<PAGE>
As filed with the Securities and Exchange Commission on July 30, 1999
Registration No. 333-78517
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 2 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 Proskauer Rose LLP
919 Third Avenue 1585 Broadway
New York, New York 10022 New York, New York 10036
(212) 758-9500 (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.
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- -------------------------------------------------------------------------------
<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 30, 1999
PROSPECTUS
4,000,000 Shares
[LOGO]
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".
Massachusetts Mutual Life Insurance Company, or MassMutual, and affiliates of
MassMutual together own 13.3% of our common stock. We intend to use $5.0
million of the net proceeds from the sale of the shares of our common stock
offered in this offering to repay our debt outstanding under our subordinated
debt agreement with MassMutual.
See "Risk Factors" beginning on page 7 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 provides 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. 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 customers include 15 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. 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.
. 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.
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.
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.
1
<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.
2
<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. In process research and development expense and merger-related expense
are one time, non-recurring charges. In process research and development
expense relates to the valuation of software products in development by
Intermetrics at the time of the acquisition of Intermetrics by an investor
group led by current management. Merger-related expense relates to the
acquisitions of Intermetrics, Pacer and CBSI, including the integration of the
operations of these companies. In process research and development expenses and
merger-related expenses are included in selling, general and administrative
expense in the following tables. Depreciation expense is included in cost of
revenues 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.
3
<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
======= ======= ======= ======= ======= ======= ========
</TABLE>
4
<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>
5
<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>
6
<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.
7
<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. General Service
Administration Schedule contracts and other multiple award and/or government-
wide acquisition contracts provide government agencies with the opportunity to
purchase IT services and products at pre-approved prices, terms and conditions
without any additional competitive bidding. However, a government agency is not
required to purchase our IT services and products under these contracts.
Therefore, we must continually persuade government agencies to purchase our IT
services and products under these contracts, rather than IT services and
products from other IT service providers. 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 our cost-based government contracts under which we receive
a fixed fee; and laws, regulations and Executive Orders restricting the use and
dissemination of information classified for national security purposes and the
exportation of our 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.
8
<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.
9
<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.
After this offering, we will be required to pay an average of approximately
$3.5 million of the principal amount of our outstanding debt, and approximately
$2.0 million in interest, each year over the next three years. 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.
In the absence of an acquisition, we believe the capital resources available
to us under our credit agreements and cash from our operations are adequate to
fund our ongoing operations, to repay outstanding debt, and to support the
internal growth we expect to achieve for at least the next 12 months. However,
we may need more financing to make acquisitions or to support our internal
growth, to develop new or enhanced services or to respond to competitive
pressures or unanticipated requirements. Any required 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 intangible assets, which represent approximately 37% of our
assets as of March 31,
1999, 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
10
<PAGE>
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. 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. As explained in
Management's Discussion and Analysis, backlog represents management's estimate
of our realizable revenues on our contracts. 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;
11
<PAGE>
. 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.
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.
12
<PAGE>
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.
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.
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 the anti-takeover and
indemnification 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;
13
<PAGE>
. 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.
In addition, Section 203 of the Delaware General Corporation Law may
restrict 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.
14
<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.
15
<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.
16
<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>
17
<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. We have a negative net tangible
book value on a historical and pro forma basis. The following table illustrates
the 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.
18
<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.
19
<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>
20
<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>
21
<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 and licensing 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 an assignment 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 time and materials contracts 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.
22
<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
23
<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.
24
<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 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.
25
<PAGE>
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.
In the absence of an acquisition, 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. We anticipate financing our external
growth from acquisitions and our longer-term internal growth 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. We may require 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. Government
contracts comprise substantially all of our backlog. 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, based on our past experience and long-term
relationships with many of our customers, of the realizable contract
values for all expected future services, products, tasks or delivery
orders under our commercial contracts and single agency, Government
Service Administration Schedule, multiple award and government-wide
acquisition contracts, for which funds have not yet been set aside,
appropriated or committed, even if our customer is not obligated to
request any services under a contract.
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
26
<PAGE>
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 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
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.
27
<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 readiness 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.
In addition to assessing our internal Year 2000 readiness, we have focused
on monitoring our critical vendors and suppliers with respect to Year 2000
issues. We generally have flexibility in choosing our vendors and suppliers,
and have the option to seek alternate sources for routine supplies and
services. Our critical vendors and suppliers fall into four categories:
. Enterprise Information Technology;
. Communications;
. Facilities; and
. Financial Services.
With respect to material vendors and suppliers in each of these categories, we
have reviewed and are continuing to review their public disclosures to obtain
reasonable confidence as to Year 2000 readiness. Wherever possible, we have
obtained information on the web concerning our material vendors' and suppliers'
Year 2000 readiness. However, we were unable to obtain information concerning
Year 2000 readiness by our landlords on the web. We are conducting a letter
survey to obtain information regarding our landlords' Year 2000 readiness.
Based on the information which we have obtained, we believe that approximately
80% of our material suppliers and vendors are Year 2000 compliant, or have
implemented a plan to ensure that they will be Year 2000 compliant. We expect
to complete our review of our material vendors' and suppliers' Year 2000
compliance by September 1999.
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.
28
<PAGE>
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 provides 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.
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.
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.
We believe that 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. 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.
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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 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 trends in the federal IT industry discussed
above consists of the following components:
. Emphasis on Quality and Reliability. Based on our customers'
evaluations, we believe that we have established a reputation for
providing IT services and products of the highest quality and
reliability over our 30-year history. 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.
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. 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.
. 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 leverage
our position in IT assurance by:
-- Obtaining IT assurance contracts based on our reputation in IT
assurance and for high-quality, reliable products; and
-- Gaining expertise about the customer's business, processes and
technologies through performance of the IT assurance contract,
therefore becoming well positioned to provide additional IT
services and products to that customer.
. 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
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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.
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.
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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.
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
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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.
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>
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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
Typically, the government purchases our IT services and products through one
of the following contract vehicles: single-agency contracts, multiple award
contracts, GWACs, or Government Services Agency Schedule contracts. A single
agency contract is awarded by one government agency to one or more IT service
providers to perform a specific task. Multiple award contracts, GWACs and
Government Services Agency Schedule contracts permit government agencies to
purchase IT services and products at pre-approved prices, terms and conditions
without any additional competitive bidding. Multiple award contracts and GWACs
are awarded by one government agency to several IT service providers.
Government Services Agency Schedule contracts are awarded by one government
agency to one IT service provider, covering multiple services and products.
Even government agencies that are not parties to the contract may purchase IT
services and products through any GWAC or Government Services Agency Schedule
contract. The term of our current Government Services Agency Schedule contract
expires in September 2002.
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.
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.
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.
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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, based on our past experience and long-term
relationships with many of our customers of the realizable contract
values for all expected future services, products, tasks or delivery
orders under our commercial contracts and single agency, Government
Service Administration schedule, multiple award and government-wide
acquisition contracts, 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, we do not have any patents, trademarks or licenses that are material
to our business. In addition, our efforts to protect our proprietary rights 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
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.
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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.
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 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
regulations applicable 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.
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. 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 and medical benefits from
the date of termination until his 65th birthday; and
. Continued other benefits sponsored by us, 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;
49
<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>
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 other
AverStar stockholders pursuant to agreements between Messrs. Levy and
Schulte and these stockholders. In connection with the acquisition of
Intermetrics by Apollo Holding, Inc. in 1995, 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 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. The rights of
holders of common stock cannot be modified without the affirmative vote of the
holders of at least a majority of the outstanding shares of our common stock.
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 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 applicable 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. 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
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<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 limited 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>
2,720 After the date of this prospectus, subject to volume
limitations in some cases
6,877,024 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.
We, all of our directors and officers and stockholders holding an aggregate
of 6,877,024 shares of our common stock in the aggregate, together with the
holders of options to purchase 1,513,433 shares of our
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<PAGE>
common stock, have agreed that, subject to limited 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.
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.
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<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 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 6,877,024 shares of our common stock in the aggregate, together with the
holders of options to purchase 1,513,433 shares of our common stock, have
agreed that, subject to limited 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 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, 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, some 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 specified
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 assume that the acquisition of CBSI occurred on January
1, 1998, and carried forward through the interim period presented. These
adjustments 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>
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............................................................. 2
Summary Financial Data................................................... 3
Risk Factors............................................................. 7
Forward-Looking Statements............................................... 15
Use of Proceeds.......................................................... 16
Dividend Policy.......................................................... 16
Capitalization........................................................... 17
Dilution................................................................. 18
Selected Financial Data.................................................. 19
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 22
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]
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.
++ Previously filed as an Exhibit to Amendment No. 1 to Registration Statement
on Form S-1 (Registration No. 333-78517) filed with the Securities and
Exchange Commission on July 16, 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 30, 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 30, 1999
______________________________________ and Chairman of the Board
Michael B. Alexander of Directors
* Vice Chairman of the Board July 30, 1999
______________________________________ of Directors
John C. Rennie
* President, Chief Operating July 30, 1999
______________________________________ Officer and Director
Joseph A. Saponaro
* Executive Vice President July 30, 1999
______________________________________ and Director
Sigmund H. Goldblum
* Executive Vice President July 30, 1999
______________________________________ and Chief Financial
Barbara L. Landes Officer
* Director July 30, 1999
______________________________________
Mary Anne Gilleece
* Director July 30, 1999
______________________________________
Joel N. Levy
* Director July 30, 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
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<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.
++ Previously filed as an Exhibit to Amendment No. 1 to Registration Statement
on Form S-1 (Registration No. 333-78517) filed with the Securities and
Exchange Commission on July 16, 1999.
* To be filed by amendment.
<PAGE>
EXHIBIT 5.1
July 30, 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. 2 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 with respect to which we have been consulted,
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.
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, the laws of the State of Delaware. 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 as of the date of the consummation of the Company's initial public
offering:
1. The Company has been duly incorporated under the laws of the State of
Delaware and the Company has 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. The maximum of 4,600,000 shares of Common Stock to be sold by the
Company has 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.
Very truly yours,
/s/ Swidler Berlin Shereff Friedman, LLP
SWIDLER BERLIN SHEREFF FRIEDMAN, LLP
SBSF, LLP:GA:JSH:RMF
<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 report dated March 30, 1999, relating to AverStar, Inc., in the
Registration Statement (Amendment No. 2 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.
Our audits also included the financial statement schedule of Averstar, Inc.
listed in Item 16(b). This schedule is the responsibility of Averstar, Inc.'s
management. Our responsibility is to express an opinion based on our audits. In
our opinion, the financial statement schedule referred to above, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects, the information set forth therein.
/s/ Ernst & Young LLP
Ernst & Young LLP
Boston, Massachusetts
July 30, 1999
