agent, the Agent
and each Lender shall pay to each other such amounts (the "Equalization
Payments") as may be necessary to cause each Lender to own its applicable
Percentage of the Loan and otherwise implement the terms and provisions of this
Agreement; it being understood that (i) each Lender shall be entitled to receive
interest on amounts advanced by it only from the date of such Lender's advance
of funds; (ii) payments made by the Borrowers and received by the Agent shall be
promptly distributed to the Lenders in accordance with the terms of this
Agreement; and (iii) LIBOR advances and payments of amounts outstanding on a
LIBOR basis shall be made by and between the Agent and the applicable Lenders on
a same day basis, provided that the applicable Request for Advance, LIBOR
Election Form and Certification and/or payment of amounts outstanding on a LIBOR
basis shall have been received by the Agent on or before 1:00 p.m. Washington,
D.C. time on any given Business Day. The obligation of the Agent and each Lender
to make Equalization Payments shall not be affected by a bankruptcy filing by
any Borrower, the occurrence of any Event of Default or any other act,
occurrence or event whatsoever, whether the same occurs, before, on or after the
date on which an Equalization Payment is required to be made. All Equalization
Payments shall be made by 1:00 p.m. Washington, D.C. time on the date such
payment is required.
(b) Unless the Agent shall have been notified in writing by any
Lender no later than the close of business on the Business Day before the
Business Day on which an advance requested by the Borrowers is to be made, that
such Lender will not make its ratable share of such advance, the Agent may
assume that such Lender will make its ratable share of the advance, and in
reliance upon such assumption the Agent may (but in no circumstances shall be
required to) make available to the Borrowers a corresponding amount. If and to
the extent that any Lender fails to make such payment to the Agent when
required, such Lender shall pay such amount on demand (or, if such Lender fails
to pay such amount on demand, the Borrowers shall arrange for the repayment of
such amount to the Agent), together with interest for the Agent's own account
for each day from and including the date of the Agent's payment, to and
including the date of repayment to the Agent (before and after judgment).
Interest (a) if paid by such Lender
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(i) for each day from and including the date of the Agent's payment to and
including the second Business Day thereafter, shall accrue at the Federal Funds
Rate for such day, and (ii) for each day thereafter, shall accrue at the rate or
rates per annum payable under the Notes; and (b) if paid by the Borrowers, shall
accrue at the rate or rates per annum payable under the Notes. All payments to
the Agent under this Section shall be made to the Agent at its office set forth
in the preamble of this Agreement (or as otherwise directed by the Agent), in
dollars, in immediately available funds, without set-off, withholding,
counterclaim or other deduction of any nature.
(c) All borrowings under this Agreement shall be incurred from the
Lenders pro rata on the basis of their respective Percentages of the applicable
Facility (except to the extent advanced (i) as a Swing Line Loan, or (ii) by the
Agent on behalf of any Lender as provided in subsection (a) or (b) above). It is
understood that no Lender shall be responsible for any other Lender's failure to
meet its obligation to make advances hereunder, and that each Lender shall be
obligated to make advances required to be made by it hereunder regardless of the
failure of any other Lender to make its advances hereunder.
(d) Each payment and prepayment received by the Agent for the account
of the Lenders shall be distributed first to the Swing Line Lender for
application to any Swing Line Outstandings, and then to each Lender entitled to
share in such payment, ratably in accordance with each Lender's Percentage;
provided, however, that (i) any payment or prepayment made with respect to
amounts outstanding under any Term Facility shall not be distributed first to
the Swing Line Lender for application to any Swing Line Outstandings; (ii) any
payment received by the Agent after the Acceleration Date shall be distributed
first to the Swing Line Lender for application to any Swing Line Outstandings,
and then to each Lender entitled to share in such payment, ratably based on the
aggregate outstanding principal amount of the Loans funded by such Lender,
together with any and all accrued and unpaid interest thereon, and (iii) any
Lender who shall be in default of its obligations set forth in this Agreement or
any other Loan Document or who has failed to fund its Percentage of any advance
under the Loan shall not be entitled to share in any such payment(s) until such
time as such default has been cured or such failure to fund, together with
interest thereon (as provided in subsection (b) above), has been paid to the
Agent in accordance with the terms and conditions of this Agreement or cured (as
the case may be). Payments from the Agent to the Lenders shall be made by wire
transfer in accordance with written instructions provided to the Agent by the
Lenders from time to time. Unless the Agent shall have received notice from the
Borrowers prior to the date on which any payment is due to the Lenders hereunder
that the Borrowers will not make such payment in full, the Agent may assume that
the Borrowers have made such payment in full on such date and the Agent, in
reliance upon such assumption, may cause to be distributed to each Lender on
such due date an amount equal to the amount then due such Lender. If and to the
extent the Borrowers shall not have made such payment in full to the Agent, each
Lender shall repay to the Agent upon its demand therefor such amount distributed
to such Lender, together with interest thereon at the overnight Federal Funds
Rate for each
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day from the date such amount is distributed to such Lender until the date such
Lender repays such amount to the Agent.
(e) If any Lender shall obtain any payment (whether voluntary,
involuntary, through the exercise of any right of setoff, or otherwise) in
excess of such Lender's Percentage of payments, such Lender shall forthwith
purchase from the other Lender(s) such participations in the Loans made by them
as shall be necessary to cause such purchasing Lender to share the excess
payment ratably with each of the other Lender(s); provided, however, if all or
any portion of such excess payment is thereafter recovered from such purchasing
Lender, such purchase from the other Lender(s) shall be rescinded and each other
Lender shall repay to the purchasing Lender the purchase price to the extent of
such recovery, together with an amount equal to such Lender's ratable share
(according to the proportion of (1) the amount of such Lender's required
repayment, to (2) the total amount so recovered from the purchasing Lender) of
any interest or other amount paid or payable by the purchasing Lender in respect
of the total amount recovered. The Borrowers agree that any Lender purchasing a
participation from another Lender pursuant to this Section 10.13(e), to the
fullest extent permitted by law, may exercise all of its rights of payment with
respect to such participation as fully as if such Lender were the direct
creditor of the Borrowers in the amount of such participation.
Section 10.14 Benefit of Article. The provisions of this Article 10 are
------------------
solely for the benefit of the Lenders. The Borrowers shall have no rights under
(or rights to require any Lender's compliance with) any of the provisions of
this Article 10; it being understood that the provisions of this Article 10 are
not in limitation of any right, power, duty, obligation or liability which the
Agent would have to or against any Borrower.
ARTICLE 11
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CERTAIN ADDITIONAL RIGHTS AND
OBLIGATIONS REGARDING THE COLLATERAL
------------------------------------
Section 11.1 Power of Attorney. Each Borrower hereby irrevocably appoints
-----------------
the Agent as its agent and attorney-in-fact, with power of substitution, having
full power and authority, in its own name, in the name of any Borrower or
otherwise (but at the cost and expense of the Borrowers and without notice to
the Borrowers), to (i) notify account debtors obligated on any of the
Receivables to make payments thereon directly to the lockbox referenced in
Section 11.2 (if the lockbox shall have been established as required pursuant to
Section 11.2 of this Agreement), and to take control of the cash and non-cash
proceeds of any such Receivables, which right the Agent may exercise at any time
whether or not any Borrower is then in default hereunder or was theretofore
making collections thereon; (ii) charge against any bank account of any Borrower
any item of payment credited to the Collateral Account which is dishonored by
the drawee or the maker thereof; (iii) upon an Event of Default, compromise,
extend or renew any of the Collateral constituting Receivables or deal with any
of the Collateral as the Agent may deem
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advisable; (iv) upon an Event of Default, release its interest in, make
exchanges or substitutions for and/or surrender, all or any part of any
Borrower's interest in all or any part of the Collateral; (v) upon an Event of
Default, remove from any Borrower's place(s) of business all books, records,
ledger sheets, correspondence, invoices and documents relating to or evidencing
any of the Collateral, or without cost or expense to the Agent or any Lender,
make such use of any Borrower's place(s) of business as may be reasonably
necessary to administer, control and/or collect the Collateral; (vi) upon an
Event of Default, repair, alter or supply goods, if any, necessary to fulfill in
whole or in part the purchase order of any Account Debtor; (vii) demand, collect
receipt for and upon an Event of Default, give renewals, extensions, discharges
and releases of all or any part of the Collateral; (viii) upon an Event of
Default, institute and prosecute legal and equitable proceedings to enforce
collection of, or realize upon, all or any part of the Collateral; (ix) upon an
Event of Default, settle, renew, extend, compromise, compound, exchange or
adjust claims with respect to all or any part of the Collateral or any legal
proceedings brought with respect thereto; and (x) receive and open all mail
addressed to any Borrower, and if an Event of Default exists hereunder, notify
the Post Office authorities to change the address for the delivery of mail to
any Borrower to such address as the Agent may designate; it being understood
that the rights granted to the Agent in this clause (x), which are operative on
the occurrence of an Event of Default, shall not in any way limit or impair the
other rights provided to the Agent or any Lender in this Agreement or any other
Loan Document, including, without limitation, their rights with respect to the
Collateral Account and the below-referenced lockbox. Furthermore, each Borrower
hereby irrevocably appoints the Agent as its agent and attorney-in-fact, with
power of substitution, having full power and authority, in its own name, in the
name of the Agent, in the name of such Borrower or otherwise (but at the cost
and expense of the Borrowers and without notice to the Borrowers) and regardless
of whether an Event of Default has occurred or any act, event or condition which
with notice or the lapse of time, or both, would constitute an Event of Default
has occurred, to (a) file financing statements and continuation statements
covering the Collateral and execute the same on behalf of any Borrower; (b)
charge against any banking account of any Borrower any item of payment credited
to any Borrower's account which is dishonored by the drawee or maker thereof;
and/or (iii) endorse the name of any Borrower upon any items of payment relating
to the Collateral or upon any proof of claim in bankruptcy against any Account
Debtor.
Section 11.2 Lockbox. Each Borrower agrees that, upon the Agent's request
-------
following the occurrence of an Event of Default which has continued unremedied
beyond any applicable notice and/or cure period, the Borrowers shall establish
and continually maintain on terms and conditions reasonably satisfactory to the
Agent, one or more lockboxes (and, if required by the Agent, one or more blocked
accounts) for the collection of Receivables. Each Borrower hereby authorizes the
Agent to receive and collect any amount or amounts due or to become due on
account of any Receivables following the occurrence of an Event of Default and,
at its discretion, to apply the same to the repayment of the Notes. Except as
otherwise may be approved by the Agent in writing, any checks or other
remittances received by any Borrower in payment of the Receivables shall be held
in
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trust by such Borrower for the Agent and Lender(s). Each Borrower shall, in
writing, within thirty (30) days from the date the Agent shall have requested
that one or more lockboxes be established and maintained, direct all of its
customers (other than certain customers as may be approved by the Agent in
writing) to make payments directly to the Agent pursuant to the form of Payment
Direction Letter attached as Exhibit 8 hereto, and shall include on all of its
---------
invoices, a direction to its customer to make all payments directly to the
lockbox designated by the Agent in writing.
Section 11.3 Other Agreements. Except as may otherwise be expressly
----------------
permitted by the terms of this Agreement, and without limiting any other
restrictions or provisions of this Agreement, each Borrower will (i) on demand,
subject to any confidentiality and secrecy requirements imposed by any
Government agency, make available in form reasonably acceptable to the Agent,
shipping documents and delivery receipts evidencing the shipment of goods which
gave rise to the sale or lease of inventory or of an account, contract right or
chattel paper, completion certificates or other proof of the satisfactory
performance of services which gave rise to the sale or lease of inventory or of
an account, contract right or chattel paper, and each Borrower's copy of any
written contract or order from which a sale or lease of inventory, an account,
contract right or chattel paper arose; and (ii) when requested, advise the Agent
when an Account Debtor returns or refuses to retain any goods, the sale or lease
of which gave rise to an account, contract right or chattel paper, and of any
delay in delivery or performance, or claims made in regard to any sale or lease
of inventory, account, contract right or chattel paper. Upon reasonable notice,
all such records will be available for examination by authorized agents of the
Agent.
It is expressly understood and agreed, however, that neither the Agent nor
any Lender shall be required or obligated in any manner to make any inquiries as
to the nature or sufficiency of any payment received by it or to present or file
any claims or take any other action to collect or enforce a payment of any
amounts which may have been assigned to it or to which it may be entitled
hereunder at any time or times.
ARTICLE 12
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MISCELLANEOUS
-------------
Section 12.1 Remedies Cumulative. Each right, power and remedy of the
-------------------
Agent and/or Lender(s) provided for in this Agreement or in any other Loan
Document or now or hereafter existing at law or in equity, by statute or
otherwise, shall be cumulative and concurrent and shall be in addition to every
other right, power or remedy provided for in this Agreement or in any other Loan
Document, or now or hereafter existing at law or in equity, by statute or
otherwise, and the exercise or beginning of the exercise by the Agent and/or any
Lender of any one or more of such rights, powers or remedies shall not
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preclude the simultaneous or later exercise by the Agent and/or any Lender of
any or all such other rights, powers or remedies.
Section 12.2 Waiver. No failure or delay by the Agent or any Lender to
------
insist upon the strict performance of any term, condition, covenant or agreement
set forth in this Agreement or any other Loan Document, or to exercise any
right, power or remedy consequent upon a breach thereof, shall constitute a
waiver of such term, condition, covenant or agreement or of any such breach, or
preclude the Agent or any Lender from exercising any such right, power or remedy
at any later time or times. By accepting payment after the due date of any of
the Obligations, neither the Agent nor any Lender shall be deemed to have waived
either the right to require prompt payment when due of all other Obligations, or
the right to declare a default for failure to make payment of any such other
Obligations.
Section 12.3 Notices. Notices to any party shall be in writing and shall
-------
be delivered personally or by first-class mail or nationally-recognized
overnight delivery service addressed to the parties at the addresses set forth
below or otherwise designated in writing:
If to the Borrowers: AverStar, Inc.
23 Fourth Avenue
Burlington, Massachusetts 01803
Attention: Michael Alexander
Chief Executive Officer
If to the Agent: First Union Commercial Corporation
1970 Chain Bridge Road, 9th Floor
McLean, Virginia 22102
Attention: Mr. Jeffrey McGrath
Director
If to the Lender(s): First Union Commercial Corporation
1970 Chain Bridge Road, 9th Floor
McLean, Virginia 22102
Attention: Mr. Jeffrey McGrath
Director
and to the other Lender parties hereto from time
to time
with a copy of all
notices to the Agent
and/or Lender to: Dickstein Shapiro Morin & Oshinsky LLP
2101 L Street, N.W.
Washington, D.C. 20037
Attention: Matthew S. Bergman, Esq.
67
<PAGE>
with a copy of all
notices to the
Borrowers to: Swidler Berlin Shereff Friedman, LLP
919 Third Avenue
New York, New York 10022
Attention: Gerald Adler, Esq.
Section 12.4 Entire Agreement. This Agreement and the other Loan
----------------
Documents constitute the entire agreement of the parties with respect to the
Loan and supersede all prior agreements and understandings (except that the
terms and provisions set forth in (i) the Commitment Letter and attached term
sheet with respect to the right of First Union and/or First Union Capital
Markets Corp., exercisable in connection with its syndication of the Loan, to
alter or amend the Loan, including, but not limited to any change in structure,
pricing, financial covenants or maturity of the Loan, and the Borrowers'
agreement to develop an alternative structure with First Union and/or First
Union Capital Markets Corp. that will permit syndication of the Loan to the
satisfaction of First Union and/or First Union Capital Markets Corp., and (ii)
the Fee Letter, shall in each case survive the execution and delivery of this
Agreement). This Agreement and the other Loan Documents shall continue in full
force and effect for so long as any Borrower shall be indebted hereunder or
under any Note, and thereafter until the Agent shall have actually received
written notice of the termination hereof from the Borrowers and all Obligations
incurred or contracted before receipt of such notice shall have been fully paid.
Section 12.5 Relationship of the Parties. This Agreement provides for the
---------------------------
extension of financial accommodations by the Lender(s), in their capacity as
lender, to each Borrower, in its capacity as a borrower, and for the payment of
interest and repayment of the Obligations by the Borrowers. Certain provisions
herein, such as those relating to compliance with the financial covenants,
delivery to the Agent and/or Lender(s) of financial statements, and compliance
with other affirmative and negative covenants are for the benefit of the
Lender(s) to protect the interests of the Lender(s) in assuring repayment of the
Obligations. Nothing contained in this Agreement shall be construed as
permitting or obligating the Agent or any Lender to act as a financial or
business advisor or consultant to any Borrower, as permitting or obligating the
Agent or any Lender to control any Borrower or to conduct any Borrower's
operations, as creating any fiduciary obligation on the part of the Agent or any
Lender to any Borrower, or as creating any joint venture, agency or other
relationship between the parties other than as explicitly and specifically
stated in this Agreement. Each Borrower acknowledges that it has had the
opportunity to obtain the advice of experienced counsel of its own choosing in
connection with the negotiation and execution of this Agreement and to obtain
the advice of such counsel with respect to all matters contained herein,
including, without limitation, the provision in this Agreement for waiver of
trial by jury. Each Borrower further acknowledges that it is experienced with
respect to financial and credit matters and has made its own independent
decision to request the Obligations and execute and deliver this Agreement.
68
<PAGE>
Section 12.6 Waiver of Jury Trial; Punitive Damages. Each Borrower
--------------------------------------
hereby (a) covenants and agrees not to elect a trial by jury of any issue
triable by a jury, and (b) waives any right to trial by jury and any right to
claim punitive damages, in each case, fully to the extent that any such right
shall now or hereafter exist. This waiver of right to trial by jury and right to
claim punitive damages is separately given by each Borrower, knowingly and
voluntarily, and this waiver is intended to encompass individually each instance
and each issue as to which the right to a jury trial or any claim of punitive
damages would otherwise accrue. The Agent or any Lender is hereby authorized and
requested to submit this Agreement to any court having jurisdiction over the
subject matter and the parties hereto, so as to serve as conclusive evidence of
the Borrower's herein contained waiver of the right to jury trial and any right
to claim punitive damages. Further, each Borrower hereby certifies that no
representative or agent of the Agent or any Lender (including counsel for the
Agent and/or and Lender) has represented, expressly or otherwise, to the
undersigned that the Agent or any Lender will not seek to enforce this provision
waiving the right to a trial by jury or any right to claim punitive damages.
Section 12.7 Submission to Jurisdiction; Service of Process; Venue. Any
-----------------------------------------------------
judicial proceeding brought against any Borrower with respect to this Agreement
or any other Loan Document may be brought in any court of competent jurisdiction
in the Commonwealth of Virginia, and by execution and delivery of this
Agreement, each party accepts for themselves and in connection with their
properties, generally and unconditionally, the non-exclusive jurisdiction of the
aforesaid court, and irrevocably agree to be bound by any judgment rendered by
such court in connection with this Agreement. Each Borrower irrevocably
designates and appoints AverStar whose address is 23 Fourth Avenue, Burlington,
Massachusetts 01803, as its agent to receive on its behalf service of all
process in any such proceeding in any court in the Commonwealth of Virginia,
such service being hereby acknowledged by each Borrower to be effective and
binding on it in every respect. A copy of any such process so served shall be
mailed by registered or certified mail to the Borrowers at the address to which
notices are to be addressed in accordance with this Agreement, except that any
failure to mail such copy shall not affect the validity of service of process.
Each Borrower shall at all times maintain an agent for service of process
pursuant to this provision. If any Borrower fails to appoint such an agent, or
if such agent refuses to accept service, such Borrower hereby agrees that
service upon it by mail shall constitute sufficient notice. Nothing herein shall
affect the right to serve process in any other manner permitted by law or shall
limit the right of the Agent or any Lender to bring proceedings against any
Borrower in the courts of any other jurisdiction.
Section 12.8 Changes in Capital Requirements. If after the date of this
-------------------------------
Agreement any Lender shall determine that the adoption of any applicable law,
rule or regulation regarding capital adequacy, or any change therein, or any
change in the interpretation or administration thereof, or compliance by such
Lender with any request or directive regarding capital adequacy of any
authority, central bank or comparable agency, which adoption, change or
compliance has or would have the effect of reducing the rate of return on such
Lender's capital as a consequence of such Lender's obligations hereunder to
69
<PAGE>
a level below that which such Lender could have achieved but for such adoption,
change or compliance (taking into consideration such Lender's policies with
respect to capital adequacy), then the interest rate on the Notes shall be
increased to a rate which shall retain such Lender's original rate of return on
such Lender's capital.
Section 12.9 Captions. The paragraph headings of this Agreement are for
--------
convenience of reference only, and in no way define, limit or describe the scope
of this Agreement or the intent of any provision hereof.
Section 12.10 Modification And Waiver. Neither this Agreement nor any
-----------------------
term, condition, covenant or agreement hereof may be changed, waived, discharged
or terminated orally, but that may be accomplished only by an instrument in
writing signed by the party against whom enforcement of the change, waiver,
discharge or termination is sought.
Section 12.11 Transferability.
---------------
(a) No Borrower shall assign any of its rights, interests or
Obligations under this Agreement.
(b) No Lender shall sell, assign or otherwise transfer its interests
under this Agreement to any person or entity (other than an Eligible Assignee),
without the prior written consent of the Agent and the Borrowers; it being
understood and agreed that the Borrowers' consent shall not be (i) unreasonably
withheld; or (ii) required if an Event of Default exists or any act, event or
condition has occurred which with notice or the lapse of time, or both, would
constitute an Event of Default. Furthermore, no sale, assignment or transfer
shall be made by any Lender (other than First Union) unless (i) if the proposed
assignee of the transferring Lender is not an affiliate of the transferring
Lender, at least thirty (30) days' prior written notice of such sale, assignment
or transfer shall have been issued by such transferring Lender to the Agent and
the Borrowers, and such notice identifies the proposed assignee; (ii) if the
proposed assignee of the transferring Lender is an affiliate of the transferring
Lender, written notice of such sale, assignment or transfer shall have been
issued by such transferring Lender to the Agent and the Borrowers simultaneously
with such sale, assignment or transfer, and such notice identifies the proposed
assignee; (iii) the dollar equivalent of the Percentage of the transferring
Lender being assigned equals or exceeds Five Million and No/100 Dollars
($5,000,000.00); (iv) the Agent shall have received a duly executed Assignment
and Acceptance agreement, in the form attached as Exhibit 9 hereto; and (v) if
---------
the proposed assignee of the transferring Lender is not an affiliate of the
transferring Lender, an assignment fee in the amount of Five Thousand and No/100
Dollars ($5,000.00) shall have been paid to the Agent.
Section 12.12 Governing Law; Binding Effect. This Agreement shall be
-----------------------------
governed by the laws of the Commonwealth of Virginia and be binding upon the
Borrower
70
<PAGE>
and inure to the benefit of the parties hereto and their respective personal
representatives, successors and assigns.
Section 12.13 Gender; Number. As used herein, the singular number shall
--------------
include the plural, the plural the singular and the use of the masculine,
feminine or neuter gender shall include all genders, as the context may require.
Section 12.14 Materiality. Unless the context clearly indicates to the
-----------
contrary, determinations regarding the materiality of any act, event, condition
or circumstance shall be in the reasonable judgment of the Agent.
Section 12.15 Counterparts. This Agreement may be executed in any number
------------
of counterparts, each of which shall be deemed an original and all of which
together shall be deemed one and the same instrument.
[Remainder of page intentionally left blank]
71
<PAGE>
This Agreement is signed, sealed and delivered as of the date first above-
written.
ATTEST: Borrowers:
---------
[Corporate Seal] AVERSTAR, INC., a Delaware corporation
By: /s/ Nicholas A. Pettinella By: /s/ Michael A. Alexander
-------------------------- ------------------------
Name: Nicholas A. Pettinella Name: Michael A. Alexander
--------------------------
Title: Secretary Title: Chairman and CEO
--------------------------
ATTEST:
[Corporate Seal] COMPUTER BASED SYSTEMS, INC.,
a Virginia corporation
By: /s/ Nicholas A. Pettinella By: /s/ Michael A. Alexander
-------------------------- ------------------------
Name: Nicholas A. Pettinella Name: Michael B. Alexander
--------------------------
Title: Asst. Secretary Title: President and Secretary
--------------------------
ATTEST:
[Corporate Seal] COMPUTING APPLICATIONS SOFTWARE TECHNOLOGY,
INC., a California corporation
By: /s/ Nicholas A. Pettinella By: /s/ Michael A. Alexander
-------------------------- ------------------------
Name: Nicholas A. Pettinella Name: Michael A. Alexander
--------------------------
Title: Secretary Title: Vice President
--------------------------
ATTEST:
[Corporate Seal] INTERMETRICS SECURITIES, INC.,
a Massachusetts corporation
By: /s/ Nicholas A. Pettinella By: /s/ Michael A. Alexander
-------------------------- ------------------------
Name: Nicholas A. Pettinella Name: Michael A. Alexander
--------------------------
Title: V.P., CFO Treasurer Title: Vice President
--------------------------
ATTEST:
[Corporate Seal] INTERMETRICS INTERNATIONAL, INC.,
a Massachusetts corporation
By: /s/ Nicholas A. Pettinella By: /s/ Michael A. Alexander
-------------------------- ------------------------
Name: Nicholas A. Pettinella Name: Michael A. Alexander
--------------------------
Title: V.P., CFO, Treasurer Title: Vice President
--------------------------
72
<PAGE>
Agent:
-----
FIRST UNION COMMERCIAL CORPORATION
By: /s/ Jeff McGrath
------------------------
Name: Jeff McGrath
Title: Director
Lenders:
-------
FIRST UNION COMMERCIAL CORPORATION
By: /s/ Jeff McGrath
------------------------
Name: Jeff McGrath
Title: Director
STATE STREET BANK & TRUST COMPANY, N.A.
By: ________________________
Name:
Title:
CRESTAR BANK
By: ________________________
Name:
Title:
MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY
By: ________________________
Name:
Title:
73
<PAGE>
Agent:
-----
FIRST UNION COMMERCIAL CORPORATION
By: ___________________________
Name:
Title:
Lenders:
-------
FIRST UNION COMMERCIAL CORPORATION
By: ___________________________
Name:
Title:
STATE STREET BANK & TRUST COMPANY, N.A.
By: Suzanne L.Dwyer
---------------------------
Name: Suzanne L. Dwyer
Title: Vice President
CRESTAR BANK
By: ___________________________
Name:
Title:
MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY
By: ___________________________
Name:
Title:
<PAGE>
Agent:
-----
FIRST UNION COMMERCIAL CORPORATION
By: ___________________________
Name:
Title:
Lenders:
-------
FIRST UNION COMMERCIAL CORPORATION
By: ___________________________
Name:
Title:
STATE STREET BANK & TRUST COMPANY, N.A.
By: ___________________________
Name:
Title:
CRESTAR BANK
By: /s/ Timothy J. Duggan
---------------------------
Name: Timothy J. Duggan
Title: Vice President
MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY
By: ___________________________
Name:
Title:
<PAGE>
Agent:
-----
FIRST UNION COMMERCIAL CORPORATION
By: ___________________________
Name:
Title:
Lenders:
-------
FIRST UNION COMMERCIAL CORPORATION
By: ___________________________
Name:
Title:
STATE STREET BANK & TRUST COMPANY, N.A.
By: ___________________________
Name:
Title:
CRESTAR BANK
By: ___________________________
Name:
Title:
MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY
By: /s/ Michael P. Hermsen
---------------------------
Name: Michael P. Hermsen
Title: Managing Director
<PAGE>
EXHIBIT 23.2(a)
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated March 30, 1999, relating to AverStar, Inc., in the
Registration Statement (Amendment No. 1 to Form S-1 No. 333-78517) and related
Prospectus of AverStar, Inc. for the registration of 4.000,000 shares of its
common stock.
We also consent to the incorporation by reference therein of our report dated
March 30, 1999 with respect to the financial statement schedule of AverStar,
Inc. for the year ended February 28, 1997, the ten month period ended December
31, 1997 and the year ended December 31, 1998, included in the Registration
Statement (Amendment No. 1 to Form S-1 No. 333-78517) filed with the Securities
and Exchange Commission.
/s/ Ernst & Young LLP
Ernst & Young LLP
Boston, Massachusetts
July 15, 1999
<PAGE>
EXHIBIT 23.2(b)
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated April 17, 1998, relating to Pacer Infotec, Inc. and
Subsidiaries, in the Registration Statement (Amendment No. 1 to Form S-1
No. 333-78517) and related Prospectus of AverStar, Inc. for the registration of
4,000,000 shares of its common stock.
Ernst & Young LLP
Boston, Massachusetts
July 15, 1999
<PAGE>
EXHIBIT 23.2(c)
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated April 17, 1998, relating to Looking Glass Technologies,
Inc., in the Registration Statement (Amendment No. 1 to Form
S-1 No. 333-78517) and related Prospectus of AverStar, Inc. for the registration
of 4,000,000 shares of its common stock.
Ernst & Young, LLP
Boston, Massachusetts
July 15, 1999
<PAGE>
EXHIBIT 23.3
Consent of Independent Certified Public Accountants
We have issued our report dated April 18, 1997, accompanying the financial
statements of Computer Based Systems, Inc. contained in Amendment No. 1 to the
Registration Statement and Prospectus. We consent to the use of the
aforementioned report in Amendment No. 1 to the Registration Statement and
Prospectus, and to the use of our name as it appears under the caption
"Experts."
/s/ Grant Thorton LLP
Vienna, Virginia
July 13, 1999
<PAGE>
Exhibit 23.4
Consent of Aronson & Fetridge & Weigle,
_______________________________________
A Professional Corporation
__________________________
We consent to the inclusion of our report dated March 12, 1999 on our audits of
the financial statements of Computer Based Systems, Inc. as of and for each of
the two years ended December 31, 1998 and 1997 included in Amendment No. 1 to
the Registration Statement on Form S-1 (No. 333-78517) of AverStar, Inc. We also
consent to the inclusion in Amendment No. 1 to the Registration Statement on
Form S-1 (No. 333-78517) of AverStar, Inc. of the reference to Aronson, Fetridge
& Weigle, a Professional Corporation, as experts in accounting and auditing.
Aronson, Fetridge & Weigle
(a professional corporation)
/s/ Aronson, Fetridge & Weigle
Rockville, Maryland
July 13, 1999
<PAGE>
EXHIBIT 23.5
INTERNATIONAL DATA CORPORATION
------------------------------
International Data Corporation
5 Speen Street
Framingham, MA 01701
(508)-872-8200
References to International Data Corporation to be used in S-1 registration
statement:
- --------------------------------------------------------------------------------
International Data Corporation, or IDC, forecasts that the United States market
for IT services will grow from an estimated $139 billion in 1998 to $207 billion
in 2002. IDC forecasts that the IT systems services segment of the worldwide IT
services market will grow at a compound annual growth rate of approximately 12%
over this period.
- --------------------------------------------------------------------------------
The Undersigned hereby consents to the references to the Undersigned included
in the Registration statement on form S-1 and any amendment thereto.
/s/ Alexa McCloughan
- ----------------------------
Signed
Alexa McCloughan
- ----------------------------
Name
Sr. Vice President 7/9/99
- ----------------------------
Title/Date
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<PAGE>
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,777
<SECURITIES> 0
<RECEIVABLES> 46,367
<ALLOWANCES> 622
<INVENTORY> 0
<CURRENT-ASSETS> 50,595
<PP&E> 13,980
<DEPRECIATION> 8,998
<TOTAL-ASSETS> 94,212
<CURRENT-LIABILITIES> 42,942
<BONDS> 0
0
0
<COMMON> 10,194
<OTHER-SE> (12,242)
<TOTAL-LIABILITY-AND-EQUITY> 94,212
<SALES> 36,346
<TOTAL-REVENUES> 36,346
<CGS> 28,841
<TOTAL-COSTS> 34,138
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 760
<INCOME-PRETAX> 1,448
<INCOME-TAX> 656
<INCOME-CONTINUING> 792
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 792
<EPS-BASIC> 0.11
<EPS-DILUTED> 0.11
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